Credit Trans Full Cases

G.R. No.
133632 February 15, 2002
BPI INVESTMENT CORPORATION, petitioner,

vs.
HON. COURT OF APPEALS and ALS MANAGEMENT & DEVELOPMENT
CORPORATION, respondents.
DECISION
QUISUMBING, J.:
This petition for certiorari assails the decision dated February 28, 1997, of the Court of Appeals
and its resolution dated April 21, 1998, in CA-G.R. CV No. 38887. The appellate court affirmed
the judgment of the Regional Trial Court of Pasig City, Branch 151, in (a) Civil Case No. 11831,
for foreclosure of mortgage by petitioner BPI Investment Corporation (BPIIC for brevity) against
private respondents ALS Management and Development Corporation and Antonio K.
Litonjua,1 consolidated with (b) Civil Case No. 52093, for damages with prayer for the issuance
of a writ of preliminary injunction by the private respondents against said petitioner.
The trial court had held that private respondents were not in default in the payment of their
monthly amortization, hence, the extrajudicial foreclosure conducted by BPIIC was premature
and made in bad faith. It awarded private respondents the amount of ₱300,000 for moral
damages, ₱50,000 for exemplary damages, and ₱50,000 for attorney’s fees and expenses for
litigation. It likewise dismissed the foreclosure suit for being premature.
The facts are as follows:
Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala Investment and
Development Corporation (AIDC), the predecessor of petitioner BPIIC, for the construction of a
house on his lot in New Alabang Village, Muntinlupa. Said house and lot were mortgaged to
AIDC to secure the loan. Sometime in 1980, Roa sold the house and lot to private respondents
ALS and Antonio Litonjua for ₱850,000. They paid ₱350,000 in cash and assumed the ₱500,000
balance of Roa’s indebtedness with AIDC. The latter, however, was not willing to extend the old
interest rate to private respondents and proposed to grant them a new loan of ₱500,000 to be
applied to Roa’s debt and secured by the same property, at an interest rate of 20% per annum and
service fee of 1% per annum on the outstanding principal balance payable within ten years in
equal monthly amortization of ₱9,996.58 and penalty interest at the rate of 21% per annum per
day from the date the amortization became due and payable.
Consequently, in March 1981, private respondents executed a mortgage deed containing the
above stipulations with the provision that payment of the monthly amortization shall commence
on May 1, 1981.
On August 13, 1982, ALS and Litonjua updated Roa’s arrearages by paying BPIIC the sum of
₱190,601.35. This reduced Roa’s principal balance to ₱457,204.90 which, in turn, was liquidated
when BPIIC applied thereto the proceeds of private respondents’ loan of ₱500,000.
On September 13, 1982, BPIIC released to private respondents ₱7,146.87, purporting to be what
was left of their loan after full payment of Roa’s loan.
In June 1984, BPIIC instituted foreclosure proceedings against private respondents on the ground
that they failed to pay the mortgage indebtedness which from May 1, 1981 to June 30, 1984,
amounted to Four Hundred Seventy Five Thousand Five Hundred Eighty Five and 31/100 Pesos
(₱475,585.31). A notice of sheriff’s sale was published on August 13, 1984.
On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093 against BPIIC. They
alleged, among others, that they were not in arrears in their payment, but in fact made an
overpayment as of June 30, 1984. They maintained that they should not be made to pay
amortization before the actual release of the ₱500,000 loan in August and September 1982.
Further, out of the ₱500,000 loan, only the total amount of ₱464,351.77 was released to private
respondents. Hence, applying the effects of legal compensation, the balance of ₱35,648.23
should be applied to the initial monthly amortization for the loan.
On August 31, 1988, the trial court rendered its judgment in Civil Case Nos. 11831 and 52093,
thus:
WHEREFORE, judgment is hereby rendered in favor of ALS Management and Development

Corporation and Antonio K. Litonjua and against BPI Investment Corporation, holding that the
amount of loan granted by BPI to ALS and Litonjua was only in the principal sum of
P464,351.77, with interest at 20% plus service charge of 1% per annum, payable on equal
monthly and successive amortizations at P9,283.83 for ten (10) years or one hundred twenty
(120) months. The amortization schedule attached as Annex "A" to the "Deed of Mortgage" is
correspondingly reformed as aforestated.
The Court further finds that ALS and Litonjua suffered compensable damages when BPI caused
their publication in a newspaper of general circulation as defaulting debtors, and therefore orders
BPI to pay ALS and Litonjua the following sums:
a) P300,000.00 for and as moral damages;
b) P50,000.00 as and for exemplary damages;
c) P50,000.00 as and for attorney’s fees and expenses of litigation.
The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED for being premature.
Costs against BPI.
SO ORDERED.2
Both parties appealed to the Court of Appeals. However, private respondents’ appeal was
dismissed for non-payment of docket fees.
On February 28, 1997, the Court of Appeals promulgated its decision, the dispositive portion
reads:
WHEREFORE, finding no error in the appealed decision the same is hereby

AFFIRMED in toto.
SO ORDERED.3
In its decision, the Court of Appeals reasoned that a simple loan is perfected only upon the
delivery of the object of the contract. The contract of loan between BPIIC and ALS & Litonjua
was perfected only on September 13, 1982, the date when BPIIC released the purported balance
of the ₱500,000 loan after deducting therefrom the value of Roa’s indebtedness. Thus, payment
of the monthly amortization should commence only a month after the said date, as can be
inferred from the stipulations in the contract. This, despite the express agreement of the parties
that payment shall commence on May 1, 1981. From October 1982 to June 1984, the total
amortization due was only ₱194,960.43. Evidence showed that private respondents had an
overpayment, because as of June 1984, they already paid a total amount of ₱201,791.96.
Therefore, there was no basis for BPIIC to extrajudicially foreclose the mortgage and cause the
publication in newspapers concerning private respondents’ delinquency in the payment of their
loan. This fact constituted sufficient ground for moral damages in favor of private respondents.
The motion for reconsideration filed by petitioner BPIIC was likewise denied, hence this
petition, where BPIIC submits for resolution the following issues:
I. WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL CONTRACT

IN THE LIGHT OF THE RULE LAID DOWN IN BONNEVIE VS. COURT OF
APPEALS, 125 SCRA 122.
II. WHETHER OR NOT BPI SHOULD BE HELD LIABLE FOR MORAL AND
EXEMPLARY DAMAGES AND ATTORNEY’S FEES IN THE FACE OF
IRREGULAR PAYMENTS MADE BY ALS AND OPPOSED TO THE RULE LAID
DOWN IN SOCIAL SECURITY SYSTEM VS. COURT OF APPEALS, 120 SCRA 707.
On the first issue, petitioner contends that the Court of Appeals erred in ruling that because a
simple loan is perfected upon the delivery of the object of the contract, the loan contract in this
case was perfected only on September 13, 1982. Petitioner claims that a contract of loan is a
consensual contract, and a loan contract is perfected at the time the contract of mortgage is
executed conformably with our ruling in Bonnevie v. Court of Appeals, 125 SCRA 122. In the
present case, the loan contract was perfected on March 31, 1981, the date when the mortgage
deed was executed, hence, the amortization and interests on the loan should be computed from
said date.
Petitioner also argues that while the documents showed that the loan was released only on
August 1982, the loan was actually released on March 31, 1981, when BPIIC issued a
cancellation of mortgage of Frank Roa’s loan. This finds support in the registration on March 31,
1981 of the Deed of Absolute Sale executed by Roa in favor of ALS, transferring the title of the
property to ALS, and ALS executing the Mortgage Deed in favor of BPIIC. Moreover, petitioner
claims, the delay in the release of the loan should be attributed to private respondents. As BPIIC
only agreed to extend a ₱500,000 loan, private respondents were required to reduce Frank Roa’s
loan below said amount. According to petitioner, private respondents were only able to do so in
August 1982.
In their comment, private respondents assert that based on Article 1934 of the Civil Code, 4 a
simple loan is perfected upon the delivery of the object of the contract, hence a real contract. In
this case, even though the loan contract was signed on March 31, 1981, it was perfected only on
September 13, 1982, when the full loan was released to private respondents. They submit that
petitioner misread Bonnevie. To give meaning to Article 1934, according to private
respondents, Bonnevie must be construed to mean that the contract to extend the loan was
perfected on March 31, 1981 but the contract of loan itself was only perfected upon the delivery
of the full loan to private respondents on September 13, 1982.
Private respondents further maintain that even granting, arguendo, that the loan contract was
perfected on March 31, 1981, and their payment did not start a month thereafter, still no default
took place. According to private respondents, a perfected loan agreement imposes reciprocal
obligations, where the obligation or promise of each party is the consideration of the other party.
In this case, the consideration for BPIIC in entering into the loan contract is the promise of
private respondents to pay the monthly amortization. For the latter, it is the promise of BPIIC to
deliver the money. In reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is incumbent upon him.
Therefore, private respondents conclude, they did not incur in delay when they did not
commence paying the monthly amortization on May 1, 1981, as it was only on September 13,
1982 when petitioner fully complied with its obligation under the loan contract.
We agree with private respondents. A loan contract is not a consensual contract but a real
contract. It is perfected only upon the delivery of the object of the contract. 5 Petitioner
misapplied Bonnevie. The contract in Bonnevie declared by this Court as a perfected consensual
contract falls under the first clause of Article 1934, Civil Code. It is an accepted promise to
deliver something by way of simple loan.
In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44 SCRA 445,
petitioner applied for a loan of ₱500,000 with respondent bank. The latter approved the
application through a board resolution. Thereafter, the corresponding mortgage was executed and
registered. However, because of acts attributable to petitioner, the loan was not released. Later,
petitioner instituted an action for damages. We recognized in this case, a perfected consensual
contract which under normal circumstances could have made the bank liable for not releasing the
loan. However, since the fault was attributable to petitioner therein, the court did not award it
damages.
A perfected consensual contract, as shown above, can give rise to an action for damages.
However, said contract does not constitute the real contract of loan which requires the delivery of
the object of the contract for its perfection and which gives rise to obligations only on the part of
the borrower.6
In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on
the other, was perfected only on September 13, 1982, the date of the second release of the loan.
Following the intentions of the parties on the commencement of the monthly amortization, as
found by the Court of Appeals, private respondents’ obligation to pay commenced only on
October 13, 1982, a month after the perfection of the contract.7
We also agree with private respondents that a contract of loan involves a reciprocal obligation,
wherein the obligation or promise of each party is the consideration for that of the other. 8 As
averred by private respondents, the promise of BPIIC to extend and deliver the loan is upon the
consideration that ALS and Litonjua shall pay the monthly amortization commencing on May 1,
1981, one month after the supposed release of the loan. It is a basic principle in reciprocal
obligations that neither party incurs in delay, if the other does not comply or is not ready to
comply in a proper manner with what is incumbent upon him. 9 Only when a party has performed
his part of the contract can he demand that the other party also fulfills his own obligation and if
the latter fails, default sets in. Consequently, petitioner could only demand for the payment of the
monthly amortization after September 13, 1982 for it was only then when it complied with its
obligation under the loan contract. Therefore, in computing the amount due as of the date when
BPIIC extrajudicially caused the foreclosure of the mortgage, the starting date is October 13,
1982 and not May 1, 1981.
Other points raised by petitioner in connection with the first issue, such as the date of actual
release of the loan and whether private respondents were the cause of the delay in the release of
the loan, are factual. Since petitioner has not shown that the instant case is one of the exceptions
to the basic rule that only questions of law can be raised in a petition for review under Rule 45 of
the Rules of Court,10 factual matters need not tarry us now. On these points we are bound by the
findings of the appellate and trial courts.
On the second issue, petitioner claims that it should not be held liable for moral and exemplary
damages for it did not act maliciously when it initiated the foreclosure proceedings. It merely
exercised its right under the mortgage contract because private respondents were irregular in
their monthly amortization.1âwphi1 It invoked our ruling in Social Security System vs. Court of
Appeals, 120 SCRA 707, where we said:
Nor can the SSS be held liable for moral and temperate damages. As concluded by the Court of
Appeals "the negligence of the appellant is not so gross as to warrant moral and temperate
damages," except that, said Court reduced those damages by only P5,000.00 instead of
eliminating them. Neither can we agree with the findings of both the Trial Court and respondent
Court that the SSS had acted maliciously or in bad faith. The SSS was of the belief that it was
acting in the legitimate exercise of its right under the mortgage contract in the face of irregular
payments made by private respondents and placed reliance on the automatic acceleration clause
in the contract. The filing alone of the foreclosure application should not be a ground for an
award of moral damages in the same way that a clearly unfounded civil action is not among the
grounds for moral damages.
Private respondents counter that BPIIC was guilty of bad faith and should be liable for said
damages because it insisted on the payment of amortization on the loan even before it was
released. Further, it did not make the corresponding deduction in the monthly amortization to
conform to the actual amount of loan released, and it immediately initiated foreclosure
proceedings when private respondents failed to make timely payment.
But as admitted by private respondents themselves, they were irregular in their payment of
monthly amortization. Conformably with our ruling in SSS, we can not properly declare BPIIC in
bad faith. Consequently, we should rule out the award of moral and exemplary damages.11
However, in our view, BPIIC was negligent in relying merely on the entries found in the deed of
mortgage, without checking and correspondingly adjusting its records on the amount actually
released to private respondents and the date when it was released. Such negligence resulted in
damage to private respondents, for which an award of nominal damages should be given in
recognition of their rights which were violated by BPIIC. 12 For this purpose, the amount of
₱25,000 is sufficient.
Lastly, as in SSS where we awarded attorney’s fees because private respondents were compelled
to litigate, we sustain the award of ₱50,000 in favor of private respondents as attorney’s fees.
WHEREFORE, the decision dated February 28, 1997, of the Court of Appeals and its resolution
dated April 21, 1998, are AFFIRMED WITH MODIFICATION as to the award of damages. The
award of moral and exemplary damages in favor of private respondents is DELETED, but the
award to them of attorney’s fees in the amount of ₱50,000 is UPHELD. Additionally, petitioner
is ORDERED to pay private respondents ₱25,000 as nominal damages. Costs against petitioner.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.
G.R. No. L-46145 November 26, 1986
REPUBLIC OF THE PHILIPPINES (BUREAU OF LANDS), petitioner,

vs.
THE HON. COURT OF APPEALS, HEIRS OF DOMINGO P. BALOY, represented by
RICARDO BALOY, ET AL., respondents.
Pelaez, Jalondoni, Adriano and Associates for respondents.
PARAS, J.:p
This case originally emanated from a decision of the then Court of First Instance of Zambales in
LRC Case No. 11-0, LRC Record No. N-29355, denying respondents' application for
registration. From said order of denial the applicants, heirs of Domingo Baloy, represented by
Ricardo P. Baloy, (herein private respondents) interposed on appeal to the Court of Appeals
which was docketed as CA-G.R. No. 52039-R. The appellate court, thru its Fifth Division with
the Hon. Justice Magno Gatmaitan as ponente, rendered a decision dated February 3, 1977
reversing the decision appealed from and thus approving the application for registration.
Oppositors (petitioners herein) filed their Motion for Reconsideration alleging among other
things that applicants' possessory information title can no longer be invoked and that they were
not able to prove a registerable title over the land. Said Motion for Reconsideration was denied,
hence this petition for review on certiorari.
Applicants' claim is anchored on their possessory information title (Exhibit F which had been
translated in Exhibit F-1) coupled with their continuous, adverse and public possession over the
land in question. An examination of the possessory information title shows that the description
and the area of the land stated therein substantially coincides with the land applied for and that
said possessory information title had been regularly issued having been acquired by applicants'
predecessor, Domingo Baloy, under the provisions of the Spanish Mortgage Law. Applicants
presented their tax declaration on said lands on April 8, 1965.
The Director of Lands opposed the registration alleging that this land had become public land
thru the operation of Act 627 of the Philippine Commission. On November 26, 1902 pursuant to
the executive order of the President of the U.S., the area was declared within the U.S. Naval
Reservation. Under Act 627 as amended by Act 1138, a period was fixed within which persons
affected thereby could file their application, (that is within 6 months from July 8, 1905)
otherwise "the said lands or interest therein will be conclusively adjudged to be public lands and
all claims on the part of private individuals for such lands or interests therein not to presented
will be forever barred." Petitioner argues that since Domingo Baloy failed to file his claim within
the prescribed period, the land had become irrevocably public and could not be the subject of a
valid registration for private ownership.
Considering the foregoing facts respondents Court of Appeals ruled as follows:
... perhaps, the consequence was that upon failure of Domingo Baloy to have filed
his application within that period the land had become irrevocably public; but
perhaps also, for the reason that warning was from the Clerk of the Court of Land
Registration, named J.R. Wilson and there has not been presented a formal order
or decision of the said Court of Land Registration so declaring the land public
because of that failure, it can with plausibility be said that after all, there was no
judicial declaration to that effect, it is true that the U.S. Navy did occupy it
apparently for some time, as a recreation area, as this Court understands from the
communication of the Department of Foreign Affairs to the U.S. Embassy
exhibited in the record, but the very tenor of the communication apparently seeks
to justify the title of herein applicants, in other words, what this Court has taken
from the occupation by the U.S. Navy is that during the interim, the title of
applicants was in a state of suspended animation so to speak but it had not died
either; and the fact being that this land was really originally private from and after
the issuance and inscription of the possessory information Exh. F during the
Spanish times, it would be most difficult to sustain position of Director of Lands
that it was land of no private owner; open to public disposition, and over which he
has control; and since immediately after U.S. Navy had abandoned the area,
applicant came in and asserted title once again, only to be troubled by first
Crispiniano Blanco who however in due time, quitclaimed in favor of applicants,
and then by private oppositors now, apparently originally tenants of Blanco, but
that entry of private oppositors sought to be given color of ownership when they
sought to and did file tax declaration in 1965, should not prejudice the original
rights of applicants thru their possessory information secured regularly so long
ago, the conclusion must have to be that after all, applicants had succeeded in
bringing themselves within the provisions of Sec. 19 of Act 496, the land should
be registered in their favor;
IN VIEW WHEREOF, this Court is constrained to reverse, as it now reverses,

judgment appealed from the application is approved, and once this decision shall
have become final, if ever it would be, let decree issue in favor of applicants with
the personal circumstances outlined in the application, costs against private
oppositors.
Petitioner now comes to Us with the following:
ASSIGNMENT OF ERRORS:
1. Respondent court erred in holding that to bar private respondents from

asserting any right under their possessory information title there is need for a
court order to that effect.
2. Respondent court erred in not holding that private respondents' rights by virtue
of their possessory information title was lost by prescription.
3. Respondent court erred in concluding that applicants have registerable title.
A cursory reading of Sec. 3, Act 627 reveals that several steps are to be followed before any
affected land can "be conclusively adjudged to be public land." Sec. 3, Act 627 reads as follows:
SEC. 3. Immediately upon receipt of the notice from the civil Governor in the
preceeding section mentioned it shall be the duty of the judge of the Court of
Land Registration to issue a notice, stating that the lands within the limits
aforesaid have been reserved for military purposes, and announced and declared
to be military reservations, and that claims for all private lands, buildings, and
interests therein, within the limits aforesaid, must be presented for registration
under the Land Registration Act within six calendar months from the date of
issuing the notice, and that all lands, buildings, and interests therein within the
limits aforesaid not so presented within the time therein limited will be
conclusively adjudged to be public lands and all claims on the part of private
individuals for such lands, buildings, or an interest therein not so presented will
be forever barred. The clerk of the Court of Land Registration shall immediately
upon the issuing of such notice by the judge cause the same to be published once
a week for three successive weeks in two newspapers, one of which newspapers
shall be in the English Language, and one in the Spanish language in the city or
province where the land lies, if there be no such Spanish or English newspapers
having a general circulation in the city or province wherein the land lies, then it
shall be a sufficient compliance with this section if the notice be published as
herein provided, in a daily newspaper in the Spanish language and one in the
English language, in the City of Manila, having a general circulation. The clerk
shall also cause a duly attested copy of the notice in the Spanish language to be
posted in conspicuous place at each angle formed by the lines of the limits of the
land reserved. The clerk shall also issue and cause to be personally served the
notice in the Spanish language upon every person living upon or in visible
possession of any part of the military reservation. If the person in possession is
the head of the family living upon the hand, it shall be sufficient to serve the
notice upon him, and if he is absent it shall be sufficient to leave a copy at his
usual place of residence. The clerk shall certify the manner in which the notices
have been published, posted, and served, and his certificate shall be conclusive
proof of such publication, posting, and service, but the court shall have the power
to cause such further notice to be given as in its opinion may be necessary.
Clearly under said provisions, private land could be deemed to have become public land only by
virtue of a judicial declaration after due notice and hearing. It runs contrary therefore to the
contention of petitioners that failure to present claims set forth under Sec. 2 of Act 627 made the
land ipso facto public without any deed of judicial pronouncement. Petitioner in making such
declaration relied on Sec. 4 of Act 627 alone. But in construing a statute the entire provisions of
the law must be considered in order to establish the correct interpretation as intended by the law-
making body. Act 627 by its terms is not self-executory and requires implementation by the
Court of Land Registration. Act 627, to the extent that it creates a forfeiture, is a penal statute in
derogation of private rights, so it must be strictly construed so as to safeguard private
respondents' rights. Significantly, petitioner does not even allege the existence of any judgment
of the Land Registration court with respect to the land in question. Without a judgment or order
declaring the land to be public, its private character and the possessory information title over it
must be respected. Since no such order has been rendered by the Land Registration Court it
necessarily follows that it never became public land thru the operation of Act 627. To assume
otherwise is to deprive private respondents of their property without due process of law. In fact it
can be presumed that the notice required by law to be given by publication and by personal
service did not include the name of Domingo Baloy and the subject land, and hence he and his
lane were never brought within the operation of Act 627 as amended. The procedure laid down in
Sec. 3 is a requirement of due process. "Due process requires that the statutes which under it is
attempted to deprive a citizen of private property without or against his consent must, as in
expropriation cases, be strictly complied with, because such statutes are in derogation of general
rights." (Arriete vs. Director of Public Works, 58 Phil. 507, 508, 511).
We also find with favor private respondents' views that court judgments are not to be presumed.
It would be absurd to speak of a judgment by presumption. If it could be contended that such a
judgment may be presumed, it could equally be contended that applicants' predecessor Domingo
Baloy presumably seasonably filed a claim, in accordance with the legal presumption that a
person takes ordinary care of his concerns, and that a judgment in his favor was rendered.
The finding of respondent court that during the interim of 57 years from November 26, 1902 to
December 17, 1959 (when the U.S. Navy possessed the area) the possessory rights of Baloy or
heirs were merely suspended and not lost by prescription, is supported by Exhibit "U," a
communication or letter No. 1108-63, dated June 24, 1963, which contains an official statement
of the position of the Republic of the Philippines with regard to the status of the land in question.
Said letter recognizes the fact that Domingo Baloy and/or his heirs have been in continuous
possession of said land since 1894 as attested by an "Informacion Possessoria" Title, which was
granted by the Spanish Government. Hence, the disputed property is private land and this
possession was interrupted only by the occupation of the land by the U.S. Navy in 1945 for
recreational purposes. The U.S. Navy eventually abandoned the premises. The heirs of the late
Domingo P. Baloy, are now in actual possession, and this has been so since the abandonment by
the U.S. Navy. A new recreation area is now being used by the U.S. Navy personnel and this
place is remote from the land in question.
Clearly, the occupancy of the U.S. Navy was not in the concept of owner. It partakes of the
character of a commodatum. It cannot therefore militate against the title of Domingo Baloy and
his successors-in-interest. One's ownership of a thing may be lost by prescription by reason of
another's possession if such possession be under claim of ownership, not where the possession is
only intended to be transient, as in the case of the U.S. Navy's occupation of the land concerned,
in which case the owner is not divested of his title, although it cannot be exercised in the
meantime.
WHEREFORE, premises considered, finding no merit in the petition the appealed decision is
hereby AFFIRMED.
SO ORDERED.
G.R. No. 195166, July 08, 2015
SPOUSES SALVADOR ABELLA AND ALMA ABELLA, Petitioners, v. SPOUSES

ROMEO ABELLA AND ANNIE ABELLA, Respondents.
DECISION
LEONEN, J.:
This resolves a Petition for Review on Certiorari under Rule 45 of the Rules of Court praying
that judgment be rendered reversing and setting aside the September 30, 2010 Decision 1 and the
January 4, 2011 Resolution2 of the Court of Appeals Nineteenth Division in CA-G.R. CV No.
01388. The Petition also prays that respondents Spouses Romeo and Annie Abella be ordered
to pay petitioners Spouses Salvador and Alma Abella 2.5% monthly interest plus the
remaining balance of the amount loaned.
The assailed September 30, 2010 Decision of the Court of Appeals reversed and set aside the
December 28, 2005 Decision3 of the Regional Trial Court, Branch 8, Kalibo, Aklan in Civil Case
No. 6627. It directed petitioners to pay respondents P148,500.00 (plus interest), which was
the amount respondents supposedly overpaid. The assailed January 4, 2011 Resolution of the
Court of Appeals denied petitioners' Motion for Reconsideration.
The Regional Trial Court's December 28, 2005 Decision ordered respondents to pay petitioners
the supposedly unpaid loan balance of P300,000.00 plus the allegedly stipulated interest rate of
30% per annum, as well as litigation expenses and attorney's fees. 4redarclaw
On July 31, 2002, petitioners Spouses Salvador and Alma Abella filed a Complaint 5 for sum of
money and damages with prayer for preliminary attachment against respondents Spouses Romeo
and Annie Abella before the Regional Trial Court, Branch 8, Kalibo, Aklan. The case was
docketed as Civil Case No. 6627.6redarclaw
In their Complaint, petitioners alleged that respondents obtained a loan from them in the amount
of P500,000.00. The loan was evidenced by an acknowledgment receipt dated March 22, 1999
and was payable within one (1) year. Petitioners added that respondents were able to pay a total
of P200,000.00—P100,000.00 paid on two separate occasions—leaving an unpaid balance of
P300,000.00.7redarclaw
In their Answer8 (with counterclaim and motion to dismiss), respondents alleged that the amount
involved did not pertain to a loan they obtained from petitioners but was part of the capital for a
joint venture involving the lending of money. 9redarclaw
Specifically, respondents claimed that they were approached by petitioners, who proposed that if
respondents were to "undertake the management of whatever money [petitioners] would give
them, [petitioners] would get 2.5% a month with a 2.5% service fee to [respondents]." 10 The
2.5% that each party would be receiving represented their sharing of the 5% interest that the joint
venture was supposedly going to charge against its debtors. Respondents further alleged that the
one year averred by petitioners was not a deadline for payment but the term within which they
were to return the money placed by petitioners should the joint venture prove to be not lucrative.
Moreover, they claimed that the entire amount of P500,000.00 was disposed of in accordance
with their agreed terms and conditions and that petitioners terminated the joint venture,
prompting them to collect from the joint venture's borrowers. They were, however, able to collect
only to the extent of P200,000.00; hence, the P300,000.00 balance remained unpaid. 11redarclaw
In the Decision12 dated December 28, 2005, the Regional Trial Court ruled in favor of petitioners.
It noted that the terms of the acknowledgment receipt executed by respondents clearly showed
that: (a) respondents were indebted to the extent of P500,000.00; (b) this indebtedness was to be
paid within one (1) year; and (c) the indebtedness was subject to interest. Thus, the trial court
concluded that respondents obtained a simple loan, although they later invested its proceeds in a
lending enterprise.13The Regional Trial Court adjudged respondents solidarity liable to
petitioners. The dispositive portion of its Decision reads:LawlibraryofCRAlaw
ChanRoblesVirtualawlibrary
WHEREFORE, premises considered, judgment is hereby rendered:LawlibraryofCRAlaw
1. Ordering the defendants jointly and severally to pay the plaintiffs the sum of P300,000.00
with interest at the rate of 30% per annum from the time the complaint was filed on July
31, 2002 until fully paid;chanRoblesvirtualLawlibrary
2. Ordering the defendants to pay the plaintiffs the sum of P2,227.50 as reimbursement for
litigation expenses, and another sum of P5,000.00 as attorney's fees.
For lack of legal basis, plaintiffs' claim for moral and exemplary damages has to be denied, and
for lack of merit the counter-claim is ordered dismissed.14
In the Order dated March 13, 2006,15 the Regional Trial Court denied respondents' Motion for
Reconsideration.
On respondents' appeal, the Court of Appeals ruled that while respondents had indeed entered
into a simple loan with petitioners, respondents were no longer liable to pay the outstanding
amount of P300,000.00.16redarclaw
The Court of Appeals reasoned that the loan could not have earned interest, whether as
contractually stipulated interest or as interest in the concept of actual or compensatory damages.
As to the loan's not having earned stipulated interest, the Court of Appeals anchored its ruling on
Article 1956 of the Civil Code, which requires interest to be stipulated in writing for it to be
due.17 The Court of Appeals noted that while the acknowledgement receipt showed that interest
was to be charged, no particular interest rate was specified. 18 Thus, at the time respondents were
making interest payments of 2.5% per month, these interest payments were invalid for not being
properly stipulated by the parties. As to the loan's not having earned interest in the concept of
actual or compensatory damages, the Court of Appeals, citing Eusebio-Calderon v.
People,19 noted that interest in the concept of actual or compensatory damages accrues only from
the time that demand (whether judicial or extrajudicial) is made. It reasoned that since
respondents received petitioners' demand letter only on July 12, 2002, any interest in the concept
of actual or compensatory damages due should be reckoned only from then. Thus, the payments
for the 2.5% monthly interest made after the perfection of the loan in 1999 but before the
demand was made in 2002 were invalid.20redarclaw
Since petitioners' charging of interest was invalid, the Court of Appeals reasoned that all
payments respondents made by way of interest should be deemed payments for the principal
amount of P500,000.00.21redarclaw
The Court of Appeals further noted that respondents made a total payment of P648,500.00,
which, as against the principal amount of P500,000.00, entailed an overpayment of P148,500.00.
Applying the principle of solutio indebiti, the Court of Appeals concluded that petitioners were
liable to reimburse respondents for the overpaid amount of P148,500.00. 22 The dispositive
portion of the assailed Court of Appeals Decision reads:LawlibraryofCRAlaw
WHEREFORE, the Decision of the Regional Trial Court is hereby REVERSED and SET
ASIDE, and a new one issued, finding that the Spouses Salvador and Alma Abella
are DIRECTED to jointly and severally pay Spouses Romeo and Annie Abella the amount of
P148,500.00, with interest of 6% interest (sic) per annum to be computed upon receipt of this
decision, until full satisfaction thereof. Upon finality of this judgment, an interest as the rate of
12% per annum, instead of 6%, shall be imposed on the amount due, until full payment thereof.23
In the Resolution24 dated January 4, 2011, the Court of Appeals denied petitioners' Motion for
Reconsideration.
Aggrieved, petitioners filed the present appeal 25 where they claim that the Court of Appeals erred
in completely striking off interest despite the parties' written agreement stipulating it, as well as
in ordering them to reimburse and pay interest to respondents.
In support of their contentions, petitioners cite Article 1371 of the Civil Code, 26 which calls for
the consideration of the contracting parties' contemporaneous and subsequent acts in determining
their true intention. Petitioners insist that respondents' consistent payment of interest in the year
following the perfection of the loan showed that interest at 2.5% per month was properly agreed
upon despite its not having been expressly stated in the acknowledgment receipt. They add that
during the proceedings before the Regional Trial Court, respondents admitted that interest was
due on the loan.27redarclaw
In their Comment,28 respondents reiterate the Court of Appeals' findings that no interest rate was
ever stipulated by the parties and that interest was not due and demandable at the time they were
making interest payments.29redarclaw
In their Reply,30 petitioners argue that even though no interest rate was stipulated in the
acknowledgment receipt, the case fell under the exception to the Parol Evidence Rule. They also
argue that there exists convincing and sufficiently credible evidence to supplement the
imperfection of the acknowledgment receipt.31redarclaw
For resolution are the following issues:LawlibraryofCRAlaw
First, whether interest accrued on respondents' loan from petitioners, If so, at what rate?
Second, whether petitioners are liable to reimburse respondents for the Litter's supposed excess
payments and for interest.
I
As noted by the Court of Appeals and the Regional Trial Court, respondents entered into a simple
loan or mutuum, rather than a joint venture, with petitioners.
Respondents' claims, as articulated in their testimonies before the trial court, cannot prevail over
the clear terms of the document attesting to the relation of the parties. "If the terms of a contract
are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of
its stipulations shall control."32redarclaw
Articles 1933 and 1953 of the Civil Code provide the guideposts that determine if a contractual
relation is one of simple loan or mutuum:LawlibraryofCRAlaw
Art. 1933. By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it, in which case the
contract is called a commodatum; or money or other consumable thing, upon the condition that
the same amount of the same kind and quality shall be paid, in which case the contract is simply
called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while in simple loan,
ownership passes to the borrower.
....
Art. 1953. A person who receives a loan of money or any other fungible thing acquires the
ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and
quality. (Emphasis supplied)
On March 22, 1999, respondents executed an acknowledgment receipt to petitioners, which

states:LawlibraryofCRAlaw
Batan, Aklan
March 22, 1999
This is to acknowledge receipt of the Amount of Five Hundred Thousand (P500,000.00) Pesos
from Mrs. Alma R. Abella, payable within one (1) year from date hereof with interest.
Annie C. Abella (sgd.) Romeo M. Abella (sgd.)33

