Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 74886 December 8, 1992
PRUDENTIAL BANK, petitioner,
vs.
INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, INC. and
ANACLETO R. CHI, respondents.

Upon the arrival of the machineries, the Prudential Bank indorsed

the shipping documents to the defendant-appellant which
accepted delivery of the same. To enable the defendant-appellant
to take delivery of the machineries, it executed, by prior
arrangement with the Prudential Bank, a trust receipt which was
signed by Anacleto R. Chi in his capacity as President (sic) of
defendant-appellant company (Exhibit C, Ibid., p. 13).
At the back of the trust receipt is a printed form to be
accomplished by two sureties who, by the very terms and
conditions thereof, were to be jointly and severally liable to the
Prudential Bank should the defendant-appellant fail to pay the
total amount or any portion of the drafts issued by Nissho and
paid for by Prudential Bank. The defendant-appellant was able to
take delivery of the textile machineries and installed the same at
its factory site at 69 Obudan Street, Quezon City.

DAVIDE, JR., J.:

Petitioner seeks to review and set aside the decision 1 of public respondent;
Intermediate Appellate Court (now Court of Appeals), dated 10 March 1986, in ACG.R. No. 66733 which affirmed in toto the 15 June 1978 decision of Branch 9
(Quezon City) of the then Court of First Instance (now Regional Trial Court) of Rizal
in Civil Case No. Q-19312. The latter involved an action instituted by the petitioner
for the recovery of a sum of money representing the amount paid by it to the
Nissho Company Ltd. of Japan for textile machinery imported by the defendant, now
private respondent, Philippine Rayon Mills, Inc. (hereinafter Philippine Rayon),
represented by co-defendant Anacleto R. Chi.
The facts which gave rise to the instant controversy are summarized by the public
respondent as follows:
On August 8, 1962, defendant-appellant Philippine Rayon Mills,
Inc. entered into a contract with Nissho Co., Ltd. of Japan for the
importation of textile machineries under a five-year deferred
payment plan (Exhibit B, Plaintiff's Folder of Exhibits, p 2). To
effect payment for said machineries, the defendant-appellant
applied for a commercial letter of credit with the Prudential Bank
and Trust Company in favor of Nissho. By virtue of said
application, the Prudential Bank opened Letter of Credit No. DPP63762 for $128,548.78 (Exhibit A, Ibid., p. 1). Against this letter
of credit, drafts were drawn and issued by Nissho (Exhibits X, X-1
to X-11, Ibid., pp. 65, 66 to 76), which were all paid by the
Prudential Bank through its correspondent in Japan, the Bank of
Tokyo, Ltd. As indicated on their faces, two of these drafts (Exhibit
X and X-1, Ibid., pp. 65-66) were accepted by the defendantappellant through its president, Anacleto R. Chi, while the others
were not (Exhibits X-2 to X-11, Ibid., pp. 66 to 76).

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Sometime in 1967, the defendant-appellant ceased business

operation (sic). On December 29, 1969, defendant-appellant's
factory was leased by Yupangco Cotton Mills for an annual rental
of P200,000.00 (Exhibit I, Ibid., p. 22). The lease was renewed on
January 3, 1973 (Exhibit J, Ibid., p. 26). On January 5, 1974, all
the textile machineries in the defendant-appellant's factory were
sold to AIC Development Corporation for P300,000.00 (Exhibit
K, Ibid., p. 29).
The obligation of the defendant-appellant arising from the letter of
credit and the trust receipt remained unpaid and unliquidated.
Repeated formal demands (Exhibits U, V, and W, Ibid., pp. 62, 63,
64) for the payment of the said trust receipt yielded no result
Hence, the present action for the collection of the principal
amount of P956,384.95 was filed on October 3, 1974 against the
defendant-appellant and Anacleto R. Chi. In their respective
answers, the defendants interposed identical special
defenses, viz., the complaint states no cause of action; if there is,
the same has prescribed; and the plaintiff is guilty of laches. 2
On 15 June 1978, the trial court rendered its decision the dispositive portion of
which reads:
WHEREFORE, judgment is hereby rendered sentencing the
defendant Philippine Rayon Mills, Inc. to pay plaintiff the sum of
P153,645.22, the amounts due under Exhibits "X" & "X-1", with
interest at 6% per annum beginning September 15, 1974 until
fully paid.
Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11",
inclusive, the same not having been accepted by defendant

Philippine Rayon Mills, Inc., plaintiff's cause of action thereon has

not accrued, hence, the instant case is premature.
Insofar as defendant Anacleto R. Chi is concerned, the case is
dismissed. Plaintiff is ordered to pay defendant Anacleto R. Chi the
sum of P20,000.00 as attorney's fees.
With costs against defendant Philippine Rayon Mills, Inc.
SO ORDERED.

Petitioner appealed the decision to the then Intermediate Appellate Court. In urging
the said court to reverse or modify the decision, petitioner alleged in its Brief that
the trial court erred in (a) disregarding its right to reimbursement from the private
respondents for the entire unpaid balance of the imported machines, the total
amount of which was paid to the Nissho Company Ltd., thereby violating the
principle of the third party payor's right to reimbursement provided for in the
second paragraph of Article 1236 of the Civil Code and under the rule against unjust
enrichment; (b) refusing to hold Anacleto R. Chi, as the responsible officer of
defendant corporation, liable under Section 13 of P.D No 115 for the entire unpaid
balance of the imported machines covered by the bank's trust receipt (Exhibit "C");
(c) finding that the solidary guaranty clause signed by Anacleto R. Chi is not a
guaranty at all; (d) controverting the judicial admissions of Anacleto R. Chi that he
is at least a simple guarantor of the said trust receipt obligation; (e) contravening,
based on the assumption that Chi is a simple guarantor, Articles 2059, 2060 and
2062 of the Civil Code and the related evidence and jurisprudence which provide
that such liability had already attached; (f) contravening the judicial admissions of
Philippine Rayon with respect to its liability to pay the petitioner the amounts
involved in the drafts (Exhibits "X", "X-l" to "X-11''); and (g) interpreting "sight"
drafts as requiring acceptance by Philippine Rayon before the latter could be held
liable thereon. 4
In its decision, public respondent sustained the trial court in all respects. As to the
first and last assigned errors, it ruled that the provision on unjust enrichment,
Article 2142 of the Civil Code, applies only if there is no express contract between
the parties and there is a clear showing that the payment is justified. In the instant
case, the relationship existing between the petitioner and Philippine Rayon is
governed by specific contracts, namely the application for letters of credit, the
promissory note, the drafts and the trust receipt. With respect to the last ten (10)
drafts (Exhibits "X-2" to "X-11") which had not been presented to and were not
accepted by Philippine Rayon, petitioner was not justified in unilaterally paying the
amounts stated therein. The public respondent did not agree with the petitioner's
claim that the drafts were sight drafts which did not require presentment for
acceptance to Philippine Rayon because paragraph 8 of the trust receipt
presupposes prior acceptance of the drafts. Since the ten (10) drafts were not
presented and accepted, no valid demand for payment can be made.
Public respondent also disagreed with the petitioner's contention that private
respondent Chi is solidarily liable with Philippine Rayon pursuant to Section 13 of

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P.D. No. 115 and based on his signature on the solidary guaranty clause at the
dorsal side of the trust receipt. As to the first contention, the public respondent
ruled that the civil liability provided for in said Section 13 attaches only after
conviction. As to the second, it expressed misgivings as to whether Chi's signature
on the trust receipt made the latter automatically liable thereon because the socalled solidary guaranty clause at the dorsal portion of the trust receipt is to be
signed not by one (1) person alone, but by two (2) persons; the last sentence of the
same is incomplete and unsigned by witnesses; and it is not acknowledged before a
notary public. Besides, even granting that it was executed and acknowledged before
a notary public, Chi cannot be held liable therefor because the records fail to show
that petitioner had either exhausted the properties of Philippine Rayon or had
resorted to all legal remedies as required in Article 2058 of the Civil Code. As
provided for under Articles 2052 and 2054 of the Civil Code, the obligation of a
guarantor is merely accessory and subsidiary, respectively. Chi's liability would
therefore arise only when the principal debtor fails to comply with his obligation. 5
Its motion to reconsider the decision having been denied by the public respondent
in its Resolution of 11 June 1986, 6 petitioner filed the instant petition on 31 July
1986 submitting the following legal issues:
I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT
GRIEVOUSLY ERRED IN DENYING PETITIONER'S CLAIM FOR FULL
REIMBURSEMENT AGAINST THE PRIVATE RESPONDENTS FOR THE
PAYMENT PETITIONER MADE TO NISSHO CO. LTD. FOR THE
BENEFIT OF PRIVATE RESPONDENT UNDER ART. 1283 OF THE
NEW CIVIL CODE OF THE PHILIPPINES AND UNDER THE GENERAL
PRINCIPLE AGAINST UNJUST ENRICHMENT;
II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY LIABLE
UNDER THE TRUST RECEIPT (EXH. C);
III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL
ADMISSIONS OF RESPONDENT CHI HE IS LIABLE THEREON AND
TO WHAT EXTENT;
IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE
GUARANTOR; AND IF SO; HAS HIS LIABILITY AS SUCH ALREADY
ATTACHED;
V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE
OFFICER OF RESPONDENT PHIL. RAYON RESPONDENT CHI IS
PERSONALLY LIABLE PURSUANT TO THE PROVISION OF SECTION
13, P.D. 115;
VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE TO
THE PETITIONER UNDER THE TRUST RECEIPT (EXH. C);

VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL

ADMISSIONS RESPONDENT PHIL. RAYON IS LIABLE TO THE
PETITIONER UNDER THE DRAFTS (EXHS. X, X-1 TO X-11) AND TO
WHAT EXTENT;
VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR
ACCEPTANCE FROM RESPONDENT PHIL. RAYON BEFORE THE
LATTER BECOMES LIABLE TO PETITIONER. 7
In the Resolution of 12 March 1990, 8 this Court gave due course to the petition
after the filing of the Comment thereto by private respondent Anacleto Chi and of
the Reply to the latter by the petitioner; both parties were also required to submit
their respective memoranda which they subsequently complied with.
As We see it, the issues may be reduced as follows:
1. Whether presentment for acceptance of the
drafts was indispensable to make Philippine
Rayon liable thereon;
2. Whether Philippine Rayon is liable on the
basis of the trust receipt;
3. Whether private respondent Chi is jointly and
severally liable with Philippine Rayon for the
obligation sought to be enforced and if not,
whether he may be considered a guarantor; in
the latter situation, whether the case should
have been dismissed on the ground of lack of
cause of action as there was no prior exhaustion
of Philippine Rayon's properties.
Both the trial court and the public respondent ruled that Philippine Rayon could be
held liable for the two (2) drafts, Exhibits "X" and "X-1", because only these appear
to have been accepted by the latter after due presentment. The liability for the
remaining ten (10) drafts (Exhibits "X-2" to "X-11" inclusive) did not arise because
the same were not presented for acceptance. In short, both courts concluded that
acceptance of the drafts by Philippine Rayon was indispensable to make the latter
liable thereon. We are unable to agree with this proposition. The transaction in the
case at bar stemmed from Philippine Rayon's application for a commercial letter of
credit with the petitioner in the amount of $128,548.78 to cover the former's
contract to purchase and import loom and textile machinery from Nissho Company,
Ltd. of Japan under a five-year deferred payment plan. Petitioner approved the
application. As correctly ruled by the trial court in its Order of 6 March 1975: 9

Company, Ltd., periodically drew against said letter of credit from

1963 to 1968, pursuant to plaintiff's contract with the defendant
Philippine Rayon Mills, Inc. In turn, defendant Philippine Rayon
Mills, Inc., was obligated to pay plaintiff bank the amounts of the
drafts drawn by Nisso (sic) Company, Ltd. against said plaintiff
bank together with any accruing commercial charges, interest,
etc. pursuant to the terms and conditions stipulated in the
Application and Agreement of Commercial Letter of Credit Annex
"A".
A letter of credit is defined as an engagement by a bank or other person made at
the request of a customer that the issuer will honor drafts or other demands for
payment upon compliance with the conditions specified in the credit. 11 Through a
letter of credit, the bank merely substitutes its own promise to pay for one of its
customers who in return promises to pay the bank the amount of funds mentioned
in the letter of credit plus credit or commitment fees mutually agreed upon. 12 In
the instant case then, the drawee was necessarily the herein petitioner. It was to
the latter that the drafts were presented for payment. In fact, there was no need for
acceptance as the issued drafts are sight drafts. Presentment for acceptance is
necessary only in the cases expressly provided for in Section 143 of the Negotiable
Instruments Law (NIL). 13 The said section reads:
Sec. 143. When presentment for acceptance must be made.
Presentment for acceptance must be made:
(a) Where the bill is payable
after sight, or in any other
case, where presentment for
acceptance is necessary in
order to fix the maturity of the
instrument; or
(b) Where the bill expressly
stipulates that it shall be
presented for acceptance; or
(c) Where the bill is drawn
payable elsewhere than at the
residence or place of business
of the drawee.
In no other case is presentment for acceptance necessary in order
to render any party to the bill liable.
Obviously then, sight drafts do not require presentment for acceptance.

. . . By virtue of said Application and Agreement for Commercial

Letter of Credit, plaintiff bank 10 was under obligation to pay
through its correspondent bank in Japan the drafts that Nisso (sic)

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The acceptance of a bill is the signification by the drawee of his assent to the order
of the drawer; 14 this may be done in writing by the drawee in the bill itself, or in a
separate instrument. 15
The parties herein agree, and the trial court explicitly ruled, that the subject, drafts
are sight drafts. Said the latter:
. . . In the instant case the drafts being at sight, they are
supposed to be payable upon acceptance unless plaintiff bank has
given the Philippine Rayon Mills Inc. time within which to pay the
same. The first two drafts (Annexes C & D, Exh. X & X-1) were
duly accepted as indicated on their face (sic), and upon such
acceptance should have been paid forthwith. These two drafts
were not paid and although Philippine Rayon Mills
ought to have paid the same, the fact remains that until now they
are still unpaid. 16
Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section
7 provides:
Sec. 7. When payable on demand. An instrument is payable on
demand
(a) When so it is expressed to
be payable on demand, or at
sight, or on presentation; or
(b) In which no time for
payment in expressed.
Where an instrument is issued, accepted, or indorsed when
overdue, it is, as regards the person so issuing, accepting, or
indorsing it, payable on demand. (emphasis supplied)
Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment
at maturity of any accepted draft, bill of exchange or indebtedness shall
not be extinguished or modified" 17 does not, contrary to the holding of the
public respondent, contemplate prior acceptance by Philippine Rayon, but
by the petitioner. Acceptance, however, was not even necessary in the first
place because the drafts which were eventually issued were sight drafts
And even if these were not sight drafts, thereby necessitating acceptance,
it would be the petitioner and not Philippine Rayon which had to
accept the same for the latter was not the drawee. Presentment for
acceptance is defined an the production of a bill of exchange to a drawee
for acceptance. 18 The trial court and the public respondent, therefore,
erred in ruling that presentment for acceptance was an indispensable
requisite for Philippine Rayon's liability on the drafts to attach. Contrary to
both courts' pronouncements, Philippine Rayon immediately became liable

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thereon upon petitioner's payment thereof. Such is the essence of the

letter of credit issued by the petitioner. A different conclusion would violate
the principle upon which commercial letters of credit are founded because
in such a case, both the beneficiary and the issuer, Nissho Company Ltd.
and the petitioner, respectively, would be placed at the mercy of Philippine
Rayon even if the latter had already received the imported machinery and
the petitioner had fully paid for it. The typical setting and purpose of a
letter of credit are described inHibernia Bank and Trust Co. vs. J. Aron &
Co., Inc., 19 thus:
Commercial letters of credit have come into general use in
international sales transactions where much time necessarily
elapses between the sale and the receipt by a purchaser of the
merchandise, during which interval great price changes may occur.
Buyers and sellers struggle for the advantage of position. The
seller is desirous of being paid as surely and as soon as possible,
realizing that the vendee at a distant point has it in his power to
reject on trivial grounds merchandise on arrival, and cause
considerable hardship to the shipper. Letters of credit meet this
condition by affording celerity and certainty of payment. Their
purpose is to insure to a seller payment of a definite amount upon
presentation of documents. The bank deals only with documents.
It has nothing to do with the quality of the merchandise. Disputes
as to the merchandise shipped may arise and be litigated later
between vendor and vendee, but they may not impede acceptance
of drafts and payment by the issuing bank when the proper
documents are presented.
The trial court and the public respondent likewise erred in disregarding the trust
receipt and in not holding that Philippine Rayon was liable thereon. In People vs. Yu
Chai Ho, 20 this Court explains the nature of a trust receipt by quoting In re Dunlap
Carpet Co., 21 thus:
By this arrangement a banker advances money to an intending
importer, and thereby lends the aid of capital, of credit, or of
business facilities and agencies abroad, to the enterprise of
foreign commerce. Much of this trade could hardly be carried on
by any other means, and therefore it is of the first importance
that the fundamental factor in the transaction, the banker's
advance of money and credit, should receive the amplest
protection. Accordingly, in order to secure that the banker shall be
repaid at the critical point that is, when the imported goods
finally reach the hands of the intended vendee the banker takes
the full title to the goods at the very beginning; he takes it as
soon as the goods are bought and settled for by his payments or
acceptances in the foreign country, and he continues to hold that
title as his indispensable security until the goods are sold in the
United States and the vendee is called upon to pay for them. This
security is not an ordinary pledge by the importer to the banker,
for the importer has never owned the goods, and moreover he is

not able to deliver the possession; but the security is the complete
title vested originally in the bankers, and this characteristic of the
transaction has again and again been recognized and protected by
the courts. Of course, the title is at bottom a security title, as it
has sometimes been called, and the banker is always under the
obligation to reconvey; but only after his advances have been fully
repaid and after the importer has fulfilled the other terms of the
contract.
As further stated in National Bank vs. Viuda e Hijos de Angel Jose,

