Contents

Francisco vs Gregorio - Reread....................................................................................................................1

State Investment House Inc. v. CA.............................................................................................................15
Tio Khe Chio v. CA......................................................................................................................................23
Eastern Shipping Lines vs CA......................................................................................................................27
Sangrador v Villarama................................................................................................................................42
Almeda v CA..............................................................................................................................................55

Francisco vs Gregorio - Reread

G.R. No. L-59519 July 20, 1982

ADELA FRANCISCO, petitioner,
vs.
HON. ALFREDO M. GORGONIO, as Presiding Judge of the Court of First Instance
of Rizal, Branch XXXV, Caloocan City, Deputy Sheriff Danilo P. Norberto, and
Spouses Ching Siao and Lim O. Chu, respondents.
Napoleon M. Malimas for petitioner.
Antonio P. Coronel for respondents.

BARREDO, J.:
Petition for certiorari seeking the setting aside of the orders of respondent court of
August 15, 1980, November 7, 1980, March 2, 1981, October 27, 1981 and December
16, 1981, particularly insofar as said orders require petitioner to pay interest at the rates
stated therein in addition to the amount of P150,000.00 which has already been paid to
private respondents.
The case below stemmed from a contract of lease entered into on July 5, 1977 between
Zenaida F. Boiser "representing her parents, spouses Luis F. Francisco and Adela Blas
Francisco" (p. 26, Record) 1 of a piece of land one hundred thirty-five square meters,
more or less, situated at No. 691 (Old) Rizal Avenue Extension, Caloocan City, with the
following pertinent provisions:

1
 1. That the amount of ONE HUNDRED FIFTY THOUSAND PESOS
(Pl50,000.00), Philippine Currency, shall be deposited by the Lessee in
favor of the Lessor upon signing of this agreement;
2. That out of the deposit of P150,000.00, the amount of P30,000.00
equivalent to twenty per cent (20%) of said deposit shall represent the
goodwill of the store space;
3. That the monthly rental shall be THREE THOUSAND SEVEN
HUNDRED FIFTY PESOS (P3,750.00), Philippine Currency, and the
amount of P2,500.00 shall be deducted against the aforesaid deposit and
the amount of P1,250.00 shall be in postdated monthly checks for 12
months. It is understood and agreed that the monthly rental aforesaid shall
begin upon final occupancy of said store space by the Lessee;
4. That the proposed building shall be constructed and to be finished by
the Lessor within 6 months from execution of this agreement:
5. That the terms of the lease contract shall be ten (10) years from
execution hereof, to be renewed for a 5-year period upon agreement of
both parties, subject however for a reasonable increase of monthly rental
after five (5) years from execution hereof;
6. That in case the parties hereof will not agree as to the conditions and
terms to be set up in the final contract of lease, then the Lessor agrees to
return and refund the amount of P150,000.00 as deposit in full with legal
interest to the Lessee and this agreement shall be considered null and
void and without force and effect, if however, it is the Lessee who will back
out from this agreement, then the amount of P30,000.00 shall be forfeited.
On May 30, 1978, private respondents filed a complaint, Civil Case No. C-6935,
precisely the case below, against Zenaida F. Boiser, as attorney-in-fact of the spouses
Luis F. Francisco and Adela Francisco, alleging that in spite of their having paid the
P120,000.00 advanced rentals and P30,000.00 goodwill stipulated in the agreement,
and the promise of said defendant to deliver to them the leased premises within six
months from the signing of the contract, she failed to do so without any legal

2
justification, and instead was about to turn over possession thereof to Ginza Telamart,
and, therefore, prayed thus:
WHEREFORE, in view of all the foregoing it is most respectfully prayed as
a preliminary matter that a writ 6f preliminary prohibitory injunction be
issued by this court pending the final termination of this case ordering
defendant to desist from awarding the leased premises to another and that
after due hearing judgment be rendered:
1. Making preliminary prohibitory injunction final and
permanent;
2. That plaintiff be entitled to the described leased portion of
the building and ordering defendant to deliver the same;
3. Ordering defendant to pay an amount reasonably
assessed by the Honorable Court for moral damages;
4. Ordering the defendant to pay actual damage as may be
proven, plus legal interest;
5. And further ordering defendant to pay the sum of
P15,000.00 as and for attorney's fees.
Plaintiffs herein further pray for such other reliefs and remedies just and
equitable in the premises. (Pp. 24-25, Record)
After being summoned, on June 29, 1978, defendant Boiser (who was the only one
served with summons) filed her answer alleging and praying:
10. That the agreement to lease was subject to the following conditions:
(a) the resolutory condition contained in paragraph 6 thereof
quoted in paragraph 2 of this answer;
(b) the specific area of the building to be constructed was
still to be agreed upon and it was not provided in the
agreement what specific area of the building was to be
leased by plaintiff;
11. That plaintiff and defendant could not agree on the specific area of the
new building to be leased, the choice of which was made difficult by the
fact that the frontage as required by the city government; consequently,

3
defendant opted to consider the agreement null and void and of no force
and effect; that defendant tendered payment to plaintiff before the
complaint was filed of the sum of P150,000.00 with interest at the legal
rate as provided in paragraph 6 of the agreement, which tender of
payment was refused by the plaintiff;
12. That defendant is ready, willing and able to refund or reimburse the
amount of P150,000.00 with interest at the legal rate as provided in
paragraph 6 of the agreement;
And as counterclaim, defendant respectfully alleges:
13. That defendant reiterates the foregoing allegations to form integral part
of this counterclaim;
14. That defendant is lawfully entitled to consider the agreement null and
void and of no force and effect and to make a consignation of the amount
of P150,000.00 with interest at the legal rate under paragraph 6 of the
agreement and to be released from any further liability thereon;
15. That due to the unfounded suit filed by plaintiff, defendant has been
compelled to litigate to protect her interest and avail of the services of
counsel at an agreed fee of P5,000.00.
WHEREFORE, it is respectfully prayed:
1. That the prayer for a writ of preliminary injunction contained in the
complaint be denied and the temporary restraining order be set aside;
2. After trial, that judgment be rendered dismissing the complaint for lack
of merit;
3. On the counterclaim, that the Agreement dated July 5, 1977 between
plaintiff and defendant be declared null and void and of no force and effect
pursuant to paragraph 6 thereof, that the consignation of the amount of
P150,000.00 with interest at the legal rate from July 5, 1977 until its
deposit in court be accepted by the court; and that defendant be declared
released from any further liability or obligation under the said Agreement;

4
 4. Likewise on the counterclaim, that plaintiff be ordered to pay defendant
attorney's fees in the amount of P5,000.00, such expenses of litigation as
may be proven, and to pay the costs, if any.
Defendant respectfully prays for such other relief as the court may deem
just and proper in the premises. (Pp. 29-31, Record)
Evidently, the court a quo must have issued the restraining order prayed for in private
respondent's complaint, for on July 24, 1978, defendant Boiser filed a motion praying:
1. That the restraining order contained in the order of June 26, 1978 be
lifted and set aside; and
2. That plaintiff be allowed to deposit with the clerk of court, or with such
other depository as the court may determine, the sum of Pl50,000.00
subject to the disposition of the court in its judgment. (Page 33, Record.)
Acting on the foregoing motion, on August 10, 1978 Judge Alberto Q. Ubay, who was
then still the judge in charge of the case, issued the following order:
ORDER
The "Omnibus Motion" filed by defendant, thru counsel, on July 25, 1978,
is hereby GRANTED, it appearing from the records of this case and from
the testimony of plaintiff Ching Siao that when on June 26, 1978 the Court
issued a restraining order requiting defendant "to desist and refrain from
awarding the leased premises to Ginza Telamart", the premises in
question had already been leased to the said Ginza Telamart and has
been actually occupied by it, contrary to the allegation and contention of
the herein plaintiffs. Hence, the continuance of said restraining order is no
longer justified.
As regards the consignment of the sum of P150,000.00, the Court
believes that no valid reason has been advanced by plaintiffs why the
same should not be accepted or granted, subject to the outcome of this
case on the merits and subject to the orders of this Court.
WHEREFORE, the restraining order issued by the Court dated June 26,
1978, is hereby lifted and set aside; and the defendant Zenaida F. Boiser
is hereby authorized to deposit with the Clerk of Court the sum of

5
 P150,000.00 subject to the disposition of the Court, as may be provided in
the decision to be rendered in this case.
SO ORDERED. (Page, 35, Record.)
However, on August 22, 1978, the following motion appears to have been filed by
defendant:
NOW COMES defendant, by undersigned counsel, and to the Court
respectfully moves for a partial reconsideration of the Order of August 10,
1978 insofar as said Order states that:
... the defendant Zenaida F. Boiser is hereby authorized to
deposit with the Clerk of Court the sum of P150,000.00
subject to the disposition of the court, as may be provided in
the decision to be rendered in this case.
on the following grounds:
1. That as early as July 18, 1978, Adela B. Francisco, one of defendant's
principals (who is also defendant's mother) had deposited with the
Associated Citizen's Bank, Sangandaan Branch, the amount of
P150,000.00 intended to be refunded to plaintiffs, as provided in
paragraph 6 of the Agreement of July 5, 1977 (Annex "A" of the
Complaint);
2. That the said deposit earns interest of l4% per annum;
3. That the said Adela Blas Francisco, as signified by her conformity to this
motion, is willing to keep the said deposit and make it subject to the
disposition of this court, as may be provided in the decision to be rendered
in this case:
4. That no prejudice would be caused to plaintiffs under the foregoing
arrangement; on the other hand, it will earn for the parties interest at 14%
per annum until disposed of under the judgment of this court;
5. That as evidence of the deposit alleged in paragraph 1 hereof, there is
attached to this motion a xerox copy of a certificate of time deposit issued
by the Associated Citizens Bank, Sangandaan Branch, as Annex "A"
hereof.

6
 WHEREFORE, it is respectfully prayed that the portion of the Order dated
August 10, 1978 quoted in the opening paragraph of this motion be
amended to read as follows:
... that the defendant Zenaida F. Boiser is hereby authorized
to deposit in the name of Adela B. Francisco, one of the
principals in entering into contract with plaintiffs, the sum of
P150,000.00 with the Associated Citizens Bank,
Sangandaan Branch, subject to the disposition of the court,
as may be provided in the decision to be rendered in this
case.
Quezon City for Caloocan City, August 22, 1978.
(SGD.) ANACLETO S. MAGNO
Attorney for the Defendant
113 Mendez, Baesa
Quezon City
WITH MY CONFORMITY:
ADELA B. FRANCISCO (Pp. 38-39, Record.)
Consequently, Judge Ubay ordered on September 13, 1978 that:
ORDER
Acting on the "Motion for Reconsideration", dated August 22, 1978 and
filed by counsel for defendants, the Court, after a careful consideration of
the grounds stated therein, as well as the arguments advanced by counsel
for plaintiff, is of the opinion that the said motion should be, as it is hereby,
GRANTED.
WHEREFORE, the Order of this Court dated August 10, 1978 is hereby
amended to read as follows:
that the defendant Zenaida F. Boiser is hereby authorized to
deposit in the name of Adela S. Francisco, one of her
principals, in entering into contract with the Associated
Citizens Bank, Sangandaan Branch, subject to the
disposition of the Court, as may be provided in the decision

7
 to be rendered in this case, amount shall be made without
an order from the Court. (sic)
SO ORDERED. (Page 41, Record.)
Apparently, as a counter-move, respondents filed on June 10, 1980, a Motion to
Withdraw Deposit, asking the court that:
WHEREFORE, premises considered, it is respectfully so prayed that Lim
O. Chu be snowed to withdraw the P150,000.00 previously deposited in
bank upon order of this Honorable Court, plus legal rate of interest (14%
per anum) from July 5, 1977, the date of the contract, Annex "A" of
complaint. (Page 43, Record.)
Acting on this motion, on August 15, 1980, the now respondent judge who had replaced
Judge Ubay, after the latter retired, issued an order pertinently ordering that:
Considering the foregoing antecedents and subsequent developments in
this case and in the broad interest of justice and equity, this Court hereby
grants said motion of the plaintiffs to withdraw from the Associated
Citizens Bank, Caloocan City Branch, the amount of P150,000.00 plus the
legal interests accruing thereon deposited in the name of the defendant
Adela B. Francisco by way of refund to plaintiffs spouses Ching Siao and
Lim O. Chu and hereby orders the said bank and defendant Zenaida
Boiser and/or Adela B. Francisco in whose name said amount had been
deposited to comply with this Order, directing Zenaida Boiser and/or Adela
Francisco to withdraw from said bank the amount of P150,000.00,
together with all the interests due thereon, and further to turn over said
amount to the plaintiffs spouses within five (5) days from receipt of this
Order.
Meanwhile and brushing aside legal technicalities raised by the parties,
this Court will hold in abeyance resolution on other matters raised in the
pleadings of the parties (Motion to Withdraw Deposit and Opposition to
Withdrawal of Rentals) until such further steps that may be henceforth be
taken by the parties-litigants in this case in the prosecution of their
respective side of this case. (Pp. 45-46, Record.)

8
This order was followed by another dated November 7, 1980, portions of which read:
The delivery of the principal amount of P150,000.00 to the plaintiffs now
being a fait accompli what remains now to be resolved by this Court is the
amount of the interest to be paid the plaintiffs. The defendants maintain
that it should be the legal rate of six (6%) percent per annum while the
plaintiffs claim their legal rate of interest should be twelve percent (12 %)
per annum.
Before resolving this issue, this Court finds it illuminating that the subject
amount of P150,000.00 as admitted by the Associated Citizens Bank
through their counsel, Atty. Teresita L. Nuguid in her Manifestation filed
with this Court on September 3, 1980, was deposited by defendant Adela
B. Francisco thru her attorney-in-fact, Zenaida F. Boiser in the form of time
deposit (Account No. 7270, ACB). Hence, this Court can take judicial
notice of the fact that as time deposit said amount of P150,000.00 earned
aggregate interest far above the legal rates of 12% and 14% per annum
allowed by law. Furthermore, as can be seen from Annex "A" of said
Manifestation of the Associated Citizens Bank, defendant Adela B.
Francisco made an assignment of said time deposit in favor of Engr.
Laureano R. Arcadio and no doubt the said ban profited from the interest
by reason of the time deposit far and above said legal rates.
Said interest derived by the defendants by virtue of said time deposit is of
no moment in this case and what is controlling as heretofore stated is the
agreement not contrary to law, morals and public policy between the
parties which in this case is and should be the legal rate of interest which
is twelve percent (12%) per annum computed from the date of the
aforesaid Agreement executed on July 5, 1977 and to deny the plaintiffs
that the rate of interest due them (12%) would amount to allowing a party
to enrich himself at the expense of the other. It cannot also be said that
defendants- depositor suffered losses by reason of making such time
deposit because the difference between the legal rates of interest and the
aggregate interests in time deposits is substantial.