(Emphasis supplied)
The text of the acknowledgment receipt is uncomplicated and straightforward. It attests to: first,
respondents' receipt of the sum of P500,000.00 from petitioner Alma Abella; second,
respondents' duty to pay tack this amount within one (1) year from March 22, 1999; and third,
respondents' duty to pay interest. Consistent with what typifies a simple loan, petitioners
delivered to respondents with the corresponding condition lat respondents shall pay the same
amount to petitioners within one (1) year.
II
Although we have settled the nature of the contractual relation between petitioners and
respondents, controversy persists over respondents' duty to pay conventional interest, i.e.,
interest as the cost of borrowing money. 34redarclaw
Article 1956 of the Civil Code spells out the basic rule that "[n]o interest shall be due unless it
has been expressly stipulated in writing."
On the matter of interest, the text of the acknowledgment receipt is simple, plain, and
unequivocal. It attests to the contracting parties' intent to subject to interest the loan extended by
petitioners to respondents. The controversy, however, stems from the acknowledgment receipt's
failure to state the exact rate of interest.
Jurisprudence is clear about the applicable interest rate if a written instrument fails to specify a
rate. In Spouses Toring v. Spouses Olan,35 this court clarified the effect of Article 1956 of the
Civil Code and noted that the legal rate of interest (then at 12%) is to apply: "In a loan or
forbearance of money, according to the Civil Code, the interest due should be that stipulated in
writing, and in the absence thereof, the rate shall be 12% per annum."36redarclaw
Spouses Toring cites and restates (practically verbatim) what this court settled in Security Bank
and Trust Company v. Regional Trial Court of Makati, Branch 61: "In a loan or forbearance of
money, the interest due should be that stipulated in writing, and in the absence thereof the
rate shall be 12% per annum."37redarclaw
Security Bank also refers to Eastern Shipping Lines, Inc. v. Court of Appeals, which, in turn,
stated:38
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan
or forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.39 (Emphasis supplied)
The rule is not only definite; it is cast in mandatory language. From Eastern Shipping to Security
Bank to Spouses Toring, jurisprudence has repeatedly used the word "shall," a term that has long
been settled to denote something imperative or operating to impose a duty. 40 Thus, the rule leaves
no room for alternatives or otherwise does not allow for discretion. It requires the application of
the legal rate of interest.
Our intervening Decision in Nacar v. Gallery Frames41 recognized that the legal rate of interest
has been reduced to 6% per annum:LawlibraryofCRAlaw
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its
Resolution No. 796 dated May 16, 2013, approved the amendment of Section 2 of Circular No.
905, Series of 1982 and, accordingly, issued Circular No. 799, Series of 2013, effective July 1,
2013, the pertinent portion of which reads:LawlibraryofCRAlaw
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following
revisions governing the rate of interest in the absence of stipulation in loan contracts, thereby
amending Section 2 of Circular No. 905, Series of 1982:LawlibraryofCRAlaw
Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the
rate allowed in judgments, in the absence of an express contract as to such rate of
interest, shall be six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations for Banks and
Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank Financial
Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that
would govern the parties, the rate of legal interest for loans or forbearance of any money, goods
or credits and the rate allowed in judgments shall no longer be twelve percent (12%) per
annum — as reflected in the case of Eastern Shipping Lines and Subsection X305.1 of the
Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of
Regulations for Non-Bank Financial Institutions, before its amendment by BSP-MB Circular No.
799 — but will now be six percent (6%) per annum effective July 1, 2013. It should be noted,
nonetheless, that the new rate could only be applied prospectively and not retroactively.
Consequently, the twelve percent (12%) per annum legal interest shall apply only until June 30,
2013. Come July 1, 2013 the new rate of six percent (6%) per annum shall be the prevailing rate
of interest when applicable.42(Emphasis supplied, citations omitted)
Nevertheless, both Bangko Sentral ng Pilipinas Circular No. 799, Series of 2013 and Nacar
retain the definite and mandatory framing of the rule articulated in Eastern Shipping, Security
Bank, and Spouses Toring. Nacar even restates Eastern Shipping:LawlibraryofCRAlaw
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping
Lines are accordingly modified to embody BSP-MB Circular No. 799, as
follows:LawlibraryofCRAlaw
....
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
Joan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be
6% per annum to be computed from default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169 of the Civil Code. 43 (Emphasis
supplied, citations omitted)
Thus, it remains that where interest was stipulated in writing by the debtor and creditor in a
simple loan or mutuum, but no exact interest rate was mentioned, the legal rate of interest shall
apply. At present, this is 6% per annum, subject to Nacar's qualification on prospective
application.
Applying this, the loan obtained by respondents from petitioners is deemed subjected to
conventional interest at the rate of 12% per annum, the legal rate of interest at the time the
parties executed their agreement. Moreover, should conventional interest still be due as of July 1,
2013, the rate of 12% per annum shall persist as the rate of conventional interest.
This is so because interest in this respect is used as a surrogate for the parties' intent, as
expressed as of the time of the execution of their contract. In this sense, the legal rate of interest
is an affirmation of the contracting parties' intent; that is, by their contract's silence on a specific
rate, the then prevailing legal rate of interest shall be the cost of borrowing money. This rate,
which by their contract the parties have settled on, is deemed to persist regardless of shifts in the
legal rate of interest. Stated otherwise, the legal rate of interest, when applied as conventional
interest, shall always be the legal rate at the time the agreement was executed and shall not be
susceptible to shifts in rate.
Petitioners, however, insist on conventional interest at the rate of 2.5% per month or 30% per
annum. They argue that the acknowledgment receipt fails to show the complete and accurate
intention of the contracting parties. They rely on Article 1371 of the Civil Code, which provides
that the contemporaneous and subsequent acts of the contracting parties shall be considered
should there be a need to ascertain their intent. 44 In addition, they claim that this case falls under
the exceptions to the Parol Evidence Rule, as spelled out in Rule 130, Section 9 of the Revised
Rules on Evidence.45redarclaw
It is a basic precept in legal interpretation and construction that a rule or provision that treats a
subject with specificity prevails over a rule or provision that treats a subject in general
terms.46redarclaw
The rule spelled out in Security Bank and Spouses Toring is anchored on Article 1956 of the Civil
Code and specifically governs simple loans or mutuum. Mutuum is a type of nominate contract
that is specifically recognized by the Civil Code and for which the Civil Code provides a specific
set of governing rules: Articles 1953 to 1961. In contrast, Article 11371 is among the Civil Code
provisions generally dealing with contracts. As this case particularly involves a simple loan, the
specific rule spelled out in Security Bank and Spouses Toring finds preferential application as
against Article 1371.
Contrary to petitioners' assertions, there is no room for entertaining extraneous (or parol)
evidence. In Spouses Bonifacio and Lucia Paras v. Kimwa Construction and Development
Corporation,47 we spelled out the requisites for the admission of parol
evidence:LawlibraryofCRAlaw
In sum, two (2) things must be established for parol evidence to be admitted: first, that the
existence of any of the four (4) exceptions has been put in issue in a party's pleading or has not
been objected to by the adverse party; and second, that the parol evidence sought to be presented
serves to form the basis of the conclusion proposed by the presenting party.48
The issue of admitting parol evidence is a matter that is proper to the trial, not the appellate,
stage of a case. Petitioners raised the issue of applying the exceptions to the Parol Evidence Rule
only in the Reply they filed before this court. This is the last pleading that either of the parties
has filed in the entire string of proceedings culminating in this Decision. It is, therefore, too late
for petitioners to harp on this rule. In any case, what is at issue is not admission of evidence per
se, but the appreciation given to the evidence adduced by the parties. In the Petition they filed
before this court, petitioners themselves acknowledged that checks supposedly attesting to
payment of monthly interest at the rate of 2.5% were admitted by the trial court (and marked as
Exhibits "2," "3," "4," "5," "6," "7," and "8").49 What petitioners have an issue with is not the
admission of these pieces of evidence but how these have not been appreciated in a manner
consistent with the conclusions they advance.
Even if it can be shown that the parties have agreed to monthly interest at the rate of 2.5%, this is
unconscionable. As emphasized in Castro v. Tan,50 the willingness of the parties to enter into a
relation involving an unconscionable interest rate is inconsequential to the validity of the
stipulated rate:LawlibraryofCRAlaw
The imposition of an unconscionable rate of interest on a money debt, even if knowingly and
voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an
iniquitous deprivation of property, repulsive to the common sense of man. It has no support in
law, in principles of justice, or in the human conscience nor is there any reason whatsoever
which may justify such imposition as righteous and as one that may be sustained within the
sphere of public or private morals.51
The imposition of an unconscionable interest rate is void ab initio for being "contrary to morals,
and the law."52redarclaw
In determining whether the rate of interest is unconscionable, the mechanical application of pre-
established floors would be wanting. The lowest rates that have previously been considered
unconscionable need not be an impenetrable minimum. What is more crucial is a consideration
of the parties' contexts. Moreover, interest rates must be appreciated in light of the fundamental
nature of interest as compensation to the creditor for money lent to another, which he or she
could otherwise have used for his or her own purposes at the time it was lent. It is not the default
vehicle for predatory gain. As such, interest need only be reasonable. It ought not be a supine
mechanism for the creditor's unjust enrichment at the expense of another.
Petitioners here insist upon the imposition of 2.5% monthly or 30% annual interest.
Compounded at this rate, respondents' obligation would have more than doubled—increased to
219.7% of the principal—by the end of the third year after which the loan was contracted if the
entire principal remained unpaid. By the end of the ninth year, it would have multiplied more
than tenfold (or increased to 1,060.45%). In 2015, this would have multiplied by more than 66
times (or increased to 6,654.17%). Thus, from an initial loan of only P500,000.00, respondents
would be obliged to pay more than P33 million. This is grossly unfair, especially since up to the
fourth year from when the loan was obtained, respondents had been assiduously delivering
payment. This reduces their best efforts to satisfy their obligation into a protracted servicing of a
rapacious loan.
The legal rate of interest is the presumptive reasonable compensation for borrowed money.
While parties are free to deviate from this, any deviation must be reasonable and fair. Any
deviation that is far-removed is suspect. Thus, in cases where stipulated interest is more than
twice the prevailing legal rate of interest, it is for the creditor to prove that this rate is required by
prevailing market conditions. Here, petitioners have articulated no such justification.
In sum, Article 1956 of the Civil Code, read in light of established jurisprudence, prevents the
application of any interest rate other than that specifically provided for by the parties in their loan
document or, in lieu of it, the legal rate. Here, as the contracting parties failed to make a specific
stipulation, the legal rate must apply. Moreover, the rate that petitioners adverted to is
unconscionable. The conventional interest due on the principal amount loaned by respondents
from petitioners is held to be 12% per annum.
III
Apart from respondents' liability for conventional interest at the rate of 12% per annum,
outstanding conventional interest—if any is due from respondents—shall itself earn legal interest
from the time judicial demand was made by petitioners, i.e., on July 31, 2002, when they filed
their Complaint. This is consistent with Article 2212 of the Civil Code, which
provides:LawlibraryofCRAlaw
Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although
the obligation may be silent upon this point.
So, too, Nacar states that "the interest due shall itself earn legal interest from the time it is
judicially demanded."53redarclaw
Consistent with Nacar, as well as with our ruling in Rivera v. Spouses Chua,54 the interest due on
conventional interest shall be at the rate of 12% per annum from July 31, 2002 to June 30, 2013.
Thereafter, or starting July 1, 2013, this shall be at the rate of 6% per annum.
IV
Proceeding from these premises, we find that respondents made an overpayment in the amount
of P3,379.17.
As acknowledged by petitioner Salvador Abella, respondents paid a total of P200,000.00, which

was charged against the principal amount of P500,000.00. The first payment of P100,000.00 was
made on June 30, 2001,55 while the second payment of P100,000.00 was made on December 30,
2001.56redarclaw
The Court of Appeals' September 30, 2010 Decision stated that respondents paid P6,000.00 in
March 1999.57redarclaw
The Pre-Trial Order dated December 2, 2002,58 stated that the parties admitted that "from the
time the principal sum of P500,000.00 was borrowed from [petitioners], [respondents] ha[d]
been religiously paying"59 what was supposedly interest "at the rate of 2.5% per
month."60redarclaw
From March 22, 1999 (after the loan was perfected) to June 22, 2001 (before respondents'
payment of P100,000.00 on June 30, 2001, which was deducted from the principal amount of
P500,000.00), the 2.5% monthly "interest" was pegged to the principal amount of P500,000.00.
These monthly interests, thus, amounted to P12,500.00 per month. Considering that the period
from March 1999 to June 2001 spanned twenty-seven (27) months, respondents paid a total of
P337,500.00.61redarclaw
From June 22, 2001 up to December 22, 2001 (before respondents' payment of another
P100,000.00 on December 30, 2001, which was deducted from the remaining principal amount
of P400,000.00), the 2.5% monthly "interest" was pegged to the remaining principal amount of
P400,000.00. These monthly interests, thus, amounted to P10,000.00 per month. Considering
that this period spanned six (6) months, respondents paid a total of P60,000.00. 62redarclaw
From after December 22, 2001 up to June 2002 (when petitioners filed their Complaint), the
2.5% monthly "interest" was pegged to the remaining principal amount of P300,000.00. These
monthly interests, thus, amounted to P7,500.00 per month. Considering that this period spanned
six (6) months, respondents paid a total of P45,000.00. 63redarclaw
Applying these facts and the properly applicable interest rate (for conventional interest, 12% per
annum; for interest on conventional interest, 12% per annum from July 31, 2002 up to June 30,
2013 and 6% per annum henceforth), the following conclusions may be
drawn:LawlibraryofCRAlaw
By the end of the first year following the perfection of the loan, or as of March 21, 2000,
P560,000.00 was due from respondents. This consisted cf the principal of P500,000.00 and
conventional interest of P60,000.00.
Within this first year, respondents made twelve (12) monthly payments totalling P150,000.00
(P12,500.00 each from April 1999 to March 2000). This was in addition to their initial payment
of P6,000.00 in March 999.
Application of payments must be in accordance with Article 1253 of the Civil Code, which
reads:LawlibraryofCRAlaw
Art. 1253. If the debt produces interest, payment of the principal shall not be deemed to have
been made until the interests have been covered.
Thus, the payments respondents made must first be reckoned as interest payments. Thereafter,
any excess payments shall be charged against the principal. As respondents paid a total of
P156,000.00 within the first year, the conventional interest of P60,000.00 must be deemed fully
paid and the remaining amount that respondents paid (i.e., P96,000.00) is to be charged against
the principal. This yields a balance of P404,000.00.
By the end of the second year following the perfection of the loan, or as of March 21, 2001,
P452,480.00 was due from respondents. This consisted of the outstanding principal of
P404,000.00 and conventional interest of P48,480.00.
Within this second year, respondents completed another round of twelve (12) monthly payments
totaling P150,000.00.
Consistent with Article 1253 of the Civil Code, as respondents paid a total of P156,000.00 within
the second year, the conventional interest of P48,480.00 must be deemed fully paid and the
remaining amount that respondents paid (i.e., P101,520.00) is to be charged against the principal.
This yields a balance of P302,480.00.
By the end of the third year following the perfection of the loan, or as of March 21, 2002,
P338,777.60 was due from respondents. This consists of he outstanding principal of P302,480.00
and conventional interest of P36,297.60.
Within this third year, respondents paid a total of P320,000.00, as follows:LawlibraryofCRAlaw
(a) Between March 22, 2001 and June 30, 2001, respondents completed three (3) monthly
payments of P12,500.00 each, totaling P37,500.00.
(b) On June 30, 2001, respondents paid P100,000.00, which was charged as principal payment.
(c) Between June 30, 2001 and December 30, 2001, respondents delivered monthly payments
of P10,000.00 each. At this point, the monthly payments no longer amounted to P12,500.00
each because the supposed monthly interest payments were pegged to the supposedly
remaining principal of P400,000.00. Thus, during this period, they paid a total of six (6)
monthly payments totaling P60,000.00.
(d) On December 30, 2001, respondents paid P100,000.00, which, like the June 30, 2001
payment, was charged against the principal.
(e) From the end of December 2002 to the end of February 2002, respondents delivered
monthly payments of P7,500.00 each. At this point, the supposed monthly interest payments
were now pegged to the supposedly remaining principal of P300,000.00. Thus, during this
period, they delivered three (3) monthly payments totaling P22,500.00.
Consistent with Article 1253 of the Civil Code, as respondents paid a total of P320,000.00 within
the third year, the conventional interest of P36,927.50 must be deemed fully paid and the
remaining amount that respondents paid (i.e., P283,702.40) is to be charged against the principal.
This yields a balance of P18,777.60.
By the end of the fourth year following the perfection of the loan, or as of March 21, 2003,
P21,203.51 would have been due from respondents. This consists of: (a) the outstanding
principal of P18,777.60, (b) conventional interest of P2,253.31, and (c) interest due on
conventional interest starting from July 31, 2002, the date of judicial demand, in the amount of
P172.60. The last (i.e., interest on interest) must be pro-rated. There were only 233 days from
July 31, 2002 (the date of judicial demand) to March 21, 2003 (the end of the fourth year); this
left 63.83% of the fourth year, within which interest on interest might have accrued. Thus, the
full annual interest on interest of 12% per annum could not have been completed, and only the
proportional amount of 7.66% per annum may be properly imposed for the remainder of the
fourth year.
From the end of March 2002 to June 2002, respondents delivered three (3) more monthly
payments of P7,500.00 each. Thus, during this period, they delivered three (3) monthly payments
totalling P22,500.00.
At this rate, however, payment would have been completed by respondents even before the end of
the fourth year. Thus, for precision, it is more appropriate to reckon the amounts due as
against payments made on monthly, rather than an annual, basis.
By April 21, 2002, P18,965.38 (i.e., remaining principal of P18,777.60 plus pro-rated monthly
conventional interest at 1%, amounting to P187.78) would have been due from respondents.
Deducting the monthly payment of P7,500.00 for the preceding month in a manner consistent
with Article 1253 of the Civil Code would yield a balance of P11,465.38.
By May 21, 2002, P11,580.03 (i.e., remaining principal of P11,465.38 plus pro-rated monthly
with Article 1253 of the Civil Code would yield a balance of P4,080.03.
By June 21, 2002, P4,120.83 (i.e., remaining principal of P4,080.03 plus pro-rated monthly
with Article 1253 of the Civil Code would yield a negative balance of P3,379.17.
Thus, by June 21, 2002, respondents had not only fully paid the principal and all the
conventional interest that had accrued on their loan. By this date, they also overpaid P3,379.17.
Moreover, while hypothetically, interest on conventional interest would not have run from July
31, 2002, no such interest accrued since there was no longer any conventional interest due from
respondents by then.
As respondents made an overpayment, the principle of solutio indebiti as provided by Article

2154 of the Civil Code64 applies. Article 2154 reads:LawlibraryofCRAlaw
Article 2154. If something is received when there is no right to demand it, and it was unduly
delivered through mistake, the obligation to return it arises.
In Moreno-Lentfer v. Wolff,65 this court explained the application of solutio

indebiti:LawlibraryofCRAlaw
The quasi-contract of solutio indebiti harks back to the ancient principle that no one shall enrich
himself unjustly at the expense of another. It applies where (1) a payment is made when there
exists no binding relation between the payor, who has no duty to pay, and the person who
received the payment, and (2) the payment is made through mistake, and not through liberality or
some other cause.66
As respondents had already fully paid the principal and all conventional interest that had
accrued, they were no longer obliged to make further payments. Any further payment they made
was only because of a mistaken impression that they were still due. Accordingly, petitioners are
now bound by a quasi-contractual obligation to return any and all excess payments delivered by
respondents.
Nacar provides that "[w]hen an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed at the discretion of the
court at the rate of 6% per annum." 67 This applies to obligations arising from quasi-contracts
such as solutio indebiti.
Further, Article 2159 of the Civil Code provides:LawlibraryofCRAlaw

Art. 2159. Whoever in bad faith accepts an undue payment, shall pay legal interest if a sum of
money is involved, or shall be liable for fruits received or which should have been received if the
thing produces fruits.
He shall furthermore be answerable for any loss or impairment of the thing from any cause, and
for damages to the person who delivered the thing, until it is recovered.
Consistent however, with our finding that the excess payment made by respondents were borne
out of a mere mistake that it was due, we find it in the better interest of equity to no longer hold
petitioners liable for interest arising from their quasi-contractual obligation.
Nevertheless, Nacar also provides:LawlibraryofCRAlaw
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 6% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.68
Thus, interest at the rate of 6% per annum may be properly imposed on the total judgment award.
This shall be reckoned from the finality of this Decision until its full satisfaction.
WHEREFORE, the assailed September 30, 2010 Decision and the January 4, 2011 Resolution
of the Court of Appeals Nineteenth Division in CA-G.R. CV No. 01388 are SET ASIDE.
Petitioners Spouses Salvador and Alma Abella are DIRECTED to jointly and severally
reimburse respondents Spouses Romeo and Annie Abella the amount of P3,379.17, which
respondents have overpaid.
A legal interest of 6% per annum shall likewise be imposed on the total judgment award from the
finality of this Decision until its full satisfaction.
SO ORDERED.cralawlawlibrary
G.R. No. 115324 February 19, 2003

PRODUCERS BANK OF THE PHILIPPINES (now FIRST INTERNATIONAL
BANK), petitioner,
vs.
HON. COURT OF APPEALS AND FRANKLIN VIVES, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision1 of the Court of Appeals dated June 25,
1991 in CA-G.R. CV No. 11791 and of its Resolution 2 dated May 5, 1994, denying the motion
for reconsideration of said decision filed by petitioner Producers Bank of the Philippines.
Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and friend
Angeles Sanchez to help her friend and townmate, Col. Arturo Doronilla, in incorporating his
business, the Sterela Marketing and Services ("Sterela" for brevity). Specifically, Sanchez asked
private respondent to deposit in a bank a certain amount of money in the bank account of Sterela
for purposes of its incorporation. She assured private respondent that he could withdraw his
money from said account within a month’s time. Private respondent asked Sanchez to bring
Doronilla to their house so that they could discuss Sanchez’s request.3
On May 9, 1979, private respondent, Sanchez, Doronilla and a certain Estrella Dumagpi,
Doronilla’s private secretary, met and discussed the matter. Thereafter, relying on the assurances
and representations of Sanchez and Doronilla, private respondent issued a check in the amount of
Two Hundred Thousand Pesos (₱200,000.00) in favor of Sterela. Private respondent instructed
his wife, Mrs. Inocencia Vives, to accompany Doronilla and Sanchez in opening a savings
account in the name of Sterela in the Buendia, Makati branch of Producers Bank of the
Philippines. However, only Sanchez, Mrs. Vives and Dumagpi went to the bank to deposit the
check. They had with them an authorization letter from Doronilla authorizing Sanchez and her
companions, "in coordination with Mr. Rufo Atienza," to open an account for Sterela Marketing
Services in the amount of ₱200,000.00. In opening the account, the authorized signatories were
Inocencia Vives and/or Angeles Sanchez. A passbook for Savings Account No. 10-1567 was
thereafter issued to Mrs. Vives.4
Subsequently, private respondent learned that Sterela was no longer holding office in the address
previously given to him. Alarmed, he and his wife went to the Bank to verify if their money was
still intact. The bank manager referred them to Mr. Rufo Atienza, the assistant manager, who
informed them that part of the money in Savings Account No. 10-1567 had been withdrawn by
Doronilla, and that only ₱90,000.00 remained therein. He likewise told them that Mrs. Vives
could not withdraw said remaining amount because it had to answer for some postdated checks
issued by Doronilla. According to Atienza, after Mrs. Vives and Sanchez opened Savings
Account No. 10-1567, Doronilla opened Current Account No. 10-0320 for Sterela and authorized
the Bank to debit Savings Account No. 10-1567 for the amounts necessary to cover
overdrawings in Current Account No. 10-0320. In opening said current account, Sterela, through
Doronilla, obtained a loan of ₱175,000.00 from the Bank. To cover payment thereof, Doronilla
issued three postdated checks, all of which were dishonored. Atienza also said that Doronilla
could assign or withdraw the money in Savings Account No. 10-1567 because he was the sole
proprietor of Sterela.5
Private respondent tried to get in touch with Doronilla through Sanchez. On June 29, 1979, he
received a letter from Doronilla, assuring him that his money was intact and would be returned to
him. On August 13, 1979, Doronilla issued a postdated check for Two Hundred Twelve
Thousand Pesos (₱212,000.00) in favor of private respondent. However, upon presentment
thereof by private respondent to the drawee bank, the check was dishonored. Doronilla requested
private respondent to present the same check on September 15, 1979 but when the latter
presented the check, it was again dishonored.6
Private respondent referred the matter to a lawyer, who made a written demand upon Doronilla
for the return of his client’s money. Doronilla issued another check for ₱212,000.00 in private
respondent’s favor but the check was again dishonored for insufficiency of funds.7
Private respondent instituted an action for recovery of sum of money in the Regional Trial Court
(RTC) in Pasig, Metro Manila against Doronilla, Sanchez, Dumagpi and petitioner. The case was
docketed as Civil Case No. 44485. He also filed criminal actions against Doronilla, Sanchez and
Dumagpi in the RTC. However, Sanchez passed away on March 16, 1985 while the case was
pending before the trial court. On October 3, 1995, the RTC of Pasig, Branch 157, promulgated
its Decision in Civil Case No. 44485, the dispositive portion of which reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered sentencing defendants Arturo J.

