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G.R. No. L-24968 April 27, 1972 5.

5. That release shall be made at the discretion of the Rehabilitation Finance Corporation, subject
SAURA IMPORT V DBP to availability of funds, and as the construction of the factory buildings progresses, to be certified
to by an appraiser of this Corporation;"
MAKALINTAL, J.:p
Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before, however,
evidently having otherwise been informed of its approval, Saura, Inc. wrote a letter to RFC,
In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was rendered on June
requesting a modification of the terms laid down by it, namely: that in lieu of having China
28, 1965 sentencing defendant Development Bank of the Philippines (DBP) to pay actual and
Engineers, Ltd. (which was willing to assume liability only to the extent of its stock subscription
consequential damages to plaintiff Saura Import and Export Co., Inc. in the amount of
with Saura, Inc.) sign as co-maker on the corresponding promissory notes, Saura, Inc. would put
P383,343.68, plus interest at the legal rate from the date the complaint was filed and attorney's
up a bond for P123,500.00, an amount equivalent to such subscription; and that Maria S. Roca
fees in the amount of P5,000.00. The present appeal is from that judgment.
would be substituted for Inocencia Arellano as one of the other co-makers, having acquired the
latter's shares in Saura, Inc.
In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the Rehabilitation
Finance Corporation (RFC), before its conversion into DBP, for an industrial loan of P500,000.00,
In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating of the
to be used as follows: P250,000.00 for the construction of a factory building (for the manufacture
members of its Board of Governors, for certain reasons stated in the resolution, "to reexamine all
of jute sacks); P240,900.00 to pay the balance of the purchase price of the jute mill machinery and
the aspects of this approved loan ... with special reference as to the advisability of financing this
equipment; and P9,100.00 as additional working capital.
particular project based on present conditions obtaining in the operations of jute mills, and to
submit his findings thereon at the next meeting of the Board."
Parenthetically, it may be mentioned that the jute mill machinery had already been purchased by
Saura on the strength of a letter of credit extended by the Prudential Bank and Trust Co., and
On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act as
arrived in Davao City in July 1953; and that to secure its release without first paying the draft,
co-signer for the loan, and asked that the necessary documents be prepared in accordance with
Saura, Inc. executed a trust receipt in favor of the said bank.
the terms and conditions specified in Resolution No. 145. In connection with the reexamination of
the project to be financed with the loan applied for, as stated in Resolution No. 736, the parties
On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for named their respective committees of engineers and technical men to meet with each other and
P500,000.00, to be secured by a first mortgage on the factory building to be constructed, the land undertake the necessary studies, although in appointing its own committee Saura, Inc. made the
site thereof, and the machinery and equipment to be installed. Among the other terms spelled out observation that the same "should not be taken as an acquiescence on (its) part to novate, or
in the resolution were the following: accept new conditions to, the agreement already) entered into," referring to its acceptance of the
terms and conditions mentioned in Resolution No. 145.
1. That the proceeds of the loan shall be utilized exclusively for the following
purposes: On April 13, 1954 the loan documents were executed: the promissory note, with F.R. Halling,
representing China Engineers, Ltd., as one of the co-signers; and the corresponding deed of
mortgage, which was duly registered on the following April 17.
For construction of factory building P250,000.00

It appears, however, that despite the formal execution of the loan agreement the reexamination
For payment of the balance of purchase contemplated in Resolution No. 736 proceeded. In a meeting of the RFC Board of Governors on
June 10, 1954, at which Ramon Saura, President of Saura, Inc., was present, it was decided to
price of machinery and equipment 240,900.00 reduce the loan from P500,000.00 to P300,000.00. Resolution No. 3989 was approved as follows:

For working capital 9,100.00 RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc. under
Resolution No. 145, C.S., from P500,000.00 to P300,000.00. Pursuant to Bd. Res. No. 736, c.s.,
authorizing the re-examination of all the various aspects of the loan granted the Saura Import &
T O T A L P500,000.00 Export Co. under Resolution No. 145, c.s., for the purpose of financing the manufacture of jute
sacks in Davao, with special reference as to the advisability of financing this particular project
4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and Gregoria Estabillo based on present conditions obtaining in the operation of jute mills, and after having heard Ramon
and China Engineers, Ltd. shall sign the promissory notes jointly with the borrower-corporation; E. Saura and after extensive discussion on the subject the Board, upon recommendation of the
Chairman, RESOLVED that the loan granted the Saura Import & Export Co. be REDUCED from
P500,000 to P300,000 and that releases up to P100,000 may be authorized as may be necessary
from time to time to place the factory in actual operation: PROVIDED that all terms and conditions This fact, according to defendant DBP, is what moved RFC to approve the loan application in the
of Resolution No. 145, c.s., not inconsistent herewith, shall remain in full force and effect." first place, and to require, in its Resolution No. 9083, a certification from the Department of
Agriculture and Natural Resources as to the availability of local raw materials to provide adequately
for the requirements of the factory. Saura, Inc. itself confirmed the defendant's stand impliedly in
On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory note for
its letter of January 21, 1955: (1) stating that according to a special study made by the Bureau of
China Engineers Ltd. jointly and severally with the other RFC that his company no longer to of the
Forestry "kenaf will not be available in sufficient quantity this year or probably even next year;" (2)
loan and therefore considered the same as cancelled as far as it was concerned. A follow-up letter
requesting "assurances (from RFC) that my company and associates will be able to bring in
dated July 2 requested RFC that the registration of the mortgage be withdrawn.
sufficient jute materials as may be necessary for the full operation of the jute mill;" and (3) asking
that releases of the loan be made as follows:
In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be granted.
The request was denied by RFC, which added in its letter-reply that it was "constrained to consider
a) For the payment of the receipt for jute mill
as cancelled the loan of P300,000.00 ... in view of a notification ... from the China Engineers Ltd.,
machineries with the Prudential Bank &
expressing their desire to consider the loan insofar as they are concerned."

Trust Company P250,000.00


On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC that
China Engineers, Ltd. "will at any time reinstate their signature as co-signer of the note if RFC
releases to us the P500,000.00 originally approved by you.". (For immediate release)

On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original amount b) For the purchase of materials and equip-
of P500,000.00, "it appearing that China Engineers, Ltd. is now willing to sign the promissory notes ment per attached list to enable the jute
jointly with the borrower-corporation," but with the following proviso: mill to operate 182,413.91

That in view of observations made of the shortage and high cost of imported c) For raw materials and labor 67,586.09
raw materials, the Department of Agriculture and Natural Resources shall
certify to the following:
1) P25,000.00 to be released on the open-
ing of the letter of credit for raw jute
1. That the raw materials needed by the borrower-corporation to carry out its for $25,000.00.
operation are available in the immediate vicinity; and
2) P25,000.00 to be released upon arrival
2. That there is prospect of increased production thereof to provide adequately of raw jute.
for the requirements of the factory."
3) P17,586.09 to be released as soon as the
The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December 22, mill is ready to operate.
1954, wherein it was explained that the certification by the Department of Agriculture and Natural
Resources was required "as the intention of the original approval (of the loan) is to develop the
On January 25, 1955 RFC sent to Saura, Inc. the following reply:
manufacture of sacks on the basis of locally available raw materials." This point is important, and
sheds light on the subsequent actuations of the parties. Saura, Inc. does not deny that the factory
he was building in Davao was for the manufacture of bags from local raw materials. The cover Dear Sirs:
page of its brochure (Exh. M) describes the project as a "Joint venture by and between the
Mindanao Industry Corporation and the Saura Import and Export Co., Inc. to finance, manage and
This is with reference to your letter of January 21, 1955,
operate a Kenaf mill plant, to manufacture copra and corn bags, runners, floor mattings, carpets,
draperies; out of 100% local raw materials, principal kenaf." The explanatory note on page 1 of the regarding the release of your loan under consideration of
same brochure states that, the venture "is the first serious attempt in this country to use 100% P500,000. As stated in our letter of December 22, 1954,
the releases of the loan, if revived, are proposed to be
locally grown raw materials notably kenaf which is presently grown commercially in theIsland of
Mindanao where the proposed jutemill is located ..." made from time to time, subject to availability of funds
towards the end that the sack factory shall be placed in
actual operating status. We shall be able to act on your
request for revised purpose and manner of releases upon There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan
re-appraisal of the securities offered for the loan. of P500,000.00 was approved by resolution of the defendant, and the corresponding mortgage
was executed and registered. But this fact alone falls short of resolving the basic claim that the
defendant failed to fulfill its obligation and the plaintiff is therefore entitled to recover damages.
With respect to our requirement that the Department of
Agriculture and Natural Resources certify that the raw
materials needed are available in the immediate vicinity It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption that
and that there is prospect of increased production thereof the factory to be constructed would utilize locally grown raw materials, principally kenaf. There is
to provide adequately the requirements of the factory, we no serious dispute about this. It was in line with such assumption that when RFC, by Resolution
wish to reiterate that the basis of the original approval is No. 9083 approved on December 17, 1954, restored the loan to the original amount of
to develop the manufacture of sacks on the basis of the P500,000.00. it imposed two conditions, to wit: "(1) that the raw materials needed by the borrower-
locally available raw materials. Your statement that you corporation to carry out its operation are available in the immediate vicinity; and (2) that there is
will have to rely on the importation of jute and your prospect of increased production thereof to provide adequately for the requirements of the factory."
request that we give you assurance that your company The imposition of those conditions was by no means a deviation from the terms of the agreement,
will be able to bring in sufficient jute materials as may be but rather a step in its implementation. There was nothing in said conditions that contradicted the
necessary for the operation of your factory, would not be terms laid down in RFC Resolution No. 145, passed on January 7, 1954, namely — "that the
in line with our principle in approving the loan. proceeds of the loan shall be utilized exclusively for the following purposes: for construction of
factory building — P250,000.00; for payment of the balance of purchase price of machinery and
equipment — P240,900.00; for working capital — P9,100.00." Evidently Saura, Inc. realized that it
With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the matter
could not meet the conditions required by RFC, and so wrote its letter of January 21, 1955, stating
further. Instead, it requested RFC to cancel the mortgage, and so, on June 17, 1955 RFC executed
that local jute "will not be able in sufficient quantity this year or probably next year," and asking that
the corresponding deed of cancellation and delivered it to Ramon F. Saura himself as president of
out of the loan agreed upon the sum of P67,586.09 be released "for raw materials and labor." This
Saura, Inc.
was a deviation from the terms laid down in Resolution No. 145 and embodied in the mortgage
contract, implying as it did a diversion of part of the proceeds of the loan to purposes other than
It appears that the cancellation was requested to make way for the registration of a mortgage those agreed upon.
contract, executed on August 6, 1954, over the same property in favor of the Prudential Bank and
Trust Co., under which contract Saura, Inc. had up to December 31 of the same year within which
When RFC turned down the request in its letter of January 25, 1955 the negotiations which had
to pay its obligation on the trust receipt heretofore mentioned. It appears further that for failure to
been going on for the implementation of the agreement reached an impasse. Saura, Inc. obviously
pay the said obligation the Prudential Bank and Trust Co. sued Saura, Inc. on May 15, 1955.
was in no position to comply with RFC's conditions. So instead of doing so and insisting that the
loan be released as agreed upon, Saura, Inc. asked that the mortgage be cancelled, which was
On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was cancelled at the done on June 15, 1955. The action thus taken by both parties was in the nature cf mutual
request of Saura, Inc., the latter commenced the present suit for damages, alleging failure of RFC desistance — what Manresa terms "mutuo disenso"1 — which is a mode of extinguishing
(as predecessor of the defendant DBP) to comply with its obligation to release the proceeds of the obligations. It is a concept that derives from the principle that since mutual agreement can create
loan applied for and approved, thereby preventing the plaintiff from completing or paying a contract, mutual disagreement by the parties can cause its extinguishment. 2
contractual commitments it had entered into, in connection with its jute mill project.
The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against any
The trial court rendered judgment for the plaintiff, ruling that there was a perfected contract alleged breach of contract by RFC, or even point out that the latter's stand was legally unjustified.
between the parties and that the defendant was guilty of breach thereof. The defendant pleaded Its request for cancellation of the mortgage carried no reservation of whatever rights it believed it
below, and reiterates in this appeal: (1) that the plaintiff's cause of action had prescribed, or that might have against RFC for the latter's non-compliance. In 1962 it even applied with DBP for
its claim had been waived or abandoned; (2) that there was no perfected contract; and (3) that another loan to finance a rice and corn project, which application was disapproved. It was only in
assuming there was, the plaintiff itself did not comply with the terms thereof. 1964, nine years after the loan agreement had been cancelled at its own request, that Saura, Inc.
brought this action for damages.All these circumstances demonstrate beyond doubt that the said
agreement had been extinguished by mutual desistance — and that on the initiative of the plaintiff-
We hold that there was indeed a perfected consensual contract, as recognized in Article 1934 of
appellee itself.
the Civil Code, which provides:

With this view we take of the case, we find it unnecessary to consider and resolve the other issues
ART. 1954. An accepted promise to deliver something, by way of
raised in the respective briefs of the parties.
commodatum or simple loan is binding upon the parties, but the commodatum
or simple loan itself shall not be perferted until the delivery of the object of the
contract.
WHEREFORE, the judgment appealed from is reversed and the complaint dismissed, with costs . . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value of the
against the plaintiff-appellee. three bulls plus the breeding fees in the amount of P626.17 with interest on both sums
of (at) the legal rate from the filing of this complaint and costs.
Reyes, J.B.L., Actg. C.J., Zaldivar, Castro, Fernando, Teehankee, Barredo and Antonio, JJ.,
concur. On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court granted on
18 October and issued on 11 November 1958. On 2 December 1958 granted an ex-parte motion
filed by the plaintiff on November 1958 for the appointment of a special sheriff to serve the writ
Makasiar, J., took no part.
outside Manila. Of this order appointing a special sheriff, on 6 December 1958, Felicidad M.
Bagtas, the surviving spouse of the defendant Jose Bagtas who died on 23 October 1951 and as
G.R. No. L-17474 October 25, 1962 administratrix of his estate, was notified. On 7 January 1959 she file a motion alleging that on 26
RP V BALAGTAS June 1952 the two bull Sindhi and Bhagnari were returned to the Bureau Animal of Industry and
that sometime in November 1958 the third bull, the Sahiniwal, died from gunshot wound inflicted
during a Huk raid on Hacienda Felicidad Intal, and praying that the writ of execution be quashed
PADILLA, J.:
and that a writ of preliminary injunction be issued. On 31 January 1959 the plaintiff objected to her
motion. On 6 February 1959 she filed a reply thereto. On the same day, 6 February, the Court
The Court of Appeals certified this case to this Court because only questions of law are raised. denied her motion. Hence, this appeal certified by the Court of Appeals to this Court as stated at
the beginning of this opinion.
On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau
of Animal Industry three bulls: a Red Sindhi with a book value of P1,176.46, a Bhagnari, of It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late defendant,
P1,320.56 and a Sahiniwal, of P744.46, for a period of one year from 8 May 1948 to 7 May 1949 returned the Sindhi and Bhagnari bulls to Roman Remorin, Superintendent of the NVB Station,
for breeding purposes subject to a government charge of breeding fee of 10% of the book value Bureau of Animal Industry, Bayombong, Nueva Vizcaya, as evidenced by a memorandum receipt
of the bulls. Upon the expiration on 7 May 1949 of the contract, the borrower asked for a renewal signed by the latter (Exhibit 2). That is why in its objection of 31 January 1959 to the appellant's
for another period of one year. However, the Secretary of Agriculture and Natural Resources motion to quash the writ of execution the appellee prays "that another writ of execution in the sum
approved a renewal thereof of only one bull for another year from 8 May 1949 to 7 May 1950 and of P859.53 be issued against the estate of defendant deceased Jose V. Bagtas." She cannot be
requested the return of the other two. On 25 March 1950 Jose V. Bagtas wrote to the Director of held liable for the two bulls which already had been returned to and received by the appellee.
Animal Industry that he would pay the value of the three bulls. On 17 October 1950 he reiterated
his desire to buy them at a value with a deduction of yearly depreciation to be approved by the The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huk in
Auditor General. On 19 October 1950 the Director of Animal Industry advised him that the book November 1953 upon the surrounding barrios of Hacienda Felicidad Intal, Baggao, Cagayan,
value of the three bulls could not be reduced and that they either be returned or their book value
where the animal was kept, and that as such death was due to force majeure she is relieved from
paid not later than 31 October 1950. Jose V. Bagtas failed to pay the book value of the three bulls the duty of returning the bull or paying its value to the appellee. The contention is without merit.
or to return them. So, on 20 December 1950 in the Court of First Instance of Manila the Republic The loan by the appellee to the late defendant Jose V. Bagtas of the three bulls for breeding
of the Philippines commenced an action against him praying that he be ordered to return the three purposes for a period of one year from 8 May 1948 to 7 May 1949, later on renewed for another
bulls loaned to him or to pay their book value in the total sum of P3,241.45 and the unpaid breeding year as regards one bull, was subject to the payment by the borrower of breeding fee of 10% of
fee in the sum of P199.62, both with interests, and costs; and that other just and equitable relief the book value of the bulls. The appellant contends that the contract was commodatum and that,
be granted in (civil No. 12818). for that reason, as the appellee retained ownership or title to the bull it should suffer its loss due
to force majeure. A contract of commodatum is essentially gratuitous.1 If the breeding fee be
On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that considered a compensation, then the contract would be a lease of the bull. Under article 1671 of
because of the bad peace and order situation in Cagayan Valley, particularly in the barrio of the Civil Code the lessee would be subject to the responsibilities of a possessor in bad faith,
Baggao, and of the pending appeal he had taken to the Secretary of Agriculture and Natural because she had continued possession of the bull after the expiry of the contract. And even if the
Resources and the President of the Philippines from the refusal by the Director of Animal Industry contract be commodatum, still the appellant is liable, because article 1942 of the Civil Code
to deduct from the book value of the bulls corresponding yearly depreciation of 8% from the date provides that a bailee in a contract of commodatum —
of acquisition, to which depreciation the Auditor General did not object, he could not return the
animals nor pay their value and prayed for the dismissal of the complaint.
. . . is liable for loss of the things, even if it should be through a fortuitous event:

After hearing, on 30 July 1956 the trial court render judgment — (2) If he keeps it longer than the period stipulated . . .
(3) If the thing loaned has been delivered with appraisal of its value, unless there is a As the appellant already had returned the two bulls to the appellee, the estate of the late defendant
stipulation exempting the bailee from responsibility in case of a fortuitous event; is only liable for the sum of P859.63, the value of the bull which has not been returned to the
appellee, because it was killed while in the custody of the administratrix of his estate. This is the
amount prayed for by the appellee in its objection on 31 January 1959 to the motion filed on 7
The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was
January 1959 by the appellant for the quashing of the writ of execution.
renewed for another period of one year to end on 8 May 1950. But the appellant kept and used the
bull until November 1953 when during a Huk raid it was killed by stray bullets. Furthermore, when
lent and delivered to the deceased husband of the appellant the bulls had each an appraised book Special proceedings for the administration and settlement of the estate of the deceased Jose V.
value, to with: the Sindhi, at P1,176.46, the Bhagnari at P1,320.56 and the Sahiniwal at P744.46. Bagtas having been instituted in the Court of First Instance of Rizal (Q-200), the money judgment
It was not stipulated that in case of loss of the bull due to fortuitous event the late husband of the rendered in favor of the appellee cannot be enforced by means of a writ of execution but must be
appellant would be exempt from liability. presented to the probate court for payment by the appellant, the administratrix appointed by the
court.
The appellant's contention that the demand or prayer by the appellee for the return of the bull or
the payment of its value being a money claim should be presented or filed in the intestate ACCORDINGLY, the writ of execution appealed from is set aside, without pronouncement as to
proceedings of the defendant who died on 23 October 1951, is not altogether without merit. costs.
However, the claim that his civil personality having ceased to exist the trial court lost jurisdiction
over the case against him, is untenable, because section 17 of Rule 3 of the Rules of Court
Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala
provides that —
and Makalintal, JJ., concur.
Barrera, J., concurs in the result.
After a party dies and the claim is not thereby extinguished, the court shall order, upon
proper notice, the legal representative of the deceased to appear and to be substituted
FIRST DIVISION
for the deceased, within a period of thirty (30) days, or within such time as may be
granted. . . . [G.R. No. 146364. June 3, 2004]
PAJUYO V CA
and after the defendant's death on 23 October 1951 his counsel failed to comply with section 16
of Rule 3 which provides that —
CARPIO, J.:
The Case
Whenever a party to a pending case dies . . . it shall be the duty of his attorney to inform
the court promptly of such death . . . and to give the name and residence of the executory
administrator, guardian, or other legal representative of the deceased . . . .
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
The notice by the probate court and its publication in the Voz de Manila that Felicidad M. Bagtas 11 November 1996 decision[3] of the Regional Trial Court of Quezon City, Branch 81,[4] affirming
had been issue letters of administration of the estate of the late Jose Bagtas and that "all persons the 15 December 1995 decision[5] of the Metropolitan Trial Court of Quezon City, Branch 31.[6]
having claims for monopoly against the deceased Jose V. Bagtas, arising from contract express
or implied, whether the same be due, not due, or contingent, for funeral expenses and expenses The Antecedents
of the last sickness of the said decedent, and judgment for monopoly against him, to file said claims
with the Clerk of this Court at the City Hall Bldg., Highway 54, Quezon City, within six (6) months
from the date of the first publication of this order, serving a copy thereof upon the aforementioned In June 1979, petitioner Colito T. Pajuyo (Pajuyo) paid P400 to a certain Pedro Perez for the
Felicidad M. Bagtas, the appointed administratrix of the estate of the said deceased," is not a notice rights over a 250-square meter lot in Barrio Payatas, Quezon City. Pajuyo then constructed a
to the court and the appellee who were to be notified of the defendant's death in accordance with house made of light materials on the lot. Pajuyo and his family lived in the house from 1979 to 7
the above-quoted rule, and there was no reason for such failure to notify, because the attorney December 1985.
who appeared for the defendant was the same who represented the administratrix in the special
proceedings instituted for the administration and settlement of his estate. The appellee or its On 8 December 1985, Pajuyo and private respondent Eddie Guevarra (Guevarra) executed
attorney or representative could not be expected to know of the death of the defendant or of the a Kasunduan or agreement. Pajuyo, as owner of the house, allowed Guevarra to live in the house
administration proceedings of his estate instituted in another court that if the attorney for the for free provided Guevarra would maintain the cleanliness and orderliness of the house. Guevarra
deceased defendant did not notify the plaintiff or its attorney of such death as required by the rule. 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 On 3 January 1997, Guevarra filed his petition for review with the Supreme Court.
Guevarra vacate the house. Guevarra refused.
On 8 January 1997, the First Division of the Supreme Court issued a Resolution[9] referring
Pajuyo filed an ejectment case against Guevarra with the Metropolitan Trial Court of Quezon the motion for extension to the Court of Appeals which has concurrent jurisdiction over the case.
City, Branch 31 (MTC). The case presented no special and important matter for the Supreme Court to take cognizance of
at the first instance.
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 On 28 January 1997, the Thirteenth Division of the Court of Appeals issued a
No. 137 for socialized housing. Guevarra pointed out that from December 1985 to September Resolution[10] granting the motion for extension conditioned on the timeliness of the filing of the
1994, Pajuyo did not show up or communicate with him. Guevarra insisted that neither he nor motion.
Pajuyo has valid title to the lot.
On 27 February 1997, the Court of Appeals ordered Pajuyo to comment on Guevaras
On 15 December 1995, the MTC rendered its decision in favor of Pajuyo. The dispositive petition for review. On 11 April 1997, Pajuyo filed his Comment.
portion of the MTC decision reads:
On 21 June 2000, the Court of Appeals issued its decision reversing the RTC decision. The
dispositive portion of the decision reads:
WHEREFORE, premises considered, judgment is hereby rendered for the plaintiff and against
defendant, ordering the latter to:
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
A) vacate the house and lot occupied by the defendant or any other person or persons against defendant-appellant is without factual and legal basis.
claiming any right under him;

B) pay unto plaintiff the sum of THREE HUNDRED PESOS (P300.00) monthly as SO ORDERED.[11]
reasonable compensation for the use of the premises starting from the last
demand;
Pajuyo filed a motion for reconsideration of the decision. Pajuyo pointed out that the Court
C) pay plaintiff the sum of P3,000.00 as and by way of attorneys fees; and 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
D) pay the cost of suit. forum-shopping.

On 14 December 2000, the Court of Appeals issued a resolution denying Pajuyos motion for
SO ORDERED.[7] reconsideration. The dispositive portion of the resolution reads:

Aggrieved, Guevarra appealed to the Regional Trial Court of Quezon City, Branch 81 (RTC). WHEREFORE, for lack of merit, the motion for reconsideration is hereby DENIED. No costs.
On 11 November 1996, the RTC affirmed the MTC decision. The dispositive portion of the
RTC decision reads: SO ORDERED.[12]

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
The Ruling of the MTC
toto.

