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, decided 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 Court 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, promulgated on 28 July
1986. The case was for damages occasioned by an injury to person and loss of property. The trial
court awarded private respondent Pedro Manabat actual and compensatory damages in the
amount of P72,500.00 with legal interest thereon from the filing of the complaint until fully paid.
Relying on the Reformina v. Tomol case, this Court modified the interest award from 12% to 6%
interest per annum but sustained the time computation thereof, i.e., from the filing of the
complaint until fully paid.

In Nakpil and Sons vs. Court of Appeals,9 the trial court, in an action for the recovery of damages
arising from the collapse of a building, ordered, inter alia, the "defendant United Construction Co.,
Inc. (one of the petitioners) . . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the
legal rate from November 29, 1968, the date of the filing of the complaint until full payment . . . ."
Save from the modification of the amount granted by the lower court, the Court of Appeals
sustained the trial court's decision. When taken to this Court for review, the case, on 03 October
1986, was decided, thus:

WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and
environmental circumstances of this case, we deem it reasonable to render a decision imposing, as
We do hereby impose, upon the defendant and the third-party defendants (with the exception of
Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra. p. 10) indemnity in favor of the Philippine Bar
Association of FIVE MILLION (P5,000,000.00) Pesos to cover all damages (with the exception to
attorney's fees) occasioned by the loss of the building (including interest charges and lost rentals)
and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for attorney's fees, the
total sum being payable upon the finality of this decision. Upon failure to pay on such finality,
twelve (12%) per cent interest per annum shall be imposed upon aforementioned amounts from
finality until paid. Solidary costs against the defendant and third-party defendants (Except Roman
Ozaeta). (Emphasis supplied)
A motion for reconsideration was filed by United Construction, contending that "the interest of
twelve (12%) per cent per annum imposed on the total amount of the monetary award was in
contravention of law." The Court ruled out the applicability of the Reformina and Philippine Rabbit
Bus Lines cases and, in its resolution of 15 April 1988, it explained:

There should be no dispute that the imposition of 12% interest pursuant to Central Bank Circular No.
416 . . . is applicable only in the following: (1) loans; (2) forbearance of any money, goods or credit;
and (3) rate allowed in judgments (judgments spoken of refer to judgments involving loans or
forbearance of any money, goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143 SCRA 160-
161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260 [1985]). It is true that in the instant case, there is
neither a loan or a forbearance, but then no interest is actually imposed provided the sums
referred to in the judgment are paid upon the finality of the judgment. It is delay in the payment
of such final judgment, that will cause the imposition of the interest.

It will be noted that in the cases already adverted to, the rate of interest is imposed on the total
sum, from the filing of the complaint until paid; in other words, as part of the judgment for
damages. Clearly, they are not applicable to the instant case. (Emphasis supplied.)

The subsequent case of American Express International, Inc., vs. Intermediate Appellate Court was a
petition for review on certiorari from the decision, dated 27 February 1985, of the then Intermediate
Appellate Court reducing the amount of moral and exemplary damages awarded by the trial court,
to P240,000.00 and P100,000.00, respectively, and its resolution, dated 29 April 1985, restoring the
amount of damages awarded by the trial court, i.e., P2,000,000.00 as moral damages and
P400,000.00 as exemplary damages with interest thereon at 12% per annum from notice of
judgment, plus costs of suit. In a decision of 09 November 1988, this Court, while recognizing the
right of the private respondent to recover damages, held the award, however, for moral damages by
the trial court, later sustained by the IAC, to be inconceivably large. The Court thus set aside the
decision of the appellate court and rendered a new one, "ordering the petitioner to pay private
respondent the sum of One Hundred Thousand (P100,000.00) Pesos as moral damages, with six (6%)
percent interest thereon computed from the finality of this decision until paid. (Emphasis supplied)

Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz 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, decided on 08 May 1992, involved the expropriation of certain parcels of land. After
conducting a hearing on the complaints for eminent domain, the trial court ordered the petitioner to
pay the private respondents certain sums of money as just compensation for their lands so
expropriated "with legal interest thereon . . . until fully paid." Again, in applying the 6% legal
interest per annum under the Civil Code, the Court declared:

. . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods or credits but
EXPROPRIATION of certain parcels of land for a public purpose, the payment of which is without
stipulation regarding interest, and the INTEREST ADJUDGED BY THE TRIAL COURT IS IN THE
NATURE OF INDEMNITY FOR DAMAGES. The legal interest required to be paid on the amount of
just compensation for the properties expropriated is manifestly in the form of indemnity for
damages for the delay in the payment thereof. Therefore, since the kind of interest involved in the
joint judgment of the lower court sought to be enforced in this case is INTEREST BY WAY OF
DAMAGES, and NOT BY WAY OF EARNINGS FROM LOANS, etc. Art. 2209 of the Civil Code shall
apply.

Concededly, there have been seeming variances in the above holdings. The cases can perhaps be
classified into two groups according to the similarity of the issues involved and the corresponding
rulings rendered by the court. The "first group" would consist of the cases of Reformina v. Tomol
(1985), Philippine Rabbit Bus Lines v. Cruz (1986), Florendo v. Ruiz (1989) and National Power
Corporation v. Angas (1992). In the "second group" would be Malayan Insurance Company v. Manila
Port Service (1969), Nakpil and Sons v. Court of Appeals (1988), and American Express International
v. Intermediate Appellate Court (1988).

