G.R. No.

141811 November 15, 2001

FIRST METRO INVESTMENT CORPORATION, petitioner,

vs.
ESTE DEL SOL MOUNTAIN RESERVE, INC., VALENTIN S. DAEZ, JR., MANUEL Q. SALIENTES, MA. ROCIO
A. DE VEGA, ALEXANDER G. ASUNCION, ALBERTO * M. LADORES, VICENTE M. DE VERA, JR., and FELIPE
B. SESE, respondents.

DE LEON, JR., J.:

Before us is a petition for review on certiorari of the Decision1 of the Court of Appeals2 dated November 8, 1999 in
CA-G.R. CV No. 53328 reversing the Decision3 of the Regional Trial Court of Pasig City, Branch 159 dated June 2,
1994 in Civil Case No. 39224. Essentially, the Court of Appeals found and declared that the fees provided for in the
Underwriting and Consultancy Agreements executed by and between petitioner First Metro Investment Corp. (FMIC)
and respondent Este del Sol Mountain Reserve, Inc. (Este del Sol) simultaneously with the Loan Agreement dated
January 31, 1978 were mere subterfuges to camouflage the usurious interest charged by petitioner FMIC.

The facts of the case are as follows:

It appears that on January 31, 1978, petitioner FMIC granted respondent Este del Sol a loan of Seven Million Three
Hundred Eighty-Five Thousand Five Hundred Pesos (P7,385,500.00) to finance the construction and development
of the Este del Sol Mountain Reserve, a sports/resort complex project located at Barrio Puray, Montalban, Rizal.4

Under the terms of the Loan Agreement, the proceeds of the loan were to be released on staggered basis. Interest
on the loan was pegged at sixteen (16%) percent per annum based on the diminishing balance. The loan was
payable in thirty-six (36) equal and consecutive monthly amortizations to commence at the beginning of the
thirteenth month from the date of the first release in accordance with the Schedule of Amortization.5 In case of
default, an acceleration clause was, among others, provided and the amount due was made subject to a twenty
(20%) percent one-time penalty on the amount due and such amount shall bear interest at the highest rate permitted
by law from the date of default until full payment thereof plus liquidated damages at the rate of two (2%) percent per
month compounded quarterly on the unpaid balance and accrued interests together with all the penalties, fees,
expenses or charges thereon until the unpaid balance is fully paid, plus attorney's fees equivalent to twenty-five
(25%) percent of the sum sought to be recovered, which in no case shall be less than Twenty Thousand Pesos
(P20,000.00) if the services of a lawyer were hired.6

In accordance with the terms of the Loan Agreement, respondent Este del Sol executed several documents7 as
security for payment, among them, (a) a Real Estate Mortgage dated January 31, 1978 over two (2) parcels of land
being utilized as the site of its development project with an area of approximately One Million Twenty-Eight
Thousand and Twenty-Nine (1,028,029) square meters and particularly described in TCT Nos. N-24332 and N-
24356 of the Register of Deeds of Rizal, inclusive of all improvements, as well as all the machineries, equipment,
furnishings and furnitures existing thereon; and (b) individual Continuing Suretyship agreements by co-respondents
Valentin S. Daez, Jr., Manuel Q. Salientes, Ma. Rocio A. De Vega, Alexander G. Asuncion, Alberto M. Ladores,
Vicente M. De Vera, Jr. and Felipe B. Sese, all dated February 2, 1978, to guarantee the payment of all the
obligations of respondent Este del Sol up to the aggregate sum of Seven Million Five Hundred Thousand Pesos
(P7,500,000.00) each.8

Respondent Este del Sol also executed, as provided for by the Loan Agreement, an Underwriting Agreement on
January 31, 1978 whereby petitioner FMIC shall underwrite on a best-efforts basis the public offering of One
Hundred Twenty Thousand (120,000) common shares of respondent Este del Sol's capital stock for a one-time
underwriting fee of Two Hundred Thousand Pesos (P200,000.00). In addition to the underwriting fee, the
Underwriting Agreement provided that for supervising the public offering of the shares, respondent Este del Sol shall
pay petitioner FMIC an annual supervision fee of Two Hundred Thousand Pesos (P200,000.00) per annum for a
period of four (4) consecutive years. The Underwriting Agreement also stipulated for the payment by respondent
Este del Sol to petitioner FMIC a consultancy fee of Three Hundred Thirty-Two Thousand Five Hundred Pesos
(P332,500.00) per annum for a period of four (4) consecutive years. Simultaneous with the execution of and in
accordance with the terms of the Underwriting Agreement, a Consultancy Agreement was also executed on January
31, 1978 whereby respondent Este del Sol engaged the services of petitioner FMIC for a fee as consultant to render
general consultancy services.9

In three (3) letters all dated February 22, 1978 petitioner billed respondent Este del Sol for the amounts of [a] Two
Hundred Thousand Pesos (P200,000.00) as the underwriting fee of petitioner FMIC in connection with the public
offering of the common shares of stock of respondent Este del Sol; [b] One Million Three Hundred Thirty Thousand
Pesos (P1,330,000.00) as consultancy fee for a period of four (4) years; and [c] Two Hundred Thousand Pesos
(P200,000.00) as supervision fee for the year beginning February, 1978, in accordance to the Underwriting
Agreement.10 The said amounts of fees were deemed paid by respondent Este del Sol to petitioner FMIC which
deducted the same from the first release of the loan.

Since respondent Este del Sol failed to meet the schedule of repayment in accordance with a revised Schedule of
Amortization, it appeared to have incurred a total obligation of Twelve Million Six Hundred Seventy-Nine Thousand
Six Hundred Thirty Pesos and Ninety-Eight Centavos (P12,679,630.98) per the petitioner's Statement of Account
dated June 23, 1980,11 to wit:

STATEMENT OF ACCOUNT OF ESTE DEL SOL MOUNTAIN RESERVE,

INC.
AS OF JUNE 23, 1980
PARTICULARS AMOUNT
Total amount due as of 11-22-78 per revised amortization
schedule dated 1-3-78 P7,999,631.42
Interest on P7,999,631.42 @ 16% p.a. from 11-22-78 to 2-
22-79 (92 days) 327,096.04
Balance 8,326,727.46
One time penalty of 20% of the entire unpaid obligations
under Section 6.02 (ii) of Loan Agreement 1,665,345.49
Past due interest under Section 6.02 (iii) of loan Agreement:
@ 19% p.a. from 2-22-79 to 11-30-79 (281 days) 1,481,879.93
@ 21% p.a. from 11-30-79 to 6-23-80 (206 days) 1,200,714.10
Other charges — publication of extra judicial foreclosure of
REM made on 5-23-80 & 6-6-80 4,964.00
Total Amount Due and Collectible as of June 23, 1980 P12,679,630.98

Accordingly, petitioner FMIC caused the extrajudicial foreclosure of the real estate mortgage on June 23, 1980.12 At
the public auction, petitioner FMIC was the highest bidder of the mortgaged properties for Nine Million Pesos
(P9,000,000.00). The total amount of Three Million One Hundred Eighty-Eight Thousand Six Hundred Thirty Pesos
and Seventy-Five Centavos (P3,188,630.75) was deducted therefrom, that is, for the publication fee for the
publication of the Sheriff's Notice of Sale, Four Thousand Nine Hundred Sixty-Four Pesos (P4,964.00); for Sheriff's
fees for conducting the foreclosure proceedings, Fifteen Thousand Pesos (P15,000.00); and for Attorney's fees,
Three Million One Hundred Sixty-Eight Thousand Six Hundred Sixty-Six Pesos and Seventy-Five Centavos
(P3,168,666.75). The remaining balance of Five Million Eight Hundred Eleven Thousand Three Hundred Sixty-Nine
Pesos and Twenty-Five Centavos (P5,811,369.25) was applied to interests and penalty charges and partly against
the principal, due as of June 23, 1980, thereby leaving a balance of Six Million Eight Hundred Sixty-Three Thousand
Two Hundred Ninety-Seven Pesos and Seventy-Three Centavos (P6,863,297.73) on the principal amount of the
loan as of June 23, 1980.13

Failing to secure from the individual respondents, as sureties of the loan of respondent Este del Sol by virtue of their
continuing surety agreements, the payment of the alleged deficiency balance, despite individual demands sent to
each of them,14 petitioner instituted on November 11, 1980 the instant collection suit15 against the respondents to
collect the alleged deficiency balance of Six Million Eight Hundred Sixty-Three Thousand Two Hundred Ninety-
Seven Pesos and Seventy-Three Centavos (P6,863,297.73) plus interest thereon at twenty-one (21%) percent per
annum from June 24, 1980 until fully paid, and twenty-five (25%) percent thereof as and for attorney's fees and
costs.

In their Answer, the respondents sought the dismissal of the case and set up several special and affirmative
defenses, foremost of which is that the Underwriting and Consultancy Agreements executed simultaneously with
and as integral parts of the Loan Agreement and which provided for the payment of Underwriting, Consultancy and
Supervision fees were in reality subterfuges resorted to by petitioner FMIC and imposed upon respondent Este del
Sol to camouflage the usurious interest being charged by petitioner FMIC.16

The petitioner FMIC presented as its witnesses during the trial: Cesar Valenzuela, its former Senior Vice-President,
Felipe Neri, its Vice-President for Marketing, and Dennis Aragon, an Account Manager of its Account Management
Group, as well as documentary evidence. On the other hand, co-respondents Vicente M. De Vera, Jr. and Valentin
S. Daez, Jr., and Perfecto Doroja, former Senior Manager and Assistant Vice-President of FMIC, testified for the
respondents.

After the trial, the trial court rendered its decision in favor of petitioner FMIC, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendants, ordering
defendants jointly and severally to pay to plaintiff the amount of P6,863,297.73 plus 21% interest per annum,
from June 24, 1980, until the entire amount is fully paid, plus the amount equivalent to 25% of the total
amount due, as attorney's fees, plus costs of suit.

Defendants' counterclaims are dismissed, for lack of merit.

Finding the decision of the trial court unacceptable, respondents interposed an appeal to the Court of Appeals. On
November 8, 1999, the appellate court reversed the challenged decision of the trial court. The appellate court found
and declared that the fees provided for in the Underwriting and Consultancy Agreements were mere subterfuges to
camouflage the excessively usurious interest charged by the petitioner FMIC on the loan of respondent Este del Sol;
and that the stipulated penalties, liquidated damages and attorney's fees were "excessive, iniquitous,
unconscionable and revolting to the conscience," and declared that in lieu thereof, the stipulated one time twenty
(20%) percent penalty on the amount due and ten (10%) percent of the amount due as attorney's fees would be
reasonable and suffice to compensate petitioner FMIC for those items. Thus, the appellate court dismissed the
complaint as against the individual respondents sureties and ordered petitioner FMIC to pay or reimburse
respondent Este del Sol the amount of Nine Hundred Seventy-One Thousand Pesos (P971,000.00) representing
the difference between what is due to the petitioner and what is due to respondent Este del Sol, based on the
following computation:17

A: DUE TO THE [PETITIONER]

Principal of Loan P7,382,500.00
Add: 20% one-time
Penalty 1,476,500.00
Attorney's fees 900,000.00 P9,759,000.00
Less: Proceeds of foreclosure Sale 9,000,000.00
Deficiency P759,000.00
B. DUE TO [RESPONDENT ESTE DEL SOL]
Return of usurious interest in the form of:
Underwriting fee P 200,000.00
Supervision fee 200,000.00
Consultancy fee 1,330,000.00
Total amount due Este P1,730,000.00

The appellee is, therefore, obliged to return to the appellant Este del Sol the difference of P971,000.00 or
(P1,730,000.00 less P759,000.00).

Petitioner moved for reconsideration of the appellate court's adverse decision. However, this was denied in a
Resolution18 dated February 9, 2000 of the appellate court.

