Republic of the Philippines SUPREME COURT Manila THIRD DIVISION GENERAL MILLING CORPORATION, Petitioner, G.R. No.

193723 Present: CARPIO, J.,* VELASCO, JR., Chairperson, LEONARDO-DE CASTRO,** ABAD, and MENDOZA, JJ. Promulgated:

- versus -

SPS. LIBRADO RAMOS and REMEDIOS RAMOS, Respondents.

July 20, 2011 x-----------------------------------------------------------------------------------------x

DECISION VELASCO, JR., J.: The Case This is a petition for review of the April 15, 2010 Decision of the Court of Appeals (CA) in CA-G.R. CR-H.C. No. 85400 entitled Spouses Librado Ramos & Remedios Ramos v. General Milling Corporation, et al. , which affirmed the May 31, 2005 Decision of the Regional Trial Court (RTC), Branch 12 in Lipa City, in Civil Case No. 00-0129 for Annulment and/or Declaration of Nullity of Extrajudicial Foreclosure Sale with Damages.

The Facts On August 24, 1989, General Milling Corporation (GMC) entered into a Growers Contract with spouses Librado and Remedios Ramos (Spouses Ramos). Under the contract, GMC was to supply broiler chickens for the spouses to raise on their land in Barangay Banaybanay, Lipa City, Batangas.[1] To guarantee full compliance, the Growers Contract was accompanied by a Deed of Real Estate Mortgage over a piece of real property upon which their conjugal home was built. The spouses further agreed to put up a surety bond at the rate of PhP 20,000 per 1,000 chicks delivered by GMC. The Deed of Real Estate Mortgage extended to Spouses Ramos a maximum credit line of PhP 215,000 payable within an indefinite period with an interest of twelve percent (12%) per annum.[2] The Deed of Real Estate Mortgage contained the following provision: WHEREAS, the MORTGAGOR/S has/have agreed to guarantee and secure the full and faithful compliance of [MORTGAGORS+ obligation/s with the MORTGAGEE by a First Real Estate Mortgage in favor of the MORTGAGEE, over a 1 parcel of land and the improvements existing thereon, situated in the Barrio/s of Banaybanay, Municipality of Lipa City, Province of Batangas, Philippines, his/her/their title/s thereto being evidenced by Transfer Certificate/s No./s T-9214 of the Registry of Deeds for the Province of Batangas in the amount of TWO HUNDRED FIFTEEN THOUSAND (P 215,000.00), Philippine Currency, which the maximum credit line payable within a x x x day term and to secure the payment of the same plus interest of twelve percent (12%) per annum.

Spouses Ramos eventually were unable to settle their account with GMC. They alleged that they suffered business losses because of the negligence of GMC and its violation of the Growers Contract.[3]

On March 31, 1997, the counsel for GMC notified Spouses Ramos that GMC would institute foreclosure proceedings on their mortgaged property.[4]

On May 7, 1997, GMC filed a Petition for Extrajudicial Foreclosure of Mortgage. On June 10, 1997, the property subject of the foreclosure was subsequently sold by public auction to GMC after the required posting and publication.[5] It was foreclosed for PhP 935,882,075, an amount representing the losses on chicks and feeds exclusive of interest at 12% per annum and attorneys fees.[6] To complicate matters, on October 27, 1997, GMC informed the spouses that its Agribusiness Division had closed its business and poultry operations. [7] On March 3, 2000, Spouses Ramos filed a Complaint for Annulment and/or Declaration of Nullity of the Extrajudicial Foreclosure Sale with Damages. They contended that the extrajudicial foreclosure sale on June 10, 1997 was null and void, since there was no compliance with the requirements of posting and publication of notices under Act No. 3135, as amended, or An Act to Regulate the Sale of Property under Special Powers Inserted in or Annexed to Real Estate Mortgages. They likewise claimed that there was no sheriffs affidavit to prove compliance with the requirements on posting and publication of notices. It was further alleged that the Deed of Real Estate Mortgage had no fixed term. A prayer for moral and exemplary damages and attorneys fees was also included in the complaint.[8] Librado Ramos alleged that, when the property was foreclosed, GMC did not notify him at all of the foreclosure.[9] During the trial, the parties agreed to limit the issues to the following: (1) the validity of the Deed of Real Estate Mortgage; (2) the validity of the extrajudicial foreclosure; and (3) the party liable for damages.[10] In its Answer, GMC argued that it repeatedly reminded Spouses Ramos of their liabilities under the Growers Contract. It argued that it was compelled to foreclose the mortgage because of Spouses Ramos failure to pay their obligation. GMC insisted that it had observed all the requirements of posting and publication of notices under Act No. 3135.[11]

The Ruling of the Trial Court

Holding in favor of Spouses Ramos, the trial court ruled that the Deed of Real Estate Mortgage was valid even if its term was not fixed. Since the duration of the term was made to depend exclusively upon the will of the debtors-spouses, the trial court cited jurisprudence and said that the obligation is not due and payable until an action is commenced by the mortgagee against the mortgagor for the purpose of having the court fix the date on and after which the instrument is payable and the date of maturity is fixed in pursuance thereto.[12] The trial court held that the action of GMC in moving for the foreclosure of the spouses properties was premature, because the latters obligation under their contract was not yet due. The trial court awarded attorneys fees because of the premature action taken by GMC in filing extrajudicial foreclosure proceedings before the obligation of the spouses became due.

The RTC ruled, thus:

WHEREFORE, premises considered, judgment is rendered as follows: 1. The Extra-Judicial Foreclosure Proceedings under docket no. 0107-97 is hereby declared null and void; 2. The Deed of Real Estate Mortgage is hereby declared valid and legal for all intents and puposes; 3. Defendant-corporation General Milling Corporation is ordered to pay Spouses Librado and Remedios Ramos attorneys fees in the total amount of P 57,000.00 representing acceptance fee of P30,000.00 and P3,000.00 appearance fee for nine (9) trial dates or a total appearance fee of P 27,000.00;

4. The claims for moral and exemplary damages are denied for lack of merit. IT IS SO ORDERED.[13]

The Ruling of the Appellate Court On appeal, GMC argued that the trial court erred in: (1) declaring the extrajudicial foreclosure proceedings null and void; (2) ordering GMC to pay Spouses Ramos attorneys fees; and (3) not awarding damages in favor of GMC. The CA sustained the decision of the trial court but anchored its ruling on a different ground. Contrary to the findings of the trial court, the CA ruled that the requirements of posting and publication of notices under Act No. 3135 were complied with. The CA, however, still found that GMCs action against Spouses Ramos was premature, as they were not in default when the action was filed on May 7, 1997.[14]

The CA ruled: In this case, a careful scrutiny of the evidence on record shows that defendant-appellant GMC made no demand to spouses Ramos for the full payment of their obligation. While it was alleged in the Answer as well as in the Affidavit constituting the direct testimony of Joseph Dominise, the principal witness of defendant-appellant GMC, that demands were sent to spouses Ramos, the documentary evidence proves otherwise. A perusal of the letters presented and offered as evidence by defendant-appellant GMC did not demand but only request spouses Ramos to go to the office of GMC to discuss the settlement of their account.[15]

According to the CA, however, the RTC erroneously awarded attorneys fees to Spouses Ramos, since the presumption of good faith on the part of GMC was not overturned. The CA disposed of the case as follows: WHEREFORE, and in view of the foregoing considerations, the Decision of the Regional Trial Court of Lipa City, Branch 12, dated May 21, 2005 is hereby AFFIRMED with MODIFICATION by deleting the award of attorneys fees to plaintiffs-appellees spouses Librado Ramos and Remedios Ramos.[16]

Hence, We have this appeal. The Issues A. WHETHER [THE CA] MAY CONSIDER ISSUES NOT ALLEGED AND DISCUSSED IN THE LOWER COURT AND LIKEWISE NOT RAISED BY THE PARTIES ON APPEAL, THEREFORE HAD DECIDED THE CASE NOT IN ACCORD WITH LAW AND APPLICABLE DECISIONS OF THE SUPREME COURT. B. WHETHER [THE CA] ERRED IN RULING THAT PETITIONER GMC MADE NO DEMAND TO RESPONDENT SPOUSES FOR THE FULL PAYMENT OF THEIR OBLIGATION CONSIDERING THAT THE LETTER DATED MARCH 31, 1997 OF PETITIONER GMC TO RESPONDENT SPOUSES IS TANTAMOUNT TO A FINAL DEMAND TO PAY, THEREFORE IT DEPARTED FROM THE ACCEPTED AND USUAL COURSE OF JUDICIAL PROCEEDINGS.[17]

The Ruling of this Court Can the CA consider matters not alleged?

GMC asserts that since the issue on the existence of the demand letter was not raised in the trial court, the CA, by considering such issue, violated the basic requirements of fair play, justice, and due process.[18] In their Comment,[19] respondents-spouses aver that the CA has ample authority to rule on matters not assigned as errors on appeal if these are indispensable or necessary to the just resolution of the pleaded issues. In Diamonon v. Department of Labor and Employment,[20] We explained that an appellate court has a broad discretionary power in waiving the lack of assignment of errors in the following instances: (a) Grounds not assigned as errors but affecting the jurisdiction of the court over the subject matter; (b) Matters not assigned as errors on appeal but are evidently plain or clerical errors within contemplation of law; (c) Matters not assigned as errors on appeal but consideration of which is necessary in arriving at a just decision and complete resolution of the case or to serve the interests of a justice or to avoid dispensing piecemeal justice; (d) Matters not specifically assigned as errors on appeal but raised in the trial court and are matters of record having some bearing on the issue submitted which the parties failed to raise or which the lower court ignored; (e) Matters not assigned as errors on appeal but closely related to an error assigned; (f) Matters not assigned as errors on appeal but upon which the determination of a question properly assigned, is dependent.

Paragraph (c) above applies to the instant case, for there would be a just and complete resolution of the appeal if there is a ruling on whether the Spouses Ramos were actually in default of their obligation to GMC. Was there sufficient demand? We now go to the second issue raised by GMC. GMC asserts error on the part of the CA in finding that no demand was made on Spouses Ramos to pay their obligation. On the contrary, it claims that its March 31, 1997 letter is akin to a demand. We disagree. There are three requisites necessary for a finding of default. First, the obligation is demandable and liquidated; second, the debtor delays performance; and third, the creditor judicially or extrajudicially requires the debtors performance.[21] According to the CA, GMC did not make a demand on Spouses Ramos but merely requested them to go to GMCs office to discuss the settlement of their account. In spite of the lack of demand made on the spouses, however, GMC proceeded with the foreclosure proceedings. Neither was there any provision in the Deed of Real Estate Mortgage allowing GMC to extrajudicially foreclose the mortgage without need of demand.

Indeed, Article 1169 of the Civil Code on delay requires the following: Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfilment of their obligation. However, the demand by the creditor shall not be necessary in order that delay may exist: (1) When the obligation or the law expressly so declares; x x x

As the contract in the instant case carries no such provision on demand not being necessary for delay to exist, We agree with the appellate court that GMC should have first made a demand on the spouses before proceeding to foreclose the real estate mortgage. Development Bank of the Philippines v. Licuanan finds application to the instant case: The issue of whether demand was made before the foreclosure was effected is essential. If demand was made and duly received by the respondents and the latter still did not pay, then they were already in default and foreclosure was proper. However, if demand was not made, then the loans had not yet become due and demandable. This meant that respondents had not defaulted in their payments and the foreclosure by petitioner was premature. Foreclosure is valid only when the debtor is in default in the payment of his obligation.[22] In turn, whether or not demand was made is a question of fact.[23] This petition filed under Rule 45 of the Rules of Court shall raise only questions of law. For a question to be one of law, it must not involve an examination of the probative value of the evidence presented by the litigants or any of them. The resolution of the issue must rest solely on what the law provides on the given set of circumstances. Once it is clear that the issue invites a review of the evidence presented, the question posed is one of fact.[24] It need not be reiterated that this Court is not a trier of facts.[25] We will defer to the factual findings of the trial court, because petitioner GMC has not shown any circumstances making this case an exception to the rule. WHEREFORE, the petition is DENIED. The CA Decision in CA-G.R. CR-H.C. No. 85400 is AFFIRMED. SO ORDERED.

PRESBITERO J. VELASCO, JR. Associate Justice

WE CONCUR:

ANTONIO T. CARPIO Associate Justice

TERESITA J. LEONARDO-DE CASTRO Associate Justice

ROBERTO A. ABAD Associate Justice

JOSE CATRAL MENDOZA Associate Justice

ATTESTATION I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

PRESBITERO J. VELASCO, JR. Associate Justice Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairpersons Attestation, I certify that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

RENATO C. CORONA Chief Justice

Additional member per Special Order No. 1042 dated July 6, 2011. Additional member per raffle dated July 13, 2011. [1] Rollo, p. 37. [2] Id. at 13. [3] Id. at 113. [4] Id. at 37. [5] Id. [6] Id. at 117. [7] Id. at 114. [8] Id. at 37-38. [9] Id. at 117. [10] Id. at 115. [11] Id. at 38. [12] Id. at 123. (Citation omitted.) [13] Id. at 127. Penned by Judge Vicente F. Landicho. [14] Id. at 40-41. [15] Id. at 41. [16] Id. at 36-44. Penned by Associate Justice Priscilla J. Baltazar-Padilla and concurred in by Associate Justices Fernanda Lampas Peralta and Manuel B. Barrios.
**

Id. at 18. [18] Id. at 19. [19] Id. at 194-199. [20] G.R. No. 108951, March 7, 2000, 327 SCRA 283, 288-289. See also Kulas Ideas & Creations v. Alcoseba, G.R. No. 180123, February 18, 2010, 613 SCRA 217, 231. [21] Selegna Management and Development Corporation v. United Coconut Planters Bank, G.R. No. 165662, May 3, 2006, 489 SCRA 125, 138. [22] G.R. No. 150097, February 26, 2007, 516 SCRA 644, 650. (Emphasis supplied.) [23] Id. [24] Tirazona v. Court of Appeals, G.R. No. 169712, March 14, 2008, 548 SCRA 560, 581. [25] Heirs of Completo & Abiad v. Sgt. Albayda, G.R. No. 172200, July 6, 2010, 624 SCRA 97, 110.

[17]

FIRST DIVISION [G.R. No. 153004. November 5, 2004] SANTOS VENTURA HOCORMA FOUNDATION, INC., petitioner, vs. ERNESTO V. SANTOS and RIVERLAND, INC., respondents DECISION QUISUMBING, J.: Subject of the present petition for review on certiorari is [1] the Decision, dated January 30, 2002, as well as the April 12, 2002, Resolution[2] of the Court of Appeals in CA-G.R. CV No. 55122. The appellate court reversed the Decision,[3] dated October 4, 1996, of the Regional Trial Court of Makati City, Branch 148, in Civil Case No. 95-811, and likewise denied petitioners Motion for Reconsideration. The facts of this case are undisputed. Ernesto V. Santos and Santos Ventura Hocorma Foundation, Inc. (SVHFI) were the plaintiff and defendant, respectively, in several civil cases filed in different courts in the Philippines. OnOctober 26, 1990, the parties executed a Compromise Agreement[4] which amicably ended all their pending litigations. The pertinent portions of the Agreement read as follows: 1. Defendant Foundation shall pay Plaintiff Santos P14.5 Million in the following manner: a. b. P1.5 Million immediately upon the execution of this agreement; The balance of P13 Million shall be paid, whether in one lump sum or in installments, at the discretion of the Foundation, within a period of not more than two (2) years from the execution of this agreement; provided, however, that in the event that the Foundation does not pay the whole or any part of such balance, the same shall be paid with the corresponding portion of the land or real properties subject of the aforesaid cases and previously

covered by the notices of lis pendens, under such terms and conditions as to area, valuation, and location mutually acceptable to both parties; but in no case shall the payment of such balance be later than two (2) years from the date of this agreement; otherwise, payment of any unpaid portion shall only be in the form of land aforesaid; 2. Immediately upon the execution of this agreement (and [the] receipt of the P1.5 Million), plaintiff Santos shall cause the dismissal with prejudice of Civil Cases Nos. 88-743, 1413OR, TC-1024, 45366 and 18166 and voluntarily withdraw the appeals in Civil Cases Nos. 4968 (C.A.-G.R. No. 26598) and 88-45366 (C.A.-G.R. No. 24304) respectively and for the immediate lifting of the aforesaid various notices of lis pendens on the real properties aforementioned (by signing herein attached corresponding documents, for such lifting); provided, however, that in the event that defendant Foundation shall sell or dispose of any of the lands previously subject of lis pendens, the proceeds of any such sale, or any part thereof as may be required, shall be partially devoted to the payment of the Foundations obligations under this agreement as may still be subsisting and payable at the time of any such sale or sales; ... 5. Failure of compliance of any of the foregoing terms and conditions by either or both parties to this agreement shall ipso facto and ipso jure automatically entitle the aggrieved party to a writ of execution for the enforcement of this agreement. [Emphasis supplied][5] In compliance with the Compromise Agreement, respondent Santos moved for the dismissal of the aforesaid civil cases. He also caused the lifting of the notices of lis pendens on the real properties involved. For its part, petitioner SVHFI, paid P1.5 million to respondent Santos, leaving a balance of P13 million. Subsequently, petitioner SVHFI sold to Development Exchange Livelihood Corporation two real properties, which were previously subjects of lis pendens. Discovering the disposition made by the petitioner, respondent Santos sent a letter to the petitioner demanding the payment of the remaining P13 million, which was ignored by the latter. Meanwhile, on September

30, 1991, theRegional Trial Court of Makati City, [6] a Decision approving the compromise agreement.

Branch

62,

issued

On October 28, 1992, respondent Santos sent another letter to petitioner inquiring when it would pay the balance of P13 million. There was no response from petitioner. Consequently, respondent Santos applied with the Regional Trial Court of Makati City, Branch 62, for the issuance of a writ of execution of its compromise judgment dated September 30, 1991. The RTC granted the writ. Thus, on March 10, 1993, the Sheriff levied on the real properties of petitioner, which were formerly subjects of the lis pendens. Petitioner, however, filed numerous motions to block the enforcement of the said writ. The challenge of the execution of the aforesaid compromise judgment even reached the Supreme Court. All these efforts, however, were futile. On November 22, 1994, petitioners real properties located in Mabalacat, Pampanga were auctioned. In the said auction, Riverland, Inc. was the highest bidder for P12 million and it was issued a Certificate of Sale covering the real properties subject of the auction sale. Subsequently, another auction sale was held on February 8, 1995, for the sale of real properties of petitioner inBacolod City. Again, Riverland, Inc. was the highest bidder. The Certificates of Sale issued for both properties provided for the right of redemption within one year from the date of registration of the said properties. On June 2, 1995, Santos and Riverland Inc. filed a Complaint for Declaratory Relief and Damages[7] alleging that there was delay on the part of petitioner in paying the balance of P13 million. They further alleged that under the Compromise Agreement, the obligation became due on October 26, 1992, but payment of the remaining P12 million was effected only on November 22, 1994. Thus, respondents prayed that petitioner be ordered to pay legal interest on the obligation, penalty, attorneys fees and costs of litigation. Furthermore, they prayed that the aforesaid sales be declared final and not subject to legal redemption. In its Answer,[8] petitioner countered that respondents have no cause of action against it since it had fully paid its obligation to the latter. It further claimed that the alleged delay in the payment of the balance was due to its valid exercise of its rights to protect its interests as provided under the Rules. Petitioner counterclaimed for attorneys fees and exemplary damages.

On October 4, 1996, the trial court rendered a Decision[9] dismissing herein respondents complaint and ordering them to pay attorneys fe es and exemplary damages to petitioner. Respondents then appealed to the Court of Appeals. The appellate court reversed the ruling of the trial court: WHEREFORE, finding merit in the appeal, the appealed Decision is hereby REVERSED and judgment is hereby rendered ordering appellee SVHFI to pay appellants Santos and Riverland, Inc.: (1) legal interest on the principal amount of P13 million at the rate of 12% per annum from the date of demand on October 28, 1992 up to the date of actual payment of the whole obligation; and (2) P20,000 as attorneys fees and costs of suit. SO ORDERED. Hence this petition for review on certiorari where petitioner assigns the following issues: I WHETHER OR NOT THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR WHEN IT AWARDED LEGAL INTEREST IN FAVOR OF THE RESPONDENTS, MR. SANTOS AND RIVERLAND, INC., NOTWITHSTANDING THE FACT THAT NEITHER IN THE COMPROMISE AGREEMENT NOR IN THE COMPROMISE JUDGEMENT OF HON. JUDGE DIOKNO PROVIDES FOR PAYMENT OF INTEREST TO THE RESPONDENT II WHETHER OF NOT THE COURT OF APPEALS ERRED IN AWARDING LEGAL IN[T]EREST IN FAVOR OF THE RESPONDENTS, MR. SANTOS AND RIVERLAND, INC., NOTWITHSTANDING THE FACT THAT THE OBLIGATION OF THE PETITIONER TO RESPONDENT SANTOS TO PAY A SUM OF MONEY HAD BEEN CONVERTED TO AN OBLIGATION TO PAY IN KIND DELIVERY OF REAL PROPERTIES OWNED BY THE PETITIONER WHICH HAD BEEN FULLY PERFORMED III

WHETHER OR NOT RESPONDENTS ARE BARRED FROM DEMANDING PAYMENT OF INTEREST BY REASON OF THE WAIVER PROVISION IN THE COMPROMISE AGREEMENT, WHICH BECAME THE LAW AMONG THE PARTIES[10] The only issue to be resolved is whether the respondents are entitled to legal interest. Petitioner SVHFI alleges that where a compromise agreement or compromise judgment does not provide for the payment of interest, the legal interest by way of penalty on account of fault or delay shall not be due and payable, considering that the obligation or loan, on which the payment of legal interest could be based, has been superseded by the compromise agreement.[11]Furthermore, the petitioner argues that the respondents are barred by res judicata from seeking legal interest on account of the waiver clause in the duly approved compromise agreement.[12]Article 4 of the compromise agreement provides: Plaintiff Santos waives and renounces any and all other claims that he and his family may have on the defendant Foundation arising from and in connection with the aforesaid civil cases, and defendant Foundation, on the other hand, also waives and renounces any and all claims that it may have against plaintiff Santos in connection with such cases.[13] [Emphasis supplied.] Lastly, petitioner alleges that since the compromise agreement did not provide for a period within which the obligation will become due and demandable, it is incumbent upon respondentSantos to ask for judicial intervention for purposes of fixing the period. It is only when a fixed period exists that the legal interests can be computed. Respondents profer that their right to damages is based on delay in the payment of the obligation provided in the Compromise Agreement. The Compromise Agreement provides that payment must be made within the two-year period from its execution. This was approved by the trial court and became the law governing their contract. Respondents posit that petitioners failure to comply entitles them to damages, by way of interest.[14] The petition lacks merit. A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced.[15] It is an

agreement between two or more persons, who, for preventing or putting an end to a lawsuit, adjust their difficulties by mutual consent in the manner which they agree on, and which everyone of them prefers in the hope of gaining, balanced by the danger of losing.[16] The general rule is that a compromise has upon the parties the effect and authority of res judicata, with respect to the matter definitely stated therein, or which by implication from its terms should be deemed to have been included therein.[17] This holds true even if the agreement has not been judicially approved.[18] In the case at bar, the Compromise Agreement was entered into by the parties on October 26, 1990.[19] It was judicially approved on September 30, 1991.[20] Applying existing jurisprudence, the compromise agreement as a consensual contract became binding between the parties upon its execution and not upon its court approval. From the time a compromise is validly entered into, it becomes the source of the rights and obligations of the parties thereto. The purpose of the compromise is precisely to replace and terminate controverted claims.[21] In accordance with the compromise agreement, the respondents asked for the dismissal of the pending civil cases. The petitioner, on the other hand, paid the initial P1.5 million upon the execution of the agreement. This act of the petitioner showed that it acknowledges that the agreement was immediately executory and enforceable upon its execution. As to the remaining P13 million, the terms and conditions of the compromise agreement are clear and unambiguous. It provides: ... b. The balance of P13 Million shall be paid, whether in one lump sum or in installments, at the discretion of the Foundation, within a period of not more than two (2) years from the execution of this agreement[22][Emphasis supplied.] ... The two-year period must be counted from October 26, 1990, the date of execution of the compromise agreement, and not on the judicial approval of the compromise agreement onSeptember 30, 1991. When respondents wrote a

demand letter to petitioner on October 28, 1992, the obligation was already due and demandable. When the petitioner failed to pay its due obligation after the demand was made, it incurred delay. Article 1169 of the New Civil Code provides: Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation. [Emphasis supplied] Delay as used in this article is synonymous to default or mora which means delay in the fulfillment of obligations. It is the non-fulfillment of the obligation with respect to time.[23] In order for the debtor to be in default, it is necessary that the following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance judicially or extrajudicially.[24] In the case at bar, the obligation was already due and demandable after the lapse of the two-year period from the execution of the contract. The two-year period ended on October 26, 1992. When the respondents gave a demand letter on October 28, 1992, to the petitioner, the obligation was already due and demandable. Furthermore, the obligation is liquidated because the debtor knows precisely how much he is to pay and when he is to pay it. The second requisite is also present. Petitioner delayed in the performance. It was able to fully settle its outstanding balance only on February 8, 1995, which is more than two years after the extra-judicial demand. Moreover, it filed several motions and elevated adverse resolutions to the appellate court to hinder the execution of a final and executory judgment, and further delay the fulfillment of its obligation. Third, the demand letter sent to the petitioner on October 28, 1992, was in accordance with an extra-judicial demand contemplated by law. Verily, the petitioner is liable for damages for the delay in the performance of its obligation. This is provided for in Article 1170[25] of the New Civil Code. When the debtor knows the amount and period when he is to pay, interest as damages is generally allowed as a matter of right.[26] The complaining party has

been deprived of funds to which he is entitled by virtue of their compromise agreement. The goal of compensation requires that the complainant be compensated for the loss of use of those funds. This compensation is in the form of interest.[27] In the absence of agreement, the legal rate of interest shall prevail.[28] The legal interest for loan as forbearance of money is 12% per annum[29] 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.[30] WHEREFORE, the petition is DENIED for lack of merit. The Decision dated January 30, 2002 of the Court of Appeals and its April 12, 2002 Resolution in CA-G.R. CV No. 55122 are AFFIRMED. Costs against petitioner. SO ORDERED. Davide, Jr. C.J. (Chairman), Ynares-Santiago and Carpio, JJ., concur. Azcuna, J., on leave.