9
 WHEREFORE, premises considered, the defendants Adela B. Francisco
and/or Zenaida F. Boiser, is hereby ordered:
1. to pay the plaintiffs the legal rate of interest of twelve percent (12%) per
annum on the deposit of P150,000.00 computed from July 5, 1977 (date
when Agreement was executed) up to September 13, 1978 when the
money was deposited with the Associated Citizens Bank on Time Deposit
pursuant to the Order of then Presiding Judge, the Hon. Alberto Q. Ubay;
and
2. to pay the plaintiffs the legal rate of interest of twelve percent (12%) per
annum on the deposit of P150,000.00 from September 13, 1978 (date
when money was deposited with the Bank) up to August 29, 1980, when
the said deposited money was refunded to the plaintiffs. (Pp. 48-50,
Record.)
And on March 2, 1981, again respondent judge ordered:
Before this Court is plaintiffs' Motion for Execution of the Order dated
November 7, 1980, to which the defendants file their opposition with
Motion for Reconsideration on January 29, 1981, and as a rejoinder the
plaintiffs filed their Opposition to Defendants' Motion for Reconsideration
on February 13, 1981.
Brushing aside all legal technicalities and niceties of the law raised by the
respective counsels in their respective pleadings, this Court has to resolve
the issue as to the proper rate of legal interest due to the plaintiffs and to
reckon the period from which said interest should run in consonance with
the antecedent facts and circumstances of this case in the broad interest
of justice and equity.
This Court observes that the parties in the prosecution of their respective
claims are motivated with a desire to get the maximum of what is due him
on the one hand and the desire of the other to give the least or minimum
of what he is bound to pay. At first blush considering that the bone of
contention revolves in the determination of the proper rate of interest and
the period to be covered, the issue seems inconsequential but considering

10
 the amount involved which is to the tune of P150,000.00 the respective
positions taken by the parties in the instant case is quite understandable.
Hence, this Court will resolve the issue on the basis of the time-honored
legal dictum that "no one shall enrich himself at the expense of another" in
conjunction with the facts and circumstances of this case in the broad
interest of justice and equity.
Premises considered, this Court hereby reconsiders its Order dated
November 7, 1980 and hereby orders the defendants Adela B. Francisco
and/or Zenaida F. Boiser:
1. To pay the plaintiffs the legal rate of interest of nine (9%) percent per
annum on the deposit of P 150,000.00 computed from July 5, 1977 (date
of execution of Agreement) up to September 13, 1978 when the money
was deposited with the Associated Citizens Bank on Time Deposit
pursuant to the Order of then Presiding Judge of this Court, Hon. Alberto
Q. Ubay; and
2. To pay the plaintiffs the legal rate of interest of twelve (12%) percent per
annum on the deposit of P150,000.00 from September 13, 1978 (date
when money was deposited with the Bank) up to August 29, 1980 (date of
refund of the money to the plaintiffs). (Pp. 51-53, Record)
On July 31, 1981, petitioner filed a motion to quash the writ of execution issued
pursuant to the above order, contending that she was not properly made a party to the
case, since the defendant was her daughter Zenaida F. Boiser. On October 27, 1981,
respondent judge denied said motion holding that said movant had by certain actuations
related to the case vitually submitted her person to its jurisdiction although she was not
properly made a party thereto. On October 16, 1981, respondent denied petitioner's
motion for reconsideration, hence the instant petition before Us.
From a reading of the pleadings of both parties and looking at the case as a whole, We
feel that somehow both counsel have centered, even with vehemence, on two points,
which could be off-tangent, namely: (1) petitioner insists that the lower court had not
acquired jurisdiction over her person and (2) respondents, for their part, maintain that
they should be paid interest.

11
As far as petitioner is concerned, she evidently overlooks the fact that the record
reveals that she gave her express conformity to the motion of defendant Boiser dated
August 22, 1978, We have quoted earlier. Although technically, her contention is correct
that she is not a party to the case below, she voluntarily formally manifested to the court
"her conformity to this motion (of defendant Boiser) (and) is willing to keep the said
deposit (made by her on July 18, 1978 in her own name in the Associated Citizens
Bank, Sangandaan Branch) and make it subject to the disposition of this court, as may
be provided in the decision to be rendered in this case." Under this circumstance, her
being a party or not in the case has become immaterial. The fact is that she bound
herself to an obligation with the court and the respondents, albeit, in this connection, it is
very clear that her obligation is premised on the "decision to be rendered in this case"
exclusively. And that decision has not materialized, hence she has nothing to answer
for.
On the other hand, the insistence of respondents to recover interests on the
P150,000.00, can hardly have any legal basis, as things developed when they first
demanded from defendant Boiser compliance with the agreement. According to the
answer filed by said defendant, it is alleged therein, and this allegation has not been
denied by respondents, "that defendant tendered payment to the plaintiff before the
complaint was filed (on May 30, 1978) of the sum of P150,000.00 with interest at the
legal rate as provided in paragraph 6 of the agreement, which tender of payment was
refused by the plaintiffs." On this score, We hold to be well taken the following posture
of defendant Boiser, which, of course, benefits equally her mother:
DAMAGES CANNOT BE AWARDED WITHOUT PRIOR
DETERMINATION OF THE MERITS OF THE CASE. IN ANY EVENT,
DEFENDANT BOISER HAVING TENDERED THE AMOUNT, DAMAGES
CANNOT BE ADJUDGED AGAINST HER
The award for interests in an action for the recovery of a sum of money
partakes of a nature of an award for damages. Thus, Article 2209 of the
Civil Code provides:
Art. 2209. If the obligation consists in the payment of a sum
of money, and the debtor incurs in delay, the indemnity for

12
 damages, there being no stipulation to the contrary, shall be
the payment of the interest agreed upon, and in the absence
of stipulation, the legal interest, which is six percent per
annum.
Clearly, the indemnity for interest on a monetary obligation attaches only
when the obligor incurs delay, that is, when he is in default, it being a
fundamental principle of law that:
Those obliged to deliver or to do something incur in delay
from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their
obligation. (Art. 1169, Civil Code.)
In the case at bar, it is not disputed that no demands, judicial or
extrajudicial, were made by private respondents on defendant Boiser for
the return of the amount of P150,000.00. There could not have been any
because of the nature of the action filed by private respondents, which is
for specific performance. Hence, there is no delay of the latter's obligation,
assuming that she be eventually required in the decision of the Court to
return the same. Upon the contrary, it was private respondents who were
in mora accipiende from the time defendant Boiser tendered and
consigned the amount in Court.
Art. 1256. If the creditor to whom tender of payment has
been made refuses without just cause to accept, the debtor
shall be released from the responsibility by the consignation
of the thing or sum done.(Art. 1256, Civil Code).
Tender and consignation having been properly made by defendant Boiser,
she should therefore be released from paying the interests on the sum so
deposited.
In Gregorio Araneta, Inc. vs. Tuazon de Paterno, et al., 91 Phil. 786, it was
held that tender of payment alone suspends the running of the interest on
the obligation. Thus

13
 The matter of the suspension of the running of interest on
the loan is governed by principles which regard reality rather
than technicality, substance rather than form. Good faith of
the offeror or ability to make good the offer should in simple
justice excuse the debtor from paying interest after the offer
was rejected. A debtor cannot be consider delinquent who
offered checks backed by sufficient deposit or ready to pay
cash it the creditor chose that means of payment. Technical
defects of the offer cannot be adduced to destroy its effects
when the objection to accept the payment was based on
entirely different grounds. Thus, although the defective
consignation made by the debtor did not discharge the
mortgage debt, the running of interest on the loan is
suspended by the offer and tender of payment. (Pp. 17-18,
Record.)
IN VIEW OF ALL THE FOREGOING, judgment is hereby rendered in favor of petitioner
absolving her from the payment of the interests claimed by respondents beyond the
date when defendant Boiser made her tender, not-only because the decision on the
merits contemplated in her obligation aforementioned and on which her conformity to
defendant Boiser's motion of August 22, 1978 was based has not materialized because
respondents opted to get their money back instead of insisting on being given
possession of the premises; which was the original nature of their action, 2 but also
because, in consequence of Boiser's tender to return the P150,000.00 prior to the filing
of the respondents' complaint, and the refusal of the latter to accept the same, no
obligation to pay any interest could attach after the tender was made. In other words,
defendant Boiser and/or petitioner should pay 12% interest only from January 5, 1978,
that is, six months after the signing of the contract 3 up to, at the latest, May 30, 1978,
when the respondents' complaint was filed, roughly a little less than four months.
No costs.

14
State Investment House Inc. v. CA

G.R. No. 90676 June 19, 1991

STATE INVESTMENT HOUSE, INC., petitioner,
vs.
THE HONORABLE COURT OF APPEALS, HON. JUDGE PERLITA J. TRIA TIRONA,
Presiding Judge of the Regional Trial Court of Quezon City, Branch CII and SPS.
RAFAEL and REFUGIO AQUINO, respondents.
Padilla Law Office for petitioner.
Rodolfo T. Galing and Chaves, Hechanova & Lim Law Offices for private respondents.

FELICIANO, J.:
On 5 April 1982, respondent spouses Rafael and Refugio Aquino pledged certain
shares of stock to petitioner State Investment House, Inc. ("State") in order to secure a
loan of P120,000.00 designated as Account No. IF-82-0631-AA. Prior to the execution
of the pledge, respondent-spouses, as an accommodation to and together with the
spouses Jose and Marcelina Aquino, signed an agreement (Account No. IF-82-1379-
AA) with petitioner State for the latter's purchase of receivables amounting to
P375,000.00. When Account No. IF-82-0631-AA fell due, respondent spouses paid the
same partly with their own funds and partly from the proceeds of another loan which
they obtained also from petitioner State designated as Account No. IF-82-0904-AA. This
new loan was secured by the same pledge agreement executed in relation to Account
No. IF-820631-AA. When the new loan matured, State demanded payment.
Respondents expressed willingness to pay, requesting that upon payment, the shares of
stock pledged be released. Petitioner State denied the request on the ground that the
loan which it had extended to the spouses Jose and Marcelina Aquino (Account No. IF-
82-1379- AA) had remained unpaid.
On 29 June 1984, Atty. Rolando Salonga sent to respondent spouses a Notice of
Notarial Sale stating that upon request of State and by virtue of the pledge agreement,
he would sell at public auction the shares of stock pledged to State. This prompted
respondents to file a case before the Regional Trial Court of Quezon City alleging that

15
the intended foreclosure sale was illegal because from the time the obligation under
Account No. IF-82-0904-AA became due, they had been able and willing to pay the
same, but petitioner had insisted that respondents pay even the loan account of Jose
and Marcelina Aquino which had not been secured by the pledge. It was further alleged
that their failure to pay their loan (Account No. IF-82-0904-AA) was excused because
the petitioner State itself had prevented the satisfaction of the obligation.
The trial court, in a decision dated 14 December 1984 rendered by Judge Willelmo
Fortun, initially dismissed the complaint. Respondent spouses filed a motion for
reconsideration praying for a new decision ordering petitioner State to release the
shares upon payment of respondents' loan "without interest," as the latter had not been
in delay in the performance of their obligation. State countered that the pledge executed
by respondent spouses also covered the loan extended to Jose and Marcelina Aquino,
which too should be paid before the shares may be released.
Acting on the motion for reconsideration, Judge Fortun set aside his original decision
and rendered a new judgment dated 29 January 1985, ordering State to immediately
release the pledge and to deliver to respondents the share of stock "upon payment of
the loan under Code No. 82-0904-AA."
On appeal, the Court of Appeals affirmed in toto the new decision of the trial court,
holding that the loan extended to Jose and Marcelina Aquino, having been executed
prior to the pledge was not covered by the pledge which secured only loans executed
subsequently. Thus, upon payment of the loan under Code No. IF-0904-AA, the shares
of stock should be released. The decisions of the Court of Appeals and of Judge Fortun
became final and executory.
Upon remand of the records of the case to the trial court for execution, there developed
disagreement over the amount which respondent spouses Rafael and Refugio Aquino
should pay to secure the release of the shares of stock petitioner State contending
that respondents should also pay interest and respondents arguing they should not.
Respondent spouses then filed a motion with the trial court to clarify the Fortun decision
praying that an order issue clarifying the phrase "upon payment of plaintiffs' loan" to
mean upon payment of plaintiff' loan in the principal amount of P110,000.00 alone,
"without interest, penalties and other charges."