22

trust receipts:

. . . [I]n a certain manner, . . . partake of the nature of a

conditional sale as provided by the Chattel Mortgage Law, that is,
the importer becomes absolute owner of the imported
merchandise as soon an he has paid its price. The ownership of
the merchandise continues to be vested in the owner thereof or in
the person who has advanced payment, until he has been paid in
full, or if the merchandise has already been sold, the proceeds of
the sale should be turned over to him by the importer or by his
representative or successor in interest.
Under P.D. No. 115, otherwise known an the Trust Receipts Law, which took effect
on 29 January 1973, a trust receipt transaction is defined as "any transaction by
and between a person referred to in this Decree as the entruster, and another
person referred to in this Decree as the entrustee, whereby the entruster, who owns
or holds absolute title or security interests' over certain specified goods, documents
or instruments, releases the same to the possession of the entrustee upon the
latter's execution and delivery to the entruster of a signed document called the
"trust receipt" wherein the entrustee binds himself to hold the designated goods,
documents or instruments in trust for the entruster and to sell or otherwise dispose
of the goods, documents or instruments with the obligation to turn over to the
entruster the proceeds thereof to the extent of the amount owing to the entruster
or as appears in the trust receipt or the goods, instruments themselves if they are
unsold or not otherwise disposed of, in accordance with the terms and conditions
specified in the trusts receipt, or for other purposes substantially equivalent to any
one of the following: . . ."
It is alleged in the complaint that private respondents "not only have presumably
put said machinery to good use and have profited by its operation and/or disposition
but very recent information that (sic) reached plaintiff bank that defendants already
sold the machinery covered by the trust receipt to Yupangco Cotton Mills," and that
"as trustees of the property covered by the trust receipt, . . . and therefore acting in
fiduciary (sic) capacity, defendants have willfully violated their duty to account for
the whereabouts of the machinery covered by the trust receipt or for the proceeds
of any lease, sale or other disposition of the same that they may have made,
notwithstanding demands therefor; defendants have fraudulently misapplied or
converted to their own use any money realized from the lease, sale, and other
disposition of said machinery." 23 While there is no specific prayer for the delivery to
the petitioner by Philippine Rayon of the proceeds of the sale of the machinery
covered by the trust receipt, such relief is covered by the general prayer for "such

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further and other relief as may be just and equitable on the premises." 24 And
although it is true that the petitioner commenced a criminal action for the violation
of the Trust Receipts Law, no legal obstacle prevented it from enforcing the civil
liability arising out of the trust, receipt in a separate civil action. Under Section 13 of
the Trust Receipts Law, the failure of an entrustee to turn over the proceeds of the
sale of goods, documents or instruments covered by a trust receipt to the extent of
the amount owing to the entruster or as appear in the trust receipt or to return said
goods, documents or instruments if they were not sold or disposed of in accordance
with the terms of the trust receipt shall constitute the crime of estafa, punishable
under the provisions of Article 315, paragraph 1(b) of the Revised Penal
Code. 25 Under Article 33 of the Civil Code, a civil action for damages, entirely
separate and distinct from the criminal action, may be brought by the injured party
in cases of defamation, fraud and physical injuries. Estafa falls under fraud.
We also conclude, for the reason hereinafter discussed, and not for that adduced by
the public respondent, that private respondent Chi's signature in the dorsal portion
of the trust receipt did not bind him solidarily with Philippine Rayon. The statement
at the dorsal portion of the said trust receipt, which petitioner describes as a
"solidary guaranty clause", reads:
In consideration of the PRUDENTIAL BANK AND TRUST COMPANY
complying with the foregoing, we jointly and severally agree and
undertake to pay on demand to the PRUDENTIAL BANK AND
TRUST COMPANY all sums of money which the said PRUDENTIAL
BANK AND TRUST COMPANY may call upon us to pay arising out
of or pertaining to, and/or in any event connected with the default
of and/or non-fulfillment in any respect of the undertaking of the
aforesaid:
PHILIPPINE RAYON MILLS, INC.
We further agree that the PRUDENTIAL BANK AND TRUST
COMPANY does not have to take any steps or exhaust its remedy
against aforesaid:
before making demand on me/us.

(Sgd.) An
ANACLETO
Petitioner insists that by virtue of the clear wording of the statement, specifically the
clause ". . . we jointly and severally agree and undertake . . .," and the concluding
sentence on exhaustion, Chi's liability therein is solidary.
In holding otherwise, the public respondent ratiocinates as follows:
With respect to the second argument, we have our misgivings as
to whether the mere signature of defendant-appellee Chi of (sic)

the guaranty agreement, Exhibit "C-1", will make it an actionable

document. It should be noted that Exhibit "C-1" was prepared and
printed by the plaintiff-appellant. A perusal of Exhibit "C-1" shows
that it was to be signed and executed by two persons. It was
signed only by defendant-appellee Chi. Exhibit "C-1" was to be
witnessed by two persons, but no one signed in that capacity. The
last sentence of the guaranty clause is incomplete. Furthermore,
the plaintiff-appellant also failed to have the purported guarantee
clause acknowledged before a notary public. All these show that
the alleged guaranty provision was disregarded and, therefore,
not consummated.
But granting arguendo that the guaranty provision in Exhibit "C-1"
was fully executed and acknowledged still defendant-appellee Chi
cannot be held liable thereunder because the records show that
the plaintiff-appellant had neither exhausted the property of the
defendant-appellant nor had it resorted to all legal remedies
against the said defendant-appellant as provided in Article 2058 of
the Civil Code. The obligation of a guarantor is merely accessory
under Article 2052 of the Civil Code and subsidiary under Article
2054 of the Civil Code. Therefore, the liability of the defendantappellee arises only when the principal debtor fails to comply with
his obligation. 27
Our own reading of the questioned solidary guaranty clause yields no other
conclusion than that the obligation of Chi is only that of a guarantor. This is further
bolstered by the last sentence which speaks of waiver of exhaustion, which,
nevertheless, is ineffective in this case because the space therein for the party
whose property may not be exhausted was not filled up. Under Article 2058 of the
Civil Code, the defense of exhaustion (excussion) may be raised by a guarantor
before he may be held liable for the obligation. Petitioner likewise admits that the
questioned provision is a solidary guaranty clause, thereby clearly distinguishing it
from a contract of surety. It, however, described the guaranty as solidary between
the guarantors; this would have been correct if two (2) guarantors had signed it.
The clause "we jointly and severally agree and undertake" refers to the undertaking
of the two (2) parties who are to sign it or to the liability existing between
themselves. It does not refer to the undertaking between either one or both of them
on the one hand and the petitioner on the other with respect to the liability
described under the trust receipt. Elsewise stated, their liability is not divisible as
between them, i.e., it can be enforced to its full extent against any one of them.
Furthermore, any doubt as to the import, or true intent of the solidary guaranty
clause should be resolved against the petitioner. The trust receipt, together with the
questioned solidary guaranty clause, is on a form drafted and prepared solely by the
petitioner; Chi's participation therein is limited to the affixing of his signature
thereon. It is, therefore, a contract of adhesion; 28 as such, it must be strictly
construed against the party responsible for its preparation. 29
Neither can We agree with the reasoning of the public respondent that this solidary
guaranty clause was effectively disregarded simply because it was not signed and

6 | Page

witnessed by two (2) persons and acknowledged before a notary public. While
indeed, the clause ought to have been signed by two (2) guarantors, the fact that it
was only Chi who signed the same did not make his act an idle ceremony or render
the clause totally meaningless. By his signing, Chi became the sole guarantor. The
attestation by witnesses and the acknowledgement before a notary public are not
required by law to make a party liable on the instrument. The rule is that contracts
shall be obligatory in whatever form they may have been entered into, provided all
the essential requisites for their validity are present; however, when the law
requires that a contract be in some form in order that it may be valid or
enforceable, or that it be proved in a certain way, that requirement is absolute and
indispensable. 30 With respect to a guaranty, 31 which is a promise to answer for the
debt or default of another, the law merely requires that it, or some note or
memorandum thereof, be in writing. Otherwise, it would be unenforceable unless
ratified. 32 While the acknowledgement of a surety before a notary public is required
to make the same a public document, under Article 1358 of the Civil Code, a
contract of guaranty does not have to appear in a public document.
And now to the other ground relied upon by the petitioner as basis for the solidary
liability of Chi, namely the criminal proceedings against the latter for the violation of
P.D. No. 115. Petitioner claims that because of the said criminal proceedings, Chi
would be answerable for the civil liability arising therefrom pursuant to Section 13 of
P.D. No. 115. Public respondent rejected this claim because such civil liability
presupposes prior conviction as can be gleaned from the phrase "without prejudice
to the civil liability arising from the criminal offense." Both are wrong. The said
section reads:
Sec. 13. Penalty Clause. The failure of an entrustee to turn over
the proceeds of the sale of the goods, documents or instruments
covered by a trust receipt to the extent of the amount owing to
the entruster or as appears in the trust receipt or to return said
goods, documents or instruments if they were not sold or
disposed of in accordance with the terms of the trust receipt shall
constitute the crime of estafa, punishable under the provisions of
Article Three hundred and fifteen, paragraph one (b) of Act
Numbered Three thousand eight hundred and fifteen, as
amended, otherwise known as the Revised Penal Code. If the
violation or offense is committed by a corporation, partnership,
association or other juridical entities, the penalty provided for in
this Decree shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for the
offense, without prejudice to the civil liabilities arising from the
criminal offense.
A close examination of the quoted provision reveals that it is the last sentence
which provides for the correct solution. It is clear that if the violation or offense is
committed by a corporation, partnership, association or other juridical entities, the
penalty shall be imposed upon the directors, officers, employees or other officials or
persons therein responsible for the offense. The penalty referred to is
imprisonment, the duration of which would depend on the amount of the fraud as
provided for in Article 315 of the Revised Penal Code. The reason for this is obvious:

corporations, partnerships, associations and other juridical entities cannot be put in

jail. However, it is these entities which are made liable for the civil liability arising
from the criminal offense. This is the import of the clause "without prejudice to the
civil liabilities arising from the criminal offense." And, as We stated earlier, since that
violation of a trust receipt constitutes fraud under Article 33 of the Civil Code,
petitioner was acting well within its rights in filing an independent civil action to
enforce the civil liability arising therefrom against Philippine Rayon.
The remaining issue to be resolved concerns the propriety of the dismissal of the
case against private respondent Chi. The trial court based the dismissal, and the
respondent Court its affirmance thereof, on the theory that Chi is not liable on the
trust receipt in any capacity either as surety or as guarantor because his
signature at the dorsal portion thereof was useless; and even if he could be bound
by such signature as a simple guarantor, he cannot, pursuant to Article 2058 of the
Civil Code, be compelled to pay until
after petitioner has exhausted and resorted to all legal remedies against the
principal debtor, Philippine Rayon. The records fail to show that petitioner had done
so 33 Reliance is thus placed on Article 2058 of the Civil Code which provides:
Art. 2056. The guarantor cannot be compelled to pay the creditor
unless the latter has exhausted all the property of the debtor, and
has resorted to all the legal remedies against the debtor.
Simply stated, there is as yet no cause of action against Chi.
We are not persuaded. Excussion is not a condition sine qua non for the institution
of an action against a guarantor. In Southern Motors, Inc. vs. Barbosa, 34 this Court
stated:
4. Although an ordinary personal guarantor not a mortgagor or
pledgor may demand the aforementioned exhaustion, the
creditor may, prior thereto, secure a judgment against said
guarantor, who shall be entitled, however, to a deferment of the
execution of said judgment against him until after the properties
of the principal debtor shall have been exhausted to satisfy the
obligation involved in the case.
There was then nothing procedurally objectionable in impleading private respondent
Chi as a co-defendant in Civil Case No. Q-19312 before the trial court. As a matter
of fact, Section 6, Rule 3 of the Rules of Court on permissive joinder of parties
explicitly allows it. It reads:
Sec. 6. Permissive joinder of parties. All persons in whom or
against whom any right to relief in respect to or arising out of the
same transaction or series of transactions is alleged to exist,
whether jointly, severally, or in the alternative, may, except as
otherwise provided in these rules, join as plaintiffs or be joined as
defendants in one complaint, where any question of law or fact
common to all such plaintiffs or to all such defendants may arise

7 | Page

in the action; but the court may make such orders as may be just
to prevent any plaintiff or defendant from being embarrassed or
put to expense in connection with any proceedings in which he
may have no interest.
This is the equity rule relating to multifariousness. It is based on trial convenience
and is designed to permit the joinder of plaintiffs or defendants whenever there is a
common question of law or fact. It will save the parties unnecessary work, trouble
and expense. 35
However, Chi's liability is limited to the principal obligation in the trust receipt plus
all the accessories thereof including judicial costs; with respect to the latter, he shall
only be liable for those costs incurred after being judicially required to
pay. 36 Interest and damages, being accessories of the principal obligation, should
also be paid; these, however, shall run only from the date of the filing of the
complaint. Attorney's fees may even be allowed in appropriate cases. 37
In the instant case, the attorney's fees to be paid by Chi cannot be the same as that
to be paid by Philippine Rayon since it is only the trust receipt that is covered by the
guaranty and not the full extent of the latter's liability. All things considered, he can
be held liable for the sum of P10,000.00 as attorney's fees in favor of the petitioner.
Thus, the trial court committed grave abuse of discretion in dismissing the
complaint as against private respondent Chi and condemning petitioner to pay him
P20,000.00 as attorney's fees.
In the light of the foregoing, it would no longer necessary to discuss the other
issues raised by the petitioner
WHEREFORE, the instant Petition is hereby GRANTED.
The appealed Decision of 10 March 1986 of the public respondent in ACG.R. CV No. 66733 and, necessarily, that of Branch 9 (Quezon City) of the
then Court of First Instance of Rizal in Civil Case No. Q-19312 are hereby
REVERSED and SET ASIDE and another is hereby entered:
1. Declaring private respondent Philippine Rayon
Mills, Inc. liable on the twelve drafts in question
(Exhibits "X", "X-1" to "X-11", inclusive) and on
the trust receipt (Exhibit "C"), and ordering it to
pay petitioner: (a) the amounts due thereon in
the total sum of P956,384.95 as of 15
September 1974, with interest thereon at six
percent (6%) per annum from 16 September
1974 until it is fully paid, less whatever may
have been applied thereto by virtue of
foreclosure of mortgages, if any; (b) a sum

equal to ten percent (10%) of the aforesaid

amount as attorney's fees; and (c) the costs.
2. Declaring private respondent Anacleto R. Chi
secondarily liable on the trust receipt and
ordering him to pay the face value thereof, with
interest at the legal rate, commencing from the
date of the filing of the complaint in Civil Case
No. Q-19312 until the same is fully paid as well
as the costs and attorney's fees in the sum of
P10,000.00 if the writ of execution for the
enforcement of the above awards against
Philippine Rayon Mills, Inc. is returned
unsatisfied.
Costs against private respondents. SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 105395 December 10, 1993

BANK OF AMERICA, NT & SA, petitioners,
vs.
COURT OF APPEALS, INTER-RESIN INDUSTRIAL CORPORATION,
FRANCISCO TRAJANO, JOHN DOE AND JANE DOE, respondents.
Agcaoili & Associates for petitioner.
Valenzuela Law Center, Victor Fernandez and Ramon Guevarra for private
respondents.

VITUG, J.:
A "fiasco," involving an irrevocable letter of credit, has found the distressed parties
coming to court as adversaries in seeking a definition of their respective rights or
liabilities thereunder.