Hence, the instant petition anchored on the following assigned errors:19

THE APPELLATE COURT HAS DECIDED QUESTIONS OF SUBSTANCE IN A WAY NOT IN ACCORD WITH
LAW AND WITH APPLICABLE DECISIONS OF THIS HONORABLE COURT WHEN IT:

a] HELD THAT ALLEGEDLY THE UNDERWRITING AND CONSULTANCY AGREEMENTS SHOULD NOT
BE CONSIDERED SEPARATE AND DISTINCT FROM THE LOAN AGREEMENT, AND INSTEAD, THEY
SHOULD BE CONSIDERED AS A SINGLE CONTRACT.

b] HELD THAT THE UNDERWRITING AND CONSULTANCY AGREEMENTS ARE "MERE

SUBTERFUGES TO CAMOUFLAGE THE USURIOUS INTEREST CHARGED" BY THE PETITIONER.

c] REFUSED TO CONSIDER THE TESTIMONIES OF PETITIONER'S WITNESSES ON THE SERVICES

PERFORMED BY PETITIONER.

d] REFUSED TO CONSIDER THE FACT [i] THAT RESPONDENTS HAD WAIVED THEIR RIGHT TO
SEEK RECOVERY OF THE AMOUNTS THEY PAID TO PETITIONER, AND [ii] THAT RESPONDENTS
HAD ADMITTED THE VALIDITY OF THE UNDERWRITING AND CONSULTANCY AGREEMENTS.

e] MADE AN ERRONEOUS COMPUTATION ON SUPPOSEDLY "WHAT IS DUE TO EACH PARTY AFTER

THE FORECLOSURE SALE", AS SHOWN IN PP. 34-35 OF THE ASSAILED DECISION, EVEN
GRANTING JUST FOR THE SAKE OF ARGUMENT THAT THE APPELLATE COURT WAS CORRECT IN
STIGMATIZING [i] THE PROVISIONS OF THE LOAN AGREEMENT THAT REFER TO STIPULATED
PENALTIES, LIQUIDATED DAMAGES AND ATTORNEY'S FEES AS SUPPOSEDLY "EXCESSIVE,
INIQUITOUS AND UNCONSCIONABLE AND REVOLTING TO THE CONSCIENCE" AND [ii] THE
UNDERWRITING, SUPERVISION AND CONSULTANCY SERVICES AGREEMENT AS SUPPOSEDLY
"MERE SUBTERFUGES TO CAMOUFLAGE THE USURIOUS INTEREST CHARGED" UPON THE
RESPONDENT ESTE BY PETITIONER.

f] REFUSED TO CONSIDER THE FACT THAT RESPONDENT ESTE, AND THUS THE INDIVIDUAL
RESPONDENTS, ARE STILL OBLIGATED TO THE PETITIONER.

Petitioner essentially assails the factual findings and conclusion of the appellate court that the Underwriting and
Consultancy Agreements were executed to conceal a usurious loan. Inquiry upon the veracity of the appellate
court's factual findings and conclusion is not the function of this Court for the Supreme Court is not a trier of facts.
Only when the factual findings of the trial court and the appellate court are opposed to each other does this Court
exercise its discretion to re-examine the factual findings of both courts and weigh which, after considering the record
of the case, is more in accord with law and justice.

After a careful and thorough review of the record including the evidence adduced, we find no reason to depart from
the findings of the appellate court.

First, there is no merit to petitioner FMIC's contention that Central Bank Circular No. 905 which took effect on
January 1, 1983 and removed the ceiling on interest rates for secured and unsecured loans, regardless of maturity,
should be applied retroactively to a contract executed on January 31, 1978, as in the case at bar, that is, while the
Usury Law was in full force and effect. It is an elementary rule of contracts that the laws, in force at the time the
contract was made and entered into, govern it.20 More significantly, Central Bank Circular No. 905 did not repeal nor
in any way amend the Usury Law but simply suspended the latter's effectivity.21 The illegality of usury is wholly the
creature of legislation. A Central Bank Circular cannot repeal a law. Only a law can repeal another law.22 Thus,
retroactive application of a Central Bank Circular cannot, and should not, be presumed.23

Second, when a contract between two (2) parties is evidenced by a written instrument, such document is ordinarily
the best evidence of the terms of the contract. Courts only need to rely on the face of written contracts to determine
the intention of the parties. However, this rule is not without exception.24 The form of the contract is not conclusive
for the law will not permit a usurious loan to hide itself behind a legal form. Parol evidence is admissible to show that
a written document though legal in form was in fact a device to cover usury. If from a construction of the whole
transaction it becomes apparent that there exists a corrupt intention to violate the Usury Law, the courts should and
will permit no scheme, however ingenious, to becloud the crime of usury.25

In the instant case, several facts and circumstances taken altogether show that the Underwriting and Consultancy
Agreements were simply cloaks or devices to cover an illegal scheme employed by petitioner FMIC to conceal and
collect excessively usurious interest, and these are:

a) The Underwriting and Consultancy Agreements are both dated January 31, 1978 which is the same date of the
Loan Agreement.26 Furthermore, under the Underwriting Agreement payment of the supervision and consultancy
fees was set for a period of four (4) years27 to coincide ultimately with the term of the Loan Agreement.28 This fact
means that all the said agreements which were executed simultaneously were set to mature or shall remain
effective during the same period of time.

b) The Loan Agreement dated January 31, 1978 stipulated for the execution and delivery of an underwriting
agreement29 and specifically mentioned that such underwriting agreement is a condition precedent30 for petitioner
FMIC to extend the loan to respondent Este del Sol, indicating and as admitted by petitioner FMIC's
employees,31that such Underwriting Agreement is "part and parcel of the Loan Agreement."32

c) Respondent Este del Sol was billed by petitioner on February 28, 1978 One Million Three Hundred Thirty
Thousand Pesos (P1,330,000.00)33 as consultancy fee despite the clear provision in the Consultancy Agreement
that the said agreement is for Three Hundred Thirty-Two Thousand Five Hundred Pesos (P332,500.00) per annum
for four (4) years and that only the first year consultancy fee shall be due upon signing of the said consultancy
agreement.34

d) The Underwriting, Supervision and Consultancy fees in the amounts of Two Hundred Thousand Pesos
(P200,000.00), and one Million Three Hundred Thirty Thousand Pesos (P1,330,000.00), respectively, were billed by
petitioner to respondent Este del Sol on February 22, 1978,35 that is, on the same occasion of the first partial release
of the loan in the amount of Two Million Three Hundred Eighty-Two Thousand Five Hundred Pesos
(P2,382,500.00).36 It is from this first partial release of the loan that the said corresponding bills for Underwriting,
Supervision and Constantly fees were conducted and apparently paid, thus, reverting back to petitioner FMIC the
total amount of One Million Seven Hundred Thirty Thousand Pesos (P1,730,000.00) as part of the amount loaned to
respondent Este del Sol.37

e) Petitioner FMIC was in fact unable to organize an underwriting/selling syndicate to sell any share of stock of
respondent Este del Sol and much less to supervise such a syndicate, thus failing to comply with its obligation under
the Underwriting Agreement.38 Besides, there was really no need for an Underwriting Agreement since respondent
Este del Sol had its own licensed marketing arm to sell its shares and all its shares have been sold through its
marketing arm.39

f) Petitioner FMIC failed to comply with its obligation under the Consultancy Agreement,40 aside from the fact that
there was no need for a Consultancy Agreement, since respondent Este del Sol's officers appeared to be more
competent to be consultants in the development of the projected sports/resort complex.41

All the foregoing established facts and circumstances clearly belie the contention of petitioner FMIC that the Loan,
Underwriting and Consultancy Agreements are separate and independent transactions. The Underwriting and
Consultancy Agreements which were executed and delivered contemporaneously with the Loan Agreement on
January 31, 1978 were exacted by petitioner FMIC as essential conditions for the grant of the loan. An apparently
lawful loan is usurious when it is intended that additional compensation for the loan be disguised by an ostensibly
unrelated contract providing for payment by the borrower for the lender's services which are of little value or which
are not in fact to be rendered, such as in the instant case.42 In this connection, Article 1957 of the New Civil Code
clearly provides that:

Art. 1957. Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws
against usury shall be void. The borrower may recover in accordance with the laws on usury.

In usurious loans, the entire obligation does not become void because of an agreement for usurious interest; the
unpaid principal debt still stands and remains valid but the stipulation as to the usurious interest is void,
consequently, the debt is to be considered without stipulation as to the interest.43 The reason for this rule was
adequately explained in the case of Angel Jose Warehousing Co., Inc. v. Chelda Enterprises44 where this Court
held:

In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt,
which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies only as to the
prestation to pay the stipulated interest; hence, being separable, the latter only should be deemed void,
since it is the only one that is illegal.

Thus, the nullity of the stipulation on the usurious interest does not affect the lender's right to receive back the
principal amount of the loan. With respect to the debtor, the amount paid as interest under a usurious agreement is
recoverable by him, since the payment is deemed to have been made under restraint, rather than voluntarily.45

This Court agrees with the factual findings and conclusion of the appellate court, to wit:

We find the stipulated penalties, liquidated damages and attorney's fees, excessive, iniquitous and
unconscionable and revolting to the conscience as they hardly allow the borrower any chance of survival in
case of default. And true enough, ESTE folded up when the appellee extrajudicially foreclosed on its
(ESTE's) development project and literally closed its offices as both the appellee and ESTE were at the time
holding office in the same building. Accordingly, we hold that 20% penalty on the amount due and 10% of
the proceeds of the foreclosure sale as attorney's fees would suffice to compensate the appellee, especially
so because there is no clear showing that the appellee hired the services of counsel to effect the
foreclosure, it engaged counsel only when it was seeking the recovery of the alleged deficiency.

Attorney's fees as provided in penal clauses are in the nature of liquidated damages. So long as such stipulation
does not contravene any law, morals, or public order, it is binding upon the parties. Nonetheless, courts are
empowered to reduce the amount of attorney's fees if the same is "iniquitous or unconscionable."46 Articles 1229
and 2227 of the New Civil Code provide that:

Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or
irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or unconscionable.

Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if
they are iniquitous or unconscionable.

In the case at bar, the amount of Three Million One Hundred Eighty-Eight Thousand Six Hundred Thirty Pesos and
Seventy-Five Centavos (93,188,630.75) for the stipulated attorney's fees equivalent to twenty-five (25%) percent of
the alleged amount due, as of the date of the auction sale on June 23, 1980, is manifestly exorbitant and
unconscionable. Accordingly, we agree with the appellate court that a reduction of the attorney's fees to ten (10%)
percent is appropriate and reasonable under the facts and circumstances of this case.

Lastly, there is no merit to petitioner FMIC's contention that the appellate court erred in awarding an amount
allegedly not asked nor prayed for by respondents. Whether the exact amount of the relief was not expressly prayed
for is of no moment for the reason that the relief was plainly warranted by the allegations of the respondents as well
as by the facts as found by the appellate court. A party is entitled to as much relief as the facts may warrant 47

In view of all the foregoing, the Court is convinced that the appellate court committed no reversible error in its
challenged Decision.

WHEREFORE, the instant petition is hereby DENIED, and the assailed Decision of the Court of Appeals is
AFFIRMED. Costs against petitioner.

SO ORDERED.

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

SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee,

vs.
DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.
Mabanag, Eliger and Associates and Saura, Magno and Associates for plaintiff-appellee.

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

MAKALINTAL, J.:p

In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was rendered on June 28, 1965 sentencing defendant Development Bank of the
Philippines (DBP) to pay actual and consequential damages to plaintiff Saura Import and Export Co., Inc. in the amount of P383,343.68, plus interest at the legal
rate from the date the complaint was filed and attorney's fees in the amount of P5,000.00. The present appeal is from that judgment.

In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the Rehabilitation Finance Corporation
(RFC), before its conversion into DBP, for an industrial loan of P500,000.00, to be used as follows: P250,000.00 for
the construction of a factory building (for the manufacture of jute sacks); P240,900.00 to pay the balance of the
purchase price of the jute mill machinery and equipment; and P9,100.00 as additional working capital.

Parenthetically, it may be mentioned that the jute mill machinery had already been purchased by Saura on the
strength of a letter of credit extended by the Prudential Bank and Trust Co., and arrived in Davao City in July 1953;
and that to secure its release without first paying the draft, Saura, Inc. executed a trust receipt in favor of the said
bank.

On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for P500,000.00, to be secured
by a first mortgage on the factory building to be constructed, the land site thereof, and the machinery and equipment
to be installed. Among the other terms spelled out in the resolution were the following:

1. That the proceeds of the loan shall be utilized exclusively for the following purposes:

For construction of factory building P250,000.00

For payment of the balance of purchase

price of machinery and equipment 240,900.00

For working capital 9,100.00

T O T A L P500,000.00

4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and Gregoria Estabillo and China
Engineers, Ltd. shall sign the promissory notes jointly with the borrower-corporation;

5. That release shall be made at the discretion of the Rehabilitation Finance Corporation, subject to availability of
funds, and as the construction of the factory buildings progresses, to be certified to by an appraiser of this
Corporation;"

Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before, however, evidently having
otherwise been informed of its approval, Saura, Inc. wrote a letter to RFC, requesting a modification of the terms laid
down by it, namely: that in lieu of having China Engineers, Ltd. (which was willing to assume liability only to the
extent of its stock subscription with Saura, Inc.) sign as co-maker on the corresponding promissory notes, Saura,
Inc. would put up a bond for P123,500.00, an amount equivalent to such subscription; and that Maria S. Roca would
be substituted for Inocencia Arellano as one of the other co-makers, having acquired the latter's shares in Saura,
Inc.