16
On 17 February 1989, the trial court, speaking this time through Judge Perlita Tria
Tirona, rendered a decision purporting to clarify the decision of Judge Fortun and ruling
that petitioner State shall release respondents' shares of stock upon payment by
respondents of the principal of the loan as set forth in PN No. 82-0904-AA in the amount
of P110,000.00, without interest, penalties and other charges.
Petitioner State appealed Judge Tirona's decision to the Court of Appeals; the appeal
was dismissed. The Court of Appeals agreed with Judge Tirona that no interest need be
paid and added that the clarificatory (Tirona) decision of the trial court merely restated
what had been provided for in the earlier (Fortun) decision; that the Tirona decision did
not go beyond what had been adjudged in the earlier decision. The motion for
reconsideration filed by petitioner was accordingly denied.
Hence, this Petition for Review contending that no manifest ambiguity existed in the
decision penned by Judge Fortun; that the trial court through Judge Tirona, erred in
clarifying the decision of Judge Fortun; and that the amendment sought to be introduced
in the Fortun decision by respondents may not be made as the same was substantial in
nature and the Fortun decision had become final.
We begin by noting that the trial court has asserted authority to issue the clarificatory
order in respect of the decision of Judge Fortun, even though that judgment had
become final and executory. In Reinsurance Company of the Orient, Inc. v. Court of
Appeals,1 this Court had occasion to deal with the applicable doctrine to some extent:
- - - [E]ven a judgment which has become final and executory may be clarified
under certain circumstances. The dispositive portion of the judgment may, for
instance, contain an error clearly clerical in nature (perhaps best illustrated by an
error in arithmetical computation) or an ambiguity arising from inadvertent
omission, which error may be rectified or ambiguity clarified and the omission
supplied by reference primarily to the body of the decision itself Supplementary
reference to the pleadings previously filed in the case may also be resorted to by
way of corroboration of the existence of the error or of the ambiguity in the
dispositive part of the judgment. In Locsin, et al. v. Parades, et al., this Court
allowed a judgment which had become final and executory to be clarified by

17
 supplying a word which had been inadvertently omitted and which, when
supplied, in effect changed the literal import of the original phraseology:
. . . it clearly appears from the allegations of the complaint, the promissory
note reproduced therein and made a part thereof, the prayer and the
conclusions of fact and of law contained in the decision of the respondent
judge, that the obligation contracted by the petitioners is joint and several
and that the parties as well as the trial judge so understood it. Under the
juridical rule that the judgment should be in accordance with the
allegations, the evidence and the conclusions of fact and law, the
dispositive part of the judgment under consideration should have ordered
that the debt be paid 'severally' and in omitting the word or adverb
'severally' inadvertently, said judgment became ambiguous. This
ambiguity may be clarified at any time after the decision is rendered and
even after it had become final (34 Corpus Juris, 235, 326). This
respondent judge did not, therefore, exceed his jurisdiction in clarifying the
dispositive part of the judgment by supplying the omission. (Emphasis
supplied)
In Filipino Legion Corporation vs. Court of Appeals, et al., the applicable principle was
set out in the following terms:
[W]here there is ambiguity caused by an omission or mistake in the dispositive
portion of a decision, the court may clarify such ambiguity by an amendment even after
the judgment had become final, and for this purpose it may resort to the pleadings filed
by the parties, the court's findings of facts and conclusions of law as expressed in the
body of the decision. (Emphasis supplied)
In Republic Surety and Insurance Company, Inc. v. Intermediate Appellate Court, the
Court, in applying the above doctrine, said:
. . . We clarify, in other words, what we did affirm. That is involved here is not what is
ordinarily regarded as a clerical error in the dispositive part of the decision of the Court
of First Instance, . . . At the same time, what is involved here is not a correction of an
erroneous judgment or dispositive portion of a judgment. What we believe is involved
here is in the nature of an inadvertent omission on the part of the Court of First Instance

18
(which should have been noticed by private respondents' counsel who had prepared the
complaint), of what might be described as a logical follow-through of something set forth
both in the body of the decision and in the dispositive portion thereof; the inevitable
follow-through, or translation into, operational or behavioral terms, of the annulment of
the Deed of Sale with Assumption of Mortgage, from which petitioners' title or claim of
title embodied in TCT 133153 flows. (Emphasis supplied) 2 (Underscoring in the original;
citations omitted)
The question we must resolve is thus whether or not there is an ambiguity or clerical
error or inadvertent omission in the dispositive portion of the decision of Judge Fortun
which may be legitimately clarified by referring to the body of the decision and perhaps
even the pleadings filed before him. The decision of Judge Fortun disposing of the
motion for reconsideration filed by respondent spouses Rafael and Refugio Aquino
consisted basically of quoting practically the whole motion for reconsideration. In its
dispositive portion, Judge Fortun's decision stated:
WHEREFORE, plaintiffs "Motion for Reconsideration" dated January 3, 1985, is
granted and the decision of this Court dated December 14, 1984 is hereby
revoked and set aside and another judgment is hereby rendered in favor of
plaintiffs as follows:
(1) Ordering defendants to immediately release the pledge on, and to deliver to
plaintiffs, the shares of stocks enumerated and described in paragraph 4 of
plaintiffs' complaint dated July 17, 1984, upon payment of plaintiffs loan under
Code No. 82-0904-AA to defendants;
(2) Ordering defendant State Investment House, Inc. to pay to plaintiffs
P10,000.00 as moral damages, P5,000.00 as exemplary damages, P6,000.00 as
attorney's fees, plus costs;
(3) Dismissing defendants' counterclaim, for lack of merit and making the
preliminary injunction permanent.
SO ORDERED.3
Judge Fortun evidently meant to act favorably on the motion for reconsideration of the
respondent Aquino spouses and in effect accepted respondent spouses' argument that
they had not incurred mora considering that their failure to pay PN No. IF82-0904-AA on

19
time had been due to petitioner State's unjustified refusal to release the shares pledged
to it. It is not, however, clear to what precise extent Judge Fortun meant to grant the
motion for reconsideration. The promissory note in Account No. IF-82-0904-AA had
three (3) components: (a) principal of the loan in the amount of P110,000.00; (b) regular
interest in the amount of seventeen percent (17%) per annum; and (c) additional or
penalty interest in case of non-payment at maturity, at the rate of two percent (2%) per
month or twenty-four percent (24%) per annum. In the dispositive part of his resolution,
Judge Fortun did notspecify which of these components of the loan he was ordering
respondent spouses to pay and which component or components he was in effect
deleting. We cannot assume that Judge Fortun meant to grant the relief prayed for by
respondent spouses in all its parts. For one thing, respondent spouses in their motion
for reconsideration asked for "at least P50,000.00" for moral damages and "at least
P50,000.00" for exemplary damages, as well as P20,000.00 by way of attorney's fees
and litigation expenses. Judge Fortun granted respondent spouses only P10,000.00 as
moral damages and P5,000.00 as exemplary damages, plus P6,000.00 as attorney's
fees and costs. For another, respondent spouses asked Judge Fortun to order the
release of the shares pledged "upon payment of [respondent spouses'] loan under Code
No. 82-0904-AA without interest, as plaintiffs were not in delay in accordance with
Article 69 of the New Civil Code " (Emphasis supplied). In other words, respondent
spouses did not themselves become very clear what they were asking Judge Fortun to
grant them; they did not apparently distinguish between regular interest or "monetary
interest" in the amount of seventeen percent (17%) per annum and penalty charges or
"compensatory interest" in the amount of two percent (2%) per month or twenty-four
percent (24%) per annum.
It thus appears that the Fortun decision was ambiguous in the sense that it was cryptic.
We believe that in these circumstances, we must assume that Judge Fortun meant to
decide in accordance with law, that we cannot fairly assume that Judge Fortun was
grossly ignorant of the law, or that he intended to grant the respondent spouses relief to
which they were not entitled under law. Thus, the ultimate question which arises is: if
respondent Aquino spouses were not in delay, what should they have been held liable
for in accordance with law?

20
We believe and so hold that since respondent Aquino spouses were held not to have
been in delay, they were properly liable only for: (a) the principal of the loan or
P110,000.00; and (b) regular or monetary interest in the amount of seventeen percent
(17%) per annum. They were not liable for penalty or compensatory interest, fixed by
the promissory note in Account No. IF-82-0904-AA at two percent (2%) per month or
twenty-four (24%) per annum. It must be stressed in this connection that under Article
2209 of the Civil Code which provides that
. . . [i]f the obligation consists in the payment of a sum of money, and the debtor
incurs in delay. the indemnity for damages, there being no stimulation to the
contrary. shall be the payment of the interest agreed upon, and in the absence of
stipulation, the legal interest, which is six per cent per annum.
the appropriate measure for damages in case of delay in discharging an obligation
consisting of the payment of a sum or money, is the payment of penalty interest at the
rate agreed upon; and in the absence of a stipulation of a particular rate of penalty
interest, then the payment of additional interest at a rate equal to the regular monetary
interest; and if no regular interest had been agreed upon, then payment of legal interest
or six percent (6%) per annum.4
The fact that the respondent Aquino spouses were not in default did not mean that they,
as a matter of law, were relieved from the payment not only of penalty or compensatory
interest at the rate of twenty-four percent (24%)per annum but also of regular or
monetary interest of seventeen percent (17%) per annum. The regular or monetary
interest continued to accrue under the terms of the relevant promissory note until actual
payment is effected. The payment of regular interest constitutes the price or cost of the
use of money and thus, until the principal sum due is returned to the creditor, regular
interest continues to accrue since the debtor continues to use such principal amount.
The relevant rule is set out in Article 1256 of the Civil Code which provides as follows:
Art. 1256. If the creditor to whom tender of payment has been made refuses
without just cause to accept it, the debtor shall be released from responsibility by
the consignation of the thing or sum due.
Consignation alone shall produce the same effect in the following cases:

21
 (1) When the creditor is absent or unknown, or does not appear at the place of
payment;
(2) When he is incapacitated to receive the payment at the time it is due;
(3) When, without just cause, he refuses to give a receipt;
(4) When two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost. (Emphasis supplied)
Where the creditor unjustly refuses to accept payment, the debtor desirous of being
released from his obligation must comply with two (2) conditions: (a) tender of payment;
and (b) consignation of the sum due. Tender of payment must be accompanied or
followed by consignation in order that the effects of payment may be produced. Thus,
in Llamas v. Abaya,5 the Supreme Court stressed that a written tender of payment
alone, without consignation in court of the sum due, does not suspend the accruing of
regular or monetary interest.
In the instant case, respondent spouses Aquino, while they are properly regarded as
having made a written tender of payment to petitioner State, failed to consign in court
the amount due at the time of the maturity of Account No. IF-820904-AA. It follows that
their obligation to pay principal-cum-regular or monetary interest under the terms and
conditions of Account No. IF-82-0904-AA was not extinguished by such tender of
payment alone.
For the respondent spouses to continue in possession of the principal of the loan
amounting to P110,000.00 and to continue to use the same after maturity of the loan
without payment of regular or monetary interest, would constitute unjust enrichment on
the part of the respondent spouses at the expense of petitioner State even though the
spouses had not been guilty of mora. It is precisely this unjust enrichment which Article
1256 of the Civil Code prevents by requiring, in addition to tender of payment, the
consignation of the amount due in court which amount would thereafter be deposited by
the Clerk of Court in a bank and earn interest to which the creditor would be entitled.
WHEREFORE, the Petition for Review is hereby GRANTED DUE COURSE. The
Decision of the Court of Appeals dated 30 August 1989 in C.A.-G.R. No. 17954 and the
Decision of the Regional Trial Court dated 17 February 1989 in Civil Case No. Q-42188

22
are hereby REVERSED and SET ASIDE. The dispositive portion of the decision of
Judge Fortun is hereby clarified so as to read as follows:
(1) Ordering defendants to immediately release the pledge and to deliver to the plaintiff
spouses Rafael and Refugio Aquino the shares of stock enumerated and described in
paragraph 4 of said spouses' complaint dated 17 July 1984, upon full payment of the
amount of P110,000.00 plus seventeen percent (17%) per annum regular interest
computed from the time of maturity of the plaintiffs' loan (Account No. IF-82-0904-AA)
and until full payment of such principal and interest to defendants;
(2) Ordering defendant State Investment House, Inc. to pay to the plaintiff spouses
Rafael and Refugio Aquino P10,000.00 as moral damages, P5,000.00 as exemplary
damages, P6,000.00 as attorney's fees, plus costs; and
(3) Dismissing defendants' counterclaim for lack of merit and making the preliminary
injunction permanent."
No pronouncement as to costs.
SO ORDERED.

Tio Khe Chio v. CA

G.R. No. 76101-02 September 30, 1991

TIO KHE CHIO, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and EASTERN ASSURANCE AND
SURETY CORPORATION,respondents.
Rodolfo M. Morelos for petitioner.
Ferrer, Mariano, Sangalang & Gatdula for private respondent.

FERNAN, C.J.:p
The issue in this petition for certiorari and prohibition is the legal rate of interest to be
imposed in actions for damages arising from unpaid insurance claims. Petitioner Tio
Khe Chio claims that it should be twelve (12%) per cent pursuant to Articles 243 and
244 of the Insurance Code while private respondent Eastern Assurance and Surety

23
Corporation (EASCO) claims that it should be six (6%) per cent under Article 2209 of
the Civil Code.
The facts are as follows: On December 18, 1978, petitioner Tio Khe Chio imported one
thousand (1,000) bags of fishmeal valued at $36,000.30 from Agro Impex, U.S.A.
Dallas, Texas, U.S.A. The goods were insured with respondent EASCO and shipped on
board the M/V Peskov, a vessel owned by Far Eastern Shipping Company. When the
goods reached Manila on January 28, 1979, they were found to have been damaged by
sea water which rendered the fishmeal useless. Petitioner filed a claim with EASCO and
Far Eastern Shipping. Both refused to pay. Whereupon, petitioner sued them before the
then Court of First Instance of Cebu, Branch II for damages. EASCO, as the insurer,
filed a counterclaim against the petitioner for the recovery of P18,387.86 representing
the unpaid insurance premiums.
On June 30, 1982, the trial court rendered judgment ordering EASCO and Far Eastern
Shipping to pay petitioner solidarily the sum of P105,986.68 less the amount of
P18,387.86 for unpaid premiums with interest at the legal rate from the filing of the
complaint, the sum of P15,000.00 as attorney's fees and the costs. 1
The judgment became final as to EASCO but the shipping company appealed to the
Court of Appeals and was absolved from liability by the said court in AC-G.R. No.
00161, entitled "Tio Khe Chio vs. Eastern Assurance and Surety Corporation."
The trial court, upon motion by petitioner, issued a writ of execution against EASCO.
The sheriff enforcing the writ reportedly fixed the legal rate of interest at twelve (12%).
Respondent EASCO moved to quash the writ alleging that the legal interest to be
computed should be six (6%) per cent per annum in accordance with Article 2209 of the
Civil Code and not twelve (12%) per cent as insisted upon by petitioner's counsel. In its
order of July 30, 1986, the trial court denied EASCO's motion. EASCO then filed a
petition for certiorari and prohibition before the Court of Appeals.
On July 30, 1986, the Appellate Court rendered the assailed judgment, the dispositive
part of which states:
WHEREFORE, the order dated July 30, 1986 is hereby SET ASIDE in so far as it fixes
the interest at 12% on the principal amount of P87,598.82 from the date of filing of the