SO ORDERED.[8] 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
Guevarra received the RTC decision on 29 November 1996. Guevarra had only until 14 by tolerance. Thus, Guevarras refusal to vacate the house on Pajuyos demand made Guevarras
December 1996 to file his appeal with the Court of Appeals. Instead of filing his appeal with the continued possession of the house illegal.
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. The Ruling of the RTC
The RTC upheld the Kasunduan, which established the landlord and tenant relationship the certification against forum-shopping. The Court of Appeals pointed out that Pajuyo did not raise
between Pajuyo and Guevarra. The terms of the Kasunduan bound Guevarra to return possession this issue in his Comment. The Court of Appeals held that Pajuyo could not now seek the dismissal
of the house on demand. 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 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, The Issues
not ownership.

Pajuyo raises the following issues for resolution:


The Ruling of the Court of Appeals
WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS AUTHORITY AND
DISCRETION TANTAMOUNT TO LACK OF JURISDICTION:
The Court of Appeals declared that Pajuyo and Guevarra are squatters. Pajuyo and
Guevarra illegally occupied the contested lot which the government owned. 1) in GRANTING, instead of denying, Private Respondents Motion for an
Extension of thirty days to file petition for review at the time when
Perez, the person from whom Pajuyo acquired his rights, was also a squatter. Perez had no
there was no more period to extend as the decision of the Regional
right or title over the lot because it is public land. The assignment of rights between Perez and
Trial Court had already become final and executory.
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. 2) in giving due course, instead of dismissing, private
respondents Petition for Review even though the certification against
The Court of Appeals reversed the MTC and RTC rulings, which held that
forum-shopping was signed only by counsel instead of by petitioner
the Kasunduan between Pajuyo and Guevarra created a legal tie akin to that of a landlord and
himself.
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. 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
Since Pajuyo admitted that he resurfaced only in 1994 to claim the property, the appellate
the Metropolitan Trial Court and in holding that the ejectment case
court held that Guevarra has a better right over the property under Proclamation No. 137.President
filed against defendant-appellant is without legal and factual basis.
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 4) in reversing and setting aside the Decision of the Regional Trial Court
Beneficiary Selection and Disposition of Homelots and Structures in the National Housing Project in Civil Case No. Q-96-26943 and in holding that the parties are in
(the Code), the actual occupant or caretaker of the lot shall have first priority as beneficiary of the pari delicto being both squatters, therefore, illegal occupants of the
project. The Court of Appeals concluded that Guevarra is first in the hierarchy of priority. contested parcel of land.
In denying Pajuyos motion for reconsideration, the appellate court debunked Pajuyos claim 5) in deciding the unlawful detainer case based on the so-called Code of
that Guevarra filed his motion for extension beyond the period to appeal. Policies of the National Government Center Housing Project instead
of deciding the same under the Kasunduan voluntarily executed by
The Court of Appeals pointed out that Guevarras motion for extension filed before the
the parties, the terms and conditions of which are the laws between
Supreme Court was stamped 13 December 1996 at 4:09 PM by the Supreme Courts Receiving
themselves.[13]
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 The Ruling of the Court
Appeals explained that the thirty-day extension to file the petition for review was deemed granted
because of such compliance.
The procedural issues Pajuyo is raising are baseless. However, we find merit in the
The Court of Appeals rejected Pajuyos argument that the appellate court should have substantive issues Pajuyo is submitting for resolution.
dismissed the petition for review because it was Guevarras counsel and not Guevarra who signed
Procedural Issues 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


Pajuyo insists that the Court of Appeals should have dismissed outright Guevarras petition held that Liboros clarification of Lacsamana is consistent with the Revised Internal Rules of the
for review because the RTC decision had already become final and executory when the appellate
Court of Appeals and Supreme Court Circular No. 1-91. They all allow an extension of time for
court acted on Guevarras motion for extension to file the petition. Pajuyo points out that Guevarra filing petitions for review with the Court of Appeals. The extension, however, should be limited to
had only one day before the expiry of his period to appeal the RTC decision.Instead of filing the only fifteen days save in exceptionally meritorious cases where the Court of Appeals may grant a
petition for review with the Court of Appeals, Guevarra filed with this Court an undated motion for
longer period.
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 A judgment becomes final and executory by operation of law. Finality of judgment becomes
running of the period to perfect the appeal. Hence, when the Court of Appeals received the motion, a fact on the lapse of the reglementary period to appeal if no appeal is perfected.[23] The RTC
the period to appeal had already expired. decision could not have gained finality because the Court of Appeals granted the 30-day extension
to Guevarra.
We are not persuaded.
The Court of Appeals did not commit grave abuse of discretion when it approved Guevarras
Decisions of the regional trial courts in the exercise of their appellate jurisdiction are
motion for extension. The Court of Appeals gave due course to the motion for extension because
appealable to the Court of Appeals by petition for review in cases involving questions of fact or it complied with the condition set by the appellate court in its resolution dated 28 January 1997. The
mixed questions of fact and law.[14] Decisions of the regional trial courts involving pure questions resolution stated that the Court of Appeals would only give due course to the motion for extension
of law are appealable directly to this Court by petition for review. [15] These modes of appeal are
if filed on time. The motion for extension met this condition.
now embodied in Section 2, Rule 41 of the 1997 Rules of Civil Procedure.
The material dates to consider in determining the timeliness of the filing of the motion for
Guevarra believed that his appeal of the RTC decision involved only questions of extension are (1) the date of receipt of the judgment or final order or resolution subject of the
law. Guevarra thus filed his motion for extension to file petition for review before this Court on 14
petition, and (2) the date of filing of the motion for extension.[24] It is the date of the filing of the
December 1996. On 3 January 1997, Guevarra then filed his petition for review with this Court. A motion or pleading, and not the date of execution, that determines the timeliness of the filing of
perusal of Guevarras petition for review gives the impression that the issues he raised were pure that motion or pleading. Thus, even if the motion for extension bears no date, the date of filing
questions of law. There is a question of law when the doubt or difference is on what the law is on
stamped on it is the reckoning point for determining the timeliness of its filing.
a certain state of facts.[16] There is a question of fact when the doubt or difference is on the truth or
falsity of the facts alleged.[17] Guevarra had until 14 December 1996 to file an appeal from the RTC decision. Guevarra
filed his motion for extension before this Court on 13 December 1996, the date stamped by this
In his petition for review before this Court, Guevarra no longer disputed the facts. Guevarras
Courts Receiving Clerk on the motion for extension. Clearly, Guevarra filed the motion for
petition for review raised these questions: (1) Do ejectment cases pertain only to possession of a extension exactly one day before the lapse of the reglementary period to appeal.
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 Assuming that the Court of Appeals should have dismissed Guevarras appeal on technical
governing the lot on which a squatters structure stands be considered in an ejectment suit filed by grounds, Pajuyo did not ask the appellate court to deny the motion for extension and dismiss the
the owner of the structure? 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
These questions call for the evaluation of the rights of the parties under the law on ejectment procedural issues against Guevarras petition for review.
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 A party who, after voluntarily submitting a dispute for resolution, receives an adverse
the legal questions raised in the petition for review. These factual matters refer to the metes and decision on the merits, is estopped from attacking the jurisdiction of the court. [25] Estoppel sets in
bounds of the disputed property and the application of Guevarra as beneficiary of Proclamation not because the judgment of the court is a valid and conclusive adjudication, but because the
No. 137. practice of attacking the courts jurisdiction after voluntarily submitting to it is against public policy. [26]
The Court of Appeals has the power to grant an extension of time to file a petition for In his Comment before the Court of Appeals, Pajuyo also failed to discuss Guevarras failure
review. In Lacsamana v. Second Special Cases Division of the Intermediate Appellate to sign the certification against forum shopping. Instead, Pajuyo harped on Guevarras counsel
Court,[18] we declared that the Court of Appeals could grant extension of time in appeals by petition signing the verification, claiming that the counsels verification is insufficient since it is based only
for review. In Liboro v. Court of Appeals,[19] we clarified that the prohibition against granting an on mere information.
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 A partys failure to sign the certification against forum shopping is different from the partys
verification. A petition for review, unlike an ordinary appeal, requires preparation and research to failure to sign personally the verification. The certificate of non-forum shopping must be signed by
present a persuasive position.[20] The drafting of the petition for review entails more time and effort 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 Thus, a party who can prove prior possession can recover such possession even against
jurisdictional requisite.[29] It is intended simply to secure an assurance that what are alleged in the the owner himself.[41] Whatever may be the character of his possession, if he has in his favor prior
pleading are true and correct and not the product of the imagination or a matter of speculation, and possession in time, he has the security that entitles him to remain on the property until a person
that the pleading is filed in good faith.[30] The party need not sign the verification. A partys with a better right lawfully ejects him.[42] To repeat, the only issue that the court has to settle in an
representative, lawyer or any person who personally knows the truth of the facts alleged in the ejectment suit is the right to physical possession.
pleading may sign the verification.[31]
In Pitargue v. Sorilla,[43] the government owned the land in dispute. The government did not
We agree with the Court of Appeals that the issue on the certificate against forum shopping authorize either the plaintiff or the defendant in the case of forcible entry case to occupy the
was merely an afterthought. Pajuyo did not call the Court of Appeals attention to this defect at the land. The plaintiff had prior possession and had already introduced improvements on the public
early stage of the proceedings. Pajuyo raised this procedural issue too late in the proceedings. 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.

Absence of Title over the Disputed Property will not Divest the Courts of Jurisdiction to The defendant questioned the jurisdiction of the courts to settle the issue of possession
Resolve 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
Settled is the rule that the defendants claim of ownership of the disputed property will not prior physical possession over the public land applied for as against other private claimants. That
divest the inferior court of its jurisdiction over the ejectment case.[32] Even if the pleadings raise the prior physical possession enjoys legal protection against other private claimants because only a
issue of ownership, the court may pass on such issue to determine only the question of possession, court can take away such physical possession in an ejectment case.
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 While the Court did not brand the plaintiff and the defendant in Pitargue[44] as squatters,
title to the land.[34] This doctrine is a necessary consequence of the nature of the two summary strictly speaking, their entry into the disputed land was illegal. Both the plaintiff and defendant
actions of ejectment, forcible entry and unlawful detainer, where the only issue for adjudication is entered the public land without the owners permission. Title to the land remained with the
the physical or material possession over the real property.[35] 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
In this case, what Guevarra raised before the courts was that he and Pajuyo are not the courts jurisdiction to resolve the issue of possession even if the plaintiff and the defendant in the
owners of the contested property and that they are mere squatters. Will the defense that the parties ejectment case did not have any title over the contested land.
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 Courts must not abdicate their jurisdiction to resolve the issue of physical possession
parties where they are since they are in pari delicto. 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
We do not agree with the Court of Appeals. 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
Ownership or the right to possess arising from ownership is not at issue in an action for
the law into his own hands.[46] Ejectment proceedings are summary in nature so the authorities can
recovery of possession. The parties cannot present evidence to prove ownership or right to legal
settle speedily actions to recover possession because of the overriding need to quell social
possession except to prove the nature of the possession when necessary to resolve the issue of
disturbances.[47]
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 We further explained in Pitargue the greater interest that is at stake in actions for recovery
from the parties in an ejectment case. of possession. We made the following pronouncements in Pitargue:
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 The question that is before this Court is: Are courts without jurisdiction to take cognizance of
possession de jure.[37] It does not even matter if a partys title to the property is questionable, [38] or possessory actions involving these public lands before final award is made by the Lands
when both parties intruded into public land and their applications to own the land have yet to be Department, and before title is given any of the conflicting claimants? It is one of utmost
approved by the proper government agency.[39] Regardless of the actual condition of the title to the importance, as there are public lands everywhere and there are thousands of settlers, especially
property, the party in peaceable quiet possession shall not be thrown out by a strong hand, in newly opened regions. It also involves a matter of policy, as it requires the determination of the
violence or terror.[40] Neither is the unlawful withholding of property allowed. Courts will always respective authorities and functions of two coordinate branches of the Government in connection
uphold respect for prior possession. with public land conflicts.
Our problem is made simple by the fact that under the Civil Code, either in the old, which was in courts were deprived of jurisdiction of cases involving conflicts of possession, that threat
force in this country before the American occupation, or in the new, we have a possessory action, of judicial action against breaches of the peace committed on public lands would be
the aim and purpose of which is the recovery of the physical possession of real property, eliminated, and a state of lawlessness would probably be produced between applicants,
irrespective of the question as to who has the title thereto. Under the Spanish Civil Code we had occupants or squatters, where force or might, not right or justice, would rule.
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
It must be borne in mind that the action that would be used to solve conflicts of possession between
October 1, 1901, upon the enactment of the Code of Civil Procedure (Act No. 190 of the Philippine
rivals or conflicting applicants or claimants would be no other than that of forcible entry. This action,
Commission) we implanted the common law action of forcible entry (section 80 of Act No. 190),
both in England and the United States and in our jurisdiction, is a summary and expeditious remedy
the object of which has been stated by this Court to be to prevent breaches of the peace and
whereby one in peaceful and quiet possession may recover the possession of which he has been
criminal disorder which would ensue from the withdrawal of the remedy, and the reasonable
deprived by a stronger hand, by violence or terror; its ultimate object being to prevent breach of
hope such withdrawal would create that some advantage must accrue to those persons
the peace and criminal disorder. (Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.)
who, believing themselves entitled to the possession of property, resort to force to gain
The basis of the remedy is mere possession as a fact, of physical possession, not a legal
possession rather than to some appropriate action in the court to assert their claims. (Supia
possession. (Mediran vs. Villanueva, 37 Phil. 752.) The title or right to possession is never in issue
and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) So before the enactment of the first Public
in an action of forcible entry; as a matter of fact, evidence thereof is expressly banned, except to
Land Act (Act No. 926) the action of forcible entry was already available in the courts of the country.
prove the nature of the possession. (Second 4, Rule 72, Rules of Court.) With this nature of the
So the question to be resolved is, Did the Legislature intend, when it vested the power and authority
action in mind, by no stretch of the imagination can conclusion be arrived at that the use of the
to alienate and dispose of the public lands in the Lands Department, to exclude the courts from
remedy in the courts of justice would constitute an interference with the alienation, disposition, and
entertaining the possessory action of forcible entry between rival claimants or occupants of any
control of public lands. To limit ourselves to the case at bar can it be pretended at all that its result
land before award thereof to any of the parties? Did Congress intend that the lands applied for, or
would in any way interfere with the manner of the alienation or disposition of the land contested?
all public lands for that matter, be removed from the jurisdiction of the judicial Branch of the
On the contrary, it would facilitate adjudication, for the question of priority of possession having
Government, so that any troubles arising therefrom, or any breaches of the peace or disorders
been decided in a final manner by the courts, said question need no longer waste the time of the
caused by rival claimants, could be inquired into only by the Lands Department to the exclusion of
land officers making the adjudication or award. (Emphasis ours)
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 The Principle of Pari Delicto is not Applicable to Ejectment Cases
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 The Court of Appeals erroneously applied the principle of pari delicto to this case.
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 Articles 1411 and 1412 of the Civil Code[48] embody the principle of pari delicto. We
of the Government must continue to exercise power and jurisdiction within the limits of their explained the principle of pari delicto in these words:
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 The rule of pari delicto is expressed in the maxims ex dolo malo non eritur actio and in pari delicto
branches of the Government of the exercise of the respective functions or powers thereon, potior est conditio defedentis. The law will not aid either party to an illegal agreement. It leaves the
such as the authority to stop disorders and quell breaches of the peace by the police, the parties where it finds them.[49]
authority on the part of the courts to take jurisdiction over possessory actions arising
therefrom not involving, directly or indirectly, alienation and disposition.
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
Our attention has been called to a principle enunciated in American courts to the effect that courts well-established public policy.[50]
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 In Drilon v. Gaurana,[51] we reiterated the basic policy behind the summary actions of
with the administration of matters concerning the same. (50 C. J. 1093-1094.) We have no quarrel forcible entry and unlawful detainer. We held that:
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 It must be stated that the purpose of an action of forcible entry and detainer is that, regardless of
court ordering restitution of the possession of a parcel of land to the actual occupant, who has the actual condition of the title to the property, the party in peaceable quiet possession shall not
been deprived thereof by another through the use of force or in any other illegal manner, can never be turned out by strong hand, violence or terror. In affording this remedy of restitution the object of
be prejudicial interference with the disposition or alienation of public lands. On the other hand, if 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 Second. The Court of Appeals should not have given credence to Guevarras
advantage must accrue to those persons who, believing themselves entitled to the possession of unsubstantiated claim that he is the beneficiary of Proclamation No. 137. Guevarra merely alleged
property, resort to force to gain possession rather than to some appropriate action in the courts to that in the survey the project administrator conducted, he and not Pajuyo appeared as the actual
assert their claims. This is the philosophy at the foundation of all these actions of forcible entry and occupant of the lot.
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] 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
Clearly, the application of the principle of pari delicto to a case of ejectment between to vacate the property in September 1994.
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 During the time that Guevarra temporarily held the property up to the time that Proclamation
of the lot that the latter had illegally occupied, emboldened by the knowledge that the courts would No. 137 allegedly segregated the disputed lot, Guevarra never applied as beneficiary of
leave them where they are. Nothing would then stand in the way of the ousted squatter from re- Proclamation No. 137. Even when Guevarra already knew that Pajuyo was reclaiming possession
claiming his prior possession at all cost. of the property, Guevarra did not take any step to comply with the requirements of Proclamation
No. 137.
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 Third. Even assuming that the disputed lot is within the coverage of Proclamation No. 137
cannot take the law into his own hands to regain possession of his property. The owner must go and Guevarra has a pending application over the lot, courts should still assume jurisdiction and
to court. resolve the issue of possession. However, the jurisdiction of the courts would be limited to the
issue of physical possession only.
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 In Pitargue,[55] we ruled that courts have jurisdiction over possessory actions involving public
that cannot be left to the squatters to decide. To do so would make squatters receive better land to determine the issue of physical possession. The determination of the respective rights of
treatment under the law. The law restrains property owners from taking the law into their own rival claimants to public land is, however, distinct from the determination of who has the actual
hands. However, the principle of pari delicto as applied by the Court of Appeals would give physical possession or who has a better right of physical possession. [56] The administrative
squatters free rein to dispossess fellow squatters or violently retake possession of properties disposition and alienation of public lands should be threshed out in the proper government
usurped from them. Courts should not leave squatters to their own devices in cases involving agency.[57]
recovery of possession.
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
Possession is the only Issue for Resolution in an Ejectment Case 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]
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
Pajuyo is Entitled to Physical Possession of the Disputed Property
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. 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 ruling of the Court of Appeals has no factual and legal basis. the Kasunduan.The Kasunduan reads:
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 Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas, Quezon City, ay nagbibigay
land that it declared open for disposition to bona fide residents. 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
The records do not show that the contested lot is within the land specified by Proclamation lote.
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.
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 Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also
rent, but Guevarra was under obligation to maintain the premises in good condition. Guevarra a squatter. Squatters, Guevarra pointed out, cannot enter into a contract involving the land they
promised to vacate the premises on Pajuyos demand but Guevarra broke his promise and refused illegally occupy. Guevarra insists that the contract is void.
to heed Pajuyos demand to vacate.
Guevarra should know that there must be honor even between squatters. Guevarra freely
These facts make out a case for unlawful detainer. Unlawful detainer involves the entered into the Kasunduan. Guevarra cannot now impugn the Kasunduan after he had benefited
withholding by a person from another of the possession of real property to which the latter is entitled from it. The Kasunduan binds Guevarra.
after the expiration or termination of the formers right to hold possession under a contract,
express or implied.[59] 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
Where the plaintiff allows the defendant to use his property by tolerance without any contract, evidence of Guevarras recognition of Pajuyos better right of physical possession. Guevarra is
the defendant is necessarily bound by an implied promise that he will vacate on demand, failing clearly a possessor in bad faith. The absence of a contract would not yield a different result, as
which, an action for unlawful detainer will lie.[60] The defendants refusal to comply with the demand there would still be an implied promise to vacate.
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 Guevarra contends that there is a pernicious evil that is sought to be avoided, and that is
continues by tolerance of the owner.[62] 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
This principle should apply with greater force in cases where a contract embodies the No. 137 on socialized housing.
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 We are not convinced.
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 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
continued possession of the property unlawful.
rents out usurped properties to other squatters. Moreover, it is for the proper government agency
We do not subscribe to the Court of Appeals theory that the Kasunduan is one to decide who between Pajuyo and Guevarra qualifies for socialized housing. The only issue that
of commodatum. we are addressing is physical possession.

In a contract of commodatum, one of the parties delivers to another something not Prior possession is not always a condition sine qua non in ejectment.[73] This is one of the
consumable so that the latter may use the same for a certain time and return it. [63] An essential distinctions between forcible entry and unlawful detainer.[74] In forcible entry, the plaintiff is deprived
feature of commodatum is that it is gratuitous. Another feature of commodatum is that the use of of physical possession of his land or building by means of force, intimidation, threat, strategy or
the thing belonging to another is for a certain period.[64] Thus, the bailor cannot demand the return stealth. Thus, he must allege and prove prior possession.[75] But in unlawful detainer, the defendant
of the thing loaned until after expiration of the period stipulated, or after accomplishment of the use unlawfully withholds possession after the expiration or termination of his right to possess under
for which the commodatum is constituted.[65] If the bailor should have urgent need of the thing, he any contract, express or implied. In such a case, prior physical possession is not required. [76]
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 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
a precarium.[67] Under the Civil Code, precarium is a kind of commodatum.[68]
possession of the property because Guevarra had to seek Pajuyos permission to temporarily hold
The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not the property and Guevarra had to follow the conditions set by Pajuyo in theKasunduan. Control
essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated him over the property still rested with Pajuyo and this is evidence of actual possession.
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 Pajuyos absence did not affect his actual possession of the disputed property. Possession
different from that of a commodatum. Case law on ejectment has treated relationship based on 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
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 occupation, but also by the fact that a thing is subject to the action of ones will.[78]Actual or physical
be unlawful. This is settled jurisprudence. occupation is not always necessary.[79]

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, Ruling on Possession Does not Bind Title to the Land in Dispute
or contracts of commission, administration and commodatum.[70] These contracts certainly involve
the obligation to deliver or return the thing received.[71]
We are aware of our pronouncement in cases where we declared that squatters and Decision dated 11 November 1996 of the Regional Trial Court of Quezon City, Branch 81 in Civil
intruders who clandestinely enter into titled government property cannot, by such act, acquire any Case No. Q-96-26943, affirming the Decision dated 15 December 1995 of the Metropolitan Trial
legal right to said property.[80] We made this declaration because the person who had title or who Court of Quezon City, Branch 31 in Civil Case No. 12432, is REINSTATED with MODIFICATION.
had the right to legal possession over the disputed property was a party in the ejectment suit and The award of attorneys fees is deleted. No costs.
that party instituted the case against squatters or usurpers.
SO ORDERED.
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. G.R. No. L-46240 November 3, 1939
QUINTOS V BECK
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
IMPERIAL, J.:
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 The plaintiff brought this action to compel the defendant to return her certain furniture which she
would subvert the policy underlying actions for recovery of possession. lent him for his use. She appealed from the judgment of the Court of First Instance of Manila which
ordered that the defendant return to her the three has heaters and the four electric lamps found in
Since Pajuyo has in his favor priority in time in holding the property, he is entitled to remain the possession of the Sheriff of said city, that she call for the other furniture from the said sheriff of
on the property until a person who has title or a better right lawfully ejects him. Guevarra is certainly Manila at her own expense, and that the fees which the Sheriff may charge for the deposit of the
not that person. The ruling in this case, however, does not preclude Pajuyo and Guevarra from furniture be paid pro rata by both parties, without pronouncement as to the costs.
introducing evidence and presenting arguments before the proper administrative agency to
establish any right to which they may be entitled under the law.[81]
The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H. del
In no way should our ruling in this case be interpreted to condone squatting. The ruling on Pilar street, No. 1175. On January 14, 1936, upon the novation of the contract of lease between
the issue of physical possession does not affect title to the property nor constitute a binding and the plaintiff and the defendant, the former gratuitously granted to the latter the use of the furniture
conclusive adjudication on the merits on the issue of ownership. [82] The owner can still go to court described in the third paragraph of the stipulation of facts, subject to the condition that the
to recover lawfully the property from the person who holds the property without legal title. Our ruling defendant would return them to the plaintiff upon the latter's demand. The plaintiff sold the property
here does not diminish the power of government agencies, including local governments, to to Maria Lopez and Rosario Lopez and on September 14, 1936, these three notified the defendant
condemn, abate, remove or demolish illegal or unauthorized structures in accordance with existing of the conveyance, giving him sixty days to vacate the premises under one of the clauses of the
laws. contract of lease. There after the plaintiff required the defendant to return all the furniture
transferred to him for them in the house where they were found. On November 5, 1936,
the defendant, through another person, wrote to the plaintiff reiterating that she may call for the
furniture in the ground floor of the house. On the 7th of the same month, the defendant wrote
Attorneys Fees and Rentals another letter to the plaintiff informing her that he could not give up the three gas heaters and the
four electric lamps because he would use them until the 15th of the same month when the lease
in due to expire. The plaintiff refused to get the furniture in view of the fact that the defendant had
declined to make delivery of all of them. On November 15th, before vacating the house,
The MTC and RTC failed to justify the award of P3,000 attorneys fees to Pajuyo. Attorneys
the defendant deposited with the Sheriff all the furniture belonging to the plaintiff and they are now
fees as part of damages are awarded only in the instances enumerated in Article 2208 of the Civil
on deposit in the warehouse situated at No. 1521, Rizal Avenue, in the custody of the said sheriff.
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. In their seven assigned errors the plaintiffs contend that the trial court incorrectly applied the law:
in holding that they violated the contract by not calling for all the furniture on November 5, 1936,
We sustain the P300 monthly rentals the MTC and RTC assessed against when the defendant placed them at their disposal; in not ordering the defendant to pay them the
Guevarra. Guevarra did not dispute this factual finding of the two courts. We find the amount value of the furniture in case they are not delivered; in holding that they should get all the furniture
reasonable compensation to Pajuyo. The P300 monthly rental is counted from the last demand to from the Sheriff at their expenses; in ordering them to pay-half of the expenses claimed by the
vacate, which was on 16 February 1995. Sheriff for the deposit of the furniture; in ruling that both parties should pay their respective legal
expenses or the costs; and in denying pay their respective legal expenses or the costs; and in
WHEREFORE, we GRANT the petition. The Decision dated 21 June 2000 and Resolution
denying the motions for reconsideration and new trial. To dispose of the case, it is only necessary
dated 14 December 2000 of the Court of Appeals in CA-G.R. SP No. 43129 are SET ASIDE.The
to decide whether the defendant complied with his obligation to return the furniture upon the
plaintiff's demand; whether the latter is bound to bear the deposit fees thereof, and whether she is This is a Petition for Review on Certiorari2 assailing the February 27, 2008 Decision3 of the Court
entitled to the costs of litigation.lawphi1.net of Appeals (CA) in CA-G.R. SP No. 100094, which reversed and set aside the Decision4 dated
April 19, 2007 of the Regional Trial Court (RTC), Branch 192, Marikina City in Civil Case No. 06-
1145-MK. The said RTC Decision affirmed in all respects the Decision5 dated June 30, 2006 of the
The contract entered into between the parties is one of commadatum, because under it the plaintiff
Metropolitan Trial Court (MeTC), Branch 75, Marikina City in Civil Case No. 05-7755, which
gratuitously granted the use of the furniture to the defendant, reserving for herself the ownership
ordered respondent L & J Development Company (L&J) to pay petitioner Architect Rolando C. De
thereof; by this contract the defendant bound himself to return the furniture to the plaintiff, upon
La Paz (Rolando) its principal obligation of ₱350,000.00, plus 12% interest per annumreckoned
the latters demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph 1, and 1741 of the
from the filing of the Complaint until full payment of the obligation.
Civil Code). The obligation voluntarily assumed by the defendant to return the furniture upon the
plaintiff's demand, means that he should return all of them to the plaintiff at the latter's residence
or house. The defendant did not comply with this obligation when he merely placed them at the Likewise assailed is the CA’s June 6, 2008 Resolution6 which denied Rolando’s Motion for
disposal of the plaintiff, retaining for his benefit the three gas heaters and the four eletric lamps. Reconsideration.
The provisions of article 1169 of the Civil Code cited by counsel for the parties are not squarely
applicable. The trial court, therefore, erred when it came to the legal conclusion that the plaintiff
Factual Antecedents
failed to comply with her obligation to get the furniture when they were offered to her.