In the "first group", the basic issue focuses on the application of either the 6% (under the Civil
Code) or 12% (under the Central Bank Circular) interest per annum. It is easily discernible in these
cases that there has been a consistent holding that the Central Bank Circular imposing the 12%
interest per annum applies only to loans or forbearance 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, depending on whether or not the amount involved is a loan or forbearance, on the one
hand, or one of indemnity for damage, on the other hand. Unlike, however, the "first group" which
remained consistent in holding that the running of the legal interest should be from the time of the
filing of the complaint until fully paid, the "second group" varied on the commencement of the
running of the legal interest.
Malayan held that the amount awarded should bear legal interest from the date of the decision of
the court a quo, explaining that "if the suit were for damages, 'unliquidated and not known until
definitely ascertained, assessed and determined by the courts after proof,' then, interest 'should be
from the date of the decision.'" American Express International v. IAC, introduced a different time
frame for reckoning the 6% interest by ordering it to be "computed from the finality of (the) decision
until paid." The Nakpil and Sons case ruled that 12% interest per annum should be imposed from
the finality of the decision until the judgment amount is paid.

The ostensible discord is not difficult to explain. The factual circumstances may have called for
different applications, guided by the rule that the courts are vested with discretion, depending on
the equities of each case, on the award of interest. Nonetheless, it may not be unwise, by way of
clarification and reconciliation, to suggest the following rules of thumb for future guidance.

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

II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

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.

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. 128721 March 9, 1999
CRISMINA GARMENTS, INC., petitioner,
vs.
COURT OF APPEALS and NORMA SIAPNO, respondent.

(CONCLUSION: No, it is not proper to impose interest at the rate of twelve percent (12%) per
annum for an obligation that does not involve a loan or forbearance of money in the absence of
stipulation of the parties. By virtue of the authority granted to it under Section 1 of Act No. 2655, as
amended, otherwise known as the "Usury Law", the 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 per cent (12%) per annum." In this case,
there is an absence of such agreement that’s why the rate shall be six percent (6%) per annum,
computed from the time of the filing of the Complaint in the trial court until the finality of the
judgment. If the adjudged principal and the interest (or any part thereof) remain unpaid
thereafter, the interest rate shall be twelve percent (12%) per annum computed from the time the
judgment becomes final and executory until it is fully satisfied.
PANGANIBAN, J.:

Interest shall be computed in accordance with the stipulation of the parties. In the absence of such
agreement, the rate shall be twelve percent (12%) per annum when the obligation arises out of a
loan or a forbearance of money, goods or credits. In other cases, it shall be six percent (6%).

The Case

On May 5, 1997, Crismina Garments, Inc. filed a Petition for Review on Certiorari assailing the
December 28, 1995 Decision and March 17, 1997 Resolution of the Court of Appeals in CA-GR CV No.
28973. On September 24, 1997, this Court issued a minute Resolution denying the petition "for its
failure to show any reversible error on the part of the Court of Appeals."

Petitioner then filed a Motion for Reconsideration, arguing that the interest rate should be
computed at 6 percent per annum as provided under Article 2209 of the Civil Code, not 12 percent
per annum as prescribed under Circular No. 416 of the Central Bank of the Philippines. Acting on
the Motion, the Court reinstated the Petition, but only with respect to the issue of which interest
rate should be applied.
The Facts

As the facts of the case are no longer disputed, we are reproducing hereunder the findings of the
appellate court:

During the period from February 1979 to April 1979, the [herein petitioner], which was engaged in
the export of girls' denim pants, contracted the services of the [respondent], the sole proprietress
of the D'Wilmar Garments, for the sewing of 20,762 pieces of assorted girls['] denims supplied by the
[petitioner] under Purchase Orders Nos. 1404, dated February 15, 1979, 0430 dated February 1,
1979, 1453 dated April 30, 1979. The [petitioner] was obliged to pay the [respondent], for her
services, in the total amount of P76,410.00. The [respondent] sew[ed] the materials and delivered
the same to the [petitioner] which acknowledged the same per Delivery Receipt Nos. 0030 dated
February 9, 1979; 0032, dated February 15, 1979; 0033 dated February 21, 1979; 0034, dated
February 24, 1979; 0036, dated February 20, 1979; 0038, dated March 11, 1979[;] 0039, dated
March 24, 1979; 0040 dated March 27, 1979; 0041, dated March 29, 1979; 0044, dated Marc[h] 25,
1979; 0101 dated May 18, 1979[;] 0037, dated March 10, 1979 and 0042 dated March 10, 1979, in
good order condition. At first, the [respondent] was told that the sewing of some of the pants
w[as] defective. She offered to take delivery of the defective pants. However, she was later told by
[petitioner]'s representative that the goods were already good. She was told to just return for her
check of P76,410.00. However, the [petitioner] failed to pay her the aforesaid amount. This
prompted her to hire the services of counsel who, on November 12, 1979, wrote a letter to the
[petitioner] demanding payment of the aforesaid amount within ten (10) days from receipt
thereof. On February 7, 1990, the [petitioner]'s [v]ice-[p]resident-[c]omptroller, wrote a letter to
[respondent]'s counsel, averring, inter alia, that the pairs of jeans sewn by her, numbering 6,164
pairs, were defective and that she was liable to the [petitioner] for the amount of P49,925.51
which was the value of the damaged pairs of denim pants and demanded refund of the aforesaid
amount.