24
complaint until the full payment of the amount, and the interest that the private
respondent is entitled to collect from the petitioner is hereby reduced to 6% per annum.
No pronouncement as to costs. 2
In disputing the aforesaid decision of the Court of Appeals, petitioner maintains that not
only is it unjust and unfair but it is also contrary to the correct interpretation of the fixing
of interest rates under Sections 243 and 244 of the Insurance Code. And since
petitioner's claims is based on an insurance contract, then it is the Insurance Code
which must govern and not the Civil Code.
We rule for respondent EASCO. The legal rate of interest in the case at bar is six (6%)
per annum as correctly held by the Appellate Court.
Section 243 of the Insurance Code provides:
The amount of any loss or damage for which an insurer may be liable,
under any policy other than life insurance policy, shall be paid within thirty
days after proof of loss is received by the insurer and ascertainment of the
loss or damage is made either by agreement between the insured and the
insurer or by arbitration; but if such ascertainment is not had or made
within sixty days after such receipt by the insurer of the proof of loss, then
the loss or damage shall be paid within ninety days after such receipt.
Refusal or failure to pay the loss or damage within the time prescribed
herein will entitle the assured to collect interest on the proceeds of the
policy for the duration of the delay at the rate of twice the ceiling
prescribed by the Monetary Board, unless such failure or refusal to pay is
based on the ground that the claim is fraudulent.
Section 244 of the aforementioned Code also provides:
In case of any litigation for the enforcement of any policy or contract of
insurance, it shall be the duty of the Commissioner or the Court, as the
case may be, to make a finding as to whether the payment of the claim of
the insured has been unreasonably denied or withheld; and in the
affirmative case, the insurance company shall be adjudged to pay
damages which shall consist of attorney's fees and other expenses
incurred by the insured person by reason of such undeniable denial or

25
 withholding of payment plus interest of twice the ceiling prescribed by the
Monetary Board of the amount of the claim due the insured, from the date
following the time prescribed in section two hundred forty-two or in section
two hundred forty-three, as the case may be, until the claim is fully
satisfied; Provided, That the failure to pay any such claim within the time
prescribed in said sections shall be considered prima facie evidence of
unreasonable delay in payment.
In the case at bar, the Court of Appeals made no finding that there was an unjustified
refusal or withholding of payment on petitioner's claim. In fact, respondent court had this
to say on EASCO's refusal to settle the claim of petitioner:
... EASCO's refusal to settle the claim to Tio Khe Chio was based on some
ground which, while not sufficient to free it from liability under its policy,
nevertheless is sufficient to negate any assertion that in refusing to pay, it
acted unjustifiably.
xxx xxx xxx
The case posed some genuine issues of interpretation of the terms of the
policy as to which persons may honestly differ. This is the reason the trial
3
court did not say EASCO's refusal was unjustified.
Simply put, the aforecited sections of the Insurance Code are not pertinent to the instant
case. They apply only when the court finds an unreasonable delay or refusal in the
payment of the claims.
Neither does Circular No. 416 of the Central Bank which took effect on July 29, 1974
pursuant to Presidential Decree No. 116 (Usury Law) which raised the legal rate of
interest from six (6%) to twelve (12%) per cent apply to the case at bar as by the
petitioner. The adjusted rate mentioned in the circular refers only to loans or
forbearances of money, goods or credits and court judgments thereon but not to court
judgments for damages arising from injury to persons and loss of property which does
not involve a loan. 4
In the case of Philippine Rabbit Bus Lines, Inc. vs. Cruz, G.R. No. 71017, July 28, 1986,
143 SCRA 158, the Court declared that the legal rate of interest is six (6%) per cent per
annum, and not twelve (12%) per cent, where a judgment award is based on an action

26
for damages for personal injury, not use or forbearance of money, goods or credit. In the
same vein, the Court held in GSIS vs. Court of Appeals, G.R. No. 52478, October 30,
1986, 145 SCRA 311, that the rates under the Usury Law (amended by P.D. 116) are
applicable only to interest by way of compensation for the use or forbearance of money,
interest by way of damages is governed by Article 2209 of the Civil Code.
Clearly, the applicable law is Article 2209 of the Civil Code which reads:
If the obligation consists in the payment of a sum of money and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to
the contrary, shall be the payment of interest agreed upon, and in the
absence of stipulation, the legal interest which is six per cent per annum.
And in the light of the fact that the contending parties did not allege the rate of interest
stipulated in the insurance contract, the legal interest was properly pegged by the
Appellate Court at six (6%) per cent.
WHEREFORE, in view of the foregoing, the petition is DENIED for lack of merit.
SO ORDERED.

Eastern Shipping Lines vs CA

G.R. No. 97412 July 12, 1994

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

VITUG, J.:
The issues, albeit not completely novel, are: (a) whether or not a claim for damage
sustained on a shipment of goods can be a solidary, or joint and several, liability of the
common carrier, the arrastre operator and the customs broker; (b) whether the payment
of legal interest on an award for loss or damage is to be computed from the time the
complaint is filed or from the date the decision appealed from is rendered; and (c)
27
whether the applicable rate of interest, referred to above, is twelve percent (12%) or six
percent (6%).
The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and
undisputed facts that have led to the controversy are hereunder reproduced:
This is an action against defendants shipping company, arrastre operator
and broker-forwarder for damages sustained by a shipment while in
defendants' custody, filed by the insurer-subrogee who paid the consignee
the value of such losses/damages.
On December 4, 1981, two fiber drums of riboflavin were shipped from
Yokohama, Japan for delivery vessel "SS EASTERN COMET" owned by
defendant Eastern Shipping Lines under Bill of Lading
No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine
Insurance Policy No. 81/01177 for P36,382,466.38.
Upon arrival of the shipment in Manila on December 12, 1981, it was
discharged unto the custody of defendant Metro Port Service, Inc. The
latter excepted to one drum, said to be in bad order, which damage was
unknown to plaintiff.
On January 7, 1982 defendant Allied Brokerage Corporation received the
shipment from defendant Metro Port Service, Inc., one drum opened and
without seal (per "Request for Bad Order Survey." Exh. D).
On January 8 and 14, 1982, defendant Allied Brokerage Corporation made
deliveries of the shipment to the consignee's warehouse. The latter
excepted to one drum which contained spillages, while the rest of the
contents was adulterated/fake (per "Bad Order Waybill" No. 10649, Exh.
E).
Plaintiff contended that due to the losses/damage sustained by said drum,
the consignee suffered losses totaling P19,032.95, due to the fault and
negligence of defendants. Claims were presented against defendants who
failed and refused to pay the same (Exhs. H, I, J, K, L).
As a consequence of the losses sustained, plaintiff was compelled to pay
the consignee P19,032.95 under the aforestated marine insurance policy,

28
 so that it became subrogated to all the rights of action of said consignee
against defendants (per "Form of Subrogation", "Release" and Philbanking
check, Exhs. M, N, and O). (pp. 85-86, Rollo.)
There were, to be sure, other factual issues that confronted both courts. Here, the
appellate court said:
Defendants filed their respective answers, traversing the material
allegations of the complaint contending that: As for defendant Eastern
Shipping it alleged that the shipment was discharged in good order from
the vessel unto the custody of Metro Port Service so that any
damage/losses incurred after the shipment was incurred after the
shipment was turned over to the latter, is no longer its liability (p. 17,
Record); Metroport averred that although subject shipment was
discharged unto its custody, portion of the same was already in bad order
(p. 11, Record); Allied Brokerage alleged that plaintiff has no cause of
action against it, not having negligent or at fault for the shipment was
already in damage and bad order condition when received by it, but
nonetheless, it still exercised extra ordinary care and diligence in the
handling/delivery of the cargo to consignee in the same condition
shipment was received by it.
From the evidence the court found the following:
The issues are:
1. Whether or not the shipment sustained losses/damages;
2. Whether or not these losses/damages were sustained
while in the custody of defendants (in whose respective
custody, if determinable);
3. Whether or not defendant(s) should be held liable for the
losses/damages (see plaintiff's pre-Trial Brief, Records, p.
34; Allied's pre-Trial Brief, adopting plaintiff's Records, p. 38).
As to the first issue, there can be no doubt that the shipment
sustained losses/damages. The two drums were shipped in
good order and condition, as clearly shown by the Bill of

29
Lading and Commercial Invoice which do not indicate any
damages drum that was shipped (Exhs. B and C). But when
on December 12, 1981 the shipment was delivered to
defendant Metro Port Service, Inc., it excepted to one drum
in bad order.
Correspondingly, as to the second issue, it follows that the
losses/damages were sustained while in the respective
and/or successive custody and possession of defendants
carrier (Eastern), arrastre operator (Metro Port) and broker
(Allied Brokerage). This becomes evident when the Marine
Cargo Survey Report (Exh. G), with its "Additional Survey
Notes", are considered. In the latter notes, it is stated that
when the shipment was "landed on vessel" to dock of Pier #
15, South Harbor, Manila on December 12, 1981, it was
observed that "one (1) fiber drum (was) in damaged
condition, covered by the vessel's Agent's Bad Order Tally
Sheet No. 86427." The report further states that when
defendant Allied Brokerage withdrew the shipment from
defendant arrastre operator's custody on January 7, 1982,
one drum was found opened without seal, cello bag partly
torn but contents intact. Net unrecovered spillages was
15 kgs. The report went on to state that when the drums
reached the consignee, one drum was found with
adulterated/faked contents. It is obvious, therefore, that
these losses/damages occurred before the shipment
reached the consignee while under the successive custodies
of defendants. Under Art. 1737 of the New Civil Code, the
common carrier's duty to observe extraordinary diligence in
the vigilance of goods remains in full force and effect even if
the goods are temporarily unloaded and stored in transit in
the warehouse of the carrier at the place of destination, until

30
 the consignee has been advised and has had reasonable
opportunity to remove or dispose of the goods (Art. 1738,
NCC). Defendant Eastern Shipping's own exhibit, the "Turn-
Over Survey of Bad Order Cargoes" (Exhs. 3-Eastern) states
that on December 12, 1981 one drum was found "open".
and thus held:
WHEREFORE, PREMISES CONSIDERED, judgment is
hereby rendered:
A. Ordering defendants to pay plaintiff, jointly and severally:
1. The amount of P19,032.95, with the present legal interest
of 12% per annum from October 1, 1982, the date of filing of
this complaints, until fully paid (the liability of defendant
Eastern Shipping, Inc. shall not exceed US$500 per case or
the CIF value of the loss, whichever is lesser, while the
liability of defendant Metro Port Service, Inc. shall be to the
extent of the actual invoice value of each package, crate box
or container in no case to exceed P5,000.00 each, pursuant
to Section 6.01 of the Management Contract);
2. P3,000.00 as attorney's fees, and
3. Costs.
B. Dismissing the counterclaims and
crossclaim of defendant/cross-claimant Allied
Brokerage Corporation.
SO ORDERED. (p. 207, Record).
Dissatisfied, defendant's recourse to US.
The appeal is devoid of merit.
After a careful scrutiny of the evidence on record. We find that the
conclusion drawn therefrom is correct. As there is sufficient evidence that
the shipment sustained damage while in the successive possession of
appellants, and therefore they are liable to the appellee, as subrogee for
the amount it paid to the consignee. (pp. 87-89, Rollo.)

31
The Court of Appeals thus affirmed in toto the judgment of the court
a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and
grave abuse of discretion on the part of the appellate court when
I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE
WITH THE ARRASTRE OPERATOR AND CUSTOMS BROKER FOR
THE CLAIM OF PRIVATE RESPONDENT AS GRANTED IN THE
QUESTIONED DECISION;
II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF
PRIVATE RESPONDENT SHOULD COMMENCE FROM THE DATE OF
THE FILING OF THE COMPLAINT AT THE RATE OF TWELVE
PERCENT PER ANNUM INSTEAD OF FROM THE DATE OF THE
DECISION OF THE TRIAL COURT AND ONLY AT THE RATE OF SIX
PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING
INDISPUTABLY UNLIQUIDATED.
The petition is, in part, granted.
In this decision, we have begun by saying that the questions raised by petitioner carrier
are not all that novel. Indeed, we do have a fairly good number of previous decisions
this Court can merely tack to.
The common carrier's duty to observe the requisite diligence in the shipment of goods
lasts from the time the articles are surrendered to or unconditionally placed in the
possession of, and received by, the carrier for transportation until delivered to, or until
the lapse of a reasonable time for their acceptance by, the person entitled to receive
them (Arts. 1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui
Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods shipped either are lost or
arrive in damaged condition, a presumption arises against the carrier of its failure to
observe that diligence, and there need not be an express finding of negligence to hold it
liable (Art. 1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139
SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA 365). There are, of
course, exceptional cases when such presumption of fault is not observed but these

32
cases, enumerated in Article 1734 1 of the Civil Code, are exclusive, not one of which
can be applied to this case.
The question of charging both the carrier and the arrastre operator with the obligation of
properly delivering the goods to the consignee has, too, been passed upon by the
Court. In Fireman's Fund Insurance vs. Metro Port Services (182 SCRA 455), we have
explained, in holding the carrier and the arrastre operator liable in solidum,thus:
The legal relationship between the consignee and the arrastre operator is
akin to that of a depositor and warehouseman (Lua Kian v. Manila
Railroad Co., 19 SCRA 5 [1967]. The relationship between the consignee
and the common carrier is similar to that of the consignee and the arrastre
operator (Northern Motors, Inc. v. Prince Line, et al., 107 Phil. 253 [1960]).
Since it is the duty of the ARRASTRE to take good care of the goods that
are in its custody and to deliver them in good condition to the consignee,
such responsibility also devolves upon the CARRIER. Both the
ARRASTRE and the CARRIER are therefore charged with the obligation
to deliver the goods in good condition to the consignee.
We do not, of course, imply by the above pronouncement that the arrastre operator and
the customs broker are themselves always and necessarily liable solidarily with the
carrier, or vice-versa, nor that attendant facts in a given case may not vary the rule. The
instant petition has been brought solely by Eastern Shipping Lines, which, being the
carrier and not having been able to rebut the presumption of fault, is, in any event, to be
held liable in this particular case. A factual finding of both the court a quo and the
appellate court, we take note, is that "there is sufficient evidence that the shipment
sustained damage while in the successive possession of appellants" (the herein
petitioner among them). Accordingly, the liability imposed on Eastern Shipping Lines,
Inc., the sole petitioner in this case, is inevitable regardless of whether there are others
solidarily liable with it.
It is over the issue of legal interest adjudged by the appellate court that deserves more
than just a passing remark.
Let us first see a chronological recitation of the major rulings of this Court:

33
The early case of Malayan Insurance Co., Inc., vs. Manila Port
Service, 2 decided 3 on 15 May 1969, involved a suit for recovery of money arising out of
short deliveries and pilferage of goods. In this case, appellee Malayan Insurance (the
plaintiff in the lower court) averred in its complaint that the total amount of its claim for
the value of the undelivered goods amounted to P3,947.20. This demand, however, was
neither established in its totality nor definitely ascertained. In the stipulation of facts later
entered into by the parties, in lieu of proof, the amount of P1,447.51 was agreed upon.
The trial court rendered judgment ordering the appellants (defendants) Manila Port
Service and Manila Railroad Company to pay appellee Malayan Insurance the sum of
P1,447.51 with legal interest thereon from the date the complaint was filed on 28
December 1962 until full payment thereof. The appellants then assailed,inter alia, the
award of legal interest. In sustaining the appellants, this Court ruled:
Interest upon an obligation which calls for the payment of money, absent a
stipulation, is the legal rate. Such interest normally is allowable from the
date of demand, judicial or extrajudicial. The trial court opted for judicial
demand as the starting point.
But then upon the provisions of Article 2213 of the Civil Code, interest
"cannot be recovered upon unliquidated claims or damages, except when
the demand can be established with reasonable certainty." And as was
held by this Court in Rivera vs. Perez, 4 L-6998, February 29, 1956, if the
suit were for damages, "unliquidated and not known until definitely
ascertained, assessed and determined by the courts after proof (Montilla
c. Corporacion de P.P. Agustinos, 25 Phil. 447; Lichauco v. Guzman,
38 Phil. 302)," then, interest "should be from the date of the decision."
(Emphasis supplied)
The case of Reformina vs. Tomol, 5 rendered on 11 October 1985, was for "Recovery of
Damages for Injury to Person and Loss of Property." After trial, the lower court decreed:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and
third party defendants and against the defendants and third party plaintiffs
as follows:

34
 Ordering defendants and third party plaintiffs Shell and Michael,
Incorporated to pay jointly and severally the following persons:
xxx xxx xxx
(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of
P131,084.00 which is the value of the boat F B Pacita III together with its
accessories, fishing gear and equipment minus P80,000.00 which is the
value of the insurance recovered and the amount of P10,000.00 a month
as the estimated monthly loss suffered by them as a result of the fire of
May 6, 1969 up to the time they are actually paid or already the total sum
of P370,000.00 as of June 4, 1972 with legal interest from the filing of the
complaint until paid and to pay attorney's fees of P5,000.00 with costs
against defendants and third party plaintiffs. (Emphasis supplied.)
On appeal to the Court of Appeals, the latter modified the amount of damages
awarded but sustained the trial court in adjudging legal interest from the filing of
the complaint until fully paid. When the appellate court's decision became final,
the case was remanded to the lower court for execution, and this was when the
trial court issued its assailed resolution which applied the 6% interest per
annum prescribed in Article 2209 of the Civil Code. In their petition for review
on certiorari, the petitioners contended that Central Bank Circular
No. 416, providing thus
By virtue of the authority granted to it under Section 1 of Act 2655, as
amended, Monetary Board in its Resolution No. 1622 dated July 29, 1974,
has prescribed that the rate of interest for the loan, or forbearance of any
money, goods, or credits and the rate allowed in judgments, in the
absence of express contract as to such rate of interest, shall be twelve
(12%) percent per annum. This Circular shall take effect immediately.
(Emphasis found in the text)
should have, instead, been applied. This Court 6 ruled:
The judgments spoken of and referred to are judgments in litigations
involving loans or forbearance of any money, goods or credits. Any other
kind of monetary judgment which has nothing to do with, nor involving

35
 loans or forbearance of any money, goods or credits does not fall within
the coverage of the said law for it is not within the ambit of the authority
granted to the Central Bank.
xxx xxx xxx
Coming to the case at bar, the decision herein sought to be executed is
one rendered in an Action for Damages for injury to persons and loss of
property and does not involve any loan, much less forbearances of any
money, goods or credits. As correctly argued by the private respondents,
the law applicable to the said case is Article 2209 of the New Civil Code
which reads
Art. 2209. If the obligation consists in the payment of a
sum of money, and the debtor incurs in delay, the indemnity
for damages, there being no stipulation to the contrary, shall
be the payment of interest agreed upon, and in the absence
of stipulation, the legal interest which is six percent per
annum.
The above rule was reiterated in Philippine Rabbit Bus Lines, Inc .,
v. Cruz, 7 promulgated on 28 July 1986. The case was for damages occasioned by an
injury to person and loss of property. The trial court awarded private respondent Pedro
Manabat actual and compensatory damages in the amount of P72,500.00 with legal
interest thereon from the filing of the complaint until fully paid. Relying on the Reformina
v. Tomol case, this Court 8 modified the interest award from 12% to 6% interest per
annum but sustained the time computation thereof, i.e., from the filing of the complaint
until fully paid.
In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an action for the recovery of
damages arising from the collapse of a building, ordered,
inter alia, the "defendant United Construction Co., Inc. (one of the petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from
November 29, 1968, the date of the filing of the complaint until full payment . . . ." Save
from the modification of the amount granted by the lower court, the Court of Appeals

36
sustained the trial court's decision. When taken to this Court for review, the case, on 03
October 1986, was decided, thus:
WHEREFORE, the decision appealed from is hereby MODIFIED and
considering the special and environmental circumstances of this case, we
deem it reasonable to render a decision imposing, as We do hereby
impose, upon the defendant and the third-party defendants (with the
exception of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra.
p. 10) indemnity in favor of the Philippine Bar Association of FIVE
MILLION (P5,000,000.00) Pesos to cover all damages (with the exception
to attorney's fees) occasioned by the loss of the building (including interest
charges and lost rentals) and an additional ONE HUNDRED THOUSAND
(P100,000.00) Pesos as and for attorney's fees, the total sum being
payable upon the finality of this decision. Upon failure to pay on such
finality, twelve (12%) per cent interest per annum shall be imposed upon
aforementioned amounts from finality until paid. Solidary costs against the
defendant and third-party defendants (Except Roman Ozaeta). (Emphasis
supplied)
A motion for reconsideration was filed by United Construction, contending that
"the interest of twelve (12%) per cent per annum imposed on the total amount of
the monetary award was in contravention of law." The Court 10 ruled out the
applicability of the Reformina and Philippine Rabbit Bus Lines cases and, in its
resolution of 15 April 1988, it explained:
There should be no dispute that the imposition of 12% interest pursuant to
Central Bank Circular No. 416 . . . is applicable only in the following: (1)
loans; (2) forbearance of any money, goods or credit; and
(3) rate allowed in judgments (judgments spoken of refer to judgments
involving loans or forbearance of any money, goods or credits. (Philippine
Rabbit Bus Lines Inc. v. Cruz, 143 SCRA 160-161 [1986]; Reformina v.
Tomol, Jr., 139 SCRA 260 [1985]). It is true that in the instant case, there
is neither a loan or a forbearance, but then no interest is actually imposed
provided the sums referred to in the judgment are paid upon the finality of

37
 the judgment. It is delay in the payment of such final judgment, that will
cause the imposition of the interest.
It will be noted that in the cases already adverted to, the rate of interest is
imposed on the total sum, from the filing of the complaint until paid; in
other words, as part of the judgment for damages. Clearly, they are not
applicable to the instant case. (Emphasis supplied.)
The subsequent case of American Express International, Inc., vs. Intermediate
Appellate Court 11 was a petition for review on certiorari from the decision, dated 27
February 1985, of the then Intermediate Appellate Court reducing the amount of moral
and exemplary damages awarded by the trial court, to P240,000.00 and P100,000.00,
respectively, and its resolution, dated 29 April 1985, restoring the amount of damages
awarded by the trial court, i.e., P2,000,000.00 as moral damages and P400,000.00 as
exemplary damages with interest thereon at 12% per annum from notice of
judgment, plus costs of suit. In a decision of 09 November 1988, this Court, while
recognizing the right of the private respondent to recover damages, held the award,
however, for moral damages by the trial court, later sustained by the IAC, to be
inconceivably large. The Court 12 thus set aside the decision of the appellate court and
rendered a new one, "ordering the petitioner to pay private respondent the sum of One
Hundred Thousand (P100,000.00) Pesos as moral damages, with
six (6%) percent interest thereon computed from the finality of this decision until paid.
(Emphasis supplied)
Reformina came into fore again in the 21 February 1989 case of Florendo
v. Ruiz 13 which arose from a breach of employment contract. For having been illegally
dismissed, the petitioner was awarded by the trial court moral and exemplary damages
without, however, providing any legal interest thereon. When the decision was appealed
to the Court of Appeals, the latter held:
WHEREFORE, except as modified hereinabove the decision of the CFI of
Negros Oriental dated October 31, 1972 is affirmed in all respects, with
the modification that defendants-appellants, except defendant-appellant
Merton Munn, are ordered to pay, jointly and severally, the amounts stated
in the dispositive portion of the decision, including the sum of P1,400.00 in

38
 concept of compensatory damages, with interest at the legal rate from the
date of the filing of the complaint until fully paid(Emphasis supplied.)
The petition for review to this Court was denied. The records were thereupon
transmitted to the trial court, and an entry of judgment was made. The writ of
execution issued by the trial court directed that only compensatory damages
should earn interest at 6% per annum from the date of the filing of the complaint.
Ascribing grave abuse of discretion on the part of the trial judge, a petition
for certiorari assailed the said order. This Court said:
. . . , it is to be noted that the Court of Appeals ordered the payment of
interest "at the legal rate"from the time of the filing of the complaint. . .
Said circular [Central Bank Circular No. 416] does not apply to actions
based on a breach of employment contract like the case at bar. (Emphasis
supplied)
The Court reiterated that the 6% interest per annum on the damages should be
computed from the time the complaint was filed until the amount is fully paid.
Quite recently, the Court had another occasion to rule on the matter. National Power
Corporation vs. Angas, 14decided on 08 May 1992, involved the expropriation of certain
parcels of land. After conducting a hearing on the complaints for eminent domain, the
trial court ordered the petitioner to pay the private respondents certain sums of money
as just compensation for their lands so expropriated "with legal interest thereon . . . until
fully paid." Again, in applying the 6% legal interest per annum under the Civil Code, the
Court 15 declared:
. . . , (T)he transaction involved is clearly not a loan or forbearance of
money, goods or credits but expropriation of certain parcels of land for a
public purpose, the payment of which is without stipulation regarding
interest, and the interest adjudged by the trial court is in the nature of
indemnity for damages. The legal interest required to be paid on the
amount of just compensation for the properties expropriated is manifestly
in the form of indemnity for damages for the delay in the payment thereof.
Therefore, since the kind of interest involved in the joint judgment of the
lower court sought to be enforced in this case is interest by way of

39
 damages, and not by way of earnings from loans, etc. Art. 2209 of the Civil
Code shall apply.
Concededly, there have been seeming variances in the above holdings. The cases can
perhaps be classified into two groups according to the similarity of the issues involved
and the corresponding rulings rendered by the court. The "first group" would consist of
the cases of Reformina v. Tomol (1985), Philippine Rabbit Bus Lines v. Cruz(1986),
Florendo v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second group" would
be Malayan Insurance Company v.Manila Port Service (1969), Nakpil and Sons
v. Court of Appeals (1988), and American Express International v.Intermediate
Appellate Court (1988).
In the "first group", the basic issue focuses on the application of either the 6% (under
the Civil Code) or 12% (under the Central Bank Circular) interest per annum. It is easily
discernible in these cases that there has been a consistent holding that the Central
Bank Circular imposing the 12% interest per annum applies only to loans or
forbearance 16 of money, goods or credits, as well as to judgments involving such loan or
forbearance of money, goods or credits, and that the 6% interest under the Civil Code
governs when the transaction involves the payment of indemnities in the concept of
damage arising from the breach or a delay in the performance of obligations in general.
Observe, too, that in these cases, a common time frame in the computation of the 6%
interest per annum has been applied, i.e., from the time the complaint is filed until the
adjudged amount is fully paid.
The "second group", did not alter the pronounced rule on the application of the 6% or
12% interest per annum, 17depending on whether or not the amount involved is a loan or
forbearance, on the one hand, or one of indemnity for damage, on the other hand.
Unlike, however, the "first group" which remained consistent in holding that the running
of the legal interest should be from the time of the filing of the complaint until fully paid,
the "second group" varied on the commencement of the running of the legal interest.
Malayan held that the amount awarded should bear legal interest from the date of the
decision of the court a quo,explaining that "if the suit were for damages, 'unliquidated
and not known until definitely ascertained, assessed and determined by the courts after

40
proof,' then, interest 'should be from the date of the decision.'" American Express
International v. IAC, introduced a different time frame for reckoning the 6% interest by
ordering it to be "computed from the finality of (the) decision until paid." The Nakpil and
Sons case ruled that 12% interest per annum should be imposed from the finality of the
decision until the judgment amount is paid.
The ostensible discord is not difficult to explain. The factual circumstances may have
called for different applications, guided by the rule that the courts are vested with
discretion, depending on the equities of each case, on the award of interest.
Nonetheless, it may not be unwise, by way of clarification and reconciliation, to suggest
the following rules of thumb for future guidance.
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,
delicts or quasi-delicts 18 is breached, the contravenor can be held liable for
damages. 19 The provisions under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages. 20
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed,
as follows:
1. When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that which may
have been stipulated in writing. 21 Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. 22 In the absence of stipulation, the rate
of interest shall be 12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 23 of the Civil
Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the
court 24 at the rate of 6% per annum. 25 No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established
with reasonable certainty. 26 Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so

41
reasonably established at the time the demand is made, the interest shall begin to run
only from the date the judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained). The actual base for
the computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a forbearance of credit.
WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED
with the MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the
amount due computed from the decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of
SIX PERCENT (6%), shall be imposed on such amount upon finality of this decision
until the payment thereof.
SO ORDERED.

Sangrador v Villarama

G.R. No. 79552 November 29, 1988

EVELYN J. SANGRADOR, joined by her husband RODRIGO SANGRADOR,
SR., petitioners,
vs.
SPOUSES FRANCISCO VALDERRAMA and TERESITA M.
VALDERRAMA, respondents.
Enrique G. Arguelles for petitioners.
Rex Suiza Castillon for respondents.

