G.R. No.

127246 April 21, 1999

SPOUSES LUIS M. ERMITAO and MANUELITA C. ERMITAO, petitioners,
vs.
THE COURT OF APPEALS AND BPI EXPRESS CARD CORP., respondents.
QUISUMBING, J
This petition for review under Rule 45, of the Rules of Court, seeks to set aside the
decision of the Court of Appeals in C.A.-G.R. CV No. 47888 reversing the trial
court's 1 judgment in Civil Case No. 61357, as well as the resolution of the Court
of Appeals denying petitioners' motion for reconsideration.
In dispute is the validity of the stipulation embodied in the standard application
form for credit cards furnished by private respondent. The stipulation makes the
cardholder liable for purchases made through his lost or stolen credit card until (a)
notice of such loss or theft has been given to private respondent and (b) the latter
has communicated such loss or theft to its member-establishments.
The facts, as found by the trial court, are not disputed.
Petitioner Luis Ermitao applied for a credit card from private respondent BPI
Express Card Corp. (BECC) on October 8, 1986 with his wife, Manuelita, as
extension cardholder. The spouses were given credit cards with a credit limit of
P10,000.00. They often exceeded this credit limit without protest from BECC.
On August 29, 1989, Manuelita's bag was snatched from her as she was shopping
at the Greenbelt Mall in Makati, Metro Manila. Among the items inside the bag was
her BECC credit card. That same night she informed, by telephone, BECC of the
loss. The call was received by BECC offices through a certain Gina Banzon. This
was followed by a letter dated August 30, 1989. She also surrendered Luis' credit
card and requested for replacement cards. In her letter, Manuelita stated that she
"shall not be responsible for any and all charges incurred [through the use of the
lost card] after August 29, 1989. 2
However, when Luis received his monthly billing statement from BECC dated
September 20, 1989, the charges included amounts for purchases made on
August 30, 1989 through Manuelita's lost card. Two purchases were made, one
amounting to P2,350.05 and the other, P607.50. Manuelita received a billing
statement dated October 20, 1989 which required her to immediately pay the total
amount of P3,197.70 covering the same (unauthorized) purchases. Manuelita
again wrote BECC disclaiming responsibility for those charges, which were made
after she had served BECC with notice of the loss of her card.
Despite the spouses' refusal to pay and the fact that they repeatedly exceeded
their monthly credit limit, BECC sent them a notice dated December 29, 1989
stating that their cards had been renewed until March 1991. Notwithstanding this,
however, BECC continued to include in the spouses' billing statements those
purchases made through Manuelita's lost card. Luis protested this billing in his
letter dated June 20, 1990.

card had not been cancelled but, since he exceeded his credit limit, he could not
avail of his credit privileges.
Once more, Luis pointed out that notice of the lost card was given to BECC before
the purchases were made.
Subsequently, BECC cancelled the spouses' credit cards and advised them to
settle the account immediately or risk being sued for collection of said account.
Constrained, petitioners sued BECC for damages. The trial court ruled in their
favor, stating that there was a waiver on the part of BECC in enforcing the
spouses' liability, as indicated by the following circumstances:
(1) Its failure to inform the spouses that the unauthorized charges on the lost card
would be carried over to their replacement cards; and
(2) Its act of unqualifiedly replacing the lost card and Luis' card which were both
surrendered by the spouses, even after the spouses unequivocally denied liability
for the unauthorized purchases.
The trial court further noted that the suspension of the spouses' credit cards was
based upon the "lame excuse" that the credit limit had been exceeded, despite the
fact that BECC allowed the spouses previously to exceed their credit limit, even for
almost two years after the loss of Manuelita's card. Moreover, the credit limit was
exceeded only after BECC added the unauthorized purchases to the liability of the
spouses. BECC continued to send the spouses separate billing statements that
included the unauthorized purchases, with interest and penalty charges.
The trial court opined that the only purpose for the suspension of the spouses'
credit privileges was to compel them to pay for the unauthorized purchases. The
trial court ruled that the latter portion of the condition in the parties' contract, which
states that liability for purchases made after a card is lost or stolen shall be for the
account of the cardholder until after notice of the loss or theft has been given to
BECC and after the latter has informed its member establishments, is void for
being contrary to public policy and for being dependent upon the sole will of the
debtor. 5
Moreover, the trial court observed that the contract between BECC and the
Ermitaos was a contract of adhesion, whose terms must be construed strictly
against BECC, the party that prepared it.
The dispositive portion of the trial court's decision reads:
WHEREFORE, and IN VIEW OF THE ALL THE FOREGOING
CONSIDERATIONS, judgment is hereby rendered in favor of the plaintiffs,
Spouses Luis M. Ermitao and Manuelita C. Ermitao and against defendant BPI
Express Card Corporation:
1. Ordering the said defendant to pay the plaintiffs the sum of P100,000.00 as
moral damages.

However, BECC, in a letter dated July 13, 1990, pointed out to Luis the following
stipulation in their contract:

2. Ordering said defendant to pay the plaintiffs the sum of P50,000.00 as

exemplary damages.

In the event the card is lost or stolen, the cardholder agrees to immediately report
its loss or theft in writing to BECC . . . purchases made/incurred arising from the
use of the lost/stolen card shall be for the exclusive account of the cardholder and
the cardholder continues to be liable for the purchases made through the use of
the lost/stolen BPI Express Card until after such notice has been given to BECC
and the latter has communicated such loss/theft to its member establishments. 3

3. Ordering said defencant to pay the plaintiffs the sum equivalent to twenty per
cent (20%) of the amounts abovementioned as and for attorney's fees and
expenses of litigation, and

Pursuant to this stipulation, BECC held Luis liable for the amount of P3,197.70
incurred through the use of his wife's lost card, exclusive of interest and penalty
charges.

But, on appeal this decision was reversed. The Court of Appeals stated that the
spouses should be bound by the contract, even though it was one of adhesion. It
also said that Luis, being a lawyer, had "all the tools to drive a hard bargain had he
wanted to. 6 It cited the case of Serra v. Court of Appeals 7 wherein this Court
ruled that contracts of adhesion are as binding as ordinary contracts. The
petitioner in Serra was a CPA-lawyer, "a highly educated man
. . . who should have been more cautious in (his) transactions. . . 8 The Court of
Appeals therefore disposed of the appeal as follows:

In his reply dated July 18, 1990, Luis stressed that the contract BECC was
referring to was a contract of adhesion and warned that if BECC insisted on
charging him and his wife for the unauthorized purchases, they will sue BECC for
damages. This warning notwithstanding, BECC continued to bill the spouses for
said purchases. 4
On April 10, 1991, Luis used his credit card to purchase gasoline at a Caltex
station. The latter, however, dishonored his card. In reply to Luis' demand for an
explanation, BECC wrote that it transferred the balance of his old credit card to his
new one, including the unauthorized charges. Consequently, his outstanding
balance exceeded his credit limit of P10,00000. He was informed that his credit

4. Ordering the said defendant to pay the costs of suit.

SO ORDERED

THE FOREGOING CONSIDERED, the contested decision is REVERSED.

Plaintiffs/appellees are hereby directed to pay the defendant/appellant the amount
of P3,197.70 with 3% interest per month and an additional 3% penalty equivalent
to the amount due every month until full payment. Without cost. SO ORDERED. 9

Hence, this recourse by petitioners, in which they claim that the Court of Appeals
gravely erred in:
(i) Ruling that petitioners should be bound by the stipulations contained in the
credit card application a document wholly prepared by private respondent itself
taking into consideration the professional credentials of petitioner Luis M.
Ermitao;
(ii) Relying on the case of Serra v. Court of Appeals, 229 SCRA 60, because
unlike that case, petitioners have no chance at all to contest the stipulations
appearing in the credit card application that was drafted entirely by private
respondent, thus, a clear contract of adhesion;
(iii) Ruling that private respondent is not estopped by its subsequent acts after
having been notified of the loss/theft of the credit card issued to petitioners, and
(iv) Holding that the onerous and unconscionable condition in the credit card
application that the cardholder continues to be liable for purchases made on
lost or stolen credit cards not only after such notice has been given to appellant
but also after the latter has communicated such loss/theft to its member
establishments without any specific time or period is valid. 10
At the outset, we note that the contract between the parties in this case is indeed a
contract of adhesion, so-called because its terms are prepared by only one party
while the other party merely affixes his signature signifying his adhesion
thereto. 11 Such contracts are not void in themselves. 12 They are as binding as
ordinary contracts. Parties who enter into such contracts are free to reject the
stipulations entirely. This Court, however, will not hesitate to rule out blind
adherence to such contracts if they prove to be too one-sided under the attendant
facts and circumstances. 13
The resolution of this petition, in our view, hinges on the validity and fairness of the
stipulation on notice required by private respondent in case of loss or theft of a
BECC-issued credit card. Because of the peculiar nature of contracts of adhesion,
the validity thereof must be determined in light of the circumstances under which
the stipulation is intended to apply. 14
The stipulation in question reads:
In the event the card is lost or stolen, the cardholder agrees to immediately report
its loss or theft in citing to BECC . . . purchases made/incurred arising from the use
of the lost/stolen card shall be for the exclusive account of the cardholder and the
cardholder continues to be liable for the purchases made through the use of the
lost/stolen BPI Express Card until after such notice has been given to BECC and
the latter has communicated such loss/theft to its member establishments.
For the cardholder to be absolved from liability for unauthorized purchases made
through his lost or stolen card, two steps must be followed: (1) the cardholder must
give written notice to BECC, and (2) BECC must notify its member establishments
of such loss or theft, which, naturally, it may only do upon receipt of a notice from
the cardholder. Both the cardholder and BECC, then, have a responsibility to
perform, in order to free the cardholder from any liability arising from the use of a
lost or stolen card.
In this case, the cardholder, Manuelita, has complied with what was required of
her under the contract with BECC. She immediately notified BECC of the loss of
her card on the same day it was lost and, the following day, she sent a written
notice of the loss to BECC. That she gave such notices to BECC is admitted by
BECC in the letter sent to Luis by Roberto L. Maniquiz, head of BECC's Collection
Department. 15

fact of the loss. 16 Nothing, however, prevents said member-establishments from

observing verification procedures including ascertaining the genuine signature and
proper identification of the purported purchaser using the credit card.
BECC states that, "between two persons who are negligent, the one who made
the wrong possible should bear the loss." We take this to be an admission that
negligence had occurred. In effect, BECC is saying that the company, and the
member-establishments or the petitioners could be negligent. However, according
to BECC, petitioners should be the ones to bear the loss since it was they who
made possible the commission of a wrong. This conclusion, however, is selfserving and obviously untenable.
From one perspective, it was not petitioners who made possible the commission of
the wrong. It could be BECC for its failure to immediately notify its membersestablishments, who appear lacking in care or instruction by BECC in proper
procedures, regarding signatures and the identification of card users at the point of
actual purchase of goods or services. For how else could an unauthorized person
succeed to use Manuelita's lost card?
The cardholder was no longer in control of the procedure after it has notified
BECC of the card's loss or theft. It was already BECC's responsibility to inform its
member-establishments of the loss or theft of the card at the soonest possible
time. We note that BECC is not a neophyte financial institution, unaware of the
intricacies and risks of providing credit privileges to a large number of people. It
should have anticipated an occurrence such as the one in this case and devised
effective ways and means to prevent it, or otherwise insure itself against such risk.
Prompt notice by the cardholder to the credit card company of the loss or theft of
his card should be enough to relieve the former of any liability occasioned by the
unauthorized use of his lost or stolen card. The questioned stipulation in this case,
which still requires the cardholder to wait until the credit card company has notified
all its member-establishments, puts the cardholder at the mercy of the credit card
company which may delay indefinitely the notification of its members to minimize if
not to eliminate the possibility of incurring any loss from unauthorized purchases.
Or, as in this case, the credit card company may for some reason fail to promptly
notify its members through absolutely no fault of the cardholder. To require the
cardholder to still pay for unauthorized purchases after he has given prompt notice
of the loss or theft of his card to the credit card company would simply be unfair
and unjust. The Court cannot give its assent to such a stipulation which could
clearly run against public policy. 17
On the matter of the damages petitioners are seeking, we must delete the award
of exemplary damages, absent any clear showing that BECC acted in a wanton,
fraudulent, reckless, oppressive, or malevolent manner, as required by Article
2232 of the Civil Code. We likewise reduce the amount of moral damages to
P50,000.00, considering the circumstances of the parties to the case.
WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 47888 is
hereby REVERSED and the decision of the Regional Trial Court, Branch 157,
Pasig City in Civil Case No. 61375 is REINSTATED, with the MODIFICATION that
the award of exemplary damages in the amount of P50,000.00 is hereby deleted;
and the amount of moral damages is reduced to P50,000.00; but private
respondent is further ordered to pay P25,000 as attorney's fees and litigation
expenses.
Costs against private respondents.1wphi1.nt
SO ORDERED.
[G.R. No. 113412. April 17, 1996]

Having thus performed her part of the notification procedure, it was reasonable for
Manuelita and Luis, for that matter to expect that BECC would perform its
part of the procedure, which is to forthwith notify its member-establishments. It is
not unreasonable to assume that BECC would do this immediately, precisely to
avoid any unauthorized charges.

Spouses PONCIANO ALMEDA and EUFEMIA P. ALMEDA, petitioners,

vs. THE COURT OF APPEALS and PHILIPPINE NATIONAL
BANK, respondents.

Clearly, what happened in this case was that BECC failed to notify promptly the
establishment in which the unauthorized purchases were made with the use of
Manuelita's lost card. Thus, Manuelita was being liable for those purchases, even
if there is no showing that Manuelita herself had signed for said purchases, and
after notice by her concerning her card's loss was already given to BECC.