Doronila, Estrella Dumagpi and Producers Bank of the Philippines to pay plaintiff Franklin
Vives jointly and severally –
(a) the amount of ₱200,000.00, representing the money deposited, with interest at the
legal rate from the filing of the complaint until the same is fully paid;
(b) the sum of ₱50,000.00 for moral damages and a similar amount for exemplary
damages;
(c) the amount of ₱40,000.00 for attorney’s fees; and
(d) the costs of the suit.
SO ORDERED.8
Petitioner appealed the trial court’s decision to the Court of Appeals. In its Decision dated June
25, 1991, the appellate court affirmed in toto the decision of the RTC. 9 It likewise denied with
finality petitioner’s motion for reconsideration in its Resolution dated May 5, 1994.10
On June 30, 1994, petitioner filed the present petition, arguing that –
I.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT THE
TRANSACTION BETWEEN THE DEFENDANT DORONILLA AND RESPONDENT VIVES
WAS ONE OF SIMPLE LOAN AND NOT ACCOMMODATION;
II.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT PETITIONER’S

BANK MANAGER, MR. RUFO ATIENZA, CONNIVED WITH THE OTHER DEFENDANTS
IN DEFRAUDING PETITIONER (Sic. Should be PRIVATE RESPONDENT) AND AS A
CONSEQUENCE, THE PETITIONER SHOULD BE HELD LIABLE UNDER THE
PRINCIPLE OF NATURAL JUSTICE;
III.
THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING THE ENTIRE RECORDS

OF THE REGIONAL TRIAL COURT AND AFFIRMING THE JUDGMENT APPEALED
FROM, AS THE FINDINGS OF THE REGIONAL TRIAL COURT WERE BASED ON A
MISAPPREHENSION OF FACTS;
IV.
THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT THE CITED

DECISION IN SALUDARES VS. MARTINEZ, 29 SCRA 745, UPHOLDING THE LIABILITY
OF AN EMPLOYER FOR ACTS COMMITTED BY AN EMPLOYEE IS APPLICABLE;
V.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE DECISION OF

THE LOWER COURT THAT HEREIN PETITIONER BANK IS JOINTLY AND SEVERALLY
LIABLE WITH THE OTHER DEFENDANTS FOR THE AMOUNT OF P200,000.00
REPRESENTING THE SAVINGS ACCOUNT DEPOSIT, P50,000.00 FOR MORAL
DAMAGES, P50,000.00 FOR EXEMPLARY DAMAGES, P40,000.00 FOR ATTORNEY’S
FEES AND THE COSTS OF SUIT.11
Private respondent filed his Comment on September 23, 1994. Petitioner filed its Reply thereto
on September 25, 1995. The Court then required private respondent to submit a rejoinder to the
reply. However, said rejoinder was filed only on April 21, 1997, due to petitioner’s delay in
furnishing private respondent with copy of the reply 12 and several substitutions of counsel on the
part of private respondent.13 On January 17, 2001, the Court resolved to give due course to the
petition and required the parties to submit their respective memoranda. 14 Petitioner filed its
memorandum on April 16, 2001 while private respondent submitted his memorandum on March
22, 2001.
Petitioner contends that the transaction between private respondent and Doronilla is a simple
loan (mutuum) since all the elements of a mutuum are present: first, what was delivered by
private respondent to Doronilla was money, a consumable thing; and second, the transaction was
onerous as Doronilla was obliged to pay interest, as evidenced by the check issued by Doronilla
in the amount of ₱212,000.00, or ₱12,000 more than what private respondent deposited in
Sterela’s bank account.15 Moreover, the fact that private respondent sued his good friend Sanchez
for his failure to recover his money from Doronilla shows that the transaction was not merely
gratuitous but "had a business angle" to it. Hence, petitioner argues that it cannot be held liable
for the return of private respondent’s ₱200,000.00 because it is not privy to the transaction
between the latter and Doronilla.16
It argues further that petitioner’s Assistant Manager, Mr. Rufo Atienza, could not be faulted for
allowing Doronilla to withdraw from the savings account of Sterela since the latter was the sole
proprietor of said company. Petitioner asserts that Doronilla’s May 8, 1979 letter addressed to the
bank, authorizing Mrs. Vives and Sanchez to open a savings account for Sterela, did not contain
any authorization for these two to withdraw from said account. Hence, the authority to withdraw
therefrom remained exclusively with Doronilla, who was the sole proprietor of Sterela, and who
alone had legal title to the savings account.17 Petitioner points out that no evidence other than the
testimonies of private respondent and Mrs. Vives was presented during trial to prove that private
respondent deposited his ₱200,000.00 in Sterela’s account for purposes of its
incorporation.18 Hence, petitioner should not be held liable for allowing Doronilla to withdraw
from Sterela’s savings account.1a\^/phi1.net
Petitioner also asserts that the Court of Appeals erred in affirming the trial court’s decision since
the findings of fact therein were not accord with the evidence presented by petitioner during trial
to prove that the transaction between private respondent and Doronilla was a mutuum, and that it
committed no wrong in allowing Doronilla to withdraw from Sterela’s savings account.19
Finally, petitioner claims that since there is no wrongful act or omission on its part, it is not liable
for the actual damages suffered by private respondent, and neither may it be held liable for moral
and exemplary damages as well as attorney’s fees.20
Private respondent, on the other hand, argues that the transaction between him and Doronilla is
not a mutuum but an accommodation, 21 since he did not actually part with the ownership of his
₱200,000.00 and in fact asked his wife to deposit said amount in the account of Sterela so that a
certification can be issued to the effect that Sterela had sufficient funds for purposes of its
incorporation but at the same time, he retained some degree of control over his money through
his wife who was made a signatory to the savings account and in whose possession the savings
account passbook was given.22
He likewise asserts that the trial court did not err in finding that petitioner, Atienza’s employer, is
liable for the return of his money. He insists that Atienza, petitioner’s assistant manager,
connived with Doronilla in defrauding private respondent since it was Atienza who facilitated the
opening of Sterela’s current account three days after Mrs. Vives and Sanchez opened a savings
account with petitioner for said company, as well as the approval of the authority to debit
Sterela’s savings account to cover any overdrawings in its current account.23
There is no merit in the petition.

At the outset, it must be emphasized that only questions of law may be raised in a petition for
review filed with this Court. The Court has repeatedly held that it is not its function to analyze
and weigh all over again the evidence presented by the parties during trial.24 The Court’s
jurisdiction is in principle limited to reviewing errors of law that might have been committed by
the Court of Appeals.25 Moreover, factual findings of courts, when adopted and confirmed by the
Court of Appeals, are final and conclusive on this Court unless these findings are not supported
by the evidence on record.26 There is no showing of any misapprehension of facts on the part of
the Court of Appeals in the case at bar that would require this Court to review and overturn the
factual findings of that court, especially since the conclusions of fact of the Court of Appeals and
the trial court are not only consistent but are also amply supported by the evidence on record.
No error was committed by the Court of Appeals when it ruled that the transaction between
private respondent and Doronilla was a commodatum and not a mutuum. A circumspect
examination of the records reveals that the transaction between them was a commodatum. Article
1933 of the Civil Code distinguishes between the two kinds of loans in this wise:
By the contract of loan, one of the parties delivers to another, either something not consumable
so that the latter may use the same for a certain time and return it, in which case the contract is
called a commodatum; or money or other consumable thing, upon the condition that the same
amount of the same kind and quality shall be paid, in which case the contract is simply called a
loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan,
ownership passes to the borrower.
The foregoing provision seems to imply that if the subject of the contract is a consumable thing,
such as money, the contract would be a mutuum. However, there are some instances where a
commodatum may have for its object a consumable thing. Article 1936 of the Civil Code
provides:
Consumable goods may be the subject of commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for exhibition.
Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of
the parties is to lend consumable goods and to have the very same goods returned at the end of
the period agreed upon, the loan is a commodatum and not a mutuum.
The rule is that the intention of the parties thereto shall be accorded primordial consideration in
determining the actual character of a contract. 27 In case of doubt, the contemporaneous and
subsequent acts of the parties shall be considered in such determination.28
As correctly pointed out by both the Court of Appeals and the trial court, the evidence shows that
private respondent agreed to deposit his money in the savings account of Sterela specifically for
the purpose of making it appear "that said firm had sufficient capitalization for incorporation,
with the promise that the amount shall be returned within thirty (30) days." 29 Private respondent
merely "accommodated" Doronilla by lending his money without consideration, as a favor to his
good friend Sanchez. It was however clear to the parties to the transaction that the money would
not be removed from Sterela’s savings account and would be returned to private respondent after
thirty (30) days.
Doronilla’s attempts to return to private respondent the amount of ₱200,000.00 which the latter
deposited in Sterela’s account together with an additional ₱12,000.00, allegedly representing
interest on the mutuum, did not convert the transaction from a commodatum into a mutuum
because such was not the intent of the parties and because the additional ₱12,000.00 corresponds
to the fruits of the lending of the ₱200,000.00. Article 1935 of the Civil Code expressly states
that "[t]he bailee in commodatum acquires the use of the thing loaned but not its fruits." Hence, it
was only proper for Doronilla to remit to private respondent the interest accruing to the latter’s
money deposited with petitioner.
Neither does the Court agree with petitioner’s contention that it is not solidarily liable for the
return of private respondent’s money because it was not privy to the transaction between
Doronilla and private respondent. The nature of said transaction, that is, whether it is a mutuum
or a commodatum, has no bearing on the question of petitioner’s liability for the return of private
respondent’s money because the factual circumstances of the case clearly show that petitioner,
through its employee Mr. Atienza, was partly responsible for the loss of private respondent’s
money and is liable for its restitution.
Petitioner’s rules for savings deposits written on the passbook it issued Mrs. Vives on behalf of
Sterela for Savings Account No. 10-1567 expressly states that—
"2. Deposits and withdrawals must be made by the depositor personally or upon his written
authority duly authenticated, and neither a deposit nor a withdrawal will be permitted except
upon the production of the depositor savings bank book in which will be entered by the Bank the
amount deposited or withdrawn."30
Said rule notwithstanding, Doronilla was permitted by petitioner, through Atienza, the Assistant
Branch Manager for the Buendia Branch of petitioner, to withdraw therefrom even without
presenting the passbook (which Atienza very well knew was in the possession of Mrs. Vives), not
just once, but several times. Both the Court of Appeals and the trial court found that Atienza
allowed said withdrawals because he was party to Doronilla’s "scheme" of defrauding private
respondent:
XXX
But the scheme could not have been executed successfully without the knowledge, help and
cooperation of Rufo Atienza, assistant manager and cashier of the Makati (Buendia) branch of
the defendant bank. Indeed, the evidence indicates that Atienza had not only facilitated the
commission of the fraud but he likewise helped in devising the means by which it can be done in
such manner as to make it appear that the transaction was in accordance with banking procedure.
To begin with, the deposit was made in defendant’s Buendia branch precisely because Atienza
was a key officer therein. The records show that plaintiff had suggested that the ₱200,000.00 be
deposited in his bank, the Manila Banking Corporation, but Doronilla and Dumagpi insisted that
it must be in defendant’s branch in Makati for "it will be easier for them to get a certification". In
fact before he was introduced to plaintiff, Doronilla had already prepared a letter addressed to the
Buendia branch manager authorizing Angeles B. Sanchez and company to open a savings
account for Sterela in the amount of ₱200,000.00, as "per coordination with Mr. Rufo Atienza,
Assistant Manager of the Bank x x x" (Exh. 1). This is a clear manifestation that the other
defendants had been in consultation with Atienza from the inception of the scheme. Significantly,
there were testimonies and admission that Atienza is the brother-in-law of a certain Romeo
Mirasol, a friend and business associate of Doronilla.1awphi1.nét
Then there is the matter of the ownership of the fund. Because of the "coordination" between
Doronilla and Atienza, the latter knew before hand that the money deposited did not belong to
Doronilla nor to Sterela. Aside from such foreknowledge, he was explicitly told by Inocencia
Vives that the money belonged to her and her husband and the deposit was merely to
accommodate Doronilla. Atienza even declared that the money came from Mrs. Vives.
Although the savings account was in the name of Sterela, the bank records disclose that the only
ones empowered to withdraw the same were Inocencia Vives and Angeles B. Sanchez. In the
signature card pertaining to this account (Exh. J), the authorized signatories were Inocencia
Vives &/or Angeles B. Sanchez. Atienza stated that it is the usual banking procedure that
withdrawals of savings deposits could only be made by persons whose authorized signatures are
in the signature cards on file with the bank. He, however, said that this procedure was not
followed here because Sterela was owned by Doronilla. He explained that Doronilla had the full
authority to withdraw by virtue of such ownership. The Court is not inclined to agree with
Atienza. In the first place, he was all the time aware that the money came from Vives and did not
belong to Sterela. He was also told by Mrs. Vives that they were only accommodating Doronilla
so that a certification can be issued to the effect that Sterela had a deposit of so much amount to
be sued in the incorporation of the firm. In the second place, the signature of Doronilla was not
authorized in so far as that account is concerned inasmuch as he had not signed the signature
card provided by the bank whenever a deposit is opened. In the third place, neither Mrs. Vives
nor Sanchez had given Doronilla the authority to withdraw.
Moreover, the transfer of fund was done without the passbook having been presented. It is an
accepted practice that whenever a withdrawal is made in a savings deposit, the bank requires the
presentation of the passbook. In this case, such recognized practice was dispensed with. The
transfer from the savings account to the current account was without the submission of the
passbook which Atienza had given to Mrs. Vives. Instead, it was made to appear in a certification
signed by Estrella Dumagpi that a duplicate passbook was issued to Sterela because the original
passbook had been surrendered to the Makati branch in view of a loan accommodation assigning
the savings account (Exh. C). Atienza, who undoubtedly had a hand in the execution of this
certification, was aware that the contents of the same are not true. He knew that the passbook
was in the hands of Mrs. Vives for he was the one who gave it to her. Besides, as assistant
manager of the branch and the bank official servicing the savings and current accounts in
question, he also was aware that the original passbook was never surrendered. He was also
cognizant that Estrella Dumagpi was not among those authorized to withdraw so her certification
had no effect whatsoever.
The circumstance surrounding the opening of the current account also demonstrate that Atienza’s
active participation in the perpetration of the fraud and deception that caused the loss. The
records indicate that this account was opened three days later after the ₱200,000.00 was
deposited. In spite of his disclaimer, the Court believes that Atienza was mindful and posted
regarding the opening of the current account considering that Doronilla was all the while in
"coordination" with him. That it was he who facilitated the approval of the authority to debit the
savings account to cover any overdrawings in the current account (Exh. 2) is not hard to
comprehend.
Clearly Atienza had committed wrongful acts that had resulted to the loss subject of this case. x x
x.31
Under Article 2180 of the Civil Code, employers shall be held primarily and solidarily liable for
damages caused by their employees acting within the scope of their assigned tasks. To hold the
employer liable under this provision, it must be shown that an employer-employee relationship
exists, and that the employee was acting within the scope of his assigned task when the act
complained of was committed.32 Case law in the United States of America has it that a
corporation that entrusts a general duty to its employee is responsible to the injured party for
damages flowing from the employee’s wrongful act done in the course of his general authority,
even though in doing such act, the employee may have failed in its duty to the employer and
disobeyed the latter’s instructions.33
There is no dispute that Atienza was an employee of petitioner. Furthermore, petitioner did not
deny that Atienza was acting within the scope of his authority as Assistant Branch Manager when
he assisted Doronilla in withdrawing funds from Sterela’s Savings Account No. 10-1567, in
which account private respondent’s money was deposited, and in transferring the money
withdrawn to Sterela’s Current Account with petitioner. Atienza’s acts of helping Doronilla, a
customer of the petitioner, were obviously done in furtherance of petitioner’s interests 34 even
though in the process, Atienza violated some of petitioner’s rules such as those stipulated in its
savings account passbook.35 It was established that the transfer of funds from Sterela’s savings
account to its current account could not have been accomplished by Doronilla without the
invaluable assistance of Atienza, and that it was their connivance which was the cause of private
respondent’s loss.
The foregoing shows that the Court of Appeals correctly held that under Article 2180 of the Civil
Code, petitioner is liable for private respondent’s loss and is solidarily liable with Doronilla and
Dumagpi for the return of the ₱200,000.00 since it is clear that petitioner failed to prove that it
exercised due diligence to prevent the unauthorized withdrawals from Sterela’s savings account,
and that it was not negligent in the selection and supervision of Atienza. Accordingly, no error
was committed by the appellate court in the award of actual, moral and exemplary damages,
attorney’s fees and costs of suit to private respondent.
WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution of the
Court of Appeals are AFFIRMED.
SO ORDERED.
G.R. No. 97412 July 12, 1994
EASTERN SHIPPING LINES, INC., petitioner,

vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY,
INC., respondents.
Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.
Zapa Law Office for private respondent.
VITUG, J.:
The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a
shipment of goods can be a solidary, or joint and several, liability of the common carrier, the
arrastre operator and the customs broker; (b) whether the payment of legal interest on an award
for loss or damage is to be computed from the time the complaint is filed or from the date the
decision appealed from is rendered; and (c) whether the applicable rate of interest, referred to
above, is twelve percent (12%) or six percent (6%).
The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and
undisputed facts that have led to the controversy are hereunder reproduced:
This is an action against defendants shipping company, arrastre operator and

broker-forwarder for damages sustained by a shipment while in defendants'
custody, filed by the 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, 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 Lading and
Commercial Invoice which do not indicate any damages drum that
was shipped (Exhs. B and C). But when on December 12, 1981 the
shipment was delivered to defendant Metro Port Service, Inc., it
excepted to one drum in bad order.
Correspondingly, as to the second issue, it follows that the

losses/damages were sustained while in the respective and/or
successive custody and possession of defendants carrier (Eastern),
arrastre operator (Metro Port) and broker (Allied Brokerage). This
becomes evident when the Marine Cargo Survey Report (Exh. G),
with its "Additional Survey Notes", are considered. In the latter
notes, it is stated that when the shipment was "landed on vessel" to
dock of Pier # 15, South Harbor, Manila on December 12, 1981, it
was observed that "one (1) fiber drum (was) in damaged condition,
covered by the vessel's Agent's Bad Order Tally Sheet No. 86427."
The report further states that when defendant Allied Brokerage
withdrew the shipment from defendant arrastre operator's custody
on January 7, 1982, one drum was found opened without seal, cello
bag partly torn but contents intact. Net unrecovered spillages was
15 kgs. The report went on to state that when the drums reached
the consignee, one drum was found with adulterated/faked
contents. It is obvious, therefore, that these losses/damages
occurred before the shipment reached the consignee while under
the successive custodies of defendants. Under Art. 1737 of the
New Civil Code, the common carrier's duty to observe
extraordinary diligence in the vigilance of goods remains in full
force and effect even if the goods are temporarily unloaded and
stored in transit in the warehouse of the carrier at the place of
destination, until the consignee has been advised and has had
reasonable opportunity to remove or dispose of the goods (Art.
1738, NCC). Defendant Eastern Shipping's own exhibit, the "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.)
The Court of Appeals thus affirmed in toto the judgment of the court
a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave
abuse of discretion on the part of the appellate court when —
I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE

WITH THE ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE
CLAIM OF PRIVATE RESPONDENT AS GRANTED IN THE QUESTIONED
DECISION;
II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF
PRIVATE RESPONDENT SHOULD COMMENCE FROM THE DATE OF THE
FILING OF THE COMPLAINT AT THE RATE OF TWELVE PERCENT PER
ANNUM INSTEAD OF FROM THE DATE OF THE DECISION OF THE
TRIAL COURT AND ONLY AT THE RATE OF SIX PERCENT PER ANNUM,
PRIVATE RESPONDENT'S CLAIM BEING INDISPUTABLY
UNLIQUIDATED.
The petition is, in part, granted.
In this decision, we have begun by saying that the questions raised by petitioner carrier are not
all that novel. Indeed, we do have a fairly good number of previous decisions this Court can
merely tack to.
The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from
the time the articles are surrendered to or unconditionally placed in the possession of, and
received by, the carrier for transportation until delivered to, or until the lapse of a reasonable time
for their acceptance by, the person entitled to receive them (Arts. 1736-1738, Civil Code;
Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863).
When the goods shipped either are lost or arrive in damaged condition, a presumption arises
against the carrier of its failure to observe that diligence, and there need not be an express finding
of negligence to hold it liable (Art. 1735, Civil Code; Philippine National Railways vs. Court of
Appeals, 139 SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA 365). There are, of
course, exceptional cases when such presumption of fault is not observed but these cases,
enumerated in Article 17341 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:
The early case of Malayan Insurance Co., Inc., vs. Manila Port
Service,2 decided3 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:
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 Court6 ruled:
The judgments spoken of and referred to are judgments in litigations involving

loans or forbearance of any money, goods or credits. Any other kind of monetary
judgment which has nothing to do with, nor involving loans or forbearance of any
money, goods or credits does not fall within the coverage of the said law for it is
not within the ambit of the authority granted to the Central Bank.
xxx xxx xxx
Coming to the case at bar, the decision herein sought to be executed is one
rendered in an Action for Damages for injury to persons and loss of property and
does not involve any loan, much less forbearances of any money, goods or credits.
As correctly argued by the private respondents, the law applicable to the said case
is Article 2209 of the New Civil Code which reads —
Art. 2209. — If the obligation consists in the payment of a sum of
money, and the debtor incurs in delay, the indemnity for damages,
there being no stipulation to the contrary, shall be the payment of
interest agreed upon, and in the absence of stipulation, the legal
interest which is six percent per annum.
The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz,7 promulgated on 28
July 1986. The case was for damages occasioned by an injury to person and loss of property. The
trial court awarded private respondent Pedro Manabat actual and compensatory damages in the
amount of P72,500.00 with legal interest thereon from the filing of the complaint until fully paid.
Relying on the Reformina v. Tomol case, this Court8 modified the interest award from 12% to 6%
interest per annum but sustained the time computation thereof, i.e., from the filing of the
complaint until fully paid.
In Nakpil and Sons vs. Court of Appeals,9 the trial court, in an action for the recovery of damages
arising from the collapse of a building, ordered,
inter alia, the "defendant United Construction Co., Inc. (one of the petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from
November 29, 1968, the date of the filing of the complaint until full payment . . . ." Save from the
modification of the amount granted by the lower court, the Court of Appeals sustained the trial
court's decision. When taken to this Court for review, the case, on 03 October 1986, was decided,
thus:
WHEREFORE, the decision appealed from is hereby MODIFIED and

considering the special and environmental circumstances of this case, we deem it
reasonable to render a decision imposing, as We do hereby impose, upon the
defendant and the third-party defendants (with the exception of Roman Ozaeta) a
solidary (Art. 1723, Civil Code, Supra.
p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION
(P5,000,000.00) Pesos to cover all damages (with the exception to attorney's fees)
occasioned by the loss of the building (including interest charges and lost rentals)
and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for
attorney's fees, the total sum being payable upon the finality of this
decision. Upon failure to pay on such finality, twelve (12%) per cent interest per
annum shall be imposed upon aforementioned amounts from finality until paid.
Solidary costs against the defendant and third-party defendants (Except Roman
Ozaeta). (Emphasis supplied)
A motion for reconsideration was filed by United Construction, contending that "the
interest of twelve (12%) per cent per annum imposed on the total amount of the monetary
award was in contravention of law." The Court10 ruled out the applicability of the
Reformina and Philippine Rabbit Bus Lines cases and, in its resolution of 15 April 1988,
it explained:
There should be no dispute that the imposition of 12% interest pursuant to Central
Bank Circular No. 416 . . . is applicable only in the following: (1) loans; (2)
forbearance of any money, goods or credit; and
(3) rate allowed in judgments (judgments spoken of refer to judgments involving
loans or forbearance of any money, goods or credits. (Philippine Rabbit Bus Lines
Inc. v. Cruz, 143 SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260
[1985]). It is true that in the instant case, there is neither a loan or a forbearance,
but then no interest is actually imposed provided the sums referred to in the
judgment are paid upon the finality of the judgment. It is delay in the payment of
such final judgment, that will cause the imposition of the interest.
It will be noted that in the cases already adverted to, the rate of interest is imposed
on the total sum, from the filing of the complaint until paid; in other words,
as part of the judgment for damages. Clearly, they are not applicable to the instant
case. (Emphasis supplied.)
The subsequent case of American Express International, Inc., vs. Intermediate Appellate
Court11 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 Court12 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. Ruiz13 which arose
from a breach of employment contract. For having been illegally dismissed, the petitioner was
awarded by the trial court moral and exemplary damages without, however, providing any legal
interest thereon. When the decision was appealed to the Court of Appeals, the latter held:
WHEREFORE, except as modified hereinabove the decision of the CFI of Negros

Oriental dated October 31, 1972 is affirmed in all respects, with the modification
that defendants-appellants, except defendant-appellant Merton Munn, are ordered
to pay, jointly and severally, the amounts stated in the dispositive portion of the
decision, including the sum of P1,400.00 in concept of compensatory damages,
with interest at the legal rate from the date of the filing of the complaint until fully
paid(Emphasis supplied.)
The petition for review to this Court was denied. The records were thereupon transmitted
to the trial court, and an entry of judgment was made. The writ of execution issued by the
trial court directed that only compensatory damages should earn interest at 6% per
annum from the date of the filing of the complaint. Ascribing grave abuse of discretion on
the part of the trial judge, a petition for certiorari assailed the said order. This Court said:
. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at
the legal rate" from the time of the filing of the complaint. . . Said circular [Central
Bank Circular No. 416] does not apply to actions based on a breach of
employment contract like the case at bar. (Emphasis supplied)
The Court reiterated that the 6% interest per annum on the damages should be computed
from the time the complaint was filed until the amount is fully paid.
Quite recently, the Court had another occasion to rule on the matter. National Power
Corporation vs. Angas,14decided on 08 May 1992, involved the expropriation of certain parcels
of land. After conducting a hearing on the complaints for eminent domain, the trial court ordered
the petitioner to pay the private respondents certain sums of money as just compensation for their
lands so expropriated "with legal interest thereon . . . until fully paid." Again, in applying the 6%
legal interest per annum under the Civil Code, the Court15 declared:
. . . , (T)he transaction involved is clearly not a loan or forbearance of money,

goods or credits but expropriation of certain parcels of land for a public purpose,
the payment of which is without stipulation regarding interest, and the interest
adjudged by the trial court is in the nature of indemnity for damages. The legal
interest required to be paid on the amount of just compensation for the properties
expropriated is manifestly in the form of indemnity for damages for the delay in
the payment thereof. Therefore, since the kind of interest involved in the joint
judgment of the lower court sought to be enforced in this case is interest by way
of damages, and not by way of earnings from loans, etc. Art. 2209 of the Civil
Code shall apply.
Concededly, there have been seeming variances in the above holdings. The cases can perhaps be
classified into two groups according to the similarity of the issues involved and the
corresponding rulings rendered by the court. The "first group" would consist of the cases
of Reformina v. Tomol (1985), Philippine Rabbit Bus Lines v. Cruz(1986), Florendo
v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second group" would be Malayan
Insurance Company v.Manila Port Service (1969), Nakpil and Sons v. Court of
Appeals (1988), and American Express International v.Intermediate Appellate Court (1988).
In the "first group", the basic issue focuses on the application of either the 6% (under the Civil
Code) or 12% (under the Central Bank Circular) interest per annum. It is easily discernible in
these cases that there has been a consistent holding that the Central Bank Circular imposing the
12% interest per annum applies only to loans or forbearance16 of money, goods or credits, as well
as to judgments involving such loan or forbearance of money, goods or credits, and that the 6%
interest under the Civil Code governs when the transaction involves the payment of indemnities
in the concept of damage arising from the breach or a delay in the performance of obligations in
general. Observe, too, that in these cases, a common time frame in the computation of the 6%
interest per annum has been applied, i.e., from the time the complaint is filed until the adjudged
amount is fully paid.
The "second group", did not alter the pronounced rule on the application of the 6% or 12%
interest per annum,17depending on whether or not the amount involved is a loan or forbearance,
on the one hand, or one of indemnity for damage, on the other hand. Unlike, however, the "first
group" which remained consistent in holding that the running of the legal interest should be from
the time of the filing of the complaint until fully paid, the "second group" varied on the
commencement of the running of the legal interest.
Malayan held that the amount awarded should bear legal interest from the date of the decision of
the court a quo,explaining that "if the suit were for damages, 'unliquidated and not known until
definitely ascertained, assessed and determined by the courts after proof,' then, interest 'should be
from the date of the decision.'" American Express International v. IAC, introduced a different
time frame for reckoning the 6% interest by ordering it to be "computed from the finality of (the)
decision until paid." The Nakpil and Sons case ruled that 12% interest per annum should be
imposed from the finality of the decision until the judgment amount is paid.
The ostensible discord is not difficult to explain. The factual circumstances may have called for
different applications, guided by the rule that the courts are vested with discretion, depending on
the equities of each case, on the award of interest. Nonetheless, it may not be unwise, by way of
clarification and reconciliation, to suggest the following rules of thumb for future guidance.
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts18 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
provisions of Article 116923 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 court24 at the rate of
6% per annum.25 No interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable certainty. 26 Accordingly,
where the demand is established with reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual base
for the computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this interim period being deemed to be
by then an equivalent to a forbearance of credit.
WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the
MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due
computed from the decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX
PERCENT (6%), shall be imposed on such amount upon finality of this decision until the
payment thereof.
SO ORDERED.
G.R. No. 189871 August 13, 2013
DARIO NACAR, PETITIONER,