On 05 March 1981, petitioner Bank of America, NT & SA, Manila, received by

registered mail an Irrevocable Letter of Credit No. 20272/81 purportedly issued by
Bank of Ayudhya, Samyaek Branch, for the account of General Chemicals, Ltd., of
Thailand in the amount of US$2,782,000.00 to cover the sale of plastic ropes and
"agricultural files," with the petitioner as advising bank and private respondent
Inter-Resin Industrial Corporation as beneficiary.
On 11 March 1981, Bank of America wrote Inter-Resin informing the latter of the
foregoing and transmitting, along with the bank's communication,
the latter of credit. Upon receipt of the letter-advice with the letter of credit, InterResin sent Atty. Emiliano Tanay to Bank of America to have the letter of credit
confirmed. The bank did not. Reynaldo Dueas, bank employee in charge of letters
of credit, however, explained to Atty. Tanay that there was no need for confirmation
because the letter of credit would not have been transmitted if it were not genuine.
Between 26 March to 10 April 1981, Inter-Resin sought to make a partial availment
under the letter of credit by submitting to Bank of America invoices, covering the
shipment of 24,000 bales of polyethylene rope to General Chemicals valued at
US$1,320,600.00, the corresponding packing list, export declaration and bill of
lading. Finally, after being satisfied that Inter-Resin's documents conformed with the
conditions expressed in the letter of credit, Bank of America issued in favor of InterResin a Cashier's Check for P10,219,093.20, "the Peso equivalent of the draft (for)
US$1,320,600.00 drawn by Inter-Resin, after deducting the costs for documentary
stamps, postage and mail issuance." 1 The check was picked up by Inter-Resin's
Executive Vice-President Barcelina Tio. On 10 April 1981, Bank of America wrote
Bank of Ayudhya advising the latter of the availment under the letter of credit and
sought the corresponding reimbursement therefor.
Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of America the
documents for the second availment under the same letter of credit consisting of a
packing list, bill of lading, invoices, export declaration and bills in set, evidencing
the second shipment of goods. Immediately upon receipt of a telex from the Bank of
Ayudhya declaring the letter of credit fraudulent, 2 Bank of America stopped the
processing of Inter-Resin's documents and sent a telex to its branch office in
Bangkok, Thailand, requesting assistance in determining the authenticity of the
letter of credit. 3Bank of America kept Inter-Resin informed of the developments.
Sensing a fraud, Bank of America sought the assistance of the National Bureau of
Investigation (NBI). With the help of the staff of the Philippine Embassy at Bangkok,
as well as the police and customs personnel of Thailand, the NBI agents, who were
sent to Thailand, discovered that the vans exported by Inter-Resin did not contain
ropes but plastic strips, wrappers, rags and waste materials. Here at home, the NBI
also investigated Inter-Resin's President Francisco Trajano and Executive Vice
President Barcelina Tio, who, thereafter, were criminally charged for estafa through
falsification of commercial documents. The case, however, was eventually dismissed
by the Rizal Provincial Fiscal who found no prima facie evidence to warrant
prosecution.
Bank of America sued Inter-Resin for the recovery of P10,219,093.20, the peso
equivalent of the draft for US$1,320,600.00 on the partial availment of the now
disowned letter of credit. On the other hand, Inter-Resin claimed that not only was

8 | Page

it entitled to retain P10,219,093.20 on its first shipment but also to the balance
US$1,461,400.00 covering the second shipment.
On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding that:
(a) Bank of America made assurances that enticed Inter-Resin to send the
merchandise to Thailand; (b) the telex declaring the letter of credit fraudulent was
unverified and self-serving, hence, hearsay, but even assuming that the letter of
credit was fake, "the fault should be borne by the BA which was careless and
negligent" 5 for failing to utilize its modern means of communication to verify with
Bank of Ayudhya in Thailand the authenticity of the letter of credit before sending
the same to Inter-Resin; (c) the loading of plastic products into the vans were under
strict supervision, inspection and verification of government officers who have in
their favor the presumption of regularity in the performance of official functions;
and (d) Bank of America failed to prove the participation of Inter-Resin or its
employees in the alleged fraud as, in fact, the complaint for estafa through
falsification of documents was dismissed by the Provincial Fiscal of Rizal. 6
On appeal, the Court of Appeals 7 sustained the trial court; hence, this present
recourse by petitioner Bank of America.
The following issues are raised by Bank of America: (a) whether it has warranted
the genuineness and authenticity of the letter of credit and, corollarily, whether it
has acted merely as an advising bank or as a confirming bank; (b) whether InterResin has actually shipped the ropes specified by the letter of credit; and (c)
following the dishonor of the letter of credit by Bank of Ayudhya, whether Bank of
America may recover against Inter-Resin under the draft executed in its partial
availment of the letter of credit. 8
In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on appeal, belatedly
raise the issue of being only an advising bank; (b) the findings of the trial court that
the ropes have actually been shipped is binding on the Court; and, (c) Bank of
America cannot recover from Inter-Resin because the drawer of the letter of credit
is the Bank of Ayudhya and not Inter-Resin.
If only to understand how the parties, in the first place, got themselves into the
mess, it may be well to start by recalling how, in its modern use, a letter of credit is
employed in trade transactions.
A letter of credit is a financial device developed by merchants as a convenient and
relatively safe mode of dealing with sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who refuses to part with his goods before he is
paid, and a buyer, who wants to have control of the goods before paying. 9 To break
the impasse, the buyer may be required to contract a bank to issue a letter of credit
in favor of the seller so that, by virtue of the latter of credit, the issuing bank can
authorize the seller to draw drafts and engage to pay them upon their presentment
simultaneously with the tender of documents required by the letter of credit. 10 The
buyer and the seller agree on what documents are to be presented for payment, but
ordinarily they are documents of title evidencing or attesting to the shipment of the
goods to the buyer.

9 | Page

Once the credit is established, the seller ships the goods to the buyer and in the
process secures the required shipping documents or documents of title. To get paid,
the seller executes a draft and presents it together with the required documents to
the issuing bank. The issuing bank redeems the draft and pays cash to the seller if it
finds that the documents submitted by the seller conform with what the letter of
credit requires. The bank then obtains possession of the documents upon paying the
seller. The transaction is completed when the buyer reimburses the issuing bank and
acquires the documents entitling him to the goods. Under this arrangement, the
seller gets paid only if he delivers the documents of title over the goods, while the
buyer acquires said documents and control over the goods only after reimbursing
the bank.
What characterizes letters of credit, as distinguished from other accessory contracts,
is the engagement of the issuing bank to pay the seller of the draft and the required
shipping documents are presented to it. In turn, this arrangement assures the seller
of prompt payment, independent of any breach of the main sales contract. By this
so-called "independence principle," the bank determines compliance with the letter
of credit only by examining the shipping documents presented; it is precluded from
determining whether the main contract is actually accomplished or not. 11
There would at least be three (3) parties: (a) the buyer, 12 who procures the letter
of credit and obliges himself to reimburse the issuing bank upon receipts of the
documents of title; (b) the bank issuing the letter of credit, 13 which undertakes to
pay the seller upon receipt of the draft and proper document of titles and to
surrender the documents to the buyer upon reimbursement; and, (c)
the seller, 14 who in compliance with the contract of sale ships the goods to the
buyer and delivers the documents of title and draft to the issuing bank to recover
payment.
The number of the parties, not infrequently and almost invariably in international
trade practice, may be increased. Thus, the services of an advising (notifying)
bank 15 may be utilized to convey to the seller the existence of the credit; or, of
a confirming bank 16 which will lend credence to the letter of credit issued by a
lesser known issuing bank; or, of a paying bank, 17 which undertakes to encash the
drafts drawn by the exporter. Further, instead of going to the place of the issuing
bank to claim payment, the buyer may approach another bank, termed
the negotiating bank, 18 to have the draft discounted.
Being a product of international commerce, the impact of this commercial
instrument transcends national boundaries, and it is thus not uncommon to find a
dearth of national law that can adequately provide for its governance. This country
is no exception. Our own Code of Commerce basically introduces only its concept
under Articles 567-572, inclusive, thereof. It is no wonder then why great reliance
has been placed on commercial usage and practice, which, in any case, can be
justified by the universal acceptance of the autonomy of contract rules. The rules
were later developed into what is now known as the Uniform Customs and Practice
for Documentary Credits ("U.C.P.") issued by the International Chamber of
Commerce. It is by no means a complete text by itself, for, to be sure, there are
other principles, which, although part of lex mercatoria, are not dealt with the U.C.P.

In FEATI Bank and Trust Company v. Court of Appeals, 19 we have accepted, to the
extent of their pertinency, the application in our jurisdiction of this international
commercial credit regulatory set of rules. 20 In Bank of Phil. Islands v. De
Nery, 21 we have said that the observances of the U.C.P. is justified by Article 2 of
the Code of Commerce which expresses that, in the absence of any particular
provision in the Code of Commerce, commercial transactions shall be governed by
usages and customs generally observed. We have further observed that there being
no specific provisions which govern the legal complexities arising from transactions
involving letters of credit not only between or among banks themselves but also
between banks and the seller or the buyer, as the case may be, the applicability of
the U.C.P. is undeniable.
The first issue raised with the petitioner, i.e., that it has in this instance merely been
advising bank, is outrightly rejected by Inter-Resin and is thus sought to be
discarded for having been raised only on appeal. We cannot agree. The crucial point
of dispute in this case is whether under the "letter of credit," Bank of America has
incurred any liability to the "beneficiary" thereof, an issue that largely is dependent
on the bank's participation in that transaction; as a mere advising or notifying bank,
it would not be liable, but as a confirming bank, had this been the case, it could be
considered as having incurred that liability. 22
In Insular Life Assurance Co. Ltd. Employees Association Natu vs. Insular Life
Assurance Co., Ltd., 23 the Court said: Where the issues already raised also rest on
other issues not specifically presented, as long as the latter issues bear relevance
and close relation to the former and as long as they arise from the matters on
record, the court has the authority to include them in its discussion of the
controversy and to pass upon them just as well. In brief, in those cases where
questions not particularly raised by the parties surface as necessary for the
complete adjudication of the rights and obligations of the parties, the interests of
justice dictate that the court should consider and resolve them. The rule that only
issues or theories raised in the initial proceedings may be taken up by a party
thereto on appeal should only refer to independent, not concomitant matters, to
support or oppose the cause of action or defense. The evil that is sought to be
avoided, i.e., surprise to the adverse party, is in reality not existent on matters that
are properly litigated in the lower court and appear on record.
It cannot seriously be disputed, looking at this case, that Bank of America has, in
fact, only been an advising, not confirming, bank, and this much is clearly evident,
among other things, by the provisions of the letter of credit itself, the petitioner
bank's letter of advice, its request for payment of advising fee, and the admission of
Inter-Resin that it has paid the same. That Bank of America has asked Inter-Resin
to submit documents required by the letter of credit and eventually has paid the
proceeds thereof, did not obviously make it a confirming bank. The fact, too, that
the draft required by the letter of credit is to be drawn under the account of General
Chemicals (buyer) only means the same had to be presented to Bank of Ayudhya
(issuing bank) for payment. It may be significant to recall that the letter of credit is
an engagement of the issuing bank, not the advising bank, to pay the draft.
No less important is that Bank of America's letter of 11 March 1981 has expressly
stated that "[t]he enclosure issolely an advise of credit opened by the

10 | P a g e

abovementioned correspondent and conveys no engagement by us." 24This written

reservation by Bank of America in limiting its obligation only to being an advising
bank is in consonance with the provisions of U.C.P.
As an advising or notifying bank, Bank of America did not incur any obligation more
than just notifying Inter-Resin of the letter of credit issued in its favor, let alone to
confirm the letter of credit. 25 The bare statement of the bank employees,
aforementioned, in responding to the inquiry made by Atty. Tanay, Inter-Resin's
representative, on the authenticity of the letter of credit certainly did not have the
effect of novating the letter of credit and Bank of America's letter of advise, 26 nor
can it justify the conclusion that the bank must now assume total liability on the
letter of credit. Indeed, Inter-Resin itself cannot claim to have been all that free
from fault. As the seller, the issuance of the letter of credit should have obviously
been a great concern to it. 27 It would have, in fact, been strange if it did not, prior
to the letter of credit, enter into a contract, or negotiated at the every least, with
General Chemicals. 28 In the ordinary course of business, the perfection of contract
precedes the issuance of a letter of credit.
Bringing the letter of credit to the attention of the seller is the primordial obligation
of an advising bank. The view that Bank of America should have first checked the
authenticity of the letter of credit with bank of Ayudhya, by using advanced mode of
business communications, before dispatching the same to Inter-Resin finds no real
support in U.C.P. Article 18 of the U.C.P. states that: "Banks assume no liability or
responsibility for the consequences arising out of the delay and/or loss in transit of
any messages, letters or documents, or for delay, mutilation or other errors arising
in the transmission of any telecommunication . . ." As advising bank, Bank of
America is bound only to check the "apparent authenticity" of the letter of credit,
which it did. 29 Clarifying its meaning, Webster's Ninth New Collegiate
Dictionary 30 explains that the word "APPARENT suggests appearance to unaided
senses that is not or may not be borne out by more rigorous examination or greater
knowledge."
May Bank of America then recover what it has paid under the letter of credit when
the corresponding draft for partial availment thereunder and the required
documents were later negotiated with it by Inter-Resin? The answer is yes. This
kind of transaction is what is commonly referred to as a discounting arrangement.
This time, Bank of America has acted independently as a negotiating bank, thus
saving Inter-Resin from the hardship of presenting the documents directly to Bank
of Ayudhya to recover payment. (Inter-Resin, of course, could have chosen other
banks with which to negotiate the draft and the documents.) As a negotiating bank,
Bank of America has a right to recourse against the issuer bank and until
reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues to
assume a contingent liability thereon. 31
While bank of America has indeed failed to allege material facts in its complaint that
might have likewise warranted the application of the Negotiable Instruments Law
and possible then allowed it to even go after the indorsers of the draft, this failure,
32/ nonetheless, does not preclude petitioner bank's right (as negotiating bank) of
recovery from Inter-Resin itself. Inter-Resin admits having received P10,219,093.20
from bank of America on the letter of credit and in having executed the

corresponding draft. The payment to Inter-Resin has given, as aforesaid, Bank of

America the right of reimbursement from the issuing bank, Bank of Ayudhya which,
in turn, would then seek indemnification from the buyer (the General Chemicals of
Thailand). Since Bank of Ayudhya disowned the letter of credit, however, Bank of
America may now turn to Inter-Resin for restitution.
Between the seller and the negotiating bank there is the usual
relationship existing between a drawer and purchaser of drafts.
Unless drafts drawn in pursuance of the credit are indicated to be
without recourse therefore, the negotiating bank has the ordinary
right of recourse against the seller in the event of dishonor by the
issuing bank . . . The fact that the correspondent and the
negotiating bank may be one and the same does not affect its
rights and obligations in either capacity, although a special
agreement is always a possibility . . . 33
The additional ground raised by the petitioner, i.e., that Inter-Resin sent waste
instead of its products, is really of no consequence. In the operation of a letter of
credit, the involved banks deal only with documents and not on goods described in
those documents. 34
The other issues raised in then instant petition, for instance, whether or not Bank of
Ayudhya did issue the letter of credit and whether or not the main contract of sale
that has given rise to the letter of credit has been breached, are not relevant to this
controversy. They are matters, instead, that can only be of concern to the herein
parties in an appropriate recourse against those, who, unfortunately, are not
impleaded in these proceedings.
In fine, we hold that
First, given the factual findings of the courts below, we conclude that petitioner
Bank of America has acted merely as a notifying bank and did not assume the
responsibility of a confirming bank; and
Second, petitioner bank, as a negotiating bank, is entitled to recover on InterResin's partial availment as beneficiary of the letter of credit which has been
disowned by the alleged issuer bank.
No judgment of civil liability against the other defendants, Francisco Trajano and
other unidentified parties, can be made, in this instance, there being no sufficient
evidence to warrant any such finding.
WHEREFORE, the assailed decision is SET ASIDE, and respondent Inter-Resin
Industrial Corporation is ordered to refund to petitioner Bank of America NT & SA
the amount of P10,219,093.20 with legal interest from the filing of the complaint
until fully paid.
No costs.

11 | P a g e

SO ORDERED.

CASTRO, J.:.
This is an appeal from the decision of the Court of First Instance of Manila ordering
the defendants-appellants to pay to the Bank of the Philippine Islands (hereinafter
referred to as the Bank), jointly and severally, the value of the credit it extended to
them in several letters of credit which the Bank opened at the behest of the
defendants appellants to finance their importation of dyestuffs from the United
States, which however turned out to be mere colored chalk upon arrival and
inspection thereof at the port of Manila.
The record shows that on four (4) different occasions in 1961, the De Reny Fabric
Industries, Inc., a Philippine corporation through its co-defendants-appellants,
Aurora Carcereny alias Aurora C. Gonzales, and Aurora T. Tuyo, president and
secretary, respectively of the corporation, applied to the Bank for four (4)
irrevocable commercial letters of credit to cover the purchase by the corporation of
goods described in the covering L/C applications as "dyestuffs of various colors"
from its American supplier, the J.B. Distributing Company. All the applications of the
corporation were approved, and the corresponding Commercial L/C Agreements
were executed pursuant to banking procedures. Under these agreements, the
aforementioned officers of the corporation bound themselves personally as joint and
solidary debtors with the corporation. Pursuant to banking regulations then in force,
the corporation delivered to the Bank peso marginal deposits as each letter of credit
was opened.
The dates and amounts of the L/Cs applied for and approved as well as the peso
marginal deposits made were, respectively, as follows:.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC

Date Application Amount Marginal

& L/C No. Deposit
Oct. 10, 1961 61/1413 $57,658.38 P43,407.33
Oct. 23, 1961 61/1483 $25,867.34 19,473.64

G.R. No. L-24821 October 16, 1970

Oct. 30, 1961 61/1495 $19,408.39 14,610.88

BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee,

vs.
DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO and AURORA
CARCERENY alias AURORA C. GONZALES, defendants-appellants.

Nov. 10, 1961 61/1564 $26,687.64 20,090.90

Aviado and Aranda for plaintiff-appellee.

S. Emiliano Calma for defendants-appellants.

12 | P a g e

TOTAL .... $129,621.75 P97,582.75

By virtue of the foregoing transactions, the Bank issued irrevocable commercial
letters of credit addressed to its correspondent banks in the United States, with
uniform instructions for them to notify the beneficiary thereof, the J.B. Distributing
Company, that they have been authorized to negotiate the latter's sight drafts up to
the amounts mentioned the respectively, if accompanied, upon presentation, by a
full set of negotiable clean "on board" ocean bills of lading covering the merchandise
appearing in the LCs that is, dyestuffs of various colors. Consequently, the J.B.