On January 8, 1981, the [respondent] filed her complaint against the [petitioner] with the [trial
court] for the collection of the principal amount of P76,410.00. . . .

xxx xxx xxx

After due proceedings, the [trial court] rendered judgment, on February 28, 1989, in favor of the
[respondent] against the [petitioner], the dispositive portion of which reads as follows:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant
ordering the latter to pay the former:

(1) The sum of P76,140.00 with interest thereon at 12% per annum, to be counted from the filing of
this complaint on January 8, 1981, until fully paid;

(2) The sum of P5,000 as attorney[']s fees; and

(3) The costs of this suit;

(4) Defendant's counterclaim is hereby dismissed.8

The Court of Appeals (CA) affirmed the trial court's ruling, except for the award of attorney's fees
which was deleted. Subsequently, the CA denied the Motion for Reconsideration.

Hence, this recourse to this Court

Sole Issue

In light of the Court's Resolution dated April 27, 1998, petitioner submits for our consideration this
sole issue:

Whether or not it is proper to impose interest at the rate of twelve percent (12%) per annum for
an obligation that does not involve a loan or forbearance of money in the absence of stipulation of
the parties.

This Court's Ruling

We sustain petitioner's contention that the interest rate should be computed at six percent (6%) per
annum.

Sole Issue: Interest Rate

The controversy revolves around petitioner's payment of the price beyond the period prescribed in a
contract for a piece of work. Article 1589 on the Civil Code provides that "[t]he vendee [herein
petitioner] shall owe interest for the period between the delivery of the thing and the payment of
the price . . . should he be in default from the time of judicial or extrajudicial demand for the
payment of the price." The only issue now is the applicable rate of interest for the late payment.

Because the case before us is "an action for the enforcement of an obligation for payment of
money arising from a contract for a piece of work,"petitioner submits that the interest rate should
be six percent (6%), pursuant to Article 2209 of the Civil Code, which states:

If the obligation consists in the payment of money and the debtor incurs in delay, the indemnity
for damages, there being no stipulation to the contrary, shall be the payment of the interest
agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum."
(Emphasis supplied.)

On the other hand, private respondent maintains that the interest rate should be twelve percent
(12 %) per annum, in accordance with Central Bank (CB) Circular No. 416, which reads:

By virtue of the authority granted to it under Section 1 of Act No. 2655, as amended, otherwise
known as the "Usury Law", the 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 per cent (12%) per annum." (Emphasis supplied.)

She argues that the circular applies, since "the money sought to be recovered by her is in the form of
forbearance."

We agree with the petitioner. In Reformina v. Tomol Jr., this Court stressed that the interest rate
under CB Circular No. 416 applies to (1) loans; (2) forbearance of money, goods or credits; or (3) a
judgment involving a loan or forbearance of money, goods or credits. Cases beyond the scope of
the said circular are governed by Article 2209 of the Civil Code, which considers interest a form of
indemnity for the delay in the performance of an obligation.

In Eastern Shipping Lines, Inc. v. Court of Appeals, the Court gave the following guidelines for the
application of the proper interest rates:

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.

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 . . . 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 forbearance of credit.

In Keng Hua Paper Products Co., Inc. v. CA, 20 we also ruled that the monetary award shall earn
interest at twelve percent (12%) per annum from the date of finality of the judgment until its
satisfaction, regardless of whether or not the case involves a loan of forbearance of money. The
interim period is deemed to be equivalent to a forbearance of a credit. 21

Because the amount due in this case arose from a contract for a piece of work , not from a loan or
forbearance of money, the legal interest of six percent (6%) per annum should be applied.
Furthermore, since the amount of the demand could be ESTABLISHED WITH CERTAINTY when the
Complaint was filed, the six percent (6%) interest should be COMPUTED FROM THE FILING OF THE
SAID COMPLAINT. But AFTER THE JUDGMENT BECOMES FINAL AND EXECUTORY until the
obligation is satisfied, the interest should be reckoned at twelve percent (12%) per year.

Private respondent maintains that the twelve percent (12%) interest should be imposed, because
the obligation arose from a forbearance of money. This is erroneous. In Eastern Shipping, the Court
observed that a "forbearance" in the context of the usury law is a "contractual obligation of lender
or creditor to refrain, during a given period of time, from requiring the borrower or debtor to
repay a loan or debt then due and payable." Using this standard, the obligation in this case was
obviously not a forbearance of money, goods or credit.

WHEREFORE, the appealed Decision is MODIFIED. The rate of interest shall be six percent (6%) per
annum, computed from the time of the filing of the Complaint in the trial court until the finality of
the judgment. If the adjudged principal and the interest (or any part thereof) remain unpaid
thereafter, the interest rate shall be twelve percent (12%) per annum computed from the time the
judgment becomes final and executory until it is fully satisfied. No pronouncement as to costs.
SO ORDERED.