vs.
GALLERY FRAMES AND/OR FELIPE BORDEY, JR., RESPONDENTS.
DECISION
PERALTA, J.:
This is a petition for review on certiorari assailing the Decision 1 dated September 23, 2008 of the
Court of Appeals (CA) in CA-G.R. SP No. 98591, and the Resolution 2 dated October 9, 2009
denying petitioner’s motion for reconsideration.
The factual antecedents are undisputed.
Petitioner Dario Nacar filed a complaint for constructive dismissal before the Arbitration Branch
of the National Labor Relations Commission (NLRC) against respondents Gallery Frames (GF)
and/or Felipe Bordey, Jr., docketed as NLRC NCR Case No. 01-00519-97.
On October 15, 1998, the Labor Arbiter rendered a Decision3 in favor of petitioner and found
that he was dismissed from employment without a valid or just cause. Thus, petitioner was
awarded backwages and separation pay in lieu of reinstatement in the amount of ₱158,919.92.
The dispositive portion of the decision, reads:
With the foregoing, we find and so rule that respondents failed to discharge the burden of
showing that complainant was dismissed from employment for a just or valid cause. All the
more, it is clear from the records that complainant was never afforded due process before he was
terminated. As such, we are perforce constrained to grant complainant’s prayer for the payments
of separation pay in lieu of reinstatement to his former position, considering the strained
relationship between the parties, and his apparent reluctance to be reinstated, computed only up
to promulgation of this decision as follows:
SEPARATION PAY
Date Hired = August 1990
Rate = ₱198/day
Date of Decision = Aug. 18, 1998
Length of Service = 8 yrs. & 1 month
₱198.00 x 26 days x 8 months = ₱41,184.00
BACKWAGES
Date Dismissed = January 24, 1997
Rate per day = ₱196.00
Date of Decisions = Aug. 18, 1998
a) 1/24/97 to 2/5/98 = 12.36 mos.
₱196.00/day x 12.36 mos. = ₱62,986.56
b) 2/6/98 to 8/18/98 = 6.4 months
Prevailing Rate per day = ₱62,986.00
₱198.00 x 26 days x 6.4 mos. = ₱32,947.20
T O TAL = ₱95.933.76
xxxx
WHEREFORE, premises considered, judgment is hereby rendered finding respondents guilty of

constructive dismissal and are therefore, ordered:
To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred
eighty-six pesos and 56/100 (₱62,986.56) Pesos representing his separation pay;
To pay jointly and severally the complainant the amount of nine (sic) five thousand nine hundred
thirty-three and 36/100 (₱95,933.36) representing his backwages; and
All other claims are hereby dismissed for lack of merit.
SO ORDERED.4
Respondents appealed to the NLRC, but it was dismissed for lack of merit in the
Resolution5 dated February 29, 2000. Accordingly, the NLRC sustained the decision of the Labor
Arbiter. Respondents filed a motion for reconsideration, but it was denied.6
Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On August 24,
2000, the CA issued a Resolution dismissing the petition. Respondents filed a Motion for
Reconsideration, but it was likewise denied in a Resolution dated May 8, 2001.7
Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332. Finding
no reversible error on the part of the CA, this Court denied the petition in the Resolution dated
April 17, 2002.8
An Entry of Judgment was later issued certifying that the resolution became final and executory
on May 27, 2002.9The case was, thereafter, referred back to the Labor Arbiter. A pre-execution
conference was consequently scheduled, but respondents failed to appear.10
On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his
backwages be computed from the date of his dismissal on January 24, 1997 up to the finality of
the Resolution of the Supreme Court on May 27, 2002. 11 Upon recomputation, the Computation
and Examination Unit of the NLRC arrived at an updated amount in the sum of ₱471,320.31.12
On December 2, 2002, a Writ of Execution 13 was issued by the Labor Arbiter ordering the Sheriff
to collect from respondents the total amount of ₱471,320.31. Respondents filed a Motion to
Quash Writ of Execution, arguing, among other things, that since the Labor Arbiter awarded
separation pay of ₱62,986.56 and limited backwages of ₱95,933.36, no more recomputation is
required to be made of the said awards. They claimed that after the decision becomes final and
executory, the same cannot be altered or amended anymore. 14 On January 13, 2003, the Labor
Arbiter issued an Order15 denying the motion. Thus, an Alias Writ of Execution 16 was issued on
January 14, 2003.
Respondents again appealed before the NLRC, which on June 30, 2003 issued a
Resolution17 granting the appeal in favor of the respondents and ordered the recomputation of the
judgment award.
On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the NLRC to
be final and executory. Consequently, another pre-execution conference was held, but
respondents failed to appear on time. Meanwhile, petitioner moved that an Alias Writ of
Execution be issued to enforce the earlier recomputed judgment award in the sum of
₱471,320.31.18
The records of the case were again forwarded to the Computation and Examination Unit for
recomputation, where the judgment award of petitioner was reassessed to be in the total amount
of only ₱147,560.19.
Petitioner then moved that a writ of execution be issued ordering respondents to pay him the
original amount as determined by the Labor Arbiter in his Decision dated October 15, 1998,
pending the final computation of his backwages and separation pay.
On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the judgment
award that was due to petitioner in the amount of ₱147,560.19, which petitioner eventually
received.
Petitioner then filed a Manifestation and Motion praying for the re-computation of the monetary
award to include the appropriate interests.19
On May 10, 2005, the Labor Arbiter issued an Order 20 granting the motion, but only up to the
amount of ₱11,459.73. The Labor Arbiter reasoned that it is the October 15, 1998 Decision that
should be enforced considering that it was the one that became final and executory. However, the
Labor Arbiter reasoned that since the decision states that the separation pay and backwages are
computed only up to the promulgation of the said decision, it is the amount of ₱158,919.92 that
should be executed. Thus, since petitioner already received ₱147,560.19, he is only entitled to
the balance of ₱11,459.73.
Petitioner then appealed before the NLRC, 21 which appeal was denied by the NLRC in its
Resolution22 dated September 27, 2006. Petitioner filed a Motion for Reconsideration, but it was
likewise denied in the Resolution23dated January 31, 2007.
Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No. 98591.
On September 23, 2008, the CA rendered a Decision 24 denying the petition. The CA opined that
since petitioner no longer appealed the October 15, 1998 Decision of the Labor Arbiter, which
already became final and executory, a belated correction thereof is no longer allowed. The CA
stated that there is nothing left to be done except to enforce the said judgment. Consequently, it
can no longer be modified in any respect, except to correct clerical errors or mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution 25 dated October
9, 2009.
Hence, the petition assigning the lone error:
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED,

COMMITTED GRAVE ABUSE OF DISCRETION AND DECIDED CONTRARY TO LAW IN
UPHOLDING THE QUESTIONED RESOLUTIONS OF THE NLRC WHICH, IN TURN,
SUSTAINED THE MAY 10, 2005 ORDER OF LABOR ARBITER MAGAT MAKING THE
DISPOSITIVE PORTION OF THE OCTOBER 15, 1998 DECISION OF LABOR ARBITER
LUSTRIA SUBSERVIENT TO AN OPINION EXPRESSED IN THE BODY OF THE SAME
DECISION.26
Petitioner argues that notwithstanding the fact that there was a computation of backwages in the
Labor Arbiter’s decision, the same is not final until reinstatement is made or until finality of the
decision, in case of an award of separation pay. Petitioner maintains that considering that the
October 15, 1998 decision of the Labor Arbiter did not become final and executory until the
April 17, 2002 Resolution of the Supreme Court in G.R. No. 151332 was entered in the Book of
Entries on May 27, 2002, the reckoning point for the computation of the backwages and
separation pay should be on May 27, 2002 and not when the decision of the Labor Arbiter was
rendered on October 15, 1998. Further, petitioner posits that he is also entitled to the payment of
interest from the finality of the decision until full payment by the respondents.
On their part, respondents assert that since only separation pay and limited backwages were
awarded to petitioner by the October 15, 1998 decision of the Labor Arbiter, no more
recomputation is required to be made of said awards. Respondents insist that since the decision
clearly stated that the separation pay and backwages are "computed only up to [the]
promulgation of this decision," and considering that petitioner no longer appealed the decision,
petitioner is only entitled to the award as computed by the Labor Arbiter in the total amount of
₱158,919.92. Respondents added that it was only during the execution proceedings that the
petitioner questioned the award, long after the decision had become final and executory.
Respondents contend that to allow the further recomputation of the backwages to be awarded to
petitioner at this point of the proceedings would substantially vary the decision of the Labor
Arbiter as it violates the rule on immutability of judgments.
The petition is meritorious.
The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v. Court of
Appeals (Sixth Division),27 wherein the issue submitted to the Court for resolution was the
propriety of the computation of the awards made, and whether this violated the principle of
immutability of judgment. Like in the present case, it was a distinct feature of the judgment of
the Labor Arbiter in the above-cited case that the decision already provided for the computation
of the payable separation pay and backwages due and did not further order the computation of
the monetary awards up to the time of the finality of the judgment. Also in Session Delights, the
dismissed employee failed to appeal the decision of the labor arbiter. The Court clarified, thus:
In concrete terms, the question is whether a re-computation in the course of execution of the
labor arbiter's original computation of the awards made, pegged as of the time the decision was
rendered and confirmed with modification by a final CA decision, is legally proper. The question
is posed, given that the petitioner did not immediately pay the awards stated in the original labor
arbiter's decision; it delayed payment because it continued with the litigation until final judgment
at the CA level.
A source of misunderstanding in implementing the final decision in this case proceeds from the
way the original labor arbiter framed his decision. The decision consists essentially of two parts.
The first is that part of the decision that cannot now be disputed because it has been confirmed
with finality. This is the finding of the illegality of the dismissal and the awards of separation pay
in lieu of reinstatement, backwages, attorney's fees, and legal interests.
The second part is the computation of the awards made. On its face, the computation the labor
arbiter made shows that it was time-bound as can be seen from the figures used in the
computation. This part, being merely a computation of what the first part of the decision
established and declared, can, by its nature, be re-computed. This is the part, too, that the
petitioner now posits should no longer be re-computed because the computation is already in the
labor arbiter's decision that the CA had affirmed. The public and private respondents, on the
other hand, posit that a re-computation is necessary because the relief in an illegal dismissal
decision goes all the way up to reinstatement if reinstatement is to be made, or up to the finality
of the decision, if separation pay is to be given in lieu reinstatement.
That the labor arbiter's decision, at the same time that it found that an illegal dismissal had taken
place, also made a computation of the award, is understandable in light of Section 3, Rule VIII of
the then NLRC Rules of Procedure which requires that a computation be made. This Section in
part states:
[T]he Labor Arbiter of origin, in cases involving monetary awards and at all events, as far as
practicable, shall embody in any such decision or order the detailed and full amount awarded.
Clearly implied from this original computation is its currency up to the finality of the labor
arbiter's decision. As we noted above, this implication is apparent from the terms of the
computation itself, and no question would have arisen had the parties terminated the case and
implemented the decision at that point.
However, the petitioner disagreed with the labor arbiter's findings on all counts - i.e., on the
finding of illegality as well as on all the consequent awards made. Hence, the petitioner appealed
the case to the NLRC which, in turn, affirmed the labor arbiter's decision. By law, the NLRC
decision is final, reviewable only by the CA on jurisdictional grounds.
The petitioner appropriately sought to nullify the NLRC decision on jurisdictional grounds
through a timely filed Rule 65 petition for certiorari. The CA decision, finding that NLRC
exceeded its authority in affirming the payment of 13th month pay and indemnity, lapsed to
finality and was subsequently returned to the labor arbiter of origin for execution.
It was at this point that the present case arose. Focusing on the core illegal dismissal portion of
the original labor arbiter's decision, the implementing labor arbiter ordered the award re-
computed; he apparently read the figures originally ordered to be paid to be the computation due
had the case been terminated and implemented at the labor arbiter's level. Thus, the labor arbiter
re-computed the award to include the separation pay and the backwages due up to the finality of
the CA decision that fully terminated the case on the merits. Unfortunately, the labor arbiter's
approved computation went beyond the finality of the CA decision (July 29, 2003) and included
as well the payment for awards the final CA decision had deleted - specifically, the proportionate
13th month pay and the indemnity awards. Hence, the CA issued the decision now questioned in
the present petition.
We see no error in the CA decision confirming that a re-computation is necessary as it essentially

considered the labor arbiter's original decision in accordance with its basic component parts as
we discussed above. To reiterate, the first part contains the finding of illegality and its monetary
consequences; the second part is the computation of the awards or monetary consequences of the
illegal dismissal, computed as of the time of the labor arbiter's original decision.28
Consequently, from the above disquisitions, under the terms of the decision which is sought to be
executed by the petitioner, no essential change is made by a recomputation as this step is a
necessary consequence that flows from the nature of the illegality of dismissal declared by the
Labor Arbiter in that decision.29 A recomputation (or an original computation, if no previous
computation has been made) is a part of the law – specifically, Article 279 of the Labor Code and
the established jurisprudence on this provision – that is read into the decision. By the nature of an
illegal dismissal case, the reliefs continue to add up until full satisfaction, as expressed under
Article 279 of the Labor Code. The recomputation of the consequences of illegal dismissal upon
execution of the decision does not constitute an alteration or amendment of the final decision
being implemented. The illegal dismissal ruling stands; only the computation of monetary
consequences of this dismissal is affected, and this is not a violation of the principle of
immutability of final judgments.30
That the amount respondents shall now pay has greatly increased is a consequence that it cannot
avoid as it is the risk that it ran when it continued to seek recourses against the Labor Arbiter's
decision. Article 279 provides for the consequences of illegal dismissal in no uncertain terms,
qualified only by jurisprudence in its interpretation of when separation pay in lieu of
reinstatement is allowed. When that happens, the finality of the illegal dismissal decision
becomes the reckoning point instead of the reinstatement that the law decrees. In allowing
separation pay, the final decision effectively declares that the employment relationship ended so
that separation pay and backwages are to be computed up to that point.31
Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines, Inc.
v. Court of Appeals,32 the Court laid down the guidelines regarding the manner of computing
legal interest, to wit:
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e.,
a loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be
12% per annum to be computed from default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an

interest on the amount of damages awarded may be imposed at the discretion of the court
at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated
claims or damages except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with reasonable certainty, the
interest shall begin to run from the time the claim is made judicially or extrajudicially
(Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at
the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be
deemed to have been reasonably ascertained). The actual base for the computation of
legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph
2, above, shall be 12% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance of credit.33
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its
Resolution No. 796 dated May 16, 2013, approved the amendment of Section 234 of Circular No.
905, Series of 1982 and, accordingly, issued Circular No. 799, 35 Series of 2013, effective July 1,
2013, the pertinent portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following
revisions governing the rate of interest in the absence of stipulation in loan contracts, thereby
amending Section 2 of Circular No. 905, Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the
rate allowed in judgments, in the absence of an express contract as to such rate of interest, shall
be six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.136 of the Manual of Regulations for Banks and
Sections 4305Q.1,37 4305S.338 and 4303P.139 of the Manual of Regulations for Non-Bank
Financial Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that
would govern the parties, the rate of legal interest for loans or forbearance of any money, goods
or credits and the rate allowed in judgments shall no longer be twelve percent (12%) per annum -
as reflected in the case of Eastern Shipping Lines 40and Subsection X305.1 of the Manual of
Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations
for Non-Bank Financial Institutions, before its amendment by BSP-MB Circular No. 799 - but
will now be six percent (6%) per annum effective July 1, 2013. It should be noted, nonetheless,
that the new rate could only be applied prospectively and not retroactively. Consequently, the
twelve percent (12%) per annum legal interest shall apply only until June 30, 2013. Come July 1,
2013 the new rate of six percent (6%) per annum shall be the prevailing rate of interest when
applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B. Olaguer v.
Bangko Sentral Monetary Board,41 this Court affirmed the authority of the BSP-MB to set
interest rates and to issue and enforce Circulars when it ruled that "the BSP-MB may prescribe
the maximum rate or rates of interest for all loans or renewals thereof or the forbearance of any
money, goods or credits, including those for loans of low priority such as consumer loans, as
well as such loans made by pawnshops, finance companies and similar credit institutions. It even
authorizes the BSP-MB to prescribe different maximum rate or rates for different types of
borrowings, including deposits and deposit substitutes, or loans of financial intermediaries."
Nonetheless, with regard to those judgments that have become final and executory prior to July
1, 2013, said judgments shall not be disturbed and shall continue to be implemented applying the
rate of interest fixed therein.1awp++i1
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping
Lines42 are accordingly modified to embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts
or quasi-delicts is breached, the contravenor can be held liable for damages. The
provisions under Title XVIII on "Damages" of the Civil Code govern in determining the
measure of recoverable damages.1âwphi1
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as
follows:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be
provisions of Article 1169 of the Civil Code.
When an obligation, not constituting a loan or forbearance of money, is breached, an interest on

the amount of damages awarded may be imposed at the discretion of the court at the rate of 6%
per annum. No interest, however, shall be adjudged on unliquidated claims or damages, except
when or until the demand can be established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty
cannot be so reasonably established at the time the demand is made, the interest shall begin to
run only from the date the judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally adjudged.
When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July 1,
2013, shall not be disturbed and shall continue to be implemented applying the rate of interest
fixed therein.
WHEREFORE, premises considered, the Decision dated September 23, 2008 of the Court of
Appeals in CA-G.R. SP No. 98591, and the Resolution dated October 9, 2009 are REVERSED
and SET ASIDE. Respondents are Ordered to Pay petitioner:
(1) backwages computed from the time petitioner was illegally dismissed on January 24,
1997 up to May 27, 2002, when the Resolution of this Court in G.R. No. 151332 became
final and executory;
(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one
month pay per year of service; and
(3) interest of twelve percent (12%) per annum of the total monetary awards, computed
from May 27, 2002 to June 30, 2013 and six percent (6%) per annum from July 1, 2013
until their full satisfaction.
The Labor Arbiter is hereby ORDERED to make another recomputation of the total monetary
benefits awarded and due to petitioner in accordance with this Decision.
SO ORDERED.
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:
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, 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.
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.
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 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 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 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. Navarro8 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
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:
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.
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 ordinary fairness and decency under the due process
clause of the Constitution. 11
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.
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.
G.R. No. 192934, June 27, 2018
SECURITY BANK CORPORATION, Petitioner, v. SPOUSES RODRIGO AND ERLINDA

MERCADO, Respondents.
G.R. No. 197010, June 27, 2018
SPOUSES RODRIGO AND ERLINDA MERCADO, Petitioner, v. SECURITY BANK AND

TRUST COMPANY, Respondent.
DECISION
JARDELEZA, J.:
These are consolidated petitions1 seeking to nullify the Court of Appeals' (CA) July 19, 2010
Decision2and May 2, 2011 Resolution3 in CA-G.R. CV No. 90031. The CA modified the
February 26, 2007 Decision,4 as amended by the June 19, 2007 Amendatory Order 5 (Amended
Decision), of Branch 84, Regional Trial Court (RTC), Batangas City in the consolidated cases of
Civil Case No. 5808 and LRC Case No. N-1685. The RTC nullified the extrajudicial foreclosure
sales over petitioners-spouses Rodrigo and Erlinda Mercado's (spouses Mercado) properties, and
the interest rates imposed by petitioner Security Bank Corporation (Security Bank).
On September 13, 1996, Security Bank granted spouses Mercado a revolving credit line in the
amount of P1,000,000.00.6 The terms and conditions of the revolving credit line agreement
included the following stipulations:
7. Interest on Availments – I hereby agree to pay Security Bank interest on outstanding

Availments at a per annum rate determined from time to time, by Security Bank and advised
through my Statement of Account every month. I hereby agree that the basis for the
determination of the interest rate by Security Bank on my outstanding Availments will be
Security Bank's prevailing lending rate at the date of availment. I understand that the interest on
each availment will be computed daily from date of availment until paid.
xxxx
17. Late Payment Charges – If my account is delinquent, I agree to pay Security Bank the
payment penalty of 2% per month computed on the amount due and unpaid or in excess of my
Credit Limit.7
On the other hand, the addendum to the revolving credit line agreement further provided that:
I hereby agree to pay Security Bank Corporation (SBC) interest on outstanding availments based
on annual rate computed and billed monthly by SBC on the basis of its prevailing monthly rate.
It is understood that the annual rate shall in no case exceed the total monthly prevailing rate as
computed by SBC. I hereby give my continuing consent without need of additional confirmation
to the interests stipulated as computed by SBC. The interests shall be due on the first day of
every month after date of availment. x x x8
To secure the credit line, the spouses Mercado executed a Real Estate Mortgage 9 in favor of
Security Bank on July 3, 1996 over their properties covered by Transfer Certificate of Title
(TCT) No. T-103519 (located in Lipa City, Batangas), and TCT No. T-89822 (located in San
Jose, Batangas).10 On September 13, 1996, the spouses Mercado executed another Real Estate
Mortgage11 in favor of Security Bank this time over their properties located in Batangas City,
Batangas covered by TCT Nos. T-33150, T-34288, and T-34289 to secure an additional amount
of P7,000,000.00 under the same revolving credit agreement.
Subsequently, the spouses Mercado defaulted in their payment under the revolving credit line
agreement. Security Bank requested the spouses Mercado to update their account, and sent a
final demand letter on March 31, 1999.12 Thereafter, it filed a petition for extrajudicial
foreclosure pursuant to Act No. 3135,13 as amended, with the Office of the Clerk of Court
and Ex-Officio Sheriff of the RTC of Lipa City with respect to the parcel of land situated in Lipa
City. Security Bank likewise filed a similar petition with the Office of the Clerk of Court and Ex-
Officio Sheriff of the RTC of Batangas City with respect to the parcels of land located in San
Jose, Batangas and Batangas City.14
The respective notices of the foreclosure sales of the properties were published in newspapers of
general circulation once a week for three consecutive weeks as required by Act No. 3135, as
amended. However, the publication of the notices of the foreclosure of the properties in Batangas
City and San Jose, Batangas contained errors with respect to their technical description. Security
Bank caused the publication of an erratum in a newspaper to correct these errors. The corrections
consist of the following: (1) TCT No. 33150 – "Lot 952-C-1" to "Lot 952-C-1-B;" and (2) TCT
No. 89822 – "Lot 1931 Cadm- 164-D" to "Lot 1931 Cadm 464-D." The erratum was published
only once, and did not correct the lack of indication of location in both cases.15
On October 19, 1999, the foreclosure sale of the parcel of land in Lipa City, Batangas was held
wherein Security Bank was adjudged as the winning bidder. The Certificate of Sale 16 over it was
issued on November 3, 1999. A similar foreclosure sale was conducted over the parcels of land in
Batangas City and San Jose, Batangas where Security Bank was likewise adjudged as the
winning bidder. The Certificate of Sale17 over these properties was issued on October 29, 1999.
Both Certificates of Sale were registered, respectively, with the Registry of Deeds of Lipa City
on November 11, 1999 and the Registry of Deeds of Batangas City on November 17, 1999.18
On September 18, 2000, the spouses Mercado offered to redeem the foreclosed properties for
P10,000,000.00. However, Security Bank allegedly refused the offer and made a counter-offer in
the amount of P15,000,000.00.19
On November 8, 2000, the spouses Mercado filed a complaint for annulment of foreclosure sale,
damages, injunction, specific performance, and accounting with application for temporary
restraining order and/or preliminary injunction20 with the RTC of Batangas City, docketed as
Civil Case No. 5808 and eventually assigned to Branch 84. 21 In the complaint, the spouses
Mercado averred that: (1) the parcel of land in San Jose, Batangas should not have been
foreclosed together with the properties in Batangas City because they are covered by separate
real estate mortgages; (2) the requirements of posting and publication of the notice under Act No.
3135, as amended, were not complied with; (3) Security Bank acted arbitrarily in disallowing the
redemption of the foreclosed properties for P10,000,000.00; (4) the total price for all of the
parcels of land only amounted to P4723,620.00; and (5) the interests and the penalties imposed
by Security Bank on their obligations were iniquitous and unconscionable.22
Meanwhile, Security Bank, after having consolidated its titles to the foreclosed parcels of land,
filed an ex-parte petition for issuance of a writ of possession23 over the parcels of land located in
Batangas City and San Jose, Batangas with the RTC of Batangas City on June 9, 2005. The case
was docketed as LRC Case No. N-1685 and subsequently raffled to Branch 84 where Civil Case
No. 5808 was pending.24
Thereafter, the two cases were consolidated before Branch 84 of the RTC of Batangas City.
In its February 26, 2007 Decision,25 the RTC declared that: (1) the foreclosure sales of the five
parcels of land void; (2) the interest rates contained in the revolving credit line agreement void
for being potestative or solely based on the will of Security Bank; and (3) thesum of
P8,000,000.00 as the true and correct obligation of the spouses Mercado to Security Bank.26
The RTC declared the foreclosure sales void because "[t]he act of making only one corrective
publication x x x is a fatal omission committed by the mortgagee bank." 27 It also found merit in
the spouses Mercado's contention that the parcel of land in San Jose, Batangas and the three
parcels of land in Batangas City should not be lumped together in a single foreclosure sale. Not
only does it make the redemption onerous, it further violates Sections 1 and 5 of Act No. 3135
which do not envision and permit a single sale of more than one real estate mortgage separately
constituted. The notice of sale itself is also defective because the act of making only one
corrective publication is fatal.28
The RTC also ruled that the stipulation as to the interest rate on the availments under the
revolving credit line agreement "where the fixing of the interest rate is the sole prerogative of the
creditor/mortgagee, belongs to the class of potestatiye condition which is null and void under
[Article] 1308 of the New Civil [C]ode."29 It also violates Central Bank Circular No. 1191 which
requires the interest rate for each re-pricing period to be subject to a mutual agreement between
the borrower and bank. As such, no interest has been expressly stipulated in writing as required
under Article 1956 of the New Civil Code. 30 The RTC ruled that since the spouses Mercado
offered to pay the higher amount of P10,000,000.00 and the bank unjustifiably refused to accept
it, no interest shall be due and demandable after the offer.31
Security Bank moved for reconsideration of the RTCs Decision, claiming that the trial court: ( 1)
does not have jurisdiction over the parcels of land in Lipa City, Batangas; and (2) erred in
limiting the obligation to only P8,000,000.00.32
The RTC modified its Decision in an Amendatory Order 33 dated June 19, 2007 where it declared
that: (1) only the foreclosure sales of the parcels of land in Batangas City and San Jose, Batangas
are void as it has no jurisdiction over the properties in Lipa City, Batangas; (2) the obligation of
the spouses Mercado is P7,500,000.00, after deducting P500,000.00 from the principal loan of
P1,000,000.00; and (3) as "cost of money," the obligation shall bear the interest at the rate of 6%
from the time of date of the Amendatory Order until fully paid.34
The CA, on appeal, affirmed with modifications the RTC Amended Decision. It agreed that the
error in the technical description of the property rendered the notice of foreclosure sale defective.
Security Bank's subsequent single publication of an erratum will not cure the defective notice; it
is as if no valid publication of the notice of the foreclosure sale was made. 35 The CA also
concluded that the provisos giving Security Bank the sole discretion to determine the annual
interest rate is violative of the principle of mutuality of contracts because there is no reference
rate from which to peg the annual interest rate to be imposed.36
The CA, however, disagreed with the trial court's findings as to the amount of the outstanding
obligation, the imposition of interest, and the penalty. As to the principal amount of the
obligation and the legal interest, it noted that the liability of the spouses Mercado from Security
Bank is P7,516,880.00 or the principal obligation of P8,000,000.00 less the amount of
P483,120.00 for which the Lipa City property has been sold.37 It also modified the legal interest
rate imposed from 6% to 12% from the date of extrajudicial demand, i.e., March 31,
1999.38 Lastly, it imposed the stipulated 2% monthly penalty under the revolving credit line
agreement.39 Thus:
WHEREFORE, in view of the foregoing premises, the instant appeal is hereby PARTIALLY
GRANTED. Accordingly, the assailed Decision dated February 26, 2007 and the Amendatory
Order dated June 19, 2007 are hereby MODIFIED. [Spouses Mercado] are hereby ordered to
pay [Security Bank] the sum of Seven Million Five Hundred Sixteen Thousand Eight Hundred
Eighty Pesos (P7,516,880.00) with interest at the rate of twelve percent (12%) per annum from
March 30, 1999, the date of extrajudicial demand, until fully paid. [Spouses Mercado] are further
ordered to pay the stipulated penalty of two percent (2%) per month on the amount due in favor
of Security Bank. The award of attorney's fees in favor of [spouses Mercado] is hereby deleted
for lack of merit. All other dispositions of the trial court are hereby AFFIRMED.40
Hence, these consolidated petitions.
Security Bank argues that the CA erred in declaring: (1) the foreclosure sale invalid; and (2) the
provisions on interest rate violative of the principle of mutuality of contracts. First, the
foreclosure sale is valid because Security Bank complied with the publication requirements of
Act No. 3135, as amended. The mistake in the original notice is inconsequential or minor since it
only pertains to a letter and number in the technical description without actually affecting the
actual size, location, and/or description or title number of the property. 41 It invokes Office of the
Court Administrator (OCA) Circular No. 1442 issued on May 29, 1984 governing the format of
sale which allegedly does not require that the complete technical description of the property be
published.43Second, Security Bank insists that the provision on the interest rate observed the
principle of mutuality of contracts. Absolute discretion on its part is wanting because a ceiling on
the maximum applicable rate is found in the addendum. It is the market forces that dictate and
establish the rate of interest to be applied and takes into account various factors such as but not
limited to, Singapore Rate, London Rate, Inter-Bank Rate which serve as reference rates. This is
acceptable, as held in Polotan, Sr. v. Court of Appeals (Eleventh Division).44 Further, the spouses
Mercado are bound by the rate because they were aware of, and had freely and voluntarily
assented to it.45
The spouses Mercado on the other hand, claim that the CA erred in imposing interest and penalty
from the date of extrajudicial demand until finality of the Decision. Under the doctrine of
operative facts laid down in Spouses Caraig v. Alday46 and Andal v. Philippine National
Bank,47 the interest and penalty were considered paid by the auction sale. 48 As such, interest
should only run from the finality of this Decision. They also assert that they should be excused
from paying the penalty because of economic crises, and their lack of bad faith in this case.49
Initially, we denied the spouses Mercado’s petition (G.R. No. 197010) in our Resolution 50 dated
July 27, 2011. Upon the spouses Mercado's motion for reconsideration,51 were reinstated the
petition on April 18, 2012.52
The following issues are presented for this Court's resolution:
I. Whether the foreclosure sales of the parcels of land in Batangas City and San Jose,
Batangas are valid.
II. Whether the provisions on interest rate in the revolving credit line agreement and its
addendum are void for being violative of the principle of mutuality of contracts.
III. Whether interest and penalty are due and demandable from date of auction sale until
finality of the judgment declaring the foreclosure void under the doctrine of operative
facts.
We deny the petitions.