1. CIVIL LAW; CONTRACTS; BINDING EFFECT OF AGREEMENT BETWEEN

PARTIES; PREMISED ON THE PRINCIPLE OF MUTUALITY AND
OBLIGATORY. - The binding effect of any agreement between parties to a
contract is premised on two settled principles: (1) that any obligation arising from
contract has the force of law between the parties; and (2) that there must be
mutuality between the parties based on their essential equality. Any contract which
appears to be heavily weighed in favor of one of the parties so as to lead to an
unconscionable result is void. Any stipulation regarding the validity or compliance

BECC asserts that the period that elapsed from the time of the loss of the card to
the time of its unauthorized use was too short such that "it would be next to
impossible for respondent to notify all its member-establishments regarding the

SYLLABUS

of the contract which is left solely to the will of one of the parties, is likewise,
invalid.
2. ID.; SPECIAL CONTRACTS; LOAN; INTEREST ARE REQUIRED TO BE
EXPRESSLY STIPULATED IN WRITING. - The manner of agreement is itself
explicitly stipulated by the Civil Code when it provides, in Article 1956 that No
interest shall be due unless it has been expressly stipulated in writing. What has
been stipulated in writing from a perusal of interest rate provision of the credit
agreement signed between the parties is that petitioners were bound merely to
pay 21% interest, subject to a possible escalation or de-escalation, when 1) the
circumstances warrant such escalation or de-escalation; 2) within the limits
allowed by law; and (3) upon agreement.
3. ID.; ID.; ID.; LIFTING OF USURY CEILING; DOES NOT GRANT
BANKS CARTE BLANCHE AUTHORITY TO RAISE INTEREST; RULE UNDER
CB CIRCULAR 905. - While the Usury Law ceiling on interest rates was lifted by
C.B. Circular 905, nothing in the said circular could possibly be read as granting
respondent bank carte blanche authority to raise interest rates to levels which
would either enslave its borrowers or lead to a hemorrhaging of their assets.
Borrowing represents a transfusion of capital from lending institutions to industries
and businesses in order to stimulate growth. This would not, obviously, be the
effect of PNBs unilateral and lopsided policy regarding the interest rates of
petitioners borrowings in the instant case.
4. ID.; ID.; ID.; ID.; CANNOT BE INVOKED TO JUSTIFY ESCALATION
CLAUSES, NOT BEING A GRANT OF SPECIFIC AUTHORITY. - Apart from
violating the principle of mutuality of contracts, there is authority for disallowing the
interest rates imposed by respondent bank, for the credit agreement specifically
requires that the increase be within the limits allowed by law. In the case of PNB
vs. Court of Appeals, cited above, this Court clearly emphasized that C.B. Circular
No. 905 could not be properly invoked to justify the escalation clauses of such
contracts, not being a grant of specific authority.
5. ID.; ID.; ID.; ESCALATION CLAUSES; VALID AS LONG AS NOT SOLELY
POTESTATIVE BUT BASED ON REASONABLE AND VALID GROUNDS. Escalation clauses are not basically wrong or legally objectionable so long as they
are not solely potestative but based on reasonable and valid grounds. Here, as
clearly demonstrated above, not only the increases of the interest rates on the
basis of the escalation clause patently unreasonable and unconscionable, but also
there are no valid and reasonable standards upon which the increases are
anchored.
6. ID.; ID.; MORTGAGE; AUTOMATIC FORECLOSURE PROVISIONS OF
PD 385; CAN BE INVOKED AFTER SETTLEMENT OF QUESTION INVOLVING
INTEREST AND ONLY AFTER DEBTOR REFUSE TO MEET OBLIGATION
FOLLOWING SUCH DETERMINATION. - In the first place, because of the dispute
regarding the interest rate increases, an issue which was never settled on merit in
the courts below, the exact amount of petitioners obligations could not be
determined. Thus, the foreclosure provisions of P.D. 385 could be validly invoked
by respondent only after settlement of the question involving the interest rate on
the loan, and only after the spouses refused to meet their obligations following
such determination.
7. STATUTORY CONSTRUCTION; THE PHRASE WITHIN THE LIMITS
ALLOWED BY LAW REFERS TO LEGISLATIVE ENACTMENTS NOT
ADMINISTRATIVE CIRCULARS. -The escalation clause of the credit agreement
requires that the same be made within the limits allowed by law, obviously
referring specifically to legislative enactments not administrative circulars. Note
that the phrase limits imposed by law, refers only to the escalation clause.
However, the same agreement allows reduction on the basis of law or the
Monetary Board. Had the parties intended the word law to refer to both legislative
enactments and administrative circulars and issuances, the agreement would not
have gone as far as making a distinction between law or the Monetary Board
Circulars in referring to mutually agreed upon reductions in interest rates.
DECISION
KAPUNAN, J.:
On various dates in 1981, the Philippine National Bank granted to herein
petitioners, the spouses Ponciano L. Almeda and Eufemia P. Almeda several
loan/credit accommodations totaling P18.0 Million pesos payable in a period of six
years at an interest rate of 21 % per annum. To secure the loan, the spouses
Almeda executed a Real Estate Mortgage Contract covering a 3,500 square meter
parcel of land, together with the building erected thereon (the Marvin Plaza)

located at Pasong Tamo, Makati, Metro Manila. A credit agreement embodying the
terms and conditions of the loan was executed between the parties. Pertinent
portions of the said agreement are quoted below:
SPECIAL CONDITIONS
xxx

xxx

xxx

The loan shall be subject to interest at the rate of twenty one per cent (21 %) per
annum, payable semi-annually in arrears, the first interest payment to become due
and payable six (6) months from date of initial release of the loan. The loan shall
likewise be subject to the appropriate service charge and a penalty charge of three
per cent (3%) per annum to be imposed on any amount remaining unpaid or not
rendered when due.
xxx

xxx

xxx

III. OTHER CONDITIONS

(c)

Interest and Charges

(1) The Bank reserves the right to increase the interest rate within the limits
allowed by law at any time depending on whatever policy it may adopt in the
future; provided, that the interest rate on this/these accommodations shall be
correspondingly decreased in the event that the applicable maximum interest rate
is reduced by law or by the Monetary Board. In either case, the adjustment in
the interest rate agreed upon shall take effect on the effectivity date of the
increase or decrease of the maximum interest rate.1
Between 1981 and 1984, petitioners made several partial payments on the loan
totaling P7,735,004.66,2 a substantial portion of which was applied to accrued
interest.3 On March 31, 1984, respondent bank, over petitioners protestations,
raised the interest rate to 28%, allegedly pursuant to Section III-c (1) of its credit
agreement. Said interest rate thereupon increased from an initial 21% to a high of
68% between March of 1984 to September, 1986.4
Petitioners protested the increase in interest rates, to no avail. Before the loan was
to mature in March, 1988, the spouses filed on February 6, 1988 a petition for
declaratory relief with prayer for a writ of preliminary injunction and temporary
restraining order with the Regional Trial Court of Makati, docketed as Civil Case
No. 18872. In said petition, which was raffled to Branch 134 presided by Judge
Ignacio Capulong, the spouses sought clarification as to whether or not the PNB
could unilaterally raise interest rates on the loan, pursuant to the credit
agreements escalation clause, and in relation to Central Bank Circular No. 905.
As a preliminary measure, the lower court, on March 3, 1988, issued a writ of
preliminary injunction enjoining the Philippine National Bank from enforcing an
interest rate above the 21% stipulated in the credit agreement. By this time the
spouses were already in default of their loan obligations.
Invoking the Law on Mandatory Foreclosure (Act 3135, as amended and P.D.
385), the PNB countered by ordering the extrajudicial foreclosure of petitioners
mortgaged properties and scheduled an auction sale for March 14, 1989. Upon
motion by petitioners, however, the lower court, on April 5, 1989, granted a
supplemental writ of preliminary injunction, staying the public auction of the
mortgaged property.
On January 15, 1990, upon the posting of a counterbond by the PNB, the trial
court dissolved the supplemental writ of preliminary injunction. Petitioners filed a
motion for reconsideration. In the interim, respondent bank once more set a new
date for the foreclosure sale of Marvin Plaza which was March 12, 1990. Prior to
the scheduled date, however, petitioners tendered to respondent bank the amount
of P40,142,518.00, consisting of the principal (P18,000,000.00) and accrued
interest calculated at the originally stipulated rate of 21%. The PNB refused to
accept the payment.5
As a result of PNBs refusal of the tender of payment, petitioners, on March 8,
1990, formally consigned the amount of P40,142,518.00 with the Regional Trial
Court in Civil Case No. 90-663. They prayed therein for a writ of preliminary
injunction with a temporary restraining order. The case was raffled to Branch 147,
presided by Judge Teofilo Guadiz. On March 15, 1990, respondent bank sought
the dismissal of the case.
On March 30, 1990 Judge Guadiz in Civil Case No. 90-663 issued an order
granting the writ of preliminary injunction enjoining the foreclosure sale of
Marvin Plaza scheduled onMarch 12, 1990. On April 17, 1990 respondent bank
filed a motion for reconsideration of the said order.

On August 16, 1991, Civil Case No. 90-663 was transferred to Branch 66 presided
by Judge Eriberto Rosario who issued an order consolidating said case with Civil
Case 18871 presided by Judge Ignacio Capulong.
For Judge Ignacio Capulongs refusal to lift the writ of preliminary injunction
issued March 30, 1990, respondent bank filed a petition for Certiorari, Prohibition
and Mandamus with respondent Court of Appeals, assailing the following orders of
the Regional Trial Court:
1. Order dated March 30, 1990 of Judge Guadiz granting the writ of preliminary
injunction restraining the foreclosure sale of Marvin Plaza set on March 12, 1990;
2. Order of Judge Ignacio Capulong dated January 10, 1992 denying respondent
banks motion to lift the writ of injunction issued by Judge Guadiz as well as its
motion to dismiss Civil Case No. 90-663;
3. Order of Judge Capulong dated July 3, 1992 denying respondent banks
subsequent motion to lift the writ of preliminary injunction; and
4. Order of Judge Capulong dated October 20, 1992 denying respondent banks
motion for reconsideration.
On August 27, 1993, respondent court rendered its decision setting aside the
assailed orders and upholding respondent banks right to foreclose the mortgaged
property pursuant to Act 3135, as amended and P.D. 385. Petitioners Motion for
Reconsideration and Supplemental Motion for Reconsideration, dated September
15, 1993 and October 28, 1993, respectively, were denied by respondent court in
its resolution dated January 10, 1994.
Hence the instant petition.
This appeal by certiorari from the respondent courts decision dated August 27,
1993 raises two principal issues namely: 1) Whether or not respondent bank was
authorized to raise its interest rates from 21% to as high as 68% under the credit
agreement; and 2) Whether or not respondent bank is granted the authority to
foreclose the Marvin Plaza under the mandatory foreclosure provisions of P.D.
385.
In its comment dated April 19, 1994, respondent bank vigorously denied that the
increases in the interest rates were illegal, unilateral, excessive and arbitrary, it
argues that the escalated rates of interest it imposed was based on the agreement
of the parties. Respondent bank further contends that it had a right to foreclose the
mortgaged property pursuant to P.D. 385, after petitioners were unable to pay their
loan obligations to the bank based on the increased rates upon maturity in 1984.
The instant petition is impressed with merit.
The binding effect of any agreement between parties to a contract is premised on
two settled principles:(1) that any obligation arising from contract has the force of
law between the parties; and (2) that there must be mutuality between the parties
based on their essential equality.6 Any contract which appears to be heavily
weighed in favor of one of the parties so as to lead to an unconscionable result is
void. Any stipulation regarding the validity or compliance of the contract which is
left solely to the will of one of the parties, is likewise, invalid.
It is plainly obvious, therefore, from the undisputed facts of the case that
respondent bank unilaterally altered the terms of its contract with petitioners by
increasing the interest rates on the loan without the prior assent of the latter. In
fact, the manner of agreement is itself explicitly stipulated by the Civil Code when
it provides, in Article 1956 that No interest shall be due unless it has been
expressly stipulated in writing. What has been stipulated in writing from a
perusal of interest rate provision of the credit agreement signed between the
parties is that petitioners were bound merely to pay 21% interest, subject to a
possible escalation or de-escalation, when 1) the circumstances warrant such
escalation or de-escalation; 2) within the limits allowed by law; and 3) upon
agreement.
Indeed, the interest rate which appears to have been agreed upon by the parties
to the contract in this case was the 21% rate stipulated in the interest provision.
Any doubt about this is in fact readily resolved by a careful reading of the credit
agreement because the same plainly uses the phrase interest rate agreed upon,
in reference to the original 21% interest rate. The interest provision states:
(c) Interest and Charges

(1) The Bank reserves the right to increase the interest rate within the limits
allowed by law at any time depending on whatever policy it may adopt in the
future; provided, that the interest rate on this/these accommodations shall be
correspondingly decreased in the event that the applicable maximum interest rate
is reduced by law or by the Monetary Board. In either case, the adjustment in the
interest rate agreed upon shall take effect on the effectivity date of the increase or
decrease of the maximum interest rate.
In Philippine National Bank v. Court of Appeals,7 this Court disauthorized
respondent bank from unilaterally raising the interest rate in the borrowers loan
from 18% to 32%, 41% and 48% partly because the aforestated increases violated
the principle of mutuality of contracts expressed in Article 1308 of the Civil Code.
The Court held:
CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on
interest rates
x x x increases in interest rates are not subject to any ceiling prescribed by the
Usury Law.
but it did not authorize the PNB, or any bank for that matter, to unilaterally and
successively increase the agreed interest rates from 18% to 48% within a span of
four (4) months, in violation of P.D. 116 which limits such changes to once every
twelve months.
Besides violating P.D. 116, the unilateral action of the PNB in increasing the
interest rate on the private respondents loan, violated the mutuality of contracts
ordained in Article 1308 of the Civil Code:
ART. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.
In order that obligations arising from contracts may have the force of law between
the parties, there must be mutuality between the parties based on their essential
equality. A contract containing a condition which makes its fulfillment dependent
exclusively upon the uncontrolled will of one of the contracting parties, is void
(Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the
P1.8 million loan agreement between the PNB and the private respondent gave
the PNB a license (although in fact there was none) to increase the interest rate at
will during the term of the loan, that license would have been null and void for
being violative of the principle of mutuality essential in contracts. It would have
invested the loan agreement with the character of a contract of adhesion, where
the parties do not bargain on equal footing, the weaker partys (the debtor)
participation being reduced to the alternative to take it or lease it (Qua vs. Law
Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for
the weaker party whom the courts of justice must protect against abuse and
imposition.
PNBs successive increases of the interest rate on the private respondents loan,
over the latters protest, were arbitrary as they violated an express provision of the
Credit Agreement (Exh. 1) Section 9.01 that its terms may be amended only by an
instrument in writing signed by the party to be bound as burdened by such
amendment. The increases imposed by PNB also contravene Art. 1956 of the
Civil Code which provides that no interest shall be due unless it has been
expressly stipulated in writing.
The debtor herein never agreed in writing to pay the interest increases fixed by the
PNB beyond 24% per annum, hence, he is not bound to pay a higher rate than
that.
That an increase in the interest rate from 18% to 48% within a period of four (4)
months is excessive, as found by the Court of Appeals, is indisputable.
Clearly, the galloping increases in interest rate imposed by respondent bank
on petitioners loan, over the latters vehement protests, were arbitrary.
Moreover, respondent banks reliance on C.B. Circular No. 905, Series of 1982 did
not authorize the bank, or any lending institution for that matter, to progressively
increase interest rates on borrowings to an extent which would have made it
virtually impossible for debtors to comply with their own obligations. True,
escalation clauses in credit agreements are perfectly valid and do not contravene
public policy. Such clauses, however, (as are stipulations in other contracts) are
nonetheless still subject to laws and provisions governing agreements between
parties, which agreements - while they may be the law between the contracting
parties - implicitly incorporate provisions of existing law. Consequently, while the

Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the
said circular could possibly be read as granting respondent bank
carte blanche authority to raise interest rates to levels which would either enslave
its borrowers or lead to a hemorrhaging of their assets. Borrowing represents a
transfusion of capital from lending institutions to industries and businesses in order
to stimulate growth. This would not, obviously, be the effect of PNBs unilateral
and lopsided policy regarding the interest rates of petitioners borrowings in the
instant case.
Apart from violating the principle of mutuality of contracts, there is authority for
disallowing the interest rates imposed by respondent bank, for the credit
agreement specifically requires that the increase be within the limits allowed by
law. In the case of PNB v. Court of Appeals, cited above, this Court clearly
emphasized that C.B. Circular No. 905 could not be properly invoked to justify the
escalation clauses of such contracts, not being a grant of specific authority.
Furthermore, the escalation clause of the credit agreement requires that the same
be made within the limits allowed by law, obviously referring specifically to
legislative enactments not administrative circulars. Note that the phrase limits
imposed by law, refers only to the escalation clause. However, the same
agreement allows reduction on the basis of law or the Monetary Board. Had the
parties intended the word law to refer to both legislative enactments and
administrative circulars and issuances, the agreement would not have gone as far
as making a distinction between law or the Monetary Board Circulars in referring
to mutually agreed upon reductions in interest rates. This distinction was the
subject of the Courts disquisition in the case of Banco Filipino Savings and
Mortgage Bank v. Navarro8 where the Court held that:
What should be resolved is whether BANCO FILIPINO can increase the interest
rate on the LOAN from 12% to 17% per annum under the Escalation Clause. It is
our considered opinion that it may not.
The Escalation Clause reads as follows:
I/We hereby authorize Banco Filipino to correspondingly increase the interest rate
stipulated in this contract without advance notice to me/us in the event a law
increasing the lawful rates of interest that may be charged on this particular kind of
loan. (Paragraphing and italics supplied)
It is clear from the stipulation between the parties that the interest rate may be
increased in the event a law should be enacted increasing the lawful rate of
interest that may be charged on this particular kind of loan. The Escalation Clause
was dependent on an increase of rate made by law alone.
CIRCULAR No. 494, although it has the effect of law, is not a law. Although a
circular duly issued is not strictly a statute or a law, it has, however, the force and
effect of law. (Italics supplied). An administrative regulation adopted pursuant to
law has the force and effect of law. That administrative rules and regulations
have the force of law can no longer be questioned.
The distinction between a law and an administrative regulation is recognized in the
Monetary Board guidelines quoted in the latter to the BORROWER of Ms. Paderes
of September 24, 1976 (supra).According to the guidelines, for a loans interest to
be subject to the increases provided in CIRCULAR No. 494, there must be an
Escalation Clause allowing the increase in the event that any law or Central Bank
regulation is promulgated increasing the maximum rate for loans. The guidelines
thus presuppose that a Central Bank regulation is not within the term any law.
The distinction is again recognized by P.D. No. 1684, promulgated on March 17,
1980, adding Section 7-a to the Usury Law, providing that parties to an agreement
pertaining to a loan could stipulate that the rate of interest agreed upon may be
increased in the event that the applicable maximum rate of interest is
increased by law or by the Monetary Board. To quote:
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money,
goods or credits may stipulate that the rate of interest agreed upon may be
increased in the event that the applicable maximum rate of interest
is increased by law or by the Monetary Board:
Provided, That such stipulation shall be valid only if there is also a stipulation in
the agreement that the rate of interest agreed upon shall be reduced in the event
that the applicable maximum rate of interest is reduced by law or by the Monetary
Board;

Provided, further, That the adjustment in the rate of interest agreed upon shall take
effect on or after the effectivity of the increase or decrease in the maximum rate of
interest. (Paragraphing and italics supplied).
It is now clear that from March 17, 1980, escalation clauses to be valid should
specifically provide: (1) that there can be an increase in interest if increased by law
or by the Monetary Board; and (2) in order for such stipulation to be valid, it must
include a provision for reduction of the stipulated interest in the event that the
applicable maximum rate of interest is reduced by law or by the Monetary Board.
Petitioners never agreed in writing to pay the increased interest rates demanded
by respondent bank in contravention to the tenor of their credit agreement. That an
increase in interest rates from 18% to as much as 68% is excessive and
unconscionable is indisputable. Between 1981 and 1984, petitioners had paid an
amount equivalent to virtually half of the entire principal (P7,735,004.66) which
was applied to interest alone. By the time the spouses tendered the amount of
P40,142,518.00 in settlement of their obligations, respondent bank was
demanding P58,377,487.00 over and above those amounts already previously
paid by the spouses.
Escalation clauses are not basically wrong or legally objectionable so long as they
are not solely potestative but based on reasonable and valid grounds.9 Here, as
clearly demonstrated above, not only the increases of the interest rates on the
basis of the escalation clause patently unreasonable and unconscionable, but also
there are no valid and reasonable standards upon which the increases are
anchored.
We go now to respondent banks claim that the principal issue in the case at
bench involves its right to foreclose petitioners properties under P.D. 385. We
find respondents pretense untenable.
Presidential Decree No. 385 was issued principally to guarantee that government
financial institutions would not be denied substantial cash inflows necessary to
finance the governments development projects all over the country by large
borrowers who resort to litigation to prevent or delay the governments collection of
their debts or loans.10 In facilitating collection of debts through its automatic
foreclosure provisions, the government is however, not exempted from observing
basic principles of law, and ordinary fairness and decency under the due process
clause of the Constitution.11
In the first place, because of the dispute regarding the interest rate increases, an
issue which was never settled on merit in the courts below, the exact amount of
petitioners obligations could not be determined. Thus, the foreclosure provisions
of P.D. 385 could be validly invoked by respondent bank only after settlement of
the question involving the interest rate on the loan, and only after the spouses
refused to meet their obligations following such determination. In Filipinas Marble
Corporation v. Intermediate Appellate Court,12 involving P.D. 385s provisions on
mandatory foreclosure, we held that:
We cannot, at this point, conclude that respondent DBP together with the Bancom
people actually misappropriated and misspent the $5 million loan in whole or in
part although the trial court found that there is persuasive evidence that such acts
were committed by the respondent. This matter should rightfully be litigated below
in the main action. Pending the outcome of such litigation, P.D. 385 cannot
automatically be applied for if it is really proven that respondent DBP is
responsible for the misappropriation of the loan, even if only in part, then the
foreclosure of the petitioners properties under the provisions of P.D. 385 to satisfy
the whole amount of the loan would be a gross mistake. It would unduly prejudice
the petitioner, its employees and their families.
Only after trial on the merits of the main case can the true amount of the loan
which was applied wisely or not, for the benefit of the petitioner be determined.
Consequently, the extent of the loan where there was no failure of consideration
and which may be properly satisfied by foreclosure proceedings under P.D. 385
will have to await the presentation of evidence in a trial on the merits.
In Republic Planters Bank v. Court of Appeals13 the Court reiterating
the dictum in Filipinas Marble Corporation, held:
The enforcement of P.D. 385 will sweep under the rug this iceberg of a scandal in
the sugar industry during the Marcos Martial Law years. This we can not allow to
happen. For the benefit of future generations, all the dirty linen in the
PHILSUCOM/NASUTRA/RPB closets have to be exposed in public so that the
same may NEVER be repeated.

It is of paramount national interest, that we allow the trial court to proceed with
dispatch to allow the parties below to present their evidence.
Furthermore, petitioners made a valid consignation of what they, in good faith and
in compliance with the letter of the Credit Agreement, honestly believed to be the
real amount of their remaining obligations with the respondent bank. The latter
could not therefore claim that there was no honest-to-goodness attempt on the
part of the spouses to settle their obligations. Respondent banks rush to
inequitably invoke the foreclosure provisions of P.D. 385 through its legal
machinations in the courts below, in spite of the unsettled differences in
interpretation of the credit agreement was obviously made in bad faith, to gain the
upper hand over petitioners.
In the face of the unequivocal interest rate provisions in the credit agreement and
in the law requiring the parties to agree to changes in the interest rate in writing,
we hold that the unilateral and progressive increases imposed by respondent PNB
were null and void. Their effect was to increase the total obligation on an eighteen
million peso loan to an amount way over three times that which was originally
granted to the borrowers. That these increases, occasioned by crafty
manipulations in the interest rates is unconscionable and neutralizes the salutary
policies of extending loans to spur business cannot be disputed.
WHEREFORE, PREMISES CONSIDERED, the decision of the Court of Appeals
dated August 27, 1993, as well as the resolution dated February 10, 1994 is
hereby REVERSED AND SET ASIDE. The case is remanded to the Regional Trial
Court of Makati for further proceedings.
SO ORDERED.

debited from the spouses Belusos account with UCPB; yet, a consolidated loan
for P1.3 Million was again released to the spouses Beluso under one promissory
note with a due date of 28 February 1998.
To completely avail themselves of the P2.35 Million credit line extended to them by
UCPB, the spouses Beluso executed two more promissory notes for a total
ofP350,000.00:
PN #

Date of PN

Maturity Date

Amount
Secured

97-00363-1

11 December
1997

28 February
1998

P 200,000

98-00002-4

2 January 1998

28 February
1998

P 150,000

However, the spouses Beluso alleged that the amounts covered by these last two
promissory notes were never released or credited to their account and, thus,
claimed that the principal indebtedness was only P2 Million.

In any case, UCPB applied interest rates on the different promissory notes ranging
from 18% to 34%. From 1996 to February 1998 the spouses Beluso were able to
pay the total sum of P763,692.03.

From 28 February 1998 to 10 June 1998, UCPB continued to charge interest and
penalty on the obligations of the spouses Beluso, as follows:

G.R. No. 159912

UNITED COCONUT PLANTERS BANK,
Petitioner
- versus SPOUSES SAMUEL and ODETTE BELUSO,
Respondents.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court,
which seeks to annul the Court of Appeals Decision[1] dated 21 January 2003 and
its Resolution[2] dated 9 September 2003 in CA-G.R. CV No. 67318. The assailed
Court of Appeals Decision and Resolution affirmed in turn the Decision[3] dated 23
March 2000 and Order[4] dated 8 May 2000 of the Regional Trial Court (RTC),
Branch 65 of Makati City, in Civil Case No. 99-314, declaring void the interest rate
provided in the promissory notes executed by the respondents Spouses Samuel
and Odette Beluso (spouses Beluso) in favor of petitioner United Coconut Planters
Bank (UCPB).
The procedural and factual antecedents of this case are as follows:
On 16 April 1996, UCPB granted the spouses Beluso a Promissory Notes Line
under a Credit Agreement whereby the latter could avail from the former credit of
up to a maximum amount of P1.2 Million pesos for a term ending on 30 April
1997. The spouses Beluso constituted, other than their promissory notes, a real
estate mortgage over parcels of land in Roxas City, covered by Transfer
Certificates of Title No. T-31539 and T-27828, as additional security for the
obligation. The Credit Agreement was subsequently amended to increase the
amount of the Promissory Notes Line to a maximum of P2.35 Million pesos and to
extend the term thereof to 28 February 1998.
The spouses Beluso availed themselves of the credit line under the following
Promissory Notes:
PN #

Date of PN

Maturity Date

Amount Secured

8314-96-00083-3

29 April 1996

27 August 1996

P 700,000

8314-96-00085-0

2 May 1996

30 August 1996

P 500,000

8314-96-000292-2

20 November 1996

20 March 1997

P 800,000

The three promissory notes were renewed several times. On 30 April 1997, the
payment of the principal and interest of the latter two promissory notes were

PN #

Amount
Secured

Interest

Penalty

Total

97003631

P 200,000

31%

36%

P 225,313.24

97003666

P 700,000

30.17%

32.786%
(102
days)

P 795,294.72

97003682

P 1,300,000

30.41%
(102
days)

P 1,462,124.54

98000024

P 150,000

36%

P 170,034.71

(7
days)
28%
(2
days)
33%
(102
days)