G.R. No. 113926 October 23, 1996

SECURITY BANK AND TRUST COMPANY, petitioner,
vs.
REGIONAL TRIAL COURT OF MAKATI, BRANCH 61, MAGTANGGOL EUSEBIO and LEILA VENTURA,
respondents.
(CONCLUSION: Yes. the 23% rate of interest per annum agreed upon by petitioner bank and
respondents is allowable and not against the Usury Law. The Court AFFIRMED with the
MODIFICATION that the rate of interest that should be imposed be 23% per annum. For the reason
that both parties signed the promissory notes which are binding between them. The rate of
interest was agreed upon by the parties freely. Significantly, respondent did not question that rate
or the stipulation therein. All the promissory notes were signed in 1983 and, therefore, were
already covered by CB Circular No. 905. Contrary to the claim of respondent court, THIS CIRCULAR
DID NOT REPEAL NOR IN ANYWAY AMEND THE USURY LAW but simply suspended the latter's
effectivity.

HERMOSISIMA, JR. J.:p

Questions of law which are of first impression are sought to be resolved in this case: Should the rate
of interest on a loan or forbearance of money, goods or credits, as stipulated in a contract, far in
excess of the ceiling prescribed under or pursuant to the Usury Law, prevail over Section 2 of
Central Bank Circular No. 905 which prescribes that the rate of interest thereof shall continue to
be 12% per annum? Do the Courts have the discretion to arbitrarily override stipulated interest rates
of promissory notes and stipulated interest rates of promissory notes and thereby impose a 12%
interest on the loans, in the absence of evidence justifying the imposition of a higher rate?

This is a petition for review on certiorari for the purpose of assailing the decision of Honorable Judge
Fernando V. Gorospe of the Regional Trial Court of Makati, Branch 61, dated March 30, 1993, which
found private respondent Eusebio liable to petitioner for a sum of money. Interest was lowered by
the court a quo from 23% per annum as agreed upon the parties to 12% per annum.

The undisputed facts are as follows:

On April 27, 1983, private respondent Magtanggol Eusebio executed Promissory Note No.
TL/74/178/83 in favor of petitioner Security Bank and Trust Co. (SBTC) in the total amount of One
Hundred Thousand Pesos (P100,000.00) payable in (6) six monthly installments with a stipulated
interest of 23% per annum up to the fifth installment.

On July 28, 1983, respondent Eusebio again executed Promissory Note No. TL/74/1296/83 in favor
of petitioner SBTC. Respondent bound himself to pay the sum of One Hundred Thousand Pesos
(P100,000.00) in six (6) monthly installments plus 23% interest per annum.

Finally, another Promissory Note No. TL74/1491/83 was executed on August 31, 1983 in the
amount of Sixty Five Thousand Pesos (P65,000.00). Respondent agreed to pay this note in six (6)
monthly installments plus interest at the rate of 23% per annum.

On all the abovementioned promissory notes, private respondent Leila Ventura had signed as co-
maker.

Upon maturity which fell on the different dates below, the principal balance remaining on the
notes stood at:

1) PN No. TL/74/748/83 — P16,665.00 as of September 1983.

2) PN No. TL/74/1296/83 — P83,333.00 as of August 1983.
3) PN No. TL/74/1991/83 — P65,000.00 as of August 1983.
Upon the failure and refusal of respondent Eusebio to pay the aforestated balance payable, a
collection case was filed in court by petitioner SBTC. 5 On March 30, 1993, the court a quo rendered
a judgment in favor of petitioner SBTC, the dispositive portion which reads:

WHEREFORE, premises above-considered, and plaintiff's claim having been duly proven, judgment is
hereby rendered in favor of plaintiff and as against defendant Eusebio who is hereby ordered to:

1. Pay the sum of P16,655.00, plus interest of 12% per annum starting 27 September 1983, until fully
paid;

2. Pay the sum of P83,333.00, plus interest of 12% per annum starting 28 August 1983, until fully
paid;

3. Pay the sum of P65,000.00, plus interest of 12% per annum starting 31 August 1983, until fully
paid;

4. Pay the sum equivalent to 20% of the total amount due and payable to plaintiff as and by way of
attorney's fees; and to

5. Pay the costs of this suit.

SO ORDERED.

On August 6, 1993, a motion for partial reconsideration was filed by petitioner SBTC contending
that:

(1) the interest rate agreed upon by the parties during the signing of the promissory notes was
23% per annum;

(2) the interests awarded should be compounded quarterly from due date as provided in the three
(3) promissory notes;

(3) defendants Leila Ventura should likewise be held liable to pay the balance on the promissory
notes since she has signed as co-maker and as such, is liable jointly and severally with defendant
Eusebio without a need for demand upon her.

Consequently, an Order was issued by the court a quo denying the motion to grant the rates of
interest beyond 12% per annum; and holding defendant Leila Ventura jointly and severally liable
with co-defendants Eusebio.

Hence, this petition.