I
The foreclosure sales of the properties in Batangas City and San Jose, Batangas are void for
non-compliance with the publication requirement of the notice of sale.
Act No. 3135, as amended, provides for the statutory requirements for a valid extrajudicial
foreclosure sale. Among the requisites is a valid notice of sale. Section 3, as amended, requires
that when the value of the property reaches a threshold, the notice of sale must be published once
a week for at least three consecutive weeks in a newspaper of general circulation:
Sec. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at
least three public places of the municipality or city where the property is situated, and if such
property is worth more than four hundred pesos, such notice shall also be published once a
week for at least three consecutive weeks in a newspaper of general circulation in the
municipality or city. (Emphasis supplied.)
We have time and again underscored the importance of the notice of sale and its publication.
Publication of the notice is required "to give the x x x foreclosure sale a reasonably wide
publicity such that those interested might attend the public sale." 53 It gives as much advertising to
the sale as possible in order to secure bidders and prevent a sacrifice of the property. We
reiterated this in Caubang v. Crisologo54where we said:
The principal object of a notice of sale in a foreclosure of mortgage is not so much to notify the
mortgagor as to inform the public generally of the nature and condition of the property to be
sold, and of the time, place, and terms of the sale. Notices are given to secure bidders and
prevent a sacrifice of the property. Therefore, statutory provisions governing publication of
notice of mortgage foreclosure sales must be strictly complied with and slight deviations
therefrom will invalidate the notice and render the sale, at the very least, voidable. Certainly, the
statutory requirements of posting and publication are mandated and imbued with public policy
considerations. Failure to advertise a mortgage foreclosure sale in compliance with the statutory
requirements constitutes a jurisdictional defect, and any substantial error in a notice of sale will
render the notice insufficient and will consequently vitiate the sale.55 (Citation omitted.)
Failure to advertise a mortgage foreclosure sale in compliance with statutory requirements

constitutes a jurisdictional defect which invalidates the sale. 56 This jurisdictional requirement
may not be waived by the parties; to allow them to do so would convert the required public sale
into a private sale.57 Thus, the statutory provisions governing publication of notice of mortgage
foreclosure sale must be strictly complied with and that even slight deviations therefrom will
invalidate the notice and render the sale at least voidable.58
To demonstrate the strictness of the rule, we have invalidated foreclosure sales for lighter
reasons. In one case,59 we declared a foreclosure sale void for failing to comply with the
requirement that the notice shall be published once a week for at least three consecutive weeks.
There, although the notice was published three times, the second publication of the notice was
done on the first day of the third week, and not within the period for the second week.60
Nevertheless, the validity of a notice of sale is not affected by immaterial errors. 61 Only a
substantial error or omission in a notice of sale will render the notice insufficient and vitiate the
sale.62 An error is substantial if it will deter or mislead bidders, depreciate the value of the
property or prevent it from bringing a fair price.63
In this case, the errors in the notice consist of: (1) TCT No. T-33150- "Lot 952-C-1" which
should be "Lot 952-C-1-B;" (2) TCT No. T-89822 "Lot 1931, Cadm- 164-D" which should be
"Lot 1931 Cadm 464-D;''64and (3) the omission of the location.65 While the errors seem
inconsequential, they in fact constitute data important to prospective bidders when they decide
whether to acquire any of the lots announced to be auctioned. First, the published notice
misidentified the identity of the properties. Since the lot numbers are misstated, the notice
effectively identified lots other than the ones sought to be sold. Second, the published notice
omitted the exact locations of the properties. As a result, prospective buyers are left completely
unaware of the type of neighborhood and conforming areas they may consider buying into. With
the properties misidentified and their locations omitted, the properties' sizes and ultimately, the
determination of their probable market prices, are consequently compromised. The errors are of
such nature that they will significantly affect the public's decision on whether to participate in the
public auction. We find that the errors can deter or mislead bidders, depreciate the value of the
properties or prevent the process from fetching a fair price.
Our ruling finds support in San Jose v. Court of Appeals66 where we nullified a foreclosure sale
on the ground that the notice did not contain the correct number of the TCT of the property to be
sold. We rejected the contention of the mortgagee-creditor that prospective bidders may still rely
on the technical description because it was accurate. We held that the notice must contain the
correct title number and technical description of the property to be sold:
The Notice of Sheriff[']s Sale in this case, did not state the correct number of the transfer
certificate of title of the property to be sold. This is a substantial and fatal error which resulted in
invalidating the entire Notice. That the correct technical description appeared on the Notice does
not constitute substantial compliance with the statutory requirements. The purpose of the
publication of the Notice of Sheriff[']s Sale is to inform all interested parties of the date, time and
place of the foreclosure sale of the real property subject thereof. Logically, this not only requires
that the correct date, time and place of the foreclosure sale appear in the notice but also that any
and all interested parties be able to determine that what is about to be sold at the foreclosure sale
is the real property in which they have an interest.
The Court is not unaware of the fact that the majority of the population do not have the necessary
knowledge to be able to understand the technical descriptions in certificates of title. It is to be
noted and stressed that the Notice is not meant only for individuals with the training to
understand technical descriptions of property but also for the layman with an interest in the
property to be sold, who normally relies on the number of the certificate of title. To hold that the
publication of the correct technical description, with an incorrect title number, of the property to
be sold constitutes substantial compliance would certainly defeat the purpose of the Notice. This
is not to say that a correct statement of the title number but with an incorrect technical
description in the notice of sale constitutes a valid notice of sale. The Notice of Sheriff[']s Sale,
to be valid, must contain the correcttitle number and the correct technical description of the
property to be sold.67(Emphasis supplied.)
We do not agree with Security Bank's reliance on OCA Circular No. 14 (s. 1984). While it is true
that the circular does not require the full technical description of the properties, it still requires
the inclusion of the salient portions such as the lot number of the property and its boundaries. 68 In
any case, what is apparent is that Security Bank published incorrect data in the notice that could
bring about confusion to prospective bidders. In fact, their subsequent publication of an erratum
is recognition that the error is significant enough to bring about confusion as to the identity,
location, and size of the properties.
The publication of a single erratum, however, does not cure the defect. As correctly pointed out
by the RTC, "[t]he act of making only one corrective publication in the publication requirement,
instead of three (3) corrections is a fatal omission committed by the mortgagee bank." 69 To
reiterate, the published notices that contain fatal errors are nullities. Thus, the erratum is
considered as a new notice that is subject to the publication requirement for once a week for at
least three consecutive weeks in a newspaper of general circulation in the municipality or city
where the property is located. Here, however, it was published only once.
While there are cases where we upheld foreclosure sales on the ground that the mortgagor-
debtor's act of redeeming the property amounts to estoppel, we cannot apply this equitable
principle here. For one, Security Bank never raised the issue in its pleadings. Defenses and
objections that are not pleaded in the answer or motion to dismiss are deemed waived. 70 Second,
estoppel is a mere principle in equity. We cannot grant estoppel for the reason that Security Bank
itself denies that the spouses Mercado offered to redeem the Batangas properties. 71 Thus, the
element of reliance is absent.
II
The interest rate provisions in the parties' agreement violate the principle of mutuality of
contracts.
a.
The principle of mutuality of contracts is found in Article 1308 of the New Civil Code, which
states that contracts must bind both contracting parties, and its validity or compliance cannot be
left to the will of one of them. The binding effect of any agreement between parties to a contract
is premised on two settled principles: (I) 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.72 As such, 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. Likewise, any stipulation regarding
the validity or compliance of the contract that is potestative or is left solely to the will of one of
the parties is invalid.73 This holds true not only as to the original terms of the contract but also to
its modifications. Consequently, any change in a contract must be made with the consent of the
contracting parties, and must be mutually agreed upon. Otherwise, it has no binding effect.74
Stipulations as to the payment of interest are subject to the principle of mutuality of contracts. As
a principal condition and an important component in contracts of loan, 75 interest rates are only
allowed if agreed upon by express stipulation of the parties, and only when reduced into
writing.76 Any change to it must be mutually agreed upon, or it produces no binding effect:
Basic is the rule that there can be no contract in its true sense without the mutual assent of the
parties. If this consent is absent on the part of one who contracts, the act has no more efficacy
than if it had been done under duress or by a person of unsound mind. Similarly, contract
changes must be made with the consent of the contracting parties. The minds of all the parties
must meet as to the proposed modification, especially when it affects an important aspect of the
agreement In the case of loan contracts, the interest rate is undeniably always a vital component,
for it can make or break a capital venture. Thus, any change must be mutually agreed upon,
otherwise, it produces no binding effect.77 (Citation omitted.)
Thus, in several cases, we declared void stipulations that allowed for the unilateral modification
of interest rates. In Philippine National Bank v. Court of Appeals,78 we disallowed the creditor-
bank from increasing the stipulated interest rate at will for being violative of the principle of
mutuality of contracts. We said:
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. 1308. 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 debtor) participation being reduced to the alternative "to take it or leave
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.79 (Italics in the original.)
The same treatment is given to stipulations that give one party the unbridled discretion, without
the conformity of the other, to increase the rate of interest notwithstanding the inclusion of a
similar discretion to decrease it. In Philippine Savings Bank v. Castillo80 we declared void a
stipulation81 that allows for both an increase or decrease of the interest rate, without subjecting
the modification to the mutual agreement of the parties:
Escalation clauses are generally valid and do not contravene public policy. They are common in
credit agreements as means of maintaining fiscal stability and retaining the value of money on
long-term contracts. To prevent any one-sidedness that these clauses may cause, we have held
in Banco Filipino Savings and Mortgage Bank v. Judge Navarro that there should be a
corresponding de-escalation clause that would authorize a reduction in the interest rates
corresponding to downward changes made by law or by the Monetary Board. As can be gleaned
from the parties' loan agreement, a de-escalation clause is provided, by virtue of which,
petitioner had lowered its interest rates.
Nevertheless, the validity of the escalation clause did not give petitioner the unbridled right to
unilaterally adjust interest rates. The adjustment should have still been subjected to the mutual
agreement of the contracting parties. In light of the absence of consent on the part of respondents
to the modifications in the interest rates, the adjusted rates cannot bind them notwithstanding the
inclusion of a de escalation clause in the loan agreement.82(Underscoring supplied; citation
omitted.)
We reiterated this in Juico v. China Banking Corporation,83 where we held that the lack of
written notice and written consent of the borrowers made the interest proviso a one-sided
imposition that does not have the force of law between the parties:
This notwithstanding, we hold that the escalation clause is still void because it grants respondent
the power to impose an increased rate of interest without a written notice to petitioners and their
written consent. Respondent's monthly telephone calls to petitioners advising them of the
prevailing interest rates would not suffice. A detailed billing statement based on the new imposed
interest with corresponding computation of the total debt should have been provided by the
respondent to enable petitioners to make an informed decision. An appropriate form must also be
signed by the petitioners to indicate their conformity to the new rates. Compliance with these
requisites is essential to preserve the mutuality of contracts. For indeed, one-sided impositions do
not have the force of law between the parties, because such impositions are not based on the
parties' essential equality.84 (Citation omitted.)
In the case of Silos v. Philippine National Bank,85 we invalidated the following provisions:
1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% per annum. Interest
shall be payable in advance every one hundred twenty days at the rate prevailing at the time of
the renewal.
(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending on
whatever policy the Bank may adopt in the future, including without limitation, the shifting from
the floating interest rate system to the fixed interest rate system, or vice versa. Where the Bank
has imposed on the Loan interest at a rate per annum, which is equal to the Bank's spread over
the current floating interest rate, the Borrower hereby agrees that the Bank may, without need of
notice to the Borrower, increase or decrease its spread over the floating interest rate at any time
depending on whatever policy it may adopt in the future. 86 (Emphasis and citation omitted, italics
supplied.)
In Silos, an amendment to the above credit agreement was made:
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment
from date of each Availment up to but not including the date of full payment thereof at the
rate per annum which is determined by the Bank to be prime rate plus applicable spread in effect
as of the date of each Availment.87 (Emphasis and citation omitted.)
In that case, we found that the method of fixing interest rates is based solely on the will of the
bank. The method is "one-sided, indeterminate, and [based on] subjective criteria such as
profitability, cost of money, bank costs, etc. x x x."88 It is "arbitrary for there is no fixed standard
or margin above or below these considerations." 89 More, it is worded in such a way that the
borrower shall agree to whatever interest rate the bank fixes. Hence, the element of consent from
or agreement by the borrower is completely lacking.
Here, the spouses Mercado supposedly: (1) agreed to pay an annual interest based on a "floating
rate of interest;" (2) to be determined solely by Security Bank; (3) on the basis of Security Bank's
own prevailing lending rate; (4) which shall not exceed the total monthly prevailing rate as
computed by Security Bank; and (5) without need of additional confirmation to the interests
stipulated as computed by Security Bank.
Notably, stipulations on floating rate of interest differ from escalation clauses. Escalation clauses
are stipulations which allow for the increase (as well as the mandatory decrease) of the original
fixed interest rate.90 Meanwhile, floating rates of interest refer to the variable interest rate stated
on a market-based reference rate agreed upon by the parties.91 The former refers to the method by
which fixed rates may be increased, while the latter pertains to the interest rate itself that is not
fixed. Nevertheless, both are contractual provisions that entail adjustment of interest rates subject
to the principle of mutuality of contracts. Thus, while the cited cases involve escalation clauses,
the principles they lay down on mutuality equally apply to floating interest rate clauses.
The Banko Sentral ng Pilipinas (BSP) Manual of Regulations for Banks (MORB) allows banks
and borrowers to agree on a floating rate of interest, provided that it must be based on market-
based reference rates:
§ X305.3 Floating rates of interest. The rate of interest on a floating rate loan during each
interest period shall be stated on the basis of Manila Reference Rates (MRRs), T-Bill Rates
or other market based reference rates plus a margin as may be agreed upon by the parties.
The MRRs for various interest periods shall be determined and announced by the Bangko Sentral
every week and shall be based on the weighted average of the interest rates paid during the
immediately preceding week by the ten (10) KBs with the highest combined levels of
outstanding deposit substitutes and time deposits, on promissory notes issued and time deposits
received by such banks, of P100,000 and over per transaction account, with maturities
corresponding to the interest periods tor which such MRRs are being determined. Such rates and
the composition of the sample KBs shall be reviewed and determined at the beginning of every
calendar semester on the basis of the banks' combined levels of outstanding deposit substitutes
and time deposits as of 31 May or 30 November, as the case may be.
The rate of interest on floating rate loans existing and outstanding as of 23 December 1995 shall
continue to be determined on the basis of the MRRs obtained in accordance with the provisions
of the rules existing as of 01 January 1989: Provided, however, That the parties to such existing
floating rate loan agreements are not precluded from amending or modifying their loan
agreements by adopting a floating rate of interest determined on the basis of the TBR or other
market based reference rates.
Where the loan agreement provides for a floating interest rate, the interest period, which shall be
such period of time for which the rate of interest is fixed, shall be such period as may be agreed
upon by the parties.
For the purpose of computing the MRRs, banks shall accomplish the report forms, RS Form 2D
and Form 2E (BSP 5-17-34A).92 (Emphasis and underscoring supplied.)
This BSP requirement is consistent with the principle that the determination of interest rates
cannot be left solely to the will of one party. It further emphasizes that the reference rate must be
stated in writing, and must be agreed upon by the parties.
b.
Security Bank argues that the subject provisions on the interest rate observed the principle of
mutuality of contracts. It claims that there is a ceiling on the maximum applicable rate, and it is
the market forces that dictate and establish the rate of interest.
We disagree.
The RTC and CA were correct in holding that the interest provisions in the revolving credit line
agreement and its addendum violate the principle of mutuality of contracts.
First, the authority to change the interest rate was given to Security Bank alone as the lender,
without need of the written assent of the spouses Mercado. This unbridled discretion given to
Security Bank is evidenced by the clause "I hereby give my continuing consent without need of
additional confirmation to the interests stipulated as computed by [Security Bank]." 93 The
lopsidedness of the imposition of interest rates is further highlighted by the lack of a breakdown
of the interest rates imposed by Security Bank in its statement of account 94 accompanying its
demand letter.
Second, the interest rate to be imposed is determined solely by Security Bank for lack of a stated,
valid reference rate. The reference rate of "Security Bank's prevailing lending rate" is not pegged
on a market-based reference rate as required by the BSP. In this regard, we do not agree with the
CA that this case is similar with Polotan, Sr. v. Court of Appeals (Eleventh Division).95 There, we
declared that escalation clauses are not basically wrong or legally objectionable as long as they
are not solely potestative but based on reasonable and valid grounds. We held that the interest
rate based on the "prevailing market rate" is valid because it cannot be said to be dependent
solely on the will of the bank as it is also dependent on the prevailing market rates. The
fluctuation in the market rates is beyond the control of the bank. 96 Here, however, the stipulated
interest rate based on "Security Bank's prevailing lending rate" is not synonymous with
"prevailing market rate." For one, Security Bank is still the one who determines its own
prevailing lending rate. More, the argument that Security Bank is guided by other facts (or
external factors such as Singapore Rate, London Rate, Inter-Bank Rate) in determining its
prevailing monthly rate fails because these reference rates are not contained in writing as
required by law and the BSP. Thus, we find that the interest stipulations here are akin to the ones
invalidated in Silos and in Philippine Savings Bank for being potestative.
In striking out these provisions, both in the original and the addendum, we note that there are no
other stipulations in writing from which we can base an imposition of interest. Unlike in cases
involving escalation clauses that allowed us to impose the original rate of interest, we cannot do
the same here as there is none. Nevertheless, while we find that no stipulated interest rate may be
imposed on the obligation, legal interest may still be imposed on the outstanding loan. Eastern
Shipping Lines, Inc. v. Court of Appeals 97 and Nacar v. Gallery Frames98 provide that in the
absence of a stipulated interest. a loan obligation shall earn legal interest from the time of
default, i.e., from judicial or extrajudicial demand.99
III
In Andal v. Philippine National Bank,100 the case cited by the spouses Mercado, we declared the
mortgagor-debtors therein liable to pay interest at the rate equal to the legal interest rate from the
time they defaulted in payment until their loan is fully paid. We also said that default, for
purposes of determining when interest shall run, is to be counted from the time of the finality of
decision determining the rate of interest Spouses Mercado claim that following Andal, they, too,
could not be deemed to have been in default from the time of the extrajudicial demand on March
31, 1991. They claim anew that since the validity of the interest rates is still being determined in
this petition, interest should be imposed only after finality of this Decision.
They err. Andal is not squarely applicable to this case. In that case, there was a finding by both
the trial court and the CA that no default can be declared because of the arbitrary, illegal, and
unconscionable interest rates and penalty charges unilaterally imposed by the bank. There, the
debtors questioned the period of default in relation to the interest imposed as it was an issue
necessary for the determination of the validity of the foreclosure sales therein. In contrast, here,
the spouses Mercado never denied that they defaulted in the payment of the principal obligation.
They did not assert, from their complaint or up to their petition before this Court, that they would
not have been in default were it not for the bank's imposition of the interest rates. Theories raised
for the first time cannot be entertained in appeal.
Moreover, for purposes of computing when legal interest shall run, it is enough that the debtor be
in default on the principal obligation. To be considered in default under the revolving credit line
agreement, the borrower need not be in default for the whole amount, but for any amount
due.101 The spouses Mercado never challenged Security Bank's claim that they defaulted as to the
payment of the principal obligation of P8,000,000.00. Thus, we find they have defaulted to this
amount at the time Security Bank made an extrajudicial demand on March 31, 1999.
We also find no merit in their argument that penalty charges should not be imposed. While we
see no legal basis to strike down the penalty stipulation, however, we reduce the penalty of 2%
per month or 24% per annum for being iniquitous and unconscionable as allowed under Article
1229102 of the Civil Code.
In MCMP Construction Corp. v. Monark Equipment Corp.,103 we declared the rate of 36% per
annumunconscionable and reduced it to 6% per annum. We thus similarly reduce the penalty
here from 24% per annum to 6% per annum from the time of default, i.e., extrajudicial demand.
We also modify the amount of the outstanding obligation of the spouses Mercado to Security
Bank. To recall, the foreclosure sale over the parcel of land in Lipa City is not affected by the
annulment proceedings. We thus find that the proceeds of the foreclosure sale over the parcel of
land in Lipa City in the amount of P483,120.00 should be applied to the principal obligation of
P8,000,000.00 plus interest and penalty from extrajudicial demand (March 31, 1999) until date
of foreclosure sale (October 19, 1999). 104 The resulting deficiency shall earn legal interest at the
rate of 12% from the filing of Security Bank's answer with counterclaim 105 on January 5, 2001
until June 30, 2013, and shall earn legal interest at the present rate of 6% from July 1, 2013 until
finality of judgment.106 Thus, the outstanding obligation of the spouses Mercado should be
computed as follows:
Principal P8,000,000.00
Interest at 12% per annum 533.917.81
P8,000,000.00 x 0.12 x (203 days/365 days)107
Penalty at 6% per annum 266,958.90
P8,000,000.00 x 0.06 x (203 days/365 days) ____________
P8,800,876.71
Less: Bid price for Lipa City property 483,120.00
TOTAL DEFICIENCY P8,317,756.71
WHEREFORE, the petitions are DENIED. Accordingly, the Court of Appeals' Decision dated
July 19, 2010 and the Amendatory Order dated June 19, 2007 are hereby MODIFIED. Spouses
Rodrigo and Erlinda Mercado are hereby ordered to pay Security Bank Corporation the sum of
P8,317,756.71 representing the amount of deficiency, inclusive of interest and penalty. Said
amount shall earn legal interest of 12% per annum from January 5, 2001 until June 30, 2013, and
shall earn the legal interest of 6% per annum from July 1, 2013 until finality of this Decision.
The total amount shall thereafter earn interest at the rate of 6% per annum from the finality of
judgment until its full satisfaction.
No costs.
SO ORDERED.
G.R. No. 181045 July 2, 2014
SPOUSES EDUARDO and LYDIA SILOS, Petitioners,

vs.
PHILIPPINE NATIONAL BANK, Respondent.
DECISION
DEL CASTILLO, J.:
In loan agreements, it cannot be denied that the rate of interest is a principal condition, if not the
most important component. Thus, any modification thereof must be mutually agreed upon;
otherwise, it has no binding effect. Moreover, the Court cannot consider a stipulation granting a
party the option to prepay the loan if said party is not agreeable to the arbitrary interest rates
imposed. Premium may not be placed upon a stipulation in a contract which grants one party the
right to choose whether to continue with or withdraw from the agreement if it discovers that what
the other party has been doing all along is improper or illegal.
This Petition for Review on Certiorari1 questions the May 8, 2007 Decision2 of the Court of
Appeals (CA) in CA-G.R. CV No. 79650, which affirmed with modifications the February 28,
2003 Decision3 and the June 4, 2003 Order4 of the Regional Trial Court (RTC), Branch 6 of
Kalibo, Aklan in Civil Case No. 5975.
Factual Antecedents
Spouses Eduardo and Lydia Silos (petitioners) have been in business for about two decades of
operating a department store and buying and selling of ready-to-wear apparel. Respondent
Philippine National Bank (PNB) is a banking corporation organized and existing under
Philippine laws.
To secure a one-year revolving credit line of ₱150,000.00 obtained from PNB, petitioners
constituted in August 1987 a Real Estate Mortgage 5 over a 370-square meter lot in Kalibo, Aklan
covered by Transfer Certificate of Title No. (TCT) T-14250. In July 1988,the credit line was
increased to ₱1.8 million and the mortgage was correspondingly increased to ₱1.8 million.6
And in July 1989, a Supplement to the Existing Real Estate Mortgage 7 was executed to cover the
same credit line, which was increased to ₱2.5 million, and additional security was given in the
form of a 134-square meter lot covered by TCT T-16208. In addition, petitioners issued eight
Promissory Notes8 and signed a Credit Agreement.9 This July 1989 Credit Agreement contained
a stipulation on interest which provides as follows:
1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% per annum. Interest
the renewal.
has imposed on the Loan interest at a rate per annum, which is equal to the Bank’s spread over
depending on whatever policy it may adopt in the future.10 (Emphases supplied)
The eight Promissory Notes, on the other hand, contained a stipulation granting PNB the right to
increase or reduce interest rates "within the limits allowed by law or by the Monetary Board."11
The Real Estate Mortgage agreement provided the same right to increase or reduce interest rates
"at any time depending on whatever policy PNB may adopt in the future."12
Petitioners religiously paid interest on the notes at the following rates:
1. 1st Promissory Note dated July 24, 1989 – 19.5%;
2. 2nd Promissory Note dated November 22, 1989 – 23%;
3. 3rd Promissory Note dated March 21, 1990 – 22%;
4. 4th Promissory Note dated July 19, 1990 – 24%;
5. 5th Promissory Note dated December 17, 1990 – 28%;
6. 6th Promissory Note dated February 14, 1991 – 32%;
7. 7th Promissory Note dated March 1, 1991 – 30%; and
8. 8th Promissory Note dated July 11, 1991 – 24%.13
In August 1991, an Amendment to Credit Agreement 14 was executed by the parties, with the
following stipulation regarding interest:
from date of each Availment up to but not including the date of full payment thereof at the rate
per annum which is determined by the Bank to be prime rate plus applicable spread in effect as
of the date of each Availment.15 (Emphases supplied)
Under this Amendment to Credit Agreement, petitioners issued in favor of PNB the following 18
Promissory Notes, which petitioners settled – except the last (the note covering the principal) – at
the following interest rates:
1. 9th Promissory Note dated November 8, 1991 – 26%;