Distributing Company drew upon, presented to and negotiated with these banks, its
sight drafts covering the amounts of the merchandise ostensibly being exported by
it, together with clean bills of lading, and collected the full value of the drafts up to
the amounts appearing in the L/Cs as above indicated. These correspondent banks
then debited the account of the Bank of the Philippine Islands with them up to the
full value of the drafts presented by the J.B. Distributing Company, plus commission
thereon, and, thereafter, endorsed and forwarded all documents to the Bank of the
Philippine Islands.
In the meantime, as each shipment (covered by the above-mentioned letters of
credit) arrived in the Philippines, the De Reny Fabric Industries, Inc. made partial
payments to the Bank amounting, in the aggregate, to P90,000. Further payments
were, however, subsequently discontinued by the corporation when it became
established, as a result of a chemical test conducted by the National Science
Development Board, that the goods that arrived in Manila were colored chalks
instead of dyestuffs.
The corporation also refused to take possession of these goods, and for this reason,
the Bank caused them to be deposited with a bonded warehouse paying therefor the
amount of P12,609.64 up to the filing of its complaint with the court below on
December 10, 1962.
On October 24, 1963 the lower court rendered its decision ordering the corporation
and its co-defendants (the herein appellants) to pay to the plaintiff-appellee the
amount of P291,807.46, with interest thereon, as provided for in the L/C
Agreements, at the rate of 7% per annum from October 31, 1962 until fully paid,
plus costs.
It is the submission of the defendants-appellants that it was the duty of the foreign
correspondent banks of the Bank of the Philippine Islands to take the necessary
precaution to insure that the goods shipped under the covering L/Cs conformed with
the item appearing therein, and, that the foregoing banks having failed to perform
this duty, no claim for recoupment against the defendants-appellants, arising from
the losses incurred for the non-delivery or defective delivery of the articles ordered,
could accrue.
We can appreciate the sweep of the appellants' argument, but we also find that it is
nestled hopelessly inside a salient where the valid contract between the parties and
the internationally accepted customs of the banking trade must prevail. 1
Under the terms of their Commercial Letter of Credit Agreements with the Bank, the
appellants agreed that the Bank shall not be responsible for the "existence,
character, quality, quantity, conditions, packing, value, or delivery of the property
purporting to be represented by documents; for any difference in character, quality,
quantity, condition, or value of the property from that expressed in documents," or
for "partial or incomplete shipment, or failure or omission to ship any or all of the
property referred to in the Credit," as well as "for any deviation from instructions,
delay, default or fraud by the shipper or anyone else in connection with the property
the shippers or vendors and ourselves [purchasers] or any of us." Having agreed to

13 | P a g e

these terms, the appellants have, therefore, no recourse but to comply with their
covenant. 2
But even without the stipulation recited above, the appellants cannot shift the
burden of loss to the Bank on account of the violation by their vendor of its
prestation.
It was uncontrovertibly proven by the Bank during the trial below that banks, in
providing financing in international business transactions such as those entered into
by the appellants, do not deal with the property to be exported or shipped to the
importer, but deal only with documents. The Bank introduced in evidence a
provision contained in the "Uniform Customs and Practices for Commercial
Documentary Credits Fixed for the Thirteenth Congress of International Chamber of
Commerce," to which the Philippines is a signatory nation. Article 10 thereof
provides: .
In documentary credit operations, all parties concerned deal in
documents and not in goods. Payment, negotiation or
acceptance against documents in accordance with the terms and
conditions of a credit by a Bank authorized to do so binds the
party giving the authorization to take up the documents and
reimburse the Bank making the payment, negotiation or
acceptance.
The existence of a custom in international banking and financing circles negating
any duty on the part of a bank to verify whether what has been described in letters
of credits or drafts or shipping documents actually tallies with what was loaded
aboard ship, having been positively proven as a fact, the appellants are bound by
this established usage. They were, after all, the ones who tapped the facilities
afforded by the Bank in order to engage in international business.
ACCORDINGLY, the judgment a quo is affirmed, at defendants-appellants' cost. This
is without prejudice to the Bank, in proper proceedings in the court below in this
same case proving and being reimbursed additional expenses, if any, it has incurred
by virtue of the continued storage of the goods in question up to the time this
decision becomes final and executory.

Pelaez, Adriano & Gregorio for petitioner.

Ezequiel S. Consulta for private respondent.

GUTIERREZ, JR., J.:

This is a petition for review seeking the reversal of the decision of the Court of
Appeals dated June 29, 1990 which affirmed the decision of the Regional Trial Court
of Rizal dated October 20, 1986 ordering the defendants Christiansen and the
petitioner, to pay various sums to respondent Villaluz, jointly and severally.
The facts of the case are as follows:
On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant Axel
Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB.
After inspecting the logs, Christiansen issued purchase order No. 76171.
On the arrangements made and upon the instructions of the consignee, Hanmi
Trade Development, Ltd., de Santa Ana, California, the Security Pacific National
Bank of Los Angeles, California issued Irrevocable Letter of Credit No. IC-46268
available at sight in favor of Villaluz for the sum of $54,000.00, the total purchase
price of the lauan logs.
The letter of credit was mailed to the Feati Bank and Trust Company (now Citytrust)
with the instruction to the latter that it "forward the enclosed letter of credit to the
beneficiary." (Records, Vol. I, p. 11)
The letter of credit further provided that the draft to be drawn is on Security Pacific
National Bank and that it be accompanied by the following documents:
1. Signed Commercial Invoice in four copies showing the number of the
purchase order and certifying that
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 94209

April 30, 1991

FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING

CORPORATION), petitioner,
vs.
THE COURT OF APPEALS, and BERNARDO E. VILLALUZ, respondents.

14 | P a g e

a. All terms and conditions of the purchase order have been

complied with and that all logs are fresh cut and quality equal to
or better than that described in H.A. Christiansen's telex #201 of
May 1, 1970, and that all logs have been marked "BEV-EX."
b. One complete set of documents, including 1/3 original bills of
lading was airmailed to Consignee and Parties to be advised by
Hans-Axel Christiansen, Ship and Merchandise Broker.
c. One set of non-negotiable documents was airmailed to Han Mi
Trade Development Company and one set to Consignee and

Parties to be advised by Hans-Axel Christiansen, Ship and

Merchandise Broker.
2. Tally sheets in quadruplicate.
3. 2/3 Original Clean on Board Ocean Bills of Lading with Consignee and
Parties to be advised by Hans Axel Christiansen, showing Freight Prepaid
and marked Notify:
Han Mi Trade Development Company, Ltd., Santa Ana, California.
Letter of Credit No. 46268 dated June 7, 1971
Han Mi Trade Development Company, Ltd., P.O. Box 10480, Santa Ana,
California 92711 and Han Mi Trade Development Company, Ltd., Seoul,
Korea.
4. Certification from Han-Axel Christiansen, Ship and Merchandise Broker,
stating that logs have been approved prior to shipment in accordance with
terms and conditions of corresponding purchase Order. (Record, Vol. 1 pp.
11-12)
Also incorporated by reference in the letter of credit is the Uniform Customs and
Practice for Documentary Credits (1962 Revision).
The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by
Christiansen. Before its loading, the logs were inspected by custom inspectors Nelo
Laurente, Alejandro Cabiao, Estanislao Edera from the Bureau of Customs (Records,
Vol. I, p. 124) and representatives Rogelio Cantuba and Jesus Tadena of the Bureau
of Forestry (Records, Vol. I, pp. 16-17) all of whom certified to the good condition
and exportability of the logs.
After the loading of the logs was completed, the Chief Mate, Shao Shu Wang issued
a mate receipt of the cargo which stated the same are in good condition (Records,
Vol. I, p. 363). However, Christiansen refused to issue the certification as required in
paragraph 4 of the letter of credit, despite several requests made by the private
respondent.
Because of the absence of the certification by Christiansen, the Feati Bank and Trust
Company refused to advance the payment on the letter of credit.
The letter of credit lapsed on June 30, 1971, (extended, however up to July 31,
1971) without the private respondent receiving any certification from Christiansen.
The persistent refusal of Christiansen to issue the certification prompted the private
respondent to bring the matter before the Central Bank. In a memorandum dated
August 16, 1971, the Central Bank ruled that:

15 | P a g e

. . . pursuant to the Monetary Board Resolution No. 1230 dated August 3,

1971, in all log exports, the certification of the lumber inspectors of the
Bureau of Forestry . . . shall be considered final for purposes of negotiating
documents. Any provision in any letter of credit covering log exports
requiring certification of buyer's agent or representative that said logs have
been approved for shipment as a condition precedent to negotiation of
shipping documents shall not be allowed. (Records, Vol. I, p. 367)
Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee,
Hanmi Trade Development Company, to whom Christiansen sold the logs for the
amount of $37.50 per cubic meter, for a net profit of $10 per cubic meter. Hanmi
Trade Development Company, on the other hand sold the logs to Taisung Lumber
Company at Inchon, Korea. (Rollo, p. 39)
Since the demands by the private respondent for Christiansen to execute the
certification proved futile, Villaluz, on September 1, 1971, instituted an action
for mandamus and specific performance against Christiansen and the Feati Bank
and Trust Company (now Citytrust) before the then Court of First Instance of Rizal.
The petitioner was impleaded as defendant before the lower court only to afford
complete relief should the court a quo order Christiansen to execute the required
certification.
The complaint prayed for the following:
1. Christiansen be ordered to issue the certification required of him under
the Letter of Credit;
2. Upon issuance of such certification, or, if the court should find it
unnecessary, FEATI BANK be ordered to accept negotiation of the Letter of
Credit and make payment thereon to Villaluz;
3. Order Christiansen to pay damages to the plaintiff. (Rollo, p. 39)
On or about 1979, while the case was still pending trial, Christiansen left the
Philippines without informing the Court and his counsel. Hence, Villaluz, filed an
amended complaint to make the petitioner solidarily liable with Christiansen.
The trial court, in its order dated August 29, 1979, admitted the amended
complaint.
After trial, the lower court found:
The liability of the defendant CHRISTIANSEN is beyond dispute, and the
plaintiffs right to demand payment is absolute. Defendant CHRISTIANSEN
having accepted delivery of the logs by having them loaded in his chartered
vessel the "Zenlin Glory" and shipping them to the consignee, his buyer
Han Mi Trade in Inchon, South Korea (Art. 1585, Civil Code), his obligation
to pay the purchase order had clearly arisen and the plaintiff may sue and
recover the price of the goods (Art. 1595, Id).

The Court believes that the defendant CHRISTIANSEN acted in bad faith
and deceit and with intent to defraud the plaintiff, reflected in and
aggravated by, not only his refusal to issue the certification that would
have enabled without question the plaintiff to negotiate the letter of credit,
but his accusing the plaintiff in his answer of fraud, intimidation, violence
and deceit. These accusations said defendant did not attempt to prove, as
in fact he left the country without even notifying his own lawyer. It was to
the Court's mind a pure swindle.
The defendant Feati Bank and Trust Company, on the other hand, must be
held liable together with his (sic) co-defendant for having, by its wrongful
act, i.e., its refusal to negotiate the letter of credit in the absence of
CHRISTIANSEN's certification (in spite of the Central Bank's ruling that the
requirement was illegal), prevented payment to the plaintiff. The said letter
of credit, as may be seen on its face, isirrevocable and the issuing bank,
the Security Pacific National Bank in Los Angeles, California, undertook by
its terms that the same shall be honored upon its presentment. On the
other hand, the notifying bank, the defendant Feati Bank and Trust
Company, by accepting the instructions from the issuing bank, itself
assumed the very same undertaking as the issuing bank under the terms
of the letter of credit.
xxx

xxx

The defendant BANK, in insisting upon the certification of defendant

CHRISTIANSEN as a condition precedent to negotiating the letter of credit,
likewise in the Court's opinion acted in bad faith, not only because of the
clear declaration of the Central Bank that such a requirement was illegal,
but because the BANK, with all the legal counsel available to it must have
known that the condition was void since it depended on the sole will of the
debtor, the defendant CHRISTIANSEN. (Art. 1182, Civil Code) (Rollo, pp.
29-31)
On the basis of the foregoing the trial court on October 20, 1986, ruled in favor of
the private respondent. The dispositive portion of its decision reads:
WHEREFORE, judgment is hereby rendered for the plaintiff, ordering the
defendants to pay the plaintiff, jointly and severally, the following sums:
a) $54,000.00 (US), or its peso equivalent at the prevailing rate as of the
time payment is actually made, representing the purchase price of the
logs;

xxx

The Court likewise agrees with the plaintiff that the defendant BANK may
also be held liable under the principles and laws on both trust and estoppel.
When the defendant BANK accepted its role as the notifying and
negotiating bank for and in behalf of the issuing bank, it in effect accepted
a trust reposed on it, and became a trustee in relation to plaintiff as the
beneficiary of the letter of credit. As trustee, it was then duty bound to
protect the interests of the plaintiff under the terms of the letter of credit,
and must be held liable for damages and loss resulting to the plaintiff from
its failure to perform that obligation.
Furthermore, when the defendant BANK assumed the role of a notifying
and negotiating BANK it in effect represented to the plaintiff that, if the
plaintiff complied with the terms and conditions of the letter of credit and
presents the same to the BANK together with the documents mentioned
therein the said BANK will pay the plaintiff the amount of the letter of
credit. The Court is convinced that it was upon the strength of this letter of
credit and this implied representation of the defendant BANK that the
plaintiff delivered the logs to defendant CHRISTIANSEN, considering that
the issuing bank is a foreign bank with whom plaintiff had no business
connections and CHRISTIANSEN had not offered any other Security for the
payment of the logs. Defendant BANK cannot now be allowed to deny its
commitment and liability under the letter of credit:
A holder of a promissory note given because of gambling who
indorses the same to an innocent holder for value and who
assures said party that the note has no legal defect, is in estoppel
from asserting that there had been an illegal consideration for the

16 | P a g e

note, and so, he has to pay its value. (Rodriguez v. Martinez, 5

Phil. 67).

b) P17,340.00, representing government fees and charges paid by plaintiff

in connection with the logs shipment in question;
c) P10,000.00 as temperate damages (for trips made to Bacolod and
Korea).
All three foregoing sums shall be with interest thereon at 12% per
annum from September 1, 1971, when the complaint was filed, until fully
paid:
d) P70,000.00 as moral damages;
e) P30,000.00 as exemplary damages; and
f) P30,000.00 as attorney's fees and litigation expense.
(Rollo, p. 28)
The petitioner received a copy of the decision on November 3, 1986. Two days
thereafter, or on November 5, 1986, it filed a notice of appeal.
On November 10, 1986, the private respondent filed a motion for the immediate
execution of the judgment on the ground that the appeal of the petitioner was
frivolous and dilatory.

The trial court ordered the immediate execution of its judgment upon the private
respondent's filing of a bond.
The petitioner then filed a motion for reconsideration and a motion to suspend the
implementation of the writ of execution. Both motions were, however, denied. Thus,
petitioner filed before the Court of Appeals a petition forcertiorari and prohibition
with preliminary injunction to enjoin the immediate execution of the judgment.
The Court of Appeals in a decision dated April 9, 1987 granted the petition and
nullified the order of execution, the dispositive portion of the decision states:
WHEREFORE, the petition for certiorari is granted. Respondent Judge's
order of execution dated December 29, 1986, as well as his order dated
January 14, 1987 denying the petitioner's urgent motion to suspend the
writ of execution against its properties are hereby annulled and set aside
insofar as they are sought to be enforced and implemented against the
petitioner Feati Bank & Trust Company, now Citytrust Banking Corporation,
during the pendency of its appeal from the adverse decision in Civil Case
No. 15121. However, the execution of the same decision against defendant
Axel Christiansen did not appeal said decision may proceed unimpeded.
The Sheriff s levy on the petitioner's properties, and the notice of sale
dated January 13, 1987 (Annex M), are hereby annulled and set
aside. Rollo p. 44)
A motion for reconsideration was thereafter filed by the private respondent. The
Court of Appeals, in a resolution dated June 29, 1987 denied the motion for
reconsideration.
In the meantime, the appeal filed by the petitioner before the Court of Appeals was
given due course. In its decision dated June 29, 1990, the Court of Appeals affirmed
the decision of the lower court dated October 20, 1986 and ruled that:
1. Feati Bank admitted in the "special and negative defenses" section of its
answer that it was the bank to negotiate the letter of credit issued by the
Security Pacific National Bank of Los Angeles, California. (Record, pp. 156,
157). Feati Bank did notify Villaluz of such letter of credit. In fact, as such
negotiating bank, even before the letter of credit was presented for
payment, Feati Bank had already made an advance payment of P75,000.00
to Villaluz in anticipation of such presentment. As the negotiating bank,
Feati Bank, by notifying Villaluz of the letter of credit in behalf of the
issuing bank (Security Pacific), confirmed such letter of credit and made
the same also its own obligation. This ruling finds support in the authority
cited by Villaluz:
A confirmed letter of credit is one in which the notifying bank gives its
assurance also that the opening bank's obligation will be performed. In
such a case, the notifying bank will not simply transmit but will confirm the
opening bank's obligation by making it also its own undertaking, or
commitment, or guaranty or obligation. (Ward & Hatfield, 28-29, cited in
Agbayani, Commercial Laws, 1978 edition, p. 77).