In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating of the members of its
Board of Governors, for certain reasons stated in the resolution, "to reexamine all the aspects of this approved loan
... with special reference as to the advisability of financing this particular project based on present conditions
obtaining in the operations of jute mills, and to submit his findings thereon at the next meeting of the Board."

On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act as co-signer for the
loan, and asked that the necessary documents be prepared in accordance with the terms and conditions specified in
Resolution No. 145. In connection with the reexamination of the project to be financed with the loan applied for, as
stated in Resolution No. 736, the parties named their respective committees of engineers and technical men to meet
with each other and undertake the necessary studies, although in appointing its own committee Saura, Inc. made
the observation that the same "should not be taken as an acquiescence on (its) part to novate, or accept new
conditions to, the agreement already) entered into," referring to its acceptance of the terms and conditions
mentioned in Resolution No. 145.
On April 13, 1954 the loan documents were executed: the promissory note, with F.R. Halling, representing China
Engineers, Ltd., as one of the co-signers; and the corresponding deed of mortgage, which was duly registered on
the following April 17.

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

RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc. under Resolution No. 145,
C.S., from P500,000.00 to P300,000.00. Pursuant to Bd. Res. No. 736, c.s., authorizing the re-examination of all the
various aspects of the loan granted the Saura Import & Export Co. under Resolution No. 145, c.s., for the purpose of
financing the manufacture of jute sacks in Davao, with special reference as to the advisability of financing this
particular project based on present conditions obtaining in the operation of jute mills, and after having heard Ramon
E. Saura and after extensive discussion on the subject the Board, upon recommendation of the Chairman,
RESOLVED that the loan granted the Saura Import & Export Co. be REDUCED from P500,000 to P300,000 and
that releases up to P100,000 may be authorized as may be necessary from time to time to place the factory in
actual operation: PROVIDED that all terms and conditions of Resolution No. 145, c.s., not inconsistent herewith,
shall remain in full force and effect."

On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory note for China Engineers
Ltd. jointly and severally with the other RFC that his company no longer to of the loan and therefore considered the
same as cancelled as far as it was concerned. A follow-up letter dated July 2 requested RFC that the registration of
the mortgage be withdrawn.

In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be granted. The request was
denied by RFC, which added in its letter-reply that it was "constrained to consider as cancelled the loan of
P300,000.00 ... in view of a notification ... from the China Engineers Ltd., expressing their desire to consider the loan
insofar as they are concerned."

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

On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original amount of P500,000.00,
"it appearing that China Engineers, Ltd. is now willing to sign the promissory notes jointly with the borrower-
corporation," but with the following proviso:

That in view of observations made of the shortage and high cost of imported raw materials, the
Department of Agriculture and Natural Resources shall certify to the following:

1. That the raw materials needed by the borrower-corporation to carry out its operation are available
in the immediate vicinity; and

2. That there is prospect of increased production thereof to provide adequately for the requirements
of the factory."

The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December 22, 1954, wherein it was
explained that the certification by the Department of Agriculture and Natural Resources was required "as the
intention of the original approval (of the loan) is to develop the manufacture of sacks on the basis of locally available
raw materials." This point is important, and sheds light on the subsequent actuations of the parties. Saura, Inc. does
not deny that the factory he was building in Davao was for the manufacture of bags from local raw materials. The
cover page of its brochure (Exh. M) describes the project as a "Joint venture by and between the Mindanao Industry
Corporation and the Saura Import and Export Co., Inc. to finance, manage and operate 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 same brochure states that, the venture "is the first serious
attempt in this country to use 100% locally grown raw materials notably kenaf which is presently grown commercially
in theIsland of Mindanao where the proposed jutemill is located ..."

This fact, according to defendant DBP, is what moved RFC to approve the loan application in the first place, and to
require, in its Resolution No. 9083, a certification from the Department of Agriculture and Natural Resources as to
the availability of local raw materials to provide adequately for the requirements of the factory. Saura, Inc. itself
confirmed the defendant's stand impliedly in its letter of January 21, 1955: (1) stating that according to a special
study made by the Bureau of Forestry "kenaf will not be available in sufficient quantity this year or probably even
next year;" (2) requesting "assurances (from RFC) that my company and associates will be able to bring in sufficient
jute materials as may be necessary for the full operation of the jute mill;" and (3) asking that releases of the loan be
made as follows:
 a) For the payment of the receipt for jute mill
machineries with the Prudential Bank &

Trust Company P250,000.00

(For immediate release)

b) For the purchase of materials and equip-

ment per attached list to enable the jute
mill to operate 182,413.91

c) For raw materials and labor 67,586.09

1) P25,000.00 to be released on the open-

ing of the letter of credit for raw jute
for $25,000.00.

2) P25,000.00 to be released upon arrival

of raw jute.

3) P17,586.09 to be released as soon as the

mill is ready to operate.

On January 25, 1955 RFC sent to Saura, Inc. the following reply:

Dear Sirs:

This is with reference to your letter of January 21, 1955, regarding the release of
your loan under consideration of P500,000. As stated in our letter of December 22,
1954, the releases of the loan, if revived, are proposed to be made from time to time,
subject to availability of funds towards the end that the sack factory shall be placed in
actual operating status. We shall be able to act on your request for revised purpose
and manner of releases upon re-appraisal of the securities offered for the loan.

With respect to our requirement that the Department of Agriculture and Natural
Resources certify that the raw materials needed are available in the immediate
vicinity and that there is prospect of increased production thereof to provide
adequately the requirements of the factory, we wish to reiterate that the basis of the
original approval is to develop the manufacture of sacks on the basis of the locally
available raw materials. Your statement that you will have to rely on the importation
of jute and your request that we give you assurance that your company will be able
to bring in sufficient jute materials as may be necessary for the operation of your
factory, would not be in line with our principle in approving the loan.

With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the matter further. Instead,
it requested RFC to cancel the mortgage, and so, on June 17, 1955 RFC executed the corresponding deed of
cancellation and delivered it to Ramon F. Saura himself as president of Saura, Inc.

It appears that the cancellation was requested to make way for the registration of a mortgage contract, executed on
August 6, 1954, over the same property in favor of the Prudential Bank and Trust Co., under which contract Saura,
Inc. had up to December 31 of the same year within which to pay its obligation on the trust receipt heretofore
mentioned. It appears further that for failure to pay the said obligation the Prudential Bank and Trust Co. sued
Saura, Inc. on May 15, 1955.

On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was cancelled at the request of Saura, Inc.,
the latter commenced the present suit for damages, alleging failure of RFC (as predecessor of the defendant DBP)
to comply with its obligation to release the proceeds of the loan applied for and approved, thereby preventing the
plaintiff from completing or paying contractual commitments it had entered into, in connection with its jute mill
project.

The trial court rendered judgment for the plaintiff, ruling that there was a perfected contract between the parties and
that the defendant was guilty of breach thereof. The defendant pleaded below, and reiterates in this appeal: (1) that
the plaintiff's cause of action had prescribed, or that its claim had been waived or abandoned; (2) that there was no
perfected contract; and (3) that assuming there was, the plaintiff itself did not comply with the terms thereof.

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

There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan of P500,000.00
was approved by resolution of the defendant, and the corresponding mortgage was executed and registered. But
this fact alone falls short of resolving the basic claim that the defendant failed to fulfill its obligation and the plaintiff is
therefore entitled to recover damages.

It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption that the factory to be
constructed would utilize locally grown raw materials, principally kenaf. There is no serious dispute about this. It was
in line with such assumption that when RFC, by Resolution No. 9083 approved on December 17, 1954, restored the
loan to the original amount of P500,000.00. it imposed two conditions, to wit: "(1) that the raw materials needed by
the borrower-corporation to carry out its operation are available in the immediate vicinity; and (2) that there is
prospect of increased production thereof to provide adequately for the requirements of the factory." The imposition
of those conditions was by no means a deviation from the terms of the agreement, but rather a step in its
implementation. There was nothing in said conditions that contradicted the terms laid down in RFC Resolution No.
145, passed on January 7, 1954, namely — "that the proceeds of the loan shall be 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
could not meet the conditions required by RFC, and so wrote its letter of January 21, 1955, stating that local jute
"will not be able in sufficient quantity this year or probably next year," and asking that out of the loan agreed upon
the sum of P67,586.09 be released "for raw materials and labor." This was a deviation from the terms laid down in
Resolution No. 145 and embodied in the mortgage contract, implying as it did a diversion of part of the proceeds of
the loan to purposes other than those agreed upon.

When RFC turned down the request in its letter of January 25, 1955 the negotiations which had been going on for
the implementation of the agreement reached an impasse. Saura, Inc. obviously was in no position to comply with
RFC's conditions. So instead of doing so and insisting that the loan be released as agreed upon, Saura, Inc. asked
that the mortgage be cancelled, which was done on June 15, 1955. The action thus taken by both parties was in the
nature cf mutual desistance — what Manresa terms "mutuo disenso"1 — which is a mode of extinguishing
obligations. It is a concept that derives from the principle that since mutual agreement can create a contract, mutual
disagreement by the parties can cause its extinguishment.2

The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against any alleged breach of
contract by RFC, or even point out that the latter's stand was legally unjustified. Its request for cancellation of the
mortgage carried no reservation of whatever rights it believed it might have against RFC for the latter's non-
compliance. In 1962 it even applied with DBP for another loan to finance a rice and corn project, which application
was disapproved. It was only in 1964, nine years after the loan agreement had been cancelled at its own request,
that Saura, Inc. brought this action for damages.All these circumstances demonstrate beyond doubt that the said
agreement had been extinguished by mutual desistance — and that on the initiative of the plaintiff-appellee itself.

With this view we take of the case, we find it unnecessary to consider and resolve the other issues raised in the
respective briefs of the parties.

WHEREFORE, the judgment appealed from is reversed and the complaint dismissed, with costs against the
plaintiff-appellee.

G.R. No. 26085 August 12, 1927

SEVERINO TOLENTINO and POTENCIANA MANIO, plaintiffs-appellants,

vs.
BENITO GONZALEZ SY CHIAM, defendants-appellee.

Araneta and Zaragoza for appellants.

Eusebio Orense for appelle.

JOHNSON, J.:

PRINCIPAL QUESTIONS PRESENTED BY THE APPEAL

The principal questions presented by this appeal are:

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

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

ANTECEDENT FACTS

Sometime prior to the 28th day of November, 1922, the appellants purchased of the Luzon Rice Mills, Inc., a piece
or parcel of land with the camarin located thereon, situated in the municipality of Tarlac of the Province of Tarlac for
the price of P25,000, promising to pay therefor in three installments. The first installment of P2,000 was due on or
before the 2d day of May, 1921; the second installment of P8,000 was due on or before 31st day of May, 1921; the
balance of P15,000 at 12 per cent interest was due and payable on or about the 30th day of November, 1922. One
of the conditions of that contract of purchase was that on failure of the purchaser (plaintiffs and appellants) to pay
the balance of said purchase price or any of the installments on the date agreed upon, the property bought would
revert to the original owner.

The payments due on the 2d and 31st of May, 1921, amounting to P10,000 were paid so far as the record shows
upon the due dates. The balance of P15,000 due on said contract of purchase was paid on or about the 1st day of
December, 1922, in the manner which will be explained below. On the date when the balance of P15,000 with
interest was paid, the vendor of said property had issued to the purchasers transfer certificate of title to said
property, No. 528. Said transfer certificate of title (No. 528) was transfer certificate of title from No. 40, which shows
that said land was originally registered in the name of the vendor on the 7th day of November, 1913.

PRESENT FACTS

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

Sirvase notar que de no estar liquidada esta cuenta el dia 30 del corriente, procederemos
judicialmente contra Vd. para reclamar la devolucion del camarin y los daños y perjuicios
ocasionados a la compañia por su incumplimiento al contrato.

Somos de Vd. atentos y S. S.

SMITH, BELL & CO., LTD.

By (Sgd.) F. I. HIGHAM

Treasurer.

General Managers

LUZON RICE MILLS INC.