2. 10th Promissory Note dated March 19, 1992 – 25%;
6. 14th Promissory Note dated July 12, 1993 – 17.5%;
11. 19th Promissory Note dated April 10, 1995 – 21%;
12. 20th Promissory Note dated July 19, 1995 – 18.5%;
13. 21st Promissory Note dated December 18, 1995 – 18.75%;
14. 22nd Promissory Note dated April 22, 1996 – 18.5%;
15. 23rd Promissory Note dated July 22, 1996 – 18.5%;
17. 25th Promissory Note dated May 30, 1997 – 17.5%; and
18. 26th Promissory Note (PN 9707237) dated July 30, 1997 – 25%.16
The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the Bank
may at any time without notice, raise within the limits allowed by law x x x."17
On the other hand, the 18th up to the 26th promissory notes – including PN 9707237, which is
the 26th promissory note – carried the following provision:
x x x For this purpose, I/We agree that the rate of interest herein stipulated may be increased or
decreased for the subsequent Interest Periods, with prior notice to the Borrower in the event of
changes in interest rate prescribed by law or the Monetary Board of the Central Bank of the
Philippines, or in the Bank’s overall cost of funds. I/We hereby agree that in the event I/we are
not agreeable to the interest rate fixed for any Interest Period, I/we shall have the option top
repay the loan or credit facility without penalty within ten (10) calendar days from the Interest
Setting Date.18 (Emphasis supplied)
Respondent regularly renewed the line from 1990 up to 1997, and petitioners made good on the
promissory notes, religiously paying the interests without objection or fail. But in 1997,
petitioners faltered when the interest rates soared due to the Asian financial crisis. Petitioners’
sole outstanding promissory note for ₱2.5 million – PN 9707237 executed in July 1997 and due
120 days later or on October 28, 1997 – became past due, and despite repeated demands,
petitioners failed to make good on the note.
Incidentally, PN 9707237 provided for the penalty equivalent to 24% per annum in case of
default, as follows:
Without need for notice or demand, failure to pay this note or any installment thereon, when due,
shall constitute default and in such cases or in case of garnishment, receivership or bankruptcy or
suit of any kind filed against me/us by the Bank, the outstanding principal of this note, at the
option of the Bank and without prior notice of demand, shall immediately become due and
payable and shall be subject to a penalty charge of twenty four percent (24%) per annum based
on the defaulted principal amount. x x x19 (Emphasis supplied)
PNB prepared a Statement of Account 20 as of October 12, 1998, detailing the amount due and
demandable from petitioners in the total amount of ₱3,620,541.60, broken down as follows:
Principal P 2,500,000.00
Interest 538,874.94
Penalties 581,666.66
Total P 3,620,541.60
Despite demand, petitioners failed to pay the foregoing amount. Thus, PNB foreclosed on the
mortgage, and on January 14, 1999, TCTs T-14250 and T-16208 were sold to it at auction for the
amount of ₱4,324,172.96.21 The sheriff’s certificate of sale was registered on March 11, 1999.
More than a year later, or on March 24, 2000, petitioners filed Civil Case No. 5975, seeking
annulment of the foreclosure sale and an accounting of the PNB credit. Petitioners theorized that
after the first promissory note where they agreed to pay 19.5% interest, the succeeding
stipulations for the payment of interest in their loan agreements with PNB – which allegedly left
to the latter the sole will to determine the interest rate – became null and void. Petitioners added
that because the interest rates were fixed by respondent without their prior consent or agreement,
these rates are void, and as a result, petitioners should only be made liable for interest at the legal
rate of 12%. They claimed further that they overpaid interests on the credit, and concluded that
due to this overpayment of steep interest charges, their debt should now be deemed paid, and the
foreclosure and sale of TCTs T-14250 and T-16208 became unnecessary and wrongful. As for the
imposed penalty of ₱581,666.66, petitioners alleged that since the Real Estate Mortgage and the
Supplement thereto did not include penalties as part of the secured amount, the same should be
excluded from the foreclosure amount or bid price, even if such penalties are provided for in the
final Promissory Note, or PN 9707237.22
In addition, petitioners sought to be reimbursed an alleged overpayment of ₱848,285.00 made

during the period August 21, 1991 to March 5, 1998,resulting from respondent’s imposition of
the alleged illegal and steep interest rates. They also prayed to be awarded ₱200,000.00 by way
of attorney’s fees.23
In its Answer,24 PNB denied that it unilaterally imposed or fixed interest rates; that petitioners
agreed that without prior notice, PNB may modify interest rates depending on future policy
adopted by it; and that the imposition of penalties was agreed upon in the Credit Agreement. It
added that the imposition of penalties is supported by the all-inclusive clause in the Real Estate
Mortgage agreement which provides that the mortgage shall stand as security for any and all
other obligations of whatever kind and nature owing to respondent, which thus includes penalties
imposed upon default or non-payment of the principal and interest on due date.
On pre-trial, the parties mutually agreed to the following material facts, among others:
a) That since 1991 up to 1998, petitioners had paid PNB the total amount of
₱3,484,287.00;25 and
b) That PNB sent, and petitioners received, a March 10, 2000 demand letter.26
During trial, petitioner Lydia Silos (Lydia) testified that the Credit Agreement, the Amendment to
Credit Agreement, Real Estate Mortgage and the Supplement thereto were all prepared by
respondent PNB and were presented to her and her husband Eduardo only for signature; that she
was told by PNB that the latter alone would determine the interest rate; that as to the Amendment
to Credit Agreement, she was told that PNB would fill up the interest rate portion thereof; that at
the time the parties executed the said Credit Agreement, she was not informed about the
applicable spread that PNB would impose on her account; that the interest rate portion of all
Promissory Notes she and Eduardo issued were always left in blank when they executed them,
with respondent’s mere assurance that it would be the one to enter or indicate thereon the
prevailing interest rate at the time of availment; and that they agreed to such arrangement. She
further testified that the two Real Estate Mortgage agreements she signed did not stipulate the
payment of penalties; that she and Eduardo consulted with a lawyer, and were told that PNB’s
actions were improper, and so on March 20, 2000, they wrote to the latter seeking a
recomputation of their outstanding obligation; and when PNB did not oblige, they instituted Civil
Case No. 5975.27
On cross-examination, Lydia testified that she has been in business for 20 years; that she also
borrowed from other individuals and another bank; that it was only with banks that she was
asked to sign loan documents with no indicated interest rate; that she did not bother to read the
terms of the loan documents which she signed; and that she received several PNB statements of
account detailing their outstanding obligations, but she did not complain; that she assumed
instead that what was written therein is correct.28
For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr. (Aspa), the sole witness for
respondent, stated on cross-examination that as a practice, the determination of the prime rates of
interest was the responsibility solely of PNB’s Treasury Department which is based in Manila;
that these prime rates were simply communicated to all PNB branches for implementation; that
there are a multitude of considerations which determine the interest rate, such as the cost of
money, foreign currency values, PNB’s spread, bank administrative costs, profitability, and the
practice in the banking industry; that in every repricing of each loan availment, the borrower has
the right to question the rates, but that this was not done by the petitioners; and that anything that
is not found in the Promissory Note may be supplemented by the Credit Agreement.29
Ruling of the Regional Trial Court
On February 28, 2003, the trial court rendered judgment dismissing Civil Case No. 5975.30
It ruled that:
1. While the Credit Agreement allows PNB to unilaterally increase its spread over the
floating interest rate at any time depending on whatever policy it may adopt in the future,
it likewise allows for the decrease at any time of the same. Thus, such stipulation
authorizing both the increase and decrease of interest rates as may be applicable is
valid,31 as was held in Consolidated Bank and Trust Corporation (SOLIDBANK) v. Court
of Appeals;32
2. Banks are allowed to stipulate that interest rates on loans need not be fixed and instead
be made dependent on prevailing rates upon which to peg such variable interest rates;33
3. The Promissory Note, as the principal contract evidencing petitioners’ loan, prevails
over the Credit Agreement and the Real Estate Mortgage.
As such, the rate of interest, penalties and attorney’s fees stipulated in the Promissory
Note prevail over those mentioned in the Credit Agreement and the Real Estate Mortgage
agreements;34
4. Roughly, PNB’s computation of the total amount of petitioners’ obligation is correct;35
5. Because the loan was admittedly due and demandable, the foreclosure was regularly
made;36
6. By the admission of petitioners during pre-trial, all payments made to PNB were
properly applied to the principal, interest and penalties.37
The dispositive portion of the trial court’s Decision reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the respondent and
against the petitioners by DISMISSING the latter’s petition.
Costs against the petitioners.
SO ORDERED.38
Petitioners moved for reconsideration. In an Order39 dated June 4, 2003, the trial court granted
only a modification in the award of attorney’s fees, reducing the same from 10% to 1%. Thus,
PNB was ordered to refund to petitioner the excess in attorney’s fees in the amount of
₱356,589.90, viz:
WHEREFORE, judgment is hereby rendered upholding the validity of the interest rate charged
by the respondent as well as the extra-judicial foreclosure proceedings and the Certificate of
Sale. However, respondent is directed to refund to the petitioner the amount of ₱356,589.90
representing the excess interest charged against the latter.
No pronouncement as to costs.
SO ORDERED.40
Ruling of the Court of Appeals
Petitioners appealed to the CA, which issued the questioned Decision with the following decretal
portion:
WHEREFORE, in view of the foregoing, the instant appeal is PARTLY GRANTED. The
modified Decision of the Regional Trial Court per Order dated June 4, 2003 is hereby
AFFIRMED with MODIFICATIONS, to wit:
1. [T]hat the interest rate to be applied after the expiration of the first 30-day interest
period for PN. No. 9707237 should be 12% per annum;
2. [T]hat the attorney’s fees of10% is valid and binding; and
3. [T]hat [PNB] is hereby ordered to reimburse [petitioners] the excess in the bid price of
₱377,505.99 which is the difference between the total amount due [PNB] and the amount
of its bid price.
SO ORDERED.41
On the other hand, respondent did not appeal the June 4,2003 Order of the trial court which
reduced its award of attorney’s fees. It simply raised the issue in its appellee’s brief in the CA,
and included a prayer for the reversal of said Order.
In effect, the CA limited petitioners’ appeal to the following issues:
1) Whether x x x the interest rates on petitioners’ outstanding obligation were unilaterally

and arbitrarily imposed by PNB;
2) Whether x x x the penalty charges were secured by the real estate mortgage; and
3) Whether x x x the extrajudicial foreclosure and sale are valid.42
The CA noted that, based on receipts presented by petitioners during trial, the latter dutifully paid
a total of ₱3,027,324.60 in interest for the period August 7, 1991 to August 6, 1997, over and
above the ₱2.5 million principal obligation. And this is exclusive of payments for insurance
premiums, documentary stamp taxes, and penalty. All the while, petitioners did not complain nor
object to the imposition of interest; they in fact paid the same religiously and without fail for
seven years. The appellate court ruled that petitioners are thus estopped from questioning the
same.
The CA nevertheless noted that for the period July 30, 1997 to August 14, 1997, PNB wrongly
applied an interest rate of 25.72% instead of the agreed 25%; thus it overcharged petitioners, and
the latter paid, an excess of ₱736.56 in interest.
On the issue of penalties, the CA ruled that the express tenor of the Real Estate Mortgage
agreements contemplated the inclusion of the PN 9707237-stipulated 24% penalty in the amount
to be secured by the mortgaged property, thus –
For and in consideration of certain loans, overdrafts and other credit accommodations obtained
from the MORTGAGEE and to secure the payment of the same and those others that the
MORTGAGEE may extend to the MORTGAGOR, including interest and expenses, and other
obligations owing by the MORTGAGOR to the MORTGAGEE, whether direct or indirect,
principal or secondary, as appearing in the accounts, books and records of the MORTGAGEE,
the MORTGAGOR does hereby transfer and convey by way of mortgage unto the
MORTGAGEE x x x43 (Emphasis supplied)
The CA believes that the 24% penalty is covered by the phrase "and other obligations owing by
the mortgagor to the mortgagee" and should thus be added to the amount secured by the
mortgages.44
The CA then proceeded to declare valid the foreclosure and sale of properties covered by TCTs
T-14250 and T-16208, which came as a necessary result of petitioners’ failure to pay the
outstanding obligation upon demand.45The CA saw fit to increase the trial court’s award of 1% to
10%, finding the latter rate to be reasonable and citing the Real Estate Mortgage agreement
which authorized the collection of the higher rate.46
Finally, the CA ruled that petitioners are entitled to ₱377,505.09 surplus, which is the difference
between PNB’s bid price of ₱4,324,172.96 and petitioners’ total computed obligation as of
January 14, 1999, or the date of the auction sale, in the amount of ₱3,946,667.87.47
Hence, the present Petition.
Issues
The following issues are raised in this Petition:
A. THE COURT OF APPEALS AS WELL AS THE LOWER COURT ERRED

IN NOT NULLIFYING THE INTEREST RATE PROVISION IN THE CREDIT
AGREEMENT DATED JULY 24, 1989 X X X AND IN THE AMENDMENT TO
CREDIT AGREEMENT DATEDAUGUST 21, 1991 X X X WHICH LEFT TO
THE SOLE UNILATERAL DETERMINATION OF THE RESPONDENT PNB
THE ORIGINAL FIXING OF INTEREST RATE AND ITS INCREASE, WHICH
AGREEMENT IS CONTRARY TO LAW, ART. 1308 OF THE [NEW CIVIL
CODE], AS ENUNCIATED IN PONCIANO ALMEIDA V. COURT OF
APPEALS,G.R. [NO.] 113412, APRIL 17, 1996, AND CONTRARY TO PUBLIC
POLICY AND PUBLIC INTEREST, AND IN APPLYING THE PRINCIPLE OF
ESTOPPEL ARISING FROM THE ALLEGED DELAYED COMPLAINT OF
PETITIONER[S], AND [THEIR] PAYMENT OF THE INTEREST CHARGED.
B. CONSEQUENTLY, THE COURT OF APPEALS AND THE LOWER COURT

ERRED IN NOT DECLARING THAT PNB IS NOT AT ALL ENTITLED TO
ANY INTEREST EXCEPT THE LEGAL RATE FROM DATE OF DEMAND,
AND IN NOT APPLYING THE EXCESS OVER THE LEGAL RATE OF THE
ADMITTED PAYMENTS MADE BY PETITIONER[S] FROM 1991-1998 IN
THE ADMITTED TOTAL AMOUNT OF ₱3,484,287.00, TO PAYMENT OF
THE PRINCIPAL OF ₱2,500,000.[00] LEAVING AN OVERPAYMENT
OF₱984,287.00 REFUNDABLE BY RESPONDENT TO PETITIONER[S]
WITH INTEREST OF 12% PER ANNUM.
II
THE COURT OF APPEALS AND THE LOWER COURT ERRED IN HOLDING THAT
PENALTIES ARE INCLUDEDIN THE SECURED AMOUNT, SUBJECT TO
FORECLOSURE, WHEN NO PENALTIES ARE MENTIONED [NOR] PROVIDED FOR IN
THE REAL ESTATE MORTGAGE AS A SECURED AMOUNT AND THEREFORE THE
AMOUNT OF PENALTIES SHOULDHAVE BEEN EXCLUDED FROM [THE]
FORECLOSURE AMOUNT.
III
THE COURT OF APPEALS ERRED IN REVERSING THE RULING OF THE LOWER

COURT, WHICH REDUCED THE ATTORNEY’S FEES OF 10% OF THE TOTAL
INDEBTEDNESS CHARGED IN THE X X X EXTRAJUDICIAL FORECLOSURE TOONLY
1%, AND [AWARDING] 10% ATTORNEY’S FEES.48
Petitioners’ Arguments
Petitioners insist that the interest rate provision in the Credit Agreement and the Amendment to
Credit Agreement should be declared null and void, for they relegated to PNB the sole power to
fix interest rates based on arbitrary criteria or factors such as bank policy, profitability, cost of
money, foreign currency values, and bank administrative costs; spaces for interest rates in the
two Credit Agreements and the promissory notes were left blank for PNB to unilaterally fill, and
their consent or agreement to the interest rates imposed thereafter was not obtained; the interest
rate, which consists of the prime rate plus the bank spread, is determined not by agreement of the
parties but by PNB’s Treasury Department in Manila. Petitioners conclude that by this method of
fixing the interest rates, the principle of mutuality of contracts is violated, and public policy as
well as Circular 90549 of the then Central Bank had been breached.
Petitioners question the CA’s application of the principle of estoppel, saying that no estoppel can
proceed from an illegal act. Though they failed to timely question the imposition of the alleged
illegal interest rates and continued to pay the loan on the basis of these rates, they cannot be
deemed to have acquiesced, and hence could recover what they erroneously paid.50
Petitioners argue that if the interest rates were nullified, then their obligation to PNB is deemed
extinguished as of July 1997; moreover, it would appear that they even made an over payment to
the bank in the amount of ₱984,287.00.
Next, petitioners suggest that since the Real Estate Mortgage agreements did not include nor
specify, as part of the secured amount, the penalty of 24% authorized in PN 9707237, such
amount of ₱581,666.66 could not be made answerable by or collected from the mortgages
covering TCTs T-14250 and T-16208. Claiming support from Philippine Bank of
Communications [PBCom] v. Court of Appeals, 51 petitioners insist that the phrase "and other
obligations owing by the mortgagor to the mortgagee" 52 in the mortgage agreements cannot
embrace the ₱581,666.66 penalty, because, as held in the PBCom case, "[a] penalty charge does
not belong to the species of obligations enumerated in the mortgage, hence, the said contract
cannot be understood to secure the penalty"; 53while the mortgages are the accessory contracts,
what items are secured may only be determined from the provisions of the mortgage contracts,
and not from the Credit Agreement or the promissory notes.
Finally, petitioners submit that the trial court’s award of 1% attorney’s fees should be maintained,
given that in foreclosures, a lawyer’s work consists merely in the preparation and filing of the
petition, and involves minimal study.54 To allow the imposition of a staggering ₱396,211.00 for
such work would be contrary to equity. Petitioners state that the purpose of attorney’s fees in
cases of this nature "is not to give respondent a larger compensation for the loan than the law
already allows, but to protect it against any future loss or damage by being compelled to retain
counsel x x x to institute judicial proceedings for the collection of its credit." 55 And because the
instant case involves a simple extrajudicial foreclosure, attorney’s fees may be equitably
tempered.
Respondent’s Arguments
For its part, respondent disputes petitioners’ claim that interest rates were unilaterally fixed by it,
taking relief in the CA pronouncement that petitioners are deemed estopped by their failure to
question the imposed rates and their continued payment thereof without opposition. It adds that
because the Credit Agreement and promissory notes contained both an escalation clause and a
de-escalation clause, it may not be said that the bank violated the principle of mutuality. Besides,
the increase or decrease in interest rates have been mutually agreed upon by the parties, as shown
by petitioners’ continuous payment without protest. Respondent adds that the alleged unilateral
imposition of interest rates is not a proper subject for review by the Court because the issue was
never raised in the lower court.
As for petitioners’ claim that interest rates imposed by it are null and void for the reasons that 1)
the Credit Agreements and the promissory notes were signed in blank; 2) interest rates were at
short periods; 3) no interest rates could be charged where no agreement on interest rates was
made in writing; 4) PNB fixed interest rates on the basis of arbitrary policies and standards left to
its choosing; and 5) interest rates based on prime rate plus applicable spread are indeterminate
and arbitrary – PNB counters:
a. That Credit Agreements and promissory notes were signed by petitioner[s] in blank –
Respondent claims that this issue was never raised in the lower court. Besides,
documentary evidence prevails over testimonial evidence; Lydia Silos’ testimony in this
regard is self-serving, unsupported and uncorroborated, and for being the lone evidence
on this issue. The fact remains that these documents are in proper form, presumed
regular, and endure, against arbitrary claims by Silos – who is an experienced business
person – that she signed questionable loan documents whose provisions for interest rates
were left blank, and yet she continued to pay the interests without protest for a number of
years.56
b. That interest rates were at short periods – Respondent argues that the law which
governs and prohibits changes in interest rates made more than once every twelve months
has been removed57 with the issuance of Presidential Decree No. 858.58
c. That no interest rates could be charged where no agreement on interest rates was made
in writing in violation of Article 1956 of the Civil Code, which provides that no interest
shall be due unless it has been expressly stipulated in writing – Respondent insists that
the stipulated 25% per annum as embodied in PN 9707237 should be imposed during the
interim, or the period after the loan became due and while it remains unpaid, and not the
legal interest of 12% as claimed by petitioners.59
d. That PNB fixed interest rates on the basis of arbitrary policies and standards left to its
choosing – According to respondent, interest rates were fixed taking into consideration
increases or decreases as provided by law or by the Monetary Board, the bank’s overall
costs of funds, and upon agreement of the parties.60
e. That interest rates based on prime rate plus applicable spread are indeterminate and
arbitrary – On this score, respondent submits there are various factors that influence
interest rates, from political events to economic developments, etc.; the cost of money,
profitability and foreign currency transactions may not be discounted.61
On the issue of penalties, respondent reiterates the trial court’s finding that during pre-trial,
petitioners admitted that the Statement of Account as of October 12, 1998 – which detailed and
included penalty charges as part of the total outstanding obligation owing to the bank – was
correct. Respondent justifies the imposition and collection of a penalty as a normal banking
practice, and the standard rate per annum for all commercial banks, at the time, was 24%.
Respondent adds that the purpose of the penalty or a penal clause for that matter is to ensure the
performance of the obligation and substitute for damages and the payment of interest in the event
of non-compliance.62 And the promissory note – being the principal agreement as opposed to the
mortgage, which is a mere accessory – should prevail. This being the case, its inclusion as part of
the secured amount in the mortgage agreements is valid and necessary.
Regarding the foreclosure of the mortgages, respondent accuses petitioners of pre-empting