The sole issue to be settled in this petition is whether or not the 23% rate of interest per annum
agreed upon by petitioner bank and respondents is allowable and not against the Usury Law.

We find merit in this petition.

From the examination of the records, it appears that indeed the agreed rate of interest as stipulated
on the three (3) promissory notes is 23% per annum. The applicable provision of law is the Central
Bank Circular No. 905 which took effect on December 22, 1982, particularly Sections 1 and 2 which
state: 9
Sec. 1. The rate of interest, including commissions, premiums, fees and other charges, on a loan or
forbearance of any money, goods or credits, regardless of maturity and whether secured or
unsecured, that may be charged or collected by any person, whether natural or judicial, shall not be
subject to any ceiling prescribed under or pursuant to the Usury Law, as amended.

Sec. 2. The rate of interest for the loan or forbearance of any money, goods or credits and the rate
allowed in judgments, in the absence of express contract as to such rate of interest, shall continue
to be twelve per cent (12%) per annum.

CB Circular 905 was issued by the Central Bank's Monetary Board pursuant to P.D. 1684
empowering them to prescribe the maximum rates of interest for loans and certain forbearances,
to wit:

Sec. 1. Section 1-a of Act No. 2655, as amended, is hereby amended to read as follows:

Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate of interest for the
loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate
or rates whenever warranted by prevailing economic and social conditions: Provided, That changes
in such rate or rates may be effected gradually on scheduled dates announced in advance.

In the exercise of the authority herein granted, the Monetary Board may prescribe higher
maximum rates for loans of low priority, such as consumer loans or renewals thereof as well as
such loans made by pawnshops, finance companies and other similar credit institutions although
the rates prescribed for these institutions need not necessarily be uniform. The Monetary Board is
also authorized to prescribed different maximum rate or rates for different types of borrowings,
including deposits and deposit substitutes, or loans of financial intermediaries.

The court has ruled in the case of Philippine National Bank v. Court of Appeals that:

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.

All the promissory notes were signed in 1983 and, therefore, were already covered by CB Circular
No. 905. Contrary to the claim of respondent court, THIS CIRCULAR DID NOT REPEAL NOR IN
ANYWAY AMEND THE USURY LAW but simply suspended the latter's effectivity.

Basic is the rule of statutory construction that when the law is clear and unambiguous, the court is
left with no alternative but to apply the same according to its clear language. As we have held in the
case of Quijano v. Development Bank of the Philippines:

. . . We cannot see any room for interpretation or construction in the clear and unambiguous
language of the above-quoted provision of law. This Court had steadfastly adhered to the doctrine
that its first and fundamental duty is the application of the law according to its express terms,
interpretation being called for only when such literal application is impossible. No process of
interpretation or construction need be resorted to where a provision of law peremptorily calls for
application. Where a requirement or condition is made in explicit and unambiguous terms, no
discretion is left to the judiciary. It must see to it that is mandate is obeyed.
The rate of interest was agreed upon by the parties freely. Significantly, respondent did not
question that rate. It is not for respondent court a quo to change the stipulations in the contract
where it is not illegal. Furthermore, Article 1306 of the New Civil Code provides that contracting
parties may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order, or public
policy. We find no valid reason for the respondent court a quo to impose a 12% rate of interest on
the principal balance owing to petitioner by respondent in the presence of a valid stipulation. 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. Hence, only in the absence of a stipulation can
the court impose the 12% rate of interest.

The promissory notes were signed by both parties voluntarily. Therefore, stipulations therein are
binding between them. Respondent Eusebio, likewise, did not question any of the stipulations
therein. In fact, in the Comment filed by respondent Eusebio to this court, he chose not to question
the decision and instead expressed his desire to negotiate with the petitioner bank for "terms within
which to settle his obligation."
IN VIEW OF THE FOREGOING, the decision of the respondent court a quo, is hereby AFFIRMED with
the MODIFICATION that the rate of interest that should be imposed be 23% per annum.
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.

(CONCLUSION: No, respondent bank was not authorized to raise its interest rates from 21% to as
high as 68% under the credit agreement.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. 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. 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. 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. 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.

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 totalling 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.

Between 1981 and 1984, petitioners made several partial payments on the loan totaling.
P7,735,004.66, a substantial portion of which was applied to accrued interest. 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.

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. 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, 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 haemorrhaging of their assets. Borrowing represents a transfusion of
capital from lending institutions to industries and businesses in order to stimulate growth. This
would not, obviously, be the effect of PNB's unilateral and lopsided policy regarding the interest
rates of petitioners' borrowings in the instant case.

Apart from violating the principle of mutuality of contracts, there is authority for disallowing the
interest rates imposed by respondent bank, for the credit agreement specifically requires that the
increase be "within the limits allowed by law". In the case of PNB v. Court of Appeals, cited above,
this Court clearly emphasized that C.B. Circular No. 905 could not be properly invoked to justify the
escalation clauses of such contracts, not being a grant of specific authority.