PADILLA, J.:
This is a petition for review on certiorari of the decision 1 of the Court of Appeals in CA-
G.R. CV No. 08813, dated 13 August 1987, which modified the decision 2 of the
Regional Trial Court of Iloilo City, Branch XXIII, in Civil Case No. 16210, entitled "Evelyn

42
J. Sangrador, joined by her husband, Rodrigo Sangrador, Plaintiffs, versus Spouses
Francisco Valderrama and Teresita Valderrama, Defendants."
The factual background of the case is narrated in the decision of the Court of Appeals
as follows:
On April 11, 1983 the defendants-spouses Francisco and Teresita
Valderrama obtained a P500,000 loan from Manuel Asencio payable on or
before April 12, 1984, and secured by a real estate mortgage on their
house and lot (actually 3 lots) in front of the Jaro Plaza in Iloilo City (Exh.
9).
Foreseeing that they would not be able to pay the loan and redeem their
property upon maturity of the loan, the defendants scouted around for
money-lenders who would be willing to lend them money with which to pay
off their mortgage to Asencio.
Through the help of a loan broker, Wilson Jesena, they were able to obtain
on April 6, 1984 a P1,000,000 loan from the plaintiff Teresita Sangrador,
who is an aunt of Jesena, on the security of the same property which they
redeemed from Asencio. The loan is evidenced by the following
promissory note (Exh. B) dated April 6, 1 984 providing for the payment of
P1,400,000 to the creditor eight months after date'.
FOR VALUE RECEIVED, we jointly and severally promise to
pay EVELYN J. SANGRADOR, or order, at her address at
No. 2 Locsin Street, Molo, Iloilo City, Philippines, the sum of
ONE MILLION FOUR HUNDRED THOUSAND PESOS
(P1,400,000.00) Philippine Currency, EIGHT (8) MONTHS
after date without need of demand.
Should we default in the payment of the obligation or in the manner of
performance thereof and it shall become necessary to enforce and collect
on this note by or through an attorney, the makers shall jointly and
severally pay TWENTY (20) PER CENTUM of the amount due, principal
and interest and charges then unpaid, which in no case shall be less than
P1,000.00.

43
The makers hereby submit to the jurisdiction of the Municipal Trial Court of
Iloilo or the Regional Trial Court of Iloilo, Sixth Judicial Region, Iloilo City,
as the case may be, in the event of litigation arising from this note.
The makers of this note, jointly and severally undertake that in the event
that an extraordinary inflation of the Philippine Peso should supervene
between now and eight (8) months after date, then the value of the
Philippine Peso at the time of the establishment of this obligation, shall be
the basis of payment pursuant to Art. 1250 of the Civil Code of the
Philippines, and for this purpose, we hereby acknowledge the official
exchange rate of the Philippine Peso to the US Dollar at P14.002 to $1.
The corresponding adjustment in the value of the Philippine Peso shall be
made in the event that at the time of the maturity of this obligation, the rate
of exchange will have changed as a result of the supervening inflation. We
further agree that the official rate of exchange as set by the Central Bank
of the Philippines for private transactions, shall be the basis of this
adjustment.
This note is secured by a Real Estate Mortgage over three (3) parcels of
residential land, Lots 700, 701 and 750, of the Cadastral Survey of Jaro,
covered by TCT Nos. T-41719, T41721 and T-41720, respectively, of the
Registry of Deeds for the City of Iloilo, together with the improvements
thereon.
In case of judicial execution of this obligation or any part thereof, the
debtors waive all their rights under the provisions of Rule 39, Sec. 12, of
the Rules of Court.
EXECUTED in the City of Iloilo, Philippines, on this 6th day of April 1984.
(SGD) TERESITA MONTINOLA-VALDERRAMA
Maker
(SGD) FRANCISCO VALDERRAMA
Maker
Signed in the presence of.

44
(illegible) (illegible)
(Exh. B)
The debtors allege that the amount actually received by them was only
P1,000,000 the disposition of which was itemized by the broker, Wilson
Jesena a, on a memo pad of "Jesena Realty" as follows:
From the desk of:
REALTOR WILSON G. Jesena, Jr.
President & Gen. Manager
EXPENSES
P625,000.00Manuel Asencio
50,000.00Commission Boy
4,000.00Atty. Arguelles
13,398.69Transfer fees
Register of Deeds and B.I.R.
P692,398.69
P1,000,000.00
692,398.69
P307,601.40 Balance (Exh. 1)
Accordingly, a Prudential Bank Cashier's check for P625,000 was issued
by Sangrador to Asencio to redeem the defendants' property from him. A
receipt for that check was issued by the Valderramas to the plaintiff as
follows:
RECEIPT
Date April 6, 1984
Received from EVELYN JESENA SANGRADOR the amount
of SIX HUNDRED TWENTY FIVE THOUSAND PESOS
(625,000.00) Bank Prudential Bank Cashier's Check No.
14937. The balance of THREE HUNDRED SEVENTY FIVE
THOUSAND PESOS (P375,000.00) is to be paid to the
undersigned after deducting all expenses incurred in
payment of real estate taxes, attorney's fees, commission,

45
 Bureau of Internal Revenue fees and Register of Deeds
fees. All expenses are to be supported by receipts.
(SGD) FRANCISCO (SGD) TERESITA MONTINOLA- VALDERRAMA
VALDERRAMA
(Exh. 2)
Plaintiff Evelyn Sangrador made a list of the expenses chargeable to the
debtors (Exh. 5) and submitted it to them (22 t.s.n., May 7, 1985).
Payment of Atty. Arguelles' attorney's fees was duly acknowledged by him
(Exh. 8). Jesena issued the following receipt to the defendants for his 5%
commission in procuring the loan for them;
RECEIPT
Received from Spouses Francisco Valderrama and Teresita
Montinola Valderrama the amount of FIFTY THOUSAND
PESOS (P50,000.00) representing commission for my efforts
and expertise in effecting the procurement of a loan from a
financier for the amount of ONE MILLION PESOS
(P1,000,000.00).
(SGD) REALTOR WILSON JESENA, JR.
REB License No. 3441-R
(Exh. 3)
The balance of P307,601.40 was paid to the defendants by means of
another Prudential Bank check for which the corresponding receipt (Exh.
4) was also signed by the mortgagors:
RECEIPT
April 7, 1984
Received from EVELYN J. SANGRADOR the amount of THREE
HUNDRED SEVEN THOUSAND SIX HUNDRED ONE PESOS AND
FORTY CENTAVOS (P307,601.40) representing full payment per
Promissory Note dated April 6,1984.
(SGD) FRANCISCO (SGD) TERESITA MONTINOLA- VALDERRAMA
VALDERRAMA

46
Paid byPrudential Bank Chk.
#144358-2April 7, 1984 P307,601.40
c/o #0033-00022-0 paid byEvelyn J. Sangrador
(Exh. 4)
Evelyn Sangrador admitted that the receipts (Exhs. 2 and 4) were issued
to her by the defendants (14, 21 t.s.n., May 7, 1985).
When the defendants failed to pay the sum of P1,400,000 stated in the
promissory note on December 6, 1984 despite the plaintiffs' written
demands (Exhs. C and D) a complaint for judicial foreclosure of the real
estate mortgage was filed against them on December 21, 1984.
(Exh. G).
The defendants in their answer denied that the loan was P1,400,000.
They alleged that it was only P1,000,000.00 and that the additional
P400,000 represented usurious interest.
At the trial, the plaintiff testified that the sum of P1,400,000 was received
by the defendants. She alleged that besides the expenses of P67,398.69
itemized in Jesena's and her lists (Exhs. 1 and 5), the check of P625,000
for Asencio and the check of P307,601.40 which she issued to the
defendants for the balance of the loan, she gave to the defendants the
amount of P400,000 in cash for which no receipt was issued by them.
On the other hand Francisco Valderrama testified that he thought all along
that the promissory note (Exh. B) and deed of real estate mortgage (Exh.
A) provided for a loan of only P1 million since that was the amount which
they borrowed and received from the plaintiffs. He allegedly did not notice
that both documents provided for a loan of P1,400,000.
After the trial, the court rendered judgment on November 7, 1985 binding
3
the debtors to the terms of the promissory note and mortgage deed.
The dispositive part of the trial court's judgment reads as follows:
WHEREFORE, in the light of the foregoing, considerations and findings of
this Court, judgment is hereby rendered:

47
 1) Directing the foreclosure of the Deeds of Real Estate Mortgage (Exh.
'A');
2) Ordering the defendants to pay the mortgage obligation in the amount
of P1,400,000.00 plus the sum of P569,718.61 pursuant to the escalation
clause contained in paragraph 14 of the Deed of Real Estate Mortgage; to
pay attorney's fees equivalent to twenty (20%) percentum of the total
indebtedness including costs, plus 12% interest per annum from
December 18,1984 until fully paid, all of which shall be paid into Court
within 90 days from date of the service of the order;
3) In default of such payment, ordering the mortgaged properties to be
sold at public auction to realize the mortgage debt and costs.
SO ORDERED. 4
Private respondents, defendants in the trial court, appealed to the Court of Appeals,
where the appeal was docketed as CA G.R. CV No. 08813. On 12 August 1987,
respondent Court of Appeals promulgated its decision 5modifying the decision of the trial
court, the dispositive part of which reads, as follows:
WHEREFORE, the appealed decision is hereby modified by ordering the
defendants, within (90) days from date of service of this decision, to pay to
the plaintiffs the principal loan of P1,000,000 with 12% interest per annum
from April 6,1984 until fully paid, P50,000 as attorney's fees, and the costs
of this suit. In default of such payment, the mortgaged property shall be
sold at public auction to realize the sums due to plaintiffs under this
judgment.
SO ORDERED. 6
Hence, the present petition for review on certiorari of the decision of the Court of
Appeals. Petitioners present the following
ASSIGNMENT OF ERRORS
1. FIRST ASSIGNED ERROR:
THE HONORABLE COURT OF APPEALS ERRED IN
NULLIFYING THE ESCALATION CLAUSE AS FOUND BY

48
 THE TRIAL COURT ORDERING THE PAYMENT BY
RESPONDENTS OF THE SUM OF P569,718.61.
2. SECOND ASSIGNED ERROR:
THE HONORABLE COURT OF APPEALS ERRED IN
FINDING THE PRINCIPAL LOAN TO BE IN THE SUM OF
P1,000,000.00 INSTEAD OF P1,400,000.00 AS FOUND BY
THE LOWER COURT.
3. THIRD ASSIGNED ERROR:
THE HONORABLE COURT OF APPEALS ERRED IN
REDUCING PETITIONER'S AWARD OF ATTORNEY'S
FEES TO P50,000.00 INSTEAD OF 20% OF THE TOTAL
7
INDEBTEDNESS AS FOUND BY THE TRIAL COURT.
The pivotal issue to be resolved in this case is whether or not the loan obtained by
private respondents from petitioners was in the amount of P1,400,000.00 or
P1,000,000.00 only.
In resolving this issue, the Court of Appeals in its decision under review, held:
After carefully reviewing the evidence, We are convinced that the trial
court erred in finding that the loan was P1,400,000 as stated in the
promissory note (Exh. B) and deed of mortgage. Like the trial court, We do
not believe defendant Valderrama's allegation that he did not notice that
the amount stated in the promissory note was P1,400,000, instead of only
P1,000,000, until demands for payment were sent to him by the plaintiffs'
counsel. But neither do We believe the plaintiff Evelyn Sangrador's
allegation that besides the sum of P1,000,000 admittedly received by the
defendants and evidenced by checks and receipts, she also gave them
P400,000.00 in cash without receipt. This is a case, therefore, where both
parties prevaricated.
The documentary evidence preponderantly proves that the loan was only
P1,000,000, not P1,400,000. The checks and receipts and the broker's
computations found in Exhibit 'l' show clearly that the loan was only
P1,000,000. Even the broker's P50,000 commission was computed on the

49
 basis of 5% of P1 million. The circumstance that the alleged payment of
P400,000 in cash to the debtors is not evidenced by a receipt, is
conclusive proof that it was not a part of the loan. The loan was only P1
million.
Obviously, the P400,000 that was added to the principal represents a
hidden interest charge for the promissory note contains no express
8
provision fixing the rate of interest on the loan.
Petitioners assail the foregoing findings and conclusions of the Court of Appeals,
contending that the amount of the loan as clearly and expressly stated in the Deed of
Real Estate Mortgage 9 and the Promissory Note, 10 is P1,400,000.00 and not
P1,000,000.00 only.
Because the findings of the trial court and the Court of Appeals differ on this crucial
factual issue, we have carefully reviewed and examined the evidence. The finding of the
Court of Appeals that the loan is in the amount of P1,000,000.00 only is supported by
substantial evidence.
The Promissory Note (Exh- B) and the Deed of Real Estate Mortgage (Exh. A) executed
by the respondents in favor of the petitioners indeed state that the loan is in the amount
of P1,400,000.00. However, the other documents executed by the parties
contemporaneously with said Promissory Note and Deed of Real Estate Mortgage
clearly show that the actual loan, i.e. the amount received by respondents, was only
P1,000,000.00. Thus, for the payment made by the petitioners for the account of the
respondents to Manuel Asencio, thereby releasing the mortgage on the property, so that
it could in turn be mortgaged to the petitioners, the respondents signed a receipt in favor
of the petitioners in the amount of P625,000.00 (Exh. 2). The respondents executed
another receipt in favor of the petitioners for the amount of P307,601.40," representing
full payment per promissory note dated 6 April 1984" (Exh. 4). The broker who arranged
for the loan signed a receipt in favor of the respondents for the amount of P50,000.00
representing his commission in effecting the loan "for the amount of P1,000,000.00"
(Exh. 3).<re||an1w> The attorney who assisted in the transaction was paid
attorney's fees in the amount of P4,000.00 (Exh. 8). The petitioners submitted a list of
expenses chargeable to the respondents, totalling P13,398.69 covering transfer fees,

50
expenses in the Register of Deeds and payments to the BIR (Exh. 5). All told, the loan
of P1,000,000.00 obtained by the respondents from the petitioners was applied or used
in the following manner at the time the loan was obtained:
P625,00.00 to pay Manuel Asencio (first creditor)
50,000.00 to pay Wilson Jesena (for broker's commission)
4,000.00 to pay Atty. Enrique Arguelles (for attorney's fees)
13,398.69 to pay transfer fees and other expenses in Register of Deeds
and BIR
307,601.40 to pay respondents as balance of the loan
P1,000,000.09 TOTAL
The above itemization tallies with the breakdown of the proceeds of the loan, made by
the loan broker Wilson Jesena (Exh. 1).
Petitioners contend that over and above the P1,000,000.00, the amount of P400,000.00
was delivered by them to the respondents in cash and that this delivery was not
evidenced by a receipt because, anyway, said amount (P400,000.00) is already
included in the statement of the loan amount in the promissory note and the deed of real
estate mortgage, which is P1,400,000.00. We find this contention to be quite incredible,
to say the least. It is contrary to ordinary human experience. Normally, in delivering a
hefty sum like P400,000.00 in cash, one would require some sort of receipt or
acknowledgment from the recipient.
Moreover, if petitioners were careful enough to require from the respondents the
separate receipts above-mentioned, there was no reason why they would not require
another receipt from the respondents for said amount of P400,000.00. And if, as
petitioners now allege, they did not anymore require a receipt for the P400,000.00
allegedly delivered by them in cash to the respondents because the loan amount stated
in the promissory note and the real estate mortgage already included said amount of
P400,000.00, then, by the same reasoning, there was no need for requiring the other
separate receipts abovementionedas the amounts they referred to were already a
part of the loan amount stated in the promissory note and real estate mortgageand
yet, said separate receipts were required by petitioners of the respondents.