consolidation of its ownership over TCTs T-14250 and T-16208; that petitioners filed Civil Case
No. 5975 ostensibly to question the foreclosure and sale of properties covered by TCTs T-14250
and T-16208 in a desperate move to retain ownership over these properties, because they failed to
timely redeem them.
Respondent directs the attention of the Court to its petition in G.R. No. 181046, 63 where the
propriety of the CA’s ruling on the following issues is squarely raised:
1. That the interest rate to be applied after the expiration of the first 30-day interest period
for PN 9707237 should be 12% per annum; and
2. That PNB should reimburse petitioners the excess in the bid price of ₱377,505.99
which is the difference between the total amount due to PNB and the amount of its bid
price.
Our Ruling
The Court grants the Petition.
Before anything else, it must be said that it is not the function of the Court to re-examine or re-
evaluate evidence adduced by the parties in the proceedings below. The rule admits of certain
well-recognized exceptions, though, as when the lower courts’ findings are not supported by the
evidence on record or are based on a misapprehension of facts, or when certain relevant and
undisputed facts were manifestly overlooked that, if properly considered, would justify a
different conclusion. This case falls within such exceptions.
The Court notes that on March 5, 2008, a Resolution was issued by the Court’s First Division
denying respondent’s petition in G.R. No. 181046, due to late filing, failure to attach the required
affidavit of service of the petition on the trial court and the petitioners, and submission of a
defective verification and certification of non-forum shopping. On June 25, 2008, the Court
issued another Resolution denying with finality respondent’s motion for reconsideration of the
March 5, 2008 Resolution. And on August 15, 2008, entry of judgment was made. This thus
settles the issues, as above-stated, covering a) the interest rate – or 12% per annum– that applies
upon expiration of the first 30 days interest period provided under PN 9707237, and b)the CA’s
decree that PNB should reimburse petitioner the excess in the bid price of ₱377,505.09.
It appears that respondent’s practice, more than once proscribed by the Court, has been carried
over once more to the petitioners. In a number of decided cases, the Court struck down
provisions in credit documents issued by PNB to, or required of, its borrowers which allow the
bank to increase or decrease interest rates "within the limits allowed by law at any time
depending on whatever policy it may adopt in the future." Thus, in Philippine National Bank v.
Court of Appeals,64 such stipulation and similar ones were declared in violation of Article
130865 of the Civil Code. In a second case, Philippine National Bank v. Court of Appeals, 66 the
very same stipulations found in the credit agreement and the promissory notes prepared and
issued by the respondent were again invalidated. The Court therein said:
The Credit Agreement provided inter alia, that —
(a) 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 accommodation shall be correspondingly decreased in the event that the applicable
maximum interest is reduced by law or by the Monetary Board. In either case, the adjustment in
the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease in
the maximum interest rate.
The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time without
notice, beyond the stipulated rate of 12% but only "within the limits allowed by law."
The Real Estate Mortgage contract likewise provided that —
(k) INCREASE OF INTEREST RATE: The rate of interest charged on the obligation secured by
this mortgage as well as the interest on the amount which may have been advanced by the
MORTGAGEE, in accordance with the provision hereof, shall be subject during the life of this
contract to such an increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.
xxxx
In making the unilateral increases in interest rates, petitioner bank relied on the escalation clause
contained in their credit agreement which provides, as follows:
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 and provided, that, the interest rate
on this accommodation shall be correspondingly decreased in the event that the applicable
maximum interest rate is reduced by law or by the Monetary Board. In either case, the
adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase
or decrease in maximum interest rate.
This clause is authorized by Section 2 of Presidential Decree (P.D.) No. 1684 which further
amended Act No. 2655 ("The Usury Law"), as amended, thus:
Section 2. The same Act is hereby amended by adding a new section after Section 7, to read as
follows:
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 bylaw or by the Monetary Board; 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.
Section 1 of P.D. No. 1684 also empowered the Central Bank’s Monetary Board to prescribe the
maximum rates of interest for loans and certain forbearances. Pursuant to such authority, the
Monetary Board issued Central Bank (C.B.) Circular No. 905, series of 1982, Section 5 of which
provides:
Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial
Intermediaries) is hereby amended to read as follows:
Sec. 1303. Interest and Other Charges.
— The rate of interest, including commissions, premiums, fees and other charges, on any loan, or
forbearance of any money, goods or credits, regardless of maturity and whether secured or
unsecured, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as
amended.
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate
freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or
forbearance of money, goods or credits. In fine, they can agree to adjust, upward or downward,
the interest previously stipulated. However, contrary to the stubborn insistence of petitioner
bank, the said law and circular did not authorize either party to unilaterally raise the interest rate
without the other’s consent.
It is basic that there can be no contract in the true sense in the absence of the element of
agreement, or of mutual assent of the parties. If this assent is wanting on the part of the one who
contracts, his act has no more efficacy than if it had been done under duress or by a person of
unsound mind.
Similarly, contract changes must be made with the consent of the contracting parties. The minds
of all the parties must meet as to the proposed modification, especially when it affects an
important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the
rate of interest is always a vital component, for it can make or break a capital venture. Thus, any
change must be mutually agreed upon, otherwise, it is bereft of any binding effect.
We cannot countenance petitioner bank’s posturing that the escalation clause at bench gives it
unbridled right to unilaterally upwardly adjust the interest on private respondents’ loan. That
would completely take away from private respondents the right to assent to an important
modification in their agreement, and would negate the element of mutuality in contracts. In
Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held —
x x x 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. 1308. The contract must bind both contracting parties; its validity or compliance cannot be
left to the will of one of them.
will of one of the contracting parties, is void . . . . Hence, even assuming that the . . . 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 debtor) participation being
reduced to the alternative "to take it or leave it" . . . . Such a contract is a veritable trap for the
weaker party whom the courts of justice must protect against abuse and imposition. 67 (Emphases
supplied)
Then again, in a third case, Spouses Almeda v. Court of Appeals, 68 the Court invalidated the very
same provisions in the respondent’s prepared Credit Agreement, declaring thus:
The binding effect of any agreement between parties to a contract is premised on two settled
principles: (1) that any obligation arising from contract has the force of law between the parties;
and (2) that there must be mutuality between the parties based on their essential equality. Any
contract which appears to be heavily weighed in favor of one of the parties so as to lead to an
unconscionable result is void. Any stipulation regarding the validity or compliance of the
contract which is left solely to the will of one of the parties, is likewise, invalid.
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. x x x
xxxx
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
(₱7,735,004.66) which was applied to interest alone. By the time the spouses tendered the
amount of ₱40,142,518.00 in settlement of their obligations; respondent bank was demanding
₱58,377,487.00 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. Here, as clearly demonstrated above, not
only [are] 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.
xxxx
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.69 (Emphases supplied)
Still, in a fourth case, Philippine National Bank v. Court of Appeals, 70 the above doctrine was
reiterated:
The promissory note contained the following stipulation:
For value received, I/we, [private respondents] jointly and severally promise to pay to the
ORDER of the PHILIPPINE NATIONAL BANK, at its office in San Jose City, Philippines, the
sum of FIFTEEN THOUSAND ONLY (₱15,000.00), Philippine Currency, together with interest
thereon at the rate of 12% per annum until paid, which interest rate the Bank may at any time
without notice, raise within the limits allowed by law, and I/we also agree to pay jointly and
severally ____% per annum penalty charge, by way of liquidated damages should this note be
unpaid or is not renewed on due dated.
Payment of this note shall be as follows:
*THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE
On the reverse side of the note the following condition was stamped:
All short-term loans to be granted starting January 1, 1978 shall be made subject to the condition
that any and/or all extensions hereof that will leave any portion of the amount still unpaid after
730 days shall automatically convert the outstanding balance into a medium or long-term
obligation as the case may be and give the Bank the right to charge the interest rates prescribed
under its policies from the date the account was originally granted.
To secure payment of the loan the parties executed a real estate mortgage contract which
provided:
(k) INCREASE OF INTEREST RATE:
The rate of interest charged on the obligation secured by this mortgage as well as the interest on
the amount which may have been advanced by the MORTGAGEE, in accordance with the
provision hereof, shall be subject during the life of this contract to such an increase within the
rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its
debtors.
xxxx
To begin with, PNB’s argument rests on a misapprehension of the import of the appellate court’s
ruling. The Court of Appeals nullified the interest rate increases not because the promissory note
did not comply with P.D. No. 1684 by providing for a de-escalation, but because the absence of
such provision made the clause so one-sided as to make it unreasonable.
That ruling is correct. It is in line with our decision in Banco Filipino Savings & Mortgage Bank
v. Navarro that although P.D. No. 1684 is not to be retroactively applied to loans granted before
its effectivity, there must nevertheless be a de-escalation clause to mitigate the one-sidedness of
the escalation clause. Indeed because of concern for the unequal status of borrowers vis-à-vis the
banks, our cases after Banco Filipino have fashioned the rule that any increase in the rate of
interest made pursuant to an escalation clause must be the result of agreement between the
parties.
Thus in Philippine National Bank v. Court of Appeals, two promissory notes authorized PNB to
increase the stipulated interest per annum" within the limits allowed by law at any time
depending on whatever policy [PNB] may adopt in the future; Provided, that the interest rate on
this note shall be correspondingly decreased in the event that the applicable maximum interest
rate is reduced by law or by the Monetary Board." The real estate mortgage likewise provided:
The rate of interest charged on the obligation secured by this mortgage as well as the interest on
the amount which may have been advanced by the MORTGAGEE, in accordance with the
provisions hereof, shall be subject during the life of this contract to such an increase within the
rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its
debtors.
Pursuant to these clauses, PNB successively increased the interest from 18% to 32%, then to
41% and then to 48%. This Court declared the increases unilaterally imposed by [PNB] to be in
violation of the principle of mutuality as embodied in Art.1308 of the Civil Code, which provides
that "[t]he contract must bind both contracting parties; its validity or compliance cannot be left to
the will of one of them." As the Court explained:
will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555).
Hence, even assuming that the ₱1.8 million loan agreement between the PNB and the private
respondent gave the PNB a license (although in fact there was none) to increase the interest rate
at will during the term of the loan, that license would have been null and void for being violative
of the principle of mutuality essential in contracts. It would have invested the loan agreement
with the character of a contract of adhesion, where the parties do not bargain on equal footing,
the weaker party’s (the debtor) participation being reduced to the alternative "to take it or leave
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.
A similar ruling was made in Philippine National Bank v. Court of Appeals. The credit agreement
in that case provided:
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 accommodation shall be correspondingly decreased in the event that the applicable
maximum interest is reduced by law or by the Monetary Board. . . .
As in the first case, PNB successively increased the stipulated interest so that what was originally
12% per annum became, after only two years, 42%. In declaring the increases invalid, we held:
We cannot countenance petitioner bank’s posturing that the escalation clause at bench gives it
unbridled right to unilaterally upwardly adjust the interest on private respondents’ loan. That
would completely take away from private respondents the right to assent to an important
modification in their agreement, and would negate the element of mutuality in contracts.
Only recently we invalidated another round of interest increases decreed by PNB pursuant to a
similar agreement it had with other borrowers:
[W]hile the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the
said circular could possibly be read as granting respondent bank carte blanche authority to raise
interest rates to levels which would either enslave its borrowers or lead to a hemorrhaging of
their assets.
In this case no attempt was made by PNB to secure the conformity of private respondents to the
successive increases in the interest rate. Private respondents’ assent to the increases can not be
implied from their lack of response to the letters sent by PNB, informing them of the increases.
For as stated in one case, no one receiving a proposal to change a contract is obliged to answer
the proposal.71 (Emphasis supplied)
We made the same pronouncement in a fifth case, New Sampaguita Builders Construction, Inc.
v. Philippine National Bank,72 thus –
Courts have the authority to strike down or to modify provisions in promissory notes that grant
the lenders unrestrained power to increase interest rates, penalties and other charges at the latter’s
sole discretion and without giving prior notice to and securing the consent of the borrowers. This
unilateral authority is anathema to the mutuality of contracts and enable lenders to take undue
advantage of borrowers. Although the Usury Law has been effectively repealed, courts may still
reduce iniquitous or unconscionable rates charged for the use of money. Furthermore, excessive
interests, penalties and other charges not revealed in disclosure statements issued by banks, even
if stipulated in the promissory notes, cannot be given effect under the Truth in Lending
Act.73 (Emphasis supplied)
Yet again, in a sixth disposition, Philippine National Bank v. Spouses Rocamora, 74 the above
pronouncements were reiterated to debunk PNB’s repeated reliance on its invalidated contract
stipulations:
We repeated this rule in the 1994 case of PNB v. CA and Jayme Fernandez and the 1996 case of
PNB v. CA and Spouses Basco. Taking no heed of these rulings, the escalation clause PNB used
in the present case to justify the increased interest rates is no different from the escalation clause
assailed in the 1996 PNB case; in both, the interest rates were increased from the agreed 12% per
annum rate to 42%. x x x
xxxx
On the strength of this ruling, PNB’s argument – that the spouses Rocamora’s failure to contest
the increased interest rates that were purportedly reflected in the statements of account and the
demand letters sent by the bank amounted to their implied acceptance of the increase – should
likewise fail.
Evidently, PNB’s failure to secure the spouses Rocamora’s consent to the increased interest rates
prompted the lower courts to declare excessive and illegal the interest rates imposed. Togo
around this lower court finding, PNB alleges that the ₱206,297.47 deficiency claim was
computed using only the original 12% per annum interest rate. We find this unlikely. Our
examination of PNB’s own ledgers, included in the records of the case, clearly indicates that
PNB imposed interest rates higher than the agreed 12% per annum rate. This confirmatory
finding, albeit based solely on ledgers found in the records, reinforces the application in this case
of the rule that findings of the RTC, when affirmed by the CA, are binding upon this
Court.75 (Emphases supplied)
Verily, all these cases, including the present one, involve identical or similar provisions found in
respondent’s credit agreements and promissory notes. Thus, the July 1989 Credit Agreement
executed by petitioners and respondent contained the following stipulation on interest:
1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% [per annum]. Interest
the renewal.
has imposed on the Loan interest at a rate per annum which is equal to the Bank’s spread over
while the eight promissory notes issued pursuant thereto granted PNB the right to increase or
reduce interest rates "within the limits allowed by law or the Monetary Board" 77 and the Real
Estate Mortgage agreement included the same right to increase or reduce interest rates "at any
time depending on whatever policy PNB may adopt in the future."78
On the basis of the Credit Agreement, petitioners issued promissory notes which they signed in
blank, and respondent later on entered their corresponding interest rates, as follows:
1st Promissory Note dated July 24, 1989 – 19.5%;
2nd Promissory Note dated November 22, 1989 – 23%;
3rd Promissory Note dated March 21, 1990 – 22%;
4th Promissory Note dated July 19, 1990 – 24%;
5th Promissory Note dated December 17, 1990 – 28%;
6th Promissory Note dated February 14, 1991 – 32%;
7th Promissory Note dated March 1, 1991 – 30%; and
8th Promissory Note dated July 11, 1991 – 24%.79
On the other hand, the August 1991 Amendment to Credit Agreement contains the following
stipulation regarding interest:
of the date of each Availment.80 (Emphases supplied)
and under this Amendment to Credit Agreement, petitioners again executed and signed the
following promissory notes in blank, for the respondent to later on enter the corresponding
interest rates, which it did, as follows:
9th Promissory Note dated November 8, 1991 – 26%;
10th Promissory Note dated March 19, 1992 – 25%;
14th Promissory Note dated July 12, 1993 – 17.5%;
19th Promissory Note dated April 10, 1995 – 21%;
20th Promissory Note dated July 19, 1995 – 18.5%;
21st Promissory Note dated December 18, 1995 – 18.75%;
22nd Promissory Note dated April 22, 1996 – 18.5%;
23rd Promissory Note dated July 22, 1996 – 18.5%;
25th Promissory Note dated May 30, 1997 – 17.5%; and
26th Promissory Note (PN 9707237) dated July 30, 1997 – 25%.81
The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the Bank
may at any time without notice, raise within the limits allowed by law x x x." 82 On the other
hand, the 18th up to the 26th promissory notes – which includes PN 9707237 – carried the
following provision:
x x x For this purpose, I/We agree that the rate of interest herein stipulated may be increased or
decreased for the subsequent Interest Periods, with prior notice to the Borrower in the event of
changes in interest rate prescribed by law or the Monetary Board of the Central Bank of the
Philippines, or in the Bank’s overall cost of funds. I/We hereby agree that in the event I/we are
not agreeable to the interest rate fixed for any Interest Period, I/we shall have the option to
prepay the loan or credit facility without penalty within ten (10) calendar days from the Interest
Setting Date.83 (Emphasis supplied)
These stipulations must be once more invalidated, as was done in previous cases. The common
denominator in these cases is the lack of agreement of the parties to the imposed interest rates.
For this case, this lack of consent by the petitioners has been made obvious by the fact that they
signed the promissory notes in blank for the respondent to fill. We find credible the testimony of
Lydia in this respect. Respondent failed to discredit her; in fact, its witness PNB Kalibo Branch
Manager Aspa admitted that interest rates were fixed solely by its Treasury Department in
Manila, which were then simply communicated to all PNB branches for implementation. If this
were the case, then this would explain why petitioners had to sign the promissory notes in blank,
since the imposable interest rates have yet to be determined and fixed by respondent’s Treasury
Department in Manila.
Moreover, in Aspa’s enumeration of the factors that determine the interest rates PNB fixes – such
as cost of money, foreign currency values, bank administrative costs, profitability, and
considerations which affect the banking industry – it can be seen that considerations which affect
PNB’s borrowers are ignored. A borrower’s current financial state, his feedback or opinions, the
nature and purpose of his borrowings, the effect of foreign currency values or fluctuations on his
business or borrowing, etc. – these are not factors which influence the fixing of interest rates to
be imposed on him. Clearly, respondent’s method of fixing interest rates based on one-sided,
indeterminate, and subjective criteria such as profitability, cost of money, bank costs, etc. is
arbitrary for there is no fixed standard or margin above or below these considerations.
The stipulation in the promissory notes subjecting the interest rate to review does not render the
imposition by UCPB of interest rates on the obligations of the spouses Beluso valid. According
to said stipulation:
The interest rate shall be subject to review and may be increased or decreased by the LENDER
considering among others the prevailing financial and monetary conditions; or the rate of interest
and charges which other banks or financial institutions charge or offer to charge for similar
accommodations; and/or the resulting profitability to the LENDER after due consideration of all
dealings with the BORROWER.
It should be pointed out that the authority to review the interest rate was given [to] UCPB alone
as the lender. Moreover, UCPB may apply the considerations enumerated in this provision as it
wishes. As worded in the above provision, UCPB may give as much weight as it desires to each
of the following considerations: (1) the prevailing financial and monetary condition;(2) the rate
of interest and charges which other banks or financial institutions charge or offer to charge for
similar accommodations; and/or(3) the resulting profitability to the LENDER (UCPB) after due
consideration of all dealings with the BORROWER (the spouses Beluso). Again, as in the case
of the interest rate provision, there is no fixed margin above or below these considerations.
In view of the foregoing, the Separability Clause cannot save either of the two options of UCPB
as to the interest to be imposed, as both options violate the principle of mutuality of
contracts.84 (Emphases supplied)
To repeat what has been said in the above-cited cases, any modification in the contract, such as
the interest rates, must be made with the consent of the contracting parties.1âwphi1 The minds of
all the parties must meet as to the proposed modification, especially when it affects an important
aspect of the agreement. In the case of loan agreements, the rate of interest is a principal
condition, if not the most important component. Thus, any modification thereof must be mutually
agreed upon; otherwise, it has no binding effect.
What is even more glaring in the present case is that, the stipulations in question no longer
provide that the parties shall agree upon the interest rate to be fixed; -instead, they are worded in
such a way that the borrower shall agree to whatever interest rate respondent fixes. In credit
agreements covered by the above-cited cases, it is provided that:
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 accommodation shall be correspondingly decreased in the event that the applicable
maximum interest rate is reduced by law or by the Monetary Board. In either case, the
adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase
or decrease in maximum interest rate.85 (Emphasis supplied)
Whereas, in the present credit agreements under scrutiny, it is stated that:
IN THE JULY 1989 CREDIT AGREEMENT
(b) The Borrower agrees that the Bank may modify the interest rate on the Loan depending on
has imposed on the Loan interest at a rate per annum, which is equal to the Bank’s spread over
IN THE AUGUST 1991 AMENDMENT TO CREDIT AGREEMENT
of the date of each Availment.87 (Emphasis supplied)
Plainly, with the present credit agreement, the element of consent or agreement by the borrower
is now completely lacking, which makes respondent’s unlawful act all the more reprehensible.
Accordingly, petitioners are correct in arguing that estoppel should not apply to them, for
"[e]stoppel cannot be predicated on an illegal act. As between the parties to a contract, validity
cannot be given to it by estoppel if it is prohibited by law or is against public policy."88
It appears that by its acts, respondent violated the Truth in Lending Act, or Republic Act No.
3765, which was enacted "to protect x x x citizens from a lack of awareness of the true cost of
credit to the user by using a full disclosure of such cost with a view of preventing the uninformed
use of credit to the detriment of the national economy." 89 The law "gives a detailed enumeration
of the specific information required to be disclosed, among which are the interest and other
charges incident to the extension of credit."90 Section 4 thereof provides that a disclosure
statement must be furnished prior to the consummation of the transaction, thus:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the
consummation of the transaction, a clear statement in writing setting forth, to the extent
applicable and in accordance with rules and regulations prescribed by the Board, the following
information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such person in
connection with the transaction but which are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed expressed as a
simple annual rate on the outstanding unpaid balance of the obligation.
Under Section 4(6), "finance charge" represents the amount to be paid by the debtor incident to
the extension of credit such as interest or discounts, collection fees, credit investigation fees,
attorney’s fees, and other service charges. The total finance charge represents the difference
between (1) the aggregate consideration (down payment plus installments) on the part of the
debtor, and (2) the sum of the cash price and non-finance charges.91
By requiring the petitioners to sign the credit documents and the promissory notes in blank, and
then unilaterally filling them up later on, respondent violated the Truth in Lending Act, and was
remiss in its disclosure obligations. In one case, which the Court finds applicable here, it was
held:
UCPB further argues that since the spouses Beluso were duly given copies of the subject
promissory notes after their execution, then they were duly notified of the terms thereof, in
substantial compliance with the Truth in Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the
disclosure statement must be furnished prior to the consummation of the transaction:
information:
The rationale of this provision is to protect users of credit from a lack of awareness of the true
cost thereof, proceeding from the experience that banks are able to conceal such true cost by
hidden charges, uncertainty of interest rates, deduction of interests from the loaned amount, and
the like. The law thereby seeks to protect debtors by permitting them to fully appreciate the true
cost of their loan, to enable them to give full consent to the contract, and to properly evaluate
their options in arriving at business decisions. Upholding UCPB’s claim of substantial
compliance would defeat these purposes of the Truth in Lending Act. The belated discovery of
the true cost of credit will too often not be able to reverse the ill effects of an already
consummated business decision.
In addition, the promissory notes, the copies of which were presented to the spouses Beluso after
execution, are not sufficient notification from UCPB. As earlier discussed, the interest rate
provision therein does not sufficiently indicate with particularity the interest rate to be applied to
the loan covered by said promissory notes.92 (Emphases supplied)
However, the one-year period within which an action for violation of the Truth in Lending Act
may be filed evidently prescribed long ago, or sometime in 2001, one year after petitioners
received the March 2000 demand letter which contained the illegal charges.
The fact that petitioners later received several statements of account detailing its outstanding
obligations does not cure respondent’s breach. To repeat, the belated discovery of the true cost of
credit does not reverse the ill effects of an already consummated business decision.93
Neither may the statements be considered proposals sent to secure the petitioners’ conformity;
they were sent after the imposition and application of the interest rate, and not before. And even
if it were to be presumed that these are proposals or offers, there was no acceptance by
petitioners. "No one receiving a proposal to modify a loan contract, especially regarding interest,
is obliged to answer the proposal."94
Loan and credit arrangements may be made enticing by, or "sweetened" with, offers of low initial
interest rates, but actually accompanied by provisions written in fine print that allow lenders to
later on increase or decrease interest rates unilaterally, without the consent of the borrower, and
depending on complex and subjective factors. Because they have been lured into these contracts
by initially low interest rates, borrowers get caught and stuck in the web of subsequent steep
rates and penalties, surcharges and the like. Being ordinary individuals or entities, they naturally
dread legal complications and cannot afford court litigation; they succumb to whatever charges
the lenders impose. At the very least, borrowers should be charged rightly; but then again this is
not possible in a one-sided credit system where the temptation to abuse is strong and the
willingness to rectify is made weak by the eternal desire for profit.
Given the above supposition, the Court cannot subscribe to respondent’s argument that in every
repricing of petitioners’ loan availment, they are given the right to question the interest rates
imposed. The import of respondent’s line of reasoning cannot be other than that if one out of
every hundred borrowers questions respondent’s practice of unilaterally fixing interest rates, then
only the loan arrangement with that lone complaining borrower will enjoy the benefit of review
or re-negotiation; as to the 99 others, the questionable practice will continue unchecked, and
respondent will continue to reap the profits from such unscrupulous practice. The Court can no
more condone a view so perverse. This is exactly what the Court meant in the immediately
preceding cited case when it said that "the belated discovery of the true cost of credit does not
reverse the ill effects of an already consummated business decision;" 95 as to the 99 borrowers
who did not or could not complain, the illegal act shall have become a fait accompli– to their
detriment, they have already suffered the oppressive rates.
Besides, that petitioners are given the right to question the interest rates imposed is, under the
circumstances, irrelevant; we have a situation where the petitioners do not stand on equal footing
with the respondent. It is doubtful that any borrower who finds himself in petitioners’ position
would dare question respondent’s power to arbitrarily modify interest rates at any time. In the
second place, on what basis could any borrower question such power, when the criteria or
standards – which are really one-sided, arbitrary and subjective – for the exercise of such power
are precisely lost on him?
For the same reasons, the Court cannot validly consider that, as stipulated in the 18th up to the
26th promissory notes, petitioners are granted the option to prepay the loan or credit facility
without penalty within 10 calendar days from the Interest Setting Date if they are not agreeable
to the interest rate fixed. It has been shown that the promissory notes are executed and signed in
blank, meaning that by the time petitioners learn of the interest rate, they are already bound to
pay it because they have already pre-signed the note where the rate is subsequently entered.
Besides, premium may not be placed upon a stipulation in a contract which grants one party the
right to choose whether to continue with or withdraw from the agreement if it discovers that what
the other party has been doing all along is improper or illegal.
Thus said, respondent’s arguments relative to the credit documents – that documentary evidence
prevails over testimonial evidence; that the credit documents are in proper form, presumed
regular, and endure, against arbitrary claims by petitioners, experienced business persons that
they are, they signed questionable loan documents whose provisions for interest rates were left
blank, and yet they continued to pay the interests without protest for a number of years – deserve
no consideration.
With regard to interest, the Court finds that since the escalation clause is annulled, the principal
amount of the loan is subject to the original or stipulated rate of interest, and upon maturity, the
amount due shall be subject to legal interest at the rate of 12% per annum. This is the uniform
ruling adopted in previous cases, including those cited here.96 The interests paid by petitioners
should be applied first to the payment of the stipulated or legal and unpaid interest, as the case
may be, and later, to the capital or principal.97 Respondent should then refund the excess amount
of interest that it has illegally imposed upon petitioners; "[t]he amount to be refunded refers to
that paid by petitioners when they had no obligation to do so." 98 Thus, the parties’ original
agreement stipulated the payment of 19.5% interest; however, this rate was intended to apply
only to the first promissory note which expired on November 21, 1989 and was paid by
petitioners; it was not intended to apply to the whole duration of the loan. Subsequent higher
interest rates have been declared illegal; but because only the rates are found to be improper, the
obligation to pay interest subsists, the same to be fixed at the legal rate of 12% per annum.
However, the 12% interest shall apply only until June 30, 2013. Starting July1, 2013, the
prevailing rate of interest shall be 6% per annum pursuant to our ruling in Nacar v. Gallery
Frames99 and Bangko Sentral ng Pilipinas-Monetary Board Circular No. 799.
Now to the issue of penalty. PN 9707237 provides that failure to pay it or any installment
thereon, when due, shall constitute default, and a penalty charge of 24% per annum based on the
defaulted principal amount shall be imposed. Petitioners claim that this penalty should be
excluded from the foreclosure amount or bid price because the Real Estate Mortgage and the
Supplement thereto did not specifically include it as part of the secured amount. Respondent
justifies its inclusion in the secured amount, saying that the purpose of the penalty or a penal
clause is to ensure the performance of the obligation and substitute for damages and the payment
of interest in the event of non-compliance.100 Respondent adds that the imposition and collection
of a penalty is a normal banking practice, and the standard rate per annum for all commercial
banks, at the time, was 24%. Its inclusion as part of the secured amount in the mortgage
agreements is thus valid and necessary.
The Court sustains petitioners’ view that the penalty may not be included as part of the secured
amount. Having found the credit agreements and promissory notes to be tainted, we must accord
the same treatment to the mortgages. After all, "[a] mortgage and a note secured by it are deemed
parts of one transaction and are construed together."101 Being so tainted and having the attributes
of a contract of adhesion as the principal credit documents, we must construe the mortgage
contracts strictly, and against the party who drafted it. An examination of the mortgage
agreements reveals that nowhere is it stated that penalties are to be included in the secured
amount. Construing this silence strictly against the respondent, the Court can only conclude that
the parties did not intend to include the penalty allowed under PN 9707237 as part of the secured
amount. Given its resources, respondent could have – if it truly wanted to – conveniently
prepared and executed an amended mortgage agreement with the petitioners, thereby including
penalties in the amount to be secured by the encumbered properties. Yet it did not.
With regard to attorney’s fees, it was plain error for the CA to have passed upon the issue since it
was not raised by the petitioners in their appeal; it was the respondent that improperly brought it
up in its appellee’s brief, when it should have interposed an appeal, since the trial court’s
Decision on this issue is adverse to it. It is an elementary principle in the subject of appeals that
an appellee who does not himself appeal cannot obtain from the appellate court any affirmative
relief other than those granted in the decision of the court below.
x x x [A]n appellee, who is at the same time not an appellant, may on appeal be permitted to
make counter assignments of error in ordinary actions, when the purpose is merely to defend
himself against an appeal in which errors are alleged to have been committed by the trial court
both in the appreciation of facts and in the interpretation of the law, in order to sustain the
judgment in his favor but not when his purpose is to seek modification or reversal of the
judgment, in which case it is necessary for him to have excepted to and appealed from the
judgment.102
Since petitioners did not raise the issue of reduction of attorney’s fees, the CA possessed no
authority to pass upon it at the instance of respondent. The ruling of the trial court in this respect
should remain undisturbed.
For the fixing of the proper amounts due and owing to the parties – to the respondent as creditor
and to the petitioners who are entitled to a refund as a consequence of overpayment considering
that they paid more by way of interest charges than the 12% per annum 103 herein allowed – the
case should be remanded to the lower court for proper accounting and computation, applying the
following procedure:
1. The 1st Promissory Note with the 19.5% interest rate is deemed proper and paid;
2. All subsequent promissory notes (from the 2nd to the 26th promissory notes) shall
carry an interest rate of only 12% per annum. 104 Thus, interest payment made in excess of
12% on the 2nd promissory note shall immediately be applied to the principal, and the
principal shall be accordingly reduced. The reduced principal shall then be subjected to
the 12%105 interest on the 3rd promissory note, and the excess over 12% interest payment
on the 3rd promissory note shall again be applied to the principal, which shall again be
reduced accordingly. The reduced principal shall then be subjected to the 12% interest on
the 4th promissory note, and the excess over12% interest payment on the 4th promissory
note shall again be applied to the principal, which shall again be reduced accordingly.
And so on and so forth;
3. After the above procedure is carried out, the trial court shall be able to conclude if
petitioners a) still have an OUTSTANDING BALANCE/OBLIGATION or b) MADE
PAYMENTS OVER AND ABOVE THEIR TOTAL OBLIGATION (principal and
interest);
4. Such outstanding balance/obligation, if there be any, shall then be subjected to a 12%

per annum interest from October 28, 1997 until January 14, 1999, which is the date of the
auction sale;
5. Such outstanding balance/obligation shall also be charged a 24% per annum penalty
from August 14, 1997 until January 14, 1999. But from this total penalty, the petitioners’
previous payment of penalties in the amount of ₱202,000.00made on January 27,
1998106 shall be DEDUCTED;
6. To this outstanding balance (3.), the interest (4.), penalties (5.), and the final and
executory award of 1% attorney’s fees shall be ADDED;
7. The sum total of the outstanding balance (3.), interest (4.) and 1% attorney’s fees (6.)
shall be DEDUCTED from the bid price of ₱4,324,172.96. The penalties (5.) are not
included because they are not included in the secured amount;
8. The difference in (7.) [₱4,324,172.96 LESS sum total of the outstanding balance (3.),
interest (4.), and 1% attorney’s fees (6.)] shall be DELIVERED TO THE PETITIONERS;
9. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-16208;
10. ON THE OTHER HAND, if after performing the procedure in (2.), it turns out that
petitioners made an OVERPAYMENT, the interest (4.), penalties (5.), and the award of
1% attorney’s fees (6.) shall be DEDUCTED from the overpayment. There is no
outstanding balance/obligation precisely because petitioners have paid beyond the
amount of the principal and interest;
11. If the overpayment exceeds the sum total of the interest (4.), penalties (5.), and award
of 1% attorney’s fees (6.), the excess shall be RETURNED to the petitioners, with legal
interest, under the principle of solutio indebiti;107
12. Likewise, if the overpayment exceeds the total amount of interest (4.) and award of
1% attorney’s fees (6.), the trial court shall INVALIDATE THE EXTRAJUDICIAL
FORECLOSURE AND SALE;
13. HOWEVER, if the total amount of interest (4.) and award of 1% attorney’s fees (6.)
exceed petitioners’ overpayment, then the excess shall be DEDUCTED from the bid price
of ₱4,324,172.96;
14. The difference in (13.) [₱4,324,172.96 LESS sum total of the interest (4.) and 1%
attorney’s fees (6.)] shall be DELIVERED TO THE PETITIONERS;
15. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-16208.
The outstanding penalties, if any, shall be collected by other means.
From the above, it will be seen that if, after proper accounting, it turns out that the
petitioners made payments exceeding what they actually owe by way of principal,
interest, and attorney’s fees, then the mortgaged properties need not answer for any
outstanding secured amount, because there is not any; quite the contrary, respondent must
refund the excess to petitioners.1âwphi1 In such case, the extrajudicial foreclosure and
sale of the properties shall be declared null and void for obvious lack of basis, the case
being one of solutio indebiti instead. If, on the other hand, it turns out that petitioners’
overpayments in interests do not exceed their total obligation, then the respondent may
consolidate its ownership over the properties, since the period for redemption has
expired. Its only obligation will be to return the difference between its bid price
(₱4,324,172.96) and petitioners’ total obligation outstanding – except penalties – after
applying the latter’s overpayments.
WHEREFORE, premises considered, the Petition is GRANTED. The May 8, 2007 Decision of
the Court of Appeals in CA-G.R. CV No. 79650 is ANNULLED and SET ASIDE. Judgment is
hereby rendered as follows:
1. The interest rates imposed and indicated in the 2nd up to the 26th Promissory Notes are
DECLARED NULL AND VOID, and such notes shall instead be subject to interest at the
rate of twelve percent (12%) per annum up to June 30, 2013, and starting July 1, 2013,
six percent (6%) per annum until full satisfaction;
2. The penalty charge imposed in Promissory Note No. 9707237 shall be EXCLUDED
from the amounts secured by the real estate mortgages;
3. The trial court’s award of one per cent (1%) attorney’s fees is REINSTATED;
4. The case is ordered REMANDED to the Regional Trial Court, Branch 6 of Kalibo,
Aklan for the computation of overpayments made by petitioners spouses Eduardo and
Lydia Silos to respondent Philippine National Bank, taking into consideration the
foregoing dispositions, and applying the procedure hereinabove set forth;
5. Thereafter, the trial court is ORDERED to make a determination as to the validity of

the extrajudicial foreclosure and sale, declaring the same null and void in case of
overpayment and ordering the release and return of Transfer Certificates of Title Nos. T-
14250 and TCT T-16208 to petitioners, or ordering the delivery to the petitioners of the
difference between the bid price and the total remaining obligation of petitioners, if any;
6. In the meantime, the respondent Philippine National Bank is ENJOINED from
consolidating title to Transfer Certificates of Title Nos. T-14250 and T-16208 until all the
steps in the procedure above set forth have been taken and applied;
7. The reimbursement of the excess in the bid price of ₱377,505.99, which respondent
Philippine National Bank is ordered to reimburse petitioners, should be HELD IN
ABEYANCE until the true amount owing to or owed by the parties as against each other
is determined;
8. Considering that this case has been pending for such a long time and that further
proceedings, albeit uncomplicated, are required, the trial court is ORDERED to proceed
with dispatch.
SO ORDERED.
G.R. No. 183360 September 8, 2014
ROLANDO C. DE LA PAZ,* Petitioner,