The spouses Beluso, however, failed to make any payment of the foregoing
amounts.
On 2 September 1998, UCPB demanded that the spouses Beluso pay their total
obligation of P2,932,543.00 plus 25% attorneys fees, but the spouses Beluso
failed to comply therewith. On 28 December 1998, UCPB foreclosed the
properties mortgaged by the spouses Beluso to secure their credit line, which, by
that time, already ballooned toP3,784,603.00.
On 9 February 1999, the spouses Beluso filed a Petition for Annulment,
Accounting and Damages against UCPB with the RTC of Makati City.
On 23 March 2000, the RTC ruled in favor of the spouses Beluso, disposing of the
case as follows:
PREMISES CONSIDERED, judgment is hereby rendered declaring the interest
rate used by [UCPB] void and the foreclosure and Sheriffs Certificate

of Sale void. [UCPB] is hereby ordered to return to [the spouses Beluso] the
properties subject of the foreclosure; to pay [the spouses Beluso] the amount
of P50,000.00 by way of attorneys fees; and to pay the costs of suit. [The spouses
Beluso] are hereby ordered to pay [UCPB] the sum of P1,560,308.00.[5]
On 8 May 2000, the RTC denied UCPBs Motion for Reconsideration,[6] prompting
UCPB to appeal the RTC Decision with the Court of Appeals. The Court of
Appeals affirmed the RTC Decision, to wit:
WHEREFORE, premises considered, the decision dated March 23, 2000 of the
Regional Trial Court, Branch 65, Makati City in Civil Case No. 99-314 is hereby
AFFIRMED subject to the modification that defendant-appellant UCPB is not liable
for attorneys fees or the costs of suit.[7]
On 9 September 2003, the Court of Appeals denied UCPBs Motion for
Reconsideration for lack of merit. UCPB thus filed the present petition, submitting
the following issues for our resolution:
I. WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF
THE TRIAL COURT WHICH DECLARED VOID THE PROVISION ON INTEREST
RATE AGREED UPON BETWEEN PETITIONER AND RESPONDENTS
II. WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE
COMPUTATION BY THE TRIAL COURT OF RESPONDENTS INDEBTEDNESS
AND ORDERED RESPONDENTS TO PAY PETITIONER THE AMOUNT OF
ONLY ONE MILLION FIVE HUNDRED SIXTY THOUSAND THREE HUNDRED
EIGHT PESOS (P1,560,308.00)
III. WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF
THE TRIAL COURT WHICH ANNULLED THE FORECLOSURE BY PETITIONER
OF THE SUBJECT PROPERTIES DUE TO AN ALLEGED INCORRECT
COMPUTATION OF RESPONDENTS INDEBTEDNESS
IV. WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF
THE TRIAL COURT WHICH FOUND PETITIONER LIABLE FOR VIOLATION OF
THE TRUTH IN LENDING ACT
V. WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT FAILED TO ORDER THE
DISMISSAL OF THE CASE BECAUSE THE RESPONDENTS ARE GUILTY OF
FORUM SHOPPING[8]
Validity of the Interest Rates
The Court of Appeals held that the imposition of interest in the following provision
found in the promissory notes of the spouses Beluso is void, as the interest rates
and the bases therefor were determined solely by petitioner UCPB:
FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS. SAMUEL
AND ODETTE BELUSO (BORROWER), jointly and severally promise to pay to
UNITED COCONUT PLANTERS BANK (LENDER) or order at UCPB Bldg., Makati
Avenue, Makati City, Philippines, the sum of ______________ PESOS, (P_____),
Philippine Currency, with interest thereon at the rate indicative of DBD retail rate or
as determined by the Branch Head.[9]
UCPB asserts that this is a reversible error, and claims that while the interest rate
was not numerically quantified in the face of the promissory notes, it was
nonetheless categorically fixed, at the time of execution thereof, at the rate
indicative of the DBD retail rate. UCPB contends that said provision must be read
with another stipulation in the promissory notes subjecting to review the interest
rate as fixed:
The interest rate shall be subject to review and may be increased or decreased by
the LENDER considering among others the prevailing financial and monetary
conditions; or the rate of interest and charges which other banks or financial
institutions charge or offer to charge for similar accommodations; and/or the
resulting profitability to the LENDER after due consideration of all dealings with the
BORROWER.[10]
In this regard, UCPB avers that these are valid reference rates akin to a
prevailing rate or prime rate allowed by this Court in Polotan v. Court of
Appeals.[11] Furthermore, UCPB argues that even if the proviso as determined

by the branch head is considered void, such a declaration would not ipso
facto render the connecting clause indicative of DBD retail rate void in view of the
separability clause of the Credit Agreement, which reads:
Section 9.08 Separability Clause. If any one or more of the provisions contained
in this AGREEMENT, or documents executed in connection herewith shall be
declared invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions hereof shall not in any way be affected
or impaired.[12]
According to UCPB, the imposition of the questioned interest rates did not infringe
on the principle of mutuality of contracts, because the spouses Beluso had the
liberty to choose whether or not to renew their credit line at the new interest rates
pegged by petitioner.[13] UCPB also claims that assuming there was any defect
in the mutuality of the contract at the time of its inception, such defect was cured
by the subsequent conduct of the spouses Beluso in availing themselves of the
credit line from April 1996 to February 1998 without airing any protest with respect
to the interest rates imposed by UCPB. According to UCPB, therefore, the
spouses Beluso are in estoppel.[14]
We agree with the Court of Appeals, and find no merit in the contentions of
UCPB.
Article 1308 of the Civil Code provides:
Art. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.
We applied this provision in Philippine National Bank v. Court of
Appeals,[15] where we held:
In order that obligations arising from contracts may have the force of law between
the parties, there must be mutuality between the parties based on their essential
equality. A contract containing a condition which makes its fulfillment dependent
exclusively upon the uncontrolled will of one of the contracting parties, is void
(Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the
P1.8 million loan agreement between the PNB and the private respondent gave
the PNB a license (although in fact there was none) to increase the interest rate at
will during the term of the loan, that license would have been null and void for
being violative of the principle of mutuality essential in contracts. It would have
invested the loan agreement with the character of a contract of adhesion, where
the parties do not bargain on equal footing, the weaker party's (the debtor)
participation being reduced to the alternative "to take it or leave it" (Qua vs. Law
Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for
the weaker party whom the courts of justice must protect against abuse and
imposition.
The provision stating that the interest shall be at the rate indicative of DBD retail
rate or as determined by the Branch Head is indeed dependent solely on the will
of petitioner UCPB. Under such provision, petitioner UCPB has two choices on
what the interest rate shall be: (1) a rate indicative of the DBD retail rate; or (2) a
rate as determined by the Branch Head. As UCPB is given this choice, the rate
should be categorically determinable in both choices. If either of these two
choices presents an opportunity for UCPB to fix the rate at will, the bank can easily
choose such an option, thus making the entire interest rate provision violative of
the principle of mutuality of contracts.
Not just one, but rather both, of these choices are dependent solely on the will of
UCPB. Clearly, a rate as determined by the Branch Head gives the latter
unfettered discretion on what the rate may be. The Branch Head may choose any
rate he or she desires. As regards the rate indicative of the DBD retail rate, the
same cannot be considered as valid for being akin to a prevailing rate or prime
rate allowed by this Court in Polotan. The interest rate in Polotan reads:
The Cardholder agrees to pay interest per annum at 3% plus the prime rate of
Security Bank and Trust Company. x x x.[16]
In this provision in Polotan, there is a fixed margin over the reference rate:
3%. Thus, the parties can easily determine the interest rate by applying simple
arithmetic. On the other hand, the provision in the case at bar does not specify
any margin above or below the DBD retail rate. UCPB can peg the interest at any
percentage above or below the DBD retail rate, again giving it unfettered discretion
in determining the interest rate.

The stipulation in the promissory notes subjecting the interest rate to review
does not render the imposition by UCPB of interest rates on the obligations of the
spouses Beluso valid. According to said stipulation:
The interest rate shall be subject to review and may be increased or decreased by
the LENDER considering among others the prevailing financial and monetary
conditions; or the rate of interest and charges which other banks or financial
institutions charge or offer to charge for similar accommodations; and/or the
resulting profitability to the LENDER after due consideration of all dealings with the
BORROWER.[17]
It should be pointed out that the authority to review the interest rate was given
UCPB alone as the lender. Moreover, UCPB may apply the considerations
enumerated in this provision as it wishes. As worded in the above provision,
UCPB may give as much weight as it desires to each of the following
considerations: (1) the prevailing financial and monetary condition; (2) the rate of
interest and charges which other banks or financial institutions charge or offer to
charge for similar accommodations; and/or (3) the resulting profitability to the
LENDER (UCPB) after due consideration of all dealings with the BORROWER (the
spouses Beluso). Again, as in the case of the interest rate provision, there is no
fixed margin above or below these considerations.
In view of the foregoing, the Separability Clause cannot save either of the two
options of UCPB as to the interest to be imposed, as both options violate the
principle of mutuality of contracts.

UCPB likewise failed to convince us that the spouses Beluso were in estoppel.
Estoppel cannot be predicated on an illegal act. As between the parties to a
contract, validity cannot be given to it by estoppel if it is prohibited by law or is
against public policy.[18]
The interest rate provisions in the case at bar are illegal not only because of the
provisions of the Civil Code on mutuality of contracts, but also, as shall be
discussed later, because they violate the Truth in Lending Act. Not disclosing the
true finance charges in connection with the extensions of credit is, furthermore, a
form of deception which we cannot countenance. It is against the policy of the
State as stated in the Truth in Lending Act:
Sec. 2. Declaration of Policy. It is hereby declared to be the policy of the State
to protect its citizens from a lack of awareness of the true cost of credit to the user
by assuring a full disclosure of such cost with a view of preventing the uninformed
use of credit to the detriment of the national economy.[19]
Moreover, while the spouses Beluso indeed agreed to renew the credit line, the
offending provisions are found in the promissory notes themselves, not in the
credit line. In fixing the interest rates in the promissory notes to cover the renewed
credit line, UCPB still reserved to itself the same two options (1) a rate indicative
of the DBD retail rate; or (2) a rate as determined by the Branch Head.
Error in Computation
UCPB asserts that while both the RTC and the Court of Appeals voided the
interest rates imposed by UCPB, both failed to include in their computation of the
outstanding obligation of the spouses Beluso the legal rate of interest of 12% per
annum. Furthermore, the penalty charges were also deleted in the decisions of
the RTC and the Court of Appeals. Section 2.04, Article II on Interest and other
Bank Charges of the subject Credit Agreement, provides:
Section 2.04 Penalty Charges. In addition to the interest provided for in Section
2.01 of this ARTICLE, any principal obligation of the CLIENT hereunder which is
not paid when due shall be subject to a penalty charge of one percent (1%) of the
amount of such obligation per month computed from due date until the obligation
is paid in full. If the bank accelerates teh (sic) payment of availments hereunder
pursuant to ARTICLE VIII hereof, the penalty charge shall be used on the total
principal amount outstanding and unpaid computed from the date of acceleration
until the obligation is paid in full.[20]
Paragraph 4 of the promissory notes also states:
In case of non-payment of this Promissory Note (Note) at maturity, I/We, jointly
and severally, agree to pay an additional sum equivalent to twenty-five percent
(25%) of the total due on the Note as attorneys fee, aside from the expenses and
costs of collection whether actually incurred or not, and a penalty charge of one

percent (1%) per month on the total amount due and unpaid from date of default
until fully paid.[21]
Petitioner further claims that it is likewise entitled to attorneys fees, pursuant to
Section 9.06 of the Credit Agreement, thus:
If the BANK shall require the services of counsel for the enforcement of its rights
under this AGREEMENT, the Note(s), the collaterals and other related documents,
the BANK shall be entitled to recover attorneys fees equivalent to not less than
twenty-five percent (25%) of the total amounts due and outstanding exclusive of
costs and other expenses.[22]
Another alleged computational error pointed out by UCPB is the negation of the
Compounding Interest agreed upon by the parties under Section 2.02 of the Credit
Agreement:
Section 2.02 Compounding Interest. Interest not paid when due shall form part of
the principal and shall be subject to the same interest rate as herein stipulated.[23]
and paragraph 3 of the subject promissory notes:
Interest not paid when due shall be added to, and become part of the principal
and shall likewise bear interest at the same rate.[24]
UCPB lastly avers that the application of the spouses Belusos payments in the
disputed computation does not reflect the parties agreement. The RTC deducted
the payment made by the spouses Beluso amounting to P763,693.00 from the
principal of P2,350,000.00. This was allegedly inconsistent with the Credit
Agreement, as well as with the agreement of the parties as to the facts of the
case. In paragraph 7 of the spouses Belusos Manifestation and Motion on
Proposed Stipulation of Facts and Issues vis--visUCPBs Manifestation, the
parties agreed that the amount of P763,693.00 was applied to the interest and not
to the principal, in accord with Section 3.03, Article II of the Credit Agreement on
Order of the Application of Payments, which provides:
Section 3.03 Application of Payment. Payments made by the CLIENT shall be
applied in accordance with the following order of preference:
1. Accounts receivable and other out-of-pocket expenses
2.
Front-end Fee, Origination Fee, Attorneys Fee and other expenses of
collection;
3. Penalty charges;
4. Past due interest;
5. Principal amortization/Payment in arrears;
6. Advance interest;
7. Outstanding balance; and
8. All other obligations of CLIENT to the BANK, if any.[25]
Thus, according to UCPB, the interest charges, penalty charges, and attorneys
fees had been erroneously excluded by the RTC and the Court of Appeals from
the computation of the total amount due and demandable from spouses Beluso.
The spouses Belusos defense as to all these issues is that the demand made by
UCPB is for a considerably bigger amount and, therefore, the demand should be
considered void. There being no valid demand, according to the spouses Beluso,
there would be no default, and therefore the interests and penalties would not
commence to run. As it was likewise improper to foreclose the mortgaged
properties or file a case against the spouses Beluso, attorneys fees were not
warranted.
We agree with UCPB on this score. Default commences upon judicial or
extrajudicial demand.[26] The excess amount in such a demand does not nullify
the demand itself, which is valid with respect to the proper amount. A contrary
ruling would put commercial transactions in disarray, as validity of demands would
be dependent on the exactness of the computations thereof, which are too often
contested.
There being a valid demand on the part of UCPB, albeit excessive, the spouses
Beluso are considered in default with respect to the proper amount and, therefore,
the interests and the penalties began to run at that point.
As regards the award of 12% legal interest in favor of petitioner, the RTC actually
recognized that said legal interest should be imposed, thus: There being no valid
stipulation as to interest, the legal rate of interest shall be charged.[27] It seems
that the RTC inadvertently overlooked its non-inclusion in its computation.