Furthermore, the escalation clause of the credit agreement requires that the same be made
"within the limits allowed by law," obviously referring specifically to legislative enactments not
administrative circulars. Note that the phrase "limits imposed by law," refers only to the escalation
clause. However, the same agreement allows reduction on the basis of law or the Monetary Board.
Had the parties intended the word "law" to refer to both legislative enactments and administrative
circulars and issuances, the agreement would not have gone as far as making a distinction between
"law or the Monetary Board Circulars" in referring to mutually agreed upon reductions in interest
rates. This distinction was the subject of the Court's disquisition in the case of Banco Filipino Savings
and Mortgage Bank v. Navarro 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. 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. 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.
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, 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. 118248 April 5, 2000

DKC HOLDINGS CORPORATION,petitioner,
vs.
COURT OF APPEALS, VICTOR U. BARTOLOME and REGISTER OF DEEDS FOR METRO MANILA,
DISTRICT III, respondents.

(CONCLUSION: No, the Contract of Lease with Option to Buy entered into by the late Encarnacion
Bartolome with petitioner was not terminated upon her death or whether it binds her sole heir,
Victor, even after her demise. The subject matter of the contract is likewise a lease, which is a
property right. The death of a party does not excuse nonperformance of a contract which involves
a property right, and the rights and obligations thereunder pass to the personal representatives of
the deceased. Similarly, nonperformance is not excused by the death of the party when the other
party has a property interest in the subject matter of the contract. Under both Article 1311 of the
Civil Code and jurisprudence, therefore, Victor is bound by the subject Contract of Lease with
Option to Buy. It appears, therefore, that the exercise by petitioner of its option to lease the subject
property was made in accordance with the contractual provisions. Concomitantly, private
respondent Victor Bartolome has the obligation to surrender possession of and lease the premises
to petitioner for a period of six (6) years, pursuant to the Contract of Lease with Option to Buy.

YNARES-SANTIAGO, J.:

This is a petition for review on certiorari seeking the reversal of the December 5, 1994 Decision of
the Court of Appeals in CA-G.R. CV No. 40849 entitled "DKC Holdings Corporation vs. Victor U.
Bartolome, et al.",1 affirming in toto the January 4, 1993 Decision of the Regional Trial Court of
Valenzuela, Branch 172,2 which dismissed Civil Case No. 3337-V-90 and ordered petitioner to pay
P30,000.00 as attorney's fees.

The subject of the controversy is a 14,021 square meter parcel of land located in Malinta,
Valenzuela, Metro Manila which was originally owned by private respondent Victor U.
Bartolome's deceased mother, Encarnacion Bartolome, under Transfer Certificate of Title No. B-
37615 of the Register of Deeds of Metro Manila, District III. This lot was in front of one of the textile
plants of petitioner and, as such, was seen by the latter as a potential warehouse site.

On March 16, 1988, petitioner entered into a Contract of Lease with Option to Buy with
Encarnacion Bartolome, whereby petitioner was given the option to lease or lease with purchase
the subject land, which option must be exercised within a period of two years counted from the
signing of the Contract. In turn, petitioner undertook to pay P3,000.00 a month as consideration
for the reservation of its option. Within the two-year period, petitioner shall serve formal written
notice upon the lessor Encarnacion Bartolome of its desire to exercise its option. The contract also
provided that in case petitioner chose to lease the property, it may take actual possession of the
premises. In such an event, the lease shall be for a period of six years, renewable for another six
years, and the monthly rental fee shall be P15,000.00 for the first six years and P18,000.00 for the
next six years, in case of renewal.

Petitioner regularly paid the monthly P3,000.00 provided for by the Contract to Encarnacion until
her death in January 1990. Thereafter, petitioner coursed its payment to private respondent Victor
Bartolome, being the sole heir of Encarnacion. Victor, however, refused to accept these payments.

Meanwhile, on January 10, 1990, Victor executed an Affidavit of Self-Adjudication over all the
properties of Encarnacion, including the subject lot. Accordingly, respondent Register of Deeds
cancelled Transfer Certificate of Title No. B-37615 and issued Transfer Certificate of Title No. V-
14249 in the name of Victor Bartolome.

On March 14, 1990, petitioner served upon Victor, via registered mail, notice that it was exercising
its option to lease the property, tendering the amount of P15,000.00 as rent for the month of
March. Again, Victor refused to accept the tendered rental fee and to surrender possession of the
property to petitioner.

Petitioner thus opened Savings Account No. 1-04-02558-I-1 with the China Banking Corporation,
Cubao Branch, in the name of Victor Bartolome and deposited therein the P15,000.00 rental fee
for March as well as P6,000.00 reservation fees for the months of February and March.

Petitioner also tried to register and annotate the Contract on the title of Victor to the property.
Although respondent Register of Deeds accepted the required fees, he nevertheless refused to
register or annotate the same or even enter it in the day book or primary register.

Thus, on April 23, 1990, petitioner filed a complaint for specific performance and damages against
Victor and the Register of Deeds, docketed as Civil Case No. 3337-V-90 which was raffled off to
Branch 171 of the Regional Trial Court of Valenzuela. Petitioner prayed for the surrender and
delivery of possession of the subject land in accordance with the Contract terms; the surrender of
title for registration and annotation thereon of the Contract; and the payment of P500,000.00 as
actual damages, P500,000.00 as moral damages, P500,000.00 as exemplary damages and
P300,000.00 as attorney's fees.