On December 27, 2000, Rolando lent ₱350,000.00 without any security to L&J, a property
As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the
developer with Atty. Esteban Salonga (Atty. Salonga) as its President and General Manager. The
latter's demand, the Court could not legally compel her to bear the expenses occasioned by the
loan, with no specified maturity date, carried a 6% monthly interest, i.e., ₱21,000.00. From
deposit of the furniture at the defendant's behest. The latter, as bailee, was not entitled to place
December 2000 to August 2003, L&J paid Rolando a total of ₱576,000.00 7 representing interest
the furniture on deposit; nor was the plaintiff under a duty to accept the offer to return the furniture,
charges.
because the defendant wanted to retain the three gas heaters and the four electric lamps.

As L&J failed to pay despite repeated demands, Rolando filed a Complaint 8 for Collection of Sum
As to the value of the furniture, we do not believe that the plaintiff is entitled to the payment thereof
of Money with Damages against L&J and Atty. Salonga in his personal capacity before the MeTC,
by the defendant in case of his inability to return some of the furniture because under paragraph 6
docketed as Civil Case No. 05-7755. Rolando alleged, amongothers, that L&J’s debtas of January
of the stipulation of facts, the defendant has neither agreed to nor admitted the correctness of the
2005, inclusive of the monthly interest, stood at ₱772,000.00; that the 6% monthly interest was
said value. Should the defendant fail to deliver some of the furniture, the value thereof should be
upon Atty. Salonga’s suggestion; and, that the latter tricked him into parting with his money without
latter determined by the trial Court through evidence which the parties may desire to present.
the loan transaction being reduced into writing.

The costs in both instances should be borne by the defendant because the plaintiff is the prevailing
In their Answer,9 L&J and Atty. Salonga denied Rolando’s allegations. While they acknowledged
party (section 487 of the Code of Civil Procedure). The defendant was the one who breached the
the loan as a corporate debt, they claimed that the failure to pay the same was due to a fortuitous
contract of commodatum, and without any reason he refused to return and deliver all the furniture
event, that is, the financial difficulties brought about by the economic crisis. They further argued
upon the plaintiff's demand. In these circumstances, it is just and equitable that he pay the legal
that Rolando cannot enforce the 6% monthly interest for being unconscionable and shocking to
expenses and other judicial costs which the plaintiff would not have otherwise defrayed.
the morals. Hence, the payments already made should be applied to the ₱350,000.00 principal
loan.
The appealed judgment is modified and the defendant is ordered to return and deliver to the
plaintiff, in the residence to return and deliver to the plaintiff, in the residence or house of the latter,
During trial, Rolando testified that he had no communication with Atty. Salonga prior to the loan
all the furniture described in paragraph 3 of the stipulation of facts Exhibit A. The expenses which
transaction but knew him as a lawyer, a son of a former Senator, and the owner of L&J which
may be occasioned by the delivery to and deposit of the furniture with the Sheriff shall be for the
developed Brentwood Subdivision in Antipolo where his associate Nilo Velasco (Nilo) lives. When
account of the defendant. the defendant shall pay the costs in both instances. So ordered.
Nilo told him that Atty. Salonga and L&J needed money to finish their projects, heagreed to lend
them money. He personally met withAtty. Salonga and their meeting was cordial.
G.R. No. 183360 September 8, 2014
He narrated that when L&J was in the process of borrowing the ₱350,000.00 from him, it was
DE LA PAZ V L&J DEVELOPMENT Arlene San Juan (Arlene), the secretary/treasurer of L&J, who negotiated the terms and conditions
thereof.She said that the money was to finance L&J’s housing project. Rolando claimed that it was
not he who demanded for the 6% monthly interest. It was L&J and Atty. Salonga, through Arlene,
DEL CASTILLO, J.:
who insisted on paying the said interest as they asserted that the loan was only a short-term one.

"No interest shall be due unless it has been expressly stipulated in writing." 1
Ruling of the Metropolitan Trial Court Unconvinced, the RTC, inits April 19, 2007 Decision,14 affirmed the MeTC Decision, viz:
WHEREFORE, premises considered, the Decision appealed from is hereby AFFIRMED in all
respects, with costs against the appellant.
The MeTC, in its Decision10 of June 30, 2006, upheld the 6% monthly interest. In so ruling, it
ratiocinated that since L&J agreed thereto and voluntarily paid the interest at suchrate from 2000
to 2003, it isalready estopped from impugning the same. Nonetheless, for reasons of equity, the SO ORDERED.15
saidcourt reduced the interest rate to 12% per annumon the remaining principal obligation of
₱350,000.00. With regard to Rolando’s prayer for moral damages, the MeTC denied the same as
Ruling of the Court of Appeals
it found no malice or bad faith on the part ofL&J in not paying the obligation. It likewise relieved
Atty. Salonga of any liability as it found that he merely acted in his official capacity in obtaining the
loan. The MeTC disposed of the case as follows: Undaunted, L&J went to the CA and echoed its arguments and proposed computation as proffered
before the RTC.
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff, Arch.
Rolando C. Dela Paz, and against the defendant, L & J Development Co., Inc., as follows: In a Decision16 dated February 27, 2008, the CAreversed and set aside the RTC Decision. The CA
stressed that the parties failedto stipulate in writing the imposition of interest on the loan. Hence,
no interest shall be due thereon pursuant to Article 1956 of the Civil Code. 17 And even if payment
a) ordering the defendant L & J Development Co., Inc. to pay plaintiff the amount of
of interest has been stipulated in writing, the 6% monthly interest is still outrightly illegal and
Three Hundred Fifty Thousand Pesos (₱350,000.00) representing the principal
unconscionable because it is contrary to morals, if not against the law. Being void, this cannot be
obligation, plus interest at the legal rate of 12% per annum to be computed from January
ratified and may be set up by the debtor as defense. For these reasons, Rolando cannot collect
20, 2005, the date of the filing of the complaint, until the whole obligation is fully paid;
any interest even if L&J offered to pay interest. Consequently, he has to return all the interest
payments of ₱576,000.00 to L&J.
b) ordering the defendant L & J Development Co., Inc. to pay plaintiff the amount of Five
Thousand Pesos (₱5,000.00) as and for attorney’s fees; and
Considering further that Rolando and L&J thereby became creditor and debtor of each other, the
CA applied the principle of legal compensation under Article 1279 of the Civil Code. 18 Accordingly,
c) to pay the costs of this suit. it set off the principal loan of ₱350,000.00 against the ₱576,000.00 total interest payments made,
leaving an excess of ₱226,000.00, which the CA ordered Rolando to pay L&J plus interest. Thus:
SO ORDERED.11
WHEREFORE, the DECISION DATED APRIL 19, 2007 is REVERSED and SET ASIDE.
Ruling of the Regional Trial Court
CONSEQUENT TO THE FOREGOING, respondent Rolando C. Dela Paz is ordered to pay to the
petitioner the amount of ₱226,000.00,plus interest of 12% per annumfrom the finality of this
L&J appealed to the RTC. It asserted in its appeal memorandum 12 that from December 2000 to
decision.
March 2003, it paid monthly interest of ₱21,000.00 based on the agreed-upon interest rate of
6%monthly and from April 2003 to August 2003, interest paymentsin various amounts.13 The total
of interest payments made amounts to ₱576,000.00 – an amount which is even more than the Costs of suit to be paid by respondent Dela Paz.
principal obligation of ₱350,000.00
SO ORDERED.19
L&J insisted that the 6% monthly interest rate is unconscionable and immoral. Hence, the 12% per
annumlegal interest should have been applied from the time of the constitution of the obligation.
In his Motion for Reconsideration,20 Rolando argued thatthe circumstances exempt both the
At 12% per annum interest rate, it asserted that the amount of interestit ought to pay from
application of Article 1956 and of jurisprudence holding that a 6% monthly interest is
December 2000 to March 2003 and from April 2003 to August 2003, only amounts to ₱105,000.00.
unconscionable, unreasonable, and exorbitant. He alleged that Atty. Salonga, a lawyer, should
If this amount is deducted from the total interest paymentsalready made, which is ₱576,000.00,
have taken it upon himself to have the loan and the stipulated rate of interest documented but, by
the amount of ₱471,000.00 appears to have beenpaid over and above what is due. Applying the
way of legal maneuver, Atty. Salonga, whom he fully trusted and relied upon, tricked him into
rule on compensation, the principal loan of ₱350,000.00 should be set-off against the ₱471,000.00,
believing that the undocumented and uncollateralized loan was withinlegal bounds. Had Atty.
resulting in the complete payment of the principal loan.
Salonga told him that the stipulated interest should be in writing, he would have readily assented.
Furthermore, Rolando insisted that the 6% monthly interest ratecould not be unconscionable as in
the first place, the interest was not imposed by the creditor but was in fact offered by the borrower,
who also dictated all the terms of the loan. He stressed that in cases where interest rates were
declared unconscionable, those meant to be protected by such declaration are helpless borrowers But Rolando asserts that his situation deserves an exception to the application of Article 1956. He
which is not the case here. blames Atty. Salonga for the lack of a written document, claiming that said lawyer used his legal
knowledge to dupe him. Rolando thus imputes bad faith on the part of L&J and Atty. Salonga. The
Court, however, finds no deception on the partof L&J and Atty. Salonga. For one, despite the lack
Still, the CA denied Rolando’s motion in its Resolution21 of June 6, 2008.
of a document stipulating the payment of interest, L&J nevertheless devotedly paid interests on
the loan. It only stopped when it suffered from financial difficulties that prevented it from
Hence, this Petition. continuously paying the 6% monthly rate. For another,regardless of Atty. Salonga’s profession,
Rolando who is an architect and an educated man himself could have been a more reasonably
prudent person under the circumstances. To top it all, he admitted that he had no prior
The Parties’ Arguments communication with Atty. Salonga. Despite Atty. Salonga being a complete stranger, he
immediately trusted him and lent his company ₱350,000.00, a significant amount. Moreover, as
Rolando argues that the 6%monthly interest rateshould not have been invalidated because Atty. the creditor,he could have requested or required that all the terms and conditions of the loan
Salonga took advantage of his legal knowledge to hoodwink him into believing that no document agreement, which include the payment of interest, be put down in writing to ensure that he and
was necessaryto reflect the interest rate. Moreover, the cases anent unconscionable interest rates L&J are on the same page. Rolando had a choice of not acceding and to insist that their contract
that the CA relied upon involve lenders who imposed the excessive rates,which are totally different be put in written form as this will favor and safeguard him as a lender. Unfortunately, he did not. It
from the case at bench where it is the borrower who decided on the high interest rate. This case must be stressed that "[c]ourts cannot follow one every step of his life and extricate him from bad
does not fall under a scenariothat ‘enslaves the borrower or that leads to the hemorrhaging of his bargains, protect him from unwise investments, relieve him from one-sided contracts,or annul the
assets’ that the courts seek to prevent. effects of foolish acts. Courts cannotconstitute themselves guardians of persons who are not
legally incompetent."23
L&J, in controverting Rolando’s arguments, contends that the interest rate is subject of negotiation
and is agreedupon by both parties, not by the borrower alone. Furthermore, jurisprudence has It may be raised that L&J is estopped from questioning the interest rate considering that it has
nullified interestrates on loans of 3% per month and higher as these rates are contrary to moralsand been paying Rolando interest at such ratefor more than two and a half years. In fact, in its pleadings
public interest. And while Rolando raises bad faithon Atty. Salonga’s part, L&J avers thatsuch issue before the MeTCand the RTC, L&J merely prayed for the reduction of interest from 6% monthly to
is a question of fact, a matter that cannot be raised under Rule 45. 1% monthly or 12% per annum. However, in Ching v. Nicdao,24 the daily payments of the debtor
to the lender were considered as payment of the principal amount of the loan because Article 1956
was not complied with. This was notwithstanding the debtor’s admission that the payments made
Issue were for the interests due. The Court categorically stated therein that "[e]stoppel cannot give
validity to an act that is prohibited by law or one thatis against public policy."
The Court’s determination of whether to uphold the judgment of the CA that the principal loan is
deemed paid isdependent on the validity of the monthly interest rate imposed. And in determining Even if the payment of interest has been reduced in writing, a 6% monthly interest rate on a loan
such validity, the Court must necessarily delve into matters regarding a) the form of the agreement is unconscionable, regardless of who between the parties proposed the rate.
of interest under the law and b) the alleged unconscionability of the interest rate. Our Ruling

Indeed at present, usury has been legally non-existent in view of the suspension of the Usury
The Petition is devoid of merit. Law25 by Central Bank Circular No. 905 s. 1982.26 Even so, not all interest rates levied upon loans
are permitted by the courts as they have the power to equitably reduce unreasonable interest rates.
The lack of a written stipulation to pay interest on the loaned amount disallows a creditor from In Trade & Investment Development Corporation of the Philippines v. Roblett Industrial
charging monetary interest. Construction Corporation,27 we said:

Under Article 1956 of the Civil Code, no interest shall bedue unless it has been expressly stipulated While the Court recognizes the right of the parties to enter into contracts and who are expectedto
in writing. Jurisprudence on the matter also holds that for interest to be due and payable, two comply with their terms and obligations, this rule is not absolute. Stipulated interest rates are illegal
conditions must concur: a) express stipulation for the payment of interest; and b) the agreement to if they are unconscionable and the Court is allowed to temper interest rates when necessary. In
pay interest is reduced in writing. exercising this vested power to determine what is iniquitous and unconscionable, the Court must
consider the circumstances of each case. What may be iniquitous and unconscionable in onecase,
may be just in another. x x x28
Here, it is undisputed that the parties did not put down in writing their agreement. Thus, no interest
is due. The collection of interest without any stipulation in writing is prohibited by law.22
Time and again, it has been ruled in a plethora of cases that stipulated interest rates of 3% per
month and higher, are excessive, iniquitous, unconscionable and exorbitant. Such stipulations are
void for being contrary to morals, if not against the law.29 The Court, however, stresses that these
rates shall be invalidated and shall be reduced only in cases where the terms of the loans are Petitioner Dario Nacar filed a complaint for constructive dismissal before the Arbitration Branch of
open-ended, and where the interest rates are applied for an indefinite period. Hence, the imposition the National Labor Relations Commission (NLRC) against respondents Gallery Frames (GF)
of a specific sum of ₱40,000.00 a month for six months on a ₱1,000,000.00 loan is not considered and/or Felipe Bordey, Jr., docketed as NLRC NCR Case No. 01-00519-97.
unconscionable.30
On October 15, 1998, the Labor Arbiter rendered a Decision3 in favor of petitioner and found that
In the case at bench, there is no specified period as to the payment of the loan. Hence, levying 6% he was dismissed from employment without a valid or just cause. Thus, petitioner was awarded
monthly or 72% interest per annumis "definitely outrageous and inordinate." 31 The situation that it backwages and separation pay in lieu of reinstatement in the amount of ₱158,919.92. The
was the debtor who insisted on the interest rate will not exempt Rolando from a ruling that the rate dispositive portion of the decision, reads:
is void. As this Court cited in Asian Cathay Finance and Leasing Corporation v. Gravador, 32 "[t]he
imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily
With the foregoing, we find and so rule that respondents failed to discharge the burden of showing
assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous
that complainant was dismissed from employment for a just or valid cause. All the more, it is clear
deprivation of property, repulsive to the common sense of man." 33 Indeed, "voluntariness does
from the records that complainant was never afforded due process before he was terminated. As
notmake the stipulation on [an unconscionable] interest valid."34
such, we are perforce constrained to grant complainant’s prayer for the payments of separation
pay in lieu of reinstatement to his former position, considering the strained relationship between
As exhaustibly discussed,no monetary interest isdue Rolando pursuant to Article the parties, and his apparent reluctance to be reinstated, computed only up to promulgation of this
1956.1âwphi1 The CA thus correctly adjudged that the excess interest payments made by L&J decision as follows:
should be applied to its principal loan. As computed by the CA, Rolando is bound to return the
excess payment of ₱226,000.00 to L&J following the principle of solutio indebiti. 35
SEPARATION PAY
36
However, pursuant to Central Bank Circular No. 799 s. 2013 which took effect on July 1, 2013, the
Date Hired = August 1990
interest imposed by the CA must be accordingly modified. The ₱226,000.00 which Rolando is
ordered to pay L&J shall earn an interest of 6% per annumfrom the finality of this Decision.
Rate = ₱198/day

WHEREFORE, the Decision dated February 27, 2008 of the Court of Appeals in CA-G.R. SP No. Date of Decision = Aug. 18, 1998
100094 is hereby AFFIRMED with modification that petitioner Rolando C. De La Paz is ordered to
pay respondent L&J Development Company the amount of ,₱226,000.00, plus interest of 6o/o per Length of Service = 8 yrs. & 1 month
annum from the finality of this Decision until fully paid.
₱198.00 x 26 days x 8 months = ₱41,184.00
SO ORDERED. BACKWAGES

G.R. No. 189871 August 13, 2013 Date Dismissed = January 24, 1997

Rate per day = ₱196.00


NACAR V GALLERY FRAMES
Date of Decisions = Aug. 18, 1998
DECISION
a) 1/24/97 to 2/5/98 = 12.36 mos.

PERALTA, J.: ₱196.00/day x 12.36 mos. = ₱62,986.56

This is a petition for review on certiorari assailing the Decision1 dated September 23, 2008 of the b) 2/6/98 to 8/18/98 = 6.4 months
Court of Appeals (CA) in CA-G.R. SP No. 98591, and the Resolution2 dated October 9, 2009
denying petitioner’s motion for reconsideration. Prevailing Rate per day = ₱62,986.00

₱198.00 x 26 days x 6.4 mos. = ₱32,947.20


The factual antecedents are undisputed.
TOTAL = ₱95.933.76
xxxx 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.
WHEREFORE, premises considered, judgment is hereby rendered finding respondents guilty of
constructive dismissal and are therefore, ordered:
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
To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred eighty-
respondents failed to appear on time. Meanwhile, petitioner moved that an Alias Writ of Execution
six pesos and 56/100 (₱62,986.56) Pesos representing his separation pay;
be issued to enforce the earlier recomputed judgment award in the sum of ₱471,320.31. 18

To pay jointly and severally the complainant the amount of nine (sic) five thousand nine hundred
The records of the case were again forwarded to the Computation and Examination Unit for
thirty-three and 36/100 (₱95,933.36) representing his backwages; and
recomputation, where the judgment award of petitioner was reassessed to be in the total amount
of only ₱147,560.19.
All other claims are hereby dismissed for lack of merit.
Petitioner then moved that a writ of execution be issued ordering respondents to pay him the
SO ORDERED.4 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.
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. On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the judgment
Respondents filed a motion for reconsideration, but it was denied. 6 award that was due to petitioner in the amount of ₱147,560.19, which petitioner eventually
received.
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 Petitioner then filed a Manifestation and Motion praying for the re-computation of the monetary
Reconsideration, but it was likewise denied in a Resolution dated May 8, 2001.7 award to include the appropriate interests.19

Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332. Finding On May 10, 2005, the Labor Arbiter issued an Order20 granting the motion, but only up to the
no reversible error on the part of the CA, this Court denied the petition in the Resolution dated April amount of ₱11,459.73. The Labor Arbiter reasoned that it is the October 15, 1998 Decision that
17, 2002.8 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 ₱158,919.92 that
An Entry of Judgment was later issued certifying that the resolution became final and executory should be executed. Thus, since petitioner already received ₱147,560.19, he is only entitled to the
on May 27, 2002.9The case was, thereafter, referred back to the Labor Arbiter. A pre-execution balance of ₱11,459.73.
conference was consequently scheduled, but respondents failed to appear.10

Petitioner then appealed before the NLRC,21 which appeal was denied by the NLRC in its
On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his Resolution22 dated September 27, 2006. Petitioner filed a Motion for Reconsideration, but it was
backwages be computed from the date of his dismissal on January 24, 1997 up to the finality of likewise denied in the Resolution23dated January 31, 2007.
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 ₱471,320.31. 12
Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No. 98591.
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 ₱471,320.31. Respondents filed a Motion to Quash On September 23, 2008, the CA rendered a Decision24 denying the petition. The CA opined that
Writ of Execution, arguing, among other things, that since the Labor Arbiter awarded separation since petitioner no longer appealed the October 15, 1998 Decision of the Labor Arbiter, which
pay of ₱62,986.56 and limited backwages of ₱95,933.36, no more recomputation is required to be already became final and executory, a belated correction thereof is no longer allowed. The CA
made of the said awards. They claimed that after the decision becomes final and executory, the stated that there is nothing left to be done except to enforce the said judgment. Consequently, it
same cannot be altered or amended anymore.14 On January 13, 2003, the Labor Arbiter issued an can no longer be modified in any respect, except to correct clerical errors or mistakes.
Order15 denying the motion. Thus, an Alias Writ of Execution16 was issued on January 14, 2003.
Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution25 dated October In concrete terms, the question is whether a re-computation in the course of execution of the labor
9, 2009. 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
Hence, the petition assigning the lone error:
decision; it delayed payment because it continued with the litigation until final judgment at the CA
level.
I
A source of misunderstanding in implementing the final decision in this case proceeds from the
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED, way the original labor arbiter framed his decision. The decision consists essentially of two parts.
COMMITTED GRAVE ABUSE OF DISCRETION AND DECIDED CONTRARY TO LAW IN
UPHOLDING THE QUESTIONED RESOLUTIONS OF THE NLRC WHICH, IN TURN,
The first is that part of the decision that cannot now be disputed because it has been confirmed
SUSTAINED THE MAY 10, 2005 ORDER OF LABOR ARBITER MAGAT MAKING THE
with finality. This is the finding of the illegality of the dismissal and the awards of separation pay in
DISPOSITIVE PORTION OF THE OCTOBER 15, 1998 DECISION OF LABOR ARBITER
lieu of reinstatement, backwages, attorney's fees, and legal interests.
LUSTRIA SUBSERVIENT TO AN OPINION EXPRESSED IN THE BODY OF THE SAME
DECISION.26
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
Petitioner argues that notwithstanding the fact that there was a computation of backwages in the
computation. This part, being merely a computation of what the first part of the decision established
Labor Arbiter’s decision, the same is not final until reinstatement is made or until finality of the
and declared, can, by its nature, be re-computed. This is the part, too, that the petitioner now posits
decision, in case of an award of separation pay. Petitioner maintains that considering that the
should no longer be re-computed because the computation is already in the labor arbiter's decision
October 15, 1998 decision of the Labor Arbiter did not become final and executory until the April
that the CA had affirmed. The public and private respondents, on the other hand, posit that a re-
17, 2002 Resolution of the Supreme Court in G.R. No. 151332 was entered in the Book of Entries
computation is necessary because the relief in an illegal dismissal decision goes all the way up to
on May 27, 2002, the reckoning point for the computation of the backwages and separation pay
reinstatement if reinstatement is to be made, or up to the finality of the decision, if separation pay
should be on May 27, 2002 and not when the decision of the Labor Arbiter was rendered on
is to be given in lieu reinstatement.
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.
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
On their part, respondents assert that since only separation pay and limited backwages were
the then NLRC Rules of Procedure which requires that a computation be made. This Section in
awarded to petitioner by the October 15, 1998 decision of the Labor Arbiter, no more recomputation
part states:
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 [T]he Labor Arbiter of origin, in cases involving monetary awards and at all events, as far as
to the award as computed by the Labor Arbiter in the total amount of ₱158,919.92. Respondents practicable, shall embody in any such decision or order the detailed and full amount awarded.
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
Clearly implied from this original computation is its currency up to the finality of the labor arbiter's
further recomputation of the backwages to be awarded to petitioner at this point of the proceedings
decision. As we noted above, this implication is apparent from the terms of the computation itself,
would substantially vary the decision of the Labor Arbiter as it violates the rule on immutability of
and no question would have arisen had the parties terminated the case and implemented the
judgments.
decision at that point.