[1]

Rollo, pp. 39-45. Penned by Associate Justice Hilarion L. Aquino, with Associate Justices Edgardo P. Cruz, and Amelita G. Tolentino concurring. Id. at 46. Id. at 77-82. Records, pp. 118-123. Id. at 38-40. Id. at 36-40. Id. at 1-11. Id. at 23-35. Id. at 151-156. Rollo, p. 218. Id. at 219-220. Id. at 221. Records, pp. 39-40.

[2] [3] [4] [5] [6] [7] [8] [9]

[10] [11] [12] [13]

[14] [15] [16]

Rollo, p. 149. New Civil Code, Art. 2028. Cebu International Finance Corp. v. Court of Appeals, G.R. No. 123031, 12 October 1999, 316 SCRA 488, 498-499 citing David v. Court of Appeals, G.R. No. 97240, 16 October 1992, 214 SCRA 644, 650. Del Rosario v. Madayag, G.R. No. 118531, 28 August 1995, 247 SCRA 767, 771. Mayuga v. Court of Appeals, No. L-46953, 28 September 1987, 154 SCRA 309, 320. Records, pp. 118-123. Id. at 36-40. Landoil Resources Corporation v. Tensuan, No. L-77733, 20 December 1988, 168 SCRA 569, 578. Records, pp. 38-39. IV Arturo M. Tolentino, CIVIL CODE OF THE PHILIPPINES, 101 (1987 ed.). Id. at 102. Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay and those who in any manner contravene the tenor thereof, are liable for damages. II J. Cesar S. Sangco, PHILIPPINE LAW ON TORTS AND DAMAGES 1085 (1993 ed.). Ibid. Quiros v. Tan-Guinlay, No. 1904, 3 March 1906, 5 Phil 675, 680. Central Bank Circular No. 416, July 29, 1974. Eastern Assurance and Surety Corporation v. Court of Appeals, G.R. No. 127135, 18 January 2000, 322 SCRA 73, 78.

[17] [18]

[19] [20] [21]

[22] [23] [24] [25]

[26]

[27] [28] [29] [30]

Republic of the Philippines Supreme Court Manila SECOND DIVISION

SOLAR HARVEST, INC., Petitioner,

G.R. No. 176868 Present: CARPIO, J., Chairperson, NACHURA, PERALTA, ABAD, and MENDOZA, JJ.

- versus -

DAVAO CORRUGATED CARTON CORPORATION, Respondent.

Promulgated: July 26, 2010

x------------------------------------------------------------------------------------x

DECISION NACHURA, J.:

Petitioner seeks a review of the Court of Appeals (CA) Decision[1] dated September 21, 2006 and Resolution[2] dated February 23, 2007, which denied petitioners motion for reconsideration. The assailed Decision denied petitioners

claim for reimbursement for the amount it paid to respondent for the manufacture of corrugated carton boxes.

The case arose from the following antecedents: In the first quarter of 1998, petitioner, Solar Harvest, Inc., entered into an agreement with respondent, Davao Corrugated Carton Corporation, for the purchase of corrugated carton boxes, specifically designed for petitioners business of exporting fresh bananas, at US$1.10 each. The agreement was not reduced into writing. To get the production underway, petitioner deposited, on March 31, 1998, US$40,150.00 in respondents US Dollar Savings Account with Westmont Bank, as full payment for the ordered boxes. Despite such payment, petitioner did not receive any boxes from respondent. On January 3, 2001, petitioner wrote a demand letter for reimbursement of the amount paid.[3]On February 19, 2001, respondent replied that the boxes had been completed as early as April 3, 1998 and that petitioner failed to pick them up from the formers warehouse 30 days from completion, as agreed upon. Respondent mentioned that petitioner even placed an additional order of 24,000 boxes, out of which, 14,000 had been manufactured without any advanced payment from petitioner. Respondent then demanded petitioner to remove the boxes from the factory and to pay the balance of US$15,400.00 for the additional boxes and P132,000.00 as storage fee. On August 17, 2001, petitioner filed a Complaint for sum of money and damages against respondent. The Complaint averred that the parties agreed that the boxes will be delivered within 30 days from payment but respondent failed to manufacture and deliver the boxes within such time. It further alleged 6. That repeated follow-up was made by the plaintiff for the immediate production of the ordered boxes, but every time, defendant [would] only show samples of boxes and ma[k]e repeated promises to deliver the said ordered boxes.

7. That because of the failure of the defendant to deliver the ordered boxes, plaintiff ha[d] to cancel the same and demand payment and/or refund from the defendant but the latter refused to pay and/or refund the US$40,150.00 payment made by the former for the ordered boxes.[4] In its Answer with Counterclaim,[5] respondent insisted that, as early as April 3, 1998, it had already completed production of the 36,500 boxes, contrary to petitioners allegation. According to respondent, petitioner, in fact, made an additional order of 24,000 boxes, out of which, 14,000 had been completed without waiting for petitioners payment. Respondent stated that petitioner was to pick up the boxes at the factory as agreed upon, but petitioner failed to do so. Respondent averred that, on October 8, 1998, petitioners representative, Bobby Que (Que), went to the factory and saw that the boxes were ready for pick up. On February 20, 1999, Que visited the factory again and supposedly advised respondent to sell the boxes as rejects to recoup the cost of the unpaid 14,000 boxes, because petitioners transaction to ship bananas to China did not materialize. Respondent claimed that the boxes were occupying warehouse space and that petitioner should be made to pay storage fee at P60.00 per square meter for every month from April 1998. As counterclaim, respondent prayed that judgment be rendered ordering petitioner to pay $15,400.00, plus interest, moral and exemplary damages, attorneys fees, and costs of the suit. In reply, petitioner denied that it made a second order of 24,000 boxes and that respondent already completed the initial order of 36,500 boxes and 14,000 boxes out of the second order. It maintained that

respondent only manufactured a sample of the ordered boxes and that respondent could not have produced 14,000 boxes without the required prepayments.[6] During trial, petitioner presented Que as its sole witness. Que testified that he ordered the boxes from respondent and deposited the money in respondents account.[7] He specifically stated that, when he visited respondents factory, he saw that the boxes had no print of petitioners logo.[8] A few months later, he followedup the order and was told that the company had full production, and thus, was promised that production of the order would be rushed. He told respondent that it should indeed rush production because the need for the boxes was urgent. Thereafter, he asked his partner, Alfred Ong, to cancel the order because it was already late for them to meet their commitment to ship the bananas to China.[9] On cross-examination, Que further testified that China Zero Food, the Chinese company that ordered the bananas, was sending a ship to Davao to get the bananas, but since there were no cartons, the ship could not proceed. He said that, at that time, bananas from Tagum Agricultural Development Corporation (TADECO) were already there. He denied that petitioner made an additional order of 24,000 boxes. He explained that it took three years to refer the matter to counsel because respondent promised to pay.[10] For respondent, Bienvenido Estanislao (Estanislao) testified that he met Que in Davao in October 1998 to inspect the boxes and that the latter got samples of them. In February 2000, they inspected the boxes again and Que got more samples. Estanislao said that petitioner did not pick up the boxes because the ship did not arrive.[11] Jaime Tan (Tan), president of respondent, also testified that his company finished production of the 36,500 boxes on April 3, 1998 and that petitioner made a second order of 24,000 boxes. He said that the agreement was for respondent to produce the boxes and for petitioner to pick them up from the warehouse.[12] He also said that the reason why petitioner did not pick up the boxes was that the ship that was to carry the bananas did not arrive. [13] According to him, during the last visit of Que and Estanislao, he asked them to withdraw the boxes immediately because they were occupying a big space in his plant, but they, instead, told him to sell the cartons as rejects. He was able to sell 5,000 boxes at P20.00 each for a total of P100,000.00. They then told him to apply the said amount to the unpaid balance.

In its March 2, 2004 Decision, the Regional Trial Court (RTC) ruled that respondent did not commit any breach of faith that would justify rescission of the contract and the consequent reimbursement of the amount paid by petitioner. The RTC said that respondent was able to produce the ordered boxes but petitioner failed to obtain possession thereof because its ship did not arrive. It thus dismissed the complaint and respondents counterclaims, disposing as follows: WHEREFORE, premises considered, judgment is hereby rendered in favor of defendant and against the plaintiff and, accordingly, plaintiffs complaint is hereby ordered DISMISSED without pronouncement as to cost. Defendants counterclaims are similarly dismissed for lack of merit. SO ORDERED.[14] Petitioner filed a notice of appeal with the CA. On September 21, 2006, the CA denied the appeal for lack of merit. [15] The appellate court held that petitioner failed to discharge its burden of proving what it claimed to be the parties agreement with respect to the delivery of the boxes. According to the CA, it was unthinkable that, over a period of more than two years, petitioner did not even demand for the delivery of the boxes. The CA added that even assuming that the agreement was for respondent to deliver the boxes, respondent would not be liable for breach of contract as petitioner had not yet demanded from it the delivery of the boxes.[16] Petitioner moved for reconsideration,[17] but the motion was denied by the CA in its Resolution of February 23, 2007.[18] In this petition, petitioner insists that respondent did not completely manufacture the boxes and that it was respondent which was obliged to deliver the boxes to TADECO.

We find no reversible error in the assailed Decision that would justify the grant of this petition. Petitioners claim for reimbursement is actually one for rescission (or resolution) of contract under Article 1191 of the Civil Code, which reads: Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.

The right to rescind a contract arises once the other party defaults in the performance of his obligation. In determining when default occurs, Art. 1191 should be taken in conjunction with Art. 1169 of the same law, which provides: Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation. However, the demand by the creditor shall not be necessary in order that delay may exist: (1) or When the obligation or the law expressly so declares;

(2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or (3) When demand would be useless, as when the obligor has rendered it beyond his power to perform. In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins. In reciprocal obligations, as in a contract of sale, the general rule is that the fulfillment of the parties respective obligations should be simultaneous. Hence, no demand is generally necessary because, once a party fulfills his obligation and the other party does not fulfill his, the latter automatically incurs in delay. But when different dates for performance of the obligations are fixed, the default for each obligation must be determined by the rules given in the first paragraph of the present article,[19] that is, the other party would incur in delay only from the moment the other party demands fulfillment of the formers obligation. Th us, even in reciprocal obligations, if the period for the fulfillment of the obligation is fixed, demand upon the obligee is still necessary before the obligor can be considered in default and before a cause of action for rescission will accrue. Evident from the records and even from the allegations in the complaint was the lack of demand by petitioner upon respondent to fulfill its obligation to manufacture and deliver the boxes. The Complaint only alleged that petitioner made a follow-up upon respondent, which, however, would not qualify as a demand for the fulfillment of the obligation. Petitioners witness also testified that they made a follow-up of the boxes, but not a demand. Note is taken of the fact that, with respect to their claim for reimbursement, the Complaint alleged and the witness testified that a demand letter was sent to respondent. Without a previous demand for the fulfillment of the obligation, petitioner would not have a cause of

action for rescission against respondent as the latter would not yet be considered in breach of its contractual obligation. Even assuming that a demand had been previously made before filing the present case, petitioners claim for reimbursement would still fail, as the circumstances would show that respondent was not guilty of breach of contract. The existence of a breach of contract is a factual matter not usually reviewed in a petition for review under Rule 45.[20] The Court, in petitions for review, limits its inquiry only to questions of law. After all, it is not a trier of facts, and findings of fact made by the trial court, especially when reiterated by the CA, must be given great respect if not considered as final.[21] In dealing with this petition, we will not veer away from this doctrine and will thus sustain the factual findings of the CA, which we find to be adequately supported by the evidence on record. As correctly observed by the CA, aside from the pictures of the finished boxes and the production report thereof, there is ample showing that the boxes had already been manufactured by respondent. There is the testimony of Estanislao who accompanied Que to the factory, attesting that, during their first visit to the company, they saw the pile of petitioners boxes and Que took samples thereof. Que, petitioners witness, himself confirmed this incident. He testified that Tan pointed the boxes to him and that he got a sample and saw that it was blank. Ques absolute assertion that the boxes were not manufactured is, therefore, implausible and suspicious. In fact, we note that respondents counsel manifested in court, during trial, that his client was willing to shoulder expenses for a representative of the court to visit the plant and see the boxes.[22] Had it been true that the boxes were not yet completed, respondent would not have been so bold as to challenge the court to conduct an ocular inspection of their warehouse. Even in its Comment to this petition, respondent prays that petitioner be ordered to remove the boxes from its factory site,[23] which could only mean that the boxes are, up to the present, still in respondents premises. We also believe that the agreement between the parties was for petitioner to pick up the boxes from respondents warehouse, contrary to petitioners

allegation. Thus, it was due to petitioners fault that the boxes were not delivered to TADECO. Petitioner had the burden to prove that the agreement was, in fact, for respondent to deliver the boxes within 30 days from payment, as alleged in the Complaint. Its sole witness, Que, was not even competent to testify on the terms of the agreement and, therefore, we cannot give much credence to his testimony. It appeared from the testimony of Que that he did not personally place the order with Tan, thus: Q. A. Q. A. No, my question is, you went to Davao City and placed your order there? I made a phone call. You made a phone call to Mr. Tan? The first time, the first call to Mr. Alf[re]d Ong. Alfred Ong has a contact with Mr. Tan. So, your first statement that you were the one who placed the order is not true? Thats true. The Solar Harvest made a contact with Mr. Tan and I deposited the money in the bank. You said a while ago [t]hat you were the one who called Mr. Tan and placed the order for 36,500 boxes, isnt it? First time it was Mr. Alfred Ong. It was Mr. Ong who placed the order[,] not you? Yes, sir.[24] Is it not a fact that the cartons were ordered through Mr. Bienvenido Estanislao? Yes, sir.[25]

Q. A.

Q. A. Q. A. Q. A.

Moreover, assuming that respondent was obliged to deliver the boxes, it could not have complied with such obligation. Que, insisting that the boxes had

not been manufactured, admitted that he did not give respondent the authority to deliver the boxes to TADECO: Q. A. Did you give authority to Mr. Tan to deliver these boxes to TADECO? No, sir. As I have said, before the delivery, we must have to check the carton, the quantity and quality. But I have not seen a single carton. Are you trying to impress upon the [c]ourt that it is only after the boxes are completed, will you give authority to Mr. Tan to deliver the boxes to TADECO[?] Sir, because when I checked the plant, I have not seen any carton. I asked Mr. Tan to rush the carton but not[26] Did you give any authority for Mr. Tan to deliver these boxes to TADECO? Because I have not seen any of my carton. You dont have any authority yet given to Mr. Tan? None, your Honor.[27]

Q.

A.

Q. A. Q. A.

Surely, without such authority, TADECO would not have allowed respondent to deposit the boxes within its premises. In sum, the Court finds that petitioner failed to establish a cause of action for rescission, the evidence having shown that respondent did not commit any breach of its contractual obligation. As previously stated, the subject boxes are still within respondents premises. To put a rest to this dispute, we therefore relieve respondent from the burden of having to keep the boxes within its premises and, consequently, give it the right to dispose of them, after petitioner is given a period of time within which to remove them from the premises. WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals Decision dated September 21, 2006 and Resolution dated February 23,

2007 areAFFIRMED. In addition, petitioner is given a period of 30 days from notice within which to cause the removal of the 36,500 boxes from respondents warehouse. After the lapse of said period and petitioner fails to effect such removal, respondent shall have the right to dispose of the boxes in any manner it may deem fit. SO ORDERED.

ANTONIO EDUARDO B. NACHURA Associate Justice

WE CONCUR:

ANTONIO T. CARPIO Associate Justice Chairperson

DIOSDADO M. PERALTAAssociate Justice

ROBERTO A. ABAD Associate Justice

JOSE CATRAL MENDOZA Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

ANTONIO T. CARPIO Associate Justice Chairperson, Second Division

CERTIFICATION Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

RENATO C. CORONA Chief Justice

[1]

Penned by Associate Justice Rebecca de Guia-Salvador, with Associate Justices Magdangal M. de Leon and Ramon R. Garcia, concurring; rollo, pp. 103114. [2] Id. at 127. [3] Records, p. 96. [4] Rollo, p. 27. [5] Id. at 33-36. [6] Records, 31-32. [7] TSN, July 10, 2003, p. 5. [8] Id. at 7.

[9]

Id. at 9-10. Id. at 18-22. [11] TSN, October 16, 2003, p. 14. [12] TSN, December 4, 2003, p. 13. [13] Id. at 15. [14] Rollo, p. 60. [15] Supra note 1, at 113-114. [16] Id. at 110-112. [17] Rollo, pp. 115-121. [18] Supra note 2. [19] IV ARTURO M. TOLENTINO, Commentaries and Jurisprudence on the Civil Code of the Philippines (1985 ed.), p. 10, citing 8 Manresa. [20] Omengan v. Philippine National Bank, G.R. No. 161319, January 23, 2007, 512 SCRA 305, 309. [21] Filipinas (Pre-Fab Bldg.) Systems, Inc. v. MRT Development Corporation, G.R. Nos. 167829-30, November 13, 2007, 537 SCRA 609, 638-639. [22] TSN, December 4, 2003, p. 26. [23] Rollo, p. 137. [24] TSN, July 10, 2003, p. 15. [25] Id. at 21. [26] Id. at 25. [27] Id. at 27.
[10]

SECOND DIVISION

G.R. No. 73345. April 7, 1993. SOCIAL SECURITY SYSTEM, petitioner, vs. MOONWALK DEVELOPMENT & HOUSING CORPORATION, ROSITA U. ALBERTO, ROSITA U. ALBERTO, JMA HOUSE, INC., MILAGROS SANCHEZ SANTIAGO, in her capacity as Register of Deeds for the Province of Cavite, ARTURO SOLITO, in his capacity as Register of Deeds for Metro Manila District IV, Makati, Metro Manila and the INTERMEDIATE APPELLATE COURT, respondents. The Solicitor General for petitioner. K.V. Faylona & Associates for private respondents. DECISION CAMPOS, JR., J p: Before Us is a petition for review on certiorari of decision 1 of the then Intermediate Appellate Court affirming in toto the decision of the former Court of First Instance of Rizal, Seventh Judicial District, Branch XXIX, Pasay City. The facts as found by the Appellate Court are as follows: "On February 20, 1980, the Social Security System, SSS for brevity, filed a complaint in the Court of First Instance of Rizal against Moonwalk Development & Housing Corporation, Moonwalk for short, alleging that the former had committed an error in failing to compute the 12% interest due on delayed payments on the loan of Moonwalk resulting in a chain of errors in the application of payments made by Moonwalk and, in an unpaid balance on the principal loan agreement in the amount of P7,053.77 and, also in not reflecting in its statement or account an unpaid balance on the said penalties for delayed payments in the amount of P7,517,178.21 as of October 10, 1979.