Meanwhile, on May 8, 1990, a Motion for Intervention with Motion to Dismiss was filed by one
Andres Lanozo, who claimed that he was and has been a tenant-tiller of the subject property,
which was agricultural riceland, for forty-five years. He questioned the jurisdiction of the lower
court over the property and invoked the Comprehensive Agrarian Reform Law to protect his rights
that would be affected by the dispute between the original parties to the case.

On May 18, 1990, the lower court issued an Order referring the case to the Department of Agrarian
Reform for preliminary determination and certification as to whether it was proper for trial by said
court.
On July 4, 1990, the lower court issued another Order6 referring the case to Branch 172 of the RTC
of Valenzuela which was designated to hear cases involving agrarian land, after the Department of
Agrarian Reform issued a letter-certification stating that referral to it for preliminary determination
is no longer required.

On July 16, 1990, the lower court issued an Order denying the Motion to Intervene,7 holding that
Lanozo's rights may well be ventilated in another proceeding in due time.

After trial on the merits, the RTC of Valenzuela, Branch 172 rendered its Decision on January 4, 1993,
dismissing the Complaint and ordering petitioner to pay Victor P30,000.00 as attorney's fees. On
appeal to the CA, the Decision was affirmed in toto.

Hence, the instant Petition assigning the following errors:

(A)

FIRST ASSIGNMENT OF ERROR

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE PROVISION ON THE NOTICE TO
EXERCISE OPTION WAS NOT TRANSMISSIBLE.

(B)

SECOND ASSIGNMENT OF ERROR

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE NOTICE OF OPTION MUST BE
SERVED BY DKC UPON ENCARNACION BARTOLOME PERSONALLY.

(C)

THIRD ASSIGNMENT OF ERROR

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE CONTRACT WAS ONE-SIDED AND
ONEROUS IN FAVOR OF DKC.

(D)

FOURTH ASSIGNMENT OF ERROR

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE EXISTENCE OF A REGISTERED
TENANCY WAS FATAL TO THE VALIDITY OF THE CONTRACT.

(E)

FIFTH ASSIGNMENT OF ERROR

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT PLAINTIFF-APPELLANT WAS LIABLE TO
DEFENDANT-APPELLEE FOR ATTORNEY'S FEES.8

The issue to be resolved in this case is whether or not the Contract of Lease with Option to Buy
entered into by the late Encarnacion Bartolome with petitioner was terminated upon her death or
whether it binds her sole heir, Victor, even after her demise.
Both the lower court and the Court of Appeals held that the said contract was terminated upon
the death of Encarnacion Bartolome and did not bind Victor because he was not a party thereto.

Art. 1311 of the Civil Code provides, as follows —

Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case
where the rights and obligations arising from the contract are not transmissible by their nature, or
by stipulation or by provision of law. The heir is not liable beyond the value of the property he
received from the decedent.

xxx xxx xxx

The general rule, therefore, is that heirs are bound by contracts entered into by their
predecessors-in-interest except when the rights and obligations arising therefrom are not
transmissible by (1) their nature, (2) stipulation or (3) provision of law.

In the case at bar, there is neither contractual stipulation nor legal provision making the rights and
obligations under the contract intransmissible. More importantly, the nature of the rights and
obligations therein are, by their nature, transmissible.

The nature of intransmissible rights as explained by Arturo Tolentino, an eminent civilist, is as

follows:

Among contracts which are intransmissible are those which are purely personal, either by
provision of law, such as in cases of partnerships and agency, or by the very nature of the
obligations arising therefrom, such as those requiring special personal qualifications of the obligor.
It may also be stated that contracts for the payment of money debts are not transmitted to the
heirs of a party, but constitute a charge against his estate. Thus, where the client in a contract for
professional services of a lawyer died, leaving minor heirs, and the lawyer, instead of presenting
his claim for professional services under the contract to the probate court, substituted the minors
as parties for his client, it was held that the contract could not be enforced against the minors; the
lawyer was limited to a recovery on the basis of quantum meruit.

In American jurisprudence, "(W)here acts stipulated in a contract require the exercise of special
knowledge, genius, skill, taste, ability, experience, judgment, discretion, integrity, or other personal
qualification of one or both parties, the agreement is of a personal nature, and terminates on the
death of the party who is required to render such service." 10

It has also been held that a good measure for determining whether a contract terminates upon the
death of one of the parties is whether it is of such a character that it may be performed by the
promissor's personal representative. Contracts to perform personal acts which cannot be as well
performed by others are discharged by the death of the promissor. Conversely, where the service
or act is of such a character that it may as well be performed by another, or where the contract, by
its terms, shows that performance by others was contemplated, DEATH DOES NOT TERMINATE
THE CONTRACT OR EXCUSE NONPERFORMANCE.

In the case at bar, there is no personal act required from the late Encarnacion Bartolome. Rather,
the obligation of Encarnacion in the contract to deliver possession of the subject property to
petitioner upon the exercise by the latter of its option to lease the same may very well be
performed by her heir Victor.
As early as 1903, it was held that "(H)e who contracts does so for himself and his heirs." In 1952, it
was ruled that if the predecessor was duty-bound to reconvey land to another, and at his death
the reconveyance had not been made, the heirs can be compelled to execute the proper deed for
reconveyance. This was grounded upon the principle that heirs cannot escape the legal
consequence of a transaction entered into by their predecessor-in-interest because they have
inherited the property subject to the liability affecting their common ancestor.