The spouses Beluso had even originally asked for the RTC to impose this legal
rate of interest in both the body and the prayer of its petition with the RTC:
12. Since the provision on the fixing of the rate of interest by the sole will of the
respondent Bank is null and void, only the legal rate of interest which is 12% per
annum can be legally charged and imposed by the bank, which would amount to
only about P599,000.00 since 1996 up to August 31, 1998.
xxxx
WHEREFORE, in view of the foregoing, petiitoners pray for judgment or order:
xxxx
2. By way of example for the public good against the Banks taking unfair
advantage of the weaker party to their contract, declaring the legal rate of 12% per
annum, as the imposable rate of interest up to February 28, 1999 on the loan of
2.350 million.[28]
All these show that the spouses Beluso had acknowledged before the RTC their
obligation to pay a 12% legal interest on their loans. When the RTC failed to
include the 12% legal interest in its computation, however, the spouses Beluso
merely defended in the appellate courts this non-inclusion, as the same was
beneficial to them. We see, however, sufficient basis to impose a 12% legal
interest in favor of petitioner in the case at bar, as what we have voided is merely
the stipulated rate of interest and not the stipulation that the loan shall earn
interest.
We must likewise uphold the contract stipulation providing the compounding of
interest. The provisions in the Credit Agreement and in the promissory notes
providing for the compounding of interest were neither nullified by the RTC or the
Court of Appeals, nor assailed by the spouses Beluso in their petition with the
RTC. The compounding of interests has furthermore been declared by this Court
to be legal. We have held in Tan v. Court of Appeals,[29] that:
Without prejudice to the provisions of Article 2212, interest due and unpaid shall
not earn interest. However, the contracting parties may by stipulation capitalize
the interest due and unpaid, which as added principal, shall earn new interest.
As regards the imposition of penalties, however, although we are likewise
upholding the imposition thereof in the contract, we find the rate iniquitous. Like in
the case of grossly excessive interests, the penalty stipulated in the contract may
also be reduced by the courts if it is iniquitous or unconscionable.[30]
We find the penalty imposed by UCPB, ranging from 30.41% to 36%, to be
iniquitous considering the fact that this penalty is already over and above the
compounded interest likewise imposed in the contract. If a 36% interest in itself
has been declared unconscionable by this Court,[31] what more a 30.41% to 36%
penalty, over and above the payment of compounded interest? UCPB itself must
have realized this, as it gave us a sample computation of the spouses Belusos
obligation if both the interest and the penalty charge are reduced to 12%.
As regards the attorneys fees, the spouses Beluso can actually be liable therefor
even if there had been no demand. Filing a case in court is the judicial demand
referred to in Article 1169[32] of the Civil Code, which would put the obligor in
delay.
The RTC, however, also held UCPB liable for attorneys fees in this case, as the
spouses Beluso were forced to litigate the issue on the illegality of the interest rate
provision of the promissory notes. The award of attorneys fees, it must be
recalled, falls under the sound discretion of the court.[33] Since both parties were
forced to litigate to protect their respective rights, and both are entitled to the
award of attorneys fees from the other, practical reasons dictate that we set off or
compensate both parties liabilities for attorneys fees. Therefore, instead of
awarding attorneys fees in favor of petitioner, we shall merely affirm the deletion
of the award of attorneys fees to the spouses Beluso.
In sum, we hold that spouses Beluso should still be held liable for a compounded
legal interest of 12% per annum and a penalty charge of 12% per annum. We
also hold that, instead of awarding attorneys fees in favor of petitioner, we shall
merely affirm the deletion of the award of attorneys fees to the spouses Beluso.
Annulment of the Foreclosure Sale
Properties of spouses Beluso had been foreclosed, titles to which had already
been consolidated on 19 February 2001 and 20 March 2001 in the name of UCPB,

as the spouses Beluso failed to exercise their right of redemption which expired
on 25 March 2000. The RTC, however, annulled the foreclosure of mortgage
based on an alleged incorrect computation of the spouses Belusos indebtedness.
UCPB alleges that none of the grounds for the annulment of a foreclosure sale
are present in the case at bar. Furthermore, the annulment of the foreclosure
proceedings and the certificates of sale were mooted by the subsequent issuance
of new certificates of title in the name of said bank. UCPB claims that the spouses
Belusos action for annulment of foreclosure constitutes a collateral attack on its
certificates of title, an act proscribed by Section 48 of Presidential Decree No.
1529, otherwise known as the Property Registration Decree, which provides:
Section 48. Certificate not subject to collateral attack. A certificate of title shall
not be subject to collateral attack. It cannot be altered, modified or cancelled
except in a direct proceeding in accordance with law.
The spouses Beluso retort that since they had the right to refuse payment of an
excessive demand on their account, they cannot be said to be in default for
refusing to pay the same. Consequently, according to the spouses Beluso, the
enforcement of such illegal and overcharged demand through foreclosure of
mortgage should be voided.
We agree with UCPB and affirm the validity of the foreclosure proceedings. Since
we already found that a valid demand was made by UCPB upon the spouses
Beluso, despite being excessive, the spouses Beluso are considered in default
with respect to the proper amount of their obligation to UCPB and, thus, the
property they mortgaged to secure such amounts may be
foreclosed. Consequently, proceeds of the foreclosure sale should be applied to
the extent of the amounts to which UCPB is rightfully entitled.
As argued by UCPB, none of the grounds for the annulment of a foreclosure sale
are present in this case. The grounds for the proper annulment of the foreclosure
sale are the following: (1) that there was fraud, collusion, accident, mutual mistake,
breach of trust or misconduct by the purchaser; (2) that the sale had not been
fairly and regularly conducted; or (3) that the price was inadequate and the
inadequacy was so great as to shock the conscience of the court.[34]
Liability for Violation of Truth in Lending Act
The RTC, affirmed by the Court of Appeals, imposed a fine of P26,000.00 for
UCPBs alleged violation of Republic Act No. 3765, otherwise known as the Truth
in Lending Act.
UCPB challenges this imposition, on the argument that Section 6(a) of the Truth
in Lending Act which mandates the filing of an action to recover such penalty must
be made under the following circumstances:
Section 6. (a) Any creditor who in connection with any credit transaction fails to
disclose to any person any information in violation of this Act or any regulation
issued thereunder shall be liable to such person in the amount of P100 or in an
amount equal to twice the finance charge required by such creditor in connection
with such transaction, whichever is greater, except that such liability shall not
exceed P2,000 on any credit transaction. Action to recover such penalty may be
brought by such person within one year from the date of the occurrence of the
violation, in any court of competent jurisdiction. x x x (Emphasis ours.)
According to UCPB, the Court of Appeals even stated that [a]dmittedly the
original complaint did not explicitly allege a violation of the Truth in Lending Act
and no action to formally admit the amended petition [which expressly alleges
violation of the Truth in Lending Act] was made either by [respondents] spouses
Beluso and the lower court. x x x.[35]
UCPB further claims that the action to recover the penalty for the violation of the
Truth in Lending Act had been barred by the one-year prescriptive period provided
for in the Act. UCPB asserts that per the records of the case, the latest of the
subject promissory notes had been executed on 2 January 1998, but the original
petition of the spouses Beluso was filed before the RTC on 9 February 1999,
which was after the expiration of the period to file the same on 2 January 1999.
On the matter of allegation of the violation of the Truth in Lending Act, the Court of
Appeals ruled:
Admittedly the original complaint did not explicitly allege a violation of the
Truth in Lending Act and no action to formally admit the amended petition was
made either by [respondents] spouses Beluso and the lower court. In such
transactions, the debtor and the lending institutions do not deal on an equal footing

and this law was intended to protect the public from hidden or undisclosed charges
on their loan obligations, requiring a full disclosure thereof by the lender. We find
that its infringement may be inferred or implied from allegations that when
[respondents] spouses Beluso executed the promissory notes, the interest rate
chargeable thereon were left blank. Thus, [petitioner] UCPB failed to discharge its
duty to disclose in full to [respondents] Spouses Beluso the charges applicable on
their loans.[36]
We agree with the Court of Appeals. The allegations in the complaint, much more
than the title thereof, are controlling. Other than that stated by the Court of
Appeals, we find that the allegation of violation of the Truth in Lending Act can also
be inferred from the same allegation in the complaint we discussed earlier:
b.) In unilaterally imposing an increased interest rates (sic) respondent bank has
relied on the provision of their promissory note granting respondent bank the
power to unilaterally fix the interest rates, which rate was not determined in the
promissory note but was left solely to the will of the Branch Head of the
respondent Bank, x x x.[37]
The allegation that the promissory notes grant UCPB the power to unilaterally fix
the interest rates certainly also means that the promissory notes do not contain a
clear statement in writing of (6) the finance charge expressed in terms of pesos
and centavos; and (7) the percentage that the finance charge bears to the amount
to be financed expressed as a simple annual rate on the outstanding unpaid
balance of the obligation.[38] Furthermore, the spouses Belusos prayer for such
other reliefs just and equitable in the premises should be deemed to include the
civil penalty provided for in Section 6(a) of the Truth in Lending Act.
UCPBs contention that this action to recover the penalty for the violation of the
Truth in Lending Act has already prescribed is likewise without merit. The penalty
for the violation of the act is P100 or an amount equal to twice the finance charge
required by such creditor in connection with such transaction, whichever is greater,
except that such liability shall not exceed P2,000.00 on any credit
transaction.[39] As this penalty depends on the finance charge required of the
borrower, the borrowers cause of action would only accrue when such finance
charge is required. In the case at bar, the date of the demand for payment of the
finance charge is 2 September 1998, while the foreclosure was made on 28
December 1998. The filing of the case on 9 February 1999 is therefore within the
one-year prescriptive period.

In the case at bar, therefore, the civil action to recover the penalty under Section
6(a) of the Truth in Lending Act had been jointly instituted with (1) the action to
declare the interests in the promissory notes void, and (2) the action to declare the
foreclosure void. This joinder is allowed under Rule 2, Section 5 of the Rules of
Court, which provides:
SEC. 5. Joinder of causes of action.A party may in one pleading assert, in the
alternative or otherwise, as many causes of action as he may have against an
opposing party, subject to the following conditions:
(a)
The party joining the causes of action shall comply with the rules on
joinder of parties;
(b)
The joinder shall not include special civil actions or actions governed by
special rules;
(c)
Where the causes of action are between the same parties but pertain to
different venues or jurisdictions, the joinder may be allowed in the Regional Trial
Court provided one of the causes of action falls within the jurisdiction of said court
and the venue lies therein; and
(d)
Where the claims in all the causes of action are principally for recovery of
money, the aggregate amount claimed shall be the test of jurisdiction.
In attacking the RTCs disposition on the violation of the Truth in Lending Act
since the same was not alleged in the complaint, UCPB is actually asserting a
violation of due process. Indeed, due process mandates that a defendant should
be sufficiently apprised of the matters he or she would be defending himself or
herself against. However, in the 1 July 1999 pre-trial brief filed by the spouses
Beluso before the RTC, the claim for civil sanctions for violation of the Truth in
Lending Act was expressly alleged, thus:
Moreover, since from the start, respondent bank violated the Truth in Lending Act
in not informing the borrower in writing before the execution of the Promissory
Notes of the interest rate expressed as a percentage of the total loan, the
respondent bank instead is liable to pay petitioners double the amount the bank is
charging petitioners by way of sanction for its violation.[41]
In the same pre-trial brief, the spouses Beluso also expressly raised the following
issue:

UCPB argues that a violation of the Truth in Lending Act, being a criminal offense,
cannot be inferred nor implied from the allegations made in the
complaint.[40] Pertinent provisions of the Act read:

b.) Does the expression indicative rate of DBD retail (sic) comply with the Truth in
Lending Act provision to express the interest rate as a simple annual percentage
of the loan?[42]

Sec. 6. (a) Any creditor who in connection with any credit transaction fails to
disclose to any person any information in violation of this Act or any regulation
issued thereunder shall be liable to such person in the amount of P100 or in an
amount equal to twice the finance charge required by such creditor in connection
with such transaction, whichever is the greater, except that such liability shall not
exceed P2,000 on any credit transaction. Action to recover such penalty may be
brought by such person within one year from the date of the occurrence of the
violation, in any court of competent jurisdiction. In any action under this
subsection in which any person is entitled to a recovery, the creditor shall be liable
for reasonable attorneys fees and court costs as determined by the court.

These assertions are so clear and unequivocal that any attempt of UCPB to feign
ignorance of the assertion of this issue in this case as to prevent it from putting up
a defense thereto is plainly hogwash.

xxxx
(c)
Any person who willfully violates any provision of this Act or any
regulation issued thereunder shall be fined by not less than P1,000 or more
than P5,000 or imprisonment for not less than 6 months, nor more than one year
or both.
As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act, the
violation of the said Act gives rise to both criminal and civil liabilities. Section 6(c)
considers a criminal offense the willful violation of the Act, imposing the penalty
therefor of fine, imprisonment or both. Section 6(a), on the other hand, clearly
provides for a civil cause of action for failure to disclose any information of the
required information to any person in violation of the Act. The penalty therefor is
an amount of P100 or in an amount equal to twice the finance charge required by
the creditor in connection with such transaction, whichever is greater, except that
the liability shall not exceed P2,000.00 on any credit transaction. The action to
recover such penalty may be instituted by the aggrieved private person separately
and independently from the criminal case for the same offense.

Petitioner further posits that it is the Metropolitan Trial Court which has jurisdiction
to try and adjudicate the alleged violation of the Truth in Lending Act, considering
that the present action allegedly involved a single credit transaction as there was
only one Promissory Note Line.
We disagree. We have already ruled that the action to recover the penalty under
Section 6(a) of the Truth in Lending Act had been jointly instituted with (1) the
action to declare the interests in the promissory notes void, and (2) the action to
declare the foreclosure void. There had been no question that the above actions
belong to the jurisdiction of the RTC. Subsection (c) of the above-quoted Section
5 of the Rules of Court on Joinder of Causes of Action provides:
(c) Where the causes of action are between the same parties but pertain to
different venues or jurisdictions, the joinder may be allowed in the Regional Trial
Court provided one of the causes of action falls within the jurisdiction of said court
and the venue lies therein.
Furthermore, opening a credit line does not create a credit transaction of loan
or mutuum, since the former is merely a preparatory contract to the contract of
loan ormutuum. Under such credit line, the bank is merely obliged, for the
considerations specified therefor, to lend to the other party amounts not exceeding
the limit provided. The credit transaction thus occurred not when the credit line
was opened, but rather when the credit line was availed of. In the case at bar, the
violation of the Truth in Lending Act allegedly occurred not when the parties
executed the Credit Agreement, where no interest rate was mentioned, but when
the parties executed the promissory notes, where the allegedly offending interest
rate was stipulated.