The petition is meritorious.


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
The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v. Court of to the NLRC which, in turn, affirmed the labor arbiter's decision. By law, the NLRC decision is final,
Appeals (Sixth Division),27 wherein the issue submitted to the Court for resolution was the propriety reviewable only by the CA on jurisdictional grounds.
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 petitioner appropriately sought to nullify the NLRC decision on jurisdictional grounds through
the above-cited case that the decision already provided for the computation of the payable
a timely filed Rule 65 petition for certiorari. The CA decision, finding that NLRC exceeded its
separation pay and backwages due and did not further order the computation of the monetary
authority in affirming the payment of 13th month pay and indemnity, lapsed to finality and was
awards up to the time of the finality of the judgment. Also in Session Delights, the dismissed
subsequently returned to the labor arbiter of origin for execution.
employee failed to appeal the decision of the labor arbiter. The Court clarified, thus:
It was at this point that the present case arose. Focusing on the core illegal dismissal portion of been stipulated in writing. Furthermore, the interest due shall itself earn legal interest
the original labor arbiter's decision, the implementing labor arbiter ordered the award re-computed; from the time it is judicially demanded. In the absence of stipulation, the rate of interest
he apparently read the figures originally ordered to be paid to be the computation due had the case shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial
been terminated and implemented at the labor arbiter's level. Thus, the labor arbiter re-computed demand under and subject to the provisions of Article 1169 of the Civil Code.
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
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
went beyond the finality of the CA decision (July 29, 2003) and included as well the payment for
interest on the amount of damages awarded may be imposed at the discretion of the
awards the final CA decision had deleted - specifically, the proportionate 13th month pay and the
court at the rate of 6% per annum. No interest, however, shall be adjudged on
indemnity awards. Hence, the CA issued the decision now questioned in the present petition.
unliquidated claims or damages except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with
We see no error in the CA decision confirming that a re-computation is necessary as it essentially reasonable certainty, the interest shall begin to run from the time the claim is made
considered the labor arbiter's original decision in accordance with its basic component parts as we judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so
discussed above. To reiterate, the first part contains the finding of illegality and its monetary reasonably established at the time the demand is made, the interest shall begin to run
consequences; the second part is the computation of the awards or monetary consequences of only from the date the judgment of the court is made (at which time the quantification of
the illegal dismissal, computed as of the time of the labor arbiter's original decision. 28 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.
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 3. When the judgment of the court awarding a sum of money becomes final and
necessary consequence that flows from the nature of the illegality of dismissal declared by the executory, the rate of legal interest, whether the case falls under paragraph 1 or
Labor Arbiter in that decision.29 A recomputation (or an original computation, if no previous paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this
computation has been made) is a part of the law – specifically, Article 279 of the Labor Code and interim period being deemed to be by then an equivalent to a forbearance of credit. 33
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
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution
Article 279 of the Labor Code. The recomputation of the consequences of illegal dismissal upon
No. 796 dated May 16, 2013, approved the amendment of Section 234 of Circular No. 905, Series
execution of the decision does not constitute an alteration or amendment of the final decision being
of 1982 and, accordingly, issued Circular No. 799,35 Series of 2013, effective July 1, 2013, the
implemented. The illegal dismissal ruling stands; only the computation of monetary consequences
pertinent portion of which reads:
of this dismissal is affected, and this is not a violation of the principle of immutability of final
judgments.30
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
That the amount respondents shall now pay has greatly increased is a consequence that it cannot
amending Section 2 of Circular No. 905, Series of 1982:
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 Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the
is allowed. When that happens, the finality of the illegal dismissal decision becomes the reckoning rate allowed in judgments, in the absence of an express contract as to such rate of interest, shall
point instead of the reinstatement that the law decrees. In allowing separation pay, the final be six percent (6%) per annum.
decision effectively declares that the employment relationship ended so that separation pay and
backwages are to be computed up to that point.31
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
Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines, Inc. Financial Institutions are hereby amended accordingly.
v. Court of Appeals,32 the Court laid down the guidelines regarding the manner of computing legal
interest, to wit:
This Circular shall take effect on 1 July 2013.

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: 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 -
1. When the obligation is breached, and it consists in the payment of a sum of money, as reflected in the case of Eastern Shipping Lines 40and Subsection X305.1 of the Manual of
i.e., a loan or forbearance of money, the interest due should be that which may have 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 be deemed to have been reasonably ascertained). The actual base for the computation of legal
now be six percent (6%) per annum effective July 1, 2013. It should be noted, nonetheless, that interest shall, in any case, be on the amount finally adjudged.
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
When the judgment of the court awarding a sum of money becomes final and executory, the rate
the new rate of six percent (6%) per annum shall be the prevailing rate of interest when applicable.
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
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B. Olaguer v. equivalent to a forbearance of credit.
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
And, in addition to the above, judgments that have become final and executory prior to July 1,
maximum rate or rates of interest for all loans or renewals thereof or the forbearance of any money,
2013, shall not be disturbed and shall continue to be implemented applying the rate of interest
goods or credits, including those for loans of low priority such as consumer loans, as well as such
fixed therein.
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." 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:
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 (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;
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:
(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one
month pay per year of service; and
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 (3) interest of twelve percent (12%) per annum of the total monetary awards, computed
measure of recoverable damages.1âwphi1 from May 27, 2002 to June 30, 2013 and six percent (6%) per annum from July 1, 2013
until their full satisfaction.
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, The Labor Arbiter is hereby ORDERED to make another recomputation of the total monetary
as follows: benefits awarded and due to petitioner in accordance with this Decision.

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or SO ORDERED.
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.
G.R. No. 181045 July 2, 2014
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. SPS. SILOS V PNB

When an obligation, not constituting a loan or forbearance of money, is breached, an interest on DECISION
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 DEL CASTILLO, J.:
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 In loan agreements, it cannot be denied that the rate of interest is a principal condition, if not the
be so reasonably established at the time the demand is made, the interest shall begin to run only most important component. Thus, any modification thereof must be mutually agreed upon;
from the date the judgment of the court is made (at which time the quantification of damages may otherwise, it has no binding effect. Moreover, the Court cannot consider a stipulation granting a
party the option to prepay the loan if said party is not agreeable to the arbitrary interest rates
imposed. Premium may not be placed upon a stipulation in a contract which grants one party the Petitioners religiously paid interest on the notes at the following rates:
right to choose whether to continue with or withdraw from the agreement if it discovers that what
the other party has been doing all along is improper or illegal.
1. 1st Promissory Note dated July 24, 1989 – 19.5%;

This Petition for Review on Certiorari1 questions the May 8, 2007 Decision2 of the Court of Appeals
2. 2nd Promissory Note dated November 22, 1989 – 23%;
(CA) in CA-G.R. CV No. 79650, which affirmed with modifications the February 28, 2003
Decision3 and the June 4, 2003 Order4 of the Regional Trial Court (RTC), Branch 6 of Kalibo, Aklan
in Civil Case No. 5975. 3. 3rd Promissory Note dated March 21, 1990 – 22%;

Factual Antecedents 4. 4th Promissory Note dated July 19, 1990 – 24%;

Spouses Eduardo and Lydia Silos (petitioners) have been in business for about two decades of 5. 5th Promissory Note dated December 17, 1990 – 28%;
operating a department store and buying and selling of ready-to-wear apparel. Respondent
Philippine National Bank (PNB) is a banking corporation organized and existing under Philippine
laws. 6. 6th Promissory Note dated February 14, 1991 – 32%;

7. 7th Promissory Note dated March 1, 1991 – 30%; and


To secure a one-year revolving credit line of ₱150,000.00 obtained from PNB, petitioners
constituted in August 1987 a Real Estate Mortgage5 over a 370-square meter lot in Kalibo, Aklan
covered by Transfer Certificate of Title No. (TCT) T-14250. In July 1988,the credit line was 8. 8th Promissory Note dated July 11, 1991 – 24%.13
increased to ₱1.8 million and the mortgage was correspondingly increased to ₱1.8 million.6
In August 1991, an Amendment to Credit Agreement14 was executed by the parties, with the
And in July 1989, a Supplement to the Existing Real Estate Mortgage7 was executed to cover the following stipulation regarding interest:
same credit line, which was increased to ₱2.5 million, and additional security was given in the form
of a 134-square meter lot covered by TCT T-16208. In addition, petitioners issued eight Promissory
Notes8 and signed a Credit Agreement.9 This July 1989 Credit Agreement contained a stipulation 1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment from
on interest which provides as follows: date of each Availment up to but not including the date of full payment thereof at the rate per
annum which is determined by the Bank to be prime rate plus applicable spread in effect as of the
date of each Availment.15 (Emphases supplied)
1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% per annum. Interest
shall be payable in advance every one hundred twenty days at the rate prevailing at the time of
the renewal. Under this Amendment to Credit Agreement, petitioners issued in favor of PNB the following 18
Promissory Notes, which petitioners settled – except the last (the note covering the principal) – at
the following interest rates:
(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending on
whatever policy the Bank may adopt in the future, including without limitation, the shifting from the
floating interest rate system to the fixed interest rate system, or vice versa. Where the Bank has 1. 9th Promissory Note dated November 8, 1991 – 26%;
imposed on the Loan interest at a rate per annum, which is equal to the Bank’s spread over the
current floating interest rate, the Borrower hereby agrees that the Bank may, without need of notice 2. 10th Promissory Note dated March 19, 1992 – 25%;
to the Borrower, increase or decrease its spread over the floating interest rate at any time
depending on whatever policy it may adopt in the future.10 (Emphases supplied)
3. 11th Promissory Note dated July 11, 1992 – 23%;

The eight Promissory Notes, on the other hand, contained a stipulation granting PNB the right to
increase or reduce interest rates "within the limits allowed by law or by the Monetary Board."11 4. 12th Promissory Note dated November 10, 1992 – 21%;

The Real Estate Mortgage agreement provided the same right to increase or reduce interest rates 5. 13th Promissory Note dated March 15, 1993 – 21%;
"at any time depending on whatever policy PNB may adopt in the future."12
6. 14th Promissory Note dated July 12, 1993 – 17.5%;
7. 15th Promissory Note dated November 17, 1993 – 21%; days later or on October 28, 1997 – became past due, and despite repeated demands, petitioners
failed to make good on the note.
8. 16th Promissory Note dated March 28, 1994 – 21%;
Incidentally, PN 9707237 provided for the penalty equivalent to 24% per annum in case of default,
as follows:
9. 17th Promissory Note dated July 13, 1994 – 21%;

Without need for notice or demand, failure to pay this note or any installment thereon, when due,
10. 18th Promissory Note dated November 16, 1994 – 16%;
shall constitute default and in such cases or in case of garnishment, receivership or bankruptcy or
suit of any kind filed against me/us by the Bank, the outstanding principal of this note, at the option
11. 19th Promissory Note dated April 10, 1995 – 21%; of the Bank and without prior notice of demand, shall immediately become due and payable and
shall be subject to a penalty charge of twenty four percent (24%) per annum based on the defaulted
principal amount. x x x19 (Emphasis supplied)
12. 20th Promissory Note dated July 19, 1995 – 18.5%;

PNB prepared a Statement of Account20 as of October 12, 1998, detailing the amount due and
13. 21st Promissory Note dated December 18, 1995 – 18.75%; demandable from petitioners in the total amount of ₱3,620,541.60, broken down as follows:

14. 22nd Promissory Note dated April 22, 1996 – 18.5%;


Principal P 2,500,000.00
15. 23rd Promissory Note dated July 22, 1996 – 18.5%;
Interest 538,874.94

16. 24th Promissory Note dated November 25, 1996 – 18%; Penalties 581,666.66

17. 25th Promissory Note dated May 30, 1997 – 17.5%; and Total P 3,620,541.60

18. 26th Promissory Note (PN 9707237) dated July 30, 1997 – 25%.16
Despite demand, petitioners failed to pay the foregoing amount. Thus, PNB foreclosed on the
mortgage, and on January 14, 1999, TCTs T-14250 and T-16208 were sold to it at auction for the
The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the Bank amount of ₱4,324,172.96.21 The sheriff’s certificate of sale was registered on March 11, 1999.
may at any time without notice, raise within the limits allowed by law x x x." 17

More than a year later, or on March 24, 2000, petitioners filed Civil Case No. 5975, seeking
On the other hand, the 18th up to the 26th promissory notes – including PN 9707237, which is the annulment of the foreclosure sale and an accounting of the PNB credit. Petitioners theorized that
26th promissory note – carried the following provision: after the first promissory note where they agreed to pay 19.5% interest, the succeeding stipulations
for the payment of interest in their loan agreements with PNB – which allegedly left to the latter the
x x x For this purpose, I/We agree that the rate of interest herein stipulated may be increased or sole will to determine the interest rate – became null and void. Petitioners added that because the
decreased for the subsequent Interest Periods, with prior notice to the Borrower in the event of interest rates were fixed by respondent without their prior consent or agreement, these rates are
changes in interest rate prescribed by law or the Monetary Board of the Central Bank of the void, and as a result, petitioners should only be made liable for interest at the legal rate of 12%.
Philippines, or in the Bank’s overall cost of funds. I/We hereby agree that in the event I/we are not They claimed further that they overpaid interests on the credit, and concluded that due to this
agreeable to the interest rate fixed for any Interest Period, I/we shall have the option top repay the overpayment of steep interest charges, their debt should now be deemed paid, and the foreclosure
loan or credit facility without penalty within ten (10) calendar days from the Interest Setting and sale of TCTs T-14250 and T-16208 became unnecessary and wrongful. As for the imposed
Date.18 (Emphasis supplied) penalty of ₱581,666.66, petitioners alleged that since the Real Estate Mortgage and the
Supplement thereto did not include penalties as part of the secured amount, the same should be
excluded from the foreclosure amount or bid price, even if such penalties are provided for in the
Respondent regularly renewed the line from 1990 up to 1997, and petitioners made good on the final Promissory Note, or PN 9707237.22
promissory notes, religiously paying the interests without objection or fail. But in 1997, petitioners
faltered when the interest rates soared due to the Asian financial crisis. Petitioners’ sole
outstanding promissory note for ₱2.5 million – PN 9707237 executed in July 1997 and due 120 In addition, petitioners sought to be reimbursed an alleged overpayment of ₱848,285.00 made
during the period August 21, 1991 to March 5, 1998,resulting from respondent’s imposition of the
alleged illegal and steep interest rates. They also prayed to be awarded ₱200,000.00 by way of the right to question the rates, but that this was not done by the petitioners; and that anything that
attorney’s fees.23 is not found in the Promissory Note may be supplemented by the Credit Agreement. 29

In its Answer,24 PNB denied that it unilaterally imposed or fixed interest rates; that petitioners Ruling of the Regional Trial Court
agreed that without prior notice, PNB may modify interest rates depending on future policy adopted
by it; and that the imposition of penalties was agreed upon in the Credit Agreement. It added that
On February 28, 2003, the trial court rendered judgment dismissing Civil Case No. 5975. 30
the imposition of penalties is supported by the all-inclusive clause in the Real Estate Mortgage
agreement which provides that the mortgage shall stand as security for any and all other
obligations of whatever kind and nature owing to respondent, which thus includes penalties It ruled that:
imposed upon default or non-payment of the principal and interest on due date.
1. While the Credit Agreement allows PNB to unilaterally increase its spread over the
On pre-trial, the parties mutually agreed to the following material facts, among others: floating interest rate at any time depending on whatever policy it may adopt in the future,
it likewise allows for the decrease at any time of the same. Thus, such stipulation
authorizing both the increase and decrease of interest rates as may be applicable is
a) That since 1991 up to 1998, petitioners had paid PNB the total amount of
valid,31 as was held in Consolidated Bank and Trust Corporation (SOLIDBANK) v. Court
₱3,484,287.00;25 and
of Appeals;32

b) That PNB sent, and petitioners received, a March 10, 2000 demand letter. 26
2. Banks are allowed to stipulate that interest rates on loans need not be fixed and
instead be made dependent on prevailing rates upon which to peg such variable interest
During trial, petitioner Lydia Silos (Lydia) testified that the Credit Agreement, the Amendment to rates;33
Credit Agreement, Real Estate Mortgage and the Supplement thereto were all prepared by
respondent PNB and were presented to her and her husband Eduardo only for signature; that she
3. The Promissory Note, as the principal contract evidencing petitioners’ loan, prevails
was told by PNB that the latter alone would determine the interest rate; that as to the Amendment
over the Credit Agreement and the Real Estate Mortgage.
to Credit Agreement, she was told that PNB would fill up the interest rate portion thereof; that at
the time the parties executed the said Credit Agreement, she was not informed about the
applicable spread that PNB would impose on her account; that the interest rate portion of all As such, the rate of interest, penalties and attorney’s fees stipulated in the Promissory
Promissory Notes she and Eduardo issued were always left in blank when they executed them, Note prevail over those mentioned in the Credit Agreement and the Real Estate
with respondent’s mere assurance that it would be the one to enter or indicate thereon the Mortgage agreements;34
prevailing interest rate at the time of availment; and that they agreed to such arrangement. She
further testified that the two Real Estate Mortgage agreements she signed did not stipulate the
payment of penalties; that she and Eduardo consulted with a lawyer, and were told that PNB’s 4. Roughly, PNB’s computation of the total amount of petitioners’ obligation is correct; 35
actions were improper, and so on March 20, 2000, they wrote to the latter seeking a recomputation
of their outstanding obligation; and when PNB did not oblige, they instituted Civil Case No. 5975. 27 5. Because the loan was admittedly due and demandable, the foreclosure was regularly
made;36
On cross-examination, Lydia testified that she has been in business for 20 years; that she also
borrowed from other individuals and another bank; that it was only with banks that she was asked 6. By the admission of petitioners during pre-trial, all payments made to PNB were
to sign loan documents with no indicated interest rate; that she did not bother to read the terms of properly applied to the principal, interest and penalties.37
the loan documents which she signed; and that she received several PNB statements of account
detailing their outstanding obligations, but she did not complain; that she assumed instead that
what was written therein is correct.28 The dispositive portion of the trial court’s Decision reads:

For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr. (Aspa), the sole witness for IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the respondent and
respondent, stated on cross-examination that as a practice, the determination of the prime rates against the petitioners by DISMISSING the latter’s petition.
of interest was the responsibility solely of PNB’s Treasury Department which is based in Manila;
that these prime rates were simply communicated to all PNB branches for implementation; that Costs against the petitioners.
there are a multitude of considerations which determine the interest rate, such as the cost of
money, foreign currency values, PNB’s spread, bank administrative costs, profitability, and the
practice in the banking industry; that in every repricing of each loan availment, the borrower has SO ORDERED.38
Petitioners moved for reconsideration. In an Order39 dated June 4, 2003, the trial court granted 3) Whether x x x the extrajudicial foreclosure and sale are valid.42
only a modification in the award of attorney’s fees, reducing the same from 10% to 1%. Thus, PNB
was ordered to refund to petitioner the excess in attorney’s fees in the amount of ₱356,589.90, viz:
The CA noted that, based on receipts presented by petitioners during trial, the latter dutifully paid
a total of ₱3,027,324.60 in interest for the period August 7, 1991 to August 6, 1997, over and above
WHEREFORE, judgment is hereby rendered upholding the validity of the interest rate charged by the ₱2.5 million principal obligation. And this is exclusive of payments for insurance premiums,
the respondent as well as the extra-judicial foreclosure proceedings and the Certificate of Sale. documentary stamp taxes, and penalty. All the while, petitioners did not complain nor object to the
However, respondent is directed to refund to the petitioner the amount of ₱356,589.90 imposition of interest; they in fact paid the same religiously and without fail for seven years. The
representing the excess interest charged against the latter. appellate court ruled that petitioners are thus estopped from questioning the same.

No pronouncement as to costs. The CA nevertheless noted that for the period July 30, 1997 to August 14, 1997, PNB wrongly
applied an interest rate of 25.72% instead of the agreed 25%; thus it overcharged petitioners, and
the latter paid, an excess of ₱736.56 in interest.
SO ORDERED.40

On the issue of penalties, the CA ruled that the express tenor of the Real Estate Mortgage
Ruling of the Court of Appeals
agreements contemplated the inclusion of the PN 9707237-stipulated 24% penalty in the amount
to be secured by the mortgaged property, thus –
Petitioners appealed to the CA, which issued the questioned Decision with the following decretal
portion:
For and in consideration of certain loans, overdrafts and other credit accommodations obtained
from the MORTGAGEE and to secure the payment of the same and those others that the
WHEREFORE, in view of the foregoing, the instant appeal is PARTLY GRANTED. The modified MORTGAGEE may extend to the MORTGAGOR, including interest and expenses, and other
Decision of the Regional Trial Court per Order dated June 4, 2003 is hereby AFFIRMED with obligations owing by the MORTGAGOR to the MORTGAGEE, whether direct or indirect, principal
MODIFICATIONS, to wit: or secondary, as appearing in the accounts, books and records of the MORTGAGEE, the
MORTGAGOR does hereby transfer and convey by way of mortgage unto the MORTGAGEE x x
x43 (Emphasis supplied)
1. [T]hat the interest rate to be applied after the expiration of the first 30-day interest
period for PN. No. 9707237 should be 12% per annum;
The CA believes that the 24% penalty is covered by the phrase "and other obligations owing by
the mortgagor to the mortgagee" and should thus be added to the amount secured by the
2. [T]hat the attorney’s fees of10% is valid and binding; and mortgages.44

3. [T]hat [PNB] is hereby ordered to reimburse [petitioners] the excess in the bid price of The CA then proceeded to declare valid the foreclosure and sale of properties covered by TCTs
₱377,505.99 which is the difference between the total amount due [PNB] and the T-14250 and T-16208, which came as a necessary result of petitioners’ failure to pay the
amount of its bid price.
outstanding obligation upon demand.45The CA saw fit to increase the trial court’s award of 1% to
10%, finding the latter rate to be reasonable and citing the Real Estate Mortgage agreement which
SO ORDERED.41 authorized the collection of the higher rate.46

On the other hand, respondent did not appeal the June 4,2003 Order of the trial court which Finally, the CA ruled that petitioners are entitled to ₱377,505.09 surplus, which is the difference
reduced its award of attorney’s fees. It simply raised the issue in its appellee’s brief in the CA, and between PNB’s bid price of ₱4,324,172.96 and petitioners’ total computed obligation as of January
included a prayer for the reversal of said Order. 14, 1999, or the date of the auction sale, in the amount of ₱3,946,667.87. 47

In effect, the CA limited petitioners’ appeal to the following issues: Hence, the present Petition.