51
In short, we agree with the finding of the Court of Appeals that the disputed amount of
P400,000.00 was a hidden interest that the petitioners had required the respondents to
pay at the maturity of the loan, but said amount of P400,000.00 was not received by or
delivered to the respondents. This conclusion is strengthened by the fact that the
promissory note and the deed of real estate mortgage (Exhs. B and A), strangely
enough, do not contain any express stipulation on interest, or rate of interest, when the
loan involved therein is in the substantial amount of allegedly P1,400,000.00.
Petitioners may conceivably argue that, granting that the disputed amount of
P400,000.00 is interest on the loan of P1,000,000.00, yet, in line with this Court's
decision in Liam Law vs. Oriental Sawmill Co., et al., 11 there is no longer any ceiling on
interest or interest rates on loans. This may be so in a situation where the parties openly
and expressly agree on a specific rate of interest to accrue on the loan but, as the Court
of Appeals in its decision under review correctly pointed out, in the case at bar, no
interest rate is expressly stipulated in the promissory note and deed of real estate
mortgage. Circular No. 905 of the Central Bank dated 10 December 1982 provides:
Section 1. The rate of interest, including commissions, premiums, fees
and other charges on a loan or forbearance of any money, goods, or
credits, regardless of maturity and whether secured or unsecured, that
may be charged or collected by any person, whether natural or
juridical, shall not be subject to any ceiling prescribed under or pursuant to
the Usury law, as amended.
Section 2. The rate of interest for the loan or forbearance of any money,
goods or credits and the rate allowed in judgments, in the absence of
express contract as to such rate of interest, shall continue to be twelve per
cent (1 2%) per annum. (Emphasis supplied)
The rate of interest for loans or forbearance of money, in the absence of express
contract as to such rate of interest, shall continue therefore to be twelve per cent (12%)
per annum. 12
Accordingly, the loan of P1,000,000.00 in the instant case should earn a twelve per cent
(12%) interest per annum computed from 6 April 1984 when the loan was obtained by
the respondents from the petitioners until paid.

52
Petitioners also impugn the Court of Appeals in nullifying the escalation clause in the
Deed of Real Estate Mortgage and Promissory Note. Under such escalation clause,
sustained by the trial court, the amount of P569,718.61 was awarded to herein
petitioners by way of adjustment of the loan of P1,400,000.00 after the eight (8) month
period of the loan. 13
The Deed of Real Estate Mortgage provides, among others, as follows:
14. That in the event that an extra-ordinary inflation of the Philippine peso
should supervene, it is hereby stipulated that the value of the currency at
the time of the establishment of the obligation shall be the basis of
payment pursuant to Art. 1250 of the New Civil Code of the Philippines.
For this purpose, MORTGAGORS hereby recognize the official exchange
rate of the Philippine Peso to the US dollar at 14.002 to one. The
corresponding adjustment in the value of the Philippine Peso shall be
made should at the time of the maturity of this obligation, the rate of
exchange will have changed as a result of the supervening inflation. It is
further agreed that the official rate of exchange as set by the Central Bank
for private transactions shall be the basis of this adjustment. (Emphasis
supplied).
A cursory reading of the aforequoted provision of the Deed of Real Estate Mortgage
(similar stipulation is contained in the Promissory Note) shows that the escalation
clause takes effect "in the event that an extraordinary inflation of the Philippine Peso
should supervene," between the date the loan was granted and the date of its maturity,
in which case, the value of the (peso) currency at the time of the establishment of the
obligation shall be the basis of payment. To give meaning to the "value of the currency
at the time of the establishment of the obligation," the parties agreed that on 6 April
1984 (date of loan), the exchange rate of the peso to the US dollar was 14.002 to one.
Consequently, under the aforesaid escalation clause, "(t)he corresponding adjustment in
the value of the Philippine Peso" at the maturity of the obligation crucially depends upon
the supervening of an extraordinary inflation in the sense contemplated in Article 1250
14
of the Civil Code of the Philippines.

53
In Filipino Pipe and Foundry Corporation vs. National Waterworks and Sewerage
Authority, 15 this Court held:
Extraordinary inflation exists when 'there is a decrease or increase in the
purchasing power of the Philippine currency which is unusual or beyond
the common fluctuation in the value of said currency, and such decrease
or increase could not have been reasonably foreseen or was manifestly
beyond the contemplation of the parties at the time of the establishment of
the obligation. (Tolentino Commentaries and Jurisprudence on the Civil
Code Vol. IV, p. 284.)
An example of extraordinary inflation is the following description of what
happened to the deutschmark in 1920:
More recently, in the 1920's Germany experience a case of
hyper-inflation. In early 1921, the value of the German mark
was 4.2 to the U.S. dollar. By May of the same year, it had
stumbled to 62 to the U.S. dollar. And as prices went up
rapidly, so that by October 1923, it had reached 4.2 trillion to
the U.S. dollar! (Bernardo M. Villegas & Victor R. Abola,
Economics, An Introduction [Third Edition].
As reported, "prices were going up every week, then every day, then every
hour. Women were paid several times a day so that they could rush out
and exchange their money for something of value before what little
purchasing power was left dissolved in their hands. Some workers tried to
beat the constantly rising prices by throwing their money out of the
windows to their waiting wives, who would rush to unload the nearly
worthless paper. A postage stamp cost millions of marks and a loaf of
bread, billions," (Sidney Rutberg, "The Money Baloon" New York; Simon
and Schuster, 1975, p. 19, cited in Economics, An Introduction by Villegas
& Abola, 3rd Ed.)
While appellant's voluminous records and statistics proved that there has
been a decline in the purchasing power of the Philippine peso, this

54
 downward fall of the currency cannot be considered "extraordinary." It is
16
simply a universal trend that has not spared our country.
Since petitioners failed to prove the supervening of extraordinary inflation between 6
April 1984 and 7 December 1984no proofs were presented on how much, for
instance, the price index of goods and services had risen during the intervening period
an extraordinary inflation cannot be assumed; consequently, there is no reason or
basis, legal or factual, for adjusting the value of the Philippine Peso in the settlement of
respondents' obligation.
Finally, the Court of Appeals did not commit any error in reducing the award of
attorney's fees to P50,000.00. The contractual provision for attorney's fees may be
17
modified by the courts in the exercise of their sound judicial discretion.
WHEREFORE, the petition is DENIED. The decision of the Court of Appeals dated 12
August 1987 is AFFIRMED. With costs against petitioners.
SO ORDERED.

Almeda v CA

G.R. No. 113412 April 17, 1996

Spouses PONCIANO ALMEDA and EUFEMIA P. ALMEDA, petitioner,
vs.
THE COURT OF APPEALS and PHILIPPINE NATIONAL BANK, respondents.

KAPUNAN, J.:p
On various dates in 1981, the Philippine National Bank granted to herein petitioners, the
spouses Ponciano L. Almeda and Eufemia P. Almeda several loan/credit
accommodations totaling P18.0 Million pesos payable in a period of six years at an
interest rate of 21% per annum. To secure the loan, the spouses Almeda executed a
Real Estate Mortgage Contract covering a 3,500 square meter parcel of land, together
with the building erected thereon (the Marvin Plaza) located at Pasong Tamo, Makati,
Metro Manila. A credit agreement embodying the terms and conditions of the loan was
executed between the parties. Pertinent portions of the said agreement are quoted
below:
55
 SPECIAL CONDITIONS
xxx xxx xxx
The loan shall be subject to interest at the rate of twenty one per cent
(21%) per annum, payable semi-annually in arrears, the first interest
payment to become due and payable six (6) months from date of initial
release of the loan. The loan shall likewise be subject to the appropriate
service charge and a penalty charge of three per cent (30%) per annum to
be imposed on any amount remaining unpaid or not rendered when due.
xxx xxx xxx
III. OTHER CONDITIONS
(c) Interest and Charges
(1) The Bank reserves the right to increase the interest
rate within the limits allowed by law at any time depending
on whatever policy it may adopt in the future; provided, that
the interest rate on this/these accommodations shall be
correspondingly decreased in the event that the applicable
maximum interest rate is reduced by law or by the Monetary
Board. In either case, the adjustment in
the interest rate agreed upon shall take effect on the
effectivity date of the increase or decrease of the maximum
interest rate. 1
Between 1981 and 1984, petitioners made several partial payments on the loan totaling.
P7,735,004.66, 2 a substantial portion of which was applied to accrued interest. 3 On
March 31, 1984, respondent bank, over petitioners' protestations, raised the interest
rate to 28%, allegedly pursuant to Section III-c (1) of its credit agreement. Said interest
rate thereupon increased from an initial 21% to a high of 68% between March of 1984 to
September, 1986. 4
Petitioner protested the increase in interest rates, to no avail. Before the loan was to
mature in March, 1988, the spouses filed on February 6, 1988 a petition for declaratory
relief with prayer for a writ of preliminary injunction and temporary restraining order with
the Regional Trial Court of Makati, docketed as Civil Case No. 18872. In said petition,

56
which was raffled to Branch 134 presided by Judge Ignacio Capulong, the spouses
sought clarification as to whether or not the PNB could unilaterally raise interest rates
on the loan, pursuant to the credit agreement's escalation clause, and in relation to
Central Bank Circular No. 905. As a preliminary measure, the lower court, on March 3,
1988, issued a writ of preliminary injunction enjoining the Philippine National Bank from
enforcing an interest rate above the 21% stipulated in the credit agreement. By this time
the spouses were already in default of their loan obligations.
Invoking the Law on Mandatory Foreclosure (Act 3135, as amended and P.D. 385), the
PNB countered by ordering the extrajudicial foreclosure of petitioner's mortgaged
properties and scheduled an auction sale for March 14, 1989. Upon motion by
petitioners, however, the lower court, on April 5, 1989, granted a supplemental writ of
preliminary injunction, staying the public auction of the mortgaged property.
On January 15, 1990, upon the posting of a counterbond by the PNB, the trial court
dissolved the supplemental writ of preliminary injunction. Petitioners filed a motion for
reconsideration. In the interim, respondent bank once more set a new date for the
foreclosure sale of Marvin Plaza which was March 12, 1990. Prior to the scheduled
date, however, petitioners tendered to respondent bank the amount of P40,142,518.00,
consisting of the principal (P18,000,000.00) and accrued interest calculated at the
originally stipulated rate of 21%. The PNB refused to accept the payment. 5
As a result of PNB's refusal of the tender of payment, petitioners, on March 8, 1990,
formally consigned the amount of P40,142,518.00 with the Regional Trial Court in Civil
Case No. 90-663. They prayed therein for a writ of preliminary injunction with a
temporary restraining order. The case was raffled to Branch 147, presided by Judge
Teofilo Guadiz. On March 15, 1990, respondent bank sought the dismissal of the case.
On March 30, 1990 Judge Guadiz in Civil Case No. 90-663 issued an order granting the
writ of preliminary injunction enjoining the foreclosure sale of "Marvin Plaza" scheduled
on March 12, 1990. On April 17, 1990 respondent bank filed a motion for
reconsideration of the said order.
On August 16, 1991, Civil Case No. 90-663 we transferred to Branch 66 presided by
Judge Eriberto Rosario who issued an order consolidating said case with Civil Case
18871 presided by Judge Ignacio Capulong.

57
For Judge Ignacio's refusal to lift the writ of preliminary injunction issued March 30,
1990, respondent bank filed a petition for Certiorari, Prohibition and Mandamus with
respondent Court of Appeals, assailing the following orders of the Regional Trial Court:
1. Order dated March 30, 1990 of Judge Guadiz granting the writ of
preliminary injunction restraining the foreclosure sale of Mavin Plaza set
on March 12, 1990;
2. Order of Judge Ignacio Capulong dated January 10, 1992 denying
respondent bank's motion to lift the writ of injunction issued by Judge
Guadiz as well as its motion to dismiss Civil Case No. 90-663;
3. Order of Judge Capulong dated July 3, 1992 denying respondent bank's
subsequent motion to lift the writ of preliminary injunction; and
4. Order of Judge Capulong dated October 20, 1992 denying respondent
bank's motion for reconsideration.
On August 27, 1993, respondent court rendered its decision setting aside the assailed
orders and upholding respondent bank's right to foreclose the mortgaged property
pursuant to Act 3135, as amended and P.D. 385. Petitioners' Motion for Reconsideration
and Supplemental Motion for Reconsideration, dated September 15, 1993 and October
28, 1993, respectively, were denied by respondent court in its resolution dated January
10, 1994.
Hence the instant petition.
This appeal by certiorari from the respondent court's decision dated August 27, 1993
raises two principal issues namely: 1) Whether or not respondent bank was authorized
to raise its interest rates from 21% to as high as 68% under the credit agreement; and
2) Whether or not respondent bank is granted the authority to foreclose the Marvin
Plaza under the mandatory foreclosure provisions of P.D. 385.
In its comment dated April 19, 1994, respondent bank vigorously denied that the
increases in the interest rates were illegal, unilateral, excessive and arbitrary, it argues
that the escalated rates of interest it imposed was based on the agreement of the
parties. Respondent bank further contends that it had a right to foreclose the mortgaged
property pursuant to P.D. 385, after petitioners were unable to pay their loan obligations
to the bank based on the increased rates upon maturity in 1984.