According to Exhibits B and D, which represent the account rendered by the vendor, there was due and payable
upon said contract of purchase on the 30th day of November, 1922, the sum P16,965.09. Upon receiving the letter
of the vendor of said property of November 7, 1922, the purchasers, the appellants herein, realizing that they would
be unable to pay the balance due, began to make an effort to borrow money with which to pay the balance due,
began to make an effort to borrow money with which to pay the balance of their indebtedness on the purchase price
of the property involved. Finally an application was made to the defendant for a loan for the purpose of satisfying
their indebtedness to the vendor of said property. After some negotiations the defendants agreed to loan the
plaintiffs to loan the plaintiffs the sum of P17,500 upon condition that the plaintiffs execute and deliver to him a pacto
de retro of said property.

In accordance with that agreement the defendant paid to the plaintiffs by means of a check the sum of P16,965.09.
The defendant, in addition to said amount paid by check, delivered to the plaintiffs the sum of P354.91 together with
the sum of P180 which the plaintiffs paid to the attorneys for drafting said contract of pacto de retro, making a total
paid by the defendant to the plaintiffs and for the plaintiffs of P17,500 upon the execution and delivery of said
contract. Said contracts was dated the 28th day of November, 1922, and is in the words and figures following:

Sepan todos por la presente:

Que nosotros, los conyuges Severino Tolentino y Potenciana Manio, ambos mayores de edad,
residentes en el Municipio de Calumpit, Provincia de Bulacan, propietarios y transeuntes en esta
Ciudad de Manila, de una parte, y de otra, Benito Gonzalez Sy Chiam, mayor de edad, casado con
Maria Santiago, comerciante y vecinos de esta Ciudad de Manila.

MANIFESTAMOS Y HACEMOS CONSTAR:

 Primero. Que nosotros, Severino Tolentino y Potenciano Manio, por y en consideracion a la
cantidad de diecisiete mil quinientos pesos (P17,500) moneda filipina, que en este acto hemos
recibido a nuestra entera satisfaccion de Don Benito Gonzalez Sy Chiam, cedemos, vendemos y
traspasamos a favor de dicho Don Benito Gonzalez Sy Chiam, sus herederos y causahabientes,
una finca que, segun el Certificado de Transferencia de Titulo No. 40 expedido por el Registrador de
Titulos de la Provincia de Tarlac a favor de "Luzon Rice Mills Company Limited" que al incorporarse
se donomino y se denomina "Luzon Rice Mills Inc.," y que esta corporacion nos ha transferido en
venta absoluta, se describe como sigue:

Un terreno (lote No. 1) con las mejoras existentes en el mismo, situado en el Municipio de Tarlac.
Linda por el O. y N. con propiedad de Manuel Urquico; por el E. con propiedad de la Manila Railroad
Co.; y por el S. con un camino. Partiendo de un punto marcado 1 en el plano, cuyo punto se halla al
N. 41 gds. 17' E.859.42 m. del mojon de localizacion No. 2 de la Oficina de Terrenos en Tarlac; y
desde dicho punto 1 N. 81 gds. 31' O., 77 m. al punto 2; desde este punto N. 4 gds. 22' E.; 54.70 m.
al punto 3; desde este punto S. 86 gds. 17' E.; 69.25 m. al punto 4; desde este punto S. 2 gds. 42'
E., 61.48 m. al punto de partida; midiendo una extension superficcial de cuatro mil doscientos diez y
seis metros cuadrados (4,216) mas o menos. Todos los puntos nombrados se hallan marcados en
el plano y sobre el terreno los puntos 1 y 2 estan determinados por mojones de P. L. S. de 20 x 20 x
70 centimetros y los puntos 3 y 4 por mojones del P. L. S. B. L.: la orientacion seguida es la
verdadera, siendo la declinacion magnetica de 0 gds. 45' E. y la fecha de la medicion, 1.º de febrero
de 1913.

Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) años contados desde
el dia 1.º de diciembre de 1922, devolvemos al expresado Don Benito Gonzalez Sy Chiam el
referido precio de diecisiete mil quinientos pesos (P17,500) queda obligado dicho Sr. Benito
Gonzalez y Chiam a retrovendernos la finca arriba descrita; pero si transcurre dicho plazo de cinco
años sin ejercitar el derecho de retracto que nos hemos reservado, entonces quedara esta venta
absoluta e irrevocable.

Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento la finca arriba
descrita, sujeto a condiciones siguientes:

(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don Benito
Gonzalez Sy Chiam y en su domicilio, era de trescientos setenta y cinco pesos (P375)
moneda filipina, cada mes.

(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito Gonzalez
Sy Chiam, asi como tambien la prima del seguro contra incendios, si el conviniera al referido
Sr. Benito Gonzalez Sy Chiam asegurar dicha finca.

(c) La falta de pago del alquiler aqui estipulado por dos meses consecutivos dara lugar a la
terminacion de este arrendamieno y a la perdida del derecho de retracto que nos hemos
reservado, como si naturalmente hubiera expirado el termino para ello, pudiendo en su
virtud dicho Sr. Gonzalez Sy Chiam tomar posesion de la finca y desahuciarnos de la
misma.

Cuarto. Que yo, Benito Gonzalez Sy Chiam, a mi vez otorgo que acepto esta escritura en los
precisos terminos en que la dejan otorgada los conyuges Severino Tolentino y Potenciana Manio.

En testimonio de todo lo cual, firmamos la presente de nuestra mano en Manila, por cuadruplicado
en Manila, hoy a 28 de noviembre de 1922.

(Fdo.) SEVERINO TOLENTINO

(Fda.) POTENCIANA MANIO

(Fdo.) BENITO GONZALEZ SY CHIAM

Firmado en presencia de:

(Fdos.) MOISES M. BUHAIN

B. S. BANAAG

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

Language cannot be clearer. The purpose of the contract is expressed clearly in said quotation that there can
certainly be not doubt as to the purpose of the plaintiff to sell the property in question, reserving the right only to
repurchase the same. The intention to sell with the right to repurchase cannot be more clearly expressed.

It will be noted from a reading of said sale of pacto de retro, that the vendor, recognizing the absolute sale of the
property, entered into a contract with the purchaser by virtue of which she became the "tenant" of the purchaser.
That contract of rent appears in said quoted document above as follows:

Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento la finca arriba descrita,
sujeto a condiciones siguientes:

(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don Benito Gonzalez Sy Chiam y
en su domicilio, sera de trescientos setenta y cinco pesos (P375) moneda filipina, cada mes.

(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito Gonzalez Sy Chiam, asi
como tambien la prima del seguro contra incendios, si le conviniera al referido Sr. Benito Gonzalez Sy
Chiam asegurar dicha finca.

From the foregoing, we are driven to the following conclusions: First, that the contract of pacto de retro is an
absolute sale of the property with the right to repurchase and not a mortgage; and, second, that by virtue of the said
contract the vendor became the tenant of the purchaser, under the conditions mentioned in paragraph 3 of said
contact quoted above.

It has been the uniform theory of this court, due to the severity of a contract of pacto de retro, to declare the same to
be a mortgage and not a sale whenever the interpretation of such a contract justifies that conclusion. There must be
something, however, in the language of the contract or in the conduct of the parties which shows clearly and beyond
doubt that they intended the contract to be a "mortgage" and not a pacto de retro. (International Banking
Corporation vs. Martinez, 10 Phil., 252; Padilla vs. Linsangan, 19 Phil., 65; Cumagun vs. Alingay, 19 Phil., 415;
Olino vs. Medina, 13 Phil., 379; Manalo vs. Gueco, 42 Phil., 925; Velazquez vs. Teodoro, 46 Phil., 757;
Villa vs.Santiago, 38 Phil., 157.)

We are not unmindful of the fact that sales with pacto de retro are not favored and that the court will not construe an
instrument to one of sale with pacto de retro, with the stringent and onerous effect which follows, unless the terms of
the document and the surrounding circumstances require it.

While it is general rule that parol evidence is not admissible for the purpose of varying the terms of a contract, but
when an issue is squarely presented that a contract does not express the intention of the parties, courts will, when a
proper foundation is laid therefor, hear evidence for the purpose of ascertaining the true intention of the parties.

In the present case the plaintiffs allege in their complaint that the contract in question is a pacto de retro. They admit
that they signed it. They admit they sold the property in question with the right to repurchase it. The terms of the
contract quoted by the plaintiffs to the defendant was a "sale" with pacto de retro, and the plaintiffs have shown no
circumstance whatever which would justify us in construing said contract to be a mere "loan" with guaranty. In every
case in which this court has construed a contract to be a mortgage or a loan instead of a sale with pacto de retro, it
has done so, either because the terms of such contract were incompatible or inconsistent with the theory that said
contract was one of purchase and sale. (Olino vs. Medina, supra; Padilla vs. Linsangan, supra; Manlagnit vs. Dy
Puico, 34 Phil., 325; Rodriguez vs. Pamintuan and De Jesus, 37 Phil., 876.)

In the case of Padilla vs. Linsangan the term employed in the contract to indicate the nature of the conveyance of
the land was "pledged" instead of "sold". In the case of Manlagnit vs. Dy Puico, while the vendor used to the terms
"sale and transfer with the right to repurchase," yet in said contract he described himself as a "debtor" the purchaser
as a "creditor" and the contract as a "mortgage". In the case of Rodriguez vs. Pamintuan and De Jesus the person
who executed the instrument, purporting on its face to be a deed of sale of certain parcels of land, had merely acted
under a power of attorney from the owner of said land, "authorizing him to borrow money in such amount and upon
such terms and conditions as he might deem proper, and to secure payment of the loan by a mortgage." In the case
of Villa vs. Santiago (38 Phil., 157), although a contract purporting to be a deed of sale was executed, the supposed
vendor remained in possession of the land and invested the money he had obtained from the supposed vendee in
making improvements thereon, which fact justified the court in holding that the transaction was a mere loan and not
a sale. In the case of Cuyugan vs. Santos (39 Phil., 970), the purchaser accepted partial payments from the vendor,
and such acceptance of partial payments is absolutely incompatible with the idea of irrevocability of the title of
ownership of the purchaser at the expiration of the term stipulated in the original contract for the exercise of the right
of repurchase."
Referring again to the right of the parties to vary the terms of written contract, we quote from the dissenting opinion
of Chief Justice Cayetano S. Arellano in the case of Government of the Philippine Islands vs. Philippine Sugar
Estates Development Co., which case was appealed to the Supreme Court of the United States and the contention
of the Chief Justice in his dissenting opinion was affirmed and the decision of the Supreme Court of the Philippine
Islands was reversed. (See decision of the Supreme Court of the United States, June 3, 1918.)1 The Chief Justice
said in discussing that question:

According to article 1282 of the Civil Code, in order to judge of the intention of the contracting parties, consideration
must chiefly be paid to those acts executed by said parties which are contemporary with and subsequent to the
contract. And according to article 1283, however general the terms of a contract may be, they must not be held to
include things and cases different from those with regard to which the interested parties agreed to contract. "The
Supreme Court of the Philippine Islands held the parol evidence was admissible in that case to vary the terms of the
contract between the Government of the Philippine Islands and the Philippine Sugar Estates Development Co. In
the course of the opinion of the Supreme Court of the United States Mr. Justice Brandeis, speaking for the court,
said:

It is well settled that courts of equity will reform a written contract where, owing to mutual mistake, the
language used therein did not fully or accurately express the agreement and intention of the parties. The fact
that interpretation or construction of a contract presents a question of law and that, therefore, the mistake
was one of law is not a bar to granting relief. . . . This court is always disposed to accept the construction
which the highest court of a territory or possession has placed upon a local statute. But that disposition may
not be yielded to where the lower court has clearly erred. Here the construction adopted was rested upon a
clearly erroneous assumption as to an established rule of equity. . . . The burden of proof resting upon the
appellant cannot be satisfied by mere preponderance of the evidence. It is settled that relief by way of
reformation will not be granted unless the proof of mutual mistake be of the clearest and most satisfactory
character.

The evidence introduced by the appellant in the present case does not meet with that stringent requirement. There
is not a word, a phrase, a sentence or a paragraph in the entire record, which justifies this court in holding that the
said contract of pacto de retro is a mortgage and not a sale with the right to repurchase. Article 1281 of the Civil
Code provides: "If the terms of a contract are clear and leave no doubt as to the intention of the contracting parties,
the literal sense of its stipulations shall be followed." Article 1282 provides: "in order to judge as to the intention of
the contracting parties, attention must be paid principally to their conduct at the time of making the contract and
subsequently thereto."