1) Whether x x x the interest rates on petitioners’ outstanding obligation were unilaterally Issues
and arbitrarily imposed by PNB;
The following issues are raised in this Petition:
2) Whether x x x the penalty charges were secured by the real estate mortgage; and
I money, foreign currency values, and bank administrative costs; spaces for interest rates in the two
Credit Agreements and the promissory notes were left blank for PNB to unilaterally fill, and their
consent or agreement to the interest rates imposed thereafter was not obtained; the interest rate,
A. THE COURT OF APPEALS AS WELL AS THE LOWER COURT ERRED
which consists of the prime rate plus the bank spread, is determined not by agreement of the
IN NOT NULLIFYING THE INTEREST RATE PROVISION IN THE CREDIT
parties but by PNB’s Treasury Department in Manila. Petitioners conclude that by this method of
AGREEMENT DATED JULY 24, 1989 X X X AND IN THE AMENDMENT TO
fixing the interest rates, the principle of mutuality of contracts is violated, and public policy as well
CREDIT AGREEMENT DATEDAUGUST 21, 1991 X X X WHICH LEFT TO
as Circular 90549 of the then Central Bank had been breached.
THE SOLE UNILATERAL DETERMINATION OF THE RESPONDENT PNB
THE ORIGINAL FIXING OF INTEREST RATE AND ITS INCREASE, WHICH
AGREEMENT IS CONTRARY TO LAW, ART. 1308 OF THE [NEW CIVIL Petitioners question the CA’s application of the principle of estoppel, saying that no estoppel can
CODE], AS ENUNCIATED IN PONCIANO ALMEIDA V. COURT OF proceed from an illegal act. Though they failed to timely question the imposition of the alleged
APPEALS,G.R. [NO.] 113412, APRIL 17, 1996, AND CONTRARY TO illegal interest rates and continued to pay the loan on the basis of these rates, they cannot be
PUBLIC POLICY AND PUBLIC INTEREST, AND IN APPLYING THE deemed to have acquiesced, and hence could recover what they erroneously paid.50
PRINCIPLE OF ESTOPPEL ARISING FROM THE ALLEGED DELAYED
COMPLAINT OF PETITIONER[S], AND [THEIR] PAYMENT OF THE
Petitioners argue that if the interest rates were nullified, then their obligation to PNB is deemed
INTEREST CHARGED.
extinguished as of July 1997; moreover, it would appear that they even made an over payment to
the bank in the amount of ₱984,287.00.
B. CONSEQUENTLY, THE COURT OF APPEALS AND THE LOWER
COURT ERRED IN NOT DECLARING THAT PNB IS NOT AT ALL ENTITLED
Next, petitioners suggest that since the Real Estate Mortgage agreements did not include nor
TO ANY INTEREST EXCEPT THE LEGAL RATE FROM DATE OF
specify, as part of the secured amount, the penalty of 24% authorized in PN 9707237, such amount
DEMAND, AND IN NOT APPLYING THE EXCESS OVER THE LEGAL RATE
of ₱581,666.66 could not be made answerable by or collected from the mortgages covering TCTs
OF THE ADMITTED PAYMENTS MADE BY PETITIONER[S] FROM 1991-
T-14250 and T-16208. Claiming support from Philippine Bank of Communications [PBCom] v.
1998 IN THE ADMITTED TOTAL AMOUNT OF ₱3,484,287.00, TO
Court of Appeals,51 petitioners insist that the phrase "and other obligations owing by the mortgagor
PAYMENT OF THE PRINCIPAL OF ₱2,500,000.[00] LEAVING AN
to the mortgagee"52 in the mortgage agreements cannot embrace the ₱581,666.66 penalty,
OVERPAYMENT OF₱984,287.00 REFUNDABLE BY RESPONDENT TO
because, as held in the PBCom case, "[a] penalty charge does not belong to the species of
PETITIONER[S] WITH INTEREST OF 12% PER ANNUM.
obligations enumerated in the mortgage, hence, the said contract cannot be understood to secure
the penalty";53while the mortgages are the accessory contracts, what items are secured may only
II be determined from the provisions of the mortgage contracts, and not from the Credit Agreement
or the promissory notes.
THE COURT OF APPEALS AND THE LOWER COURT ERRED IN HOLDING THAT PENALTIES
ARE INCLUDEDIN THE SECURED AMOUNT, SUBJECT TO FORECLOSURE, WHEN NO Finally, petitioners submit that the trial court’s award of 1% attorney’s fees should be maintained,
PENALTIES ARE MENTIONED [NOR] PROVIDED FOR IN THE REAL ESTATE MORTGAGE AS given that in foreclosures, a lawyer’s work consists merely in the preparation and filing of the
A SECURED AMOUNT AND THEREFORE THE AMOUNT OF PENALTIES SHOULDHAVE petition, and involves minimal study.54 To allow the imposition of a staggering ₱396,211.00 for
BEEN EXCLUDED FROM [THE] FORECLOSURE AMOUNT. such work would be contrary to equity. Petitioners state that the purpose of attorney’s fees in cases
of this nature "is not to give respondent a larger compensation for the loan than the law already
allows, but to protect it against any future loss or damage by being compelled to retain counsel x
III
x x to institute judicial proceedings for the collection of its credit."55 And because the instant case
involves a simple extrajudicial foreclosure, attorney’s fees may be equitably tempered.
THE COURT OF APPEALS ERRED IN REVERSING THE RULING OF THE LOWER COURT,
WHICH REDUCED THE ATTORNEY’S FEES OF 10% OF THE TOTAL INDEBTEDNESS
Respondent’s Arguments
CHARGED IN THE X X X EXTRAJUDICIAL FORECLOSURE TOONLY 1%, AND [AWARDING]
10% ATTORNEY’S FEES.48
For its part, respondent disputes petitioners’ claim that interest rates were unilaterally fixed by it,
taking relief in the CA pronouncement that petitioners are deemed estopped by their failure to
Petitioners’ Arguments
question the imposed rates and their continued payment thereof without opposition. It adds that
because the Credit Agreement and promissory notes contained both an escalation clause and a
Petitioners insist that the interest rate provision in the Credit Agreement and the Amendment to de-escalation clause, it may not be said that the bank violated the principle of mutuality. Besides,
Credit Agreement should be declared null and void, for they relegated to PNB the sole power to the increase or decrease in interest rates have been mutually agreed upon by the parties, as shown
fix interest rates based on arbitrary criteria or factors such as bank policy, profitability, cost of by petitioners’ continuous payment without protest. Respondent adds that the alleged unilateral
imposition of interest rates is not a proper subject for review by the Court because the issue was Respondent adds that the purpose of the penalty or a penal clause for that matter is to ensure the
never raised in the lower court. performance of the obligation and substitute for damages and the payment of interest in the event
of non-compliance.62 And the promissory note – being the principal agreement as opposed to the
mortgage, which is a mere accessory – should prevail. This being the case, its inclusion as part of
As for petitioners’ claim that interest rates imposed by it are null and void for the reasons that 1)
the secured amount in the mortgage agreements is valid and necessary.
the Credit Agreements and the promissory notes were signed in blank; 2) interest rates were at
short periods; 3) no interest rates could be charged where no agreement on interest rates was
made in writing; 4) PNB fixed interest rates on the basis of arbitrary policies and standards left to Regarding the foreclosure of the mortgages, respondent accuses petitioners of pre-empting
its choosing; and 5) interest rates based on prime rate plus applicable spread are indeterminate consolidation of its ownership over TCTs T-14250 and T-16208; that petitioners filed Civil Case
and arbitrary – PNB counters: No. 5975 ostensibly to question the foreclosure and sale of properties covered by TCTs T-14250
and T-16208 in a desperate move to retain ownership over these properties, because they failed
to timely redeem them.
a. That Credit Agreements and promissory notes were signed by petitioner[s] in blank –
Respondent claims that this issue was never raised in the lower court. Besides,
documentary evidence prevails over testimonial evidence; Lydia Silos’ testimony in this Respondent directs the attention of the Court to its petition in G.R. No. 181046, 63 where the
regard is self-serving, unsupported and uncorroborated, and for being the lone evidence propriety of the CA’s ruling on the following issues is squarely raised:
on this issue. The fact remains that these documents are in proper form, presumed
regular, and endure, against arbitrary claims by Silos – who is an experienced business
1. That the interest rate to be applied after the expiration of the first 30-day interest period
person – that she signed questionable loan documents whose provisions for interest
for PN 9707237 should be 12% per annum; and
rates were left blank, and yet she continued to pay the interests without protest for a
number of years.56
2. That PNB should reimburse petitioners the excess in the bid price of ₱377,505.99
which is the difference between the total amount due to PNB and the amount of its bid
b. That interest rates were at short periods – Respondent argues that the law which
price.
governs and prohibits changes in interest rates made more than once every twelve
months has been removed57 with the issuance of Presidential Decree No. 858.58
Our Ruling
c. That no interest rates could be charged where no agreement on interest rates was
made in writing in violation of Article 1956 of the Civil Code, which provides that no The Court grants the Petition.
interest shall be due unless it has been expressly stipulated in writing – Respondent
insists that the stipulated 25% per annum as embodied in PN 9707237 should be
Before anything else, it must be said that it is not the function of the Court to re-examine or re-
imposed during the interim, or the period after the loan became due and while it remains
unpaid, and not the legal interest of 12% as claimed by petitioners. 59 evaluate evidence adduced by the parties in the proceedings below. The rule admits of certain
well-recognized exceptions, though, as when the lower courts’ findings are not supported by the
evidence on record or are based on a misapprehension of facts, or when certain relevant and
d. That PNB fixed interest rates on the basis of arbitrary policies and standards left to its undisputed facts were manifestly overlooked that, if properly considered, would justify a different
choosing – According to respondent, interest rates were fixed taking into consideration conclusion. This case falls within such exceptions.
increases or decreases as provided by law or by the Monetary Board, the bank’s overall
costs of funds, and upon agreement of the parties.60
The Court notes that on March 5, 2008, a Resolution was issued by the Court’s First Division
denying respondent’s petition in G.R. No. 181046, due to late filing, failure to attach the required
e. That interest rates based on prime rate plus applicable spread are indeterminate and affidavit of service of the petition on the trial court and the petitioners, and submission of a defective
arbitrary – On this score, respondent submits there are various factors that influence verification and certification of non-forum shopping. On June 25, 2008, the Court issued another
interest rates, from political events to economic developments, etc.; the cost of money, Resolution denying with finality respondent’s motion for reconsideration of the March 5, 2008
profitability and foreign currency transactions may not be discounted.61 Resolution. And on August 15, 2008, entry of judgment was made. This thus settles the issues, as
above-stated, covering a) the interest rate – or 12% per annum– that applies upon expiration of
the first 30 days interest period provided under PN 9707237, and b)the CA’s decree that PNB
On the issue of penalties, respondent reiterates the trial court’s finding that during pre-trial,
should reimburse petitioner the excess in the bid price of ₱377,505.09.
petitioners admitted that the Statement of Account as of October 12, 1998 – which detailed and
included penalty charges as part of the total outstanding obligation owing to the bank – was correct.
Respondent justifies the imposition and collection of a penalty as a normal banking practice, and It appears that respondent’s practice, more than once proscribed by the Court, has been carried
the standard rate per annum for all commercial banks, at the time, was 24%. over once more to the petitioners. In a number of decided cases, the Court struck down provisions
in credit documents issued by PNB to, or required of, its borrowers which allow the bank to increase
or decrease interest rates "within the limits allowed by law at any time depending on whatever Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits
policy it may adopt in the future." Thus, in Philippine National Bank v. Court of Appeals, 64 such may stipulate that the rate of interest agreed upon may be increased in the event that the applicable
stipulation and similar ones were declared in violation of Article 130865 of the Civil Code. In a maximum rate of interest is increased bylaw or by the Monetary Board; Provided, That such
second case, Philippine National Bank v. Court of Appeals,66 the very same stipulations found in stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest
the credit agreement and the promissory notes prepared and issued by the respondent were again agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced
invalidated. The Court therein said: by law or by the Monetary Board; Provided further, That the adjustment in the rate of interest
agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum
rate of interest.
The Credit Agreement provided inter alia, that —

Section 1 of P.D. No. 1684 also empowered the Central Bank’s Monetary Board to prescribe the
(a) The BANK reserves the right to increase the interest rate within the limits allowed by law at any
maximum rates of interest for loans and certain forbearances. Pursuant to such authority, the
time depending on whatever policy it may adopt in the future; Provided, that the interest rate on
Monetary Board issued Central Bank (C.B.) Circular No. 905, series of 1982, Section 5 of which
this accommodation shall be correspondingly decreased in the event that the applicable maximum
provides:
interest is reduced by law or by the Monetary Board. In either case, the adjustment in the interest
rate agreed upon shall take effect on the effectivity date of the increase or decrease in the
maximum interest rate. Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial Intermediaries)
is hereby amended to read as follows:
The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time without
notice, beyond the stipulated rate of 12% but only "within the limits allowed by law." Sec. 1303. Interest and Other Charges.

The Real Estate Mortgage contract likewise provided that — — The rate of interest, including commissions, premiums, fees and other charges, on any loan, or
forbearance of any money, goods or credits, regardless of maturity and whether secured or
unsecured, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as
(k) INCREASE OF INTEREST RATE: The rate of interest charged on the obligation secured by
amended.
this mortgage as well as the interest on the amount which may have been advanced by the
MORTGAGEE, in accordance with the provision hereof, shall be subject during the life of this
contract to such an increase within the rate allowed by law, as the Board of Directors of the P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely
MORTGAGEE may prescribe for its debtors. regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance
of money, goods or credits. In fine, they can agree to adjust, upward or downward, the interest
previously stipulated. However, contrary to the stubborn insistence of petitioner bank, the said law
xxxx
and circular did not authorize either party to unilaterally raise the interest rate without the other’s
consent.
In making the unilateral increases in interest rates, petitioner bank relied on the escalation clause
contained in their credit agreement which provides, as follows:
It is basic that there can be no contract in the true sense in the absence of the element of
agreement, or of mutual assent of the parties. If this assent is wanting on the part of the one who
The Bank reserves the right to increase the interest rate within the limits allowed by law at any time contracts, his act has no more efficacy than if it had been done under duress or by a person of
depending on whatever policy it may adopt in the future and provided, that, the interest rate on this unsound mind.
accommodation shall be correspondingly decreased in the event that the applicable maximum
interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in the
Similarly, contract changes must be made with the consent of the contracting parties. The minds
interest rate agreed upon shall take effect on the effectivity date of the increase or decrease in
of all the parties must meet as to the proposed modification, especially when it affects an important
maximum interest rate.
aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest
is always a vital component, for it can make or break a capital venture. Thus, any change must be
This clause is authorized by Section 2 of Presidential Decree (P.D.) No. 1684 which further mutually agreed upon, otherwise, it is bereft of any binding effect.
amended Act No. 2655 ("The Usury Law"), as amended, thus:
We cannot countenance petitioner bank’s posturing that the escalation clause at bench gives it
Section 2. The same Act is hereby amended by adding a new section after Section 7, to read as unbridled right to unilaterally upwardly adjust the interest on private respondents’ loan. That would
follows: completely take away from private respondents the right to assent to an important modification in
their agreement, and would negate the element of mutuality in contracts. In Philippine National xxxx
Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held —
Petitioners never agreed in writing to pay the increased interest rates demanded by respondent
x x x The unilateral action of the PNB in increasing the interest rate on the private respondent’s bank in contravention to the tenor of their credit agreement. That an increase in interest rates from
loan violated the mutuality of contracts ordained in Article 1308 of the Civil Code: 18% to as much as 68% is excessive and unconscionable is indisputable. Between 1981 and 1984,
petitioners had paid an amount equivalent to virtually half of the entire principal (₱7,735,004.66)
which was applied to interest alone. By the time the spouses tendered the amount of
Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left
₱40,142,518.00 in settlement of their obligations; respondent bank was demanding
to the will of one of them.
₱58,377,487.00 over and above those amounts already previously paid by the spouses.

In order that obligations arising from contracts may have the force of law between the parties, there
Escalation clauses are not basically wrong or legally objectionable so long as they are not solely
must be mutuality between the parties based on their essential equality. A contract containing a
potestative but based on reasonable and valid grounds. Here, as clearly demonstrated above, not
condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the
only [are] the increases of the interest rates on the basis of the escalation clause patently
contracting parties, is void . . . . Hence, even assuming that the . . . loan agreement between the
unreasonable and unconscionable, but also there are no valid and reasonable standards upon
PNB and the private respondent gave the PNB a license (although in fact there was none) to
which the increases are anchored.
increase the interest rate at will during the term of the loan, that license would have been null and
void for being violative of the principle of mutuality essential in contracts. It would have invested
the loan agreement with the character of a contract of adhesion, where the parties do not bargain xxxx
on equal footing, the weaker party’s (the debtor) participation being reduced to the alternative "to
take it or leave it" . . . . Such a contract is a veritable trap for the weaker party whom the courts of
In the face of the unequivocal interest rate provisions in the credit agreement and in the law
justice must protect against abuse and imposition.67 (Emphases supplied)
requiring the parties to agree to changes in the interest rate in writing, we hold that the unilateral
and progressive increases imposed by respondent PNB were null and void. Their effect was to
Then again, in a third case, Spouses Almeda v. Court of Appeals, 68 the Court invalidated the very increase the total obligation on an eighteen million peso loan to an amount way over three times
same provisions in the respondent’s prepared Credit Agreement, declaring thus: that which was originally granted to the borrowers. That these increases, occasioned by crafty
manipulations in the interest rates is unconscionable and neutralizes the salutary policies of
extending loans to spur business cannot be disputed.69 (Emphases supplied)
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 Still, in a fourth case, Philippine National Bank v. Court of Appeals, 70 the above doctrine was
contract which appears to be heavily weighed in favor of one of the parties so as to lead to an reiterated:
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.
The promissory note contained the following stipulation:

It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank
For value received, I/we, [private respondents] jointly and severally promise to pay to the ORDER
unilaterally altered the terms of its contract with petitioners by increasing the interest rates on the
of the PHILIPPINE NATIONAL BANK, at its office in San Jose City, Philippines, the sum of
loan without the prior assent of the latter. In fact, the manner of agreement is itself explicitly
FIFTEEN THOUSAND ONLY (₱15,000.00), Philippine Currency, together with interest thereon at
stipulated by the Civil Code when it provides, in Article 1956 that "No interest shall be due unless
the rate of 12% per annum until paid, which interest rate the Bank may at any time without notice,
it has been expressly stipulated in writing." What has been "stipulated in writing" from a perusal of
raise within the limits allowed by law, and I/we also agree to pay jointly and severally ____% per
interest rate provision of the credit agreement signed between the parties is that petitioners were
annum penalty charge, by way of liquidated damages should this note be unpaid or is not renewed
bound merely to pay 21% interest, subject to a possible escalation or de-escalation, when 1) the
on due dated.
circumstances warrant such escalation or de-escalation; 2) within the limits allowed by law; and 3)
upon agreement.
Payment of this note shall be as follows:
Indeed, the interest rate which appears to have been agreed upon by the parties to the contract in
this case was the 21% rate stipulated in the interest provision. Any doubt about this is in fact readily *THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE
resolved by a careful reading of the credit agreement because the same plainly uses the phrase
"interest rate agreed upon," in reference to the original 21% interest rate. x x x
On the reverse side of the note the following condition was stamped:
All short-term loans to be granted starting January 1, 1978 shall be made subject to the condition contract must bind both contracting parties; its validity or compliance cannot be left to the will of
that any and/or all extensions hereof that will leave any portion of the amount still unpaid after 730 one of them." As the Court explained:
days shall automatically convert the outstanding balance into a medium or long-term obligation as
the case may be and give the Bank the right to charge the interest rates prescribed under its
In order that obligations arising from contracts may have the force of law between the parties, there
policies from the date the account was originally granted.
must be mutuality between the parties based on their essential equality. A contract containing a
condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the
To secure payment of the loan the parties executed a real estate mortgage contract which contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming
provided: that the ₱1.8 million loan agreement between the PNB and the private respondent gave the PNB
a license (although in fact there was none) to increase the interest rate at will during the term of
the loan, that license would have been null and void for being violative of the principle of mutuality
(k) INCREASE OF INTEREST RATE:
essential in contracts. It would have invested the loan agreement with the character of a contract
of adhesion, where the parties do not bargain on equal footing, the weaker party’s (the debtor)
The rate of interest charged on the obligation secured by this mortgage as well as the interest on participation being reduced to the alternative "to take it or leave it" (Qua vs. Law Union & Rock
the amount which may have been advanced by the MORTGAGEE, in accordance with the Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts
provision hereof, shall be subject during the life of this contract to such an increase within the rate of justice must protect against abuse and imposition.
allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its debtors.
A similar ruling was made in Philippine National Bank v. Court of Appeals. The credit agreement
xxxx in that case provided:

To begin with, PNB’s argument rests on a misapprehension of the import of the appellate court’s The BANK reserves the right to increase the interest rate within the limits allowed by law at any
ruling. The Court of Appeals nullified the interest rate increases not because the promissory note time depending on whatever policy it may adopt in the future: Provided, that the interest rate on
did not comply with P.D. No. 1684 by providing for a de-escalation, but because the absence of this accommodation shall be correspondingly decreased in the event that the applicable maximum
such provision made the clause so one-sided as to make it unreasonable. interest is reduced by law or by the Monetary Board. . . .

That ruling is correct. It is in line with our decision in Banco Filipino Savings & Mortgage Bank v. As in the first case, PNB successively increased the stipulated interest so that what was originally
Navarro that although P.D. No. 1684 is not to be retroactively applied to loans granted before its 12% per annum became, after only two years, 42%. In declaring the increases invalid, we held:
effectivity, there must nevertheless be a de-escalation clause to mitigate the one-sidedness of the
escalation clause. Indeed because of concern for the unequal status of borrowers vis-à-vis the
We cannot countenance petitioner bank’s posturing that the escalation clause at bench gives it
banks, our cases after Banco Filipino have fashioned the rule that any increase in the rate of
unbridled right to unilaterally upwardly adjust the interest on private respondents’ loan. That would
interest made pursuant to an escalation clause must be the result of agreement between the
completely take away from private respondents the right to assent to an important modification in
parties.
their agreement, and would negate the element of mutuality in contracts.

Thus in Philippine National Bank v. Court of Appeals, two promissory notes authorized PNB to
Only recently we invalidated another round of interest increases decreed by PNB pursuant to a
increase the stipulated interest per annum" within the limits allowed by law at any time depending
similar agreement it had with other borrowers:
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." The real estate mortgage likewise provided: [W]hile the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the said
circular could possibly be read as granting respondent bank carte blanche authority to raise interest
rates to levels which would either enslave its borrowers or lead to a hemorrhaging of their assets.
The rate of interest charged on the obligation secured by this mortgage as well as the interest on
the amount which may have been advanced by the MORTGAGEE, in accordance with the
provisions hereof, shall be subject during the life of this contract to such an increase within the rate In this case no attempt was made by PNB to secure the conformity of private respondents to the
allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its debtors. successive increases in the interest rate. Private respondents’ assent to the increases can not be
implied from their lack of response to the letters sent by PNB, informing them of the increases. For
as stated in one case, no one receiving a proposal to change a contract is obliged to answer the
Pursuant to these clauses, PNB successively increased the interest from 18% to 32%, then to 41%
proposal.71 (Emphasis supplied)
and then to 48%. This Court declared the increases unilaterally imposed by [PNB] to be in violation
of the principle of mutuality as embodied in Art.1308 of the Civil Code, which provides that "[t]he
We made the same pronouncement in a fifth case, New Sampaguita Builders Construction, Inc. v. (b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending on
Philippine National Bank,72 thus – whatever policy the Bank may adopt in the future, including without limitation, the shifting from the
floating interest rate system to the fixed interest rate system, or vice versa. Where the Bank has
imposed on the Loan interest at a rate per annum which is equal to the Bank’s spread over the
Courts have the authority to strike down or to modify provisions in promissory notes that grant the
current floating interest rate, the Borrower hereby agrees that the Bank may, without need of notice
lenders unrestrained power to increase interest rates, penalties and other charges at the latter’s
to the Borrower, increase or decrease its spread over the floating interest rate at any time
sole discretion and without giving prior notice to and securing the consent of the borrowers. This
depending on whatever policy it may adopt in the future.76 (Emphases supplied)
unilateral authority is anathema to the mutuality of contracts and enable lenders to take undue
advantage of borrowers. Although the Usury Law has been effectively repealed, courts may still
reduce iniquitous or unconscionable rates charged for the use of money. Furthermore, excessive while the eight promissory notes issued pursuant thereto granted PNB the right to increase or
interests, penalties and other charges not revealed in disclosure statements issued by banks, even reduce interest rates "within the limits allowed by law or the Monetary Board"77 and the Real Estate
if stipulated in the promissory notes, cannot be given effect under the Truth in Lending Mortgage agreement included the same right to increase or reduce interest rates "at any time
Act.73 (Emphasis supplied) depending on whatever policy PNB may adopt in the future."78

Yet again, in a sixth disposition, Philippine National Bank v. Spouses Rocamora, 74 the above On the basis of the Credit Agreement, petitioners issued promissory notes which they signed in
pronouncements were reiterated to debunk PNB’s repeated reliance on its invalidated contract blank, and respondent later on entered their corresponding interest rates, as follows:
stipulations:
1st Promissory Note dated July 24, 1989 – 19.5%;
We repeated this rule in the 1994 case of PNB v. CA and Jayme Fernandez and the 1996 case of
PNB v. CA and Spouses Basco. Taking no heed of these rulings, the escalation clause PNB used
2nd Promissory Note dated November 22, 1989 – 23%;
in the present case to justify the increased interest rates is no different from the escalation clause
assailed in the 1996 PNB case; in both, the interest rates were increased from the agreed 12%
per annum rate to 42%. x x x 3rd Promissory Note dated March 21, 1990 – 22%;

xxxx 4th Promissory Note dated July 19, 1990 – 24%;

On the strength of this ruling, PNB’s argument – that the spouses Rocamora’s failure to contest 5th Promissory Note dated December 17, 1990 – 28%;
the increased interest rates that were purportedly reflected in the statements of account and the
demand letters sent by the bank amounted to their implied acceptance of the increase – should
6th Promissory Note dated February 14, 1991 – 32%;
likewise fail.