Moonwalk answered denying SSS' claims and asserting that SSS had the opportunity to ascertain the truth but failed to do so. The trial court set the case for pre-trial at which pre-trial conference, the court issued an order giving both parties thirty (30) days within which to submit a stipulation of facts. The Order of October 6, 1980 dismissing the complaint followed the submission by the parties on September 19, 1980 of the following stipulation of Facts: "1. On October 6, 1971, plaintiff approved the application of defendant Moonwalk for an interim loan in the amount of THIRTY MILLION PESOS (P30,000,000.00) for the purpose of developing and constructing a housing project in the provinces of Rizal and Cavite; "2. Out of the approved loan of THIRTY MILLION PESOS (P30,000,000.00), the sum of P9,595,000.00 was released to defendant Moonwalk as of November 28, 1973; "3. A third Amended Deed of First Mortgage was executed on December 18, 1973 Annex `D' providing for restructuring of the payment of the released amount of P9,595,000.00. "4. Defendants Rosita U. Alberto and Rosita U. Alberto, mother and daughter respectively, under paragraph 5 of the aforesaid Third Amended Deed of First Mortgage substituted Associated Construction and Surveys Corporation, Philippine Model Homes Development Corporation, Mariano Z. Velarde and Eusebio T. Ramos, as solidary obligors; "5. On July 23, 1974, after considering additional releases in the amount of P2,659,700.00, made to defendant Moonwalk, defendant Moonwalk delivered to the plaintiff a promissory note for TWELVE MILLION TWO HUNDRED FIFTY FOUR THOUSAND SEVEN HUNDRED PESOS (P12,254,700.00) Annex `E', signed by Eusebio T. Ramos, and the said Rosita U. Alberto and Rosita U. Alberto; "6. Moonwalk made a total payment of P23,657,901.84 to SSS for the loan principal of P12,254,700.00 released to it. The last payment made by Moonwalk in the amount of P15,004,905.74 were based on the Statement of Account, Annex "F" prepared by plaintiff SSS for defendant;

"7. After settlement of the account stated in Annex 'F' plaintiff issued to defendant Moonwalk the Release of Mortgage for Moonwalk's mortgaged properties in Cavite and Rizal, Annexes 'G' and 'H' on October 9, 1979 and October 11, 1979 respectively. "8. In letters to defendant Moonwalk, dated November 28, 1979 and followed up by another letter dated December 17, 1979, plaintiff alleged that it committed an honest mistake in releasing defendant. "9. In a letter dated December 21, 1979, defendant's counsel told plaintiff that it had completely paid its obligations to SSS; "10. The genuineness and due execution of the documents marked as Annex (sic) 'A' to 'O' inclusive, of the Complaint and the letter dated December 21, 1979 of the defendant's counsel to the plaintiff are admitted. "Manila for Pasay City, September 2, 1980." 2 On October 6, 1990, the trial court issued an order dismissing the complaint on the ground that the obligation was already extinguished by the payment by Moonwalk of its indebtedness to SSS and by the latter's act of cancelling the real estate mortgages executed in its favor by defendant Moonwalk. The Motion for Reconsideration filed by SSS with the trial court was likewise dismissed by the latter. These orders were appealed to the Intermediate Appellate Court. Respondent Court reduced the errors assigned by the SSS into this issue: ". . . are defendantsappellees, namely, Moonwalk Development and Housing Corporation, Rosita U. Alberto, Rosita U. Alberto, JMA House, Inc. still liable for the unpaid penalties as claimed by plaintiff-appellant or is their obligation extinguished?" 3 As We have stated earlier, the respondent Court held that Moonwalk's obligation was extinguished and affirmed the trial court. Hence, this Petition wherein SSS raises the following grounds for review: "First, in concluding that the penalties due from Moonwalk are "deemed waived and/or barred," the appellate court disregarded the basic tenet that waiver of a right must be express, made in a clear and unequivocal manner. There is no

evidence in the case at bar to show that SSS made a clear, positive waiver of the penalties, made with full knowledge of the circumstances. Second, it misconstrued the ruling that SSS funds are trust funds, and SSS, being a mere trustee, cannot perform acts affecting the same, including condonation of penalties, that would diminish property rights of the owners and beneficiaries thereof. (United Christian Missionary Society v. Social Security Commission, 30 SCRA 982, 988 [1969]). Third, it ignored the fact that penalty at the rate of 12% p.a. is not inequitable. Fourth, it ignored the principle that equity will cancel a release on the ground of mistake of fact." 4 The same problem which confronted the respondent court is presented before Us: Is the penalty demandable even after the extinguishment of the principal obligation? The former Intermediate Appellate Court, through Justice Eduard P. Caguioa, held in the negative. It reasoned, thus: "2. As we have explained under No. 1, contrary to what the plaintiff-appellant states in its Brief, what is sought to be recovered in this case is not the 12% interest on the loan but the 12% penalty for failure to pay on time the amortization. What is sought to be enforced therefore is the penal clause of the contract entered into between the parties. Now, what is a penal clause. A penal clause has been defined as "an accessory obligation which the parties attach to a principal obligation for the purpose of insuring the performance thereof by imposing on the debtor a special presentation (generally consisting in the payment of a sum of money) in case the obligation is not fulfilled or is irregularly or inadequately fulfilled" (3 Castan 8th Ed. p. 118). Now an accessory obligation has been defined as that attached to a principal obligation in order to complete the same or take its place in the case of breach (4 Puig Pea Part 1 p. 76). Note therefore that an accessory obligation is dependent for its existence on the existence of a principal obligation. A principal obligation

may exist without an accessory obligation but an accessory obligation cannot exist without a principal obligation. For example, the contract of mortgage is an accessory obligation to enforce the performance of the main obligation of indebtedness. An indebtedness can exist without the mortgage but a mortgage cannot exist without the indebtedness, which is the principal obligation. In the present case, the principal obligation is the loan between the parties. The accessory obligation of a penal clause is to enforce the main obligation of payment of the loan. If therefore the principal obligation does not exist the penalty being accessory cannot exist. Now then when is the penalty demandable? A penalty is demandable in case of non performance or late performance of the main obligation. In other words in order that the penalty may arise there must be a breach of the obligation either by total or partial non fulfillment or there is non fulfillment in point of time which is called mora or delay. The debtor therefore violates the obligation in point of time if there is mora or delay. Now, there is no mora or delay unless there is a demand. It is noteworthy that in the present case during all the period when the principal obligation was still subsisting, although there were late amortizations there was no demand made by the creditor, plaintiff-appellant for the payment of the penalty. Therefore up to the time of the letter of plaintiff-appellant there was no demand for the payment of the penalty, hence the debtor was no in mora in the payment of the penalty. However, on October 1, 1979, plaintiff-appellant issued its statement of account (Exhibit F) showing the total obligation of Moonwalk as P15,004,905.74, and forthwith demanded payment from defendant-appellee. Because of the demand for payment, Moonwalk made several payments on September 29, October 9 and 19, 1979 respectively, all in all totalling P15,004,905.74 which was a complete payment of its obligation as stated in Exhibit F. Because of this payment the obligation of Moonwalk was considered extinguished, and pursuant to said extinguishment, the real estate mortgages given by Moonwalk were released on October 9, 1979 and October 10, 1979 (Exhibits G and H). For all purposes therefore the principal obligation of defendant-appellee was deemed extinguished as well as the accessory obligation of real estate mortgage; and that is the reason for the release of all the Real Estate Mortgages on October 9 and 10, 1979 respectively.

Now, besides the Real Estate Mortgages, the penal clause which is also an accessory obligation must also be deemed extinguished considering that the principal obligation was considered extinguished, and the penal clause being an accessory obligation. That being the case, the demand for payment of the penal clause made by plaintiff-appellant in its demand letter dated November 28, 1979 and its follow up letter dated December 17, 1979 (which parenthetically are the only demands for payment of the penalties) are therefore ineffective as there was nothing to demand. It would be otherwise, if the demand for the payment of the penalty was made prior to the extinguishment of the obligation because then the obligation of Moonwalk would consist of: 1) the principal obligation 2) the interest of 12% on the principal obligation and 3) the penalty of 12% for late payment for after demand, Moonwalk would be in mora and therefore liable for the penalty. Let it be emphasized that at the time of the demand made in the letters of November 28, 1979 and December 17, 1979 as far as the penalty is concerned, the defendant-appellee was not in default since there was no mora prior to the demand. That being the case, therefore, the demand made after the extinguishment of the principal obligation which carried with it the extinguishment of the penal clause being merely an accessory obligation, was an exercise in futility. 3. At the time of the payment made of the full obligation on October 10, 1979 together with the 12% interest by defendant-appellee Moonwalk, its obligation was extinguished. It being extinguished, there was no more need for the penal clause. Now, it is to be noted that penalty at anytime can be modified by the Court. Even substantial performance under Art. 1234 authorizes the Court to consider it as complete performance minus damages. Now, Art, 1229 Civil Code of the Philippines provides: "ART. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable." If the penalty can be reduced after the principal obligation has been partly or irregularly complied with by the debtor, which is nonetheless a breach of the obligation, with more reason the penal clause is not demandable when full

obligation has been complied with since in that case there is no breach of the obligation. In the present case, there has been as yet no demand for payment of the penalty at the time of the extinguishment of the obligation, hence there was likewise an extinguishment of the penalty. Let Us emphasize that the obligation of defendant-appellee was fully complied with by the debtor, that is, the amount loaned together with the 12% interest has been fully paid by the appellee. That being so, there is no basis for demanding the penal clause since the obligation has been extinguished. Here there has been a waiver of the penal clause as it was not demanded before the full obligation was fully paid and extinguished. Again, emphasis must be made on the fact that plaintiff-appellant has not lost anything under the contract since in got back in full the amount loan (sic) as well as the interest thereof. The same thing would have happened if the obligation was paid on time, for then the penal clause, under the terms of the contract would not apply. Payment of the penalty does not mean gain or loss of plaintiff-appellant since it is merely for the purpose of enforcing the performance of the main obligation has been fully complied with and extinguished, the penal clause has lost its raison d' entre." 5 We find no reason to depart from the appellate court's decision. We, however, advance the following reasons for the denial of this petition. Article 1226 of the Civil Code provides: "Art. 1226. In obligations with a penal clause, he penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation. The penalty may be enforced only when it is demandable in accordance with the provisions of this Code." (Emphasis Ours.) A penal clause is an accessory undertaking to assume greater liability in case of breach. 6 It has a double function: (1) to provide for liquidated damages, and (2) to strengthen the coercive force of the obligation by the threat of greater responsibility in the event of breach. 7 From the foregoing, it is clear that a penal clause is intended to prevent the obligor from defaulting in the performance of his

obligation. Thus, if there should be default, the penalty may be enforced. One commentator of the Civil Code wrote: "Now when is the penalty deemed demandable in accordance with the provisions of the Civil Code? We must make a distinction between a positive and a negative obligation. With regard to obligations which are positive (to give and to do), the penalty is demandable when the debtor is in mora; hence, the necessity of demand by the debtor unless the same is excused . . ." 8 When does delay arise? Under the Civil Code, delay begins from the time the obligee judicially or extrajudicially demands from the obligor the performance of the obligation. "Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation." There are only three instances when demand is not necessary to render the obligor in default. These are the following: "(1) When the obligation or the law expressly so declares; (2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or (3) When the demand would be useless, as when the obligor has rendered it beyond his power to perform." 9 This case does not fall within any of the established exceptions. Hence, despite the provision in the promissory note that "(a)ll amortization payments shall be made every first five (5) days of the calendar month until the principal and interest on the loan or any portion thereof actually released has been fully paid," 10 petitioner is not excused from making a demand. It has been established that at the time of payment of the full obligation, private respondent Moonwalk has long been delinquent in meeting its monthly arrears and in paying the full amount of the loan itself as the obligation matured sometime in January, 1977. But mere delinquency in payment does not necessarily mean delay in the legal concept. To be in default ". . . is different from mere delay in the grammatical sense, because it involves the

beginning of a special condition or status which has its own peculiar effects or results." 11 In order that the debtor may be in default it is necessary that the following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance judicially and extrajudicially. 12 Default generally begins from the moment the creditor demands the performance of the obligation. 13 Nowhere in this case did it appear that SSS demanded from Moonwalk the payment of its monthly amortizations. Neither did it show that petitioner demanded the payment of the stipulated penalty upon the failure of Moonwalk to meet its monthly amortization. What the complaint itself showed was that SSS tried to enforce the obligation sometime in September, 1977 by foreclosing the real estate mortgages executed by Moonwalk in favor of SSS. But this foreclosure did not push through upon Moonwalk's requests and promises to pay in full. The next demand for payment happened on October 1, 1979 when SSS issued a Statement of Account to Moonwalk. And in accordance with said statement, Moonwalk paid its loan in full. What is clear, therefore, is that Moonwalk was never in default because SSS never compelled performance. Though it tried to foreclose the mortgages, SSS itself desisted from doing so upon the entreaties of Moonwalk. If the Statement of Account could properly be considered as demand for payment, the demand was complied with on time. Hence, no delay occurred and there was, therefore, no occasion when the penalty became demandable and enforceable. Since there was no default in the performance of the main obligation payment of the loan SSS was never entitled to recover any penalty, not at the time it made the Statement of Account and certainly, not after the extinguishment of the principal obligation because then, all the more that SSS had no reason to ask for the penalties. Thus, there could never be any occasion for waiver or even mistake in the application for payment because there was nothing for SSS to waive as its right to enforce the penalty did not arise. SSS, however, in buttressing its claim that it never waived the penalties, argued that the funds it held were trust funds and as trustee, the petitioner could not perform acts affecting the funds that would diminish property rights of the owners and beneficiaries thereof. To support its claim, SSS cited the case of United Christian Missionary Society v. Social Security Commission. 14

We looked into the case and found out that it is not applicable to the present case as it dealt not with the right of the SSS to collect penalties which were provided for in contracts which it entered into but with its right to collect premiums and its duty to collect the penalty for delayed payment or non-payment of premiums. The Supreme Court, in that case, stated: "No discretion or alternative is granted respondent Commission in the enforcement of the law's mandate that the employer who fails to comply with his legal obligation to remit the premiums to the System within the prescribed period shall pay a penalty of three (3%) per month. The prescribed penalty is evidently of a punitive character, provided by the legislature to assure that employers do not take lightly the State's exercise of the police power in the implementation of the Republic's declared policy "to develop, establish gradually and perfect a social security system which shall be suitable to the needs of the people throughout the Philippines and (to) provide protection to employers against the hazards of disability, sickness, old age and death . . ." Thus, We agree with the decision of the respondent court on the matter which We quote, to wit: "Note that the above case refers to the condonation of the penalty for the non remittance of the premium which is provided for by Section 22(a) of the Social Security Act . . . In other words, what was sought to be condoned was the penalty provided for by law for non remittance of premium for coverage under the Social Security Act. The case at bar does not refer to any penalty provided for by law nor does it refer to the non remittance of premium. The case at bar refers to a contract of loan entered into between plaintiff and defendant Moonwalk Development and Housing Corporation. Note, therefore, that no provision of law is involved in this case, nor is there any penalty imposed by law nor a case about non-remittance of premium required by law. The present case refers to a contract of loan payable in installments not provided for by law but by agreement of the parties. Therefore, the ratio decidendi of the case of United Christian Missionary Society vs. Social Security Commission which plaintiff-appellant relies is not applicable in this case; clearly, the Social Security Commission, which is a creature of the Social Security Act cannot condone a mandatory provision of law providing for the payment of

premiums and for penalties for non remittance. The life of the Social Security Act is in the premiums because these are the funds from which the Social Security Act gets the money for its purposes and the non-remittance of the premiums is penalized not by the Social Security Commission but by law. xxx xxx xxx It is admitted that when a government created corporation enters into a contract with private party concerning a loan, it descends to the level of a private person. Hence, the rules on contract applicable to private parties are applicable to it. The argument therefore that the Social Security Commission cannot waive or condone the penalties which was applied in the United Christian Missionary Society cannot apply in this case. First, because what was not paid were installments on a loan but premiums required by law to be paid by the parties covered by the Social Security Act. Secondly, what is sought to be condoned or waived are penalties not imposed by law for failure to remit premiums required by law, but a penalty for non payment provided for by the agreement of the parties in the contract between them . . ." 15 WHEREFORE, in view of the foregoing, the petition is DISMISSED and the decision of the respondent court is AFFIRMED. LLpr SO ORDERED. Narvasa, C .J ., Padilla, Regalado and Nocon, JJ ., concur. Footnotes 1. AC-G.R. CV No. 68692, "Social Security System vs. Moonwalk Development & Housing Corporation, et al.", penned by Associate Justice Eduardo P. Caguioa, Associate Justices Abdulwahid A. Bidin and Floreliana C. Bartolome, concurring with dissenting opinion of Presiding Justice Ramon G. Gaviola, Jr., and Associate Justice Ma. Rosario Quetulio-Losa, concurring. 2. Annex "A" of Petition, pp. 1-3; Rollo, pp. 44-46. 3. Decision, p. 13; Rollo, p. 56. 4. Petition, p. 12; Rollo, p. 27.

5. Rollo, pp. 62-66. 6. 4 TOLENTINO, CIVIL CODE OF THE PHILIPPINES 259 (1991 ed.). 7. Ibid. 8. 4 E.P. CAGUIOA, COMMENTS AND CASES ON CIVIL LAW 280 (1983 ed.). 9. CIVIL CODE, Art. 1169. 10. Annex "C" of the Petition, Record on Appeal, p. 10. 11. Supra, note 6. 12. Ibid. 13. Ibid. 14. 30 SCRA 982, 987 (1969). 15. Supra, note 3, pp. 17-18.

SECOND DIVISION [G.R. No. 145483. November 19, 2004] LORENZO SHIPPING CORP., petitioner, vs. BJ MARTHEL INTERNATIONAL, INC., respondent. DECISION CHICO-NAZARIO, J.: This is a petition for review seeking to set aside the Decision [1] of the Court of Appeals in CA-G.R. CV No. 54334 and its Resolution denying petitioners mot ion for reconsideration. The factual antecedents of this case are as follows: Petitioner Lorenzo Shipping Corporation is a domestic corporation engaged in coastwise shipping. It used to own the cargo vessel M/V Dadiangas Express. Upon the other hand, respondent BJ Marthel International, Inc. is a business entity engaged in trading, marketing, and selling of various industrial commodities. It is also an importer and distributor of different brands of engines and spare parts. From 1987 up to the institution of this case, respondent supplied petitioner with spare parts for the latters marine engines. Sometime in 1989, petitioner asked respondent for a quotation for various machine parts. Acceding to this request, respondent furnished petitioner with a formal quotation,[2] thus: May 31, 1989 MINQ-6093 LORENZO SHIPPING LINES Pier 8, North Harbor Manila SUBJECT: PARTS FOR ENGINE MODEL MITSUBISHI 6UET 52/60

Dear Mr. Go: We are pleased to submit our offer for your above subject requirements. Description Nozzle Tip Plunger & Barrel Cylinder Head Cylinder Liner Qty. 6 pcs. 6 pcs. 2 pcs. 1 set Unit Price P 5,520.00 27,630.00 1,035,000.00 Total Price 33,120.00 165,780.00 2,070,000.00 477,000.00 P2,745,900.00 ___________

TOTAL PRICE FOB MANILA

DELIVERY: Within 2 months after receipt of firm order. TERMS: 25% upon delivery, balance payable in 5 bi-monthly equal Installment[s] not to exceed 90 days. We trust you find our above offer acceptable and look forward to your most valued order. Very truly yours, (SGD) HENRY PAJARILLO Sales Manager Petitioner thereafter issued to respondent Purchase Order No. 13839, [3] dated 02 November 1989, for the procurement of one set of cylinder liner, valued at P477,000, to be used for M/V Dadiangas Express. The purchase order was cosigned by Jose Go, Jr., petitioners vice-president, and Henry Pajarillo. Quoted hereunder is the pertinent portion of the purchase order: Name of Description CYL. LINER M/E NOTHING FOLLOW INV. # TERM OF PAYMENT: 25% DOWN PAYMENT 5 BI-MONTHLY INSTALLMENT[S] 1 SET Qty. Amount

P477,000.00

Instead of paying the 25% down payment for the first cylinder liner, petitioner issued in favor of respondent ten postdated checks[4] to be drawn against the formers account with Allied Banking Corporation. The checks were supposed to represent the full payment of the aforementioned cylinder liner. Subsequently, petitioner issued Purchase Order No. 14011,[5] dated 15 January 1990, for yet another unit of cylinder liner. This purchase order stated the term of payment to be 25% upon delivery, balance payable in 5 bi -monthly equal installment*s+.[6] Like the purchase order of 02 November 1989, the second purchase order did not state the date of the cylinder liners delivery. On 26 January 1990, respondent deposited petitioners check that was postdated 18 January 1990, however, the same was dishonored by the drawee bank due to insufficiency of funds. The remaining nine postdated checks were eventually returned by respondent to petitioner. The parties presented disparate accounts of what happened to the check which was previously dishonored. Petitioner claimed that it replaced said check with a good one, the proceeds of which were applied to its other obligation to respondent. For its part, respondent insisted that it returned said postdated check to petitioner. Respondent thereafter placed the order for the two cylinder liners with its principal in Japan, Daiei Sangyo Co. Ltd., by opening a letter of credit on 23 February 1990 under its own name with the First Interstate Bank of Tokyo. On 20 April 1990, Pajarillo delivered the two cylinder liners at petitioners warehouse in North Harbor, Manila. The sales invoices[7] evidencing the delivery of the cylinder liners both contain the notation subject to verification under which the signature of Eric Go, petitioners warehouseman, appeared. Respondent thereafter sent a Statement of Account dated 15 November 1990[8] to petitioner. While the other items listed in said statement of account were fully paid by petitioner, the two cylinder liners delivered to petitioner on 20 April 1990 remained unsettled. Consequently, Mr. Alejandro Kanaan, Jr., respondents vice-president, sent a demand letter dated 02 January 1991[9]to petitioner requiring the latter to pay the value of the cylinder liners subjects of this case. Instead of heeding the demand of respondent for the full payment of the value of the cylinder liners, petitioner sent the former a letter dated 12 March 1991[10] offering to pay only P150,000 for the cylinder liners. In said letter,

petitioner claimed that as the cylinder liners were delivered late and due to the scrapping of the M/V Dadiangas Express, it (petitioner) would have to sell the cylinder liners in Singapore and pay the balance from the proceeds of said sale. Shortly thereafter, another demand letter dated 27 March 1991[11] was furnished petitioner by respondents counsel requiring the former to settle its obligation to respondent together with accrued interest and attorneys fees. Due to the failure of the parties to settle the matter, respondent filed an action for sum of money and damages before the Regional Trial Court (RTC) of Makati City. In its complaint,[12]respondent (plaintiff below) alleged that despite its repeated oral and written demands, petitioner obstinately refused to settle its obligations. Respondent prayed that petitioner be ordered to pay for the value of the cylinder liners plus accrued interest of P111,300 as of May 1991 and additional interest of 14% per annum to be reckoned from June 1991 until the full payment of the principal; attorneys fees; costs of suits; exemplary damages; actual damages; and compensatory damages. On 25 July 1991, and prior to the filing of a responsive pleading, respondent filed an amended complaint with preliminary attachment pursuant to Sections 2 and 3, Rule 57 of the then Rules of Court.[13] Aside from the prayer for the issuance of writ of preliminary attachment, the amendments also pertained to the issuance by petitioner of the postdated checks and the amounts of damages claimed. In an Order dated 25 July 1991,[14] the court a quo granted respondents prayer for the issuance of a preliminary attachment. On 09 August 1991, petitioner filed an Urgent Ex-Parte Motion to Discharge Writ of Attachment[15] attaching thereto a counter-bond as required by the Rules of Court. On even date, the trial court issued an Order[16] lifting the levy on petitioners properties and the garnishment of its bank accounts. Petitioner afterwards filed its Answer[17] alleging therein that time was of the essence in the delivery of the cylinder liners and that the delivery on 20 April 1990 of said items was late as respondent committed to deliver said items within two (2) months after receipt of firm order[18] from petitioner. Petitioner likewise sought counterclaims for moral damages, exemplary damages, attorneys fees plus appearance fees, and expenses of litigation. Subsequently, respondent filed a Second Amended Complaint with Preliminary Attachment dated 25 October 1991.[19] The amendment introduced dealt solely

with the number of postdated checks issued by petitioner as full payment for the first cylinder liner it ordered from respondent. Whereas in the first amended complaint, only nine postdated checks were involved, in its second amended complaint, respondent claimed that petitioner actually issued ten postdated checks. Despite the opposition by petitioner, the trial court admitted respondents Second Amended Complaint with Preliminary Attachment.[20] Prior to the commencement of trial, petitioner filed a Motion (For Leave To Sell Cylinder Liners)[21] alleging therein that *w+ith the passage of time and with no definite end in sight to the present litigation, the cylinder liners run the risk of obsolescence and deterioration[22] to the prejudice of the parties to this case. Thus, petitioner prayed that it be allowed to sell the cylinder liners at the best possible price and to place the proceeds of said sale in escrow. This motion, unopposed by respondent, was granted by the trial court through the Order of 17 March 1991.[23] After trial, the court a quo dismissed the action, the decretal portion of the Decision stating: WHEREFORE, the complaint is hereby dismissed, with costs against the plaintiff, which is ordered to pay P50,000.00 to the defendant as and by way of attorneys fees.[24] The trial court held respondent bound to the quotation it submitted to petitioner particularly with respect to the terms of payment and delivery of the cylinder liners. It also declared that respondent had agreed to the cancellation of the contract of sale when it returned the postdated checks issued by petitioner. Respondents counterclaims for moral, exemplary, and compensatory damag es were dismissed for insufficiency of evidence. Respondent moved for the reconsideration of the trial courts Decision but the motion was denied for lack of merit.[25] Aggrieved by the findings of the trial court, respondent filed an appeal with the Court of Appeals[26] which reversed and set aside the Decision of the court a quo. The appellate court brushed aside petitioners claim that time was of the essence in the contract of sale between the parties herein considering the fact that a significant period of time had lapsed between respondents offer and the

issuance by petitioner of its purchase orders. The dispositive portion of the Decision of the appellate court states: WHEREFORE, the decision of the lower court is REVERSED and SET ASIDE. The appellee is hereby ORDERED to pay the appellant the amount of P954,000.00, and accrued interest computed at 14% per annum reckoned from May, 1991. [27] The Court of Appeals also held that respondent could not have incurred delay in the delivery of cylinder liners as no demand, judicial or extrajudicial, was made by respondent upon petitioner in contravention of the express provision of Article 1169 of the Civil Code which provides: Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation. Likewise, the appellate court concluded that there was no evidence of the alleged cancellation of orders by petitioner and that the delivery of the cylinder liners on 20 April 1990 was reasonable under the circumstances. On 22 May 2000, petitioner filed a motion for reconsideration of the Decision of the Court of Appeals but this was denied through the resolution of 06 October 2000.[28] Hence, this petition for review which basically raises the issues of whether or not respondent incurred delay in performing its obligation under the contract of sale and whether or not said contract was validly rescinded by petitioner. That a contract of sale was entered into by the parties is not disputed. Petitioner, however, maintains that its obligation to pay fully the purchase price was extinguished because the adverted contract was validly terminated due to respondents failure to deliver the cylinder liners within the two -month period stated in the formal quotation dated 31 May 1989. The threshold question, then, is: Was there late delivery of the subjects of the contract of sale to justify petitioner to disregard the terms of the contract considering that time was of the essence thereof? In determining whether time is of the essence in a contract, the ultimate criterion is the actual or apparent intention of the parties and before time may be so regarded by a court, there must be a sufficient manifestation, either in the contract itself or the surrounding circumstances of that intention .[29] Petitioner