We cannot thereto conclude this branch of our discussion of the question involved, without quoting from that very
well reasoned decision of the late Chief Justice Arellano, one of the greatest jurists of his time. He said, in
discussing the question whether or not the contract, in the case of Lichauco vs. Berenguer (20 Phil., 12), was
a pacto de retro or a mortgage:

The public instrument, Exhibit C, in part reads as follows: "Don Macarion Berenguer declares and states that
he is the proprietor in fee simple of two parcels of fallow unappropriated crown land situated within the
district of his pueblo. The first has an area of 73 quiñones, 8 balitas and 8 loanes, located in the sitio of
Batasan, and its boundaries are, etc., etc. The second is in the sitio of Panantaglay, barrio of Calumpang
has as area of 73 hectares, 22 ares, and 6 centares, and is bounded on the north, etc., etc."

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

'That under condition of right to repurchase (pacto de retro) he sells the said properties to the
aforementioned Doña Cornelia Laochangco for P4,000 and upon the following conditions: First, the
sale stipulated shall be for the period of two years, counting from this date, within which time the
deponent shall be entitled to repurchase the land sold upon payment of its price; second, the lands
sold shall, during the term of the present contract, be held in lease by the undersigned who shall
pay, as rental therefor, the sum of 400 pesos per annum, or the equivalent in sugar at the option of
the vendor; third, all the fruits of the said lands shall be deposited in the sugar depository of the
vendee, situated in the district of Quiapo of this city, and the value of which shall be applied on
account of the price of this sale; fourth, the deponent acknowledges that he has received from the
vendor the purchase price of P4,000 already paid, and in legal tender currency of this country . . .;
fifth, all the taxes which may be assessed against the lands surveyed by competent authority, shall
be payable by and constitute a charge against the vendor; sixth, if, through any unusual event, such
as flood, tempest, etc., the properties hereinbefore enumerated should be destroyed, wholly or in
part, it shall be incumbent upon the vendor to repair the damage thereto at his own expense and to
put them into a good state of cultivation, and should he fail to do so he binds himself to give to the
vendee other lands of the same area, quality and value.'

xxx xxx xxx

The opponent maintained, and his theory was accepted by the trial court, that Berenguer's contract with
Laochangco was not one of sale with right of repurchase, but merely one of loan secured by those
properties, and, consequently, that the ownership of the lands in questions could not have been conveyed to
 Laochangco, inasmuch as it continued to be held by Berenguer, as well as their possession, which he had
not ceased to enjoy.

Such a theory is, as argued by the appellant, erroneous. The instrument executed by Macario Berenguer,
the text of which has been transcribed in this decision, is very clear. Berenguer's heirs may not go counter to
the literal tenor of the obligation, the exact expression of the consent of the contracting contained in the
instrument, Exhibit C. Not because the lands may have continued in possession of the vendor, not because
the latter may have assumed the payment of the taxes on such properties, nor yet because the same party
may have bound himself to substitute by another any one of the properties which might be destroyed, does
the contract cease to be what it is, as set forth in detail in the public instrument. The vendor continued in the
possession of the lands, not as the owner thereof as before their sale, but as the lessee which he became
after its consummation, by virtue of a contract executed in his favor by the vendee in the deed itself, Exhibit
C. Right of ownership is not implied by the circumstance of the lessee's assuming the responsibility of the
payment is of the taxes on the property leased, for their payment is not peculiarly incumbent upon the
owner, nor is such right implied by the obligation to substitute the thing sold for another while in his
possession under lease, since that obligation came from him and he continues under another character in its
possession—a reason why he guarantees its integrity and obligates himself to return the thing even in a
case of force majeure. Such liability, as a general rule, is foreign to contracts of lease and, if required, is
exorbitant, but possible and lawful, if voluntarily agreed to and such agreement does not on this account
involve any sign of ownership, nor other meaning than the will to impose upon oneself scrupulous diligence
in the care of a thing belonging to another.

The purchase and sale, once consummated, is a contract which by its nature transfers the ownership and
other rights in the thing sold. A pacto de retro, or sale with right to repurchase, is nothing but a personal right
stipulated between the vendee and the vendor, to the end that the latter may again acquire the ownership of
the thing alienated.

It is true, very true indeed, that the sale with right of repurchase is employed as a method of loan; it is
likewise true that in practice many cases occur where the consummation of a pacto de retro sale means the
financial ruin of a person; it is also, unquestionable that in pacto de retro sales very important interests often
intervene, in the form of the price of the lease of the thing sold, which is stipulated as an additional covenant.
(Manresa, Civil Code, p. 274.)

But in the present case, unlike others heard by this court, there is no proof that the sale with right of
repurchase, made by Berenguer in favor of Laonchangco is rather a mortgage to secure a loan.

We come now to a discussion of the second question presented above, and that is, stating the same in another
form: May a tenant charge his landlord with a violation of the Usury Law upon the ground that the amount of rent he
pays, based upon the real value of the property, amounts to a usurious rate of interest? When the vendor of
property under a pacto de retro rents the property and agrees to pay a rental value for the property during the period
of his right to repurchase, he thereby becomes a "tenant" and in all respects stands in the same relation with the
purchaser as a tenant under any other contract of lease.

The appellant contends that the rental price paid during the period of the existence of the right to repurchase, or the
sum of P375 per month, based upon the value of the property, amounted to usury. Usury, generally speaking, may
be defined as contracting for or receiving something in excess of the amount allowed by law for the loan or
forbearance of money—the taking of more interest for the use of money than the law allows. It seems that the taking
of interest for the loan of money, at least the taking of excessive interest has been regarded with abhorrence from
the earliest times. (Dunham vs. Gould, 16 Johnson [N. Y.], 367.) During the middle ages the people of England, and
especially the English Church, entertained the opinion, then, current in Europe, that the taking of any interest for the
loan of money was a detestable vice, hateful to man and contrary to the laws of God. (3 Coke's Institute, 150; Tayler
on Usury, 44.)

Chancellor Kent, in the case of Dunham vs. Gould, supra, said: "If we look back upon history, we shall find that
there is scarcely any people, ancient or modern, that have not had usury laws. . . . The Romans, through the greater
part of their history, had the deepest abhorrence of usury. . . . It will be deemed a little singular, that the same voice
against usury should have been raised in the laws of China, in the Hindu institutes of Menu, in the Koran of
Mahomet, and perhaps, we may say, in the laws of all nations that we know of, whether Greek or Barbarian."

The collection of a rate of interest higher than that allowed by law is condemned by the Philippine Legislature (Acts
Nos. 2655, 2662 and 2992). But is it unlawful for the owner of a property to enter into a contract with the tenant for
the payment of a specific amount of rent for the use and occupation of said property, even though the amount paid
as "rent," based upon the value of the property, might exceed the rate of interest allowed by law? That question has
never been decided in this jurisdiction. It is one of first impression. No cases have been found in this jurisdiction
answering that question. Act No. 2655 is "An Act fixing rates of interest upon 'loans' and declaring the effect of
receiving or taking usurious rates."

It will be noted that said statute imposes a penalty upon a "loan" or forbearance of any money, goods, chattels or
credits, etc. The central idea of said statute is to prohibit a rate of interest on "loans." A contract of "loan," is very
different contract from that of "rent". A "loan," as that term is used in the statute, signifies the giving of a sum of
money, goods or credits to another, with a promise to repay, but not a promise to return the same thing. To "loan," in
general parlance, is to deliver to another for temporary use, on condition that the thing or its equivalent be returned;
or to deliver for temporary use on condition that an equivalent in kind shall be returned with a compensation for its
use. The word "loan," however, as used in the statute, has a technical meaning. It never means the return of the
same thing. It means the return of an equivalent only, but never the same thing loaned. A "loan" has been properly
defined as an advance payment of money, goods or credits upon a contract or stipulation to repay, not to return, the
thing loaned at some future day in accordance with the terms of the contract. Under the contract of "loan," as used
in said statute, the moment the contract is completed the money, goods or chattels given cease to be the property of
the former owner and becomes the property of the obligor to be used according to his own will, unless the contract
itself expressly provides for a special or specific use of the same. At all events, the money, goods or chattels, the
moment the contract is executed, cease to be the property of the former owner and becomes the absolute property
of the obligor.

A contract of "loan" differs materially from a contract of "rent." In a contract of "rent" the owner of the property does
not lose his ownership. He simply loses his control over the property rented during the period of the contract. In a
contract of "loan" the thing loaned becomes the property of the obligor. In a contract of "rent" the thing still remains
the property of the lessor. He simply loses control of the same in a limited way during the period of the contract of
"rent" or lease. In a contract of "rent" the relation between the contractors is that of landlord and tenant. In a contract
of "loan" of money, goods, chattels or credits, the relation between the parties is that of obligor and obligee. "Rent"
may be defined as the compensation either in money, provisions, chattels, or labor, received by the owner of the soil
from the occupant thereof. It is defined as the return or compensation for the possession of some corporeal
inheritance, and is a profit issuing out of lands or tenements, in return for their use. It is that, which is to paid for the
use of land, whether in money, labor or other thing agreed upon. A contract of "rent" is a contract by which one of
the parties delivers to the other some nonconsumable thing, in order that the latter may use it during a certain period
and return it to the former; whereas a contract of "loan", as that word is used in the statute, signifies the delivery of
money or other consumable things upon condition of returning an equivalent amount of the same kind or quantity, in
which cases it is called merely a "loan." In the case of a contract of "rent," under the civil law, it is called a
"commodatum."

From the foregoing it will be seen that there is a while distinction between a contract of "loan," as that word is used
in the statute, and a contract of "rent" even though those words are used in ordinary parlance as interchangeable
terms.

The value of money, goods or credits is easily ascertained while the amount of rent to be paid for the use and
occupation of the property may depend upon a thousand different conditions; as for example, farm lands of exactly
equal productive capacity and of the same physical value may have a different rental value, depending upon
location, prices of commodities, proximity to the market, etc. Houses may have a different rental value due to
location, conditions of business, general prosperity or depression, adaptability to particular purposes, even though
they have exactly the same original cost. A store on the Escolta, in the center of business, constructed exactly like a
store located outside of the business center, will have a much higher rental value than the other. Two places of
business located in different sections of the city may be constructed exactly on the same architectural plan and yet
one, due to particular location or adaptability to a particular business which the lessor desires to conduct, may have
a very much higher rental value than one not so located and not so well adapted to the particular business. A very
cheap building on the carnival ground may rent for more money, due to the particular circumstances and
surroundings, than a much more valuable property located elsewhere. It will thus be seen that the rent to be paid for
the use and occupation of property is not necessarily fixed upon the value of the property. The amount of rent is
fixed, based upon a thousand different conditions and may or may not have any direct reference to the value of the
property rented. To hold that "usury" can be based upon the comparative actual rental value and the actual value of
the property, is to subject every landlord to an annoyance not contemplated by the law, and would create a very
great disturbance in every business or rural community. We cannot bring ourselves to believe that the Legislature
contemplated any such disturbance in the equilibrium of the business of the country.

In the present case the property in question was sold. It was an absolute sale with the right only to repurchase.
During the period of redemption the purchaser was the absolute owner of the property. During the period of
redemption the vendor was not the owner of the property. During the period of redemption the vendor was a tenant
of the purchaser. During the period of redemption the relation which existed between the vendor and the vendee
was that of landlord and tenant. That relation can only be terminated by a repurchase of the property by the vendor
in accordance with the terms of the said contract. The contract was one of rent. The contract was not a loan, as that
word is used in Act No. 2655.

As obnoxious as contracts of pacto de retro are, yet nevertheless, the courts have no right to make contracts for
parties. They made their own contract in the present case. There is not a word, a phrase, a sentence or paragraph,
which in the slightest way indicates that the parties to the contract in question did not intend to sell the property in
question absolutely, simply with the right to repurchase. People who make their own beds must lie thereon.

What has been said above with reference to the right to modify contracts by parol evidence, sufficiently answers the
third questions presented above. The language of the contract is explicit, clear, unambiguous and beyond question.
It expresses the exact intention of the parties at the time it was made. There is not a word, a phrase, a sentence or
paragraph found in said contract which needs explanation. The parties thereto entered into said contract with the full
understanding of its terms and should not now be permitted to change or modify it by parol evidence.
With reference to the improvements made upon said property by the plaintiffs during the life of the contract, Exhibit
C, there is hereby reserved to the plaintiffs the right to exercise in a separate action the right guaranteed to them
under article 361 of the Civil Code.

For all of the foregoing reasons, we are fully persuaded from the facts of the record, in relation with the law
applicable thereto, that the judgment appealed from should be and is hereby affirmed, with costs. So ordered.

[G.R. No. 118375. October 3, 2003]

CELESTINA T. NAGUIAT, petitioner, vs. COURT OF APPEALS and AURORA

QUEAO, respondents.