17 | P a g e

Feati Bank argues further that it would be considered as the negotiating

bank only upon negotiation of the letter of credit. This stance is untenable.
Assurance, commitments or guaranties supposed to be made by notifying
banks to the beneficiary of a letter of credit, as defined above, can be
relevant or meaningful only with respect to a future transaction, that is,
negotiation. Hence, even before actual negotiation, the notifying bank, by
the mere act of notifying the beneficiary of the letter of credit, assumes as
of that moment the obligation of the issuing bank.
2. Since Feati Bank acted as guarantor of the issuing bank, and in effect
also of the latter's principal or client, i.e. Hans Axel-Christiansen. (sic) Such
being the case, when Christiansen refused to issue the certification, it was
as though refusal was made by Feati Bank itself. Feati Bank should have
taken steps to secure the certification from Christiansen; and, if the latter
should still refuse to comply, to hale him to court. In short, Feati Bank
should have honored Villaluz's demand for payment of his logs by virtue of
the irrevocable letter of credit issued in Villaluz's favor and guaranteed by
Feati Bank.
3. The decision promulgated by this Court in CA-G.R. Sp No. 11051, which
contained the statement "Since Villaluz" draft was not drawn strictly in
compliance with the terms of the letter of credit, Feati Bank's refusal to
negotiate it was justified," did not dispose of this question on the merits. In
that case, the question involved was jurisdiction or discretion, and not
judgment. The quoted pronouncement should not be taken as a
preemptive judgment on the merits of the present case on appeal.
4. The original action was for "Mandamus and/or specific performance."
Feati Bank may not be a party to the transaction between Christiansen and
Security Pacific National Bank on the one hand, and Villaluz on the other
hand; still, being guarantor or agent of Christiansen and/or Security Pacific
National Bank which had directly dealt with Villaluz, Feati Bank may be
sued properly on specific performance as a procedural means by which the
relief sought by Villaluz may be entertained. (Rollo, pp. 32-33)
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, the decision appealed from is affirmed; and accordingly, the
appeal is hereby dismissed. Costs against the petitioner. (Rollo, p. 33)
Hence, this petition for review.
The petitioner interposes the following reasons for the allowance of the petition.
First Reason
THE RESPONDENT COURT ERRONEOUSLY CONCLUDED FROM THE
ESTABLISHED FACTS AND INDEED, WENT AGAINST THE EVIDENCE AND
DECISION OF THIS HONORABLE COURT, THAT PETITIONER BANK IS

LIABLE ON THE LETTER OF CREDIT DESPITE PRIVATE RESPONDENTS NONCOMPLIANCE WITH THE TERMS THEREOF,
Second Reason
THE RESPONDENT COURT COMMITTED AN ERROR OF LAW WHEN IT HELD
THAT PETITIONER BANK, BY NOTIFYING PRIVATE RESPONDENT OF THE
LETTER OF CREDIT, CONFIRMED SUCH CREDIT AND MADE THE SAME ALSO
ITS OBLIGATION AS GUARANTOR OF THE ISSUING BANK.
Third Reason
THE RESPONDENT COURT LIKEWISE COMMITTED AN ERROR OF LAW
WHEN IT AFFIRMED THE TRIAL COURT'S DECISION. (Rollo, p. 12)
The principal issue in this case is whether or not a correspondent bank is to be held
liable under the letter of credit despite non-compliance by the beneficiary with the
terms thereof?
The petition is impressed with merit.
It is a settled rule in commercial transactions involving letters of credit that the
documents tendered must strictly conform to the terms of the letter of credit. The
tender of documents by the beneficiary (seller) must include all documents required
by the letter. A correspondent bank which departs from what has been stipulated
under the letter of credit, as when it accepts a faulty tender, acts on its own risks
and it may not thereafter be able to recover from the buyer or the issuing bank, as
the case may be, the money thus paid to the beneficiary Thus the rule of strict
compliance.
In the United States, commercial transactions involving letters of credit are
governed by the rule of strict compliance. In the Philippines, the same holds true.
The same rule must also be followed.
The case of Anglo-South America Trust Co. v. Uhe et al. (184 N.E. 741 [1933])
expounded clearly on the rule of strict compliance.
We have heretofore held that these letters of credit are to be strictly
complied with which documents, and shipping documents must be followed
as stated in the letter. There is no discretion in the bank or trust company
to waive any requirements. The terms of the letter constitutes an
agreement between the purchaser and the bank. (p. 743)
Although in some American decisions, banks are granted a little discretion to accept
a faulty tender as when the other documents may be considered immaterial or
superfluous, this theory could lead to dangerous precedents. Since a bank deals
only with documents, it is not in a position to determine whether or not the
documents required by the letter of credit are material or superfluous. The mere
fact that the document was specified therein readily means that the document is of
vital importance to the buyer.

18 | P a g e

Moreover, the incorporation of the Uniform Customs and Practice for Documentary
Credit (U.C.P. for short) in the letter of credit resulted in the applicability of the said
rules in the governance of the relations between the parties.
And even if the U.C.P. was not incorporated in the letter of credit, we have already
ruled in the affirmative as to the applicability of the U.C.P. in cases before us.
In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the
observance of the U.C.P. in this jurisdiction is justified by Article 2 of the Code of
Commerce. Article 2 of the Code of Commerce enunciates that in the absence of
any particular provision in the Code of Commerce, commercial transactions shall be
governed by the usages and customs generally observed.
There being no specific provision which governs the legal complexities arising from
transactions involving letters of credit not only between the banks themselves but
also between banks and seller and/or buyer, the applicability of the U.C.P. is
undeniable.
The pertinent provisions of the U.C.P. (1962 Revision) are:
Article 3.
An irrevocable credit is a definite undertaking on the part of the issuing
bank and constitutes the engagement of that bank to the beneficiary and
bona fide holders of drafts drawn and/or documents presented thereunder,
that the provisions for payment, acceptance or negotiation contained in the
credit will be duly fulfilled, provided that all the terms and conditions of the
credit are complied with.
An irrevocable credit may be advised to a beneficiary through another bank
(the advising bank) without engagement on the part of that bank, but
when an issuing bank authorizes or requests another bank to confirm its
irrevocable credit and the latter does so, such confirmation constitutes a
definite undertaking of the confirming bank. . . .
Article 7.
Banks must examine all documents with reasonable care to ascertain that
they appear on their face to be in accordance with the terms and
conditions of the credit,"
Article 8.
Payment, acceptance or negotiation against documents which appear
on their face to be in accordance with the terms and conditions of a
credit by a bank authorized to do so, binds the party giving the
authorization to take up documents and reimburse the bank which has
effected the payment, acceptance or negotiation. (Emphasis Supplied)

Under the foregoing provisions of the U.C.P., the bank may only negotiate, accept or
pay, if the documents tendered to it are on their face in accordance with the terms
and conditions of the documentary credit. And since a correspondent bank, like the
petitioner, principally deals only with documents, the absence of any document
required in the documentary credit justifies the refusal by the correspondent bank
to negotiate, accept or pay the beneficiary, as it is not its obligation to look beyond
the documents. It merely has to rely on the completeness of the documents
tendered by the beneficiary.
In regard to the ruling of the lower court and affirmed by the Court of Appeals that
the petitioner is not a notifying bank but a confirming bank, we find the same
erroneous.
The trial court wrongly mixed up the meaning of an irrevocable credit with that of a
confirmed credit. In its decision, the trial court ruled that the petitioner, in accepting
the obligation to notify the respondent that theirrevocable credit has been
transmitted to the petitioner on behalf of the private respondent, has confirmed the
letter.
The trial court appears to have overlooked the fact that an irrevocable credit is not
synonymous with a confirmed credit. These types of letters have different meanings
and the legal relations arising from there varies. A credit may be
an irrevocable credit and at the same time a confirmed credit or vice-versa.
An irrevocable credit refers to the duration of the letter of credit. What is simply
means is that the issuing bank may not without the consent of the beneficiary
(seller) and the applicant (buyer) revoke his undertaking under the letter. The
issuing bank does not reserve the right to revoke the credit. On the other hand, a
confirmed letter of credit pertains to the kind of obligation assumed by the
correspondent bank. In this case, the correspondent bank gives an absolute
assurance to the beneficiary that it will undertake the issuing bank's obligation as its
own according to the terms and conditions of the credit. (Agbayani, Commercial
Laws of the Philippines, Vol. 1, pp. 81-83)
Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply
that the correspondent bank in accepting the instructions of the issuing bank has
also confirmed the letter of credit. Another error which the lower court and the
Court of Appeals made was to confuse the obligation assumed by the petitioner.
In commercial transactions involving letters of credit, the functions assumed by a
correspondent bank are classified according to the obligations taken up by it. The
correspondent bank may be called a notifying bank, a negotiating bank, or a
confirming bank.
In case of a notifying bank, the correspondent bank assumes no liability except to
notify and/or transmit to the beneficiary the existence of the letter of credit.
(Kronman and Co., Inc. v. Public National Bank of New York, 218 N.Y.S. 616 [1926];
Shaterian, Export-Import Banking, p. 292, cited in Agbayani, Commercial Laws of
the Philippines, Vol. 1, p. 76). A negotiating bank, on the other hand, is a
correspondent bank which buys or discounts a draft under the letter of credit. Its
liability is dependent upon the stage of the negotiation. If before negotiation, it has

19 | P a g e

no liability with respect to the seller but after negotiation, a contractual relationship
will then prevail between the negotiating bank and the seller. (Scanlon v. First
National Bank of Mexico, 162 N.E. 567 [1928]; Shaterian, Export-Import Banking,
p. 293, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76)
In the case of a confirming bank, the correspondent bank assumes a direct
obligation to the seller and its liability is a primary one as if the correspondent bank
itself had issued the letter of credit. (Shaterian, Export-Import Banking, p. 294,
cited in Agbayani Commercial Laws of the Philippines, Vol. 1, p. 77)
In this case, the letter merely provided that the petitioner "forward the enclosed
original credit to the beneficiary." (Records, Vol. I, p. 11) Considering the aforesaid
instruction to the petitioner by the issuing bank, the Security Pacific National Bank,
it is indubitable that the petitioner is only a notifying bank and not a confirming
bank as ruled by the courts below.
If the petitioner was a confirming bank, then a categorical declaration should have
been stated in the letter of credit that the petitioner is to honor all drafts drawn in
conformity with the letter of credit. What was simply stated therein was the
instruction that the petitioner forward the original letter of credit to the beneficiary.
Since the petitioner was only a notifying bank, its responsibility was solely to notify
and/or transmit the documentary of credit to the private respondent and its
obligation ends there.
The notifying bank may suggest to the seller its willingness to negotiate, but this
fact alone does not imply that the notifying bank promises to accept the draft drawn
under the documentary credit.
A notifying bank is not a privy to the contract of sale between the buyer and the
seller, its relationship is only with that of the issuing bank and not with the
beneficiary to whom he assumes no liability. It follows therefore that when the
petitioner refused to negotiate with the private respondent, the latter has no cause
of action against the petitioner for the enforcement of his rights under the letter.
(See Kronman and Co., Inc. v. Public National Bank of New York, supra)
In order that the petitioner may be held liable under the letter, there should be
proof that the petitioner confirmed the letter of credit.
The records are, however, bereft of any evidence which will disclose that the
petitioner has confirmed the letter of credit. The only evidence in this case, and
upon which the private respondent premised his argument, is the P75,000.00 loan
extended by the petitioner to him.
The private respondent relies on this loan to advance his contention that the letter
of credit was confirmed by the petitioner. He claims that the loan was granted by
the petitioner to him, "in anticipation of the presentment of the letter of credit."

The proposition advanced by the private respondent has no basis in fact or law. That
the loan agreement between them be construed as an act of confirmation is rather
far-fetched, for it depends principally on speculative reasoning.
As earlier stated, there must have been an absolute assurance on the part of the
petitioner that it will undertake the issuing bank's obligation as its own. Verily, the
loan agreement it entered into cannot be categorized as an emphatic assurance that
it will carry out the issuing bank's obligation as its own.
The loan agreement is more reasonably classified as an isolated transaction
independent of the documentary credit.
Of course, it may be presumed that the petitioner loaned the money to the private
respondent in anticipation that it would later be paid by the latter upon the receipt
of the letter. Yet, we would have no basis to rule definitively that such "act" should
be construed as an act of confirmation.
The private respondent no doubt was in need of money in loading the logs on the
ship "Zenlin Glory" and the only way to satisfy this need was to borrow money from
the petitioner which the latter granted. From these circumstances, a logical
conclusion that can be gathered is that the letter of credit was merely to serve as a
collateral.
At the most, when the petitioner extended the loan to the private respondent, it
assumed the character of a negotiating bank. Even then, the petitioner will still not
be liable, for a negotiating bank before negotiation has no contractual relationship
with the seller.
The case of Scanlon v. First National Bank (supra) perspicuously explained the
relationship between the seller and the negotiating bank, viz:
It may buy or refuse to buy as it chooses. Equally, it must be true that it
owes no contractual duty toward the person for whose benefit the letter is
written to discount or purchase any draft drawn against the credit. No
relationship of agent and principal, or of trustee and cestui, between the
receiving bank and the beneficiary of the letter is established. (P.568)
Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot
be held liable. Absent any definitive proof that it has confirmed the letter of credit or
has actually negotiated with the private respondent, the refusal by the petitioner to
accept the tender of the private respondent is justified.
In regard to the finding that the petitioner became a "trustee in relation to the
plaintiff (private respondent) as the beneficiary of the letter of credit," the same has
no legal basis.
A trust has been defined as the "right, enforceable solely in equity, to the beneficial
enjoyment of property the legal title to which is vested to another." (89 C.J.S. 712)

20 | P a g e

The concept of a trust presupposes the existence of a specific property which has
been conferred upon the person for the benefit of another. In order therefore for the
trust theory of the private respondent to be sustained, the petitioner should have
had in its possession a sum of money as specific fund advanced to it by the issuing
bank and to be held in trust by it in favor of the private respondent. This does not
obtain in this case.
The mere opening of a letter of credit, it is to be noted, does not involve a specific
appropriation of a sum of money in favor of the beneficiary. It only signifies that the
beneficiary may be able to draw funds upon the letter of credit up to the designated
amount specified in the letter. It does not convey the notion that a particular sum of
money has been specifically reserved or has been held in trust.
What actually transpires in an irrevocable credit is that the correspondent bank does
not receive in advance the sum of money from the buyer or the issuing bank. On
the contrary, when the correspondent bank accepts the tender and pays the amount
stated in the letter, the money that it doles out comes not from any particular fund
that has been advanced by the issuing bank, rather it gets the money from its own
funds and then later seeks reimbursement from the issuing bank.
Granting that a trust has been created, still, the petitioner may not be considered a
trustee. As the petitioner is only a notifying bank, its acceptance of the instructions
of the issuing bank will not create estoppel on its part resulting in the acceptance of
the trust. Precisely, as a notifying bank, its only obligation is to notify the private
respondent of the existence of the letter of credit. How then can such create
estoppel when that is its only duty under the law?
We also find erroneous the statement of the Court of Appeals that the petitioner
"acted as a guarantor of the issuing bank and in effect also of the latter's principal
or client, i.e., Hans Axel Christiansen."
It is a fundamental rule that an irrevocable credit is independent not only of the
contract between the buyer and the seller but also of the credit agreement between
the issuing bank and the buyer. (See Kingdom of Sweden v. New York Trust Co., 96
N.Y.S. 2d 779 [1949]). The relationship between the buyer (Christiansen) and the
issuing bank (Security Pacific National Bank) is entirely independent from the letter
of credit issued by the latter.
The contract between the two has no bearing as to the non-compliance by the buyer
with the agreement between the latter and the seller. Their contract is similar to
that of a contract of services (to open the letter of credit) and not that of agency as
was intimated by the Court of Appeals. The unjustified refusal therefore by
Christiansen to issue the certification under the letter of credit should not likewise
be charged to the issuing bank.
As a mere notifying bank, not only does the petitioner not have any contractual
relationship with the buyer, it has also nothing to do with the contract between the
issuing bank and the buyer regarding the issuance of the letter of credit.

The theory of guarantee relied upon by the Court of Appeals has to necessarily fail.
The concept of guarantee vis-a-vis the concept of an irrevocable credit are
inconsistent with each other.
In the first place, the guarantee theory destroys the independence of the bank's
responsibility from the contract upon which it was opened. In the second place, the
nature of both contracts is mutually in conflict with each other. In contracts of
guarantee, the guarantor's obligation is merely collateral and it arises only upon the
default of the person primarily liable. On the other hand, in an irrevocable credit the
bank undertakes a primary obligation. (SeeNational Bank of Eagle Pass, Tex v.
American National Bank of San Francisco, 282 F. 73 [1922])
The relationship between the issuing bank and the notifying bank, on the contrary,
is more similar to that of an agency and not that of a guarantee. It may be
observed that the notifying bank is merely to follow the instructions of the issuing
bank which is to notify or to transmit the letter of credit to the beneficiary.
(See Kronman v. Public National Bank of New York, supra). Its commitment is only
to notify the beneficiary. It does not undertake any assurance that the issuing bank
will perform what has been mandated to or expected of it. As an agent of the
issuing bank, it has only to follow the instructions of the issuing bank and to it alone
is it obligated and not to buyer with whom it has no contractual relationship.
In fact the notifying bank, even if the seller tenders all the documents required
under the letter of credit, may refuse to negotiate or accept the drafts drawn
thereunder and it will still not be held liable for its only engagement is to notify
and/or transmit to the seller the letter of credit.
Finally, even if we assume that the petitioner is a confirming bank, the petitioner
cannot be forced to pay the amount under the letter. As we have previously
explained, there was a failure on the part of the private respondent to comply with
the terms of the letter of credit.
The failure by him to submit the certification was fatal to his case.1wphi1 The
U.C.P. which is incorporated in the letter of credit ordains that the bank may only
pay the amount specified under the letter if all the documents tendered are on their
face in compliance with the credit. It is not tasked with the duty of ascertaining the
reason or reasons why certain documents have not been submitted, as it is only
concerned with the documents. Thus, whether or not the buyer has performed his
responsibility towards the seller is not the bank's problem.
We are aware of the injustice committed by Christiansen on the private respondent
but we are deciding the controversy on the basis of what the law is, for the law is
not meant to favor only those who have been oppressed, the law is to govern future
relations among people as well. Its commitment is to all and not to a single
individual. The faith of the people in our justice system may be eroded if we are to
decide not what the law states but what we believe it should declare. Dura lex sed
lex.
Considering the foregoing, the materiality of ruling upon the validity of the
certificate of approval required of the private respondent to submit under the letter
of credit, has become insignificant.