Evidently, PNB’s failure to secure the spouses Rocamora’s consent to the increased interest rates 7th Promissory Note dated March 1, 1991 – 30%; and
prompted the lower courts to declare excessive and illegal the interest rates imposed. Togo around
this lower court finding, PNB alleges that the ₱206,297.47 deficiency claim was computed using 8th Promissory Note dated July 11, 1991 – 24%.79
only the original 12% per annum interest rate. We find this unlikely. Our examination of PNB’s own
ledgers, included in the records of the case, clearly indicates that PNB imposed interest rates
higher than the agreed 12% per annum rate. This confirmatory finding, albeit based solely on On the other hand, the August 1991 Amendment to Credit Agreement contains the following
ledgers found in the records, reinforces the application in this case of the rule that findings of the stipulation regarding interest:
RTC, when affirmed by the CA, are binding upon this Court.75 (Emphases supplied)
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment from
Verily, all these cases, including the present one, involve identical or similar provisions found in date of each Availment up to but not including the date of full payment thereof at the rate per
respondent’s credit agreements and promissory notes. Thus, the July 1989 Credit Agreement annum which is determined by the Bank to be prime rate plus applicable spread in effect as of the
executed by petitioners and respondent contained the following stipulation on interest: date of each Availment.80 (Emphases supplied)

1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% [per annum]. Interest and under this Amendment to Credit Agreement, petitioners again executed and signed the
shall be payable in advance every one hundred twenty days at the rate prevailing at the time of following promissory notes in blank, for the respondent to later on enter the corresponding interest
the renewal. rates, which it did, as follows:
9th Promissory Note dated November 8, 1991 – 26%; x x x For this purpose, I/We agree that the rate of interest herein stipulated may be increased or
decreased for the subsequent Interest Periods, with prior notice to the Borrower in the event of
changes in interest rate prescribed by law or the Monetary Board of the Central Bank of the
10th Promissory Note dated March 19, 1992 – 25%;
Philippines, or in the Bank’s overall cost of funds. I/We hereby agree that in the event I/we are not
agreeable to the interest rate fixed for any Interest Period, I/we shall have the option to prepay the
11th Promissory Note dated July 11, 1992 – 23%; loan or credit facility without penalty within ten (10) calendar days from the Interest Setting
Date.83 (Emphasis supplied)
12th Promissory Note dated November 10, 1992 – 21%;
These stipulations must be once more invalidated, as was done in previous cases. The common
denominator in these cases is the lack of agreement of the parties to the imposed interest rates.
13th Promissory Note dated March 15, 1993 – 21%;
For this case, this lack of consent by the petitioners has been made obvious by the fact that they
signed the promissory notes in blank for the respondent to fill. We find credible the testimony of
14th Promissory Note dated July 12, 1993 – 17.5%; Lydia in this respect. Respondent failed to discredit her; in fact, its witness PNB Kalibo Branch
Manager Aspa admitted that interest rates were fixed solely by its Treasury Department in Manila,
which were then simply communicated to all PNB branches for implementation. If this were the
15th Promissory Note dated November 17, 1993 – 21%; case, then this would explain why petitioners had to sign the promissory notes in blank, since the
imposable interest rates have yet to be determined and fixed by respondent’s Treasury Department
16th Promissory Note dated March 28, 1994 – 21%; in Manila.

17th Promissory Note dated July 13, 1994 – 21%; Moreover, in Aspa’s enumeration of the factors that determine the interest rates PNB fixes – such
as cost of money, foreign currency values, bank administrative costs, profitability, and
considerations which affect the banking industry – it can be seen that considerations which affect
18th Promissory Note dated November 16, 1994 – 16%; PNB’s borrowers are ignored. A borrower’s current financial state, his feedback or opinions, the
nature and purpose of his borrowings, the effect of foreign currency values or fluctuations on his
19th Promissory Note dated April 10, 1995 – 21%; business or borrowing, etc. – these are not factors which influence the fixing of interest rates to be
imposed on him. Clearly, respondent’s method of fixing interest rates based on one-sided,
indeterminate, and subjective criteria such as profitability, cost of money, bank costs, etc. is
20th Promissory Note dated July 19, 1995 – 18.5%; arbitrary for there is no fixed standard or margin above or below these considerations.

21st Promissory Note dated December 18, 1995 – 18.75%; The stipulation in the promissory notes subjecting the interest rate to review does not render the
imposition by UCPB of interest rates on the obligations of the spouses Beluso valid. According to
22nd Promissory Note dated April 22, 1996 – 18.5%; said stipulation:

23rd Promissory Note dated July 22, 1996 – 18.5%; The interest rate shall be subject to review and may be increased or decreased by the LENDER
considering among others the prevailing financial and monetary conditions; or the rate of interest
and charges which other banks or financial institutions charge or offer to charge for similar
24th Promissory Note dated November 25, 1996 – 18%; accommodations; and/or the resulting profitability to the LENDER after due consideration of all
dealings with the BORROWER.
25th Promissory Note dated May 30, 1997 – 17.5%; and
It should be pointed out that the authority to review the interest rate was given [to] UCPB alone as
26th Promissory Note (PN 9707237) dated July 30, 1997 – 25%.81 the lender. Moreover, UCPB may apply the considerations enumerated in this provision as it
wishes. As worded in the above provision, UCPB may give as much weight as it desires to each
of the following considerations: (1) the prevailing financial and monetary condition;(2) the rate of
The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the Bank interest and charges which other banks or financial institutions charge or offer to charge for similar
may at any time without notice, raise within the limits allowed by law x x x." 82 On the other hand, accommodations; and/or(3) the resulting profitability to the LENDER (UCPB) after due
the 18th up to the 26th promissory notes – which includes PN 9707237 – carried the following consideration of all dealings with the BORROWER (the spouses Beluso). Again, as in the case of
provision: the interest rate provision, there is no fixed margin above or below these considerations.
In view of the foregoing, the Separability Clause cannot save either of the two options of UCPB as Accordingly, petitioners are correct in arguing that estoppel should not apply to them, for "[e]stoppel
to the interest to be imposed, as both options violate the principle of mutuality of cannot be predicated on an illegal act. As between the parties to a contract, validity cannot be
contracts.84 (Emphases supplied) given to it by estoppel if it is prohibited by law or is against public policy." 88

To repeat what has been said in the above-cited cases, any modification in the contract, such as It appears that by its acts, respondent violated the Truth in Lending Act, or Republic Act No. 3765,
the interest rates, must be made with the consent of the contracting parties.1âwphi1 The minds of which was enacted "to protect x x x citizens from a lack of awareness of the true cost of credit to
all the parties must meet as to the proposed modification, especially when it affects an important the user by using a full disclosure of such cost with a view of preventing the uninformed use of
aspect of the agreement. In the case of loan agreements, the rate of interest is a principal condition, credit to the detriment of the national economy." 89 The law "gives a detailed enumeration of the
if not the most important component. Thus, any modification thereof must be mutually agreed upon; specific information required to be disclosed, among which are the interest and other charges
otherwise, it has no binding effect. incident to the extension of credit."90 Section 4 thereof provides that a disclosure statement must
be furnished prior to the consummation of the transaction, thus:
What is even more glaring in the present case is that, the stipulations in question no longer provide
that the parties shall agree upon the interest rate to be fixed; -instead, they are worded in such a SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the
way that the borrower shall agree to whatever interest rate respondent fixes. In credit agreements consummation of the transaction, a clear statement in writing setting forth, to the extent applicable
covered by the above-cited cases, it is provided that: and in accordance with rules and regulations prescribed by the Board, the following information:

The Bank reserves the right to increase the interest rate within the limits allowed by law at any time (1) the cash price or delivered price of the property or service to be acquired;
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
(2) the amounts, if any, to be credited as down payment and/or trade-in;
interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in the
interest rate agreed upon shall take effect on the effectivity date of the increase or decrease in
maximum interest rate.85 (Emphasis supplied) (3) the difference between the amounts set forth under clauses (1) and (2);

Whereas, in the present credit agreements under scrutiny, it is stated that: (4) the charges, individually itemized, which are paid or to be paid by such person in
connection with the transaction but which are not incident to the extension of credit;
IN THE JULY 1989 CREDIT AGREEMENT
(5) the total amount to be financed;
(b) The Borrower agrees that the Bank may modify the interest rate on the Loan depending on
whatever policy the Bank may adopt in the future, including without limitation, the shifting from the (6) the finance charge expressed in terms of pesos and centavos; and
floating interest rate system to the fixed interest rate system, or vice versa. Where the Bank has
imposed on the Loan interest at a rate per annum, which is equal to the Bank’s spread over the
(7) the percentage that the finance bears to the total amount to be financed expressed
current floating interest rate, the Borrower hereby agrees that the Bank may, without need of notice
to the Borrower, increase or decrease its spread over the floating interest rate at any time as a simple annual rate on the outstanding unpaid balance of the obligation.
depending on whatever policy it may adopt in the future.86 (Emphases supplied)
Under Section 4(6), "finance charge" represents the amount to be paid by the debtor incident to
IN THE AUGUST 1991 AMENDMENT TO CREDIT AGREEMENT the extension of credit such as interest or discounts, collection fees, credit investigation fees,
attorney’s fees, and other service charges. The total finance charge represents the difference
between (1) the aggregate consideration (down payment plus installments) on the part of the
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment from debtor, and (2) the sum of the cash price and non-finance charges.91
date of each Availment up to but not including the date of full payment thereof at the rate per
annum which is determined by the Bank to be prime rate plus applicable spread in effect as of the
date of each Availment.87 (Emphasis supplied) By requiring the petitioners to sign the credit documents and the promissory notes in blank, and
then unilaterally filling them up later on, respondent violated the Truth in Lending Act, and was
remiss in its disclosure obligations. In one case, which the Court finds applicable here, it was held:
Plainly, with the present credit agreement, the element of consent or agreement by the borrower
is now completely lacking, which makes respondent’s unlawful act all the more reprehensible.
UCPB further argues that since the spouses Beluso were duly given copies of the subject The fact that petitioners later received several statements of account detailing its outstanding
promissory notes after their execution, then they were duly notified of the terms thereof, in obligations does not cure respondent’s breach. To repeat, the belated discovery of the true cost of
substantial compliance with the Truth in Lending Act. credit does not reverse the ill effects of an already consummated business decision. 93

Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the disclosure Neither may the statements be considered proposals sent to secure the petitioners’ conformity;
statement must be furnished prior to the consummation of the transaction: they were sent after the imposition and application of the interest rate, and not before. And even if
it were to be presumed that these are proposals or offers, there was no acceptance by petitioners.
"No one receiving a proposal to modify a loan contract, especially regarding interest, is obliged to
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the
answer the proposal."94
consummation of the transaction, a clear statement in writing setting forth, to the extent applicable
and in accordance with rules and regulations prescribed by the Board, the following information:
Loan and credit arrangements may be made enticing by, or "sweetened" with, offers of low initial
interest rates, but actually accompanied by provisions written in fine print that allow lenders to later
(1) the cash price or delivered price of the property or service to be acquired;
on increase or decrease interest rates unilaterally, without the consent of the borrower, and
depending on complex and subjective factors. Because they have been lured into these contracts
(2) the amounts, if any, to be credited as down payment and/or trade-in; by initially low interest rates, borrowers get caught and stuck in the web of subsequent steep rates
and penalties, surcharges and the like. Being ordinary individuals or entities, they naturally dread
legal complications and cannot afford court litigation; they succumb to whatever charges the
(3) the difference between the amounts set forth under clauses (1) and (2); lenders impose. At the very least, borrowers should be charged rightly; but then again this is not
possible in a one-sided credit system where the temptation to abuse is strong and the willingness
(4) the charges, individually itemized, which are paid or to be paid by such person in to rectify is made weak by the eternal desire for profit.
connection with the transaction but which are not incident to the extension of credit;
Given the above supposition, the Court cannot subscribe to respondent’s argument that in every
(5) the total amount to be financed; repricing of petitioners’ loan availment, they are given the right to question the interest rates
imposed. The import of respondent’s line of reasoning cannot be other than that if one out of every
hundred borrowers questions respondent’s practice of unilaterally fixing interest rates, then only
(6) the finance charge expressed in terms of pesos and centavos; and the loan arrangement with that lone complaining borrower will enjoy the benefit of review or re-
negotiation; as to the 99 others, the questionable practice will continue unchecked, and respondent
(7) the percentage that the finance bears to the total amount to be financed expressed will continue to reap the profits from such unscrupulous practice. The Court can no more condone
as a simple annual rate on the outstanding unpaid balance of the obligation. a view so perverse. This is exactly what the Court meant in the immediately preceding cited case
when it said that "the belated discovery of the true cost of credit does not reverse the ill effects of
an already consummated business decision;"95 as to the 99 borrowers who did not or could not
The rationale of this provision is to protect users of credit from a lack of awareness of the true cost complain, the illegal act shall have become a fait accompli– to their detriment, they have already
thereof, proceeding from the experience that banks are able to conceal such true cost by hidden suffered the oppressive rates.
charges, uncertainty of interest rates, deduction of interests from the loaned amount, and the like.
The law thereby seeks to protect debtors by permitting them to fully appreciate the true cost of
their loan, to enable them to give full consent to the contract, and to properly evaluate their options Besides, that petitioners are given the right to question the interest rates imposed is, under the
in arriving at business decisions. Upholding UCPB’s claim of substantial compliance would defeat circumstances, irrelevant; we have a situation where the petitioners do not stand on equal footing
these purposes of the Truth in Lending Act. The belated discovery of the true cost of credit will too with the respondent. It is doubtful that any borrower who finds himself in petitioners’ position would
often not be able to reverse the ill effects of an already consummated business decision. dare question respondent’s power to arbitrarily modify interest rates at any time. In the second
place, on what basis could any borrower question such power, when the criteria or standards –
which are really one-sided, arbitrary and subjective – for the exercise of such power are precisely
In addition, the promissory notes, the copies of which were presented to the spouses Beluso after lost on him?
execution, are not sufficient notification from UCPB. As earlier discussed, the interest rate provision
therein does not sufficiently indicate with particularity the interest rate to be applied to the loan
covered by said promissory notes.92 (Emphases supplied) For the same reasons, the Court cannot validly consider that, as stipulated in the 18th up to the
26th promissory notes, petitioners are granted the option to prepay the loan or credit facility without
penalty within 10 calendar days from the Interest Setting Date if they are not agreeable to the
However, the one-year period within which an action for violation of the Truth in Lending Act may interest rate fixed. It has been shown that the promissory notes are executed and signed in blank,
be filed evidently prescribed long ago, or sometime in 2001, one year after petitioners received the meaning that by the time petitioners learn of the interest rate, they are already bound to pay it
March 2000 demand letter which contained the illegal charges. because they have already pre-signed the note where the rate is subsequently entered.
Besides, premium may not be placed upon a stipulation in a contract which grants one party the did not intend to include the penalty allowed under PN 9707237 as part of the secured amount.
right to choose whether to continue with or withdraw from the agreement if it discovers that what Given its resources, respondent could have – if it truly wanted to – conveniently prepared and
the other party has been doing all along is improper or illegal. executed an amended mortgage agreement with the petitioners, thereby including penalties in the
amount to be secured by the encumbered properties. Yet it did not.
Thus said, respondent’s arguments relative to the credit documents – that documentary evidence
prevails over testimonial evidence; that the credit documents are in proper form, presumed regular, With regard to attorney’s fees, it was plain error for the CA to have passed upon the issue since it
and endure, against arbitrary claims by petitioners, experienced business persons that they are, was not raised by the petitioners in their appeal; it was the respondent that improperly brought it
they signed questionable loan documents whose provisions for interest rates were left blank, and up in its appellee’s brief, when it should have interposed an appeal, since the trial court’s Decision
yet they continued to pay the interests without protest for a number of years – deserve no on this issue is adverse to it. It is an elementary principle in the subject of appeals that an appellee
consideration. who does not himself appeal cannot obtain from the appellate court any affirmative relief other
than those granted in the decision of the court below.
With regard to interest, the Court finds that since the escalation clause is annulled, the principal
amount of the loan is subject to the original or stipulated rate of interest, and upon maturity, the x x x [A]n appellee, who is at the same time not an appellant, may on appeal be permitted to make
amount due shall be subject to legal interest at the rate of 12% per annum. This is the uniform counter assignments of error in ordinary actions, when the purpose is merely to defend himself
ruling adopted in previous cases, including those cited here. 96 The interests paid by petitioners against an appeal in which errors are alleged to have been committed by the trial court both in the
should be applied first to the payment of the stipulated or legal and unpaid interest, as the case appreciation of facts and in the interpretation of the law, in order to sustain the judgment in his
may be, and later, to the capital or principal.97 Respondent should then refund the excess amount favor but not when his purpose is to seek modification or reversal of the judgment, in which case
of interest that it has illegally imposed upon petitioners; "[t]he amount to be refunded refers to that it is necessary for him to have excepted to and appealed from the judgment.102
paid by petitioners when they had no obligation to do so." 98 Thus, the parties’ original agreement
stipulated the payment of 19.5% interest; however, this rate was intended to apply only to the first
Since petitioners did not raise the issue of reduction of attorney’s fees, the CA possessed no
promissory note which expired on November 21, 1989 and was paid by petitioners; it was not
authority to pass upon it at the instance of respondent. The ruling of the trial court in this respect
intended to apply to the whole duration of the loan. Subsequent higher interest rates have been
should remain undisturbed.
declared illegal; but because only the rates are found to be improper, the obligation to pay interest
subsists, the same to be fixed at the legal rate of 12% per annum. However, the 12% interest shall
apply only until June 30, 2013. Starting July1, 2013, the prevailing rate of interest shall be 6% per For the fixing of the proper amounts due and owing to the parties – to the respondent as creditor
annum pursuant to our ruling in Nacar v. Gallery Frames99 and Bangko Sentral ng Pilipinas- and to the petitioners who are entitled to a refund as a consequence of overpayment considering
Monetary Board Circular No. 799. that they paid more by way of interest charges than the 12% per annum 103 herein allowed – the
case should be remanded to the lower court for proper accounting and computation, applying the
following procedure:
Now to the issue of penalty. PN 9707237 provides that failure to pay it or any installment thereon,
when due, shall constitute default, and a penalty charge of 24% per annum based on the defaulted
principal amount shall be imposed. Petitioners claim that this penalty should be excluded from the 1. The 1st Promissory Note with the 19.5% interest rate is deemed proper and paid;
foreclosure amount or bid price because the Real Estate Mortgage and the Supplement thereto
did not specifically include it as part of the secured amount. Respondent justifies its inclusion in
the secured amount, saying that the purpose of the penalty or a penal clause is to ensure the 2. All subsequent promissory notes (from the 2nd to the 26th promissory notes) shall
performance of the obligation and substitute for damages and the payment of interest in the event carry an interest rate of only 12% per annum.104 Thus, interest payment made in excess
of non-compliance.100 Respondent adds that the imposition and collection of a penalty is a normal of 12% on the 2nd promissory note shall immediately be applied to the principal, and the
principal shall be accordingly reduced. The reduced principal shall then be subjected to
banking practice, and the standard rate per annum for all commercial banks, at the time, was 24%.
Its inclusion as part of the secured amount in the mortgage agreements is thus valid and the 12%105 interest on the 3rd promissory note, and the excess over 12% interest
necessary. payment on the 3rd promissory note shall again be applied to the principal, which shall
again be reduced accordingly. The reduced principal shall then be subjected to the 12%
interest on the 4th promissory note, and the excess over12% interest payment on the
The Court sustains petitioners’ view that the penalty may not be included as part of the secured 4th promissory note shall again be applied to the principal, which shall again be reduced
amount. Having found the credit agreements and promissory notes to be tainted, we must accord accordingly. And so on and so forth;
the same treatment to the mortgages. After all, "[a] mortgage and a note secured by it are deemed
parts of one transaction and are construed together."101 Being so tainted and having the attributes
of a contract of adhesion as the principal credit documents, we must construe the mortgage 3. After the above procedure is carried out, the trial court shall be able to conclude if
petitioners a) still have an OUTSTANDING BALANCE/OBLIGATION or b) MADE
contracts strictly, and against the party who drafted it. An examination of the mortgage agreements
reveals that nowhere is it stated that penalties are to be included in the secured amount. PAYMENTS OVER AND ABOVE THEIR TOTAL OBLIGATION (principal and interest);
Construing this silence strictly against the respondent, the Court can only conclude that the parties
4. Such outstanding balance/obligation, if there be any, shall then be subjected to a 12% From the above, it will be seen that if, after proper accounting, it turns out that the
per annum interest from October 28, 1997 until January 14, 1999, which is the date of petitioners made payments exceeding what they actually owe by way of principal,
the auction sale; interest, and attorney’s fees, then the mortgaged properties need not answer for any
outstanding secured amount, because there is not any; quite the contrary, respondent
must refund the excess to petitioners.1âwphi1 In such case, the extrajudicial foreclosure
5. Such outstanding balance/obligation shall also be charged a 24% per annum penalty
and sale of the properties shall be declared null and void for obvious lack of basis, the
from August 14, 1997 until January 14, 1999. But from this total penalty, the petitioners’
case being one of solutio indebiti instead. If, on the other hand, it turns out that
previous payment of penalties in the amount of ₱202,000.00made on January 27,
petitioners’ overpayments in interests do not exceed their total obligation, then the
1998106 shall be DEDUCTED;
respondent may consolidate its ownership over the properties, since the period for
redemption has expired. Its only obligation will be to return the difference between its
6. To this outstanding balance (3.), the interest (4.), penalties (5.), and the final and bid price (₱4,324,172.96) and petitioners’ total obligation outstanding – except penalties
executory award of 1% attorney’s fees shall be ADDED; – after applying the latter’s overpayments.

7. The sum total of the outstanding balance (3.), interest (4.) and 1% attorney’s fees (6.) WHEREFORE, premises considered, the Petition is GRANTED. The May 8, 2007 Decision of the
shall be DEDUCTED from the bid price of ₱4,324,172.96. The penalties (5.) are not Court of Appeals in CA-G.R. CV No. 79650 is ANNULLED and SET ASIDE. Judgment is hereby
included because they are not included in the secured amount; rendered as follows:

8. The difference in (7.) [₱4,324,172.96 LESS sum total of the outstanding balance (3.), 1. The interest rates imposed and indicated in the 2nd up to the 26th Promissory Notes
interest (4.), and 1% attorney’s fees (6.)] shall be DELIVERED TO THE PETITIONERS; are DECLARED NULL AND VOID, and such notes shall instead be subject to interest
at the rate of twelve percent (12%) per annum up to June 30, 2013, and starting July 1,
2013, six percent (6%) per annum until full satisfaction;
9. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-16208;

2. The penalty charge imposed in Promissory Note No. 9707237 shall be EXCLUDED
10. ON THE OTHER HAND, if after performing the procedure in (2.), it turns out that from the amounts secured by the real estate mortgages;
petitioners made an OVERPAYMENT, the interest (4.), penalties (5.), and the award of
1% attorney’s fees (6.) shall be DEDUCTED from the overpayment. There is no
outstanding balance/obligation precisely because petitioners have paid beyond the 3. The trial court’s award of one per cent (1%) attorney’s fees is REINSTATED;
amount of the principal and interest;
4. The case is ordered REMANDED to the Regional Trial Court, Branch 6 of Kalibo,
11. If the overpayment exceeds the sum total of the interest (4.), penalties (5.), and Aklan for the computation of overpayments made by petitioners spouses Eduardo and
award of 1% attorney’s fees (6.), the excess shall be RETURNED to the petitioners, with Lydia Silos to respondent Philippine National Bank, taking into consideration the
legal interest, under the principle of solutio indebiti;107 foregoing dispositions, and applying the procedure hereinabove set forth;

12. Likewise, if the overpayment exceeds the total amount of interest (4.) and award of 5. Thereafter, the trial court is ORDERED to make a determination as to the validity of
1% attorney’s fees (6.), the trial court shall INVALIDATE THE EXTRAJUDICIAL the extrajudicial foreclosure and sale, declaring the same null and void in case of
FORECLOSURE AND SALE; overpayment and ordering the release and return of Transfer Certificates of Title Nos.
T-14250 and TCT T-16208 to petitioners, or ordering the delivery to the petitioners of
the difference between the bid price and the total remaining obligation of petitioners, if
13. HOWEVER, if the total amount of interest (4.) and award of 1% attorney’s fees (6.) any;
exceed petitioners’ overpayment, then the excess shall be DEDUCTED from the bid
price of ₱4,324,172.96;
6. In the meantime, the respondent Philippine National Bank is ENJOINED from
consolidating title to Transfer Certificates of Title Nos. T-14250 and T-16208 until all the
14. The difference in (13.) [₱4,324,172.96 LESS sum total of the interest (4.) and 1% steps in the procedure above set forth have been taken and applied;
attorney’s fees (6.)] shall be DELIVERED TO THE PETITIONERS;

7. The reimbursement of the excess in the bid price of ₱377,505.99, which respondent
15. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-16208. Philippine National Bank is ordered to reimburse petitioners, should be HELD IN
The outstanding penalties, if any, shall be collected by other means.
ABEYANCE until the true amount owing to or owed by the parties as against each other amended) for damages, fixing of interest rate, and application of excess payments (with prayer for
is determined; a writ of preliminary injunction). They alleged therein that Metrobank had no right to foreclose the
mortgage because they were not in default of their obligations; that Metrobank had imposed
interest rates (i.e., 15.75% per annum for two long-term loans and 22.204% per annum for the
8. Considering that this case has been pending for such a long time and that further
short term loan) on three of their loans that were different from the rate of 14.75% per annum
proceedings, albeit uncomplicated, are required, the trial court is ORDERED to proceed
agreed upon; that Metrobank had increased the interest rates on some of their loans without any
with dispatch.
basis by invoking the escalation clause written in the loan agreement; that they had paid
P2,561,557.87 instead of only P1,802,867.00 based on the stipulated interest rates, resulting in
SO ORDERED. their excess payment of P758,690.87 as interest, which should then be applied to their accrued
obligation; that they had requested the reduction of the escalated interest rates on several
occasions because of its damaging effect on their hotel business, but Metrobank had denied their
G.R. No. 153852 October 24, 2012
request; and that they were not yet in default because the long-term loans would become due and
demandable on December 9, 2006 yet and they had been paying interest on the short-term loan
SPS. DELOS SANTOS V MBTC in advance.