DECISION
TINGA, J.:

Before us is a Petition for Review on Certiorari under Rule 45, assailing the decision of
the Sixteenth Division of the respondent Court of Appeals promulgated on 21 December
1994 , which affirmed in toto the decision handed down by the Regional Trial Court (RTC)
[1]

of Pasay City. [2]

The case arose when on 11 August 1981, private respondent Aurora Queao (Queao)
filed a complaint before the Pasay City RTC for cancellation of a Real Estate Mortgage she
had entered into with petitioner Celestina Naguiat (Naguiat). The RTC rendered a decision,
declaring the questioned Real Estate Mortgage void, which Naguiat appealed to the Court
of Appeals. After the Court of Appeals upheld the RTC decision, Naguiat instituted the
present petition.
The operative facts follow:
Queao applied with Naguiat for a loan in the amount of Two Hundred Thousand Pesos
(P200,000.00), which Naguiat granted. On 11 August 1980, Naguiat indorsed to Queao
Associated Bank Check No. 090990 (dated 11 August 1980) for the amount of Ninety Five
Thousand Pesos (P95,000.00), which was earlier issued to Naguiat by the Corporate
Resources Financing Corporation. She also issued her own Filmanbank Check No. 065314,
to the order of Queao, also dated 11 August 1980 and for the amount of Ninety Five
Thousand Pesos (P95,000.00). The proceeds of these checks were to constitute the loan
granted by Naguiat to Queao. [3]

To secure the loan, Queao executed a Deed of Real Estate Mortgage dated 11 August
1980 in favor of Naguiat, and surrendered to the latter the owners duplicates of the titles
covering the mortgaged properties. On the same day, the mortgage deed was notarized,
[4]

and Queao issued to Naguiat a promissory note for the amount of TWO HUNDRED
THOUSAND PESOS (P200,000.00), with interest at 12% per annum, payable on 11
September 1980. Queao also issued a Security Bank and Trust Company check,
[5]

postdated 11 September 1980, for the amount of TWO HUNDRED THOUSAND PESOS
(P200,000.00) and payable to the order of Naguiat.
Upon presentment on its maturity date, the Security Bank check was dishonored for
insufficiency of funds. On the following day, 12 September 1980, Queao requested Security
Bank to stop payment of her postdated check, but the bank rejected the request pursuant
to its policy not to honor such requests if the check is drawn against insufficient funds. [6]

On 16 October 1980, Queao received a letter from Naguiats lawyer, demanding

settlement of the loan. Shortly thereafter, Queao and one Ruby Ruebenfeldt (Ruebenfeldt)
met with Naguiat. At the meeting, Queao told Naguiat that she did not receive the proceeds
of the loan, adding that the checks were retained by Ruebenfeldt, who purportedly was
Naguiats agent. [7]
 Naguiat applied for the extrajudicial foreclosure of the mortgage with the Sheriff of Rizal
Province, who then scheduled the foreclosure sale on 14 August 1981. Three days before
the scheduled sale, Queao filed the case before the Pasay City RTC, seeking the [8]

annulment of the mortgage deed. The trial court eventually stopped the auction sale. [9]

On 8 March 1991, the RTC rendered judgment, declaring the Deed of Real Estate
Mortgage null and void, and ordering Naguiat to return to Queao the owners duplicates of
her titles to the mortgaged lots. Naguiat appealed the decision before the Court of Appeals,
[10]

making no less than eleven assignments of error. The Court of Appeals promulgated the
decision now assailed before us that affirmed in toto the RTC decision. Hence, the present
petition.
Naguiat questions the findings of facts made by the Court of Appeals, especially on the
issue of whether Queao had actually received the loan proceeds which were supposed to
be covered by the two checks Naguiat had issued or indorsed. Naguiat claims that being a
notarial instrument or public document, the mortgage deed enjoys the presumption that the
recitals therein are true. Naguiat also questions the admissibility of various representations
and pronouncements of Ruebenfeldt, invoking the rule on the non-binding effect of the
admissions of third persons. [11]

The resolution of the issues presented before this Court by Naguiat involves the
determination of facts, a function which this Court does not exercise in an appeal
by certiorari. Under Rule 45 which governs appeal by certiorari, only questions of law may
be raised as the Supreme Court is not a trier of facts. The resolution of factual issues is
[12] [13]

the function of lower courts, whose findings on these matters are received with respect and
are in fact generally binding on the Supreme Court. A question of law which the Court may
[14]

pass upon must not involve an examination of the probative value of the evidence presented
by the litigants. There is a question of law in a given case when the doubt or difference
[15]

arises as to what the law is on a certain state of facts; there is a question of fact when the
doubt or difference arises as to the truth or the falsehood of alleged facts.
[16]

Surely, there are established exceptions to the rule on the conclusiveness of the findings
of facts of the lower courts. But Naguiats case does not fall under any of the exceptions. In
[17]

any event, both the decisions of the appellate and trial courts are supported by the evidence
on record and the applicable laws.
Against the common finding of the courts below, Naguiat vigorously insists that Queao
received the loan proceeds. Capitalizing on the status of the mortgage deed as a public
document, she cites the rule that a public document enjoys the presumption of validity and
truthfulness of its contents. The Court of Appeals, however, is correct in ruling that the
presumption of truthfulness of the recitals in a public document was defeated by the clear
and convincing evidence in this case that pointed to the absence of consideration. This [18]

Court has held that the presumption of truthfulness engendered by notarized documents is
rebuttable, yielding as it does to clear and convincing evidence to the contrary, as in this
case.[19]

On the other hand, absolutely no evidence was submitted by Naguiat that the checks
she issued or endorsed were actually encashed or deposited. The mere issuance of the
checks did not result in the perfection of the contract of loan. For the Civil Code provides
that the delivery of bills of exchange and mercantile documents such as checks shall
produce the effect of payment only when they have been cashed. It is only after the checks
[20]

have produced the effect of payment that the contract of loan may be deemed perfected. Art.
1934 of the Civil Code provides:

An accepted promise to deliver something by way of commodatum or simple loan is binding

upon the parties, but the commodatum or simple loan itself shall not be perfected until the
delivery of the object of the contract.
 A loan contract is a real contract, not consensual, and, as such, is perfected only upon
the delivery of the object of the contract. In this case, the objects of the contract are the
[21]

loan proceeds which Queao would enjoy only upon the encashment of the checks signed
or indorsed by Naguiat. If indeed the checks were encashed or deposited, Naguiat would
have certainly presented the corresponding documentary evidence, such as the returned
checks and the pertinent bank records. Since Naguiat presented no such proof, it follows
that the checks were not encashed or credited to Queaos account.
Naguiat questions the admissibility of the various written representations made by
Ruebenfeldt on the ground that they could not bind her following the res inter alia acta alteri
nocere non debet rule. The Court of Appeals rejected the argument, holding that since
Ruebenfeldt was an authorized representative or agent of Naguiat the situation falls under
a recognized exception to the rule. Still, Naguiat insists that Ruebenfeldt was not her
[22]

agent.
Suffice to say, however, the existence of an agency relationship between Naguiat and
Ruebenfeldt is supported by ample evidence. As correctly pointed out by the Court of
Appeals, Ruebenfeldt was not a stranger or an unauthorized person. Naguiat instructed
Ruebenfeldt to withhold from Queao the checks she issued or indorsed to Queao, pending
delivery by the latter of additional collateral. Ruebenfeldt served as agent of Naguiat on the
loan application of Queaos friend, Marilou Farralese, and it was in connection with that
transaction that Queao came to know Naguiat. It was also Ruebenfeldt who accompanied
[23]

Queao in her meeting with Naguiat and on that occasion, on her own and without Queao
asking for it, Reubenfeldt actually drew a check for the sum of P220,000.00 payable to
Naguiat, to cover for Queaos alleged liability to Naguiat under the loan agreement. [24]

The Court of Appeals recognized the existence of an agency by estoppel citing Article
[25]

1873 of the Civil Code. Apparently, it considered that at the very least, as a consequence
[26]

of the interaction between Naguiat and Ruebenfeldt, Queao got the impression that
Ruebenfeldt was the agent of Naguiat, but Naguiat did nothing to correct Queaos
impression. In that situation, the rule is clear. One who clothes another with apparent
authority as his agent, and holds him out to the public as such, cannot be permitted to deny
the authority of such person to act as his agent, to the prejudice of innocent third parties
dealing with such person in good faith, and in the honest belief that he is what he appears
to be. The Court of Appeals is correct in invoking the said rule on agency by estoppel.
[27]

More fundamentally, whatever was the true relationship between Naguiat and
Ruebenfeldt is irrelevant in the face of the fact that the checks issued or indorsed to Queao
were never encashed or deposited to her account of Naguiat.
All told, we find no compelling reason to disturb the finding of the courts a quo that the
lender did not remit and the borrower did not receive the proceeds of the loan. That being
the case, it follows that the mortgage which is supposed to secure the loan is null and void.
The consideration of the mortgage contract is the same as that of the principal contract from
which it receives life, and without which it cannot exist as an independent contract. A [28]

mortgage contract being a mere accessory contract, its validity would depend on the validity
of the loan secured by it. [29]

WHEREFORE, the petition is denied and the assailed decision is affirmed. Costs
against petitioner.
SO ORDERED.
G.R. No. L-20240 December 31, 1965

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
JOSE GRIJALDO, defendant-appellant.

Office of the Solicitor General for plaintiff-appellee.

Isabelo P. Samson for defendant-appellant.
ZALDIVAR, J.:

In the year 1943 appellant Jose Grijaldo obtained five loans from the branch office of the Bank of Taiwan, Ltd. in
Bacolod City, in the total sum of P1,281.97 with interest at the rate of 6% per annum, compounded quarterly. These
loans are evidenced by five promissory notes executed by the appellant in favor of the Bank of Taiwan, Ltd., as
follows: On June 1, 1943, P600.00; on June 3, 1943, P159.11; on June 18, 1943, P22.86; on August 9,
1943,P300.00; on August 13, 1943, P200.00, all notes without due dates, but because the loans were due one year
after they were incurred. To secure the payment of the loans the appellant executed a chattel mortgage on the
standing crops on his land, Lot No. 1494 known as Hacienda Campugas in Hinigiran, Negros Occidental.

By virtue of Vesting Order No. P-4, dated January 21, 1946, and under the authority provided for in the Trading with
the Enemy Act, as amended, the assets in the Philippines of the Bank of Taiwan, Ltd. were vested in the
Government of the United States. Pursuant to the Philippine Property Act of 1946 of the United States, these assets,
including the loans in question, were subsequently transferred to the Republic of the Philippines by the Government
of the United States under Transfer Agreement dated July 20, 1954. These assets were among the properties that
were placed under the administration of the Board of Liquidators created under Executive Order No. 372, dated
November 24, 1950, and in accordance with Republic Acts Nos. 8 and 477 and other pertinent laws.

On September 29, 1954 the appellee, Republic of the Philippines, represented by the Chairman of the Board of
Liquidators, made a written extrajudicial demand upon the appellant for the payment of the account in question. The
record shows that the appellant had actually received the written demand for payment, but he failed to pay.

The aggregate amount due as principal of the five loans in question, computed under the Ballantyne scale of values
as of the time that the loans were incurred in 1943, was P889.64; and the interest due thereon at the rate of 6% per
annum compounded quarterly, computed as of December 31, 1959 was P2,377.23.

On January 17, 1961 the appellee filed a complaint in the Justice of the Peace Court of Hinigaran, Negros
Occidental, to collect from the appellant the unpaid account in question. The Justice of the Peace Of Hinigaran, after
hearing, dismissed the case on the ground that the action had prescribed. The appellee appealed to the Court of
First Instance of Negros Occidental and on March 26, 1962 the court a quo rendered a decision ordering the
appellant to pay the appellee the sum of P2,377.23 as of December 31, 1959, plus interest at the rate of 6% per
annum compounded quarterly from the date of the filing of the complaint until full payment was made. The appellant
was also ordered to pay the sum equivalent to 10% of the amount due as attorney's fees and costs.

The appellant appealed directly to this Court. During the pendency of this appeal the appellant Jose Grijaldo died.
Upon motion by the Solicitor General this Court, in a resolution of May 13, 1963, required Manuel Lagtapon, Jacinto
Lagtapon, Ruben Lagtapon and Anita L. Aguilar, who are the legal heirs of Jose Grijaldo to appear and be
substituted as appellants in accordance with Section 17 of Rule 3 of the Rules of Court.

In the present appeal the appellant contends: (1) that the appellee has no cause of action against the appellant; (2)
that if the appellee has a cause of action at all, that action had prescribed; and (3) that the lower court erred in
ordering the appellant to pay the amount of P2,377.23.