insists that although its purchase orders did not specify the dates when the cylinder liners were supposed to be delivered, nevertheless, respondent should abide by the term of delivery appearing on the quotation it submitted to petitioner.[30] Petitioner theorizes that the quotation embodied the offer from respondent while the purchase order represented its (petitioners) acceptance of the proposed terms of the contract of sale.[31] Thus, petitioner is of the view that these two documents cannot be taken separately as if there were two di stinct contracts.[32] We do not agree. It is a cardinal rule in interpretation of contracts that if the terms thereof are clear and leave no doubt as to the intention of the contracting parties, the literal meaning shall control.[33] However, in order to ascertain the intention of the parties, their contemporaneous and subsequent acts should be considered.[34] While this Court recognizes the principle that contracts are respected as the law between the contracting parties, this principle is tempered by the rule that the intention of the parties is primordial [35] and once the intention of the parties has been ascertained, that element is deemed as an integral part of the contract as though it has been originally expressed in unequivocal terms. [36] In the present case, we cannot subscribe to the position of petitioner that the documents, by themselves, embody the terms of the sale of the cylinder liners. One can easily glean the significant differences in the terms as stated in the formal quotation and Purchase Order No. 13839 with regard to the due date of the down payment for the first cylinder liner and the date of its delivery as well as Purchase Order No. 14011 with respect to the date of delivery of the second cylinder liner. While the quotation provided by respondent evidently stated that the cylinder liners were supposed to be delivered within two months from receipt of the firm order of petitioner and that the 25% down payment was due upon the cylinder liners delivery, the purchase orders prepared by petitioner cle arly omitted these significant items. The petitioners Purchase Order No. 13839 made no mention at all of the due dates of delivery of the first cylinder liner and of the payment of 25% down payment. Its Purchase Order No. 14011 likewise did not indicate the due date of delivery of the second cylinder liner. In the case of Bugatti v. Court of Appeals,[37] we reiterated the principle that *a+ contract undergoes three distinct stages preparation or negotiation, its perfection, and finally, its consummation. Negotiation begins from the time the prospective contracting parties manifest their interest in the contract and ends at

the moment of agreement of the parties. The perfection or birth of the contract takes place when the parties agree upon the essential elements of the contract. The last stage is the consummation of the contract wherein the parties fulfill or perform the terms agreed upon in the contract, culminating in the extinguishment thereof. In the instant case, the formal quotation provided by respondent represented the negotiation phase of the subject contract of sale between the parties. As of that time, the parties had not yet reached an agreement as regards the terms and conditions of the contract of sale of the cylinder liners. Petitioner could very well have ignored the offer or tendered a counter-offer to respondent while the latter could have, under the pertinent provision of the Civil Code, [38] withdrawn or modified the same. The parties were at liberty to discuss the provisions of the contract of sale prior to its perfection. In this connection, we turn to the testimonies of Pajarillo and Kanaan, Jr., that the terms of the offer were, indeed, renegotiated prior to the issuance of Purchase Order No. 13839. During the hearing of the case on 28 January 1993, Pajarillo testified as follows: Q: You testified Mr. Witness, that you submitted a quotation with defendant Lorenzo Shipping Corporation dated rather marked as Exhibit A stating the terms of payment and delivery of the cylinder liner, did you not? A: Yes sir. Q: I am showing to you the quotation which is marked as Exhibit A there appears in the quotation that the delivery of the cylinder liner will be made in two months time from the time you received the confirmation of the order. Is that correct? A: Yes sir. Q: Now, after you made the formal quotation which is Exhibit A how long a time did the defendant make a confirmation of the order? A: After six months. Q: And this is contained in the purchase order given to you by Lorenzo Shipping Corporation? A: Yes sir.

Q: Now, in the purchase order dated November 2, 1989 there appears only the date the terms of payment which you required of them of 25% down payment, now, it is stated in the purchase order the date of delivery, will you explain to the court why the date of delivery of the cylinder liner was not mentioned in the purchase order which is the contract between you and Lorenzo Shipping Corporation? A: When Lorenzo Shipping Corporation inquired from us for that cylinder liner, we have inquired [with] our supplier in Japan to give us the price and delivery of that item. When we received that quotation from our supplier it is stated there that they can deliver within two months but we have to get our confirmed order within June. Q: But were you able to confirm the order from your Japanese supplier on June of that year? A: No sir. Q: Why? Will you tell the court why you were not able to confirm your order with your Japanese supplier? A: Because Lorenzo Shipping Corporation did not give us the purchase order for that cylinder liner. Q: And it was only on November 2, 1989 when they gave you the purchase order? A: Yes sir. Q: So upon receipt of the purchase order from Lorenzo Shipping Lines in 1989 did you confirm the order with your Japanese supplier after receiving the purchase order dated November 2, 1989? A: Only when Lorenzo Shipping Corporation will give us the down payment of 25%.[39] For his part, during the cross-examination conducted by counsel for petitioner, Kanaan, Jr., testified in the following manner: WITNESS: This term said 25% upon delivery. Subsequently, in the final contract, what was agreed upon by both parties was 25% down payment. Q: When?

A: Upon confirmation of the order. ... Q: And when was the down payment supposed to be paid? A: It was not stated when we were supposed to receive that. Normally, we expect to receive at the earliest possible time. Again, that would depend on the customers. Even after receipt of the purchase order which was what happened here, they re-negotiated the terms and sometimes we do accept that. Q: Was there a re-negotiation of this term? A: This offer, yes. We offered a final requirement of 25% down payment upon delivery. Q: What was the re-negotiated term? A: 25% down payment Q: To be paid when? A: Supposed to be paid upon order.[40] The above declarations remain unassailed. Other than its bare assertion that the subject contracts of sale did not undergo further renegotiation, petitioner failed to proffer sufficient evidence to refute the above testimonies of Pajarillo and Kanaan, Jr. Notably, petitioner was the one who caused the preparation of Purchase Orders No. 13839 and No. 14011 yet it utterly failed to adduce any justification as to why said documents contained terms which are at variance with those stated in the quotation provided by respondent. The only plausible reason for such failure on the part of petitioner is that the parties had, in fact, renegotiated the proposed terms of the contract of sale. Moreover, as the obscurity in the terms of the contract between respondent and petitioner was caused by the latter when it omitted the date of delivery of the cylinder liners in the purchase orders and varied the term with respect to the due date of the down payment, [41] said obscurity must be resolved against it.[42] Relative to the above discussion, we find the case of Smith, Bell & Co., Ltd. v. Matti,[43] instructive. There, we held that

When the time of delivery is not fixed or is stated in general and indefinite terms, time is not of the essence of the contract. . . . In such cases, the delivery must be made within a reasonable time. The law implies, however, that if no time is fixed, delivery shall be made within a reasonable time, in the absence of anything to show that an immediate delivery intended. . . . We also find significant the fact that while petitioner alleges that the cylinder liners were to be used for dry dock repair and maintenance of its M/V Dadiangas Express between the later part of December 1989 to early January 1990, the record is bereft of any indication that respondent was aware of such fact. The failure of petitioner to notify respondent of said date is fatal to its claim that time was of the essence in the subject contracts of sale. In addition, we quote, with approval, the keen observation of the Court of Appeals: . . . It must be noted that in the purchase orders issued by the appellee, dated November 2, 1989 and January 15, 1990, no specific date of delivery was indicated therein. If time was really of the essence as claimed by the appellee, they should have stated the same in the said purchase orders, and not merely relied on the quotation issued by the appellant considering the lapse of time between the quotation issued by the appellant and the purchase orders of the appellee. In the instant case, the appellee should have provided for an allowance of time and made the purchase order earlier if indeed the said cylinder liner was necessary for the repair of the vessel scheduled on the first week of January, 1990. In fact, the appellee should have cancelled the first purchase order when the cylinder liner was not delivered on the date it now says was necessary. Instead it issued another purchase order for the second set of cylinder liner. This fact negates appellees claim that time was indeed of the essence in the consummation of the contract of sale between the parties.[44] Finally, the ten postdated checks issued in November 1989 by petitioner and received by the respondent as full payment of the purchase price of the first cylinder liner supposed to be delivered on 02 January 1990 fail to impress. It is not an indication of failure to honor a commitment on the part of the respondent. The

earliest maturity date of the checks was 18 January 1990. As delivery of said checks could produce the effect of payment only when they have been cashed,[45] respondents obligation to deliver the first cylinder liner could not have arisen as early as 02 January 1990 as claimed by petitioner since by that time, petitioner had yet to fulfill its undertaking to fully pay for the value of the first cylinder liner. As explained by respondent, it proceeded with the placement of the order for the cylinder liners with its principal in Japan solely on the basis of its previously harmonious business relationship with petitioner. As an aside, let it be underscored that *e+ven where time is of the essence, a breach of the contract in that respect by one of the parties may be waived by the other partys subsequently treating the contract as still in force. [46] Petitioners receipt of the cylinder liners when they were delivered to its warehouse on 20 April 1990 clearly indicates that it considered the contract of sale to be still subsisting up to that time. Indeed, had the contract of sale been cancelled already as claimed by petitioner, it no longer had any business receiving the cylinder liners even if said receipt was subject to verification. By accepting the cylinder liners when these were delivered to its warehouse, petitioner indisputably waived the claimed delay in the delivery of said items. We, therefore, hold that in the subject contracts, time was not of the essence. The delivery of the cylinder liners on 20 April 1990 was made within a reasonable period of time considering that respondent had to place the order for the cylinder liners with its principal in Japan and that the latter was, at that time, beset by heavy volume of work.[47] There having been no failure on the part of the respondent to perform its obligation, the power to rescind the contract is unavailing to the petitioner. Article 1191 of the New Civil Code runs as follows: The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The law explicitly gives either party the right to rescind the contract only upon the failure of the other to perform the obligation assumed thereunder.[48] The right, however, is not an unbridled one. This Court in the case of University of the Philippines v. De los Angeles,[49] speaking through the eminent civilist Justice J.B.L. Reyes, exhorts:

Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved on account of infractions by the other contracting party must be made known to the other and is always provisional, being ever subject to scrutiny and review by the proper court. If the other party denied that rescission is justified, it is free to resort to judicial action in its own behalf, and bring the matter to court. Then, should the court, after due hearing, decide that the resolution of the contract was not warranted, the responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced. (Emphasis supplied) In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law. But the law definitely does not require that the contracting party who believes itself injured must first file suit and wait for a judgment before taking extrajudicial steps to protect its interest. Otherwise, the party injured by the others breach will have to passively sit and watch its damage s accumulate during the pendency of the suit until the final judgment of rescission is rendered when the law itself requires that he should exercise due diligence to minimize its own damages.[50] Here, there is no showing that petitioner notified respondent of its intention to rescind the contract of sale between them. Quite the contrary, respondents act of proceeding with the opening of an irrevocable letter of credit on 23 February 1990 belies petitioners claim that it notified respondent of the cancellation of the contract of sale. Truly, no prudent businessman would pursue such action knowing that the contract of sale, for which the letter of credit was opened, was already rescinded by the other party. WHEREFORE, premises considered, the instant Petition for Review on Certiorari is DENIED. The Decision of the Court of Appeals, dated 28 April 2000, and its Resolution, dated 06 October 2000, are hereby AFFIRMED. No costs. SO ORDERED. Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Tinga, JJ., concur.

[1]

Penned by Associate Justice Eubulo G. Verzola with Associate Justices Roberto A. Barrios and Eriberto U. Rosario, Jr., concurring. Exhibit 2 for petitioner; Exhibit A for respondent; Records, p. 244. Exhibit 3 for petitioner; Exhibit B for respondent; Records, p. 6. Exhibits 4-A to 4-J for petitioner; Exhibits E to E-9 for respondent; Records, pp. 248-250. Exhibit 5 for petitioner; Exhibit C for respondent; Records, p. 7. Ibid. Exhibits G and H for respondent; Records, pp. 252-253. Exhibit J for respondent; Records, p. 255. Exhibit K for respondent; Records, p. 256. Exhibit 6 for petitioner; Records, p. 269. Exhibit S for respondent; Records, p. 263. Records, pp. 1-5. Records, pp. 13-20. Records, pp. 27-29. Records, pp. 61-62. Records, p. 58. Records, pp. 87-95. Id. Records, pp. 115-122. Order dated 09 December 1991; Records, p. 139. Dated 20 January 1992; Records, pp. 143-144. Id. Records, p. 152. Rollo, p. 54. Order dated 04 December 1995; Records, pp. 389-390.

[2] [3] [4]

[5] [6] [7] [8] [9]

[10] [11] [12] [13] [14] [15] [16] [17] [18] [19] [20] [21] [22] [23] [24] [25]

[26] [27] [28] [29] [30] [31] [32] [33]

Decision dated 28 April 2000, Annex A of the Petition; Rollo, pp. 39-46. Id. at 7; Rollo, p. 45. Annex B of the Petition; Rollo, pp. 48-49. 17 Am Jur 2d, 333, p.772. Petition, p. 12; Rollo, p. 23. Petition, p. 13; Rollo, p. 24. Ibid. Paramount Surety & Insurance Co., Inc. v. Court of Appeals, G.R. No. 38669, 31 March 1989, 171 SCRA 481. Agro Conglomerates, Inc. v. Court of Appeals, et al., G.R. No. 117660, 18 December 2000, 348 SCRA 450. Golden Diamond, Inc. v. Court of Appeals, G.R. No. 131436, 31 May 2000, 332 SCRA 605. Carceller v. Court of Appeals and State Investments Houses, Inc., G.R. No. 124791, 10 February 1999, 302 SCRA 718, 725. G.R. No. 138113, 17 October 2000, 343 SCRA 335, 346, citing Ang Yu Asuncion v. CA, G.R. No. 109125, 02 December 1994, 238 SCRA 602. Article 1324 of the Civil Code states: When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something paid or promised. TSN, 28 January 1993, pp. 4-8. TSN, 01 June 1993, pp. 9-10. Supra, note 3. Ang v. Court of Appeals, G.R. No. 80058, 13 February 1989, 170 SCRA 286. G.R. No. 16570, 09 March 1922, 44 Phil. 874, 881-882. Decision dated 28 April 2000, p. 5; Rollo, p. 43. Article 1249 of the Civil Code states that (t)he delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall

[34]

[35]

[36]

[37]

[38]

[39] [40] [41] [42] [43] [44] [45]

produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired.
[46] [47] [48]

17A Am Jur. 2d 624, p. 633. TSN, 28 January 1993, p. 18. Angeles, et al. v. Calasanz, et al., G.R. No. L-42283, 18 March 1985, 135 SCRA 329. G.R. No. L-28602, 29 September 1970, 35 SCRA 102. Id. at 107.

[49] [50]

SECOND DIVISION G.R. No. 73867 February 29, 1988 TELEFAST COMMUNICATIONS/PHILIPPINE WIRELESS, INC., petitioner, vs. IGNACIO CASTRO, SR., SOFIA C. CROUCH, IGNACIO CASTRO JR., AURORA CASTRO, SALVADOR CASTRO, MARIO CASTRO, CONRADO CASTRO, ESMERALDA C. FLORO, AGERICO CASTRO, ROLANDO CASTRO, VIRGILIO CASTRO AND GLORIA CASTRO, and HONORABLE INTERMEDIATE APPELLATE COURT, respondents.

PADILLA, J.: Petition for review on certiorari of the decision * of the Intermediate Appellate Court, dated 11 February 1986, in AC-G.R. No. CV-70245, entitled "Ignacio Castro, Sr., et al., Plaintiffs-Appellees, versus Telefast Communication/Philippine Wireless, Inc., Defendant-Appellant." The facts of the case are as follows: On 2 November 1956, Consolacion Bravo-Castro wife of plaintiff Ignacio Castro, Sr. and mother of the other plaintiffs, passed away in Lingayen, Pangasinan. On the same day, her daughter Sofia C. Crouch, who was then vacationing in the Philippines, addressed a telegram to plaintiff Ignacio Castro, Sr. at 685 Wanda, Scottsburg, Indiana, U.S.A., 47170 announcing Consolacion's death. The telegram was accepted by the defendant in its Dagupan office, for transmission, after payment of the required fees or charges. The telegram never reached its addressee. Consolacion was interred with only her daughter Sofia in attendance. Neither the husband nor any of the other children of the deceased, then all residing in the United States, returned for the burial. When Sofia returned to the United States, she discovered that the wire she had caused the defendant to send, had not been received. She and the other plaintiffs thereupon brought action for damages arising from defendant's breach of contract. The case was filed in the Court of First Instance of Pangasinan and docketed therein as Civil Case No. 15356. The only defense of the defendant was

that it was unable to transmit the telegram because of "technical and atmospheric factors beyond its control." 1 No evidence appears on record that defendant ever made any attempt to advise the plaintiff Sofia C. Crouch as to why it could not transmit the telegram. The Court of First Instance of Pangasinan, after trial, ordered the defendant (now petitioner) to pay the plaintiffs (now private respondents) damages, as follows, with interest at 6% per annum: 1. Sofia C. Crouch, P31.92 and P16,000.00 as compensatory damages and P20,000.00 as moral damages. 2. Ignacio Castro Sr., P20,000.00 as moral damages. 3. Ignacio Castro Jr., P20,000.00 as moral damages. 4. Aurora Castro, P10,000.00 moral damages. 5. Salvador Castro, P10,000.00 moral damages. 6. Mario Castro, P10,000.00 moral damages. 7. Conrado Castro, P10,000 moral damages. 8. Esmeralda C. Floro, P20,000.00 moral damages. 9. Agerico Castro, P10,000.00 moral damages. 10. Rolando Castro, P10,000.00 moral damages. 11. Virgilio Castro, P10,000.00 moral damages. 12. Gloria Castro, P10,000.00 moral damages. Defendant is also ordered to pay P5,000.00 attorney's fees, exemplary damages in the amount of P1,000.00 to each of the plaintiffs and costs. 2 On appeal by petitioner, the Intermediate Appellate Court affirmed the trial court's decision but eliminated the award of P16,000.00 as compensatory damages to Sofia C. Crouch and the award of P1,000.00 to each of the private respondents as exemplary damages. The award of P20,000.00 as moral damages

to each of Sofia C. Crouch, Ignacio Castro, Jr. and Esmeralda C. Floro was also reduced to P120,000. 00 for each. 3 Petitioner appeals from the judgment of the appellate court, contending that the award of moral damages should be eliminated as defendant's negligent act was not motivated by "fraud, malice or recklessness." In other words, under petitioner's theory, it can only be held liable for P 31.92, the fee or charges paid by Sofia C. Crouch for the telegram that was never sent to the addressee thereof. Petitioner's contention is without merit. Art. 1170 of the Civil Code provides that "those who in the performance of their obligations are guilty of fraud, negligence or delay, and those who in any manner contravene the tenor thereof, are liable for damages." Art. 2176 also provides that "whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done." In the case at bar, petitioner and private respondent Sofia C. Crouch entered into a contract whereby, for a fee, petitioner undertook to send said private respondent's message overseas by telegram. This, petitioner did not do, despite performance by said private respondent of her obligation by paying the required charges. Petitioner was therefore guilty of contravening its obligation to said private respondent and is thus liable for damages. This liability is not limited to actual or quantified damages. To sustain petitioner's contrary position in this regard would result in an inequitous situation where petitioner will only be held liable for the actual cost of a telegram fixed thirty (30) years ago. We find Art. 2217 of the Civil Code applicable to the case at bar. It states: "Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. Though incapable of pecuniary computation, moral damages may be recovered if they are the proximate results of the defendant's wrongful act or omission." (Emphasis supplied).

Here, petitioner's act or omission, which amounted to gross negligence, was precisely the cause of the suffering private respondents had to undergo. As the appellate court properly observed: [Who] can seriously dispute the shock, the mental anguish and the sorrow that the overseas children must have suffered upon learning of the death of their mother after she had already been interred, without being given the opportunity to even make a choice on whether they wanted to pay her their last respects? There is no doubt that these emotional sufferings were proximately caused by appellant's omission and substantive law provides for the justification for the award of moral damages. 4 We also sustain the trial court's award of P16,000.00 as compensatory damages to Sofia C. Crouch representing the expenses she incurred when she came to the Philippines from the United States to testify before the trial court. Had petitioner not been remiss in performing its obligation, there would have been no need for this suit or for Mrs. Crouch's testimony. The award of exemplary damages by the trial court is likewise justified and, therefore, sustained in the amount of P1,000.00 for each of the private respondents, as a warning to all telegram companies to observe due diligence in transmitting the messages of their customers. WHEREFORE, the petition is DENIED. The decision appealed from is modified so that petitioner is held liable to private respondents in the following amounts: (1) P10,000.00 as moral damages, to each of private respondents; (2) P1,000.00 as exemplary damages, to each of private respondents; (3) P16,000.00 as compensatory damages, to private respondent Sofia C. Crouch; (4) P5,000.00 as attorney's fees; and (5) Costs of suit.

SO ORDERED. Yap (Chairman), Paras and Sarmiento, JJ., concur.

Separate Opinions

MELENCIO-HERRERA, J., concurring. [I] concur.In addition to compensatory and exemplary damages, moral damages are recoverable in actions for breach of contract, as in this case, where the breach has been wanton and reckless, tantamount to bad faith.

Separate Opinions MELENCIO-HERRERA, J., concurring. [I] concur.In addition to compensatory and exemplary damages, moral damages are recoverable in actions for breach of contract, as in this case, where the breach has been wanton and reckless, tantamount to bad faith. Footnotes * Penned by Justice Serafin E. Camilon, with the concurrence of Justices Crisolito Pascual, Jose C. Campos, Jr. and Desiderio P. Jurado. 1 Rollo at 8. 2 Rollo at 9-10. 3 Rollo at 14,

4 Rollo at 13.

FIRST DIVISION [G.R. No. 133107. March 25, 1999] RIZAL COMMERCIAL BANKING CORPORATION, petitioner, vs. COURT OF APPEALS and FELIPE LUSTRE, respondents. SYNOPSIS In March 1991, private respondent Atty. Felipe Lustre purchased a Toyota Corolla. He made a down payment of P164,620.00, the balance of which was to be paid in 24 equal monthly installments thru RCBC as the financing agent. He issued 24 postdated checks in the amount of P14,976.00 each. All the checks were thereafter encashed and debited from private respondents account, except for the check representing the payment for August 1991 which was unsigned and because of which the amount representing it was recalled and re-credited to private respondents account. Because of the recall, the last two checks dated February 10, 1993 and March 10, 1993 were no longer presented for payment, purportedly in conformity with petitioner banks procedure. It demanded payment of the balance including liquidated damages, but private respondent refused to pay, prompting petitioner to file an action for replevin and damages before the RTC. Private respondent in his answer interposed a counterclaim for damages. The RTC decided against petitioner (plaintiff) and granted the counterclaim of private respondent for moral and exemplary damages and attorneys fees. The Court of Appeals affirmed the RTC decision. In its appeal before the Supreme Court, petitioner contended that private respondents check representing the fifth installment was not encashed, such that the installment for August 1991 was not paid, hence, by virtue of the acceleration clause in the Chattel Mortgage executed by private respondent, petitioner was justified in treating the entire balance as due and demandable, and despite its demand private respondent refused to pay. In sum, petitioner imputed delay on private respondents. Article 1170 of the Civil Code states that those who in the performance of their obligations are guilty of delay are liable for damages. The delay in the

performance of the obligation, however, must either malicious or negligent. Thus, assuming that private respondent was guilty of delay in the payment of the value of the unsigned check, private respondent can not be held liable for damages. There is no imputation, much less evidence, that private respondent acted with malice or negligence in failing to sign the check. If there was omission on his part, such was a mere inadvertence. SYLLABUS 1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONTRACTS OF ADHESION; JUST AS BINDING AS ORDINARY CONTRACTS.- It bears stressing that a contract of adhesion is just as binding as ordinary contracts. It is true that we have, on occasion, struck down such contracts as void when the weaker party is imposed upon in dealing with the dominant bargaining party and is reduced to the alternative of taking it or leaving it, completely deprived of the opportunity to bargain on equal footing. Nevertheless, contracts of adhesion are not invalid per se; they are not entirely prohibited. The one who adheres to the contract is in reality free to reject it entirely; if he adheres, he gives his consent. 2. ID.; ID.; ID.; IF TERMS THEREOF ARE CLEAR, LITERAL MEANING OF ITS STIPULATION SHALL CONTROL.- While ambiguities in a contract of adhesion are to be construed against the party that prepared the same, this rule applies only if the stipulations in such contract are obscure or ambiguous. If the terms thereof are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. In the latter case, there would be no need for construction. 3. ID.; ID.; DELAY; MUST BE EITHER MALICIOUS OR NEGLIGENT. - Article 1170 of the Civil Code states that those who in the performance of their obligations are guilty of delay are liable for damages. The delay in the performance of the obligation, however, must be either malicious or negligent. Thus, assuming that private respondent was guilty of delay in the payment of the value of the unsigned check, private respondent cannot be held liable for damages. There is no imputation, much less evidence, that private respondent acted with malice or negligence in failing to sign the check. 4. ID.; DAMAGES; LACK OF GOOD FAITH MADE PETITIONER LIABLE FOR DAMAGES IN CASE AT BAR.- As pointed out by the trial court, this whole controversy could have been avoided if only petitioner bothered to call up private respondent and ask him to sign the check. Good faith not only in

compliance with its contractual obligations, but also in observance of the standard in human relations, for every person to act with justice, give everyone his due, and observe honesty and good faith, behooved the bank to do so. Failing thus, petitioner is liable for damages caused to private respondent. These include moral damages for the mental anguish, serious anxiety, besmirched reputation, wounded feelings and social humiliation suffered by the latter. To deter others from emulating petitioners callous example, we affirm the award of exemplary damages. As exemplary damages are warranted, so are attorneys fees. 5. ID.; ID.; AWARDED DAMAGES IN CASE AT BAR IS EXCESSIVE. - We, however, find excessive the amount of damages awarded by the trial court in favor of private respondent with respect to his counterclaims and, accordingly, reduce the same as follows: (a) Moral damages - from P200,000.00 to P100,000.00, (b) Exemplary damages - from P100,000.00 to P75,000.00, (c) Attorneys fees from P50,000.00 to P30,000.00. APPEARANCES OF COUNSEL Valdez Gonzales Lucero Associates for petitioner. F. Washington Lustre for private respondent.