vs.
L & J DEVELOPMENT COMPANY, Respondent.
DECISION
DEL CASTILLO, J.:
"No interest shall be due unless it has been expressly stipulated in writing."1
This is a Petition for Review on Certiorari 2 assailing the February 27, 2008 Decision 3 of the
Court of Appeals (CA) in CA-G.R. SP No. 100094, which reversed and set aside the
Decision4 dated April 19, 2007 of the Regional Trial Court (RTC), Branch 192, Marikina City in
Civil Case No. 06-1145-MK. The said RTC Decision affirmed in all respects the Decision 5 dated
June 30, 2006 of the Metropolitan Trial Court (MeTC), Branch 75, Marikina City in Civil Case
No. 05-7755, which ordered respondent L & J Development Company (L&J) to pay petitioner
Architect Rolando C. De La Paz (Rolando) its principal obligation of ₱350,000.00, plus 12%
interest per annumreckoned from the filing of the Complaint until full payment of the obligation.
Likewise assailed is the CA’s June 6, 2008 Resolution 6 which denied Rolando’s Motion for
Reconsideration.
Factual Antecedents
On December 27, 2000, Rolando lent ₱350,000.00 without any security to L&J, a property
developer with Atty. Esteban Salonga (Atty. Salonga) as its President and General Manager. The
loan, with no specified maturity date, carried a 6% monthly interest, i.e., ₱21,000.00. From
December 2000 to August 2003, L&J paid Rolando a total of ₱576,000.00 7 representing interest
charges.
As L&J failed to pay despite repeated demands, Rolando filed a Complaint 8 for Collection of
Sum of Money with Damages against L&J and Atty. Salonga in his personal capacity before the
MeTC, docketed as Civil Case No. 05-7755. Rolando alleged, amongothers, that L&J’s debtas of
January 2005, inclusive of the monthly interest, stood at ₱772,000.00; that the 6% monthly
interest was upon Atty. Salonga’s suggestion; and, that the latter tricked him into parting with his
money without the loan transaction being reduced into writing.
In their Answer,9 L&J and Atty. Salonga denied Rolando’s allegations. While they acknowledged
the loan as a corporate debt, they claimed that the failure to pay the same was due to a fortuitous
event, that is, the financial difficulties brought about by the economic crisis. They further argued
that Rolando cannot enforce the 6% monthly interest for being unconscionable and shocking to
the morals. Hence, the payments already made should be applied to the ₱350,000.00 principal
loan.
During trial, Rolando testified that he had no communication with Atty. Salonga prior to the loan
transaction but knew him as a lawyer, a son of a former Senator, and the owner of L&J which
developed Brentwood Subdivision in Antipolo where his associate Nilo Velasco (Nilo) lives.
When Nilo told him that Atty. Salonga and L&J needed money to finish their projects, heagreed
to lend them money. He personally met withAtty. Salonga and their meeting was cordial.
He narrated that when L&J was in the process of borrowing the ₱350,000.00 from him, it was
Arlene San Juan (Arlene), the secretary/treasurer of L&J, who negotiated the terms and
conditions thereof.She said that the money was to finance L&J’s housing project. Rolando
claimed that it was not he who demanded for the 6% monthly interest. It was L&J and Atty.
Salonga, through Arlene, who insisted on paying the said interest as they asserted that the loan
was only a short-term one.
Ruling of the Metropolitan Trial Court
The MeTC, in its Decision10 of June 30, 2006, upheld the 6% monthly interest. In so ruling, it
ratiocinated that since L&J agreed thereto and voluntarily paid the interest at suchrate from 2000
to 2003, it isalready estopped from impugning the same. Nonetheless, for reasons of equity, the
saidcourt reduced the interest rate to 12% per annumon the remaining principal obligation of
₱350,000.00. With regard to Rolando’s prayer for moral damages, the MeTC denied the same as
it found no malice or bad faith on the part ofL&J in not paying the obligation. It likewise
relieved Atty. Salonga of any liability as it found that he merely acted in his official capacity in
obtaining the loan. The MeTC disposed of the case as follows:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff, Arch.
Rolando C. Dela Paz, and against the defendant, L & J Development Co., Inc., as follows:
a) ordering the defendant L & J Development Co., Inc. to pay plaintiff the amount of
Three Hundred Fifty Thousand Pesos (₱350,000.00) representing the principal obligation,
plus interest at the legal rate of 12% per annum to be computed from January 20, 2005,
the date of the filing of the complaint, until the whole obligation is fully paid;
b) ordering the defendant L & J Development Co., Inc. to pay plaintiff the amount of Five
Thousand Pesos (₱5,000.00) as and for attorney’s fees; and
c) to pay the costs of this suit.
SO ORDERED.11
Ruling of the Regional Trial Court
L&J appealed to the RTC. It asserted in its appeal memorandum12 that from December 2000 to
March 2003, it paid monthly interest of ₱21,000.00 based on the agreed-upon interest rate of
6%monthly and from April 2003 to August 2003, interest paymentsin various amounts. 13 The
total of interest payments made amounts to ₱576,000.00 – an amount which is even more than
the principal obligation of ₱350,000.00
L&J insisted that the 6% monthly interest rate is unconscionable and immoral. Hence, the 12%
per annumlegal interest should have been applied from the time of the constitution of the
obligation. At 12% per annum interest rate, it asserted that the amount of interestit ought to pay
from December 2000 to March 2003 and from April 2003 to August 2003, only amounts to
₱105,000.00. If this amount is deducted from the total interest paymentsalready made, which is
₱576,000.00, the amount of ₱471,000.00 appears to have beenpaid over and above what is due.
Applying the rule on compensation, the principal loan of ₱350,000.00 should be set-off against
the ₱471,000.00, resulting in the complete payment of the principal loan.
Unconvinced, the RTC, inits April 19, 2007 Decision, 14 affirmed the MeTC Decision, viz:
WHEREFORE, premises considered, the Decision appealed from is hereby AFFIRMED in all
respects, with costs against the appellant.
SO ORDERED.15
Ruling of the Court of Appeals
Undaunted, L&J went to the CA and echoed its arguments and proposed computation as
proffered before the RTC.
In a Decision16 dated February 27, 2008, the CAreversed and set aside the RTC Decision. The
CA stressed that the parties failedto stipulate in writing the imposition of interest on the loan.
Hence, no interest shall be due thereon pursuant to Article 1956 of the Civil Code. 17 And even if
payment of interest has been stipulated in writing, the 6% monthly interest is still outrightly
illegal and unconscionable because it is contrary to morals, if not against the law. Being void,
this cannot be ratified and may be set up by the debtor as defense. For these reasons, Rolando
cannot collect any interest even if L&J offered to pay interest. Consequently, he has to return all
the interest payments of ₱576,000.00 to L&J.
Considering further that Rolando and L&J thereby became creditor and debtor of each other, the
CA applied the principle of legal compensation under Article 1279 of the Civil
Code.18 Accordingly, it set off the principal loan of ₱350,000.00 against the ₱576,000.00 total
interest payments made, leaving an excess of ₱226,000.00, which the CA ordered Rolando to pay
L&J plus interest. Thus:
WHEREFORE, the DECISION DATED APRIL 19, 2007 is REVERSED and SET ASIDE.
CONSEQUENT TO THE FOREGOING, respondent Rolando C. Dela Paz is ordered to pay to

the petitioner the amount of ₱226,000.00,plus interest of 12% per annumfrom the finality of this
decision.
Costs of suit to be paid by respondent Dela Paz.
SO ORDERED.19
In his Motion for Reconsideration,20 Rolando argued thatthe circumstances exempt both the
application of Article 1956 and of jurisprudence holding that a 6% monthly interest is
unconscionable, unreasonable, and exorbitant. He alleged that Atty. Salonga, a lawyer, should
have taken it upon himself to have the loan and the stipulated rate of interest documented but, by
way of legal maneuver, Atty. Salonga, whom he fully trusted and relied upon, tricked him into
believing that the undocumented and uncollateralized loan was withinlegal bounds. Had Atty.
Salonga told him that the stipulated interest should be in writing, he would have readily assented.
Furthermore, Rolando insisted that the 6% monthly interest ratecould not be unconscionable as
in the first place, the interest was not imposed by the creditor but was in fact offered by the
borrower, who also dictated all the terms of the loan. He stressed that in cases where interest
rates were declared unconscionable, those meant to be protected by such declaration are helpless
borrowers which is not the case here.
Still, the CA denied Rolando’s motion in its Resolution21 of June 6, 2008.
Hence, this Petition.
The Parties’ Arguments
Rolando argues that the 6%monthly interest rateshould not have been invalidated because Atty.
Salonga took advantage of his legal knowledge to hoodwink him into believing that no document
was necessaryto reflect the interest rate. Moreover, the cases anent unconscionable interest rates
that the CA relied upon involve lenders who imposed the excessive rates,which are totally
different from the case at bench where it is the borrower who decided on the high interest rate.
This case does not fall under a scenariothat ‘enslaves the borrower or that leads to the
hemorrhaging of his assets’ that the courts seek to prevent.
L&J, in controverting Rolando’s arguments, contends that the interest rate is subject of
negotiation and is agreedupon by both parties, not by the borrower alone. Furthermore,
jurisprudence has nullified interestrates on loans of 3% per month and higher as these rates are
contrary to moralsand public interest. And while Rolando raises bad faithon Atty. Salonga’s part,
L&J avers thatsuch issue is a question of fact, a matter that cannot be raised under Rule 45.
Issue
The Court’s determination of whether to uphold the judgment of the CA that the principal loan is
deemed paid isdependent on the validity of the monthly interest rate imposed. And in
determining such validity, the Court must necessarily delve into matters regarding a) the form of
the agreement of interest under the law and b) the alleged unconscionability of the interest rate.
Our Ruling
The Petition is devoid of merit.
The lack of a written stipulation to pay interest on the loaned amount disallows a creditor from
charging monetary interest.
Under Article 1956 of the Civil Code, no interest shall bedue unless it has been expressly
stipulated in writing. Jurisprudence on the matter also holds that for interest to be due and
payable, two conditions must concur: a) express stipulation for the payment of interest; and b)
the agreement to pay interest is reduced in writing.
Here, it is undisputed that the parties did not put down in writing their agreement. Thus, no
interest is due. The collection of interest without any stipulation in writing is prohibited by law.22
But Rolando asserts that his situation deserves an exception to the application of Article 1956.
He blames Atty. Salonga for the lack of a written document, claiming that said lawyer used his
legal knowledge to dupe him. Rolando thus imputes bad faith on the part of L&J and Atty.
Salonga. The Court, however, finds no deception on the partof L&J and Atty. Salonga. For one,
despite the lack of a document stipulating the payment of interest, L&J nevertheless devotedly
paid interests on the loan. It only stopped when it suffered from financial difficulties that
prevented it from continuously paying the 6% monthly rate. For another,regardless of Atty.
Salonga’s profession, Rolando who is an architect and an educated man himself could have been
a more reasonably prudent person under the circumstances. To top it all, he admitted that he had
no prior communication with Atty. Salonga. Despite Atty. Salonga being a complete stranger, he
immediately trusted him and lent his company ₱350,000.00, a significant amount. Moreover, as
the creditor,he could have requested or required that all the terms and conditions of the loan
agreement, which include the payment of interest, be put down in writing to ensure that he and
L&J are on the same page. Rolando had a choice of not acceding and to insist that their contract
be put in written form as this will favor and safeguard him as a lender. Unfortunately, he did not.
It must be stressed that "[c]ourts cannot follow one every step of his life and extricate him from
bad bargains, protect him from unwise investments, relieve him from one-sided contracts,or
annul the effects of foolish acts. Courts cannotconstitute themselves guardians of persons who
are not legally incompetent."23
It may be raised that L&J is estopped from questioning the interest rate considering that it has
been paying Rolando interest at such ratefor more than two and a half years. In fact, in its
pleadings before the MeTCand the RTC, L&J merely prayed for the reduction of interest from
6% monthly to 1% monthly or 12% per annum. However, in Ching v. Nicdao, 24 the daily
payments of the debtor to the lender were considered as payment of the principal amount of the
loan because Article 1956 was not complied with. This was notwithstanding the debtor’s
admission that the payments made were for the interests due. The Court categorically stated
therein that "[e]stoppel cannot give validity to an act that is prohibited by law or one thatis
against public policy."
Even if the payment of interest has been reduced in writing, a 6% monthly interest rate on a loan
is unconscionable, regardless of who between the parties proposed the rate.
Indeed at present, usury has been legally non-existent in view of the suspension of the Usury
Law25 by Central Bank Circular No. 905 s. 1982. 26 Even so, not all interest rates levied upon
loans are permitted by the courts as they have the power to equitably reduce unreasonable
interest rates. In Trade & Investment Development Corporation of the Philippines v. Roblett
Industrial Construction Corporation,27 we said:
While the Court recognizes the right of the parties to enter into contracts and who are expectedto
comply with their terms and obligations, this rule is not absolute. Stipulated interest rates are
illegal if they are unconscionable and the Court is allowed to temper interest rates when
necessary. In exercising this vested power to determine what is iniquitous and unconscionable,
the Court must consider the circumstances of each case. What may be iniquitous and
unconscionable in onecase, may be just in another. x x x28
Time and again, it has been ruled in a plethora of cases that stipulated interest rates of 3% per
month and higher, are excessive, iniquitous, unconscionable and exorbitant. Such stipulations are
void for being contrary to morals, if not against the law. 29 The Court, however, stresses that these
rates shall be invalidated and shall be reduced only in cases where the terms of the loans are
open-ended, and where the interest rates are applied for an indefinite period. Hence, the
imposition of a specific sum of ₱40,000.00 a month for six months on a ₱1,000,000.00 loan is
not considered unconscionable.30
In the case at bench, there is no specified period as to the payment of the loan. Hence, levying
6% monthly or 72% interest per annumis "definitely outrageous and inordinate." 31 The situation
that it was the debtor who insisted on the interest rate will not exempt Rolando from a ruling that
the rate is void. As this Court cited in Asian Cathay Finance and Leasing Corporation v.
Gravador,32 "[t]he imposition of an unconscionable rate of interest on a money debt, even if
knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant
spoliation and an iniquitous deprivation of property, repulsive to the common sense of
man."33 Indeed, "voluntariness does notmake the stipulation on [an unconscionable] interest
valid."34
As exhaustibly discussed,no monetary interest isdue Rolando pursuant to Article

1956.1âwphi1 The CA thus correctly adjudged that the excess interest payments made by L&J
should be applied to its principal loan. As computed by the CA, Rolando is bound to return the
excess payment of ₱226,000.00 to L&J following the principle of solutio indebiti.35
However, pursuant to Central Bank Circular No. 799 s. 2013 which took effect on July 1,
2013,36 the interest imposed by the CA must be accordingly modified. The ₱226,000.00 which
Rolando is ordered to pay L&J shall earn an interest of 6% per annumfrom the finality of this
Decision.
WHEREFORE, the Decision dated February 27, 2008 of the Court of Appeals in CA-G.R. SP
No. 100094 is hereby AFFIRMED with modification that petitioner Rolando C. De La Paz is
ordered to pay respondent L&J Development Company the amount of ,₱226,000.00, plus interest
of 6o/o per annum from the finality of this Decision until fully paid.
G.R. No. 184122 January 20, 2010
BANK OF THE PHILIPPINE ISLANDS, INC., Petitioner,

vs.
SPS. NORMAN AND ANGELINA YU and TUANSON BUILDERS CORPORATION
represented by PRES. NORMAN YU, Respondents.
DECISION
ABAD, J.:
This case is about the propriety of a summary judgment in resolving a documented claim of
alleged excessive penalty charges, interest, attorney’s fees, and foreclosure expenses imposed in
an extrajudicial foreclosure of mortgage.
The Facts and the Case
Respondents Norman and Angelina Yu (the Yus), doing business as Tuanson Trading, and
Tuanson Builders Corporation (Tuanson Builders) borrowed various sums totaling ₱75 million
from Far East Bank and Trust Company. For collateral, they executed real estate mortgages over
several of their properties,1 including certain lands in Legazpi City owned by Tuanson
Trading.2 In 1999, unable to pay their loans, the Yus and Tuanson Builders requested a loan
restructuring,3 which the bank, now merged with Bank of the Philippine Islands (BPI),
granted.4 By this time, the Yus’ loan balance stood at ₱33,400,000.00. The restructured loan used
the same collaterals, with the exception of Transfer Certificate of Title 40247 that secured a loan
of ₱1,600,000.5
Despite the restructuring, however, the Yus still had difficulties paying their loan. They asked
BPI to release some of the mortgaged lands since their total appraised value far exceeded the
amount of the remaining debt. When BPI ignored their request, the Yus withheld payments on
their amortizations. Thus, BPI extrajudicially foreclosed6 the mortgaged properties in Legazpi
City and in Pili, Camarines Sur. But the Yus sought by court action against BPI and the winning
bidder, Magnacraft Development Corporation (Magnacraft), the annulment of the foreclosure
sale.
In the course of the proceedings, however, the Yus and Magnacraft entered into a compromise
agreement7 that affirmed the latter’s ownership of three out of the 10 parcels of land that were
auctioned. By virtue of this agreement, the court dismissed the complaint against
Magnacraft,8 without prejudice to the Yus filing a new one against BPI.
On October 24, 2003 the Yus filed their new complaint before the Regional Trial Court (RTC) of
Legazpi City, Branch 1, in Civil Case 10286 against BPI for recovery of alleged excessive
penalty charges, attorney’s fees, and foreclosure expenses that the bank caused to be incorporated
in the price of the auctioned properties.91avvphi1
In its answer,10 BPI essentially admitted the foreclosure of the mortgaged properties for
₱39,055,254.95, broken down as follows: ₱33,283,758.73 as principal debt; ₱2,110,282.78 as
interest; and ₱3,661,213.46 as penalty charges.11 BPI qualified that the total of ₱39,055,254.95
corresponded only to the Yus’ debt as of date of filing of the petition. 12 The notice of the auction
sale said that the total was "inclusive of interest, penalty charges, attorney’s fee and expenses of
this foreclosure."13
BPI further admitted that its bid of ₱45,090,566.41 for all the auctioned properties was broken
down as follows:14
Principal ₱ 32,188,723.07
Interest 2,763,088.93
Penalty Charges 5,568.649.09
Sub-total…………… ₱ 40,520,461.09
Add: 10% Attorney’s Fees 4,052,046.11
Litigation Expenses & Interest 446,726.74
Cost of Publication & Interest 71,332.47
TOTAL……………. ₱ 45,090,566.41
BPI also admitted that Magnacraft submitted the highest and winning bid of
₱45,500,000.00.15 The sheriff turned over this amount to BPI. 16 According to BPI, it in turn
remitted to the Clerk of Court the ₱409,433.59 difference between its bid price and that of
Magnacraft’s.17 Although the proceeds of the sale exceeded the ₱39,055,254.95 stated in the
notice of sale by ₱6,035,311.46,18 the bid amount increased because it now included litigation
expenses and attorney’s fees as well as interests and penalties as recomputed.19
BPI admitted that it also pushed through with the second auction for the sale of a lot in Pili,
Camarines Sur that secured a remaining debt of ₱5,562,000. 20 BPI made the lone bid21 of
₱1,701,934.09.22
The Yus had three causes of action against BPI.

First. The bank imposed excessive penalty charges and interests: over ₱5 million in
penalty charges computed at 36% per annum compared to the 12% per annum that the
Court fixed in the cases of State Investment House, Inc. v. Court of Appeals 23 and Ruiz v.
Court of Appeals.24 In addition, BPI collected a 14% yearly interest on the principal,
bringing the combined penalty charges and interest to 50% of the principal per annum.
Second. BPI also imposed a charge of ₱4,052,046.11 in attorney’s fees, the equivalent of
10% of the principal, interest, and penalty charges.
Third. BPI did not provide documents to support its claim for foreclosure expenses of
₱446,726.74 and cost of publication of ₱518,059.21.
As an alternative to their three causes of action, the Yus claimed that BPI was in estoppel to
claim more than the amount stated in its published notices. Consequently, it must turn over the
excess bid of ₱6,035,311.46.
After pre-trial, the Yus moved for summary judgment,25 pointing out that based on the
answer,26 the common exhibits of the parties,27 and the answer to the written interrogatories to the
sheriff,28 no genuine issues of fact exist in the case. The Yus waived their claim for moral
damages so the RTC can dispose of the case through a summary judgment.29
Initially, the RTC granted only a partial summary judgment. It reduced the penalty charge of 36%
per annum30 to 12% per annum until the debt would have been fully paid but maintained the
attorney’s fees as reasonable considering that BPI already waived the ₱1,761,511.36 that formed
part of the attorney’s fees and reduced the rate of attorney’s fees it collected from 25% to 10% of
the amount due. The RTC ruled that facts necessary to resolve the issues on penalties and fees
had been admitted by the parties thus dispensing with the need to receive evidence.31
Still, the RTC held that it needed to receive evidence for the resolution of the issues of (1)
whether or not the foreclosure and publication expenses were justified; (2) whether or not the
foreclosure of the lot in Pili, Camarines Sur, was valid given that the proceeds of the foreclosure
of the properties in Legazpi City sufficiently covered the debt; and (3) whether or not BPI was
entitled to its counterclaim for attorney’s fees, moral damages, and exemplary damages.32
The Yus moved for partial reconsideration.33 They argued that, since BPI did not mark in
evidence any document in support of the foreclosure expenses it claimed, it may be assumed that
the bank had no evidence to prove such expenses. As regards their right to the pro-rating of their
debt among the mortgaged properties, the Yus pointed out that BPI did not dispute the fact that
the proceeds of the sale of the properties in Legazpi City fully satisfied the debt. Thus, the court
could already resolve without trial the issue of whether or not the foreclosure of the Pili property
was valid.
Further, the Yus sought reconsideration of the reduction of penalty charges and the allowance of
the attorney’s fees. They claimed that the penalty charges should be deleted for violation of
Republic Act (R.A.) 3765 or the Truth in Lending Act. BPI’s disclosure did not state the rate of
penalties on late amortizations. Also, the Yus asked the court to reduce the attorney’s fees from
10% to 1% of the amount due. On January 3, 2006 the RTC reconsidered its earlier decision and
rendered a summary judgment:34
1. Deleting the penalty charges imposed by BPI for non-compliance with the Truth in
Lending Act;
2. Reducing the attorney’s fees to 1% of the principal and interest;
3. Upholding the reasonableness of the foreclosure expenses and cost of publication, both
with interests;
4. Reiterating the turnover by the Clerk of Court to the Yus of the excess in the bid price;
5. Deleting the Yus’ claim for moral damages they having waived it;
6. Denying the Yus’ claim for attorney’s fees for lack of basis; and
7. Dismissing BPI’s counterclaim for moral and exemplary damages and for attorney’s
fees for lack of merit considering that summary judgment has been rendered in favor of
the Yus.
BPI appealed the decision to the Court of Appeals (CA) in CA-G.R. CV 86577. But the CA
rendered judgment on January 23, 2008, affirming the RTC decision in all respects. And when
BPI asked for reconsideration,35 the CA denied it on July 14, 2008,36 hence, the bank’s recourse
to this Court.
The Issues Presented
BPI presents the following issues:
1. Whether or not the case presented no genuine issues of fact such as to warrant a
summary judgment by the RTC; and
2. Where summary judgment is proper, whether or not the RTC and the CA a) correctly
deleted the penalty charges because of BPI’s alleged failure to comply with the Truth in
Lending Act; b) correctly reduced the attorney’s fees to 1% of the judgment debt; and c)
properly dismissed BPI’s counterclaims for moral and exemplary damages, attorney’s
fees, and litigation expenses.
The Court’s Rulings
One. A summary judgment is apt when the essential facts of the case are uncontested or the
parties do not raise any genuine issue of fact. 37 Here, to resolve the issue of the excessive charges
allegedly incorporated into the auction bid price, the RTC simply had to look at a) the pleadings
of the parties; b) the loan agreements, the promissory note, and the real estate mortgages between
them; c) the foreclosure and bidding documents; and d) the admissions and other disclosures
between the parties during pre-trial. Since the parties admitted not only the existence,
authenticity, and genuine execution of these documents but also what they stated, the trial court
did not need to hold a trial for the reception of the evidence of the parties.
BPI contends that a summary judgment was not proper given the following issues that the parties
raised: 1) whether or not the loan agreements between them were valid and enforceable; 2)
whether or not the Yus have a cause of action against BPI; 3) whether or not the Yus are proper
parties in interest; 4) whether or not the Yus are estopped from questioning the foreclosure
proceeding after entering into a compromise agreement with Magnacraft; 5) whether or not the
penalty charges and fees and expenses of litigation and publication are excessive; and 6) whether
or not BPI violated the Truth in Lending Act.38
But these are issues that could be readily resolved based on the facts established by the pleadings
and the admissions of the parties.39 Indeed, BPI has failed to name any document or item of fact
that it would have wanted to adduce at the trial of the case. A trial would have been such a great
waste of time and resources.
Two. Both the RTC and CA decisions cited BPI’s alleged violation of the Truth in Lending Act
and the ruling of the Court in New Sampaguita Builders Construction, Inc. v. Philippine National
Bank40 to justify their deletion of the penalty charges. Section 4 of the Truth in Lending Act
states that:
information:
Penalty charge, which is liquidated damages resulting from a breach,41 falls under item (6) or
finance charge. A finance charge "represents the amount to be paid by the debtor incident to the
extension of credit."42 The lender may provide for a penalty clause so long as the amount or rate
of the charge and the conditions under which it is to be paid are disclosed to the borrower before
he enters into the credit agreement.
In this case, although BPI failed to state the penalty charges in the disclosure statement, the
promissory note that the Yus signed, on the same date as the disclosure statement, contained a
penalty clause that said: "I/We jointly and severally, promise to further pay a late payment charge
on any overdue amount herein at the rate of 3% per month." The promissory note is an
acknowledgment of a debt and commitment to repay it on the date and under the conditions that
the parties agreed on.43 It is a valid contract absent proof of acts which might have vitiated
consent.44
The question is whether or not the reference to the penalty charges in the promissory note
constitutes substantial compliance with the disclosure requirement of the Truth in Lending
Act.45 The RTC and CA relied on the ruling in New Sampaguita as authority that the non-
disclosure of the penalty charge renders its imposition illegal. But New Sampaguita is not
attended by the same circumstances. What New Sampaguita disallowed, because it was not
mentioned either in the disclosure statement or in the promissory note, was the unilateral
increase in the rates of penalty charges that the creditor imposed on the borrower. Here, however,
it is not shown that BPI increased the rate of penalty charge that it collected from the Yus. 46
The ruling that is more in point is that laid down in The Consolidated Bank and Trust
Corporation v. Court of Appeals, 47 a case cited in New Sampaguita. The Consolidated
Bank ruling declared valid the penalty charges that were stipulated in the promissory
notes.48 What the Court disallowed in that case was the collection of a handling charge that the
promissory notes did not contain.
The Court has affirmed that financial charges are amply disclosed if stated in the promissory note
in the case of Development Bank of the Philippines v. Arcilla, Jr. 49 The Court there said, "Under
Circular 158 of the Central Bank, the lender is required to include the information required by
R.A. 3765 in the contract covering the credit transaction or any other document to be
acknowledged and signed by the borrower. In addition, the contract or document shall specify
additional charges, if any, which will be collected in case certain stipulations in the contract are
not met by the debtor." In this case, the promissory notes signed by the Yus contained data,
including penalty charges, required by the Truth in Lending Act. They cannot avoid liability
based on a rigid interpretation of the Truth in Lending Act that contravenes its goal.
Nonetheless, the courts have authority to reduce penalty charges when these are unreasonable
and iniquitous.50Considering that BPI had already received over ₱2.7 million in interest and that
it seeks to impose the penalty charge of 3% per month or 36% per annum on the total amount
due—principal plus interest, with interest not paid when due added to and becoming part of the
principal and also bearing interest at the same rate—the Court finds the ruling of the RTC in its
original decision51 reasonable and fair. Thus, the penalty charge of 12% per annum or 1% per
month52 is imposed.
Three. As for the award of attorney’s fee, it being part of a party’s liquidated damages, the same
may likewise be equitably reduced.53 The CA correctly affirmed the RTC Order54 to reduce it
from 10% to 1% based on the following reasons: (1) attorney’s fee is not essential to the cost of
borrowing, but a mere incident of collection; 55 (2) 1% is just and adequate because BPI had
already charged foreclosure expenses; (3) attorney’s fee of 10% of the total amount due is
onerous considering the rote effort that goes into extrajudicial foreclosures.
WHEREFORE, the Court DENIES the petition and AFFIRMS the Court of Appeals Decision in
CA-G.R. CV 86577 dated January 23, 2008 subject to the RESTORATION of the penalty charge
of 12% per annum or 1% per month of the amount due computed from date of nonpayment or
November 25, 2001.
SO ORDERED.

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G.R. No.

133632 February 15, 2002

BPI INVESTMENT CORPORATION, petitioner,

The facts are as follows:

WHEREFORE, judgment is hereby rendered in favor of ALS Management and Development

a) P300,000.00 for and as moral damages;

b) P50,000.00 as and for exemplary damages;

c) P50,000.00 as and for attorney’s fees and expenses of litigation.

Costs against BPI.

WHEREFORE, finding no error in the appealed decision the same is hereby

I. WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL CONTRACT

Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.

G.R. No. L-46145 November 26, 1986

REPUBLIC OF THE PHILIPPINES (BUREAU OF LANDS), petitioner,

Pelaez, Jalondoni, Adriano and Associates for respondents.

Considering the foregoing facts respondents Court of Appeals ruled as follows:

IN VIEW WHEREOF, this Court is constrained to reverse, as it now reverses,

Petitioner now comes to Us with the following:

1. Respondent court erred in holding that to bar private respondents from

3. Respondent court erred in concluding that applicants have registerable title.

G.R. No. 195166, July 08, 2015

SPOUSES SALVADOR ABELLA AND ALMA ABELLA, Petitioners, v. SPOUSES

WHEREFORE, premises considered, judgment is hereby rendered:LawlibraryofCRAlaw

For resolution are the following issues:LawlibraryofCRAlaw

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

On March 22, 1999, respondents executed an acknowledgment receipt to petitioners, which

Annie C. Abella (sgd.) Romeo M. Abella (sgd.)33

This Circular shall take effect on 1 July 2013.

As acknowledged by petitioner Salvador Abella, respondents paid a total of P200,000.00, which

Within this third year, respondents paid a total of P320,000.00, as follows:LawlibraryofCRAlaw

As respondents made an overpayment, the principle of solutio indebiti as provided by Article

In Moreno-Lentfer v. Wolff,65 this court explained the application of solutio

Further, Article 2159 of the Civil Code provides:LawlibraryofCRAlaw

Nevertheless, Nacar also provides:LawlibraryofCRAlaw

G.R. No. 115324 February 19, 2003

CALLEJO, SR., J.:

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

(c) the amount of ₱40,000.00 for attorney’s fees; and

(d) the costs of the suit.

THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT PETITIONER’S

THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING THE ENTIRE RECORDS

THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT THE CITED

THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE DECISION OF

There is no merit in the petition.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

G.R. No. 97412 July 12, 1994

EASTERN SHIPPING LINES, INC., petitioner,

Zapa Law Office for private respondent.

This is an action against defendants shipping company, arrastre operator and

On December 4, 1981, two fiber drums of riboflavin were shipped from

On January 7, 1982 defendant Allied Brokerage Corporation received the

On January 8 and 14, 1982, defendant Allied Brokerage Corporation made

As a consequence of the losses sustained, plaintiff was compelled to pay the

Defendants filed their respective answers, traversing the material allegations of

From the evidence the court found the following:

The issues are:

1. Whether or not the shipment sustained losses/damages;