In discussing the first point of contention, the appellant maintains that the appellee has no privity of contract with the
appellant. It is claimed that the transaction between the Taiwan Bank, Ltd. and the appellant, so that the appellee,
Republic of the Philippines, could not legally bring action against the appellant for the enforcement of the obligation
involved in said transaction. This contention has no merit. It is true that the Bank of Taiwan, Ltd. was the original
creditor and the transaction between the appellant and the Bank of Taiwan was a private contract of loan. However,
pursuant to the Trading with the Enemy Act, as amended, and Executive Order No. 9095 of the United States; and
under Vesting Order No. P-4, dated January 21, 1946, the properties of the Bank of Taiwan, Ltd., an entity which
was declared to be under the jurisdiction of the enemy country (Japan), were vested in the United States
Government and the Republic of the Philippines, the assets of the Bank of Taiwan, Ltd. were transferred to and
vested in the Republic of the Philippines. The successive transfer of the rights over the loans in question from the
Bank of Taiwan, Ltd. to the United States Government, and from the United States Government to the government
of the Republic of the Philippines, made the Republic of the Philippines the successor of the rights, title and interest
in said loans, thereby creating a privity of contract between the appellee and the appellant. In defining the word
"privy" this Court, in a case, said:

The word "privy" denotes the idea of succession ... hence an assignee of a credit, and one subrogated to it,
etc. will be privies; in short, he who by succession is placed in the position of one of those who contracted
the judicial relation and executed the private document and appears to be substituting him in the personal
rights and obligation is a privy (Alpurto vs. Perez, 38 Phil. 785, 790).

The United States of America acting as a belligerent sovereign power seized the assets of the Bank of Taiwan, Ltd.
which belonged to an enemy country. The confiscation of the assets of the Bank of Taiwan, Ltd. being an
involuntary act of war, and sanctioned by international law, the United States succeeded to the rights and interests
of said Bank of Taiwan, Ltd. over the assets of said bank. As successor in interest in, and transferee of, the property
rights of the United States of America over the loans in question, the Republic of the Philippines had thereby
become a privy to the original contracts of loan between the Bank of Taiwan, Ltd. and the appellant. It follows,
therefore, that the Republic of the Philippines has a legal right to bring the present action against the appellant Jose
Grijaldo.

The appellant likewise maintains, in support of his contention that the appellee has no cause of action, that because
the loans were secured by a chattel mortgage on the standing crops on a land owned by him and these crops were
lost or destroyed through enemy action his obligation to pay the loans was thereby extinguished. This argument is
untenable. The terms of the promissory notes and the chattel mortgage that the appellant executed in favor of the
Bank of Taiwan, Ltd. do not support the claim of appellant. The obligation of the appellant under the five promissory
notes was not to deliver a determinate thing namely, the crops to be harvested from his land, or the value of the
crops that would be harvested from his land. Rather, his obligation was to pay a generic thing — the amount of
money representing the total sum of the five loans, with interest. The transaction between the appellant and the
Bank of Taiwan, Ltd. was a series of five contracts of simple loan of sums of money. "By a contract of (simple) loan,
one of the parties delivers to another ... money or other consumable thing upon the condition that the same amount
of the same kind and quality shall be paid." (Article 1933, Civil Code) The obligation of the appellant under the five
promissory notes evidencing the loans in questions is to pay the value thereof; that is, to deliver a sum of money —
a clear case of an obligation to deliver, a generic thing. Article 1263 of the Civil Code provides:

In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not
extinguish the obligation.

The chattel mortgage on the crops growing on appellant's land simply stood as a security for the fulfillment of
appellant's obligation covered by the five promissory notes, and the loss of the crops did not extinguish his
obligation to pay, because the account could still be paid from other sources aside from the mortgaged crops.

In his second point of contention, the appellant maintains that the action of the appellee had prescribed. The
appellant points out that the loans became due on June 1, 1944; and when the complaint was filed on January
17,1961 a period of more than 16 years had already elapsed — far beyond the period of ten years when an action
based on a written contract should be brought to court.

This contention of the appellant has no merit. Firstly, it should be considered that the complaint in the present case
was brought by the Republic of the Philippines not as a nominal party but in the exercise of its sovereign functions,
to protect the interests of the State over a public property. Under paragraph 4 of Article 1108 of the Civil Code
prescription, both acquisitive and extinctive, does not run against the State. This Court has held that the statute of
limitations does not run against the right of action of the Government of the Philippines (Government of the
Philippine Islands vs. Monte de Piedad, etc., 35 Phil. 738-751).Secondly, the running of the period of prescription of
the action to collect the loan from the appellant was interrupted by the moratorium laws (Executive Orders No. 25,
dated November 18, 1944; Executive Order No. 32. dated March 10, 1945; and Republic Act No. 342, approved on
July 26, 1948). The loan in question, as evidenced by the five promissory notes, were incurred in the year 1943, or
during the period of Japanese occupation of the Philippines. This case is squarely covered by Executive Order No.
25, which became effective on November 18, 1944, providing for the suspension of payments of debts incurred after
December 31, 1941. The period of prescription was, therefore, suspended beginning November 18, 1944. This
Court, in the case of Rutter vs. Esteban (L-3708, May 18, 1953, 93 Phil. 68), declared on May 18, 1953 that the
Moratorium Laws, R.A. No. 342 and Executive Orders Nos. 25 and 32, are unconstitutional; but in that case this
Court ruled that the moratorium laws had suspended the prescriptive period until May 18, 1953. This ruling was
categorically reiterated in the decision in the case of Manila Motors vs. Flores, L-9396, August 16, 1956. It follows,
therefore, that the prescriptive period in the case now before US was suspended from November 18,1944, when
Executive Orders Nos. 25 and 32 were declared unconstitutional by this Court. Computed accordingly, the
prescriptive period was suspended for 8 years and 6 months. By the appellant's own admission, the cause of action
on the five promissory notes in question arose on June 1, 1944. The complaint in the present case was filed on
January 17, 1961, or after a period of 16 years, 6 months and 16 days when the cause of action arose. If the
prescriptive period was not interrupted by the moratorium laws, the action would have prescribed already; but, as
We have stated, the prescriptive period was suspended by the moratorium laws for a period of 8 years and 6
months. If we deduct the period of suspension (8 years and 6 months) from the period that elapsed from the time
the cause of action arose to the time when the complaint was filed (16 years, 6 months and 16 days) there remains
a period of 8 years and 16 days. In other words, the prescriptive period ran for only 8 years and 16 days. There still
remained a period of one year, 11 months and 14 days of the prescriptive period when the complaint was filed.

In his third point of contention the appellant maintains that the lower court erred in ordering him to pay the amount of
P2,377.23. It is claimed by the appellant that it was error on the part of the lower court to apply the Ballantyne Scale
of values in evaluating the Japanese war notes as of June 1943 when the loans were incurred, because what
should be done is to evaluate the loans on the basis of the Ballantyne Scale as of the time the loans became due,
and that was in June 1944. This contention of the appellant is also without merit.

The decision of the court a quo ordered the appellant to pay the sum of P2,377.23 as of December 31, 1959, plus
interest rate of 6% per annum compounded quarterly from the date of the filing of the complaint. The sum total of the
five loans obtained by the appellant from the Bank of Taiwan, Ltd. was P1,281.97 in Japanese war notes. Computed
under the Ballantyne Scale of values as of June 1943, this sum of P1,281.97 in Japanese war notes in June 1943 is
equivalent to P889.64 in genuine Philippine currency which was considered the aggregate amount due as principal
of the five loans, and the amount of P2,377.23 as of December 31, 1959 was arrived at after computing the interest
on the principal sum of P889.64 compounded quarterly from the time the obligations were incurred in 1943.
It is the stand of the appellee that the Ballantyne scale of values should be applied as of the time the obligation was
incurred, and that was in June 1943. This stand of the appellee was upheld by the lower court; and the decision of
the lower court is supported by the ruling of this Court in the case of Hilado vs. De la Costa (G.R. No. L-150, April
30, 1949; 46 O.G. 5472), which states:

... Contracts stipulating for payments presumably in Japanese war notes may be enforced in our Courts after
the liberation to the extent of the just obligation of the contracting parties and, as said notes have become
worthless, in order that justice may be done and the party entitled to be paid can recover their actual value in
Philippine Currency, what the debtor or defendant bank should return or pay is the value of the Japanese
military notes in relation to the peso in Philippine Currency obtaining on the date when and at the place
where the obligation was incurred unless the parties had agreed otherwise. ... . (italics supplied)

IN VIEW OF THE FOREGOING, the decision appealed from is affirmed, with costs against the appellant. Inasmuch
as the appellant Jose Grijaldo died during the pendency of this appeal, his estate must answer in the execution of
the judgment in the present case.

[G.R. No. 123031. October 12, 1999]

CEBU INTERNATIONAL FINANCE CORPORATION, petitioner, vs. COURT OF

APPEALS, VICENTE ALEGRE, respondents.

DECISION
QUISUMBING, J.:

This petition for review on certiorari assails respondent appellate courts Decision,[1] dated December 8, 1995,
in CA G.R. CV No. 44085, which affirmed the ruling of the Regional Trial Court of Makati, Branch 132. The
dispositive portion of the trial courts decision reads:

WHEREFORE, judgment is hereby rendered ordering defendant [herein petitioner] to pay

plaintiff [herein private respondent]:

(1) the principal sum of P514,390.94 with legal interest thereon computed from August 6, 1991
until fully paid; and

(2) the costs of suit.

SO ORDERED.[2]