UCPB further argues that since the spouses Beluso were duly given copies of the
subject promissory notes after their execution, then they were duly notified of the
terms thereof, in substantial compliance with the Truth in Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides
that the disclosure statement must be furnished prior to the consummation of the
transaction:
SEC. 4. Any creditor shall furnish to each person to whom credit is
extended, prior to the consummation of the transaction, a clear statement in
writing setting forth, to the extent applicable and in accordance with rules and
regulations prescribed by the Board, the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2)
(4) the charges, individually itemized, which are paid or to be paid by such
person in connection with the transaction but which are not incident to the
extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.
The rationale of this provision is to protect users of credit from a lack of awareness
of the true cost thereof, proceeding from the experience that banks are able to
conceal such true cost by hidden charges, uncertainty of interest rates, deduction
of interests from the loaned amount, and the like. The law thereby seeks to
protect debtors by permitting them to fully appreciate the true cost of their loan, to
enable them to give full consent to the contract, and to properly evaluate their
options in arriving at business decisions. Upholding UCPBs claim of substantial
compliance would defeat these purposes of the Truth in Lending Act. The belated
discovery of the true cost of credit will too often not be able to reverse the ill effects
of an already consummated business decision.
In addition, the promissory notes, the copies of which were presented to the
spouses Beluso after execution, are not sufficient notification from UCPB. As
earlier discussed, the interest rate provision therein does not sufficiently indicate
with particularity the interest rate to be applied to the loan covered by said
promissory notes.
Forum Shopping
UCPB had earlier moved to dismiss the petition (originally Case No. 99-314 in
RTC, Makati City) on the ground that the spouses Beluso instituted another case
(Civil Case No. V-7227) before the RTC of Roxas City, involving the same parties
and issues. UCPB claims that while Civil Case No. V-7227 initially appears to be a
different action, as it prayed for the issuance of a temporary restraining order
and/or injunction to stop foreclosure of spouses Belusos properties, it poses
issues which are similar to those of the present case.[43] To prove its point,
UCPB cited the spouses Belusos Amended Petition in Civil Case No. V-7227,
which contains similar allegations as those in the present case. The RTC of
Makati denied UCPBs Motion to Dismiss Case No. 99-314 for lack of
merit. Petitioner UCPB raised the same issue with the Court of Appeals, and is
raising the same issue with us now.
The spouses Beluso claim that the issue in Civil Case No. V-7227 before the RTC
of Roxas City, a Petition for Injunction Against Foreclosure, is the propriety of the
foreclosure before the true account of spouses Beluso is determined. On the
other hand, the issue in Case No. 99-314 before the RTC of Makati City is the
validity of the interest rate provision. The spouses Beluso claim that Civil Case
No. V-7227 has become moot because, before the RTC of Roxas City could act
on the restraining order, UCPB proceeded with the foreclosure and auction
sale. As the act sought to be restrained by Civil Case No. V-7227 has already
been accomplished, the spouses Beluso had to file a different action, that of
Annulment of the Foreclosure Sale, Case No. 99-314 with the RTC, Makati City.
Even if we assume for the sake of argument, however, that only one cause of
action is involved in the two civil actions, namely, the violation of the right of the

spouses Beluso not to have their property foreclosed for an amount they do not
owe, the Rules of Court nevertheless allows the filing of the second action. Civil
Case No. V-7227 was dismissed by the RTC of Roxas City before the filing of
Case No. 99-314 with the RTC of Makati City, since the venue of litigation as
provided for in the Credit Agreement is inMakati City.
Rule 16, Section 5 bars the refiling of an action previously dismissed only in the
following instances:
SEC. 5. Effect of dismissal.Subject to the right of appeal, an order granting a
motion to dismiss based on paragraphs (f), (h) and (i) of section 1 hereof shall bar
the refiling of the same action or claim. (n)
Improper venue as a ground for the dismissal of an action is found in paragraph
(c) of Section 1, not in paragraphs (f), (h) and (i):
SECTION 1. Grounds.Within the time for but before filing the answer to the
complaint or pleading asserting a claim, a motion to dismiss may be made on any
of the following grounds:
(a) That the court has no jurisdiction over the person of the defending party;
(b) That the court has no jurisdiction over the subject matter of the claim;
(c) That venue is improperly laid;
(d) That the plaintiff has no legal capacity to sue;
(e) That there is another action pending between the same parties for the same
cause;
(f) That the cause of action is barred by a prior judgment or by the statute of
limitations;
(g) That the pleading asserting the claim states no cause of action;
(h) That the claim or demand set forth in the plaintiffs pleading has been paid,
waived, abandoned, or otherwise extinguished;
(i) That the claim on which the action is founded is unenforceable under the
provisions of the statute of frauds; and
(j) That a condition precedent for filing the claim has not been complied
with.[44] (Emphases supplied.)
When an action is dismissed on the motion of the other party, it is only when the
ground for the dismissal of an action is found in paragraphs (f), (h) and (i) that the
action cannot be refiled. As regards all the other grounds, the complainant is
allowed to file same action, but should take care that, this time, it is filed with the
proper court or after the accomplishment of the erstwhile absent condition
precedent, as the case may be.
UCPB, however, brings to the attention of this Court a Motion for Reconsideration
filed by the spouses Beluso on 15 January 1999 with the RTC of Roxas City,
which Motion had not yet been ruled upon when the spouses Beluso filed Civil
Case No. 99-314 with the RTC of Makati. Hence, there were allegedly two
pending actions between the same parties on the same issue at the time of the
filing of Civil Case No. 99-314 on 9 February 1999 with the RTC of Makati. This
will still not change our findings. It is indeed the general rule that in cases where
there are two pending actions between the same parties on the same issue, it
should be the later case that should be dismissed. However, this rule is not
absolute. According to this Court in Allied Banking Corporation v. Court of
Appeals[45]:
In these cases, it is evident that the first action was filed in anticipation of the filing
of the later action and the purpose is to preempt the later suit or provide a basis for
seeking the dismissal of the second action.
Even if this is not the purpose for the filing of the first action, it may nevertheless
be dismissed if the later action is the more appropriate vehicle for the ventilation of
the issues between the parties. Thus, in Ramos v. Peralta, it was held:
[T]he rule on litis pendentia does not require that the later case should yield to the
earlier case. What is required merely is that there be another pending action, not a
prior pending action. Considering the broader scope of inquiry involved in Civil
Case No. 4102 and the location of the property involved, no error was committed
by the lower court in deferring to the Bataan court's jurisdiction.

Given, therefore, the pendency of two actions, the following are the relevant
considerations in determining which action should be dismissed: (1) the date of
filing, with preference generally given to the first action filed to be retained; (2)
whether the action sought to be dismissed was filed merely to preempt the later
action or to anticipate its filing and lay the basis for its dismissal; and (3) whether
the action is the appropriate vehicle for litigating the issues between the parties.
In the case at bar, Civil Case No. V-7227 before the RTC of Roxas City was an
action for injunction against a foreclosure sale that has already been held, while
Civil Case No. 99-314 before the RTC of Makati City includes an action for the
annulment of said foreclosure, an action certainly more proper in view of the
execution of the foreclosure sale. The former case was improperly filed
in Roxas City, while the latter was filed in Makati City, the proper venue of the
action as mandated by the Credit Agreement. It is evident, therefore, that Civil
Case No. 99-314 is the more appropriate vehicle for litigating the issues between
the parties, as compared to Civil Case No. V-7227. Thus, we rule that the RTC of
Makati City was not in error in not dismissing Civil Case No. 99-314.
WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED with the
following MODIFICATIONS:
1.
In addition to the sum of P2,350,000.00 as determined by the
courts a quo, respondent spouses Samuel and Odette Beluso are also liable for
the following amounts:
a. Penalty of 12% per annum on the amount due[46] from the date of demand;
and
b. Compounded legal interest of 12% per annum on the amount due[47] from date
of demand;
2.
The following amounts shall be deducted from the liability of the
spouses Samuel and Odette Beluso:
a. Payments made by the spouses in the amount of P763,692.00. These
payments shall be applied to the date of actual payment of the following in the
order that they are listed, to wit:
i.

penalty charges due and demandable as of the time of payment;

ii.

interest due and demandable as of the time of payment;

iii.

principal amortization/payment in arrears as of the time of payment;

iv.

outstanding balance.

b. Penalty under Republic Act No. 3765 in the amount of P26,000.00. This
amount shall be deducted from the liability of the spouses Samuel and Odette
Beluso on9 February 1999 to the following in the order that they are listed, to wit:
i.

G.R. No. 161397

DEVELOPMENT BANK OFTHE PHILIPPINES,
Petitioner,
- versus FELIPE P. ARCILLA, JR.,
Respondent. June 30,
DECISION
CALLEJO, SR., J.:
Atty. Felipe P. Arcilla, Jr. was employed by the Development Bank of the
Philippines (DBP) in October 1981. About five or six months thereafter, he was
assigned to the legal department, and thereafter, decided to avail of a loan under
the Individual Housing Project (IHP) of the bank.[1] On September 12, 1983, DBP
and Arcilla executed a Deed of Conditional Sale[2] over a parcel of land, as well as
the house to be constructed thereon, for the price of P160,000.00. Arcilla
borrowed the said amount from DBP for the purchase of the lot and the
construction of a residential building thereon. He obliged himself to pay the loan in
25 years, with a monthly amortization of P1,417.91, with 9% interest per annum, to
be deducted from his monthly salary.[3]
DBP obliged itself to transfer the title of the property upon the payment of the loan,
including any increments thereof. It was also agreed therein that if Arcilla availed
of optional retirement, he could elect to continue paying the loan, provided that the
loan/amount would be converted into a regular real estate loan account with the
prevailing interest assigned on real estate loans, payable within the remaining
term of the loan account.[4]
Arcilla was notified of the periodic release of his loan.[5] During the period of July
1984 to December 31, 1986, the monthly amortizations for the said account were
deducted from his monthly salary, for which he was issued receipts.[6]
The monthly amortization was increased to P1,468.92 in November 1984,
and to P1,691.51 beginning January 1985. However, Arcilla opted to resign from
the bank in December 1986. Conformably with the Deed of Conditional Sale, the
bank informed him, on June 11, 1987, that the balance of his loan account with the
bank had been converted to a regular housing loan, thus:
Amount converted
to PH Loan

Interest
Rate

Remaining
Term

P 155,218.79 1

9%

22 yrs. & 6 mos

Monthly
Amortization

P1,342.72
6,802.45 2

9%

21 yrs. &

59.41

10 mos.
24,342.91 - 3

9%

22 yrs.

212.07

penalty charges due and demandable as of time of payment;

ii.

interest due and demandable as of the time of payment;

iii.

principal amortization/payment in arrears as of the time of payment;

iv.

outstanding balance.

3.
The
foreclosure
of
mortgage
is
hereby
declared
VALID. Consequently, the amounts which the Regional Trial Court and the Court
of Appeals ordered respondents to pay, as modified in this Decision, shall be
deducted from the proceeds of the foreclosure sale.
SO ORDERED.

On July 24, 1987, Arcilla signed three Promissory Notes[8] for the total amount
of P186,364.15. He was also obliged to pay service charge and interests, as
follows:
a.1 On the amount advanced or balance thereof that remains unpaid for 30
days* or less:
i. Interest on advances at 7% p.a. over DBPs borrowing cost:
ii. No 2% service charge
iii. No 8% penalty charge
a.2 On the amount advanced or balance thereof that remains unpaid for more than
30 days:
i. Interest on the advance at 7% p.a. ]
over DBPs borrowing cost;
]
ii. One time 2% service charge
]-- To be computed from
iii. Interest on the service charge
] the start of the 30-day

iv. 8% penalty charge on the balances ] period of the advances and service
charge.[9]
Arcilla also agreed to pay to DBP the following:
*Insurance Premiums - 30-day period to be computed from date of advances
Other Advances
- 30-day period to be computed from date of notification
b.
Taxes
b.1
One time service charge
2% of the amount advanced
b.2
Interest and penalty charge
Interest 7% p.a. over borrowing cost
Penalty charge 8% p.a. if unpaid after 30 days from date of advance
i. Interest of the advance at ]
7% p.a. over DBPs
]
borrowing costs;
] -- To be computed from start
ii One time 2% service charge ]
of 30-day period
iii Interest on the service charge]
iv. 8% penalty charge on the ]
balances of the advance and ]
service charge.
]
*Insurance Premiums - 30-day period to be computed from date of
advances.
Other Advances
- 30-day period to be computed from date of notification.
However, Arcilla also agreed to the reservation by the DBP of its right to increase
(with notice to him) the rate of interest on the loan, as well as all other fees and
charges on loans and advances pursuant to such policy as it may adopt from time
to time during the period of the loan; Provided, that the rate of interest on the loan
shall be reduced by law or by the Monetary Board; Provided, further, that the
adjustment in the rate of interest shall take effect on or after the effectivity of the
increase or decrease in the maximum rate of interest.[10]
Upon his request, DBP agreed to grant Arcilla an additional cash advance
of P32,000.00. Thereafter, on May 23, 1984, a Supplement to the Conditional
Sale Agreement was executed in which DBP and Arcilla agreed on the following
terms of the loan:

14. That to further bend the back of the plaintiff, defendant rescinded the
subject deed of conditional sale on 4 December 1990 without giving due notice to
plaintiff;
15. That much later, on 10 October 1993, plaintiff received a letter from defendant
dated 19 September 1993, informing plaintiff that the subject deed of conditional
sale was already rescinded on 4 December 1990 (xerox copy of the same is
hereto attached and made an integral part hereof as Annex C;[17]
In its answer to the complaint, the DBP alleged that it substantially complied
with R.A. No. 3765 and CB Circular No. 158 because the details required in said
statements were particularly disclosed in the promissory notes, deed of conditional
sale and the required notices sent to Arcilla. In any event, its failure to comply
strictly with R.A. No. 3765 did not affect the validity and enforceability of the
subject contracts or transactions. DBP interposed a counterclaim for the
possession of the property.
On April 27, 2001, the trial court rendered judgment in favor of Arcilla and nullified
the notarial rescission of the deeds executed by the parties. The fallo of the
decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the
plaintiff and against the defendant. Defendant is hereby directed to furnish the
disclosure statement to the plaintiff within five (5) days upon receipt hereof in the
manner and form provided by R.A. No. 3765 and submit to this Court for approval
the total obligation of the plaintiff as of this date, within ten (10) days from receipt
of this order. The Notarial Rescission (Exh. 16) dated November 27, 1990 is
hereby declared null and void. Costs against the defendant.
SO ORDERED.[18]
DBP appealed the decision to the Court of Appeals (CA) wherein it made the
following assignment of errors:
4.1. The trial court erred in ruling that the provision of the details of the loan
without the issuance of a Disclosure Statement is not compliance with the Truth
in Lending Act;
4.2. The trial court erred in declaring the Notarial Rescission null and void; and
4.3. The trial court erred in denying DBPs counterclaims for recovery of
possession, back rentals and litigation expenses.[19]

The additional advance was, thus, consolidated to the outstanding balance

of Arcillas original advance, payable within the remaining term thereof at 9% per
annum. However, he failed to pay his loan account, advances, penalty charges
and interests which, as of October 31, 1990,
amounted
to P241,940.93.[12] DBP rescinded the Deed of Conditional Sale by notarial act
on November 27, 1990.[13] Nevertheless, it wrote Arcilla, on January 3, 1992,
giving him until October 24, 1992, within which to repurchase the property upon
full payment of the current appraisal or updated total, whichever is lesser; in case
of failure to do so, the property would be advertised for bidding.[14] DBP
reiterated the said offer on October 7, 1992.[15] Arcilla failed to
respond. Consequently, the property was advertised for sale at public bidding on
February 14, 1994.[16]
Arcilla filed a complaint against DBP with the Regional Trial Court (RTC) of
Antipolo, Rizal, on February 21, 1994. He alleged that DBP failed to furnish him
with the disclosure statement required by Republic Act (R.A.) No. 3765 and
Central Bank (CB) Circular No. 158 prior to the execution of the deed of
conditional sale and the conversion of his loan account with the bank into a regular
housing loan account. Despite this, DBP immediately deducted the account from
his salary as early as 1984. Moreover, the bank applied its own formula and
imposed its usurious interests, penalties and charges on his loan account and
advances. He further alleged, thus:
13. That when plaintiff could no longer cope-up with defendants illegal and
usurious impositions, the DBP unilaterally increased further the rate of interest,
without notice to the latter, and heaped-up usurious interests, penalties and
charges;

On May 29, 2003, the CA rendered judgment setting aside and reversing the
decision of the RTC. In ordering the dismissal of the complaint, the appellate court
ruled that DBP substantially complied with R.A. No. 3765 and CB Circular No. 158.
Arcilla filed a motion for reconsideration of the decision. For its part, DBP filed a
motion for partial reconsideration of the decision, praying that Arcilla be ordered to
vacate the property. However, the appellate court denied both motions.
The parties filed separate petitions for review on certiorari with this Court. The
first petition, entitled Development Bank of the Philippines v. Court of
Appeals, was docketed as G.R. No. 161397; the second petition, entitled Felipe
Arcilla, Jr. v. Court of Appeals, was docketed as G.R. No. 161426. The Court
resolved to consolidate the two cases.
The issues raised in the two petitions are the following: a) whether or not
petitioner DBP complied with the disclosure requirement of R.A. No. 3765 and CB
Circular No. 158, Series of 1978, in the execution of the deed of conditional sale,
the supplemental deed of conditional sale, as well as the promissory notes; and b)
whether or not respondent Felipe Arcilla, Jr. is mandated to vacate the property
and pay rentals for his occupation thereof after the notarial rescission of the deed
of conditional sale was rescinded by notarial act, as well as the supplement
executed by DBP.
On the first issue, Arcilla avers that under R.A. No. 3765 and CB Circular No.
158, the DBP, as the creditor bank, was mandated to furnish him with the requisite
information in such form prescribed by the Central Bank before the commutation of
the loan transaction. He avers that the disclosure of the details of the loan
contained in the deed of conditional sale and the supplement thereto, the
promissory notes and release sheet, do not constitute substantial compliance with
the law and the CB Circular. He avers that the required disclosure did not include
the following:
[T]he percentage of Finance Charges to Total Amount Financed
(Computed in accordance with Sec. 2(i) of CB Circular 158; the Additional Charges

in case certain stipulations in the contract are not met by the debtor; Total NonFinance Charges; Total Finance Charges, Effective Interest Rate, etc. [20]
Arcilla further posits that the failure of DBP to comply with its obligation
under R.A. No. 3765 and CB Circular No. 158 forecloses its right to rescind the
transaction between them, and to demand compliance of his obligation arising
from said transaction. Moreover, the bank had no right to deduct the monthly
amortizations from his salary without first complying with the mandate of R.A. No.
3765.
DBP, on the other hand, avers that all the information required by R.A. No. 3765
was already contained in the loan transaction documents. It posits that even if it
failed to comply strictly with the disclosure requirement of R.A. No. 3765,
nevertheless, under Section 6(b) of the law, the validity and enforceability of any
action or transaction is not affected. It asserts that Arcilla was estopped from
invoking R.A. No. 3765 because he failed to demand compliance with R.A. No.
3765 from the bank before the consummation of the loan transaction, until the time
his complaint was filed with the trial court.
In its petition in G.R. No. 161397, DBP asserts that the RTC erred in not
rendering judgment on its counterclaim for the possession of the subject property,
and the liability of Arcilla for rentals while in the possession of the property after
the notarial rescission of the deeds of conditional sale. For his part, Arcilla (in
G.R. No. 161426) insists that the respondent failed to comply with its obligation
under R.A. No. 3765; hence, the notarial rescission of the deed of conditional sale
and the supplement thereof was null and void. Until DBP complies with its
obligation, he is not obliged to comply with his.
The petition of Arcilla has no merit.
Section 1 of R.A. No. 3765 provides that prior to the consummation of a
loan transaction, the bank, as creditor, is obliged to furnish a client with a clear
statement, in writing, setting forth, to the extent applicable and in accordance with
the rules and regulations prescribed by the Monetary Board of the Central Bank of
the Philippines, the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such person
in connection with the transaction but which are not incident to the extension of
credit;
(5) the total amount to be financed;
(6) the finance charges expressed in terms of pesos and centavos; and
(7) the percentage that the finance charge bears to the total amount to be
financed expressed as a simple annual rate on the outstanding unpaid balance of
the obligation.
Under Circular No. 158 of the Central Bank, the information required by R.A. No.
3765 shall be included in the contract covering the credit transaction or any other
document to be acknowledged and signed by the debtor, thus:
The contract covering the credit transaction, or any other document to be
acknowledged and signed by the debtor, shall indicate the above seven items of
information. In addition, the contract or document shall specify additional charges,
if any, which will be collected in case certain stipulations in the contract are not
met by the debtor.
Furthermore, the contract or document shall specify additional charges, if any,
which will be collected in case certain stipulations in the contract are not met by
the debtor.[21]
If the borrower is not duly informed of the data required by the law prior to the
consummation of the availment or drawdown, the lender will have no right to
collect such charge or increases thereof, even if stipulated in the promissory
note.[22] However, such failure shall not affect the validity or enforceability of any
contract or transaction.[23]
In the present case, DBP failed to disclose the requisite information in the
disclosure statement form authorized by the Central Bank, but did so in the loan

transaction documents between it and Arcilla. There is no evidence on record that

DBP sought to collect or collected any interest, penalty or other charges, from
Arcilla other than those disclosed in the said deeds/documents.
The Court is convinced that Arcillas claim of not having been furnished the
data/information required by R.A. No. 3765 and CB Circular No. 158 was but an
afterthought. Despite the notarial rescission of the conditional sale in 1990, and
DBPs subsequent repeated offers to repurchase the property, the latter
maintained his silence. Arcilla filed his complaint only on February 21, 1994, or
four years after the said notarial rescission. The Court finds and so holds that the
following findings and ratiocinations of the CA are correct:
After a careful perusal of the records, We find that the appellee had been
sufficiently informed of the terms and the requisite charges necessarily included in
the subject loan. It must be stressed that the Truth in Lending Act (R.A. No.
3765), was enacted primarily to protect its citizens from a lack of awareness of
the true cost of credit to the user by using a full disclosure of such cost with a view
of preventing the uninformed use of credit to the detriment of the national
economy (Emata vs. Intermediate Appellate Court, 174, SCRA 464 [1989]; Sec.
2, R.A. No. 3765). Contrary to appellees claim that he was not sufficiently
informed of the details of the loan, the records disclose that the required
informations were readily available in the three (3) promissory notes he executed.
Precisely, the said promissory notes were executed to apprise appellee of the
remaining balance on his loan when the same was converted into a regular
housing loan. And on its face, the promissory notes signed by no less than the
appellee readily shows all the data required by the Truth in Lending Act (R.A. No.
3765).
Apropos, We agree with the appellant that appellee, a lawyer, would not be
so gullible or negligent as to sign documents without knowing fully well the legal
implications and consequences of his actions, and that appellee was a former
employee of appellant. As such employee, he is as well presumed knowledgeable
with matters relating to appellants business and fully cognizant of the terms of the
loan he applied for, including the charges that had to be paid.
It might have been different if the borrower was, say, an ordinary employee eager
to buy his first house and is easily lured into accepting onerous terms so long as
the same is payable on installments. In such cases, the Court would be disposed
to be stricter in the application of the Truth in Lending Act, insisting that the
borrower be fully informed of what he is entering into. But in the case at bar,
considering appellees education and training, We must hold, in the light of the
evidence at hand, that he was duly informed of the necessary charges and fully
understood their implications and effects. Consequently, the trial courts annulment
of the rescission anchored on this ground was unjustified.[24]
Anent the prayer of DBP to order Arcilla to vacate the property and pay rentals
therefor from 1990, a review of the records has shown that it failed to adduce
evidence on the reasonable amount of rentals for Arcillas occupancy of the
property. Hence, the Court orders a remand of the case to the court of origin, for
the parties to adduce their respective evidence on the banks counterclaim.
IN LIGHT OF ALL THE FOREGOING, the petition in G.R. No. 161426
is DENIED for
lack
of
merit.
The
petition
in
G.R.
No.
161397is PARTIALLY GRANTED. The case ishereby REMANDED to
the
Regional Trial Court of Antipolo, Rizal, Branch 73, for it to resolve the counterclaim
of the Development Bank of the Philippines for possession of the property, and for
the reasonable rentals for Felipe P. Arcilla, Jr.s occupancy thereof after the
notarial rescission of the Deed of Conditional Sale in 1990.
Costs against petitioner Felipe P. Arcilla, Jr.SO ORDERED.

G.R. No. L-30817 September 29, 1972

DOMINADOR DIZON, doing business under the firm name "Pawnshop of
Dominador
Dizon", petitioner,
vs.
LOURDES G. SUNTAY, respondent.
FERNANDO, J.:p
In essence there is nothing novel in this petition for review of a decision of the
Court of Appeals affirming a lower court judgment sustaining the right of an owner
of a diamond ring, respondent Lourdes G. Suntay, as against the claim of
petitioner Dominador Dizon, who owns and operates a pawnshop. The diamond
ring was turned over to a certain Clarita R. Sison, for sale on commission, along
with other pieces of jewelry of respondent Suntay. It was then pledged to
petitioner. Since what was done was violative of the terms of the agency, there
was an attempt on her part to recover possession thereof from petitioner, who
refused. She had to file an action then for its recovery. She was successful, as
noted above, both in the lower court and thereafter in the Court of Appeals. She
prevailed as she had in her favor the protection accorded by Article 559 of the
Civil
Code. 1 The matter was then elevated to us by petitioner. Ordinarily, our discretion
would have been exercised against giving due course to such petition for review.
The vigorous plea however, grounded on estoppel, by his counsel, Atty. Andres T.
Velarde, persuaded us to act otherwise. After a careful perusal of the respective
contentions of the parties, we fail to perceive any sufficient justification for a
departure from the literal language of the applicable codal provision as uniformly
interpreted by this Court in a number of decisions. The invocation of estoppel is
therefore unavailing. We affirm.
The statement of the case as well as the controlling facts may be found in the
Court of Appeals decision penned by Justice Perez. Thus: "Plaintiff is the owner of
a three-carat diamond ring valued at P5,500.00. On June 13, 1962, the plaintiff
and Clarita R. Sison entered into a transaction wherein the plaintiff's ring was
delivered to Clarita R. Sison for sale on commission. Upon receiving the ring,
Clarita R. Sison executed and delivered to the plaintiff the receipt ... . The plaintiff
had already previously known Clarita R. Sison as the latter is a close friend of the
plaintiff's cousin and they had frequently met each other at the place of the
plaintiff's said cousin. In fact, about one year before their transaction of June 13,
1962 took place, Clarita R. Sison received a piece of jewelry from the plaintiff to be
sold for P500.00, and when it was sold, Clarita R. Sison gave the price to the
plaintiff. After the lapse of a considerable time without Clarita R. Sison having
returned to the plaintiff the latter's ring, the plaintiff made demands on Clarita R.
Sison for the return of her ring but the latter could not comply with the demands
because, without the knowledge of the plaintiff, on June 15, 1962 or three days
after the ring above-mentioned was received by Clarita R. Sison from the plaintiff,
said ring was pledged by Melia Sison, niece of the husband of Clarita R. Sison,
evidently in connivance with the latter, with the defendant's pawnshop for
P2,600.00 ... ." 2 Then came this portion of the decision under review: "Since the
plaintiff insistently demanded from Clarita R. Sison the return of her ring, the latter
finally delivered to the former the pawnshop ticket ... which is the receipt of the
pledge with the defendant's pawnshop of the plaintiff's ring. When the plaintiff
found out that Clarita R. Sison pledged, she took steps to file a case of estafa
against the latter with the fiscal's office. Subsequently thereafter, the plaintiff,
through her lawyer, wrote a letter ... dated September 22, 1962, to the defendant
asking for the delivery to the plaintiff of her ring pledged with defendant's
pawnshop under pawnshop receipt serial-B No. 65606, dated June 15, 1962 ... .
Since the defendant refused to return the ring, the plaintiff filed the present action
with the Court of First Instance of Manila for the recovery of said ring, with
P500.00 as attorney's fees and costs. The plaintiff asked for the provisional
remedy of replevin by the delivery of the ring to her, upon her filing the requisite
bond, pending the final determination of the action. The lower court issued the writ
of replevin prayed for by plaintiff and the latter was able to take possession of the
ring during the pendency of the action upon her filing the requisite bond." 3 It was
then noted that the lower court rendered judgment declaring that plaintiff, now
respondent Suntay, had the right to the possession of the ring in question.
Petitioner Dizon, as defendant, sought to have the judgment reversed by the Court
of Appeals. It did him no good. The decision of May 19, 1969, now on review,
affirmed the decision of the lower court.
In the light of the facts as thus found by the Court of Appeals, well-nigh conclusive
on use, with the applicable law being what it is, this petition for review cannot
prosper. To repeat, the decision of the Court of Appeals stands.