BERSAMIN, J.: The complaint prayed that a writ of preliminary injunction to enjoin the scheduled foreclosure sale
be issued. They further prayed for a judgment making the injunction permanent, and directing
Metrobank, namely: (a) to apply the excess payment of P758,690.87 to the accrued interest; (b) to
A writ of preliminary injunction to enjoin an impending extrajudicial foreclosure sale is issued only pay P150,000.00 for the losses suffered in their hotel business; (c) to fix the interest rates of the
upon a clear showing of a violation of the mortgagor's unmistakable right. 1 loans; and (d) to pay moral and exemplary damages plus attorney’s fees.7

This appeal is taken by the petitioners to review and reverse the decision promulgated on February In its answer, Metrobank stated that the increase in the interest rates had been made pursuant to
19, 2002,2whereby the Court of Appeals (CA) dismissed their petition for certiorari that assailed the escalation clause stipulated in the loan agreements; and that not all of the payments by the
the denial by the Regional Trial Court in Davao City (RTC) of their application for the issuance of petitioners had been applied to the loans covered by the real estate mortgage, because some had
a writ of preliminary injunction to prevent the extrajudicial foreclosure sale of their mortgaged asset been applied to another loan of theirs amounting to P500,000.00 that had not been secured by the
initiated by their mortgagee, respondent Metropolitan Bank and Trust Company (Metrobank). mortgage.

Antecedents In the meantime, the RTC issued a temporary restraining order to enjoin the foreclosure sale. 8 After
hearing on notice, the RTC issued its order dated May 2, 2000,9 granting the petitioners’ application
From December 9, 1996 until March 20, 1998, the petitioners took out several loans totaling for a writ of preliminary injunction.
P12,000,000.00 from Metrobank, Davao City Branch, the proceeds of which they would use in
constructing a hotel on their 305-square-meter parcel of land located in Davao City and covered Metrobank moved for reconsideration.10 The petitioners did not file any opposition to Metrobank’s
by Transfer Certificate of Title No. I-218079 of the Registry of Deeds of Davao City. They executed motion for reconsideration; also, they did not attend the scheduled hearing of the motion for
various promissory notes covering the loans, and constituted a mortgage over their parcel of land reconsideration.
to secure the performance of their obligation. The stipulated interest rates were 15.75% per annum
for the long term loans (maturing on December 9, 2006) and 22.204% per annum for a short term
loan of P4,400,000.00 (maturing on March 12, 1999). 3 The interest rates were fixed for the first On May 19, 2000, the RTC granted Metrobank’s motion for reconsideration, holding in part, 11 as
year, subject to escalation or de-escalation in certain events without advance notice to them. The follows:
loan agreements further stipulated that the entire amount of the loans would become due and
demandable upon default in the payment of any installment, interest or other charges. 4 xxx In the motion at bench as well as at the hearing this morning defendant Metro Bank pointed
out that in all the promissory notes executed by the plaintiffs there is typewritten inside a box
On December 27, 1999, Metrobank sought the extrajudicial foreclosure of the real estate immediately following the first paragraph the following:
mortgage5 after the petitioners defaulted in their installment payments. The petitioners were
notified of the foreclosure and of the forced sale being scheduled on March 7, 2000. The notice of
"At the effective rate of 15.75% for the first year subject to upward/downward adjustments for the
the sale stated that the total amount of the obligation was P16,414,801.36 as of October 26, 1999. 6 next year thereafter."

On April 4, 2000, prior to the scheduled foreclosure sale (i.e., the original date of March 7, 2000
Moreover, in the form of the same promissory notes, there is the additional stipulation which reads:
having been meanwhile reset to April 6, 2000), the petitioners filed in the RTC a complaint (later
"The rate of interest and/or bank charges herein-stipulated, during the term of this Promissory The Court below did not excessively exercise its judicial authority not only in setting aside the May
Note, its extension, renewals or other modifications, may be increased, decreased, or otherwise 2, 2000 Order, but also in denying petitioners’ motion for reconsideration due to the faults
changed from time to time by the bank without advance notice to me/us in the event of changes in attributable to them.
the interest rates prescribed by law of the Monetary Board of the Central Bank of the Philippines,
in the rediscount rate of member banks with the Central Bank of the Philippines, in the interest
When private respondent Metrobank moved for the reconsideration of the Order of May 2, 2000
rates on savings and time deposits, in the interest rates on the Bank’s borrowings, in the reserve
which granted the issuance of the writ of preliminary injunction, petitioners failed to oppose the
requirements, or in the overall costs of funding or money;"
same despite receipt of said motion for reconsideration. The public respondent Court said –

There being no opposition to the motion despite receipt of a copy thereof by the plaintiffs through
"For resolution is the Motion for Reconsideration filed by the defendant Metropolitan Bank and
counsel and finding merit to the motion for reconsideration, this Court resolves to reconsider and
Trust Company, dated May 12, 2000, a copy of which was received by Atty. Philip Pantojan for the
set aside the Order of this Court dated May 2, 2000.
plaintiffs on May 16, 2000. There is no opposition nor appearance for the plaintiffs this morning at
the scheduled hearing of said motion x x x".
xxxx
Corollarily, the issuance of the Order of June 8, 2001 was xxx based on petitioners’ being remiss
SO ORDERED. in their obligation to update their installment payments.

The petitioners sought the reconsideration of the order, for which the RTC required the parties to The Supreme Court ruled in this wise:
submit their respective memoranda. In their memorandum, the petitioners insisted that they had
an excess payment sufficient to cover the amounts due on the principal.
To justify the issuance of the writ of certiorari, the abuse of discretion on the part of the tribunal or
officer must be grave, as when the power is exercised in an arbitrary or despotic manner by reason
Nonetheless, on June 8, 2001, the RTC denied the petitioners’ motion for reconsideration,12 to wit: of passion or personal hostility.

The record does not show that plaintiffs have updated their installment payments by depositing the Petitioners likewise discussed at length the issue of whether or not the private respondent has
same with this Court, with the interest thereon at the rate they contend to be the true and correct collected the right interest rate on the loans they obtained from the private respondent, as well as
rate agreed upon by the parties. the propriety of the application of escalated interest rate which was applied to their loans by the
latter. In the instant petition, questions of fact are not generally permitted, the inquiry being limited
essentially to whether the public respondent acted without or in excess of its jurisdiction or with
Hence, even if their contention with respect to the rates of interest is true and correct, they are in
grave abuse of discretion in issuing the questioned Orders, neither is the instant petition available
default just the same in the payment of their principal obligation.
to correct mistakes in the judge’s findings and conclusions, nor to cure erroneous conclusions of
law and fact, if there be any.
WHEREFORE, the MOTION FOR RECONSIDERATION is denied.
Certiorari will issue only to correct errors of jurisdiction, not errors of procedure or mistakes in the
Ruling of the CA findings or conclusions of the lower court.

Aggrieved, the petitioners commenced a special civil action for certiorari in the CA, ascribing grave A review of facts and evidence is not the province of the extraordinary remedy of certiorari.
abuse of discretion to the RTC when it issued the orders dated May 19, 2000 and June 8, 2001.
WHEREFORE, the petition is DENIED for lack of merit. The assailed Orders of the respondent
On February 19, 2002, the CA rendered the assailed decision dismissing the petition for certiorari Court are AFFIRMED.
for lack of merit, and affirming the assailed orders,13 stating:
SO ORDERED.
Petitioners aver that the respondent Court gravely abused its discretion in finding that petitioners
are in default in the payment of their obligation to the private respondent.
The petitioners moved for reconsideration of the decision, but the CA denied the motion for lack of
merit on May 7, 2002.14
We disagree.
Hence, this appeal. Ruling

Issues The appeal has no merit.

The petitioners pose the following issues, namely: To begin with, the petitioners’ resort to the special civil action of certiorari to assail the May 19,
2000 order of the RTC (reconsidering and setting aside its order dated May 2, 2000 issuing the
temporary restraining order against Metrobank to stop the foreclosure sale) was improper. They
1. Whether or not the Presiding Judge in issuing the 08 June 2001 Order, finding the
thereby apparently misapprehended the true nature and function of a writ of certiorari. It is clear to
petitioners in default of their obligation with the Bank, has committed grave abuse of
us, therefore, that the CA justly and properly dismissed their petition for the writ of certiorari.
discretion amounting to excess or lack of jurisdiction as the same run counter against
the legal principle enunciated in the Almeda Case;
We remind that the writ of certiorari – being a remedy narrow in scope and inflexible in character,
whose purpose is to keep an inferior court within the bounds of its jurisdiction, or to prevent an
2. Assuming that the Presiding Judge did not excessively exercise his judicial authority
inferior court from committing such grave abuse of discretion amounting to excess of jurisdiction,
in the issuance of the assailed orders, notwithstanding their consistency with the legal
or to relieve parties from arbitrary acts of courts (i.e., acts that courts have no power or authority
principle enunciated in the Almeda Case, whether or not the petitioners can avail of the
in law to perform) – is not a general utility tool in the legal workshop,19and cannot be issued to
remedy under Rule 65, taking into consideration the sense of urgency involved in the
correct every error committed by a lower court.
resolution of the issue raised;

In the common law, from which the remedy of certiorari evolved, the writ of certiorari was issued
3. Whether or not the Petition lodged before the Court of Appeals presented a question
out of Chancery, or the King’s Bench, commanding agents or officers of the inferior courts to return
of fact, and hence not within the province of the extraordinary remedy of certiorari. 15
the record of a cause pending before them, so as to give the party more sure and speedy justice,
for the writ would enable the superior court to determine from an inspection of the record whether
The petitioners argue that the foreclosure of their mortgage was premature; that they could not yet the inferior court’s judgment was rendered without authority. 20The errors were of such a nature
be considered in default under the ruling in Almeda v. Court of Appeals, 16 because the trial court that, if allowed to stand, they would result in a substantial injury to the petitioner to whom no other
was still to determine with certainty the exact amount of their obligation to Metrobank; that they remedy was available.21 If the inferior court acted without authority, the record was then revised
would likely prevail in their action because Metrobank had altered the terms of the loan agreement and corrected in matters of law.22 The writ of certiorari was limited to cases in which the inferior
by increasing the interest rates without their prior assent; and that unless the foreclosure sale was court was said to be exceeding its jurisdiction or was not proceeding according to essential
restrained their action would be rendered moot. They urge that despite finding no grave abuse of requirements of law and would lie only to review judicial or quasi-judicial acts.23
discretion on the part of the RTC in denying their application for preliminary injunction, the CA
should have nonetheless issued a writ of certiorari considering that they had no other plain and
The concept of the remedy of certiorari in our judicial system remains much the same as it has
speedy remedy.
been in the common law. In this jurisdiction, however, the exercise of the power to issue the writ
of certiorari is largely regulated by laying down the instances or situations in the Rules of Court in
Metrobank counters that Almeda v. Court of Appeals was not applicable because that ruling which a superior court may issue the writ of certiorari to an inferior court or officer. Section 1, Rule
presupposed the existence of the following conditions, to wit: (a) the escalation and de-escalation 65 of the Rules of Court compellingly provides the requirements for that purpose, viz:
of the interest rate were subject to the agreement of the parties; (b) the petitioners as obligors must
have protested the highly escalated interest rates prior to the application for foreclosure; (c) they
Section 1. Petition for certiorari. — When any tribunal, board or officer exercising judicial or quasi-
must not be in default in their obligations; (d) they must have tendered payment to Metrobank
judicial functions has acted without or in excess of its or his jurisdiction, or with grave abuse of
equivalent to the principal and accrued interest calculated at the originally stipulated rate; and (e)
discretion amounting to lack or excess of jurisdiction, and there is no appeal, or any plain, speedy,
upon refusal of Metrobank to receive payment, they should have consigned the tendered amount
and adequate remedy in the ordinary course of law, a person aggrieved thereby may file a verified
in court.17 It asserts that the petitioners’ loans, unlike the obligation involved in Almeda v. Court of
petition in the proper court, alleging the facts with certainty and praying that judgment be rendered
Appeals, had already matured prior to the filing of the case, and that they had not tendered or
annulling or modifying the proceedings of such tribunal, board or officer, and granting such
consigned in court the amount of the principal and the accrued interest at the rate they claimed to
incidental reliefs as law and justice may require.
be the correct one.18

The petition shall be accompanied by a certified true copy of the judgment, order or resolution
Based on the foregoing, the issues to be settled are, firstly, whether the petitioners had a cause of
subject thereof, copies of all pleadings and documents relevant and pertinent thereto, and a sworn
action for the grant of the extraordinary writ of certiorari; and, secondly, whether the petitioners
certification of non-forum shopping as provided in the third paragraph of section 3, Rule 46.
were entitled to the writ of preliminary injunction in light of the ruling in Almeda v. Court of Appeals.
(1a) A preliminary injunction is an order granted at any stage of an action or proceeding prior to the
judgment or final order requiring a party or a court, an agency, or a person to refrain from a
particular act or acts. It may also require the performance of a particular act or acts, in which case
Pursuant to Section 1, supra, the petitioner must show that, one, the tribunal, board or officer
it is known as a preliminary mandatory injunction. Thus, a prohibitory injunction is one that
exercising judicial or quasi-judicial functions acted without or in excess of jurisdiction or with grave
commands a party to refrain from doing a particular act, while a mandatory injunction commands
abuse of discretion amounting to lack or excess of jurisdiction, and, two, there is neither an appeal
the performance of some positive act to correct a wrong in the past.1âwphi1
nor any plain, speedy and adequate remedy in the ordinary course of law for the purpose of
amending or nullifying the proceeding.
As with all equitable remedies, injunction must be issued only at the instance of a party who
possesses sufficient interest in or title to the right or the property sought to be protected. It is proper
Considering that the requisites must concurrently be attendant, the herein petitioners’ stance that
only when the applicant appears to be entitled to the relief demanded in the complaint, which must
a writ of certiorari should have been issued even if the CA found no showing of grave abuse of
aver the existence of the right and the violation of the right, or whose averments must in the
discretion is absurd. The commission of grave abuse of discretion was a fundamental requisite for
minimum constitute a prima facie showing of a right to the final relief sought. Accordingly, the
the writ of certiorari to issue against the RTC. Without their strong showing either of the RTC’s lack
conditions for the issuance of the injunctive writ are: (a) that the right to be protected exists prima
or excess of jurisdiction, or of grave abuse of discretion by the RTC amounting to lack or excess
facie; (b) that the act sought to be enjoined is violative of that right; and (c) that there is an urgent
of jurisdiction, the writ of certiorari would not issue for being bereft of legal and factual bases. We
and paramount necessity for the writ to prevent serious damage. An injunction will not issue to
need to emphasize, too, that with certiorari being an extraordinary remedy, they must strictly
protect a right not in esse, or a right which is merely contingent and may never arise; or to restrain
observe the rules laid down by law for granting the relief sought. 24
an act which does not give rise to a cause of action; or to prevent the perpetration of an act
prohibited by statute. Indeed, a right, to be protected by injunction, means a right clearly founded
The sole office of the writ of certiorari is the correction of errors of jurisdiction, which includes the on or granted by law or is enforceable as a matter of law. (Bold emphasis supplied)
commission of grave abuse of discretion amounting to lack of jurisdiction. In this regard, mere
abuse of discretion is not enough to warrant the issuance of the writ. The abuse of discretion must
Thirdly, the petitioners allege that: (a) Metrobank had increased the interest rates without their
be grave, which means either that the judicial or quasi-judicial power was exercised in an arbitrary
assent and without any basis; and (b) they had an excess payment sufficient to cover the amounts
or despotic manner by reason of passion or personal hostility, or that the respondent judge, tribunal
due. In support of their allegation, they submitted a table of the interest payments, wherein they
or board evaded a positive duty, or virtually refused to perform the duty enjoined or to act in
projected what they had actually paid to Metrobank and contrasted the payments to what they
contemplation of law, such as when such judge, tribunal or board exercising judicial or quasi-
claimed to have been the correct amounts of interest, resulting in an excess payment of
judicial powers acted in a capricious or whimsical manner as to be equivalent to lack of jurisdiction.
P605,557.81.

Secondly, the Court must find that the petitioners were not entitled to enjoin or prevent the
The petitioners fail to convince.
extrajudicial foreclosure of their mortgage by Metrobank. They were undeniably already in default
of their obligations the performance of which the mortgage had precisely secured. Hence,
Metrobank had the unassailable right to the foreclosure. In contrast, their right to prevent the We consider to be unsubstantiated the petitioners’ claim of their lack of consent to the escalation
foreclosure did not exist. Hence, they could not be validly granted the injunction they sought. clauses. They did not adduce evidence to show that they did not assent to the increases in the
interest rates. The records reveal instead that they requested only the reduction of the interest rate
or the restructuring of their loans.28 Moreover, the mere averment that the excess payments were
The foreclosure of a mortgage is but a necessary consequence of the non-payment of an obligation
sufficient to cover their accrued obligation computed on the basis of the stipulated interest rate
secured by the mortgage. Where the parties have stipulated in their agreement, mortgage contract
cannot be readily accepted. Their computation, as their memorandum submitted to the RTC would
and promissory note that the mortgagee is authorized to foreclose the mortgage upon the
explain,29 was too simplistic, for it factored only the principal due but not the accrued interests and
mortgagor’s default, the mortgagee has a clear right to the foreclosure in case of the mortgagor’s
penalty charges that were also stipulated in the loan agreements.
default. Thereby, the issuance of a writ of preliminary injunction upon the application of the
mortgagor will be improper.25 Mindful that an injunction would be a limitation upon the freedom of
action of Metrobank, the RTC justifiably refused to grant the petitioners’ application for the writ of It is relevant to observe in this connection that escalation clauses like those affecting the petitioners
preliminary injunction. We underscore that the writ could be granted only if the RTC was fully were not void per se, and that an increase in the interest rate pursuant to such clauses were not
satisfied that the law permitted it and the emergency demanded it. 26 That, needless to state, was necessarily void. In Philippine National Bank v. Rocamora,30 the Court has said:
not true herein.
Escalation clauses are valid and do not contravene public policy. These clauses are common in
In City Government of Butuan v. Consolidated Broadcasting System (CBS), Inc., 27 the Court credit agreements as means of maintaining fiscal stability and retaining the value of money on
restated the nature and concept of a writ of preliminary injunction in the following manner, to wit: long-term contracts. To avoid any resulting one-sided situation that escalation clauses may bring,
we required in Banco Filipino the inclusion in the parties’ agreement of a de-escalation clause that
would authorize a reduction in the interest rates corresponding to downward changes made by law Almeda v. Court of Appeals involved circumstances that were far from identical with those
or by the Monetary Board. obtaining herein. To start with, Almeda v. Court of Appeals involved the mandatory foreclosure of
a mortgage by a government financial institution pursuant to Presidential Decree No. 38535 should
the arrears reach 20% of the total outstanding obligation. On the other hand, Metrobank is not a
The validity of escalation clauses notwithstanding, we cautioned that these clauses do not give
government financial institution. Secondly, the petitioners in Almeda v. Court of Appeals were not
creditors the unbridled right to adjust interest rates unilaterally. As we said in the same Banco
yet in default at the time they brought the action questioning the propriety of the interest rate
Filipino case, any increase in the rate of interest made pursuant to an escalation clause must be
increases, hut the herein petitioners were already in default and the mortgage had already been
the result of an agreement between the parties. The minds of all the parties must meet on the
foreclosed when they assailed the interest rates in court. Thirdly, the Court found in Almeda v.
proposed modification as this modification affects an important aspect of the agreement. There
Court of Appeals that the increases in the interest rates had been made without the prior assent
can be no contract in the true sense in the absence of the element of an agreement, i.e., the
of the borrowers, who had even consistently protested the increases in the stipulated interest rate.
parties’ mutual consent. Thus, any change must be mutually agreed upon, otherwise, the change
In contrast, the Court cannot make the same conclusion herein for lack of basis. Fourthly, the
carries no binding effect. A stipulation on the validity or compliance with the contract that is left
interest rates in Almeda v. Court of Appeals were raised to such a very high level that the borrowers
solely to the will of one of the parties is void; the stipulation goes against the principle of mutuality
were practically enslaved and their assets depleted, with the interest rate even reaching at one
of contract under Article 1308 of the Civil Code.
point a high of 68% per annum. Here, however, the increases reached a high of only 31% per
annum, according to the petitioners themselves. Lastly, the Court in Almeda v. Court of Appeals
We reiterate that injunction will not protect contingent, abstract or future rights whose existence is attributed good faith to the petitioners by their act of consigning in court the amounts of what they
doubtful or disputed.31 Indeed, there must exist an actual right,32 because injunction will not be believed to be their remaining obligation. No similar tender or consignation of the amount claimed
issued to protect a right not in esse and which may never arise, or to restrain an act which does by the petitioners herein to be their correct outstanding obligation was made by them.
not give rise to a cause of action. At any rate, an application for injunctive relief is strictly construed
against the pleader.33
In fine, the petitioners in Almeda v. Court o{Appeals had the existing right to a writ of preliminary
injunction pending the resolution of the main case, but the herein petitioners did not. Stated
Nor do we discern any substantial controversy that had any real bearing on Metrobank’s right to otherwise, no writ of preliminary injunction to enjoin an impending extrajudicial foreclosure sale
foreclose the mortgage. The mere possibility that the RTC would rule in the end in the petitioners’ should issue except upon a clear showing of a violation of the mortgagors' unmistakable right to
favor by lowering the interest rates and directing the application of the excess payments to the the injunction.
accrued principal and interest did not diminish the fact that when Metrobank filed its application for
extrajudicial foreclosure they were already in default as to their obligations and that their short-
WHEREFORE, the Court UENIES the petition for review on certiorari; AFFIRMS the decision
term loan of P4,400,000.00 had already matured. Under such circumstances, their application for
promulgated on February 19, 2002; and ORDERS the petitioners to pay the costs of suit.
the writ of preliminary injunction could not but be viewed as a futile attempt to deter or delay the
forced sale of their property.
SO ORDERED.
Lastly, citing the ruling in Almeda v. Court of Appeals, to the effect that the issuance of a preliminary
injunction pending the resolution of the issue on the correct interest rate would be justified, the THIRD DIVISION
petitioners submit that they could be rightly considered in default only after they had failed to settle
the exact amount of their obligation as determined by the trial court in the main case. [G.R. No. 119379. September 25, 1998]
POLOTAN V CA

The petitioners’ reliance on the ruling in Almeda v. Court of Appeals was misplaced.
ROMERO, J.:
Although it is true that the ruling in Almeda v. Court of Appeals sustained the issuance of the
Assailed before this Court in a Petition for Review on Certiorari is the decision[1] of the Court
preliminary injunction pending the determination of the issue on the interest rates, with the Court
of Appeals in CA-G.R. CV No. 33270 affirming the decision of Branch 132 of the Regional Trial
stating:
Court ofMakati City.