Based on the records, the following are the pertinent facts of the case:
Cebu International Finance Corporation (CIFC), a quasi-banking institution, is engaged in money market
operations.
On April 25, 1991, private respondent, Vicente Alegre, invested with CIFC, five hundred thousand
(P500,000.00) pesos, in cash. Petitioner issued a promissory note to mature on May 27, 1991. The note for five
hundred sixteen thousand, two hundred thirty-eight pesos and sixty-seven centavos (P516,238.67) covered private
respondents placement plus interest at twenty and a half (20.5%) percent for thirty-two (32) days.
On May 27, 1991, CIFC issued BPI Check No. 513397 (hereinafter the CHECK) for five hundred fourteen
thousand, three hundred ninety pesos and ninety-four centavos (P514,390.94) in favor of the private respondent
as proceeds of his matured investment plus interest. The CHECK was drawn from petitioners current account
number 0011-0803-59, maintained with the Bank of the Philippine Islands (BPI), main branch at Makati City.
On June 17, 1991, private respondents wife deposited the CHECK with Rizal Commercial Banking Corp.
(RCBC), in Puerto Princesa, Palawan. BPI dishonored the CHECK with the annotation, that the Check (is)
Subject of an Investigation. BPI took custody of the CHECK pending an investigation of several counterfeit
checks drawn against CIFCs aforestated checking account. BPI used the check to trace the perpetrators of the
forgery.
Immediately, private respondent notified CIFC of the dishonored CHECK and demanded, on several
occasions, that he be paid in cash. CIFC refused the request, and instead instructed private respondent to wait for
its ongoing bank reconciliation with BPI. Thereafter, private respondent, through counsel, made a formal demand
for the payment of his money market placement. In turn, CIFC promised to replace the CHECK but required an
impossible condition that the original must first be surrendered.
On February 25, 1992, private respondent Alegre filed a complaint[3] for recovery of a sum of money against
the petitioner with the Regional Trial Court of Makati (RTC-Makati), Branch 132.
On July 13, 1992, CIFC sought to recover its lost funds and formally filed against BPI, a separate civil
action[4] for collection of a sum of money with the RTC-Makati, Branch 147. The collection suit alleged that BPI
unlawfully deducted from CIFCs checking account, counterfeit checks amounting to one million, seven hundred
twenty-four thousand, three hundred sixty-four pesos and fifty-eight centavos (P1,724,364.58). The action
included the prayer to collect the amount of the CHECK paid to Vicente Alegre but dishonored by BPI.
Meanwhile, in response to Alegres complaint with RTC-Makati, Branch 132, CIFC filed a motion for leave
of court to file a third-party complaint against BPI. BPI was impleaded by CIFC to enforce a right, for contribution
and indemnity, with respect to Alegres claim. CIFC asserted that the CHECK it issued in favor of Alegre was
genuine, valid and sufficiently funded.
On July 23, 1992, the trial court granted CIFCs motion. However, BPI moved to dismiss the third-party
complaint on the ground of pendency of another action with RTC-Makati, Branch 147. Acting on the motion, the
trial court dismissed the third-party complaint on November 4, 1992, after finding that the third party complaint
filed by CIFC against BPI is similar to its ancillary claim against the bank, filed with RTC-Makati Branch 147.
Thereafter, during the hearing by RTC-Makati, Branch 132, held on May 27, and June 22, 1993, Vito Arieta,
Bank Manager of BPI, testified that the bank, indeed, dishonored the CHECK, retained the original copy and
forwarded only a certified true copy to RCBC. When Arieta was recalled on July 20, 1993, he testified that on
July 16, 1993, BPI encashed and deducted the said amount from the account of CIFC, but the proceeds, as well
as the CHECK remained in BPIs custody. The banks move was in accordance with the Compromise
Agreement[5] it entered with CIFC to end the litigation in RTC-Makati, Branch 147. The compromise agreement,
which was submitted for the approval of the said court, provided that:
1. Defendant [BPI] shall pay to the plaintiff [CIFC] the amount of P1,724,364.58 plus P 20,000 litigation expenses
as full and final settlement of all of plaintiffs claims as contained in the Amended Complaint dated September
10, 1992. The aforementioned amount shall be credited to plaintiffs current account No. 0011-0803-59
maintained at defendants Main Branch upon execution of this Compromise Agreement.
2. Thereupon, defendant shall debit the sum of P 514,390.94 from the aforesaid current account representing
payment/discharge of BPI Check No. 513397 payable to Vicente Alegre.
3. In case plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from the alleged dishonor
of BPI Check No. 513397, plaintiff cannot go after the defendant: otherwise stated, the defendant shall not be
liable to the plaintiff. Plaintiff [CIFC] may however set-up the defense of payment/discharge stipulated in par.
2 above.[6]
On July 27, 1993, BPI filed a separate collection suit[7] against Vicente Alegre with the RTC-Makati, Branch
62. The complaint alleged that Vicente Alegre connived with certain Lina A. Pena and Lita A. Anda and forged
several checks of BPIs client, CIFC. The total amount of counterfeit checks was P 1,724,364.58. BPI prevented
the encashment of some checks amounting to two hundred ninety five thousand, seven hundred seventy-five pesos
and seven centavos (P295,775.07). BPI admitted that the CHECK, payable to Vicente Alegre for P514,390.94,
was deducted from BPIs claim, hence, the balance of the loss incurred by BPI was nine hundred fourteen
thousand, one hundred ninety-eight pesos and fifty-seven centavos (P914,198.57), plus costs of suit for twenty
thousand (P20,000.00) pesos. The records are silent on the outcome of this case.
On September 27, 1993, RTC-Makati, Branch 132, rendered judgment in favor of Vicente Alegre.
CIFC appealed from the adverse decision of the trial court. The respondent court affirmed the decision of the
trial court.
Hence this appeal,[8] in which petitioner interposes the following assignments of errors:
1. The Honorable Court of Appeals erred in affirming the finding of the Honorable Trial Court holding that
petitioner was not discharged from the liability of paying the value of the subject check to private respondent
after BPI has debited the value thereof against petitioners current account.
2. The Honorable Court of Appeals erred in applying the provisions of paragraph 2 of Article 1249 of the Civil
Code in the instant case. The applicable law being the Negotiable Instruments Law.
3. The Honorable Court of Appeals erred in affirming the Honorable Trial Courts findings that the petitioner was
guilty of negligence and delay in the performance of its obligation to the private respondent.
 4. The Honorable Court of Appeals erred in affirming the Honorable Trial Courts decision ordering petitioner to
pay legal interest and the cost of suit.
5. The Honorable Court of Appeals erred in affirming the Honorable Trial Courts dismissal of petitioners third-
party complaint against BPI.
These issues may be synthesized into three:
1. WHETHER OR NOT ARTICLE 1249 OF THE NEW CIVIL CODE APPLIES IN THE PRESENT CASE;
2. WHETHER OR NOT BPI CHECK NO. 513397 WAS VALIDLY DISCHARGED; and
3. WHETHER OR NOT THE DISMISSAL OF THE THIRD PARTY COMPLAINT OF PETITIONER
AGAINST BPI BY REASON OF LIS PENDENS WAS PROPER?
On the first issue, petitioner contends that the provisions of the Negotiable Instruments Law (NIL) are the
pertinent laws to govern its money market transaction with private respondent, and not paragraph 2 of Article
1249 of the Civil Code. Petitioner stresses that it had already been discharged from the liability of paying the
value of the CHECK due to the following circumstances:
1) There was ACCEPTANCE of the subject check by BPI, the drawee bank, as defined under the Negotiable
Instruments Law, and therefore, BPI, the drawee bank, became primarily liable for the payment of the check,
and consequently, the drawer, herein petitioner, was discharged from its liability thereon;
2) Moreover, BPI, the drawee bank, has not validly DISHONORED the subject check; and,
3) The act of BPI, the drawee bank of debiting/deducting the value of the check from petitioners account amounted
to and/or constituted a discharge of the drawers (petitioners) liability under the instrument/subject check.[9]
Petitioner cites Section 137 of the Negotiable Instruments Law, which states:

Liability of drawee retaining or destroying bill - Where a drawee to whom a bill is delivered for
acceptance destroys the same, or refuses within twenty-four hours after such delivery or such other
period as the holder may allow, to return the bill accepted or non-accepted to the Holder, he will be
deemed to have accepted the same.

Petitioner asserts that since BPI accepted the instrument, the bank became primarily liable for the payment of the
CHECK. Consequently, when BPI offset the value of CHECK against the losses from the forged checks allegedly
committed by the private respondent, the check was deemed paid.
Article 1249 of the New Civil Code deals with a mode of extinction of an obligation and expressly provides
for the medium in the payment of debts. It provides that:

The payment of debts in money shall be made in the currency stipulated, and if it is not possible to
deliver such currency, then in the currency, which is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they have been cashed, or when through
the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in abeyance.

Considering the nature of a money market transaction, the above-quoted provision should be applied in the
present controversy. As held in Perez vs. Court of Appeals,[10] a money market is a market dealing in
standardized short-term credit instruments (involving large amounts) where lenders and borrowers do not deal
directly with each other but through a middle man or dealer in open market. In a money market transaction, the
investor is a lender who loans his money to a borrower through a middleman or dealer.[11]
In the case at bar, the money market transaction between the petitioner and the private respondent is in the
nature of a loan. The private respondent accepted the CHECK, instead of requiring payment in money. Yet, when
he presented it to RCBC for encashment, as early as June 17, 1991, the same was dishonored by non-acceptance,
with BPIs annotation: Check (is) subject of an investigation. These facts were testified to by BPIs manager. Under
these circumstances, and after the notice of dishonor,[12] the holder has an immediate right of recourse against the
drawer,[13] and consequently could immediately file an action for the recovery of the value of the check.
In a loan transaction, the obligation to pay a sum certain in money may be paid in money, which is the legal
tender or, by the use of a check. A check is not a legal tender, and therefore cannot constitute valid tender of
payment. In the case of Philippine Airlines, Inc. vs. Court of Appeals,[14] this Court held:
Since a negotiable instrument is only a substitute for money and not money, the delivery of such an
instrument does not, by itself, operate as payment (citation omitted). A check, whether a managers
check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a
valid tender of payment and may be refused receipt by the obligee or creditor. Mere delivery of
checks does not discharge the obligation under a judgment. The obligation is not extinguished and
remains suspended until the payment by commercial document is actually realized (Art. 1249, Civil
Code, par. 3.)[15]

Turning now to the second issue, when the bank deducted the amount of the CHECK from CIFCs current
account, this did not ipso facto operate as a discharge or payment of the instrument. Although the value of the
CHECK was deducted from the funds of CIFC, it was not delivered to the payee, Vicente Alegre. Instead, BPI
offset the amount against the losses it incurred from forgeries of CIFC checks, allegedly committed by
Alegre. The confiscation of the value of the check was agreed upon by CIFC and BPI. The parties intended to
amicably settle the collection suit filed by CIFC with the RTC-Makati, Branch 147, by entering into a compromise
agreement, which reads:
xxx
2. Thereupon, defendant shall debit the sum of P 514,390.94 from the aforesaid current account representing
payment/discharge of BPI Check No. 513397 payable to Vicente Alegre.
3. In case plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from the alleged dishonor
of BPI Check No. 513397, plaintiff cannot go after the defendant; otherwise stated, the defendant shall not
be liable to the plaintiff. Plaintiff however (sic) set-up the defense of payment/discharge stipulated in par. 2
above.[16]
A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put
an end to one already commenced.[17] It is an agreement between two or more persons who, for preventing or
putting an end to a lawsuit, adjust their difficulties by mutual consent in the manner which they agree on, and
which everyone of them prefers in the hope of gaining, balanced by the danger of losing.[18] The compromise
agreement could not bind a party who did not sign the compromise agreement nor avail of its benefits.[19] Thus,
the stipulations in the compromise agreement is unenforceable against Vicente Alegre, not a party thereto. His
money could not be the subject of an agreement between CIFC and BPI. Although Alegres money was in custody
of the bank, the banks possession of it was not in the concept of an owner. BPI cannot validly appropriate the
money as its own. The codal admonition on this issue is clear:

Art. 1317 -

No one may contract in the name of another without being authorized by the latter, or unless he has
by law a right to represent him.

A Contract entered into in the name of another by one who has no authority or legal representation,
or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or
impliedly, by the person on whose behalf it has been executed, before it is revoked by the other
contracting party.[20]

BPIs confiscation of Alegres money constitutes garnishment without the parties going through a valid
proceeding in court. Garnishment is an attachment by means of which the plaintiff seeks to subject to his claim
the property of the defendant in the hands of a third person or money owed to such third person or a garnishee to
the defendant.[21] The garnishment procedure must be upon proper order of RTC-Makati, Branch 62, the court
who had jurisdiction over the collection suit filed by BPI against Alegre. In effect, CIFC has not yet tendered a
valid payment of its obligation to the private respondent. Tender of payment involves a positive and unconditional
act by the obligor of offering legal tender currency as payment to the obligee for the formers obligation and
demanding that the latter accept the same.[22] Tender of payment cannot be presumed by a mere inference from
surrounding circumstances.
With regard to the third issue, for litis pendentia to be a ground for the dismissal of an action, the following
requisites must concur: (a) identity of parties or at least such as to represent the same interest in both actions; (b)
identity of rights asserted and relief prayed for, the relief being founded on the same acts; and (c) the identity in
the two cases should be such that the judgment which may be rendered in one would, regardless of which party
is successful, amount to res judicata in the other.[23]
The trial courts ruling as adopted by the respondent court states, thus:
A perusal of the complaint in Civil Case No. 92-1940, entitled Cebu International Finance
Corporation vs. Bank of the Philippine Islands now pending before Branch 147 of this Court and
the Third Party Complaint in the instant case would readily show that the parties are not only
identical but also the cause of action being asserted, which is the recovery of the value of BPI
Check No. 513397 is the same. In Civil Case No. 92-1940 and in the Third Party Complaint the
rights asserted and relief prayed for, the reliefs being founded on the facts, are identical.

xxx

WHEREFORE, the motion to dismiss is granted and consequently, the Third Party Complaint is
hereby ordered dismissed on ground of lis pendens.[24]

We agree with the observation of the respondent court that, as between the third party claim filed by the
petitioner against BPI in Civil Case No. 92-515 and petitioners ancillary claim against the bank in Civil Case No.
92-1940, there is identity of parties as well as identity of rights asserted, and that any judgment that may be
rendered in one case will amount to res judicata in another.
The compromise agreement between CIFC and BPI, categorically provided that In case plaintiff is adjudged
liable to Vicente Alegre in Civil Case No. 92-515 arising from the alleged dishonor of BPI Check No. 513397,
plaintiff (CIFC) cannot go after the defendant (BPI); otherwise stated, the defendant shall not be liable to the
plaintiff.[25] Clearly, this stipulation expressed that CIFC had already abandoned any further claim against BPI
with respect to the value of BPI Check No. 513397. To ask this Court to allow BPI to be a party in the case at bar,
would amount to res judicata and would violate terms of the compromise agreement between CIFC and BPI. The
general rule is that a compromise has upon the parties the effect and authority of res judicata, with respect to the
matter definitely stated therein, or which by implication from its terms should be deemed to have been included
therein.[26] This holds true even if the agreement has not been judicially approved.[27]
WHEREFORE, the instant petition is hereby DENIED. The Decision of the Court of Appeals in CA-G.R.
CV No. 44085 is AFFIRMED. Costs against petitioner.
SO ORDERED.