DECISION KAPUNAN, J.: A simple telephone call and an ounce-of good faith on the part of petitioner could have prevented the present controversy. On March 10, 1993, private respondent Atty. Felipe Lustre purchased a Toyota Corolla from Toyota Shaw, Inc. for which he made a down payment of P164,620.00, the balance of the purchase price to be paid in 24 equal monthly installments. Private respondent thus issued 24 postdated checks for the amount of P14,976.00 each. The first was dated April 10, 1991; subsequent checks were dated every 10th day of each succeeding month. To secure the balance, private respondent executed a promissory note[1] and a contract of chattel mortgage[2] over the vehicle in favor of Toyota Shaw, Inc. The contract of chattel mortgage, in paragraph 11 thereof, provided for an

acceleration clause stating that should the mortgagor default in the payment of any installment, the whole amount remaining unpaid shall become due. In addition, the mortgagor shall be liable for 25% of the principal due as liquidated damages. On March 14, 1991, Toyota Shaw, Inc. assigned all its rights and interests in the chattel mortgage to petitioner Rizal Commercial Banking Corporation (RCBC). All the checks dated April 10, 1991 to January 10, 1993 were thereafter encashed and debited by RCBC from private respondent's account, except for RCBC Check No. 279805 representing the payment for August 10, 1991, which was unsigned. Previously, the amount represented by RCBC Check No. 279805 was debited from private respondent's account but was later recalled and re-credited to him. Because of the recall, the last two checks, dated February 10, 1993 and March 10, 1993, were no longer presented for payment. This was purportedly in conformity with petitioner bank's procedure that once a client's account was forwarded to its account representative, all remaining checks outstanding as of the date the account was forwarded were no longer presented for payment. On the theory that respondent defaulted in his payments, the check representing the payment for August 10, 1991 being unsigned, petitioner, in a letter dated January 21, 1993, demanded from private respondent the payment of the balance of the debt, including liquidated damages. The latter refused, prompting petitioner to file an action for replevin and damages before the Pasay City Regional Trial Court (RTC). Private respondent, in his Answer, interposed a counterclaim for damages. After trial, the RTC[3] rendered a decision disposing of the case as follows: WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows: I. The complaint, for lack of cause of action, is hereby DISMISSED and plaintiff RCBC is hereby ordered, A. B. C. To accept the payment equivalent to the three checks amounting to a total of P44,938.00, without interest To release/cancel the mortgage on the car xxx upon payment of the amount of P44,938.00 without interest. To pay the cost of suit

II. On The Counterclaim A. B. C. Plaintiff RCBC to pay Atty. Lustre the amount of P200,000.00 as moral damages. RCBC to pay P100,000.00 as exemplary damages. RCBC to pay Atty. Obispo P50,000.00 as Attorney's fees. Atty. Lustre is not entitled to any fee for lawyering for himself.

All awards for damages are subject to payment of fees to be assessed by the Clerk of Court, RTC, Pasay City. SO ORDERED. On appeal by petitioner, the Court of Appeals affirmed the decision of the RTC, thus: We xxx concur with the trial court's ruling that the Chattel Mortgage contract being a contract of adhesion that is, one wherein a party, usually a corporation, prepares the stipulations the contract, while the other party merely affixes his signature or his "adhesion" thereto xxx - is to be strictly construed against appellant bank which prepared the form Contract xxx. Hence xxx paragraph 11 of the Chattel Mortgage contract [containing the acceleration clause] should be construed to cover only deliberate and advertent failure on the part of the mortgagor to pay an amortization as it became due in line with the consistent holding of the Supreme Court construing obscurities and ambiguities in the restrictive sense against the drafter thereof xxx in the light of Article 1377 of the Civil Code. In the case at bench, plaintiff-appellant's imputation of default to defendantappellee rested solely on the fact that the 5th check issued by appellee xxx was recalled for lack of signature. However, the check was recalled only after the amount covered thereby had been deducted from defendant-appellee's account, as shown by the testimony of plaintiff's own witness Francisco Bulatao who was in charge of the preparation of the list and trial balances of bank customers xxx. The "default" was therefore not a case of failure to pay, the check being sufficiently funded, and which amount was in fact already debitted [sic] from appellee's

account by the appellant bank which subsequently re-credited the amount to defendant-appellee's account for lack of signature. All these actions RCBC did on its own without notifying defendant until sixteen (16) months later when it wrote its demand letter dated January 21, 1993. Clearly, appellant bank was remiss in the performance of its functions for it could have easily called the defendant's attention to the lack of signature on the check and sent the check to, or summoned, the latter to affix his signature. It is also to be noted that the demand letter contains no explanation as to how defendantappellee incurred arrearages in the amount of P66,255.70, which is why defendant-appellee made a protest notation thereon. Notably, all the other checks issued by the appellee dated subsequent to August 10, 1991 and dated earlier than the demand letter, were duly encashed. This fact should have already prompted the appellant bank to review its action relative to the unsigned check. xxx[4] We take exception to the application by both the trial and appellate courts of Article 1377 of the Civil Code, which states: The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. It bears stressing that a contract of adhesion is just as binding as ordinary contracts.[5] It is true that we have, on occasion, struck down such contracts as void when the weaker party is imposed upon in dealing with the dominant bargaining party and is reduced to the alternative of taking it or leaving it, completely deprived of the opportunity to bargain on equal footing.[6] Nevertheless, contracts of adhesion are not invalid per se;[7] they are not entirely prohibited.[8] The one who adheres to the contract is in reality free to reject it entirely; if he adheres, he gives his consent.[9] While ambiguities in a contract of adhesion are to be construed against the party that prepared the same,[10] this rule applies only if the stipulations in such contract are obscure or ambiguous. If the terms thereof are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.[11] In the latter case, there would be no need for construction.[12]

Here, the terms of paragraph 11 of the Chattel Mortgage Contract [13] are clear. Said paragraph states: 11. In case the MORTGAGOR fails to pay any of the installments, or to pay the interest that may be due as provided in the said promissory note, the whole amount remaining unpaid therein shall immediately become due and payable and the mortgage on the property (ies) herein-above described may be foreclosed by the MORTGAGEE, or the MORTGAGEE may take any other legal action to enforce collection of the obligation hereby secured, and in either case the MORTGAGOR further agrees to pay the MORTGAGEE an additional sum of 25% of the principal due and unpaid, as liquidated damages, which said sum shall become part thereof. The MORTGAGOR hereby waives reimbursement of the amount heretofore paid by him/it to the MORTGAGEE. The above terms leave no room for construction. All that is required is the application thereof. Petitioner claims that private respondent's check representing the fifth installment was "not encashed,[14] such that the installment for August 1991 was not paid. By virtue of paragraph 11 above, petitioner submits that it "was justified in treating the entire balance of the obligation as due and demandable."[15] Despite demand by petitioner, however, private respondent refused to pay the balance of the debt. Petitioner, in sum, imputes delay on the part of private respondent. We do not subscribe to petitioner's theory. Article 1170 of the Civil Code states that those who in the performance of their obligations are guilty of delay are liable for damages. The delay in the performance of the obligation, however, must be either malicious or negligent.[16] Thus, assuming that private respondent was guilty of delay in the payment of the value of the unsigned check, private respondent cannot be held liable for damages. There is no imputation, much less evidence, that private respondent acted with malice or negligence in failing to sign the check. Indeed, we agree with the Court of Appeals' finding that such omission was mere "inadvertence" on the part of private respondent. Toyota salesperson Jorge Geronimo testified that he even verified whether private respondent had signed all the checks and in fact returned three or four unsigned checks to him for signing:

Atty. Obispo: After these receipts were issued, what else did you do about the transaction? A: During our transaction with Atty. Lustre, I found out when he issued to me the 24 checks, I found out 3 to 4 checks are unsigned and I asked him to sign these checks. Atty. Obispo: What did you do? A: I asked him to sign the checks. After signing the checks, I reviewed again all the documents, after I reviewed all the documents and found out that all are completed and the downpayments was completed, we released to him the car.[17] Even when the checks, were delivered to petitioner, it did not object to the unsigned check. In view of the lack of malice or negligence on the part of private respondent, petitioner's blind and mechanical invocation of paragraph 11 of the contract of chattel mortgage was unwarranted. Petitioners conduct, in the light of the circumstances of this case, can only be described as mercenary. Petitioner had already debited the value of the unsigned check from private respondent's account only to re-credit it much later to him. Thereafter, petitioner encashed checks subsequently dated, then abruptly refused to encash the last two. More than a year after the date of the unsigned check, petitioner, claiming delay and invoking paragraph 11, demanded from private respondent payment of the value of said check and. that of the last two checks, including liquidated damages. As pointed out by the trial court, this whole controversy could have been avoided if only petitioner bothered to call up private respondent and ask him to sign the check. Good faith not only in compliance with its contractual obligations,[18] but also in observance of the standard in human relations, for every person "to act with justice, give everyone his due, and observe honesty and good faith."[19] behooved the bank to do so. Failing thus, petitioner is liable for damages caused to private respondent.[20] These include moral damages for the mental anguish, serious anxiety, besmirched reputation, wounded feelings and social humiliation suffered by the latter.[21] The trial court found that private respondent was

[a] client who has shared transactions for over twenty years with a bank xxx. The shabby treatment given the defendant is unpardonable since he was put to shame and embarrassment after the case was filed in Court. He is a lawyer in his own right, married to another member of the bar. He sired children who are all professionals in their chosen field. He is known to the community of golfers with whom he gravitates. Surely, the filing of the case made defendant feel so bad and bothered. To deter others from emulating petitioners callous example, we affirm the award of exemplary damages.[22] As exemplary damages are warranted, so are attorney's fees.[23] We, however, find excessive the amount of damages awarded by the trial court in favor of private respondent with respect to his counterclaims and, accordingly, reduce the same as follows: (a) (b) (c) Moral damages - fromP200,000.00 to P100,000.00, (b)Exemplarydamages from P100,000.00 to P75,000.00, (c) Attorney's fees - from P 50,000,00 to P 30,000.00.

WHEREFORE, subject to these modifications, the decision of the Court of Appeals is AFFIRMED. SO ORDERED. Davide, Jr., C.J., (Chairman), Melo, and Pardo, JJ., concur.

[1] [2] [3] [4] [5]

Exhibit A. Exhibit B. Branch 108, presided by Judge Priscilla Mijares. Rollo, pp.6-8. Articles 1305, 1308, Civil Code. Serra vs. Court of Appeals, 229 SCRA 60 (1994).

[6]

Phil. Commercial International Bank vs. Court Bank vs. Court of Appeals, 255 SCRA 299 (1996).
[7]

Philippine Airlines, Inc. vs. Court of Appeals, 255 SCRA 48 (1996); Telengtan Brothers & Sons, Inc. vs. Court of Appeals, 236 SCRA 617 (1994).
[8]

Telengtan Brothers & Sons, Inc. vs. Court of Appeals, supra, Philippine American General Insurance Co., Inc. vs. Sweet Lines, Inc., 212 SCRA 194 (1992); Pan American Airways vs. Rapadas, 209 SCRA 67 (1992); Saludo, Jr. vs. Court of Appeals, 207 SCRA 498 (1992).
[9]

Serra vs. Court of Appeals, supra; Philippine American General Insurance Co., Inc. vs. Sweet Lines, Inc., supra; Saludo, Jr. vs. Court of Appeals, supra.
[10] [11]

Angeles vs. Calasanz, 135 SCRA 323 (1985).

Article 1370, Civil Code. Salvatierra vs. Court of Appeals, 261 SCRA 45 (1996); Abella vs. Court of Appeals 257 SCRA 482 (1996); Syquia vs. Court of Appeals, 217 SCRA 624 (1993); Lufthansa German Airlines vs. Court of Appeals, 208 SCRA 708 (1992); Papa vs. Alonzo, 198 SCRA 564 (1991).
[12] [13] [14] [15] [16]

Leveriza vs. Intermediate Appellate Court, 157 SCRA 283 (1988). Exhibit B. Rollo, p. 12. Id., at 13.

IV Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991 ed., p. 113.
[17] [18] [19] [20] [21] [22] [23]

TSN, March 10, 1994, pp. 15-16. Article 1159, Civil Code. Article 19, Civil Code. Article 19, in relation to Article 21, id. Article 2217, id. Article 2229, id. Article 2208 (1), id

THIRD DIVISION

G.R. Nos. 103442-45 May 21, 1993 NATIONAL POWER CORPORATION, ET AL., petitioners, vs. THE COURT OF APPEALS, GAUDENCIO C. RAYO, ET AL., respondents. The Solicitor General for plaintiff-appellee. Ponciano G. Hernandez for private respondents.

DAVIDE, JR., J.: This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court urging this Court to set aside the 19 August 1991 consolidated Decision of the Court of Appeals in CA.-G.R. CV Nos. 27290-93 1 which reversed the Decision of Branch 5 of the then Court of First Instance (now Regional Trial Court) of Bulacan, and held petitioners National Power Corporation (NPC) and Benjamin Chavez jointly and severally liable to the private respondents for actual and moral damages, litigation expenses and attorney's fees. This present controversy traces its beginnings to four (4) separate complaints 2 for damages filed against the NPC and Benjamin Chavez before the trial court. The plaintiffs therein, now private respondents, sought to recover actual and other damages for the loss of lives and the destruction to property caused by the inundation of the town of Norzagaray, Bulacan on 26-27 October 1978. The flooding was purportedly caused by the negligent release by the defendants of water through the spillways of the Angat Dam (Hydroelectric Plant). In said complaints, the plaintiffs alleged, inter alia, that: 1) defendant NPC operated and maintained a multi-purpose hydroelectric plant in the Angat River at Hilltop, Norzagaray, Bulacan; 2) defendant Benjamin Chavez was the plant supervisor at the time of the incident in question; 3) despite the defendants' knowledge, as early as 24 October 1978, of the impending entry of typhoon "Kading," they failed to exercise due diligence in monitoring the water level at the dam; 4) when the

said water level went beyond the maximum allowable limit at the height of the typhoon, the defendants suddenly, negligently and recklessly opened three (3) of the dam's spillways, thereby releasing a large amount of water which inundated the banks of the Angat River; and 5) as a consequence, members of the household of the plaintiffs, together with their animals, drowned, and their properties were washed away in the evening of 26 October and the early hours of 27 October 1978. 3 In their Answers, the defendants, now petitioners, alleged that: 1) the NPC exercised due care, diligence and prudence in the operation and maintenance of the hydroelectric plant; 2) the NPC exercised the diligence of a good father in the selection of its employees; 3) written notices were sent to the different municipalities of Bulacan warning the residents therein about the impending release of a large volume of water with the onset of typhoon "Kading" and advise them to take the necessary precautions; 4) the water released during the typhoon was needed to prevent the collapse of the dam and avoid greater damage to people and property; 5) in spite of the precautions undertaken and the diligence exercised, they could still not contain or control the flood that resulted and; 6) the damages incurred by the private respondents were caused by a fortuitous event or force majeure and are in the nature and character of damnum absque injuria. By way of special affirmative defense, the defendants averred that the NPC cannot be sued because it performs a purely governmental function. 4 Upon motion of the defendants, a preliminary hearing on the special defense was conducted. As a result thereof, the trial court dismissed the complaints as against the NPC on the ground that the provision of its charter allowing it to sue and be sued does not contemplate actions based on tort. The parties do not, however, dispute the fact that this Court overruled the trial court and ordered the reinstatement of the complaints as against the NPC. 5 Being closely interrelated, the cases were consolidated and trial thereafter ensued. The lower court rendered its decision on 30 April 1990 dismissing the complaints "for lack of sufficient and credible evidence." 6 Consequently, the private respondents seasonably appealed therefrom to the respondent Court which then docketed the cases as CA-G.R. CV Nos. 27290-93.

In its joint decision promulgated on 19 August 1991, the Court of Appeals reversed the appealed decision and awarded damages in favor of the private respondents. The dispositive portion of the decision reads: CONFORMABLY TO THE FOREGOING, the joint decision appealed from is hereby REVERSED and SET ASIDE, and a new one is hereby rendered: 1. In Civil Case No. SM-950, ordering defendants-appellees to pay, jointly and severally, plaintiffs-appellants, with legal interest from the date when this decision shall become final and executory, the following: A. Actual damages, to wit: 1) Gaudencio C. Rayo, Two Hundred Thirty One Thousand Two Hundred Sixty Pesos (P231,260.00); 2) Bienvenido P. Pascual, Two Hundred Four Thousand Five Hundred Pesos (P204.500.00); 3) Tomas Manuel, One Hundred Fifty Five Thousand Pesos (P155,000.00); 4) Pedro C. Bartolome, One Hundred Forty Seven Thousand Pesos (P147,000.00);. 5) Bernardino Cruz, One Hundred Forty Three Thousand Five Hundred Fifty Two Pesos and Fifty Centavos (P143,552.50); 6) Jose Palad, Fifty Seven Thousand Five Hundred Pesos (P57,500.00); 7) Mariano S. Cruz, Forty Thousand Pesos (P40,000.00); 8) Lucio Fajardo, Twenty nine Thousand Eighty Pesos (P29,080.00); and B. Litigation expenses of Ten Thousand Pesos (P10,000.00);

2. In Civil case No. SM-951, ordering defendants-appellees to pay jointly and severally, plaintiff-appellant, with legal interest from the date when this decision shall have become final and executory, the following : A. Actual damages of Five Hundred Twenty Thousand Pesos (P520,000.00);. B. Moral damages of five hundred Thousand Pesos (P500,000.00); and. C. Litigation expenses of Ten Thousand Pesos (P10,000.00);. 3. In Civil Case No. SM-953, ordering defendants-appellees to pay, jointly and severally, with legal interest from the date when this decision shall have become final and executory; A. Plaintiff-appellant Angel C. Torres: 1) Actual damages of One Hundred Ninety Nine Thousand One Hundred Twenty Pesos (P199,120.00); 2) Moral Damages of One Hundred Fifty Thousand Pesos (P150,000.00); B. Plaintiff-appellant Norberto Torres: 1) Actual damages of Fifty Thousand Pesos (P50,000.00); 2) Moral damages of Fifty Thousand Pesos (P50,000.00); C. Plaintiff-appellant Rodelio Joaquin: 1) Actual damages of One Hundred Thousand Pesos (P100,000.00); 2) Moral damages of One Hundred Thousand Pesos (P100,000.00); and D. Plaintifsf-appellants litigation expenses of Ten Thousand Pesos (P10,000.00);

4. In Civil case No. SM-1247, ordering defendants-appellees to pay, jointly and severally, with legal interest from the date when this decision shall have become final and executory : A. Plaintiffs-appellants Presentacion Lorenzo and Clodualdo Lorenzo: 1) Actual damages of Two Hundred Fifty Six Thousand Six Hundred Pesos (P256,600.00); 2) Moral damages of Fifty Thousand Pesos (P50,000.00); B. Plaintiff-appellant Consolacion Guzman : 1) Actual damages of One Hundred forty Thousand Pesos (P140,000.00); 2) Moral damages of Fifty Thousand Pesos (P50,000.00); C. Plaintiff-appellant Virginia Guzman : 1) Actual damages of Two Hundred Five Hundred Twenty Pesos (205,520.00); and D. Plaintiffs-appellants litigation expenses of Ten Thousand Pesos (10,000.00). In addition, in all the four (4) instant cases, ordering defendantsappellees to pay, jointly and severally, plaintiffs-appellants attorney fees in an amount equivalent to 15% of the total amount awarded. No pronouncement as to costs. 7 The foregoing judgment is based on the public respondent's conclusion that the petitioners were guilty of: . . . a patent gross and evident lack of foresight, imprudence and negligence . . . in the management and operation of Angat Dam. The unholiness of the hour, the extent of the opening of the spillways, And the magnitude of the water released, are all but products of defendants-appellees' headlessness, slovenliness, and carelessness. The

resulting flash flood and inundation of even areas (sic) one (1) kilometer away from the Angat River bank would have been avoided had defendants-appellees prepared the Angat Dam by maintaining in the first place, a water elevation which would allow room for the expected torrential rains. 8 This conclusion, in turn, is anchored on its findings of fact, to wit: As early as October 21, 1978, defendants-appellees knew of the impending onslaught of and imminent danger posed by typhoon "Kading". For as alleged by defendants-appellees themselves, the coming of said super typhoon was bannered by Bulletin Today, a newspaper of national circulation, on October 25, 1978, as "Super Howler to hit R.P." The next day, October 26, 1978, said typhoon once again merited a headline in said newspaper as "Kading's Big Blow expected this afternoon" (Appellee's Brief, p. 6). Apart from the newspapers, defendants-appellees learned of typhoon "Kading' through radio announcements (Civil Case No. SM-950, TSN, Benjamin Chavez, December 4, 1984, pp. 7-9). Defendants-appellees doubly knew that the Angat Dam can safely hold a normal maximum headwater elevation of 217 meters (Appellee's brief, p. 12; Civil Case No. SM-951, Exhibit "I-6"; Civil Case No. SM-953, Exhibit "J-6"; Civil Case No. SM-1247, Exhibit "G-6"). Yet, despite such knowledge, defendants-appellees maintained a reservoir water elevation even beyond its maximum and safe level, thereby giving no sufficient allowance for the reservoir to contain the rain water that will inevitably be brought by the coming typhoon. On October 24, 1978, before typhoon "Kading" entered the Philippine area of responsibility, water elevation ranged from 217.61 to 217.53, with very little opening of the spillways, ranging from 1/2 to 1 meter. On October 25, 1978, when typhoon "Kading" entered the Philippine area of responsibility, and public storm signal number one was hoisted over Bulacan at 10:45 a.m., later raised to number two at 4:45 p.m., and then to number three at 10:45 p.m., water elevation ranged from 217.47 to 217.57, with very little opening of the spillways, ranging from

1/2 to 1 meter. On October 26, 1978, when public storm signal number three remained hoisted over Bulacan, the water elevation still remained at its maximum level of 217.00 to 218.00 with very little opening of the spillways ranging from 1/2 to 2 meters, until at or about midnight, the spillways were suddenly opened at 5 meters, then increasing swiftly to 8, 10, 12, 12.5, 13, 13.5, 14, 14.5 in the early morning hours of October 27, 1978, releasing water at the rate of 4,500 cubic meters per second, more or less. On October 27, 1978, water elevation remained at a range of 218.30 to 217.05 (Civil Case No. SM950, Exhibits "D" and series, "L", "M", "N", and "O" and Exhibits "3" and "4"; Civil Case No. SM-951, Exhibits "H" and "H-1"; Civil Case No. SM953, Exhibits "I" and "I-1"; Civil Case No. SM 1247, Exhibits "F" and "F1"). xxx xxx xxx From the mass of evidence extant in the record, We are convinced, and so hold that the flash flood on October 27, 1978, was caused not by rain waters (sic), but by stored waters (sic) suddenly and simultaneously released from the Angat Dam by defendants-appellees, particularly from midnight of October 26, 1978 up to the morning hours of October 27, 1978. 9 The appellate court rejected the petitioners' defense that they had sent "early warning written notices" to the towns of Norzagaray, Angat, Bustos, Plaridel, Baliwag and Calumpit dated 24 October 1978 which read: TO ALL CONCERN (sic): Please be informed that at present our reservoir (dam) is full and that we have been releasing water intermittently for the past several days. With the coming of typhoon "Rita" (Kading) we expect to release greater (sic) volume of water, if it pass (sic) over our place. In view of this kindly advise people residing along Angat River to keep alert and stay in safe places.