58
The instant petition is impressed with merit.
The binding effect of any agreement between parties to a contract is premised on two
settled principles: (1) that any obligation arising from contract has the force of law
between the parties; and (2) that there must be mutuality between the parties based on
their essential equality. 6 Any contract which appears to be heavily weighed in favor of
one of the parties so as to lead to an unconscionable result is void. Any stipulation
regarding the validity or compliance of the contract which is left solely to the will of one
of the parties, is likewise, invalid.
It is plainly obvious, therefore, from the undisputed facts of the case that respondent
bank unilaterally altered the terms of its contract with petitioners by increasing the
interest rates on the loan without the prior assent of the latter. In fact, the manner of
agreement is itself explicitly stipulated by the Civil Code when it provides, in Article 1956
that "No interest shall be due unless it has been expressly stipulated in writing." What
has been "stipulated in writing" from a perusal of interest rate provision of the credit
agreement signed between the parties is that petitioners were bound merely to pay 21%
interest, subject to a possible escalation or de-escalation, when 1) the circumstances
warrant such escalation or de-escalation; 2) within the limits allowed by law; and 3)
upon agreement.
Indeed, the interest rate which appears to have been agreed upon by the parties to the
contract in this case was the 21% rate stipulated in the interest provision. Any doubt
about this is in fact readily resolved by a careful reading of the credit agreement
because the same plainly uses the phrase "interest rate agreed upon," in reference to
the original 21% interest rate. The interest provision states:
(c) interest and Charges
(1) The Bank reserves the right to increase the interest rate within the
limits allowed by law at any time depending on whatever policy it may
adopt in the future; provided, that the interest rate on this/these
accommodations shall be correspondingly decreased in the event that the
applicable maximum interest rate is reduced by law or by the Monetary
Board. In either case, the adjustment in the interest rate agreed upon shall

59
 take effect on the effectivity date of the increase or decrease of the
maximum interest rate.
In Philippine National Bank v. Court of Appeals, 7 this Court disauthorized respondent
bank from unilaterally raising the interest rate in the borrower's loan from 18% to 32%,
41% and 48% partly because the aforestated increases violated the principle of
mutuality of contracts expressed in Article 1308 of the Civil Code. The Court held:
CB Circular No. 905, Series of 1982 (Exh. 11) removed the
Usury Law ceiling on interest rates
. . . increases in interest rates are not subject to any ceiling
prescribed by the Usury Law.
but it did not authorize the PNB, or any bank for that matter, to unilaterally
and successively increase the agreed interest rates from 18% to 48%
within a span of four (4) months, in violation of P.D. 116 which limits such
changes to once every twelve months.
Besides violating P.D. 116, the unilateral action of the PNB in increasing
the interest rate on the private respondent's loan, violated the mutuality of
contracts ordained in Article 1308 of the Civil Code:
Art. 308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.
In order that obligations arising from contracts may have the force of law
between the parties, there must be mutuality between the parties based
on their essential equality. A contract containing a condition which makes
its fulfillment dependent exclusively upon the uncontrolled will of one of
the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA
555). Hence, even assuming that the P1.8 million loan agreement
between the PNB and the private respondent gave the PNB a license
(although in fact there was none) to increase the interest rate at will during
the term of the loan, that license would have been null and void for being
violative of the principle of mutuality essential in contracts. It would have
invested the loan agreement with the character of a contract of adhesion,
where the parties do not bargain on equal footing, the weaker party's (the

60
 debtor) participation being reduced to the alternative "to take it or lease it"
(Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is
a veritable trap for the weaker party whom the courts of justice must
protect against abuse and imposition.
PNB's successive increases of the interest rate on the private
respondent's loan, over the latter's protest, were arbitrary as they violated
an express provision of the Credit Agreement (Exh. 1) Section 9.01 that its
terms "may be amended only by an instrument in writing signed by the
party to be bound as burdened by such amendment." The increases
imposed by PNB also contravene Art. 1956 of the Civil Code which
provides that "no interest shall be due unless it has been expressly
stipulated in writing."
The debtor herein never agreed in writing to pay the interest increases
fixed by the PNB beyond 24%per annum, hence, he is not bound to pay a
higher rate than that.
That an increase in the interest rate from 18% to 48% within a period of
four (4) months is excessive, as found by the Court of Appeals, is
indisputable.
Clearly, the galloping increases in interest rate imposed by respondent bank on
petitioners' loan, over the latter's vehement protests, were arbitrary.
Moreover, respondent bank's reliance on C.B. Circular No. 905, Series of 1982 did not
authorize the bank, or any lending institution for that matter, to progressively increase
interest rates on borrowings to an extent which would have made it virtually impossible
for debtors to comply with their own obligations. True, escalation clauses in credit
agreements are perfectly valid and do not contravene public policy. Such clauses,
however, (as are stipulations in other contracts) are nonetheless still subject to laws and
provisions governing agreements between parties, which agreements while they may
be the law between the contracting parties implicitly incorporate provisions of existing
law. Consequently, while the Usury Law ceiling on interest rates was lifted by C.B.
Circular 905, nothing in the said circular could possibly be read as granting respondent
bank carte blanche authority to raise interest rates to levels which would either enslave

61
its borrowers or lead to a hemorrhaging of their assets. Borrowing represents a
transfusion of capital from lending institutions to industries and businesses in order to
stimulate growth. This would not, obviously, be the effect of PNB's unilateral and
lopsided policy regarding the interest rates of petitioners' borrowings in the instant case.
Apart from violating the principle of mutuality of contracts, there is authority for
disallowing the interest rates imposed by respondent bank, for the credit agreement
specifically requires that the increase be "within the limits allowed by law". In the case
of PNB v. Court of Appeals, cited above, this Court clearly emphasized that C.B.
Circular No. 905 could not be properly invoked to justify the escalation clauses of such
contracts, not being a grant of specific authority.
Furthermore, the escalation clause of the credit agreement requires that the same be
made "within the limits allowed by law," obviously referring specifically to legislative
enactments not administrative circulars. Note that the phrase "limits imposed by law,"
refers only to the escalation clause. However, the same agreement allows reduction on
the basis of law or the Monetary Board. Had the parties intended the word "law" to refer
to both legislative enactments and administrative circulars and issuances, the
agreement would not have gone as far as making a distinction between "law or the
Monetary Board Circulars" in referring to mutually agreed upon reductions in interest
rates. This distinction was the subject of the Court's disquisition in the case of Banco
Filipino Savings and Mortgage Bank v. Navarro 8 where the Court held that:
What should be resolved is whether BANCO FILIPINO can increase the
interest rate on the LOAN from 12% to 17% per annum under the
Escalation Clause. It is our considered opinion that it may not.
The Escalation Clause reads as follows:
I/We hereby authorize Banco Filipino to correspondingly increase.
the interest rate stipulated in this contract without advance notice to me/us
in the event.
a law
increasing
the lawful rates of interest that may be charged
on this particular

62
kind of loan. (Paragraphing and emphasis supplied)
It is clear from the stipulation between the parties that the interest rate
may be increased "in the event a law should be enacted increasing the
lawful rate of interest that may be charged on this particular kind of loan."
The Escalation Clause was dependent on an increase of rate made by
"law" alone.
CIRCULAR No. 494, although it has the effect of law, is not a law.
"Although a circular duly issued is not strictly a statute or a law, it has,
however, the force and effect of law." (Emphasis supplied). "An
administrative regulation adopted pursuant to law has the force and effect
of law." "That administrative rules and regulations have the force of law
can no longer be questioned."
The distinction between a law and an administrative regulation is
recognized in the Monetary Board guidelines quoted in the latter to the
BORROWER of Ms. Paderes of September 24, 1976 (supra). According to
the guidelines, for a loan's interest to be subject to the increases provided
in CIRCULAR No. 494, there must be an Escalation Clause allowing the
increase "in the event that any law or Central Bank regulation is
promulgated increasing the maximum rate for loans." The guidelines thus
presuppose that a Central Bank regulation is not within the term "any law."
The distinction is again recognized by P.D. No. 1684, promulgated on
March 17, 1980, adding section 7-a to the Usury Law, providing that
parties to an agreement pertaining to a loan could stipulate that the rate of
interest agreed upon may be increased in the event that the applicable
maximum rate of interest is increased "by law or by the Monetary Board."
To quote:
Sec. 7-a. Parties to an agreement pertaining to a loan or
forbearance of money, goods or credits may stipulate that
the rate of interest agreed upon may be increased in the
event that the applicable maximum rate of interest
is increased by law or by the Monetary Board:

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 Provided, That such stipulation shall be valid only if there is
also a stipulation in the agreement that the rate of interest
agreed upon shall be reduced in the event that the
applicable maximum rate of interest is reduced by law or by
the Monetary Board;
Provided, further, That the adjustment in the rate of interest
agreed upon shall take effect on or after the effectivity of the
increase or decrease in the maximum rate of interest.'
(Paragraphing and emphasis supplied).
It is now clear that from March 17, 1980, escalation clauses to be valid
should specifically provide: (1) that there can be an increase in interest if
increased by law or by the Monetary Board; and (2) in order for such
stipulation to be valid, it must include a provision for reduction of the
stipulated interest "in the event that the applicable maximum rate of
interest is reduced by law or by the Monetary Board."
Petitioners never agreed in writing to pay the increased interest rates demanded by
respondent bank in contravention to the tenor of their credit agreement. That an
increase in interest rates from 18% to as much as 68% is excessive and
unconscionable is indisputable. Between 1981 and 1984, petitioners had paid an
amount equivalent to virtually half of the entire principal (P7,735,004.66) which was
applied to interest alone. By the time the spouses tendered the amount of
P40,142,518.00 in settlement of their obligations; respondent bank was demanding
P58,377,487.00 over and above those amounts already previously paid by the spouses.
Escalation clauses are not basically wrong or legally objectionable so long as they are
not solely potestative but based on reasonable and valid grounds. 9 Here, as clearly
demonstrated above, not only the increases of the interest rates on the basis of the
escalation clause patently unreasonable and unconscionable, but also there are no
valid and reasonable standards upon which the increases are anchored.
We go now to respondent bank's claim that the principal issue in the case at bench
involves its right to foreclose petitioners' properties under P.D. 385. We find
respondent's pretense untenable.

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Presidential Decree No. 385 was issued principally to guarantee that government
financial institutions would not be denied substantial cash inflows necessary to finance
the government's development projects all over the country by large borrowers who
resort to litigation to prevent or delay the government's collection of their debts or
loans. 10 In facilitating collection of debts through its automatic foreclosure provisions,
the government is however, not exempted from observing basic principles of law, and
11
ordinary fairness and decency under the due process clause of the Constitution.
In the first place, because of the dispute regarding the interest rate increases, an issue
which was never settled on merit in the courts below, the exact amount of petitioner's
obligations could not be determined. Thus, the foreclosure provisions of P.D. 385 could
be validly invoked by respondent only after settlement of the question involving the
interest rate on the loan, and only after the spouses refused to meet their obligations
following such determination. In Filipinas Marble Corporation v. Intermediate Appellate
Court, 12 involving P.D. 385's provisions on mandatory foreclosure, we held that:
We cannot, at this point, conclude that respondent DBP together with the
Bancom people actually misappropriated and misspent the $5 million loan
in whole or in part although the trial court found that there is "persuasive"
evidence that such acts were committed by the respondent. This matter
should rightfully be litigated below in the main action. Pending the
outcome of such litigation, P.D. 385 cannot automatically be applied for if it
is really proven that respondent DBP is responsible for the
misappropriation of the loan, even if only in part, then the foreclosure of
the petitioner's properties under the provisions of P.D. 385 to satisfy the
whole amount of the loan would be a gross mistake. It would unduly
prejudice the petitioner, its employees and their families.
Only after trial on the merits of the main case can the true amount of the
loan which was applied wisely or not, for the benefit of the petitioner be
determined. Consequently, the extent of the loan where there was no
failure of consideration and which may be properly satisfied by foreclosure
proceedings under P.D. 385 will have to await the presentation of
evidence in a trial on the merits.

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In Republic Planters Bank v. Court of Appeals 13 the Court reiterating the dictum in
Filipinas Marble Corporation, held:
The enforcement of P.D. 385 will sweep under the rug' this iceberg of a
scandal in the sugar industry during the Marcos Martial Law years. This
we can not allow to happen. For the benefit of future generations, all the
dirty linen in the PHILSUCUCOM/NASUTRA/RPB closets have to be
exposed in public so that the same may NEVER be repeated.
It is of paramount national interest, that we allow the trial court to proceed
with dispatch to allow the parties below to present their evidence.
Furthermore, petitioners made a valid consignation of what they, in good faith and in
compliance with the letter of the Credit Agreement, honestly believed to be the real
amount of their remaining obligations with the respondent bank. The latter could not
therefore claim that there was no honest-to-goodness attempt on the part of the spouse
to settle their obligations. Respondent's rush to inequitably invoke the foreclosure
provisions of P.D. 385 through its legal machinations in the courts below, in spite of the
unsettled differences in interpretation of the credit agreement was obviously made in
bad faith, to gain the upper hand over petitioners.
In the face of the unequivocal interest rate provisions in the credit agreement and in the
law requiring the parties to agree to changes in the interest rate in writing, we hold that
the unilateral and progressive increases imposed by respondent PNB were null and
void. Their effect was to increase the total obligation on an eighteen million peso loan to
an amount way over three times that which was originally granted to the borrowers.
That these increases, occasioned by crafty manipulations in the interest rates is
unconscionable and neutralizes the salutary policies of extending loans to spur
business cannot be disputed.
WHEREFORE, PREMISES CONSIDERED, the decision of the Court of Appeals dated
August 27, 1993, as well as the resolution dated February 10, 1994 is hereby
REVERSED AND SET ASIDE. The case is remanded to the Regional Trial Court of
Makati for further proceedings.
SO ORDERED.

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