1. There is a fairly recent restatement of the force and effect of the governing
codal norm in De Gracia v. Court of Appeals. 4 Thus: "The controlling provision is
Article 559 of the Civil Code. It reads thus: 'The possession of movable property
acquired in good faith is equivalent to a title. Nevertheless, one who has lost any
movable or has been unlawfully deprived thereof may recover it from the person in
possession of the same. If the possessor of a movable lost of which the owner has
been unlawfully deprived, has acquired it in good faith at a public sale, the owner
cannot obtain its return without reimbursing the price paid therefor.' Respondent
Angelina D. Guevara, having been unlawfully deprived of the diamond ring in
question, was entitled to recover it from petitioner Consuelo S. de Garcia who was
found in possession of the same. The only exception the law allows is when there
is acquisition in good faith of the possessor at a public sale, in which case the
owner cannot obtain its return without reimbursing the price. As authoritatively
interpreted in Cruz v. Pahati, the right of the owner cannot be defeated even by
proof that there was good faith in the acquisition by the possessor. There is a
reiteration of this principle in Aznar v. Yapdiangco. Thus: 'Suffice it to say in this
regard that the right of the owner to recover personal property acquired in good
faith by another, is based on his being dispossessed without his consent. The
common law principle that were one of two innocent persons must suffer by a
fraud perpetrated by another, the law imposes the loss upon the party who, by his
misplaced confidence, has enabled the fraud to be committed, cannot be applied
in a case which is covered by an express provision of the new Civil Code,
specifically Article 559. Between a common law principle and a statutory provision,
the latter must prevail in this jurisdiction." " 5
2. It must have been a recognition of the compulsion exerted by the above
authoritative precedents that must have caused petitioner to invoke the principle of
estoppel. There is clearly a misapprehension. Such a contention is devoid of any
persuasive force.
Estoppel as known to the Rules of Court 6 and prior to that to the Court of Civil
Procedure, 7 has its roots in equity. Good faith is its basis. 8 It is a response to the
demands of moral right and natural justice. 9 For estoppel to exist though, it is
indispensable that there be a declaration, act or omission by the party who is
sought to be bound. Nor is this all. It is equally a requisite that he, who would claim
the benefits of such a principle, must have altered his position, having been so
intentionally and deliberately led to comport himself thus, by what was declared or
what was done or failed to be done. If thereafter a litigation arises, the former
would not be allowed to disown such act, declaration or omission. The principle
comes into full play. It may successfully be relied upon. A court is to see to it then
that there is no turning back on one's word or a repudiation of one's act. So it has
been from our earliest decisions. As Justice Mapa pointed out in the first case, a
1905 decision, Rodriguez v. Martinez, 10 a party should not be permitted "to go
against his own acts to the prejudice of [another]. Such a holding would be
contrary to the most rudimentary principles of justice and law." 11 He is not, in the
language of Justice Torres, in Irlanda v. Pitargue, 12 promulgated in 1912,
"allowed to gainsay [his] own acts or deny rights which [he had] previously
recognized." 13 Some of the later cases are to the effect that an unqualified and
unconditional acceptance of an agreement forecloses a claim for interest not
therein provided. 14 Equally so the circumstance that about a month after the date
of the conveyance, one of the parties informed the other of his being a minor,
according to Chief Justice Paras, "is of no moment, because [the former's]
previous misrepresentation had already estopped him from disavowing the
contract. 15 It is easily understandable why, under the circumstances disclosed,
estoppel is a frail reed to hang on to. There was clearly the absence of an act or
omission, as a result of which a position had been assumed by petitioner, who if
such elements were not lacking, could not thereafter in law be prejudiced by his
belief in what had been misrepresented to him. 16 As was put by Justice Labrador,
"a person claimed to be estopped must have knowledge of the fact that his
voluntary acts would deprive him of some rights because said voluntary acts are
inconsistent with said rights."17 To recapitulate, there is this pronouncement not
so long ago, from the pen of Justice Makalintal, who reaffirmed that estoppel "has
its origin in equity and, being based on moral right and natural justice, finds
applicability wherever and whenever the special circumstances of a case so
demand." 18
How then can petitioner in all seriousness assert that his appeal finds support in
the doctrine of estoppel? Neither the promptings of equity nor the mandates of
moral right and natural justice come to his rescue. He is engaged in a business
where presumably ordinary prudence would manifest itself to ascertain whether or
not an individual who is offering a jewelry by way of a pledge is entitled to do so. If
no such care be taken, perhaps because of the difficulty of resisting opportunity for
profit, he should be the last to complain if thereafter the right of the true owner of
such jewelry should be recognized. The law for this sound reason accords the

latter protection. So it has always been since Varela v.

Finnick, 19 a 1907 decision. According to Justice Torres: "In the present case not
only has the ownership and the origin of the jewels misappropriated been
unquestionably proven but also that the accused, acting fraudulently and in bad
faith, disposed of them and pledged them contrary to agreement, with no right of
ownership, and to the prejudice of the injured party, who was thereby illegally
deprived of said jewels; therefore, in accordance with the provisions of article 464,
the owner has an absolute right to recover the jewels from the possession of
whosoever holds them, ... ." 20 There have been many other decisions to the
same effect since then. At least nine may be cited. 21 Nor could any other
outcome be expected, considering the civil code provisions both in the former
Spanish legislation 22 and in the present Code. 23 Petitioner ought to have been
on his guard before accepting the pledge in question. Evidently there was no such
precaution availed of. He therefore, has only himself to blame for the fix he is now
in. It would be to stretch the concept of estoppel to the breaking point if his
contention were to prevail. Moreover, there should have been a realization on his
part that courts are not likely to be impressed with a cry of distress emanating from
one who is in a business authorized to impose a higher rate of interest precisely
due to the greater risk assumed by him. A predicament of this nature then does
not suffice to call for less than undeviating adherence to the literal terms of a codal
provision. Moreover, while the activity he is engaged in is no doubt legal, it is not
to be lost sight of that it thrives on taking advantage of the necessities precisely of
that element of our population whose lives are blighted by extreme poverty. From
whatever angle the question is viewed then, estoppel certainly cannot be justly
invoked.
WHEREFORE, the decision of the Court of Appeals of May 19, 1969 is affirmed,
with costs against petitioner.
Concepcion, C.J., Zaldivar, Makasiar, Antonio and Esguerra, JJ., concur.
Makalintal and Barredo, JJ., took no part.
Castro, J., reserves his vote.
Separate Opinions
TEEHANKEE, J., concurring:
I concur in the main opinion of Mr. Justice Fernando, tracing and confirming the
long settled and uniform jurisprudence since 1905 based on the express statutory
provision of article 559 of our Civil Code (formerly article 464 of the old Civil Code)
that the owner "who has lost any movable or has been unlawfully deprived thereof
may recover it from the person in possession of the same," the only exception
expressly provided in the codal article being that "if the possessor of a movable
lost of which the owner has been unlawfully deprived, has acquired it in good faith
at a public sale, the owner cannot obtain its return without reimbursing the price
paid therefor." 1
Senator Tolentino's submittal in his commentaries on the Civil Code "that the
better view is to consider 'unlawfully deprived' as limited to unlawful taking, such
as theft or robbery, and should not include disposition through abuse of
confidence. Thus, if the owner has entrusted personal property to a bailee, such
as for transportation, pledge, loan or deposit, without transmitting ownership, and
the latter alienates it to a third person who acquires it in good faith, the owner
cannot recover it from such third person, "is, as he himself admits, based on the
express provision of the French Code which allows the true owner of personal
property to recover it from the possessor in good faith without reimbursement only
"if it has been stolen from him." He concedes likewise that "our Code, following the
Spanish code, uses broader language than that used in the French code" since
our Code provides that the owner who has been "unlawfully deprived" of personal
property may recover it from the possessor without reimbursement, with the sole
exception where the possessor acquired the article in good faith at a public sale. 2
He thus concedes finally that "(T)here are writers who believe that the phrase
'unlawfully deprived' in our Code does not have the same meaning as stolen in the
French code; that it is used in the general sense, and is not used in the specific
sense of deprivation by robbery or theft. Under this view, it extends to all cases
where there has been no valid transmission of ownership, including the case
where the proprietor has entrusted the thing to a borrower, depositary, or lessee
who has sold the same. It is believed that the owner in such case is undoubtedly
unlawfully deprived of his property, and may recover the same from a possessor in
good faith" (citing De Buen: 2-II Colin & Capitant 1008; 1 Bonet
234) 3 and cites the long unbroken line of decisions of the Court of Appeals and of

this Court upholding the import of the broader language of the codal article in
question.
Indeed, if our legislature had intended to narrow the scope of the term "unlawfully
deprived" to "stolen" as advocated by Tolentino, it certainly would have adopted
and used such a narrower term rather than the broad language of article 464 of
the old Spanish Civil Code with its long-established and accepted meaning in
accordance with our jurisprudence.
Petitioner's contentions at bar had long been disposed of in the Court's 1911
decision of Arenas vs. Raymundo, 4per Mr. Justice Florentino Torres, reiterating
the doctrine of the earlier cases and holding that
Even supposing that the defendant Raymundo had acted in good faith in accepting
the pledge of the jewelry in litigation, even then he would not be entitled to retain it
until the owner thereof reimburse him for the amount loaned to the embezzler,
since the said owner of the jewelry, the plaintiff, did not make any contract with the
pledgee, that would obligate him to pay the amount loaned to Perello, and the trial
record does not disclose any evidence, even circumstantial, that the plaintiff
Arenas consented to or had knowledge of the pledging of her jewelry in the
pawnshop of the defendant.
For this reason, and because Concepcion Perello was not the legitimate owner of
the jewelry which she pledged to the defendant Raymundo, for a certain sum that
she received from the latter as a loan, the contract of pledge entered into by both,
is of course, null and void, and, consequently the jewelry so pawned can not serve
as security for the payment of the sum loaned, nor can the latter be collected out
of the value of the said jewelry.
Article 1857 of the Civil Code prescribes as one of the essential requisites of the
contracts of pledge and of mortgage, that the thing pledged or mortgaged must
belong to the person who pledges or mortgages it. This essential requisite for the
contract of pledge between Perello and the defendant being absent as the former
was not the owner of the jewelry given in pledge, the contract is as devoid of value
and force as if it had not been made, and as it was executed with marked violation
of an express provision of the law, it can not confer upon the defendant any rights
in the pledged jewelry, nor impose any obligation toward him on the part of the
owner thereof, since the latter was deprived of her possession by means of the
illegal pledging of the said jewelry, a criminal act.
Between the supposed good faith of the defendant Raymundo and the undisputed
good faith of the plaintiff Arenas, the owner of the jewelry, neither law nor justice
permit that the latter, after being the victim of embezzlement, should have to
choose one of the two extremes of a dilemma, both of which, without legal ground
or reason, are injurious and prejudicial to her interests and rights, that is, she must
either lose her jewelry or pay a large sum received by the embezzler as a loan
from the defendant, when the plaintiff Arenas is not related to the latter by any
legal or contractual bond out of which legal obligations arise.
xxx xxx xxx
The business of pawnshops, in exchange for the high and onerous interest which
constitutes its enormous profits, is always exposed to the contingency of receiving
in pledge or security for the loans, jewels and other articles that have been robbed,
stolen, or embezzled from their legitimate owners; and as the owner of the
pawnshop accepts the pledging of jewelry from the first bearer who offers the
same and asks for money on it, without assuring himself whether such bearer is or
is not the owner thereof, he can not, by such procedure, expect from the law better
and more preferential protection than the owner of the jewels or other articles, who
was deprived thereof by means of a crime and is entitled to be excused by the
courts.
Antonio Matute, the owner of another pawnshop, being convinced that he was
wrong, refrained from appealing from the judgment wherein he was sentenced to
return, without redemption, to the plaintiffs, another jewel of great value which had
been pledged to him by the same Perello. He undoubtedly had in mind some of
the previous decisions of this court, one of which was against himself.
By the same token, the contention that the owner may recover the lost article of
which he has been unlawfully deprived without reimbursement of the sum received
by the embezzler from the pawnshop only after a criminal conviction of the
embezzler, is to add a requirement that is not in the codal article and to unduly
prejudice the victim of embezzlement, as pointed out by the Court in
Arenas, supra.

The civil action that the owner must resort to for the recovery of his personal
property of which he has been unlawfully deprived as against the possessor
(where the latter refuses to honor the claim, presumably on same valid doubts as
to the genuineness of the claim) gives the possessor every adequate protection
and opportunity to contest the owner's claim of recovery. The owner must therein
establish by competent evidence his lawful claim, and show to the court's
satisfaction his lawful ownership of the article claimed and that he had been
unlawfully deprived thereof.
I therefore find no reason to set aside the long settled interpretation given by our
jurisprudence to article 559 (formerly article 464) of our Civil Code in accordance
with its clear and unambiguous language, as reaffirmed in the case at bar.