BENJAMIN L. CHAVEZ Power Plant Superintendent 10 because: Said notice was delivered to the "towns of Bulacan" on October 26, 1978 by defendants-appellees driver, Leonardo Nepomuceno (Civil Case No. SM-950, TSN, Benjamin Chavez, December 4, 1984, pp. 7-11 and TSN, Leonardo Nepomuceno, March 7, 1985, pp. 10-12). Said notice is ineffectual, insufficient and inadequate for purposes of the opening of the spillway gates at midnight of October 26, 1978 and on October 27, 1978. It did not prepare or warn the persons so served, for the volume of water to be released, which turned out to be of such magnitude, that residents near or along the Angat River, even those one (1) kilometer away, should have been advised to evacuate. Said notice, addressed "TO ALL CONCERN (sic)," was delivered to a policeman (Civil Case No. SM-950, pp. 10-12 and Exhibit "2-A") for the municipality of Norzagaray. Said notice was not thus addressed and delivered to the proper and responsible officials who could have disseminated the warning to the residents directly affected. As for the municipality of Sta. Maria, where plaintiffs-appellants in Civil Case No. SM-1246 reside, said notice does not appear to have been served. 11 Relying on Juan F. Nakpil & Sons vs. Court of Appeals, 12 public respondent rejected the petitioners' plea that the incident in question was caused by force majeure and that they are, therefore, not liable to the private respondents for any kind of damage such damage being in the nature of damnum absque injuria. The motion for reconsideration filed by the petitioners, as well as the motion to modify judgment filed by the public respondents, 13 were denied by the public respondent in its Resolution of 27 December 1991. 14 Petitioners thus filed the instant petition on 21 February 1992. After the Comment to the petition was filed by the private respondents and the Reply thereto was filed by the petitioners, We gave due course to the petition on

17 June 1992 and directed the parties to submit their respective Memoranda, 15 which they subsequently complied with. The petitioners raised the following errors allegedly committed by the respondent Court : I. THE COURT OF APPEALS ERRED IN APPLYING THE RULING OF NAKPIL & SONS V. COURT OF APPEALS AND HOLDING THAT PETITIONERS WERE GUILTY OF NEGLIGENCE. II. THE COURT OF APPEALS ERRED IN HOLDING THAT THE WRITTEN NOTICES OF WARNING ISSUED BY PETITIONERS WERE INSUFFICIENT. III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE DAMAGE SUFFERED BY PRIVATE RESPONDENTS WAS NOT DAMNUM ABSQUE INJURIA. IV. THE COURT OF APPEALS ERRED IN NOT AWARDING THE COUNTERCLAIM OF PETITIONERS FOR ATTORNEY'S FEES AND EXPENSES OF LITIGATION. 16 These same errors were raised by herein petitioners in G.R. No. 96410, entitled National Power Corporation, et al., vs. Court of Appeals, et al., 17 which this Court decided on 3 July 1992. The said case involved the very same incident subject of the instant petition. In no uncertain terms, We declared therein that the proximate cause of the loss and damage sustained by the plaintiffs therein who were similarly situated as the private respondents herein was the negligence of the petitioners, and that the 24 October 1978 "early warning notice" supposedly sent to the affected municipalities, the same notice involved in the case at bar, was insufficient. We thus cannot now rule otherwise not only because such a decision binds this Court with respect to the cause of the inundation of the town of Norzagaray, Bulacan on 26-27 October 1978 which resulted in the loss of lives and the destruction to property in both cases, but also because of the fact that on the basis of its meticulous analysis and evaluation of the evidence adduced by the parties in the cases subject of CA-G.R. CV Nos. 27290-93, public respondent found as conclusively established that indeed, the petitioners were guilty of "patent gross and evident lack of foresight, imprudence and negligence in the management and operation of Angat Dam," and that "the extent of the opening of

the spillways, and the magnitude of the water released, are all but products of defendants-appellees' headlessness, slovenliness, and carelessness." 18 Its findings and conclusions are biding upon Us, there being no showing of the existence of any of the exceptions to the general rule that findings of fact of the Court of Appeals are conclusive upon this Court. 19 Elsewise stated, the challenged decision can stand on its own merits independently of Our decision in G.R. No. 96410. In any event, We reiterate here in Our pronouncement in the latter case that Juan F. Nakpil & Sons vs. Court of Appeals 20 is still good law as far as the concurrent liability of an obligor in the case of force majeure is concerned. In the Nakpil case, We held: To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of an obligation due to an "act of God," the following must concur: (a) the cause of the breach of the obligation must be independent of the will of the debtor; (b) the event must be either unforseeable or unavoidable; (c) the event must be such as to render it impossible for the debtor to fulfill his obligation in a moral manner; and (d) the debtor must be free from any participation in, or aggravation of the injury to the creditor. (Vasquez v. Court of Appeals, 138 SCRA 553; Estrada v. Consolacion, 71 SCRA 423; Austria v. Court of Appeals, 39 SCRA 527; Republic of the Phil. v. Luzon Stevedoring Corp., 21 SCRA 279; Lasam v. Smith, 45 Phil. 657). Thus, if upon the happening of a fortuitous event or an act of God, there concurs a corresponding fraud, negligence, delay or violation or contravention in any manner of the tenor of the obligation as provided for in Article 1170 of the Civil Code, which results in loss or damage, the obligor cannot escape liability. The principle embodied in the act of God doctrine strictly requires that the act must be one occasioned exclusively by the violence of nature and all human agencies are to be excluded from creating or entering into the cause of the mischief. When the effect, the cause of which is to be considered, is found to be in part the result of the participation of man, whether it be from active intervention or neglect, or failure to act, the whole occurrence is thereby humanized, as it were, and removed

from the rules applicable to the acts of God. (1 Corpus Juris, pp. 11741175). Thus it has been held that when the negligence of a person concurs with an act of God in producing a loss, such person is not exempt from liability by showing that the immediate cause of the damage was the act of God. To be exempt from liability for loss because of an act of God, he must be free from any previous negligence or misconduct by which that loss or damage may have been occasioned. (Fish & Elective Co. v. Phil. Motors, 55 Phil. 129; Tucker v. Milan, 49 O.G. 4379; Limpangco & Sons v. Yangco Steamship Co., 34 Phil. 594, 604; Lasam v. Smith, 45 Phil. 657). 21 Accordingly, petitioners cannot be heard to invoke the act of God or force majeure to escape liability for the loss or damage sustained by private respondents since they, the petitioners, were guilty of negligence. The event then was not occasioned exclusively by an act of God or force majeure; a human factor negligence or imprudence had intervened. The effect then of the force majeure in question may be deemed to have, even if only partly, resulted from the participation of man. Thus, the whole occurrence was thereby humanized, as it were, and removed from the laws applicable to acts of God. WHEREFORE, for want of merit, the instant petition is hereby DISMISSED and the Consolidated Decision of the Court of Appeals in CA-G.R. CV Nos. 27290-93 is AFFIRMED, with costs against the petitioners. SO ORDERED. Feliciano, Bidin, Romero and Melo, JJ., concur. # Footnotes 1 Annex "A" of Petition; Rollo, 34-53. Per Associate Justice Venancio D. Aldecoa, Jr., concurred in by Associate Justices Luis L. Victor and Filemon N. Mendoza. 2 Civil Case No. SM-950 entitled "GAUDENCIO C. RAYO, BIENVENIDO P. PASCUAL, TOMAS MANUEL, PEDRO C. BARTOLOME, BERNARDO CRUZ, JOSE PALAD, MARIANO CRUZ AND LUCIO FAJARDO versus NATIONAL

POWER CORPORATION AND BENJAMIN CHAVEZ," and filed on 20 December 1978; Civil Case No. SM-951 entitled "FRANCISCO RAYOS versus NATIONAL POWER CORPORATION AND BENJAMIN CHAVEZ," and filed on 29 December 1978 Civil Case No. SM-953 entitled "ANGEL C. TORRES, NORBERTO TORRES AND RODELIO JOAQUIN versus NATIONAL POWER CORPORATION AND BENJAMIN CHAVEZ," and filed on 4 January 1978; and Civil Case No. SM-1247 entitled "PRESENTACION LORENZO, CLODUALDO LORENZO, CONSOLACION GUZMAN AND VIRGINIA GUZMAN, in her behalf and as natural guardian of her minor children, RODELIO, MINERVA AND EMERSON, all surnamed GUZMAN, versus NATIONAL POWER CORPORATION AND BENJAMIN CHAVEZ," and filed on 29 January 1982. 3 CA Decision, 3; Rollo, 37. 4 Id., 3-4; Id., 37-38. 5 CA Decision, 4; Rollo, 38. 6 Id., 2; Id., 36. 7 Rollo, 51-53. 8 Rollo, 40. 9 Rollo, 39-41. 10 Rollo, 41. 11 Id., 42. 12 144 SCRA 596 [1986], quoted in National Power Corp. vs. Court of Appeals, 161 SCRA 334 [1988].

13 In the matter of when interest on the damages awarded will accrue, the Court of Appeals ruled that interest shall be paid only from the time its decision shall have become final and executory. 14 Rollo, 56-57. 15 Id., 166. 16 Rollo, 16. 17 211 SCRA 162 [1992]. 18 Supra. 19 Remalante vs. Tibe, 158 SCRA 138 [1988]; Median vs. Asistio, Jr., 191 SCRA 218 [1990]. 20 Supra. 21 Supra, at 606-607.

THIRD DIVISION [G.R. No. 138123. March 12, 2002] MINDEX RESOURCES MORILLO, respondent. DEVELOPMENT, petitioner, DECISION PANGANIBAN, J.: Attorneys fees cannot be granted simply because one was compelled to sue to protect and enforce ones right. The grant must be proven by facts; it cannot depend on mere speculation or conjecture -- its basis must be stated in the text of the decision. The Case Before us is a Petition for Review under Rule 45 of the Rules of Court, assailing the March 26, 1999 Decision[1] of the Court of Appeals (CA) in CA-GR CV No. 46967. The dispositive portion of the challenged Decision reads as follows: WHEREFORE, the appealed decision is AFFIRMED with MODIFICATION that the legal interest to be paid on the rentals of P76,000.00 and costs of repair in the amount of P132,750.00 is six (6%) percent per annum from June 22, 1994, the date of the decision of the court a quo to the date of its finality. Thereafter, if the amounts adjudged remain unpaid, the interest rate shall be twelve (12%) percent per annum from the date of finality of the decision until fully paid.[2] The Facts The factual antecedents of the case are summarized by the CA in this wise: On February 1991, a verbal agreement was entered into between Ephraim Morillo and Mindex Resources Corporation (MINDEX for brevity) for the lease of vs. EPHRAIM

the formers 6 x 6 ten-wheeler cargo truck for use in MINDEXs mining operations in Binaybay, Bigaan, San Teodoro, Oriental Mindoro, at the stipulated rental of P300.00 per hour for a minimum of eight hours a day or a total of P2,400.00 daily. MINDEX had been paying the rentals until April 10, 1991. Unknown to Morillo, on April 11, 1991, the truck was burned by unidentified persons while it was parked unattended at Sitio Aras, Bigaan, San Teodoro, Oriental Mindoro, due to mechanical trouble. The findings of the Mindoro Oriental Integrated National Police in their investigation report read: 3. On 121005H April 1991, Mr Alexander Roxas, project coordinator of MINDEX MINING CORP. reported to this office that on the morning of 12 April 1991 while he was supposed to report for his Work at their office at Sitio Tibonbon, Bigaan, San Teodoro, Oriental Mindoro, he x x x noticed that their hired 6 x 6 Ten wheeler Cargo Truck temporarily parked at Sitio Aras, Bigaan, San Teodoro, Oriental Mindoro for aplha Engine Trouble was burned on the night of April 11, 1991 by still unidentified person. x x x xxx xxx

5. x x x Based also on the facts gathered and incident scene searched it was also found out that said 6 x 6 Ten Wheeler Cargo Truck was burned by means of using coconut leaves and as a result of which said 6 x 6 was totally burned excluding the engine which was partially damaged by still undetermined amount. Upon learning of the burning incident, Morillo offered to sell the truck to MINDEX but the latter refused. Instead, it replaced the vehicles burned tires and had it towed to a shop for repair and overhauling. On April 15, 1991, Morillo sent a letter to Mr. Arni Isberg, the Finance Manager of MINDEX, thru Mr. Ramoncito Gozar, Project Manager, proposing the following: x x x xxx xxx

I have written to let you know that I am entrusting to you the said vehicle in the amount of P275,000.00 which is its cost price. I will not charge your company for the encumbrance of P76,800+ since you used it as my friendly gesture on account of the unforeseen adversity.

In view of the tragic happening, I am asking you to pay us, in a way which will not be hard for you to settle to pay us in four installment monthly as follows: First payment April 25/91 P[1]50,000.00 Second payment May 15/91 50,000.00 Third payme(n)t June 15/91 50,000.00 Fourth payme(n)t July 15/91 25,000.00 TOTAL P275,000.00 I promise to relinquish all the necessary documents upon full payment of said account. x x x xxx xxx

Through Mr. Gozar, MINDEX responded by a handwritten letter to his cousin Malou (wife of Ephraim Morillo), expressing their reservations on the above demands due to their tight financial situation. However, he made the following counter offers: a) Pay the rental of the 6 x 6 truck (actual) in the amount of P76,000.00. b) Repair and overhaul the truck on our own expenses and; c) Return it to you on (A1) good running condition after repair. Morillo replied on April 18, 1991, (1) that he will relinquish to MINDEX the damaged truck; (2) that he is amenable to receive the rental in the amount of P76,000.00; and (3) that MINDEX will pay fifty thousand pesos (P50,000.00) monthly until the balance of P275,000.00 is fully paid. It is noteworthy that except for his acceptance of the proffered P76,000.00 unpaid rentals, Morillos stand has virtually not been changed as he merely lowered the first payment on the P275,000.00 valuation of the truck from P150,000.00 to P50,000.00. The parties had since remained intransigent and so on August 1991, Morillo pulled out the truck from the repair shop of MINDEX and had it repaired elsewhere for which he spent the total amount of P132,750.00.[3](Citations omitted) Ruling of the Trial Court

After evaluating the evidence adduced by both parties, the Regional Trial Court (RTC) found petitioner responsible for the destruction or loss of the leased 6 x 6 truck and ordered it to pay respondent (1) P76,000 as balance of the unpaid rental for the 6 x 6 truck with interest of 12 percent from June 22, 1994 (the rendition of the judgment) up to the payment of the amount; (2) P132,750 representing the costs of repair and overhaul of the said truck, with interest rate of 12 percent until fully paid; and (3) P20,000 as attorneys fees for compelling respondent to secure the services of counsel in filing his Complaint. Ruling of the Court of Appeals The appellate court sustained the RTCs finding that petitioner was not without fault for the loss and destruction of the truck and, thus, liable therefor. The CA said: The burning of the subject truck was impossible to foresee, but not impossible to avoid. MINDEX could have prevented the incident by immediately towing the truck to a motor shop for the needed repair or by having it guarded day and night. Instead, the appellant just left the vehicle where its transfer case broke down. The place was about twelve (12) kilometers away from the camp site of the appellant corporation and was sparsely populated. It was guarded only during daytime. It stayed in that place for two (2) weeks until it was burned on April 11, 1991 while its transfer case was being repaired elsewhere. It was only after it had been burned that the appellant had it towed to a repair shop. The appellant *respondent+ was thus not free from fault for the burning of the truck. It miserably failed to overcome the presumption of negligence against it. Neither did it rescind the lease over the truck upon its burning. On the contrary, it offered to pay P76,000.00 as rentals. It did not also complete the needed repair. Hence, the appellee was forced to pull out the truck and had it repaired at his own expense. Since under the law, the lessee shall return the thing leased, upon the termination of the lease, just as he receive it, the appellant stands liable for the expenses incurred for the repair in the aggregate amount of P132,750.00.[4] Nevertheless, the appellate court modified the Decision of the trial court. The 12 percent interest rate on the P76,000 rentals and the P132,750 repair costs, imposed by the RTC, was changed by the CA to 6 percent per annum from June 22,

1994 to the date of finality of the said Decision; and 12 percent per annum thereafter, if the amounts adjudged would remain unpaid from such date of finality until the rentals and the repair costs were fully paid. It affirmed the award of attorneys fees. Hence, this Petition.[5] Issues In its Memorandum, petitioner raises the following issues for the Courts consideration: 4.1. Whether or not the Court of Appeals gravely erred in finding that petitioner failed to overcome the presumption of negligence against it considering that the facts show, as admitted by the respondent, that the burning of the truck was a fortuitous event. 4.2. Whether or not the Court of Appeals gravely erred in affirming the decision of the trial court finding petitioner liable to pay unpaid rentals and cost of repairs. 4.3. Whether or not the Court of Appeals also erred in affirming the decision of the trial court finding petitioner liable to pay attorneys fees.[6] This Courts Ruling The Petition is partly meritorious; the award of attorneys fees should be deleted. First Issue: Petitioners Negligence Petitioner claims that the burning of the truck was a fortuitous event, for which it should not be held liable pursuant to Article 1174[7] of the Civil Code. Moreover, the letter of respondent dated April 15, 1991, stating that the burning of the truck was an unforeseen adversity, was an admission that should exculpate the former from liability.

We are not convinced. Both the RTC and the CA found petitioner negligent and thus liable for the loss or destruction of the leased truck. True, both parties may have suffered from the burning of the truck; however, as found by both lower courts, the negligence of petitioner makes it responsible for the loss. Well-settled is the rule that factual findings of the trial court, particularly when affirmed by the Court of Appeals, are binding on the Supreme Court. Contrary to its allegations, petitioner has not adequately shown that the RTC and the CA overlooked or disregarded significant facts and circumstances that, when considered, would alter the outcome of the disposition.[8] Article 1667 of the Civil Code[9] holds lessees responsible for the deterioration or loss of the thing leased, unless they prove that it took place without their fault. Fortuitous Event In order for a fortuitous event to exempt one from liability, it is necessary that one has committed no negligence or misconduct that may have occasioned the loss.[10] An act of God cannot be invoked to protect a person who has failed to take steps to forestall the possible adverse consequences of such a loss. Ones negligence may have concurred with an act of God in producing damage and injury to another; nonetheless, showing that the immediate or proximate cause of the damage or injury was a fortuitous event would not exempt one from liability. When the effect is found to be partly the result of a persons participation -whether by active intervention, neglect or failure to act -- the whole occurrence is humanized and removed from the rules applicable to acts of God.[11] This often-invoked doctrine of fortuitous event or caso fortuito has become a convenient and easy defense to exculpate an obligor from liability. To constitute a fortuitous event, the following elements must concur: (a) the cause of the unforeseen and unexpected occurrence or of the failure of the debtor to comply with obligations must be independent of human will; (b) it must be impossible to foresee the event that constitutes the caso fortuito or, if it can be foreseen, it must be impossible to avoid; (c) the occurrence must be such as to render it impossible for the debtor to fulfill obligations in a normal manner; and (d) the obligor must be free from any participation in the aggravation of the injury or loss. [12] Article 1174 of the Civil Code states that no person shall be responsible for a fortuitous event that could not be foreseen or, though foreseen, was inevitable. In

other words, there must be an exclusion of human intervention from the cause of injury or loss.[13] A review of the records clearly shows that petitioner failed to exercise reasonable care and caution that an ordinarily prudent person would have used in the same situation. Witness Alexander Roxas testified how petitioner fell short of ordinary diligence in safeguarding the leased truck against the accident, which could have been avoided in the first place. Pertinent portions of his testimony are reproduced hereunder: ATTY. ACERON Q Now, this Barangay Aras where the 6 x 6 truck had transmission trouble, how far is it from the camp site of the defendant corporation? ALEXANDER ROXAS A Twelve (12) kilometers, more or less, sir. Q Is this Barangay Aras populated? A Not so many, sir. Q The place where the 6 x 6 truck had transmission trouble, how far is the nearest house from it? A Perhaps three hundred meters, sir. Q And how many houses are within the three hundred meter radius from the place where the truck had engine trouble? A Ten, more or less, in scattered. Q You said that after hauling several sand to be used in the camp site the 6 x 6 truck had transmission trouble, what did the company do after the truck had that engine trouble? A For at least two weeks the truck was installed in the place where the said truck had engine trouble. Q Meaning in Barangay Aras? A Yes, sir. Q Was there any guard in that place by the company during the time that the truck was in that place?

A Yes, sir, during daytime but at nighttime, there was no guard. Q What happened to that 6 x 6 truck? A In the month of March, 1991, the company dismissed thirteen (13) to seventeen (17) employees and these employees came from Barangays Aras, Botolan, Calsapa, Camatis and Tibonbon and on Aril 11, 1991, the 6 x 6 truck was burned. Q How did you come to know that the 6 x 6 truck was burned on April 11, 1991? A I together with my daughter, I met the service of the company near the ORMECO and I was informed by the Project Engineer that the 6 x 6 truck was burned, so, we returned to San Teodoro and have the incident blottered at the police station. Q Aside from that, what other action did you undertake in connection with the burning of the 6 x 6 truck? A When we were at the police station, the Project Manager of the company arrived and from the police station we proceeded to the place where the 6 x 6 truck was burned and the Project Manager took pictures of the 6 x 6 truck. Q Now, did you come to know who was responsible or who were responsible for the burning of the 6 x 6 truck? A The responsible is the Mindex Resources Development Corporation, and as far as I know, the persons who actually burned the said 6 x 6 truck were the dismissed employees of the Mindex Resources Development Corporation. Q These dismissed employees of the corporation, why were they employed by the corporation? A Because we have to make a road going to the mining site and in the process of opening the road these dismissed employees happened to be the owners of the land where the road will pass, so, we paid the land. The corporation likewise gave jobs to the owners of the land.[14] As can be gleaned from the foregoing testimony, petitioner failed to employ reasonable foresight, diligence and care that would have exempted it from liability resulting from the burning of the truck. Negligence, as commonly understood, is that conduct that naturally or reasonably creates undue risk or harm to others. It may be a failure to observe that degree of care, precaution or vigilance that the

circumstances justly demand;[15] or to do any other act that would be done by a prudent and reasonable person, who is guided by considerations that ordinarily regulate the conduct of human affairs.[16] Second Issue: Unpaid Rentals and Cost of Repairs Petitioner proceeds to argue that it should be deemed to have already paid the unpaid rentals in the amount of P76,000.00, and that it should not be made to pay the P132,750 repair and overhaul costs. Nothing in the records, not even in the documentary evidence it presented, would show that it already paid the aforesaid amounts. In fact, it seeks to avoid payment of the rental by alleging that respondent already condoned it in his letter dated April 15, 1991. However, a perusal of the letter would show that his offer not to charge petitioner for the P76,000 rental was premised on the condition that it would buy the truck.[17] Moreover, the RTC based the P76,000 rental and the costs of repair and overhaul on Exhibit B, wherein Chito Gozar, the Project Mana ger of Mindex Resources Development Corporation, proposed through a letter dated April 17, 1991, the following: (1) to pay the P76,000 rental, (2) to repair the truck at the expense of petitioner, and (3) to return the truck in good running condition after the repair. Likewise, the nonpayment of the said amount was corroborated by Roxas thus: Q During that time when the 6 x 6 truck was already burned and when you went to the Petron Gasoline Station to inform plaintiff about the burning, was the plaintiff paid any amount for the rental of the 6 x 6 truck? A :Before the burning of the 6 x 6 truck, the plaintiff Morillo was already paid partially and there was a balance of P76,000.00.[18] The P132,750 repair and overhaul costs was correctly granted by the lower courts. Article 1667 of the Civil Code holds the lessee responsible for the deterioration or loss of the thing leased. In addition, Article 1665 of the same Code provides that the lessee shall return the thing leased, upon the termination of the lease, just as he received it, save what has been lost or impaired by the lapse of time, or by ordinary wear and tear, or from an inevitable cause.