21 | P a g e

In any event, we affirm the earlier ruling of the Court of Appeals dated April 9, 1987
in regard to the petition before it for certiorari and prohibition with preliminary
injunction, to wit:
There is no merit in the respondent's contention that the certification
required in condition No. 4 of the letter of credit was "patently illegal." At
the time the letter of credit was issued there was no Central Bank
regulation prohibiting such a condition in the letter of credit. The letter of
credit (Exh. C) was issued on June 7, 1971, more than two months before
the issuance of the Central Bank Memorandum on August 16, 1971
disallowing such a condition in a letter of credit. In fact the letter of credit
had already expired on July 30, 1971 when the Central Bank memorandum
was issued. In any event, it is difficult to see how such a condition could be
categorized as illegal or unreasonable since all that plaintiff Villaluz, as
seller of the logs, could and should have done was to refuse to load the
logs on the vessel "Zenlin Glory", unless Christiansen first issued the
required certification that the logs had been approved by him to be in
accordance with the terms and conditions of his purchase order.
Apparently, Villaluz was in too much haste to ship his logs without taking
all due precautions to assure that all the terms and conditions of the letter
of credit had been strictly complied with, so that there would be no hitch in
its negotiation. (Rollo, p. 8)
WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby NULLIFIES
and SETS ASIDE the decision of the Court of Appeals dated June 29, 1990. The
amended complaint in Civil Case No. 15121 is DISMISSED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. L-100831 December 17, 1993

RELIANCE COMMODITIES, INC., petitioner,
vs.
DAEWOO INDUSTRIAL CO., LTD., respondent.
Ongkiko & Dizon Law Offices for petitioner.
Lao, Veloso-Lao & Lao for private respondent.

FELICIANO, J.:
On 9 January 1980, petitioner Reliance Commodities, Inc. ("reliance") and private
respondent Daewoo Industrial Co., Ltd. ("Daewoo") entered into a contract of sale
under the terms of which the latter undertook to ship and deliver to the former
2,000 metric tons of foundry pig iron for the price of US$404,000.00. Pursuant to
this contract, Daewoo shipped from Pohang, Republic of Korea, 2,000 metric tons of
foundry pig iron on board the M/S Aurelio III under Bill of Lading No. PIP-1 for
carriage to and delivery in Manila to its consignee, Reliance. The shipment was fully
paid for. Upon arrival in Manila, the subject cargo was found to be short of 135.655
metric tons as only 1,864.345 metric tons were discharged and delivered to
Reliance.
On 2 May 1980, another contract was entered into between the same parties for the
purchase of another 2,000 metric tons of foundry pig iron. Daewoo acknowledged
the short shipment of 135.655 metric tons under the 9 January 1980 contract and,
to compensate Reliance therefor, bound itself to reduce the price by US$1 to US$2
per metric ton of pig iron for succeeding orders. This undertaking was made part of
the 2 May 1980 contract. However, that contract was not consummated and was
later superseded by still another contract dated 31 July 1980.
The 31 July 1980 contract read as follows:

22 | P a g e

CONFIRMATION OF ORDER
SALES NOTE No. HSB-SN/S001-R
To Messrs: Reliance Commodities, Inc.
161, 9th Street, 10th Avenue
Caloocan City
Reference: HSB-PI/8019-R
Contracted through:
Order No.:
Commodity: Foundry Pig Iron
Spec.: JIS G 2202 Class 1-1C
Quantity: 2,000MT
Price: US $190.30/MT C&F Manila
Amount: US $380,600.00
Packing: Bare Loose
Shipment: August
Destination: Manila
Payment: By an irrevocable of sight letter of credit in favor of
Daewoo Industrial Co., Ltd., 541 5th Street, namdaemunro, JungGu, Seoul, Korea.

3. Quantity Tolerance: +10 percent of total quantity should be

allowed.
4. Unit Weight: 5 kgs. + 1 kg. (one notch)
5. Broken pieces of twenty (20%) percent should be allowed.
6. All disputes, controversies, or differences which may arise
between the parties, out of or in relation to or in connection with
this contract, or for the breach thereof, shall be finally settled by
arbitration in Korea in accordance with the rules and regulations of
Korea commercial arbitration association or in the Philippines in
accordance with the Philippine arbitration rules.

Remarks: Other terms and conditions as per attached sheet.

7. Letter of credit should be opened on or before August 7, 1980.

We confirm our sales as specified herein. Subject to the terms and

conditions set forth herein, this confirmation of order ("the
Contract") constitutes a contract between Daewoo Industrial Co.
Ltd. ("Seller") and the addressee ("Buyer"). Other terms and
conditions of the Contract are on the back hereof. If you find
anything herein not in order, please let us know immediately, if
necessary by telex, cable or telegram. Kindly sign and return the
duplicate after confirming the above.

8. Other terms and conditions, if necessary, are to be solved later

by mutual agreement.

Read and agreed to:

Name of addressee: Daewoo Industrial Co., Ltd.
By: (SGD) MR SAMUEL CHUASON By: (SGD) JA-HYUNG RYU
Date: July 31, 1980 Date: July 31, 1980 1
The attached sheet referred to above set out the following:
Reliance Commodities, Inc.
Our Reference No. HSB-PI/SO19-R
1. Invoicing: Actual Weight

23 | P a g e

2. Chemical Composition (%):

Carbon: 3.30 min. (aiming 3.80 min.)
Silicon: 2.21-2.60 (aiming 2.60)
Manganese: 0.30-1.00
Phosphorous: 0.45 max. (aiming 0.25 max.)
Sulfur: 0.05 max.

9. Mill sheets and copies of non-negotiable documents to be sent

to buyer by airmail immediately after shipment.
10. This Sales Note No. HSB-SN/S001R cancels Sales Note No.
HSB-SN/8001 dated May 2, 1980. 2
On August 1, 1980, Reliance, through its Mrs. Samuel Chuason, filed with the China
Banking Corporation, an application for a Letter of Credit (L/C) in favor of Daewoo
covering the amount of US$380,600.00. The application was endorsed to the Iron
and Steel Authority (ISA) or approval but the application was denied. Reliance was
instead asked to submit purchase orders from end-users to support its application
for a Letter of Credit. However, Reliance was not able to raise purchase orders for
2,000 metric tons. Reliance alleges that it was able to raise purchase orders for
1,900 metric tons. 3 Daewoo, upon the other hand, contends that Reliance was only
able to raise purchase orders for 900 metric tons. 4 An examination of the
exhibits 5 presented by Reliance in the trial court shows that only purchase orders
for 900 metric tons were stamped "Received" by the ISA. The other purchase orders
for 1,000 metric tons allegedly sent by prospective end users to Reliance were not
shown to have been duly sent and exhibited to the ISA. Whatever the exact amount
of the purchase orders was, Daewoo rejected the proposed L/C for the reason that
the covered quantity fell short of the contracted tonnage. Thus, Reliance withdrew
the application for the L/C on 14 August 1980.

Subsequently, Daewoo leaned that the failure of Reliance to open the L/C as
stipulated in the 31 July 1980 contract was due to the fact that as early as May
1980, Reliance has already exceeded its foreign exchange allocation for 1980.
Because of the failure of Reliance to comply with its undertaking under the 31 July
1980 contract, Daewoo was compelled to sell the 2,000 metric tons to another
buyer at a lower price, to cut losses and expenses Daewoo had begun to incur due
to its inability to ship the 2000 metric tons to Reliance under their contract.
On 3 September 1980, Reliance, through its counsel, wrote Daewoo requesting
payment of the amount of P226,370.48, representing the value of the short delivery
of 135.655 metric tons of foundry pig iron under the contract of 9 January 1980.
Not being heeded, Reliance filed an action for damages against Daewoo with the
trial court. Daewoo responded, inter alia, with a counterclaim for damages,
contending that Reliance was guilty of breach of contract when it failed to open an
L/C as required in the 31 July 1980 contract.
After trial, the trial court ruled that:
(1) the 31 July 1980 contract did not extinguish Daewoo's
obligation for short delivery pursuant to the 9 January 1980
contract and must therefore pay Reliance P226,370.48
representing the value of the short delivered goods plus interest
and attorney's fees; and
(2) Reliance is in turn liable for breach of contract for its failure to
open a letter of credit in favor of Daewoo pursuant to the 31 July
1980 contract and must therefore pay the latter P331,920.97 as
actual damages with legal interest plus attorney's fees.
Reliance appealed the second part of the trial court's judgment. Public respondent
Court of Appeals found no merit in the appeal and in affirming the decision of the
trial court ruled that:
1) the trial court's finding that Reliance could not have opened the
Letter of Credit in favor of Daewoo because it had already
exhausted its foreign exchange allocation at the time of its
application, was amply supported by evidence; and
2) the opening of a letter of credit is not such a future and
uncertain event as to make it a suspensive condition within the
contemplation of law; but, only mode of payment agreed upon by
the parties, and a standard mode at that when one of the parties
to the transaction is a foreigner and the consideration is payable
in foreign exchange.
In the present Petition for Review, Reliance assails the award of damages in favor of
Daewoo. Reliance contends a) that its failure to open a Letter of Credit was due to
the failure of Daewoo to accept the purchase orders for 1,900 metric tons instead of

24 | P a g e

2,000 metric tons; b) that the opening of the Letter of Credit was a condition
precedent to the effectivity of the contract between Reliance and Daewoo; and c)
that since such condition had not occurred, the contract never came into existence
and, therefore, Reliance should not have been held liable for damages.
The issue before us is whether or not the failure of an importer (Reliance) to open a
letter of credit on the date agreed upon makes him liable to the exporter (Daewoo)
for damages.
In addressing this issue, it is useful to recall the nature of a Letter of Credit, and the
mechanics involved in applying for a Letter of Credit.
The nature of a letter of credit was extensively discussed in Bank of America, NT &
SA v. Court of Appeals, et al. 6by Vitug, J. in the following terms:
A letter of credit is a financial device developed by merchants as a
convenient and relatively safe mode of dealing with sales of goods
to satisfy the seemingly irreconcilable interests of a seller, who
refuses to part with his goods before he is paid, and a buyer, who
wants to have control of the goods before paying. To break the
impasse, the buyer may be required to contract a bank to issue a
letter of credit in favor of the seller so that, by virtue of the letter
of credit, the issuing bank can authorize the seller to draw drafts
and engage to pay them upon their presentment simultaneously
with the tender of documents required by the letter of credit. The
buyer and seller agree on what documents are to be presented for
payment, but ordinarily they are documents of title evidencing or
attesting to the shipment of the goods to the buyer.
Once the credit is established, the seller ships the goods to the
buyer and in the process secures the required shipping documents
or documents of title. To get paid, the seller executes a draft and
pays cash to the seller if it finds that the documents submitted by
the seller conform with what the letter of credit requires. The bank
then obtains possession of the documents upon paying the seller.
The transaction is completed when the buyer reimburses the
issuing bank and acquires the documents entitling him to the
goods. Under this arrangement, the seller gets paid only if he
delivers the documents of title over the goods, while the goods
only after reimbursing the bank. 7 (footnotes omitted)
A letter of credit is one of the modes of payment, set out in Sec. 8, Central Bank
Circular No. 1389, "Consolidated Foreign Exchange Rules and Regulations," dated 13
April 1993, by which commercial banks sell foreign exchange to service payments
for, e.g., commodity imports. The primary purpose of the letter of credit is to
substitute for and therefore support, the agreement of the buyer/importer to pay
money under a contract or other arrangement. 8 It creates in the seller/exporter a
secure expectation of payment.

A letter of credit transaction may thus be seen to be a composite of at least three

(3) distinct but intertwined relationships being concretized in a contract:
(a) One contract relationship links the party applying for the L/C
(the account party or buyer or importer) and the party for whose
benefit the L/C is issued (the beneficiary or seller or exporter). In
this contract, the account party, here Reliance, agrees, among
other things and subject to the terms and conditions of the
contract, to pay money to the beneficiary, here Daewoo.
(b) A second contract relationship is between the account party
and the issuing bank. Under this contract, (sometimes called the
"Application and Agreement" or the "Reimbursement Agreement"),
the account party among other things, applies to the issuing bank
for a specified L/C and agrees to reimburse the bank for amounts
paid by that bank pursuant to the L/C.
(c) The third contract relationship is established between the
issuing bank and the beneficiary, in order to support the contract,
under
(a) above, of the account party and the beneficiary to, inter alia,
pay certain monies to the latter.
Certain other parties may be added to the foregoing, but the above three are the
indispensable ones.
The issue raised in the Petition at bar relates principally to the first component
contractual relation above: that between account party or importer Reliance and
beneficiary or exporter Daewoo.
Examining the actual terms of that relationship as set out in the 31 July 1980
contract quoted earlier (and notsimply the summary inaccurately rendered by the
trial court), the Court considers that under that instrument, the opening of an L/C
upon application of Reliance was not a condition precedent for the birth of the
obligation of Reliance to purchase foundry pig iron from Daewoo. We agree with the
Court of Appeals that Reliance and Daewoo, having reached "a meeting of minds" in
respect of the subject matter of the contract (2000 metric tons of foundry pig iron
with a specified chemical composition), the price thereof (US $380,600.00), and
other principal provisions, "they had a perfected contract." 9 The failure of Reliance
to open, the appropriate L/C did not prevent the birth of that contract, and neither
did such failure extinguish that contract. The opening of the L/C in favor of Daewoo
was an obligation of Reliance and the performance of that obligation by Reliance
was a condition of enforcement of the reciprocal obligation of Daewoo to ship the
subject matter of the contract the foundry pig iron to Reliance. But the
contract itself between Reliance and Daewoo had already sprung into legal existence
and was enforceable.
The L/C provided for in that contract was the mode or mechanism by which
payment was to be effected by Reliance of the price of the pig iron. In undertaking

25 | P a g e

to accept or pay the drafts presented to it by the beneficiary according to the tenor
of an L/C, and only later on being reimbursed by the account party, the issuing bank
in effect extends a loan to the account party. This loan feature, combined with the
bank's undertaking to accept the beneficiary's drafts drawn on the bank, constitutes
the L/C as a mode of payment. 10 Logically, before the issuing bank open an L/C, it
will take steps to ensure that it would indeed be reimbursed when the time comes.
Before an L/C can be opened, specific legal requirements must be complied with.
The Central Bank of the Philippines has established the following requirements for
opening a letter of credit:
All L/C's must be opened on or before the date of shipment with
maximum validity of one (1) year. Likewise, only one L/C should
be opened for each import transaction. for purposes of opening an
L/C, importers shall submit to the commercial bank the following
documents:
a) the duly accomplished L/C application;
b) firm offer/proforma invoice which shall
contain information on the specific quantity of
the importation, unit cost and total cost,
complete description/specification of the
commodity and the Philippine Standard
Commodity Classification statistical code;
c) permits/clearances from the appropriate
government agencies, whenever applicable;and
d) duly accomplished Import Entry Declaration
(IED) form which shall serve as basis for
payment of advance duties as required under PD
1853. 11 (Emphasis supplied)
The need for permits or clearances from appropriate government agencies arises
when regulated commodities are to be imported. 12 Certain commodities are
classified as "regulated commodities" for purposes of their importation, "for reasons
of public health and safety, national security, international commitments, and
development/rationalization of local industry." 13 The petitioner in the instant case
entered into a transaction to import foundry pig iron, a regulated commodity. In
respect of the importation of this particular commodity, the Iron and Steel Authority
(ISA) is the government agency designated to issue the permit or clearance. 14 Prior
to the issuance of such permit or clearance, ISA asks the buyer/importer to comply
with particular requirements, such as to show the availability of foreign exchange
allocations. The issuance of an L/C becomes, among other things, an indication of
compliance by the buyer/importer with his own government's regulations relating to
imports and to payment thereof. 15