It is futile for Victor to insist that he is not a party to the contract because of the clear provision of
Article 1311 of the Civil Code. Indeed, being an heir of Encarnacion, there is privity of interest
between him and his deceased mother. He only succeeds to what rights his mother had and what
is valid and binding against her is also valid and binding as against him. This is clear from
Parañaque Kings Enterprises vs. Court of Appeals, where this Court rejected a similar defense —

With respect to the contention of respondent Raymundo that he is not privy to the lease contract,
not being the lessor nor the lessee referred to therein, he could thus not have violated its provisions,
but he is nevertheless a proper party. Clearly, he stepped into the shoes of the owner-lessor of the
land as, by virtue of his purchase, he assumed all the obligations of the lessor under the lease
contract. Moreover, he received benefits in the form of rental payments. Furthermore, the
complaint, as well as the petition, prayed for the annulment of the sale of the properties to him.
Both pleadings also alleged collusion between him and respondent Santos which defeated the
exercise by petitioner of its right of first refusal.

In order then to accord complete relief to petitioner, respondent Raymundo was a necessary, if not
indispensable, party to the case. A favorable judgment for the petitioner will necessarily affect the
rights of respondent Raymundo as the buyer of the property over which petitioner would like to
assert its right of first option to buy.

In the case at bar, the subject matter of the contract is likewise a lease, which is a property right.
The death of a party does not excuse nonperformance of a contract which involves a property
right, and the rights and obligations thereunder pass to the personal representatives of the
deceased. Similarly, nonperformance is not excused by the death of the party when the other
party has a property interest in the subject matter of the contract.

Under both Article 1311 of the Civil Code and jurisprudence, therefore, Victor is bound by the
subject Contract of Lease with Option to Buy.

That being resolved, we now rule on the issue of whether petitioner had complied with its
obligations under the contract and with the requisites to exercise its option. The payment by
petitioner of the reservation fees during the two-year period within which it had the option to lease
or purchase the property is not disputed. In fact, the payment of such reservation fees, except those
for February and March, 1990 were admitted by Victor. 17 This is clear from the transcripts, to wit —

ATTY. MOJADO:

One request, Your Honor. The last payment which was allegedly made in January 1990 just indicate
in that stipulation that it was issued November of 1989 and postdated January 1990 and then we will
admit all.

COURT:

All reservation fee?

ATTY. MOJADO:

Yes, Your Honor.

COURT:

All as part of the lease?

ATTY. MOJADO:

Reservation fee, Your Honor. There was no payment with respect to payment of rentals. 18

Petitioner also paid the P15,000.00 monthly rental fee on the subject property by depositing the
same in China Bank Savings Account No. 1-04-02558-I-1, in the name of Victor as the sole heir of
Encarnacion Bartolome, for the months of March to July 30, 1990, or a total of five (5) months,
despite the refusal of Victor to turn over the subject property.

Likewise, petitioner complied with its duty to inform the other party of its intention to exercise its
option to lease through its letter dated Match 12, 1990, 21 well within the two-year period for it to
exercise its option. Considering that at that time Encarnacion Bartolome had already passed away, it
was legitimate for petitioner to have addressed its letter to her heir.

It appears, therefore, that the exercise by petitioner of its option to lease the subject property was
made in accordance with the contractual provisions. Concomitantly, private respondent Victor
Bartolome has the obligation to surrender possession of and lease the premises to petitioner for a
period of six (6) years, pursuant to the Contract of Lease with Option to Buy.

Coming now to the issue of tenancy, we find that this is not for this Court to pass upon in the
present petition. We note that the Motion to Intervene and to Dismiss of the alleged tenant, Andres
Lanozo, was denied by the lower court and that such denial was never made the subject of an
appeal. As the lower court stated in its Order, the alleged right of the tenant may well be ventilated
in another proceeding in due time.

WHEREFORE, in view of the foregoing, the instant Petition for Review is GRANTED. The Decision of
the Court of Appeals in CA-G.R. CV No. 40849 and that of the Regional Trial Court of Valenzuela in
Civil Case No. 3337-V-90 are both SET ASIDE and a new one rendered ordering private respondent
Victor Bartolome to:

(a) surrender and deliver possession of that parcel of land covered by Transfer Certificate of Title No.
V-14249 by way of lease to petitioner and to perform all obligations of his predecessor-in-interest,
Encarnacion Bartolome, under the subject Contract of Lease with Option to Buy;

(b) surrender and deliver his copy of Transfer Certificate of Title No. V-14249 to respondent Register
of Deeds for registration and annotation thereon of the subject Contract of Lease with Option to
Buy;

(c) pay costs of suit.

Respondent Register of Deeds is, accordingly, ordered to register and annotate the subject Contract
of Lease with Option to Buy at the back of Transfer Certificate of Title No. V-14249 upon submission
by petitioner of a copy thereof to his office.

SO ORDERED.