Courts begin with the assumption that compensatory damages are for pecuniary losses that result from an act or omission of the defendant. Having been found to be negligent in safeguarding the leased truck, petitioner must shoulder its repair and overhaul costs to make it serviceable again. Such expenses are duly supported by receipts; thus, the award of P132,750 is definitely in order. Third Issue: Attorneys Fees We find the award of attorneys fees to be improper. The reason which the RTC gave -- because petitioner had compelled respondent to file an action against it -falls short of our requirement in Scott Consultants and Resource Development v. CA,[19] from which we quote: It is settled that the award of attorneys fees is the exception rather than the rule and counsels fees are not to be awarded every time a party wins suit. The power of the court to award attorneys fees under Article 2208 of the Civil Code demands factual, legal, and equitable justification; its basis cannot be left to speculation or conjecture. Where granted, the court must explicitly state in the body of the decision, and not only in the dispositive portion thereof, the legal reason for the award of attorneys fees. Moreover, a recent case[20] ruled that in the absence of stipulation, a winning party may be awarded attorneys fees only in case plaintiffs action or defendants stand is so untenable as to amount to gross and evident bad faith. Indeed, respondent was compelled to file this suit to vindicate his rights. However, such fact by itself will not justify an award of attorneys fees, when there is no sufficient showing of petitioners bad faith in refusing to pay the said rentals as well as the repair and overhaul costs.[21] WHEREFORE, the Petition is DENIED, but the assailed CA Decision is MODIFIED by DELETING the award of attorneys fees. Costs against petitioner. SO ORDERED. Melo, (Chairman), Vitug, Sandoval-Gutierrez, and Carpio, JJ., concur.

[1]

Special Tenth Division. Written by Justice Salvador J. Valdez Jr. (Acting Division chair) and concurred in by Justices Eloy R. Bello Jr. and Renato C. Dacudao (members).
[2] [3] [4] [5]

Assailed Decision, p. 10; rollo, p. 35. CA Decision, pp. 1-4; rollo, pp. 26-29. Ibid., pp. 8 & 33.

The case was deemed submitted for decision on June 21, 2001, upon the Courts receipt of respondents Memorandum, which was signed by Atty. Filibon Fabela Tacardon. Petitioners Memorandum, signed by Atty. Ricardo P. C. Castro Jr., was received by the Court on January 29, 2001.
[6] [7]

Petitioners Memorandum, p. 6; rollo, p. 114. Article 1174 provides:

Except in cases expressly specified by the law, or when it is otherwise declared by stipulation or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which though foreseen, were inevitable.
[8]

Spouses Belo v. Philippine National Bank, GR No. 134330, March 1, 2001; Republic v. CA, 349 SCRA 451, January 18, 2001; Halili v. CA, 287 SCRA 465, March 12, 1998.
[9]

Art. 1667. The lessee is responsible for the deterioration or loss of the thing leased, unless he proves that it took place without his fault. This burden of proof on the lessee does not apply when the destruction is due to earthquake, flood, storm or other natural calamity.
[10]

Tolentino, Civil Code of the Philippines, Vol. IV, 1991 ed., p. 126, citing Tan Chiong Sian v. Inchausti & Co., 22 Phil. 152, March 8, 1912; Juan F. Nakpil & Sons v. CA, 144 SCRA 596, 607, October 3, 1986. Cf. Metal Forming Corporation v. Office of the President, 247 SCRA 731, 738-739, August 28, 1995.
[11] [12]

Nakpil & Sons v. CA, supra, pp. 606-607.

Metal Forming Corp. v. Office of the President, 317 Phil. 853, 859, August 28, 1995; Vasquez v. Court of Appeals, 138 SCRA 553, 557, September 13, 1985, citing

Lasam v. Smith Jr. 45 Phil. 657, 661, February 2, 1924; Austria v. CA, 148-A Phil. 462, June 10, 1971; Estrada v. Consolacion, 71 SCRA 523, 530, June 29, 1976.
[13] [14] [15]

Vasquez v. CA, supra, p. 557. TSN, November 24, 1992, pp. 9-13.

Valenzuela v. CA, 253 SCRA 303, February 7, 1996. Cf. Quibal v. Sandiganbayan (Second Division), 244 SCRA 224, May 22, 1995; Citibank, NA v. Gatchalian, 240 SCRA 212, January 18, 1995.
[16]

Layugan v. Intermediate Appellate court, 167 SCRA 363, 372-373, November 14, 1988; Bulilan v. COA, 300 SCRA 445, December 22, 1998.
[17] [18] [19]

See Exh. C; records, p. 220. TSN, November 24, 1992, pp. 14-15.

242 SCRA 393, 406, March 16, 1995, per Davide Jr., CJ; see also Valiant Machinery & Metal Corp. v. NLRC, 252 SCRA 369, January 25, 1996.
[20]

National Power Corporation v. Philipp Brothers, GR No. 126204, November 20, 2001, per Sandoval-Gutierrez, J.
[21]

National Steel Corporation v. CA, 283 SCRA 45, December 12, 1997.

Republic of the Philippines SUPREME COURT Manila

THIRD DIVISION

ILEANA DR. MACALINAO, Petitioner,

G.R. No. 175490

Present: - versus YNARES-SANTIAGO, J., Chairperson, BANK OF THE PHILIPPINEISLANDS, Respondent. CHICO-NAZARIO, VELASCO, JR., NACHURA, and PERALTA, JJ. . Promulgated:

September 17, 2009 x-----------------------------------------------------------------------------------------x

DECISION

VELASCO, JR., J.:

The Case Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking to reverse and set aside the June 30, 2006 Decision [1] of the Court of Appeals (CA) and its November 21, 2006 Resolution[2] denying petitioners motion for reconsideration. The Facts Petitioner Ileana Macalinao was an approved cardholder of BPI Mastercard, one of the credit card facilities of respondent Bank of the Philippine Islands (BPI).[3] Petitioner Macalinao made some purchases through the use of the said credit card and defaulted in paying for said purchases. She subsequently received a letter dated January 5, 2004 from respondent BPI, demanding payment of the amount of one hundred forty-one thousand five hundred eighteen pesos and thirty-four centavos (PhP 141,518.34), as follows: Statement Date 10/27/200 2 Previous Balance 94,843.70 Purchases (Payment s) Penalty Interest 559.72 Finance Charge s 3,061.9 9 Balance Due 98,456.41

11/27/200 2 12/31/200 2 1/27/2003 2/27/2003 3/27/2003 4/27/2003 5/27/2003 6/29/2003 7/27/2003 8/27/2003 9/28/2003 10/28/200 3 11/28/200 3 12/28/200 3 1/27/2004

98,465.41 86,351.02 119,752.2 8 124,234.5 8 129,263.1 3 115,177.9 0 119,565.4 4 113,540.1 0 118,833.4 9 123,375.6 5 128,435.5 6

(15,000) 30,308.80

0 259.05 618.23 990.93

(18,000.0 0)

298.72 644.26

(10,000.0 0) 8,362.50 (7,000.00)

402.95 323.57 608.07 1,050.2 0 1,435.5 1

2,885.6 1 2,806.4 1 3,891.0 7 4,037.6 2 3,616.0 5 3,743.2 8 3,571.7 1 3,607.3 2 3,862.0 9 4,009.7 1 4,174.1 6

86,351.02 119,752.2 8 124,234.5 8 129,263.1 3 115,177.9 0 119,565.4 4 113,540.1 0 118,833.4 9 123,375.6 5 128,435.5 6 134,045.2 3

141,518.3 4

8,491.1 0

4,599.3 4

154,608.7 8

Under the Terms and Conditions Governing the Issuance and Use of the BPI Credit and BPI Mastercard, the charges or balance thereof remaining unpaid after the payment due date indicated on the monthly Statement of Accounts shall bear interest at the rate of 3% per month and an additional penalty fee equivalent to another 3% per month. Particularly: 8. PAYMENT OF CHARGES BCC shall furnish the Cardholder a monthly Statement of Account (SOA) and the Cardholder agrees that all charges made through the use of the CARD shall be paid by the Cardholder as stated in the SOA on or before the last day for payment, which is twenty (20) days from the date of the said SOA, and such payment due date may be changed to an earlier date if the Cardholders account is considered overdue and/or with balances in excess of the approved credit limit, or to such other date as may be deemed proper by the CARD issuer with notice to the Cardholder on the same monthly SOA. If the last day fall on a Saturday, Sunday or a holiday, the last day for the payment automatically becomes the last working day prior to said payment date. However, notwithstanding the absence or lack of proof of service of the SOA of the Cardholder, the latter shall pay any and all charges made through the use of the CARD within thirty (30) days from date or dates thereof. Failure of the Cardholder to pay the charges made through the CARD within the payment period as stated in the SOA or within thirty (30) days from actual date or dates of purchase whichever occur earlier, shall render him in default without the necessity of demand from BCC, which the Cardholder expressly waives. The charges or balance thereof remaining unpaid after the payment due date indicated on the monthly Statement of Accounts shall bear interest at the rate of 3% per month for BPI Express Credit, BPI Gold Mastercard and an additional penalty fee equivalent to another 3% of the amount due for every month or a fraction of a months delay. PROVIDED that if there occurs any change on the prevailing market rates, BCC shall have

the option to adjust the rate of interest and/or penalty fee due on the outstanding obligation with prior notice to the cardholder. The Cardholder hereby authorizes BCC to correspondingly increase the rate of such interest [in] the event of changes in the prevailing market rates, and to charge additional service fees as may be deemed necessary in order to maintain its service to the Cardholder. A CARD with outstanding balance unpaid after thirty (30) days from original billing statement date shall automatically be suspended, and those with accounts unpaid after ninety (90) days from said original billing/statement date shall automatically be cancel (sic), without prejudice to BCCs right to suspend or cancel any card anytime and for whatever reason. In case of default in his obligation as provided herein, Cardholder shall surrender his/her card to BCC and in addition to the interest and penalty charges aforementioned , pay the following liquidated damages and/or fees (a) a collection fee of 25% of the amount due if the account is referred to a collection agency or attorney; (b) service fee for every dishonored check issued by the cardholder in payment of his account without prejudice, however, to BCCs right of considering Cardholders account, and (c) a final fee equivalent to 25% of the unpaid balance, exclusive of litigation expenses and judicial cost, if the payment of the account is enforced though court action. Venue of all civil suits to enforce this Agreement or any other suit directly or indirectly arising from the relationship between the parties as established herein, whether arising from crimes, negligence or breach thereof, shall be in the process of courts of the City of Makati or in other courts at the option of BCC. [4] (Emphasis supplied.)

For failure of petitioner Macalinao to settle her obligations, respondent BPI filed with the Metropolitan Trial Court (MeTC) of Makati City a complaint for a sum of money against her and her husband, Danilo SJ. Macalinao. This was

raffled to Branch 66 of the MeTC and was docketed as Civil Case No. 84462 entitled Bank of the Philippine Islandsvs. Spouses Ileana Dr. Macalinao and Danilo SJ. Macalinao.[5] In said complaint, respondent BPI prayed for the payment of the amount of one hundred fifty-four thousand six hundred eight pesos and seventy-eight centavos (PhP 154,608.78) plus 3.25% finance charges and late payment charges equivalent to 6% of the amount due from February 29, 2004 and an amount equivalent to 25% of the total amount due as attorneys fees, and of the cost of suit.[6] After the summons and a copy of the complaint were served upon petitioner Macalinao and her husband, they failed to file their Answer. [7] Thus, respondent BPI moved that judgment be rendered in accordance with Section 6 of the Rule on Summary Procedure.[8] This was granted in an Order dated June 16, 2004.[9] Thereafter, respondent BPI submitted its documentary evidence.[10] In its Decision dated August 2, 2004, the MeTC ruled in favor of respondent BPI and ordered petitioner Macalinao and her husband to pay the amount of PhP 141,518.34 plus interest and penalty charges of 2% per month, to wit: WHEREFORE, finding merit in the allegations of the complaint supported by documentary evidence, judgment is hereby rendered in favor of the plaintiff, Bank of the Philippine Islands and against defendant-spouses Ileana DR Macalinao and Danilo SJ Macalinao by ordering the latter to pay the former jointly and severally the following: 1. The amount of PESOS: ONE HUNDRED FORTY ONE THOUSAND FIVE HUNDRED EIGHTEEN AND 34/100 (P141,518.34) plus interest and penalty charges of 2% per month from January 05, 2004 until fully paid;

2. 3.

P10,000.00 as and by way of attorneys fees; and Cost of suit.

SO ORDERED.[11]

Only petitioner Macalinao and her husband appealed to the Regional Trial Court (RTC) of Makati City, their recourse docketed as Civil Case No. 04-1153. In its Decision dated October 14, 2004, the RTC affirmed in toto the decision of the MeTC and held: In any event, the sum of P141,518.34 adjudged by the trial court appeared to be the result of a recomputation at the reduced rate of 2% per month. Note that the total amount sought by the plaintiff-appellee was P154,608.75 exclusive of finance charge of 3.25% per month and late payment charge of 6% per month. WHEREFORE, the appealed decision is hereby affirmed in toto. No pronouncement as to costs. SO ORDERED.[12]

Unconvinced, petitioner Macalinao filed a petition for review with the CA, which was docketed as CA-G.R. SP No. 92031. The CA affirmed with modification the Decision of the RTC: WHEREFORE, the appealed decision is AFFIRMED but MODIFIED with respect to the total amount due and interest rate. Accordingly, petitioners are jointly and severally ordered to pay respondent Bank of the Philippine Islands the following:

1.

The amount of One Hundred Twenty Six Thousand Seven Hundred Six Pesos and Seventy Centavos plus interest and penalty charges of 3% per month from January 5, 2004 until fully paid; 2. P10,000.00 as and by way of attorneys fees; and 3. Cost of Suit. SO ORDERED.[13] Although sued jointly with her husband, petitioner Macalinao was the only one who filed the petition before the CA since her husband already passed away on October 18, 2005.[14] In its assailed decision, the CA held that the amount of PhP 141,518.34 (the amount sought to be satisfied in the demand letter of respondent BPI) is clearly not the result of the re-computation at the reduced interest rate as previous higher interest rates were already incorporated in the said amount. Thus, the said amount should not be made as basis in computing the total obligation of petitioner Macalinao. Further, the CA also emphasized that respondent BPI should not compound the interest in the instant case absent a stipulation to that effect. The CA also held, however, that the MeTC erred in modifying the amount of interest rate from 3% monthly to only 2% considering that petitioner Macalinao freely availed herself of the credit card facility offered by respondent BPI to the general public. It explained that contracts of adhesion are not invalid per se and are not entirely prohibited. Petitioner Macalinaos motion for reconsideration was denied by the CA in its Resolution dated November 21, 2006. Hence, petitioner Macalinao is now before this Court with the following assigned errors: I.

THE REDUCTION OF INTEREST RATE, FROM 9.25% TO 2%, SHOULD BE UPHELD SINCE THE STIPULATED RATE OF INTEREST WAS UNCONSCIONABLE AND INIQUITOUS, AND THUS ILLEGAL. II. THE COURT OF APPEALS ARBITRARILY MODIFIED THE REDUCED RATE OF INTEREST FROM 2% TO 3%, CONTRARY TO THE TENOR OF ITS OWN DECISION.

III. THE COURT A QUO, INSTEAD OF PROCEEDING WITH A RECOMPUTATION, SHOULD HAVE DISMISSED THE CASE FOR FAILURE OF RESPONDENT BPI TO PROVE THE CORRECT AMOUNT OF PETITIONERS OBLIGATION, OR IN THE ALTERNATIVE, REMANDED THE CASE TO THE LOWER COURT FOR RESPONDENT BPI TO PRESENT PROOF OF THE CORRECT AMOUNT THEREOF. Our Ruling The petition is partly meritorious. The Interest Rate and Penalty Charge of 3% Per Month or 36% Per Annum Should Be Reduced to 2% Per Month or 24% Per Annum In its Complaint, respondent BPI originally imposed the interest and penalty charges at the rate of 9.25% per month or 111% per annum. This was declared as unconscionable by the lower courts for being clearly excessive, and was thus reduced to 2% per month or 24% per annum. On appeal, the CA modified the rate

of interest and penalty charge and increased them to 3% per month or 36% per annum based on the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, which governs the transaction between petitioner Macalinao and respondent BPI. In the instant petition, Macalinao claims that the interest rate and penalty charge of 3% per month imposed by the CA is iniquitous as the same translates to 36% per annum or thrice the legal rate of interest. [15] On the other hand, respondent BPI asserts that said interest rate and penalty charge are reasonable as the same are based on the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card.[16] We find for petitioner. We are of the opinion that the interest rate and penalty charge of 3% per month should be equitably reduced to 2% per month or 24% per annum. Indeed, in the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, there was a stipulation on the 3% interest rate. Nevertheless, it should be noted that this is not the first time that this Court has considered the interest rate of 36% per annum as excessive and unconscionable. We held in Chua vs. Timan:[17] The stipulated interest rates of 7% and 5% per month imposed on respondents loans must be equitably reduced to 1% per month or 12% per annum. We need not unsettle the principle we had affirmed in a plethora of cases that stipulated interest rates of 3% per month and higher are excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for being contrary to morals, if not against the law. While C.B. Circular No. 905-82, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless of maturity, nothing in the said circular could possibly be read as granting carte blanche authority to lenders to raise interest rates to levels which would either enslave their borrowers or lead to a hemorrhaging of their assets. (Emphasis supplied.)

Since the stipulation on the interest rate is void, it is as if there was no express contract thereon. Hence, courts may reduce the interest rate as reason and equity demand.[18] The same is true with respect to the penalty charge. Notably, under the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, it was also stated therein that respondent BPI shall impose an additional penalty charge of 3% per month. Pertinently, Article 1229 of the Civil Code states: Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. In exercising this power to determine what is iniquitous and unconscionable, courts must consider the circumstances of each case since what may be iniquitous and unconscionable in one may be totally just and equitable in another.[19] In the instant case, the records would reveal that petitioner Macalinao made partial payments to respondent BPI, as indicated in her Billing Statements.[20] Further, the stipulated penalty charge of 3% per month or 36% per annum, in addition to regular interests, is indeed iniquitous and unconscionable. Thus, under the circumstances, the Court finds it equitable to reduce the interest rate pegged by the CA at 1.5% monthly to 1% monthly and penalty charge fixed by the CA at 1.5% monthly to 1% monthly or a total of 2% per month or 24% per annum in line with the prevailing jurisprudence and in accordance with Art. 1229 of the Civil Code.

There Is No Basis for the Dismissal of the Case,

Much Less a Remand of the Same for Further Reception of Evidence

Petitioner Macalinao claims that the basis of the re-computation of the CA, that is, the amount of PhP 94,843.70 stated on the October 27, 2002 Statement of Account, was not the amount of the principal obligation. Thus, this allegedly necessitates a re-examination of the evidence presented by the parties. For this reason, petitioner Macalinao further contends that the dismissal of the case or its remand to the lower court would be a more appropriate disposition of the case. Such contention is untenable. Based on the records, the summons and a copy of the complaint were served upon petitioner Macalinao and her husband on May 4, 2004. Nevertheless, they failed to file their Answer despite such service. Thus, respondent BPI moved that judgment be rendered [21] accordingly. Consequently, a decision was rendered by the MeTC on the basis of the evidence submitted by respondent BPI. This is in consonance with Sec. 6 of the Revised Rule on Summary Procedure, which states: Sec. 6. Effect of failure to answer. Should the defendant fail to answer the complaint within the period above provided, the court, motu proprio, or on motion of the plaintiff, shall render judgment as may be warranted by the facts alleged in the complaint and limited to what is prayed for therein: Provided, however, that the court may in its discretion reduce the amount of damages and attorneys fees claimed for being excessive or otherwise unconscionable. This is without prejudice to the applicability of Section 3(c), Rule 10 of the Rules of Court, if there are two or more defendants. (As amended by the 1997 Rules of Civil Procedure; emphasis supplied.)

Considering the foregoing rule, respondent BPI should not be made to suffer for petitioner Macalinaos failure to file an answer and concomitantly, to allow the latter to submit additional evidence by dismissing or remanding the case for further reception of evidence. Significantly, petitioner Macalinao herself admitted the existence of her obligation to respondent BPI, albeit with reservation as to the principal amount. Thus, a dismissal of the case would cause great injustice to respondent BPI. Similarly, a remand of the case for further reception of evidence would unduly prolong the proceedings of the instant case and render inutile the proceedings conducted before the lower courts. Significantly, the CA correctly used the beginning balance of PhP 94,843.70 as basis for the re-computation of the interest considering that this was the first amount which appeared on the Statement of Account of petitioner Macalinao. There is no other amount on which the re-computation could be based, as can be gathered from the evidence on record. Furthermore, barring a showing that the factual findings complained of are totally devoid of support in the record or that they are so glaringly erroneous as to constitute serious abuse of discretion, such findings must stand, for this Court is not expected or required to examine or contrast the evidence submitted by the parties.[22] In view of the ruling that only 1% monthly interest and 1% penalty charge can be applied to the beginning balance of PhP 94,843.70, this Court finds the following computation more appropriate:

Statem ent Date

Previou s Balanc e 94,843. 70 94,843. 70

Purcha ses (Payme nts)

Balanc e

Intere st (1%)

10/27/2 002 11/27/2 002

(15,000 )

94,843. 70 79,843. 70

948.4 4 798.4 4

Penalt y Charg e (1%) 948.4 4 798.4 4

Total Amoun t Due for the Month 96,740. 58 81,440. 58

12/31/2 002 1/27/20 03 2/27/20 03 3/27/20 03 4/27/20 03 5/27/20 03 6/29/20 03

79,843. 70 110,15 2.50 110,15 2.50 110,15 2.50 92,152. 50 92,152. 50 82,152. 50

30,308. 80

(18,000 .00)

(10,000 .00) 8,362.5 0 (7,000. 00)

110,15 2.50 110,15 2.50 110,15 2.50 92,152. 50 92,152. 50 82,152. 50 83,515. 00

1,101. 53 1,101. 53 1,101. 53 921.5 3 921.5 3 821.5 3 835.1 5

1,101. 53 1,101. 53 1,101. 53 921.5 3 921.5 3 821.5 3 835.1 5

112,35 5.56 112,35 5.56 112,35 5.56 93,995. 56 93,995. 56 83,795. 56 85,185. 30

7/27/20 03 8/27/20 03 9/28/20 03 10/28/2 003 11/28/2 003 12/28/2 003 1/27/20 04 TOTAL

83,515. 00 83,515. 00 83,515. 00 83,515. 00 83,515. 00 83,515. 00 83,515. 00

83,515. 00 83,515. 00 83,515. 00 83,515. 00 83,515. 00 83,515. 00 83,515. 00 83,515.