In the first place, because of the dispute regarding the interest rate increases, an issue which was Private respondent Security Diners International Corporation (Diners Club), a credit card
never settled on merit in the courts below, the exact amount of petitioners’ obligations could not company, extends credit accomodations to its cardholders for the purchase of goods and other
be determined. Thus, the foreclosure provisions of P.D. 385 could be validly invoked by respondent services from member establishments. Said goods and services are reimbursed later on by
bank only after settlement of the question involving the interest rate on the loan, and only after the cardholders upon proper billing.
spouses refused to meet their obligations following such determination.34 x x x.
Petitioner Rodelo G. Polotan, Sr. applied for membership and credit accmodations with
Diners Club in October 1985. The application form contained terms and conditions governing the
use and availment of the Diners Club card, among which is for the cardholder to pay all charges RESPONDENT COURT OF APPEALS COMMITTED AN ERROR OF LAW IN RULING IN
made through the use of said card within the period indicated in the statement of account and any EFFECT THAT PRIVATE RESPONDENTS STATEMENT OF ACCOUNT (Exh. 2) AS A JUDICIAL
remaining unpaid balance to earn 3% interest per annum plus prime rate of Security Bank & Trust ADMISSION THAT MRS. POLOTAN HAD ALREADY PAID COULD BE CONTRADICTED
Company. Notably, in the application form submitted by petitioner, Ofricano Canlas obligated WITHOUT THE PRIVATE RESPONDENT LAYING THE PROPER BASIS FOR THE
himself to pay jointly and severally with petitioner the latters obligation to private respondent. INTRODUCTION OF CONTRARY EVIDENCE;

Upon acceptance of his application, petitioner was issued Diners Club card No. 3651-
212766-3005. As of May 8, 1987, petitioner incurred credit charges plus appropriate interest and III
service charges in the aggregate amount of P33,819.84 which had become due and demandable.
RESPONDENT COURT OF APPEALS COMMITTED A GRIEVOUS ERROR OF FACT IN
Demands for payment made against petitioner proved futile. Hence, private respondent filed
FINDING AS CREDIBLE THE ILLOGICAL AND ABSURD EXPLANATION OF PRIVATE
a Complaint for Collection of Sum of Money against petitioner before the lower court.
RESPONDENTS MR. VICENTE;
The lower court ruled, thus:
IV
WHEREFORE, judgment is hereby rendered ordering defendants to pay jointly and severally
plaintiff: RESPONDENT COURT OF APPEALS ERRED IN NOT AWARDING DAMAGES TO
PETITIONER.
a) The amount of P33,819.84 and interest of 3% per annum plus prime rate of SBTC and service
charges of 2% per month starting May 9, 1987 until the entire obligation is fully paid; In the first assignment of error, petitioner argues that the provision on interest rate is obscure
and ambiguous and not susceptible of reasonable interpretation particularly the terms prime rate,
b) An amount equivalent to 25% of any and all amounts due and payable as attorneys fees, plus prevailing market rate and guiding rate. In effect, there was no meeting of minds. As such, this
costs of suit. being a contract of adhesion, any ambiguity should be resolved against the one who caused it.

Petitioner added that the said provision was also illegal as it violated the laws and Central
With respect to the cross-claim of defendant Ofricano Canlas, defendant Rodelo G. Polotan, Sr. is Bank Circulars. While said proviso allowed for the escalation of interest, it did not allow for a
ordered to indemnify and/or reimburse the former for whatever he may be ordered to pay plaintiff. downward adjustment of the same.

In his second and third assignment of error, petitioner claimed that Diners Club admitted,
The Court of Appeals affirmed the ruling of the lower court. Hence, this petition. Petitioner through its statement of account, that petitioners wife, Mrs. Polotan, had no more account with
assigns the following errors: it. But then, he claimed that the lower court and the Court of Appeals allowed the testimony of one
Mr. Vicente explaining that the reason why Mrs. Polotan had no more account with it was that
I
being a supplementary cardholder, her account was consolidated with that of petitioner in
accordance with its new policy. He argued that since Diners Club admitted that Mrs. Polotan had
RESPONDENT COURT OF APPEALS COMMITTED AN ERROR OF LAW IN RULING AS VALID no more account with it, the only way it could contradict such admission was by declaring that the
AND LEGAL THE FOLLOWING PROVISION ON INTEREST IN THE DINERS CARD same was a result of a palpable mistake in accordance with Section 4 of Rule 129 of the Revised
CONTRACT, TO WIT: Rules on Evidence. In admitting said explanation, the lower court and the Court of Appeals violated
the rule on the weight to be accorded conflicting evidence. In effect, petitioner insists that both
courts favored the uncorroborated testimonial evidence of Mr. Vicente over the documentary
PAYMENT OF CHARGES - xxx xxx xxx The Cardholder agrees to pay interest per annum at 3% evidence presented by petitioner and admitted by Diners Club.
plus the prime rate of Security Bank and Trust Company. xxx xxx xxx Provided that if there occurs
any change in the prevailing market rates the new interest rate shall be the guiding rate of In its fourth assignment of error, petitioner claimed that he should have been awarded
computing the interest due on the outstanding obligation without need of serving notice to the damages because of Diners Clubs bad faith.
Cardholder other than the required posting on the monthly statement served to the Cardholder.
This Court finds petitioners contentions without merit.
The Cardholder hereby authorizes Security Diners to correspondingly increase the rate of such The issues presented by petitioner are clearly questions of law. Notwithstanding petitioners
interest in the event of changes in prevailing market rates and to charge additional service fees as submission of the above errors, however, the core issue is basically one of fact. This case
may be deemed necessary in order to maintain its service to the Cardholder. stemmed from a simple complaint for collection of sum of money. The lower court and the Court
of Appeals found that petitioner indeed owed Diners Club the amount being demanded.
II
In the case of Reyes v. CA,[2] this Court held that factual findings of the trial court, adopted contract which appears to be heavily weighed in favor of one of the parties so as to lead to an
and confirmed by the Court of Appeals, are final and conclusive and may not be reviewed on unconscionable result is void.Any stipulation regarding the validity or compliance of the contract
appeal. The exceptions to this rule are as follows: (1) when the inference made is manifestly which is left solely to the will of one of the parties, is likewise, invalid.[6] It is important to stress that
mistaken, absurd or impossible; (2) when there is a grave abuse of discretion; (3) when the finding the Court is not precluded from ruling out blind adherence to their terms if the attendant facts and
is grounded entirely on speculations, surmises or conjectures; (4) when the judgment of the Court circumstances show that they should be ignored for being obviously too one-sided.[7]
of Appeals is based on misapprehension of facts; (5) when the findings of fact are
conflicting; (6) when the Court of Appeals, in making its findings, went beyond the issues of the In this case, petitioner, in effect, claims that the subject contract is one-sided in that the
case and the same is contrary to the admissions of both appellant and appellee; (7) when the contract allows for the escalation of interests, but does not provide for a downward adjustment of
findings of the Court of Appeals are contrary to those of the trial court; (8) when the findings of fact the same in violation of Central Bank Circular 905.
are conclusions without citation of specific evidence on which they are based; (9) when the Court
The claim is without basis. First, by signing the contract, petitioner and private respondent
of Appeals manifestly overlooked certain relevant facts not disputed by the parties and which, if
properly considered, would justify a different conclusion and (10) when the findings of fact of the agreed upon the rate as stipulated in the subject contract. Such is now allowed by C.B. Circular
Court of Appeals are premised on the absence of evidence and are contradicted by the evidence 905.[8] Second, petitioner failed to cite any particular provision of said Circular which was allegedly
violated by the subject contract.
on record.

Only a clear showing that any of the above-cited exceptions exists would justify a review of Be that as it may, there is nothing inherently wrong with escalation clauses. Escalation
the findings of fact made by the lower court and upheld by the Court of Appeals. In the instant clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain the
value of money in long term contracts.[9]
case, a reviewof the decisions of the lower court, as well as the Court of Appeals, shows that the
conclusions have been logically arrived at and substantially supported by the evidence presented Petitioner further argues that the interest rate was unilaterally imposed and based on the
by the parties. standards and rate formulated solely by Diners Club.
Be that as it may, this Court sees it fit and proper to discuss the merits of this petition based In Florendo v. CA,[10] this Court has held that:
on petitioners claim that since the contract he signed with Diners Club was a contract of adhesion,
the obscure provision on interest should be resolved in his favor.
x x x the unilateral determination and imposition of increased interest rates by the herein
A contract of adhesion is one in which one of the contracting parties imposes a ready-made respondent bank is obviously violative of the principle of mutuality of contracts ordained in Article
form of contract which the other party may accept or reject, but cannot modify. One party prepares 1308 of the Civil Code. As this Court held in PNB v. CA (196 SCRA 536 [1991]):
the stipulation in the contract, while the other party merely affixes his signature or his adhesion
thereto, giving no room for negotiation and depriving the latter of the opportunity to bargain on
equal footing.[3] In order that obligations arising from contracts may have the force of law between the parties, there
must be mutuality between the parties based on their essential equality. A contract containing a
Admittedly, the contract containing standard stipulations imposed upon those who seek to condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the
avail of its credit services was prepared by Diners Club. There is no way a prospective credit card contracting parties, is void. x x x
holder can object to any onerous provision as it is offered on a take-it-or-leave-it basis. Being a
contract of adhesion, any ambiguity in its provisions must be construed against private respondent. The contractual provision in question states that if there occurs any change in the prevailing
Indeed, the terms prime rate, prevailing market rate, 2% penalty charge, service fee, and market rates, the new interest rate shall be the guiding rate in computing the interest due on the
guiding rate are technical terms which are beyond the ken of an ordinary layman. To be sure, outstanding obligation without need of serving notice to the Cardhoder other than the required
posting on the monthly statement served to the Cardholder. This could not be considered an
petitioner hardly falls into the category of an ordinary layman. As aptly observed by the Court of
Appeals: 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.

x x x [A]ppellant by his own admission is a lawyer by profession, a reputable businessman and a Interpreting it differently, while said clause does not expressly stipulate a reduction in interest
noted leader of a number of socio-civic organizations. With such impressive credentials, this Court rate, it nevertheless provides a leeway for the interest rate to be reduced in case the prevailing
is hard-put to fathom someone of his calibre entering into a contract with eyes blindfolded. [4] market rates dictate its reduction.

Admittedly, the second paragraph of the questioned proviso which provides that the
Nevertheless, these types of contracts have been declared as binding as ordinary contracts, Cardholder hereby authorizes Security Diners to correspondingly increase the rate of such interest
the reason being that the party who adheres to the contract is free to reject it entirely. [5] 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
The binding effect of any agreement between parties to a contract is premised on two settled prevailing market rates.
principles: (1) that any obligation arising from a 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
Escalation clauses are not basically wrong or legally objectionable as long as they are not SO ORDERED.
solely potestative but based on reasonable and valid grounds.[11] Obviously, the fluctuation in
the market rates is beyond the control of private respondent.
G.R. No. 149004 April 14, 2004
As to the second and third assignments of error, it is misleading for petitioner to say that
private respondent had judicially admitted that its statement of account is proof that Mrs. Polotan IMPERIAL V JAUCIAN
has already paid her account with private respondent. Proceeding from said premise, it is further
misleading for petitioner to conclude that private respondents testimonial evidence about a new
policy contradicted its judicially admitted documentary evidence without laying the proper basis for DECISION
the introduction of contrary evidence and in violation of Section 2, Rule 129 of the Revised Rules
on Evidence, which provides that: PANGANIBAN, J.:

Admissions made by the parties in the pleadings, or in the course of the trial or other proceedings Iniquitous and unconscionable stipulations on interest rates, penalties and attorney’s fees are
do not require proof and can not be contradicted unless previously shown to have been made contrary to morals. Consequently, courts are granted authority to reduce them equitably. If
through palpable mistake. reasonably exercised, such authority shall not be disturbed by appellate courts.

Certainly, Diners Club could not deny the existence of Exhibit 2 which is the Statement of The Case
Account issued to Mrs. Polotan since, precisely, it was the one which issued said statement. But
to conclude that said Statement of Account was likewise an admission that Mrs. Polotan has no
more account with Diners Club would be equivocatory, or non-sequitur. Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the July 19, 2000
Decision2 and the June 14, 2001 Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 43635.
While private respondent admitted the existence of Exhibit 2, it could not have agreed to the The decretal portion of the Decision is as follows:
purpose for which the exhibit was presented. As satisfactorily found by the Court of Appeals and
to which this Court agrees:
"WHEREFORE, premises considered, the appealed Decision of the Regional Trial
Court, 5th Judicial Region, Branch 21, Naga City, dated August 31, 1993, in Civil Case
Appellants allegation is misleading. On the contrary, appellees rebuttal witness, Alfredo Vicente, No. 89-1911 for Sum of Money, is hereby AFFIRMED in toto."4
categorically stated that the reason the Statement of Account in the name of Alicia Polotan showed
a zero balance (Exh. 2) was due to the fact that effective February 1989, under a new system,
separate monthly statements were produced on supplementary card members. Prior to February The assailed Resolution denied petitioner’s Motion for Reconsideration.
1989, the availments of Mr. and Mrs. Polotan were incorporated under one statement.
The dispositive portion of the August 31, 1993 Decision, promulgated by the Regional Trial Court
Moreover, it is to be observed that while the Complaint was filed on 15 May 1987, the Diners Club (RTC) of Naga City (Branch 21) and affirmed by the CA, reads as follows:
Monthly Statement in the name of Alicia B. Polotan is dated almost two (2) years later or 02/08/89
(Exh. 2).This bolsters the testimony of Alfredo Vicente regarding the entry of zero balance in Mrs. "Wherefore, Judgment is hereby rendered declaring Section I, Central Bank Circular No.
Polotans name. 905, series of 1982 to be of no force and legal effect, it having been promulgated by the
Monetary Board of the Central Bank of the Philippines with grave abuse of discretion
Although said exhibit would, by itself, show that Mrs. Polotan had no more account with amounting to excess of jurisdiction; declaring that the rate of interest, penalty, and
Diners Club, it would not have been conclusive to prove that said account was already paid. The charges for attorney’s fees agreed upon between the parties are unconscionable,
proper evidence would have been a receipt of payment. iniquitous, and in violation of Act No. 2655, otherwise known as the Usury Law, as
amended; and ordering Defendant to pay Plaintiff the amount of FOUR HUNDRED
Significantly, petitioner did not contest the purchases as indicated in the statements of SEVENTY-EIGHT THOUSAND, ONE HUNDRED NINETY-FOUR and 54/100
account but merely alleged that some of the purchases being claimed to have been made by (₱478,194.54) PESOS, Philippine currency, with regular and compensatory interests
petitioner were not supported by invoices. The lower court found otherwise.[12] thereon at the rate of twenty-eight (28%) per centum per annum, computed from August
31, 1993 until full payment of the said amount, and in addition, an amount equivalent to
In light of the above, this Court sees no reason to award damages to petitioner. ten (10%) per centum of the total amount due and payable, for attorney’s fees, without
pronouncement as to costs."5
WHEREFORE, in view of the foregoing, the petition for certiorari is hereby DENIED and the
Decision of the Court of Appeals AFFIRMED with the MODIFICATION that the attorneys fees are
reduced to 15%. The Facts
The CA summarized the facts of the case in this wise: 4. Exhibit ‘G’ – for loan of ₱100,000.00 on January 13, 1988, with face value
of ₱164,000.00;
"The present controversy arose from a case for collection of money, filed by Alex A.
Jaucian against Restituta Imperial, on October 26, 1989. The complaint alleges, inter 5. Exhibit ‘H’ – This particular promissory note covers the second renewal of
alia, that defendant obtained from plaintiff six (6) separate loans for which the former the original loan of ₱50,000.00 on November 13, 1987, which was renewed
executed in favor of the latter six (6) separate promissory notes and issued several for the first time on March 16, 1988 after certain payments, and which was
checks as guarantee for payment. When the said loans became overdue and unpaid, renewed finally for the second time on January 4, 1988 also after certain
especially when the defendant’s checks were dishonored, plaintiff made repeated oral payments, with a face value of ₱56,240.00;
and written demands for payment.
6. Exhibit ‘I’ – This particular promissory note covers the second renewal of
"Specifically, the six (6) separate loans obtained by defendant from plaintiff on various the original loan of ₱30,000.00 on January 6, 1988, which was renewed for
dates are as follows: the first time on June 4, 1988 after certain payments, and which was finally
renewed for the second time on August 6, 1988, also after certain payments,
with [a] face value of ₱12,760.00;
(a) November 13, 1987 ₱ 50,000.00
"The particulars about the postdated checks, i.e., number, amount, date, etc., are
(b) December 28, 1987 40,000.00
indicated in each of the promissory notes. Thus, for Exhibit ‘D’, four (4) PB checks were
issued; for Exhibit ‘E’ four (4) checks; for Exhibit ‘F’ four (4) checks; for Exhibit ‘G’ four
(c) January 6, 1988 30,000.00
(4) checks; for Exhibit ‘H’ one (1) check; for Exhibit ‘I’ one (1) check;
(d) January 11, 1988 50,000.00
"The arrangement between plaintiff and defendant regarding these guarantee checks
(e) January 12, 1988 50,000.00 was that each time a check matures the defendant would exchange it with cash.

(f) January 13, 1988 100,000.00


"Although, admittedly, defendant made several payments, the same were not enough
and she always defaulted whenever her loans mature[d]. As of August 16, 1991, the
Total ₱320,000.00 total unpaid amount, including accrued interest, penalties and attorney’s fees, [was]
₱2,807,784.20.

"The loans were covered by six (6) separate promissory notes executed by defendant. "On the other hand, defendant claims that she was extended loans by the plaintiff on
The face value of each promissory notes is bigger [than] the amount released to several occasions, i.e., from November 13, 1987 to January 13, 1988, in the total sum
defendant because said face value already include[d] the interest from date of note to of ₱320,000.00 at the rate of sixteen percent (16%) per month. The notes mature[d]
date of maturity. Said promissory notes, which indicate the interest of 16% per month, every four (4) months with unearned interest compounding every four (4) months if the
date of issue, due date, the corresponding guarantee checks issued by defendant, loan [was] not fully paid. The loan releases [were] as follows:
penalties and attorney’s fees, are the following:

1. Exhibit ‘D’ – for loan of ₱40,000.00 on December 28, 1987, with face value (a) November 13, 1987 ₱ 50,000.00
of ₱65,000.00;
(b) December 28, 1987 40,000.00

2. Exhibit ‘E’ – for loan of ₱50,000.00 on January 11, 1988, with face value of (c) January 6, 1988 30,000.00
₱82,000.00;
(d) January 11, 1988 50,000.00
3. Exhibit ‘F’ – for loan of ₱50,000.00 on January 12, 1988, with face value of
(e) January 12, 1988 50,000.00
₱82,000.00;
(f) January 13, 1988 100,000.00
On appeal, the CA held that without judicial inquiry, it was improper for the RTC to rule on the
constitutionality of Section 1, Central Bank Circular No. 905, Series of 1982. Nonetheless, the
Total ₱320,000.00
appellate court affirmed the judgment of the trial court, holding that the latter’s clear and detailed
computation of petitioner’s outstanding obligation to respondent was convincing and satisfactory.
"The loan on November 13, 1987 and January 6, 1988 ha[d] been fully paid including
the usurious interests of 16% per month, this is the reason why these were not included Hence, this Petition.7
in the complaint.
The Issues
"Defendant alleges that all the above amounts were released respectively by checks
drawn by the plaintiff, and the latter must produce these checks as these were returned
Petitioner raises the following arguments for our consideration:
to him being the drawer if only to serve the truth. The above amount are the real amount
released to the defendant but the plaintiff by masterful machinations made it appear that
the total amount released was ₱462,600.00. Because in his computation he made it "1. That the petitioner has fully paid her obligations even before filing of this case.
appear that the true amounts released was not the original amount, since it include[d]
the unconscionable interest for four months.
"2. That the charging of interest of twenty-eight (28%) per centum per annum without
any writing is illegal.
"Further, defendant claims that as of January 25, 1989, the total payments made by
defendants [were] as follows:
"3. That charging of excessive attorney’s fees is hemorrhagic.

a. Paid releases on November 13, 1987 of ₱50,000.00 and January "4. Charging of excessive penalties per month is in the guise of hidden interest.
6, 1988 of ₱30,000.00 these two items were not included in the
complaint affirming the fact that these were paid ₱ 80,000.00
"5. The non-inclusion of the husband of the petitioner at the time the case was filed
should have dismissed this case."8
b. Exhibit ‘26’ Receipt 231,000.00

c. Exhibit ‘8-25’ Receipt 65,300.00 The Court’s Ruling

d. Exhibit ‘27’ Receipt 65,000.00


The Petition has no merit.

Total
₱441,780.00 First Issue:

Less: 320,000.00
Computation of Outstanding Obligation

Excess Payment ₱121,780.00 Arguing that she had already fully paid the loan before the filing of the case, petitioner alleges that
the two lower courts misappreciated the facts when they ruled that she still had an outstanding
balance of ₱208,430.
"Defendant contends that from all perspectives the above excess payment of
₱121,780.00 is more than the interest that could be legally charged, and in fact as of
January 25, 1989, the total releases have been fully paid. This issue involves a question of fact. Such question exists when a doubt or difference arises as
to the truth or the falsehood of alleged facts; and when there is need for a calibration of the
evidence, considering mainly the credibility of witnesses and the existence and the relevancy of
"On 31 August 1993, the trial court rendered the assailed decision." 6 specific surrounding circumstances, their relation to each other and to the whole, and the
probabilities of the situation.9
Ruling of the Court of Appeals
It is a well-entrenched rule that pure questions of fact may not be the subject of an appeal by
certiorari under Rule 45 of the Rules of Court, as this remedy is generally confined to questions of
law.10 The jurisdiction of this Court over cases brought to it is limited to the review and rectification Article 1229 of the Civil Code states thus:
of errors of law allegedly committed by the lower court. As a rule, the latter’s factual findings, when
adopted and affirmed by the CA, are final and conclusive and may not be reviewed on appeal. 11
"The judge shall equitably reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor. Even if there has been no performance,
Generally, this Court is not required to analyze and weigh all over again the evidence already the penalty may also be reduced by the courts if it is iniquitous or unconscionable."
considered in the proceedings below.12 In the present case, we find no compelling reason to
overturn the factual findings of the RTC -- that the total amount of the loans extended to petitioner
In exercising this power to determine what is iniquitous and unconscionable, courts must consider
was ₱320,000, and that she paid a total of only ₱116,540 on twenty-nine dates. These findings
the circumstances of each case.17 What may be iniquitous and unconscionable in one may be
are supported by a preponderance of evidence. Moreover, the amount of the outstanding obligation
totally just and equitable in another. In the present case, iniquitous and unconscionable was the
has been meticulously computed by the trial court and affirmed by the CA. Petitioner has not given
parties’ stipulated penalty charge of 5 percent per month or 60 percent per annum, in addition to
us sufficient reason why her cause falls under any of the exceptions to this rule on the finality of
regular interests and attorney’s fees. Also, there was partial performance by petitioner when she
factual findings.
remitted ₱116,540 as partial payment of her principal obligation of ₱320,000. Under the
circumstances, the trial court was justified in reducing the stipulated penalty charge to the more
Second Issue: equitable rate of 14 percent per annum.

Rate of Interest The Promissory Note carried a stipulation for attorney’s fees of 25 percent of the principal amount
and accrued interests. Strictly speaking, this covenant on attorney’s fees is different from that
mentioned in and regulated by the Rules of Court. 18 "Rather, the attorney’s fees here are in the
The trial court, as affirmed by the CA, reduced the interest rate from 16 percent to 1.167 percent
nature of liquidated damages and the stipulation therefor is aptly called a penal clause."19 So long
per month or 14 percent per annum; and the stipulated penalty charge, from 5 percent to 1.167
as the stipulation does not contravene the law, morals, public order or public policy, it is binding
percent per month or 14 percent per annum.
upon the obligor. It is the litigant, not the counsel, who is the judgment creditor entitled to enforce
the judgment by execution.
Petitioner alleges that absent any written stipulation between the parties, the lower courts should
have imposed the rate of 12 percent per annum only.
Nevertheless, it appears that petitioner’s failure to comply fully with her obligation was not
motivated by ill will or malice. The twenty-nine partial payments she made were a manifestation of
The records show that there was a written agreement between the parties for the payment of her good faith. Again, Article 1229 of the Civil Code specifically empowers the judge to reduce the
interest on the subject loans at the rate of 16 percent per month. As decreed by the lower courts, civil penalty equitably, when the principal obligation has been partly or irregularly complied with.
this rate must be equitably reduced for being iniquitous, unconscionable and exorbitant. "While the Upon this premise, we hold that the RTC’s reduction of attorney’s fees -- from 25 percent to 10
Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the said circular percent of the total amount due and payable -- is reasonable.
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."13
Fifth Issue:

In Medel v. CA,14 the Court found the stipulated interest rate of 5.5 percent per month, or 66
Non-Inclusion of Petitioner’s Husband
percent per annum, unconscionable. In the present case, the rate is even more iniquitous and
unconscionable, as it amounts to 192 percent per annum. When the agreed rate is iniquitous or
unconscionable, it is considered "contrary to morals, if not against the law. [Such] stipulation is Petitioner contends that the case against her should have been dismissed, because her husband
void."15 was not included in the proceedings before the RTC.

Since the stipulation on the interest rate is void, it is as if there were no express contract We are not persuaded. The husband’s non-joinder does not warrant dismissal, as it is merely a
thereon.16 Hence, courts may reduce the interest rate as reason and equity demand. We find no formal requirement that may be cured by amendment.20 Since petitioner alleges that her husband
justification to reverse or modify the rate imposed by the two lower courts. has already passed away, such an amendment has thus become moot.

Third and Fourth Issue: WHEREFORE, the Petition is DENIED. Costs against petitioner.

Penalties and Attorney’s Fees SO ORDERED.

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