The records shows that the opening of the L/C in the instant case became very
difficult because Reliance had exhausted its dollar allocation. Reliance knew that it
had already exceeded its dollar allocation for the year 1980 when it entered into the
31 July 1980 transaction with Daewoo. 16 As a rule, when the importer has
exceeded its foreign exchange allocation, his application would be denied. However,
ISA could reconsider such application on a case to case basis. 17 Thus, in the instant
case, ISA required Reliance to support its application by submitting purchase orders
from end-users for the same quantity the latter wished to import. As earlier noted,
Reliance was able to present purchase orders for only 900 metric tons of the subject
pig iron. 18 For having exceeded its foreign exchange allocation before it entered
into the 31 July 1980 contract with Daewoo, petitioner Reliance can hold only itself
responsible. for having failed to secure end-users purchase orders equivalent to
2,000 metric tons, only Reliance should be held responsible.
Daewoo rejected Reliance's proposed reduced tonnage. It had the right to demand
compliance with the terms of the basic contract and had no duty to accept any
unilateral modification of that contract. Compliance with Philippine legal
requirements was the duty of Reliance; it is not disputed that ISA's requirements
were legal and valid, and not arbitrary or capricious. Compliance with such
requirements, like keeping within one's dollar allocation and complying with the
requirements of ISA, were within the control of Reliance and not of Daewoo. The
Court is compelled to agree with the Court of Appeals that the non-opening of the
L/C was due to the failure of Reliance to comply with its duty under the contract.
We believe and so hold that failure of a buyer seasonably to furnish an agreed letter
of credit is a breach of he contract between buyer and seller. Where the buyer fails
to open a letter of credit as stipulated, the seller or exporter is entitled to claim
damages for such breach. Damages for failure to open a commercial credit may, in
appropriate cases, include the loss of profit which the seller would reasonably have
made had the transaction been carried out. 19
We hold, further, that the Court of Appeals committed no reversible error when it
ruled that the damages incurred by Daewoo were sufficiently proved with the
testimony of Mr. Ricardo Fernandez and "the various documentary evidence showing
the loss suffered by the defendant when it was compelled to sell the subject goods
at a lower price." 20
WHEREFORE, in view of the foregoing, the Petition for Review is hereby DENIED for
lack of merit and the decision of the Court of Appeals dated 8 February 1991 is
hereby AFFIRMED. Costs against petitioner.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-11583

February 8, 1918

JOSE SISON and EMILIO SISON, plaintiffs-appellants,

vs.
F. M. YAP TICO and AMANDO AVANCEA, provincial sheriff of
IloIlo, defendants-appellees.
C. Lozano for appellant.
No appearance for appellees.
JOHNSON, J.:
The principal question presented by this appeal is whether or not the mortgagor of a
chattel mortgage is relieved from liability by paying the mortgagee after the
mortgage has been assigned to a third person, when he has noactual notice of said
transfer.
The pertinent facts as they appear in the record are: That on the 11th day of April,
1912, the plaintiffs borrowed of Eugenio Kilayko the sum they executed and
delivered to the said Kilayko a chattel mortgage covering machinery, crops and a
number of carabaos; that said debt was due and payable on or before the 30th day
of May, 1913; that the mortgagors had to deliver to the mortgagee (Kilayko) in the
city of Iloilo their entire crop of sugar for the years 1912-13; that in the compliance
with the mortgage the plaintiffs herein did deliver sugar for said years from time to

26 | P a g e

time in the city of Iloilo at the bodega (warehouse) of the defendant Yap Tico at the
request of the said Kilayko; that, finally a liquidation was made and there was found
to be still due the mortgagee (Kilayko) the sum of P650; that sum was sent to the
mortgagee by a representative of the mortgagors (Antonio Horrilleno) and was by
him delivered to Kilayko; that upon the delivery of said sum (P650) the mortgagee
(Kilayko) on the 14th day of May, 1914, executed and delivered a cancellation of
said mortgage; that in the month of May, 1912, the mortgagee (Kilayko) assigned
and transferred said mortgage to the defendant herein, F. M. Yap Tico; that said
assignment and transfer were duly registered upon the 14th day of April, 1913,
nearly one year after the transfer had been made; that the cancellation of said
mortgage as above indicated was duly registered on the 19th day of December,
1914; that neither Kilayko and Yap Tico gave any notice whatever to the plaintiffs
herein that said mortgage had been transferred; that the plaintiffs had no notice
that the mortgage had been transferred nor that said transfer had been registered;
that at the time the last payment was made on said mortgage (14th day of May,
1914) the mortgage (Kilayko) gave no notice to the mortgagors, or to their
representative, that the mortgage had been transferred, but upon the contrary
made a search among the papers of his office attempting to find it, and not being
able to find it at the time, promised to return the same to the mortgagors as soon
as he could find it; that later the assignee of said mortgagee (Yap Tico), in
accordance with the provisions of the Chattel Mortgage Law (Act No. 1508),
proceeded to foreclose said mortgage, and the sheriff attached and took possession
of all the property which said mortgage covered. It is admitted that the sheriff, as
well as Yap Tico, were notified by the plaintiffs, at the time of said attachment, that
the mortgage had been paid and cancelled. Notwithstanding that notice the sheriff
insisted upon enforcing the attachment, and the plaintiffs, after some delay,
obtained the release of the property so attached by the execution and delivery of a
bond. This action was brought for the purpose of recovering the property, together
with damages caused by said alleged illegal attachment.
The defendants answered by a general denial. Upon the issue presented by the
petition and answer, the cause was brought on for trial, and after hearing the
respective parties, the Honorable J. S. Powell, judge, rendered a judgment relieving
the defendants from all liability under the complaint and ordered that the
defendants recover of the plaintiffs the sum of P2,000, with interest at 12 per cent
from the 28th day of May, 1912, and the costs of the suit. From that judgment the
plaintiffs appealed to this court.
The fact is not denied that while the mortgage in question was transferred by the
mortgagee, Kilayko, to the defendant, Yap Tico, within less than two months after
its execution and delivery, and that the plaintiffs had delivered sugar at
the bodega of Yap Tico from time to time covering a period of nearly two years in
partial payment to the plaintiffs that he was the owner of said mortgage. It is
further established beyond question that the plaintiffs had no notice whatever of
said transfer, unless the registration of said assignment had the effect of giving
them notice, until long after full amount of said mortgage had been paid to the
original mortgagee, Kilayko, and said mortgage had been cancelled.
Under the recording of the assignment operated as notice to the mortgagors their
payment of the same, without actual notice of said transfer, relieved them from all

27 | P a g e

liability under said mortgage. Article 1527 of the Civil Code provides that a debtor
who, before having been informed of the assignment, pays the creditor, shall be free
from the obligation. (See also, to the same effect, arts. 152 and 154 of the
Mortgage Law.)
Manresa, in commenting upon the provisions of article 1527 of the Civil Code, after
discussing the articles of the Mortgage Law, says:
We have said that article 1527 deals with the individual phase or aspect
which presupposes the existence of a relationship with third parties, that is,
with the person of the debtor. Let us see what way. "The above-mentioned
article states that a debtor who, before having knowledge, of the
assignment, should pay the creditor shall be released from the obligation.
In the first place, the necessity for the notice to the debtor in order that
the assignment may fully produce its legal effects may be inferred from the
above. It refers to a notice and not to a petition for the consent which is
not necessary. We say that the notice is not necessary in order that the
legal effects may be fully produce, because if it should be omitted, such
omission will not imply that the assignment will not exist legally, but that
its effects will be limited to the parties thereto; at least, they will not reach
the debtor.
xxx

xxx

xxx

Let us go to the legal effects produced by the failure to give the notice. In
the beginning, we have said that the contract does not lose it efficacy with
respect to the parties who made it; but article 1527 determines specifically
one of the consequences arising from the failure to give the notice, for it
evidently takes for granted that the debtor who, before having knowledge
of the assignment, should pay the creditor shall be released from the
obligation. So that if the creditor assigned his credit, acting in bad faith and
taking advantage of the fact that the debtor does not know anything about
the assignment because the latter has not been notified, and collects its
amount, the debtor shall be free from the obligation, inasmuch as it has
been legally extinguished by a payment which fully redounds to his benefit.
The assignee can take advantage of all civil and criminal actions against
the assignor, but he can ask no thing from the debtor, because the latter
did not know of the assignment, nor was he bound to know it; the assignor
should blame himself for his failure to have the notice made.
xxx

xxx

xxx

Hence there not having been any notice to the debtor, the existence of his
knowledge of the assignment should be proved by him who is interested
therein; and the debtor is not bound to prove his ignorance. (10 Manresa,
384, 385, 387.)

The question, whether or not the registration of the assignment operated as notice,
ipso facto, to the mortgagors, we are inclined to answer in the negative, for the
reason that the law does not require such assignments to be recorded. While such
assignments may be recorded, the law is permissible and not mandatory. The filing
and recording of an instrument in the office of the registrar, when the law does not
require such filing and recording, does not constitute notice to the parties.
(Burck vs. Taylor, 152 U. S., 634; 5 Corpus Juris, 934.)
The debtor or party liable on contracts like the one in question is not affected by the
assignment until he has notice thereof, and consequently he may set up against the
claim of the assignee any defense acquired before notice that would avail him
against the assignor had there been no assignment, and payment by the debtor to
the assignor, or any compromise or release of the assigned claim by the latter
before notice will be valid against the assignee and discharge the debtor.
(Vanbuskirk vs. Hartford Fire Insurance Co., 14 Conn., 141; Clodfelter vs.Cox, 1
Sneed [Tenn.], 330; 60 Am. Dec., 157; Johnston vs. Allen, 22 Fla., 224;
Shields vs. Taylor and Tarpley, 25 Miss., 13.)
In the case of Shields vs. Taylor and Tarpley, supra, the court said:
No man is bound to remain a debtor; he may pay to him with whom he
contracted to pay; and if he pay before notice that his debt has been
assigned, the law holds him exonerated, for the reason that it is the duty of
the person who has acquired a title by transfer to demand payment of the
debt to give his debtor notice.
Any act which a person may be compelled to perform to perform by a
proceeding at law may be done voluntarily, and he will be protected by the
law.
It is generally held that if the law does not require a particular instrument to be
recorded or registered, the recording of that instrument will not be constructive
notice of its existence to anyone. (Burck vs. Taylor, 152 U. S., 634;
Srewart vs. Kirkland, 19 Ala., 162; Lambert vs. Morgan, 110 Md., 1; Dial vs. Inland
Logging Co., 52 Wash., 81.)
The rule is very well stated in 4 Cyc. (pp. 33, 34):
Until notice of the assignment is given to the debtor, it will not bind him so
as to deprive him of equities arising between the date of the assignment
and the date when he received notice thereof. As to such equities, the
assignment takes effect from the time the debtor receives notice and not
from the time of the assignment.
In the case of Dial vs. Inland Logging Co., supra, the court said:
We are not aware of any statute, and not has been called to our attention,
requiring or authorizing the recording of an assignment of a lien of the

28 | P a g e

character of the one in this case. In the absence of such statute, the
recording of the assignment to the respondent before the assignment to
the appellant did not operate as constructive notice.
It seems to be clear, then, that a debtor is protected if he pays his creditor without
actual notice that the debt has been assigned. Such notice must be actual, and the
recording of the assignment, there being no law requiring the same, will not operate
as constructive notice to the debtor.
With reference to the question of damages, the proof shows that, by reason of the
said attachment of the property included within the mortgage and the deprivation of
the plaintiffs of the possession thereof, they were unable to grind certain sugar cane
then already harvested and to reduce to sugar some juice already prepared,
amounting to, as the record shows, 52 picos of sugar, which was worth P5 per pico.
The damages resulting from the loss of sugar would be P260. The evidence relating
to the other damages claimed is too indefinite upon which to base a finding.
It will be remembered that the defendants presented a general denial. They did not
pray for affirmative relief. In view, however, of the conclusions which we have
reached it is necessary to discuss the question whether a judgment for an
affirmative relief can be based upon a general denial.
For the foregoing reasons, it is hereby ordered and decreed that the judgment of
the lower court be reversed; that all the property which was taken possession of by
the sheriff under the said foreclosure proceedings be returned to the plaintiffs if it
has not already been done; that the bond theretofore given by the plaintiffs to
secure possession of said property be cancelled; and that a judgment be rendered
in favor of the plaintiffs and against the defendant Yap Tico in the sum of P260, with
interest at the rate of 6 per cent from the 8th day of March, 1915, and costs. So
ordered.

FIRST DIVISION
[G.R. No. 158382. January 27, 2004]
MANSUETO CUATON, petitioner, vs. REBECCA SALUD and
APPEALS (Special Fourteenth Division), respondents.

COURT

OF

DECISION
YNARES-SANTIAGO, J.:
Before the Court is a petition for review on certiorari assailing the August 31,
2001 Decision[1] of the Court of Appeals in CA-G.R. CV No. 54715 insofar as it
affirmed the Judgment[2] of the Regional Trial Court of General Santos City, Branch
35, in SPL. Civil Case No. 359, imposing interest at the rate of 8% to 10% per
month on the one-million-peso loan of petitioner.

29 | P a g e

On January 5, 1993, respondent Rebecca Salud, joined by her husband

Rolando Salud, instituted a suit for foreclosure of real estate mortgage with
damages against petitioner Mansueto Cuaton and his mother, Conchita Cuaton, with
the Regional Trial Court of General Santos City, Branch 35, docketed as SPL. Civil
Case No. 359.[3] The trial court rendered a decision declaring the mortgage
constituted on October 31, 1991 as void, because it was executed by Mansueto
Cuaton in favor of Rebecca Salud without expressly stating that he was merely
acting as a representative of Conchita Cuaton, in whose name the mortgaged lot
was titled. The court ordered petitioner to pay Rebecca Salud, inter alia, the loan
secured by the mortgage in the amount of One Million Pesos plus a total
P610,000.00 representing interests of 10% and 8% per month for the period
February 1992 to August 1992, thus
Original loan ------------------------------------------------------ P1,000,000.00

--------------------Total amount as of August 1992 ------------------P 1, 610,000.00[4]

The dispositive portion of the trial courts decision, reads:
WHEREFORE, premises considered, judgment is hereby rendered:
a) Declaring the mortgage executed by Mansueto Cuaton over the property owned
by Conchita Cuaton, covered by TCT NO. T-34460, dated October 31, 1991, in favor
of Rebecca Salud as unauthorized, void and unenforceable against defendant,
Conchita Cuaton hence, the TRO issued against the foreclosure thereof is hereby
made permanent. The annotation of the mortgage over said property is likewise
cancelled;

10% interest for the month of

February 1992
balance only --------------------------------------------- 50,000.00
10% interest for the month of

b) Ordering defendant Mansueto Cuaton to pay plaintiff, Rebecca Salud, the sum of
One Million Six Hundred Ten Thousand (P1,610,000.00) Pesos, with legal interest
thereon, from January 5, 1993 until fully paid;
c) Ordering defendant, Mansueto Cuaton, to pay Attorneys fees of P25,000.00 in
favor of the plaintiff, Rebecca Salud and to pay the cost of this suit.

March 1992 --------------------------------------------- 100,000.00

Defendants counterclaims, being merely a result of the filing of plaintiffs complaint

are hereby DISMISSED.

10% interest for the month of

SO ORDERED.[5]

April 1992 ---------------------------------------------- 100,000.00

10% interest for the month of
May 1992 ----------------------------------------------- 100,000.00
10% interest for the month of
June 1992 ----------------------------------------------- 100,000.00
8% interest for the month of
July 1992 ------------------------------------------------ 80,000.00
8% interest for the month of
August 1992 -------------------------------------------- 80,000.00

30 | P a g e

Both parties filed their respective notices of appeal.[6]

On August 31, 2001, the Court of Appeals rendered the assailed decision
affirming the judgment of the trial court. Petitioner filed a motion for partial
reconsideration of the trial courts decision with respect to the award of interest in
the amount of P610,000.00, arguing that the same was iniquitous and exorbitant.
[7]
This was denied by the Court of Appeals on May 7, 2003.[8]
Hence, the instant petition on the sole issue of whether the 8% and 10%
monthly interest rates imposed on the one-million-peso loan obligation of petitioner
to respondent Rebecca Salud are valid.
We find merit in the petition.
In Ruiz v. Court of Appeals,[9] we declared that the Usury Law was suspended
by Central Bank Circular No. 905, s. 1982, effective on January 1, 1983, and that
parties to a loan agreement have been given wide latitude to agree on any interest
rate. However, nothing in the said Circular grants lenders carte blanche authority to
raise interest rates to levels which will either enslave their borrowers or lead to a

hemorrhaging of their assets. The stipulated interest rates are illegal if they are
unconscionable.
Thus, in Medel v. Court of Appeals,[10] and Spouses Solangon v. Salazar,[11] the
Court annulled a stipulated 5.5% per month or 66% per annum interest on a
P500,000.00 loan and a 6% per month or 72% per annum interest on a P60,000.00
loan, respectively, for being excessive, iniquitous, unconscionable and exorbitant. In
both cases, the interest rates were reduced to 12% per annum.
In the present case, the 10% and 8% interest rates per month on the onemillion-peso loan of petitioner are even higher than those previously invalidated by
the Court in the above cases. Accordingly, the reduction of said rates to 12% per
annum is fair and reasonable.
Stipulations authorizing iniquitous or unconscionable interests are contrary to
morals (contra bonos mores), if not against the law.[12] Under Article 1409 of the
Civil Code, these contracts are inexistent and void from the beginning. They cannot
be ratified nor the right to set up their illegality as a defense be waived. [13]
Moreover, the contention regarding the excessive interest rates cannot be
considered as an issue presented for the first time on appeal. The records show that
petitioner raised the validity of the 10% monthly interest in his answer filed with the
trial court.[14] To deprive him of his right to assail the imposition of excessive
interests would be to sacrifice justice to technicality. Furthermore, an appellate
court is clothed with ample authority to review rulings even if they are not assigned
as errors. This is especially so if the court finds that their consideration is necessary
in arriving at a just decision of the case before it. We have consistently held that an
unassigned error closely related to an error properly assigned, or upon which a
determination of the question raised by the error properly assigned is dependent,
will be considered by the appellate court notwithstanding the failure to assign it as
an error.[15] Since respondents pointed out the matter of interest in their Appellants
Brief[16] before the Court of Appeals, the fairness of the imposition thereof was
opened to further evaluation. The Court therefore is empowered to review the
same.
The case of Eastern Shipping Lines, Inc. v. Court of Appeals,[17] laid down the
following guidelines on the imposition of interest, to wit:
1. When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that which
may have been stipulated in writing. Furthermore, the interest due shall itself earn
legal interest from the time it is judicially demanded. In the absence of stipulation,
the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169
23 of the Civil Code.
xxxxxxxxx

31 | P a g e

3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.
Applying the foregoing rules, the interest of 12% per annum imposed by the
Court (in lieu of the invalidated 10% and 8% per month interest rates) on the onemillion-peso loan should be computed from the date of the execution of the loan on
October 31, 1991 until finality of this decision. After the judgment becomes final
and executory until the obligation is satisfied, the amount due shall further earn
interest at 12% per year.
WHEREFORE, in view of all the foregoing, the instant petition
is GRANTED. The August 31, 2001 Decision of the Court of Appeals in CA-G.R. CV
No. 54715, which affirmed the Decision of the Regional Trial Court of General Santos
City, Branch 35, in SPL. Civil Case No. 359, is MODIFIED. The interest rates of 10%
and 8% per month imposed by the trial court is reduced to 12% per annum,
computed from the date of the execution of the loan on October 31, 1991 until
finality of this decision. After the judgment becomes final and executory until the
obligation is satisfied, the amount due shall further earn interest at 12% per year.
SO ORDERED.