835.1 5 835.1 5 835.1 5 835.1 5 835.1 5 835.1 5 835.1 5 14,39

835.1 5 835.1 5 835.1 5 835.1 5 835.1 5 835.1 5 835.1 5 14,39

85,185. 30 85,185. 30 85,185. 30 85,185. 30 85,185. 30 85,185. 30 85,185. 30 112,30

00

7.26

7.26

9.52

WHEREFORE, the petition is PARTLY GRANTED. The CA Decision dated June 30, 2006 in CA-G.R. SP No. 92031 is hereby MODIFIED with respect to the total amount due, interest rate, and penalty charge. Accordingly, petitioner Macalinao is ordered to pay respondent BPI the following:

(1) The amount of one hundred twelve thousand three hundred nine pesos and fifty-two centavos (PhP 112,309.52) plus interest and penalty charges of 2% per month from January 5, 2004 until fully paid;

(2) PhP 10,000 as and by way of attorneys fees; and

(3) Cost of suit.

SO ORDERED.

PRESBITERO J. VELASCO, JR. Associate Justice WE CONCUR:

CONSUELO YNARES-SANTIAGO Associate Justice Chairperson

MINITA V. CHICO-NAZARIO Associate Justice

ANTONIO EDUARDO B. NACHURA Associate Justice

DIOSDADO M. PERALTA Associate Justice

ATTESTATION I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

CONSUELO YNARES-SANTIAGO Associate Justice Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairpersons Attestation, I certify that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO Chief Justice

Rollo, pp. 29-38. Penned by Associate Justice Magdangal M. De Leon and concurred in by Associate Justices Godardo A. Jacinto and Rosalinda Asuncion-Vicente. [2] Id. at 40-41. [3] Id. at 30.

[1]

Id. at 30-31. Id. at 184. [6] Id. at 2-3. [7] Id. at 141. [8] Id. at 165. [9] Id. at 228. [10] Id. at 192-223. The documentary evidence was presented pursuant to the Order dated June 16, 2004 of the MeTC. [11] Id. at 166. Penned by Judge Perpetua Atal-Pao. [12] Id. at 142-143. Penned by Hon. Manuel D. Victorio. [13] Id. at 37. [14] Id. at 146. [15] Id. at 17. [16] Id. at 323. [17] G.R. No. 170452, August 13, 2008, 562 SCRA 146, 149-150. [18] Imperial v. Jaucian, G.R. No. 149004, April 14, 2004, 427 SCRA 517; citing Tongoy v. Court of Appeals, No. L-45645, June 28, 1983, 123 SCRA 99. [19] Imperial, id. [20] Rollo, pp. 56-81. [21] Id. at 165. [22] Atlantic Gulf and Pacific Company of Manila v. Court of Appeals, G.R. Nos. 114841-43, August 23, 1995, 247 SCRA 606.
[5]

[4]

THIRD DIVISION [G.R. No. 125944. June 29, 2001] SPOUSES DANILO SOLANGON and URSULA SOLANGON, petitioners, vs. JOSE AVELINO SALAZAR, respondent. DECISION SANDOVAL-GUTIERREZ, J.: Petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, of the decision of the Court of Appeals in CA-G.R. CV No. 37899, affirming the decision of the Regional Trial Court, Branch 16, Malolos, Bulacan, in Civil Case No. 375-M-91, Spouses Danilo and Ursula Solangon vs. Jose Avelino Salazar for annulment of mortgage. The dispositive portion of the RTC decision reads: WHEREFORE, judgment is hereby rendered against the plaintiffs in favor of the defendant Salazar, as follows: 1. Ordering the dismissal of the complaint; 2. Ordering the dissolution of the preliminary injunction issued on July 8, 1991; 3. Ordering the plaintiffs to pay the defendant the amount of P10,000.00 by way of attorneys fees; and 4. To pay the costs. SO ORDERED.[1] The facts as summarized by the Court of Appeals in its decision being challenged are: On August 22, 1986, the plaintiffs-appellants executed a deed or real estate mortgage in which they mortgaged a parcel of land situated in Sta. Maria, Bulacan, in favor of the defendant-appellee, to secure payment of a loan of P60,000.00

payable within a period of four (4) months, with interest thereon at the rate of 6% per month (Exh. B). On May 27, 1987, the plaintiffs-appellants executed a deed of real estate mortgage in which they mortgaged the same parcel of land to the defendantappellee, to secure payment of a loan of P136,512.00, payable within a period of one (1) year, with interest thereon at the legal rate (Exh. 1). On December 29, 1990, the plaintiffs-appellants executed a deed of real estate mortgage in which they mortgaged the same parcel of land in favor of defendantappellee, to secure payment of a loan in the amount of P230,000.00 payable within a period of four (4) months, with interest thereon at the legal rate (Exh. 2, Exh. C). This action was initiated by the plaintiffs-appellants to prevent the foreclosure of the mortgaged property. They alleged that they obtained only one loan form the defendant-appellee, and that was for the amount of P60,000.00, the payment of which was secured by the first of the above-mentioned mortgages. The subsequent mortgages were merely continuations of the first one, which is null and void because it provided for unconscionable rate of interest. Moreover, the defendant-appellee assured them that he will not foreclose the mortgage as long as they pay the stipulated interest upon maturity or within a reasonable time thereafter. They have already paid the defendant-appellee P78,000.00 and tendered P47,000.00 more, but the latter has initiated foreclosure proceedings for their alleged failure to pay the loan P230,000.00 plus interest. On the other hand, the defendant-appellee Jose Avelino Salazar claimed that the above-described mortgages were executed to secure three separate loans of P60,000.00 P136,512.00 and P230,000.00, and that the first two loans were paid, but the last one was not. He denied having represented that he will not foreclose the mortgage as long as the plaintiffs-appellants pay interest. In their petition, spouses Danilo and Ursula Solangon ascribe to the Court of Appeals the following errors: 1. The Court of Appeals erred in holding that three (3) mortgage contracts were executed by the parties instead of one (1);

2. The Court of Appeals erred in ruling that a loan obligation secured by a real estate mortgage with an interest of 72% per cent per annum or 6% per month is not unconscionable; 4. The Court of Appeals erred in holding that the loan of P136,512.00 HAS NOT BEEN PAID when the mortgagee himself states in his ANSWER that the same was already paid; and 5. The Court of Appeals erred in not resolving the SPECIFIC ISSUES raised by the appellants. In his comment, respondent Jose Avelino Salazar avers that the petition should not be given due course as it raises questions of facts which are not allowed in a petition for review on certiorari. We find no merit in the instant petition. The core of the present controversy is the validity of the third contract of mortgage which was foreclosed. Petitioners contend that they obtained from respondent Avelino Salazar only one (1) loan in the amount of P60,000.00 secured by the first mortgage of August 1986. According to them, they signed the third mortgage contract in view of respondents assurance that the same will not be foreclosed. The trial court, which is in the best position to evaluate the evidence presented before it, did not give credence to petitioners corroborated testimony and ruled: The testimony is improbable. The real estate mortgage was signed not only by Ursula Solangon but also by her husband including the Promissory Note appended to it. Signing a document without knowing its contents is contrary to common experience. The uncorroborated testimony of Ursula Solangon cannot be given weight.[2] Petitioners likewise insist that, contrary to the finding of the Court of appeals, they had paid the amount of P136,512.00, or the second loan. In fact, such payment was confirmed by respondent Salazar in his answer to their complaint. It is readily apparent that petitioners are raising issues of fact in this petition. In a petition for review under Rule 45 of the 1997 Rules of Civil Procedure, as amended, only questions of law may be raised and they must be

distinctly set forth. The settled rule is that findings of fact of the lower courts (including the Court of Appeals) are final and conclusive and will not be reviewed on appeal except: (1) when the conclusion is a finding grounded entirely on speculation, surmises or conjectures; (2) when the inference made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings of facts are conflicting; (6) when the Court of Appeals, in making its findings, went beyond the issues of the case and such findings are contrary to the admission of both appellant and appellee; (6) when the findings of the Court of Appeals are contrary to those of the trial court; and (7) when the findings of fact are conclusions without citation of specific evidence on which they are based. [3] None of these instances are extant in the present case. Parenthetically, petitioners are questioning the rate of interest involved here. They maintain that the Court of Appeals erred in decreeing that the stipulated interest rate of 72% per annum or 6% per month is not unconscionable. The Court of Appeals, in sustaining the stipulated interest rate, ratiocinated that since the Usury Law had been repealed by Central Bank Circular No. 905 there is no more maximum rate of interest and the rate will just depend on the mutual agreement of the parties. Obviously, this was in consonance with our ruling in Liam Law v. Olympic Sawmill Co.[4] The factual circumstances of the present case require the application of a different jurisprudential instruction. While the Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the said circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.[5] In Medel v. Court of Appeals,[6] this court had the occasion to rule on this question - whether or not the stipulated rate of interest at 5.5% per month on a loan amounting to P500,000.00 is usurious. While decreeing that the aforementioned interest was not usurious, this Court held that the same must be equitably reduced for being iniquitous, unconscionable and exorbitant, thus: We agree with petitioners that the stipulated rate of interest at 5.5% per month on the P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant. However, we can not consider the rate usurious because this Court has consistently held that Circular No. 905 of the Central Bank, adopted on

December 22, 1982, has expressly removed the interest ceilings prescribed by the Usury Law and that the Usury Law is now legally inexistent. In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61 the Court held that CB Circular No. 905 did not repeal nor in any way amend the Usury Law but simply suspended the latters effectivity. Indeed, we have held that a Central Bank Circular can not repeal a law. Only a law can repeal another law. In the recent case of Florendo v. Court of Appeals, the Court reiterated the ruling that by virtue of CB Circular 905, the Usury Law has been rendered ineffective. Usury Law has been legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon. Nevertheless, we find the interest at 5.5 % per month, or 66% per annum, stipulated upon by the parties in the promissory note iniquitous or unconscionable, and hence, contrary to morals (contra bonos mores), if not against the law. The stipulation is void. The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or unconscionable. (Emphasis supplied) In the case at bench, petitioners stand on a worse situation. They are required to pay the stipulated interest rate of 6% per month or 72% per annum which is definitely outrageous and inordinate. Surely, it is more consonant with justice that the said interest rate be reduced equitably. An interest of 12% per annum is deemed fair and reasonable. WHEREFORE, the appealed decision of the Court of Appeals is AFFIRMED subject to the MODIFICATION that the interest rate of 72% per annum is ordered reduced to 12 % per annum. SO ORDERED. Melo, (Chairman), Vitug, Panganiban, and Gonzaga-Reyes, JJ., concur.

[1] [2] [3]

Rollo, p. 85. Decision, p. 6; Rollo, 83. Republic vs. Court of Appeals, 258 SCRA 712 [1996].

[4]

129 SCRA 439 (1984)

Moreover, for sometime now, usury has been legally nonexistent. Interest can now be charged as lender and borrower may agree upon. The Rules of Court in regards to allegations of usury, procedural in nature, should be considered repealed with retroactive effect.
[5] [6]

Almeda v. Court of Appeals, 256 SCRA 292 (1996) 299 SCRA 481 (1998)

SECOND DIVISION [G.R. No. 130886. January 29, 2004] COMMONWEALTH INSURANCE CORPORATION, petitioner, vs. COURT OF APPEALS and RIZAL COMMERCIAL BANKING CORPORATION,respondents. DECISION AUSTRIA-MARTINEZ, J.: Before us is a petition for review on certiorari assailing the Decision[1] of the Court of Appeals (CA), promulgated on May 16, 1997 in CA-G.R. CV No. 44473[2], which modified the decision dated March 5, 1993 of the Regional Trial Court of Makati (Branch 64); and the Resolution[3] dated September 25, 1997, denying petitioners motion for reconsideration. The facts of the case as summarized by the Court of Appeals are as follows: In 1984, plaintiff-appellant Rizal Commercial Banking Corporation (RCBC) granted two export loan lines, one, for P2,500,000.00 to Jigs Manufacturing Corporation (JIGS) and, the other, for P1,000,000.00 to Elba Industries, Inc. (ELBA). JIGS and ELBA which are sister corporations both drew from their respective credit lines, the former in the amount of P2,499,992.00 and the latter for P998,033.37 plus P478,985.05 from the case-to-case basis and trust receipts. These loans were evidenced by promissory notes (Exhibits A to L, inclusive JIGS; Exhibits V to BB, inclusive ELBA) and secured by surety bonds (Exhibits M to Q inclusive JIGS; Exhibits CC to FF, inclusive ELBA) executed by defendant-appellee Commonwealth Insurance Company (CIC). Specifically, the surety bonds issued by appellee CIC in favor of appellant RCBC to secure the obligations of JIGS totaled P2,894,128.00 while that securing ELBAs obligation was P1,570,000.00. Hence, the total face value of the surety bonds issued by appellee CIC was P4,464,128.00. JIGS and ELBA defaulted in the payment of their respective loans. On October 30, 1984, appellant RCBC made a written demand (Exhibit N) on appellee CIC to pay

JIGs account to the full extend (sic) of the suretyship. A similar demand (Exhibit O) was made on December 17, 1984 for appellee CIC to pay ELBAs account to the full extend (sic) of the suretyship. In response to those demands, appellee CIC made several payments from February 25, 1985 to February 10, 1988 in the total amount of P2,000,000.00. There having been a substantial balance unpaid, appellant RCBC made a final demand for payment (Exhibit P) on July 7, 1988 upon appellee CIC but the latter ignored it. Thus, appellant RCBC filed the Complaint for a Sum of Money on September 19, 1988 against appellee CIC.[4] The trial court rendered a decision dated March 5, 1993, the dispositive portion of which reads as follows: WHEREFORE, premises considered, in the light of the above facts, arguments, discussion, and more important, the law and jurisprudence, the Court finds the defendants Commonwealth Insurance Co. and defaulted third party defendants Jigs Manufacturing Corporation, Elba Industries and Iluminada de Guzman solidarily liable to pay herein plaintiff Rizal Commercial Banking Corporation the sum of Two Million Four Hundred Sixty-Four Thousand One Hundred Twenty-Eight Pesos (P2,464,128.00), to pay the plaintiff attorneys fees of P10,000.00 and to pay the costs of suit. IT IS SO ORDERED.[5] Not satisfied with the trial courts decision, RCBC filed a motion for reconsideration praying that in addition to the principal sum of P2,464,128.00, defendant CIC be held liable to pay interests thereon from date of demand at the rate of 12% per annum until the same is fully paid. However, the trial court denied the motion. RCBC then appealed to the Court of Appeals. On May 16, 1997, the CA rendered the herein assailed decision, ruling thus: ... Being solidarily bound, a suretys obligation is primary so that according to Art. 1216 of the Civil Code, he can be sued alone for the entire obligation. However, one very important characteristic of this contract is the fact that a suretys liability shall be limited to the amount of the bond (Sec. 176, Insurance Code). This does

not mean however that even if he defaults in the performance of his obligation, the extend (sic) of his liability remains to be the amount of the bond. If he pays his obligation at maturity upon demand, then, he cannot be made to pay more than the amount of the bond. But if he fails or refuses without justifiable cause to pay his obligation upon a valid demand so that he is in mora solvendi (Art. 1169, CC), then he must pay damages or interest in consequence thereof according to Art. 1170. Even if this interest is in excess of the amount of the bond, the defaulting surety is liable according to settled jurisprudence. ... Appellant RCBC contends that when appellee CIC failed to pay the obligation upon extrajudicial demand, it incurred in delay in consequence of which it became liable to pay legal interest. The obligation to pay such interest does not arise from the contract of suretyship but from law as a result of delay or mora. Such an interest is not, therefore, covered by the limitation of appellees liability expressed in the contract. Appellee CIC refutes this argument stating that since the surety bonds expressly state that its liability shall in no case exceed the amount stated therein, then that stipulation controls. Therefore, it cannot be made to assume an obligation more than what it secured to pay. The contention of appellant RCBC is correct because it is supported by Arts. 1169 and 1170 of the Civil Code and the case of Asia Surety & Insurance Co., Inc. and Manila Surety & Fidelity Co. supra. On the other hand, the position of appellee CIC which upholds the appealed decision is untenable. The best way to show the untenability of this argument is to give this hypothetical case situation: Surety issued a bond for P1 million to secure a Debtors obligation of P1 million to Creditor. Debtor defaults and Creditor demands payment from Surety. If the theory of appellee and the lower court is correct, then the Surety may just as well not pay and use the P1 million in the meantime. It can choose to pay only after several years after all, his liability can never exceed P1 million. That would be absurd and the law could not have intended it.[6] (Emphasis supplied) and disposed of the case as follows: WHEREFORE, the appealed Decision is MODIFIED in the manner following:

The appellee Commonwealth Insurance Company shall pay the appellant Rizal Commercial Banking Corporation: 1. On the account of JIGS, P2,894,128.00 ONLY with 12% legal interest per annum from October 30, 1984 minus payments made by the latter to the former after that date; and on the account of ELBA, P1,570,000.00 ONLY with 12% legal interest per annum from December 17, 1984 minus payments made by the latter to the former after that day; respecting in both accounts the applications of payment made by appellant RCBC on appellee CICs payments; 2. Defendant-appellee Commonwealth Insurance Company shall pay plaintiffappellant RIZAL COMMERCIAL BANKING CORP. and (sic) attorneys fee of P10,000.00 and cost of this suit; 3. The third-party defendants JIGS MANUFACTURING CORPORATION, ELBA INDUSTRIES and ILUMINADA N. DE GUZMAN shall respectively indemnify COMMONWEALTH INSURANCE CORPORATION for whatever it had paid and shall pay to RIZAL COMMERCIAL BANKING CORPORATION of their respective individual obligations pursuant to this decision. SO ORDERED.[7] CIC filed a motion for reconsideration but the CA denied the same. Hence, herein petition by CIC raising a single assignment of error, to wit: Respondent Court of Appeals grievously erred in ordering petitioner to pay respondent RCBC the amount of the surety bonds plus legal interest of 12% per annum minus payments made by the petitioner.[8] The sole issue is whether or not petitioner should be held liable to pay legal interest over and above its principal obligation under the surety bonds issued by it. Petitioner argues that it should not be made to pay interest because its issuance of the surety bonds was made on the condition that its liability shall in no case exceed the amount of the said bonds. We are not persuaded. Petitioners argument is misplaced. Jurisprudence is clear on this matter. As early as Tagawa vs. Aldanese and Union Gurantee Co.[9] and reiterated in Plaridel Surety & Insurance Co., Inc. vs. P.L.

Galang Machinery Co., Inc.[10], and more recently, in Republic vs. Court of Appeals and R & B Surety and Insurance Company, Inc.[11], we have sustained the principle that if a surety upon demand fails to pay, he can be held liable for interest, even if in thus paying, its liability becomes more than the principal obligation. The increased liability is not because of the contract but because of the default and the necessity of judicial collection.[12] Petitioners liability under the suretyship contract is different from its liability under the law. There is no question that as a surety, petitioner should not be made to pay more than its assumed obligation under the surety bonds.[13] However, it is clear from the above-cited jurisprudence that petitioners liability for the payment of interest is not by reason of the suretyship agreement itself but because of the delay in the payment of its obligation under the said agreement. Petitioner admits having incurred in delay. Nonetheless, it insists that mere delay does not warrant the payment of interest. Citing Section 244 of the Insurance Code,[14] petitioner submits that under the said provision of law, interest shall accrue only when the delay or refusal to pay is unreasonable; that the delay in the payment of its obligation is not unreasonable because such delay was brought about by negotiations being made with RCBC for the amicable settlement of the case. We are not convinced. It is not disputed that out of the principal sum of P4,464,128.00 petitioner was only able to pay P2,000,000.00. Letters demanding the payment of the respective obligations of JIGS and ELBA were initially sent by RCBC to petitioner on October 30, 1984[15] and December 17, 1984.[16] Petitioner made payments on an installment basis spanning a period of almost three years, i.e., from February 25, 1985 until February 10, 1988. On July 7, 1988, or after a period of almost five months from its last payment, RCBC, thru its legal counsel, sent a final letter of demand asking petitioner to pay the remaining balance of its obligation including interest.[17] Petitioner failed to pay. As of the date of the filing of the complaint on September 19, 1988, petitioner was even unable to pay the remaining balance of P2,464,128.00 out of the principal amount it owes RCBC. Petitioners contention that what prevented it from paying its obligation to RCBC is the fact that the latter insisted on imposing interest and penalties over and above the principal sum it seeks to recover is not plausible. Considering that petitioner admits its obligation to pay the principal amount, then it should have

paid the remaining balance of P2,464,128.00, notwithstanding any disagreements with RCBC regarding the payment of interest. The fact that the negotiations for the settlement of petitioners obligation did not push through does not excuse it from paying the principal sum due to RCBC. The issue of petitioners payment of interest is a matter that is totally different from its obligation to pay the principal amount covered by the surety bonds it issued. Petitioner offered no valid excuse for not paying the balance of its principal obligation when demanded by RCBC. Its failure to pay is, therefore, unreasonable. Thus, we find no error in the appellate courts ruling that petitioner is liable to pay interest. As to the rate of interest, we do not agree with petitioners contention that the rate should be 6% per annum. The appellate court is correct in imposing 12% interest. It is in accordance with our ruling in Eastern Shipping Lines, Inc. vs. Court of Appeals,[18] wherein we have established certain guidelines in awarding interest in the concept of actual and compensatory damages, to wit: I. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, 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 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.[19] (Emphasis supplied) In the present case, there is no dispute that petitioners obligation consists of a loan or forbearance of money. No interest has been agreed upon in writing between petitioner and respondent. Applying the above-quoted rule to the present case, the Court of Appeals correctly imposed the rate of interest at 12% per annum to be computed from the time the extra-judicial demand was made. This is in accordance with the provisions of Article 1169[20] of the Civil Code and of the settled rule that where there has been an extra-judicial demand before action for performance was filed, interest on the amount due begins to run not from the date of the filing of the complaint but from the date of such extra-judicial demand.[21] RCBCs extra-judicial demand for the payment of JIGS obligation was made on October 30, 1984; while the extra-judicial demand for the payment of ELBAs obligation was made on December 17, 1984. On the other hand, the complaint for a sum of money was filed by RCBC with the trial court only on September 19, 1988. WHEREFORE, the instant petition is DENIED and the assailed Decision and Resolution of the Court of Appeals are AFFIRMED in toto. SO ORDERED. Puno, (Chairman), Quisumbing, Callejo, Sr., and Tinga, JJ., concur.

[1]

Penned by Justice Hilarion L. Aquino, concurred in by Justices Eubulo G. Verzola and Portia Alio-Hormachuelos. Entitled, Rizal Commercial Banking Corporation, plaintiff-appellant, vs. Commonwealth Insurance Company, defendant-appellee, Commonwealth, third-party plaintiff, vs. Jigs Manufacturing Corp., et al., third-party defendants. CA Rollo, p. 135. CA Rollo, pp. 100-101. Original Records, p. 334. CA Rollo, pp. 99-103. CA Rollo, pp. 103-104. Rollo, p. 13. 43 Phil. 852, 859 (1922). 100 Phil. 679, 681-682 (1957). 354 SCRA 285, 289 (2001). Ibid. Section 176, Insurance Code. Sec. 244. In case of any litigation for the enforcement of any policy or contract of insurance, it shall be the duty of the Commissioner or the Court, as the case may be, to make a finding as to whether the payment of the claim of the insured has been unreasonably denied or withheld; and in the affirmative case, the insurance company shall be adjudged to pay damages which shall consist of attorneys fees and other expenses incurred by the insured person by reason of such unreasonable denial or withholding of payment plus interest of twice the ceiling prescribed by the Monetary Board of the amount of the claim due the insured, from the date following the time prescribed in section two hundred forty-two or in section two hundred forty-three, as the case may be, until the claim is fully satisfied; Provided, That the failure to pay any such claim within the time prescribed in said sections shall be considered prima facie evidence of unreasonable delay in payment.

[2]

[3] [4] [5] [6] [7] [8] [9]

[10] [11] [12] [13] [14]

[15] [16] [17] [18] [19] [20]

Exhibit N, Original Records, p. 33. Exhibit O, Original Records, p. 34. Exhibit P, Original Records, p. 35. 234 SCRA 78 (1994). Id., pp. 95-97. Article 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation. ... Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991 Reprint, Vol. IV, p. 103; Padilla, Civil Code Annotated, 1987 Edition, Vol. IV, p. 61.

[21]