Equally assailed in this petition is the Resolution,[4] dated July 2, 2002, of the
appellate court, denying Teresita Dios Motion for Partial Reconsideration of
March 19, 2002 and the Spouses Japor and Marta Japors Motion for
Reconsideration dated March 20, 2002.
The antecedent facts are as follows:

FIRST DIVISION
[G.R. No. 154129. July 8, 2005]
TERESITA DIO, petitioner, vs. SPOUSES VIRGILIO and LUZ ROCES JAPOR
and MARTA[1] JAPOR, respondents.
DECISION
QUISUMBING, J.:
For review on certiorari is the Decision, dated February 22, 2002, of the
Court of Appeals, in the consolidated cases CA-G.R. CV No. 51521 and CA-G.R. SP
No. 40457. The decretal portion read:
[2]

WHEREFORE, premises considered, in CA-G.R. CV No. 51521, the decision of the

trial court is AFFIRMED with MODIFICATION. Judgment is rendered as follows:
1. Declaring the Real Estate Mortgage to be valid;
2. Fixing the interest at 12% per annum and an additional 1% penalty
charge per month such that plaintiffs-appellants contractual obligation
under the deed of real estate mortgage would amount
toP1,252,674.00;
3. Directing defendant-appellee Dio to give the surplus of P2,247,326.00
to plaintiffs-appellants; and
4. Affirming the dissolution of the writ of preliminary injunction previously
issued by the trial court.
No pronouncement as to costs.
The Petition in CA-G.R. SP No. 40457 is DENIED for being moot and academic.
SO ORDERED.[3]

32 | P a g e

Herein respondents Spouses Virgilio Japor and Luz Roces Japor were the
owners of an 845.5 square-meter residential lot including its improvements,
situated in Barangay Ibabang Mayao, Lucena City, as shown by Transfer Certificate
of Title (TCT) No. T-39514. Adjacent to the Japors lot is another lot owned by
respondent Marta Japor, which consisted of 325.5 square meters and titled under
TCT No. T-15018.
On August 23, 1982, the respondents obtained a loan of P90,000 from the
Quezon Development Bank (QDB), and as security therefor, they mortgaged the lots
covered by TCT Nos. T-39514 and T-15018 to QDB, as evidenced by a Deed of Real
Estate Mortgage duly executed by and between the respondents and QDB.
On December 6, 1983, respondents and QDB amended the Deed of Real Estate
Mortgage increasing respondents loan to P128,000.
The respondents failed to pay their aforesaid loans. However, before the bank
could foreclose on the mortgage, respondents, thru their broker, one Lucia G. Orian,
offered to mortgage their properties to petitioner Teresita Dio. Petitioner prepared a
Deed of Real Estate Mortgage, whereby respondents mortgaged anew the two
properties already mortgaged with QDB to secure the timely payment of a P350,000
loan that respondents had from petitioner Dio. The Deed of Real Estate Mortgage,
though dated January 1989, was actually executed on February 13, 1989 and
notarized on February 17, 1989.
Under the terms of the deed, respondents agreed to pay the petitioner interest
at the rate of five percent (5%) a month, within a period of two months or until
April 14, 1989. In the event of default, an additional interest equivalent to five
percent (5%) of the amount then due, for every month of delay, would be charged
on them.
The respondents failed to settle their obligation to petitioner on April 14, 1989,
the agreed deadline for settlement.
On August 27, 1991, petitioner made written demands upon the respondents
to pay their debt.
Despite repeated demands, respondents did not pay, hence petitioner applied
for extrajudicial foreclosure of the mortgage. The auction of the unredeemed
properties was set for February 26, 1992.

Meanwhile, on February 24, 1992, respondents filed an action for Fixing of

Contractual
Obligation
with
Prayer
for
Preliminary
Mandatory
Injunction/Restraining Order, docketed as Civil Case No. 92-26, with the
Regional Trial Court (RTC) of Lucena City. Respondents prayed that judgment be
rendered fixing the contractual obligations of plaintiffs with the defendant Dio plus
legal or allowable interests thereon.[5]
The trial court issued an Order
aforementioned mortgaged properties.

enjoining

the

auction

sale

of

the

On June 15, 1992, the Japors filed a Motion to Admit Amended

Complaint with an attached copy of their Amended Complaint praying that the
Deed of Real Estate Mortgage dated February 13, 1989 be declared null and void,
but reiterating the plea that the trial court fix the contractual obligations of the
Japors with Dio. The trial court denied the motion.
On September 27, 1994, respondents filed with the appellate court, a petition
for certiorari, docketed as CA-G.R. SP No. 35315, praying that the Court of Appeals
direct the trial court to admit their Amended Complaint. The appellate court denied
said petition.[6]

On May 9, 1996, the Court of Appeals denied respondents application for a

temporary restraining order.[8]
On October 9, 1996, the appellate court consolidated CA-G.R. CV No. 51521
and CA-G.R. SP No. 40457.
As stated at the outset, the appellate court affirmed the decision of the trial
court with respect to the validity of the Deed of Real Estate Mortgage, but modified
the interest and penalty rates for being unconscionable and exorbitant.
Before us, petitioner assigns the following errors allegedly committed by the
appellate court:
I
THE ALLEGED INIQUITY OF THE STIPULATED INTEREST AND PENALTY WAS NOT
RAISED BEFORE THE TRIAL COURT NOR ASSIGNED AS AN ERROR IN
RESPONDENTS APPEAL.
II

On December 11, 1995, the trial court handed down the following judgment:
WHEREFORE, in view of the foregoing considerations, judgment is rendered:

THE STIPULATED INTEREST AND PENALTY ARE NOT EXCESSIVE, INIQUITOUS,

UNCONSCIONABLE, EXORBITANT AND CONTRARY TO MORAL[S].
III

1. Dismissing the complaint for failure of the plaintiffs to substantiate

their affirmative allegations;
2. Declaring the Real Estate Mortgage (Exhs. A to A-13/Exhs. 3 to 3-D) to
be valid and binding as between the parties, more particularly the
plaintiffs Virgilio Japor, Luz Japor and Marta Japor or the latters
substituted heir or heirs, as the case may be;

PAYMENT OF THE SURPLUS OF P2,247,326.00 TO RESPONDENTS WOULD RESULT IN

THEIR UNJUST ENRICHMENT.
IV
RESPONDENTS APPEAL SHOULD HAVE BEEN DISMISSED DUE TO FORUM SHOPPING.

3. Dissolving the writ of preliminary injunction previously issued by this

Court; and
4. To pay the cost of this suit.
SO ORDERED.[7]
On January 17, 1996, respondents filed their notice of appeal. On April 26,
1996, they also filed a Petition for Temporary Restraining Order And/Or
Mandatory Injunction in Aid of Appellate Jurisdiction with the Court of
Appeals.
On May 8, 1996, petitioner Dio as the sole bidder in an auction purchased the
properties for P3,500,000.

33 | P a g e

[9]

Simply stated, the issue is: Did the Court of Appeals err when it held that the
stipulations on interest and penalty in the Deed of Real Estate Mortgage is contrary
to morals, if not illegal? Corollarily, were respondents entitled to any surplus on the
auction sale price?
On the main issue, petitioner contends that The Usury Law [10] has been
rendered ineffective by Central Bank Circular No. 905, series of 1982 and
accordingly, usury has become legally non-existent in this jurisdiction, thus, interest
rates may accordingly be pegged at such levels or rates as the lender and the
borrower may agree upon. Petitioner avers she has not violated any law considering
she is not engaged in the business of money-lending. Moreover, she claims she has
suffered inconveniences and incurred expenses for some 13 years now as a result of

respondents failure to pay her. Petitioner further points out that the 5% interest rate
was proposed by the respondents and have only themselves to blame if the
interests and penalties ballooned to its present amount due to their willful delay and
default in payment. The appellate court thus erred, petitioner now insists, in
applying Sps. Almeda v. Court of Appeals[11] andMedel v. Court of Appeals[12] to
reduce the interest rate to 12% per annum and the penalty to 1% per month.
Respondents admit they owe petitioner P350,000 and do not question any
lawful interest on their loan but they maintain that the Deed of Real Estate
Mortgage is null and void since it did not state the true intent of the parties, which
limited the 5% interest rate to only two (2) months from the date of the loan and
which did not provide for penalties and other charges in the event of default or
delay. Respondents vehemently contend that they never consented to the said
stipulations and hence, should not be bound by them.
On the first issue, we are constrained to rule against the petitioners
contentions.
Central Bank Circular No. 905, which took effect on January 1, 1983,
effectively removed the ceiling on interest rates for both secured and unsecured
loans, regardless of maturity. However, nothing in said Circular grants lenders carte
blanche authority to impose interest rates which would result in the enslavement of
their borrowers or to the hemorrhaging of their assets. [13] While a stipulated rate of
interest may not technically and necessarily be usurious under Circular No. 905,
usury now being legally non-existent in our jurisdiction, [14] nonetheless, said rate
may be equitably reduced should the same be found to be iniquitous,
unconscionable, and exorbitant, and hence, contrary to morals (contra
bonos mores), if not against the law.[15] What is iniquitous, unconscionable, and
exorbitant shall depend upon the factual circumstances of each case.
In the instant case, the Court of Appeals found that the 5% interest rate per
month and 5% penalty rate per month for every month of default or delay is in
reality interest rate at 120%per annum. This Court has held that a stipulated
interest rate of 5.5% per month or 66% per annum is void for being iniquitous or
unconscionable.[16] We have likewise ruled that an interest rate of 6% per month or
72% per annum is outrageous and inordinate.[17] Conformably to these precedent
cases, a combined interest and penalty rate at 10% per month or 120% per annum,
should be deemed iniquitous, unconscionable, and inordinate. Hence, we sustain the
appellate court when it found the interest and penalty rates in the Deed of Real
Estate Mortgage in the present case excessive, hence legally impermissible.
Reduction is legally called for now in rates of interest and penalty stated in the
mortgage contract.
What then should the interest and penalty rates be?
The evidence shows that it was indeed the respondents who proposed the 5%
interest rate per month for two (2) months. Having agreed to said rate, the parties
are now estopped from claiming otherwise. For the succeeding period after the two
months, however, the Court of Appeals correctly reduced the interest rate to

34 | P a g e

12% per annum and the penalty rate to 1% per month, in accordance with Article
2227[18] of the Civil Code.
But were respondents entitled to the surplus of P2,247,326[19] as a result of
the overpricing in the auction?
We note that the surplus was the result of the computation by the Court of
Appeals of respondents outstanding liability based on a reduced interest rate of
12% per annum and the reduced penalty rate of 1% per month. The court a
quo then proceeded to apply our ruling in Sulit v. Court of Appeals,[20] to the effect
that in case of surplus in the purchase price, the mortgagee is liable for such surplus
as actually comes into his hands, but where he sells on credit instead of cash, he
must still account for the proceeds as if the price were paid in cash, for such surplus
stands in the place of the land itself with respect to liens thereon or vested rights
therein particularly those of the mortgagor or his assigns.
In the instant case, however, there is no surplus to speak of. In adjusting the
interest and penalty rates to equitable and conscionable levels, what the Court did
was merely to reflect the true price of the land in the foreclosure sale. The amount
of the petitioners bid merely represented the true amount of the mortgage debt. No
surplus in the purchase price was thus created to which the respondents as the
mortgagors have a vested right.
WHEREFORE, the Decision dated February 22, 2002, of the Court of Appeals
in the consolidated cases CA-G.R. CV No. 51521 and CA-G.R. SP No. 40457 is
hereby AFFIRMED with MODIFICATION. The interest rate for the subject loan owing
to QDB, or whoever is now the party mortgagee, is hereby fixed at five percent
(5%) for the first two (2) months following the date of execution of the Deed of Real
Estate Mortgage, and twelve percent (12%) for the succeeding period. The penalty
rate thereafter shall be fixed at one percent (1%) per month. Petitioner Teresita Dio
is declared free of any obligation to return to the respondents, the Spouses Virgilio
Japor and Luz Roces Japor and Marta Japor, any surplus in the foreclosure sale
price. There being no surplus, after the court below had applied our ruling in Sulit,
[21]
respondents could not legally claim any overprice from the petitioner, much less
the amount ofP2,247,326.00.
SO ORDERED.

FIRST DIVISION
SPOUSES
ZACARIAS
BACOLOR
CATHERINE BACOLOR,
Petitioners,

and

G.R. No. 148491

Present:

versus -

BANCO FILIPINO SAVINGS AND MORTGAGE

BANK,DAGUPAN CITY BRANCH
and
MARCELINO C. BONUAN,
Respondents.

PUNO, C.J., Chairperson,

SANDOVAL-GUTIERREZ,
*
CORONA,
AZCUNA, and
**
GARCIA, JJ.
Promulgated:

February 8, 2007
x --------------------------------------------------------------------------------------x
DECISION
SANDOVAL-GUTIERREZ, J.:
Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, as amended, assailing the Decision [1] of the Court of Appeals in CA-G.R.
CV No. 47732 promulgated on February 23, 2001 and its Resolution dated May 30,
2001.
On February 11, 1982, spouses Zacarias and Catherine Bacolor, herein petitioners,
obtained a loan of P244,000.00 from Banco Filipino Savings and Mortgage Bank,
Dagupan City Branch, respondent. They executed a promissory note providing that
the amount shall be payable within a period of ten (10) years with a monthly
amortization of P5,380.00 beginning March 11, 1982 and every 11 th day of the
month thereafter; that the interest rate shall be twenty-four percent (24%) per
annum, with a penalty of three percent (3%) on any unpaid monthly amortization;
that there shall be a service charge of three percent (3%) per annum on the
loan; and that in case respondent bank seeks the assistance of counsel to enforce
the collection of the loan, petitioners shall be liable for ten percent (10%) of the
amount due as attorneys fees and fifteen percent (15%) of the amount due as
liquidated damages.
As security for the loan, petitioners mortgaged with respondent bank their parcel of
land located in Dagupan City, Pangasinan, registered under Transfer Certificate of
Title No. 40827.
From March 11, 1982 to July 10, 1991, petitioners paid respondent bank P412,
199.36. Thereafter, they failed to pay the remaining balance of the loan.
On August 7, 1992, petitioners received from respondent bank a statement of
account stating that their indebtedness as of July 31, 1992 amounts
to P840,845.61.

35 | P a g e

In its letter dated January 13, 1993, respondent bank informed petitioners
that should they fail to pay their loan within fifteen (15) days from notice,
appropriate action shall be taken against them.

On appeal, the Court of Appeals rendered its Decision affirming the

Decision of the trial court. Petitioners subsequent motion for reconsideration was
denied.

Due to petitioners failure to settle their obligation, respondent instituted,

on March 5, 1993, an action for extra-judicial foreclosure of mortgage.
Prior thereto, or on February 1, 1993, petitioners filed with Branch 40 of
the same RTC, a complaint for violation of the Usury Law against respondent,
docketed as Civil Case No. D-10480. They alleged that the provisions of the
promissory note constitute a usurious transaction considering the (1) rate of
interest, (2) the rate of penalties, service charge, attorneys fees and liquidated
damages, and (3) deductions for surcharges and insurance premium. In their
amended complaint, petitioners further alleged that, during the closure of
respondent bank, it ceased to be a banking institution and, therefore, could not
charge interests and institute foreclosure proceeding.

Hence, this present petition for review on certiorari raising this lone
issue: whether the interest rate is excessive and unconscionable.

On August 25, 1994, the RTC rendered its decision dismissing petitioners
complaint, holding that:

It is the petitioners contention that while the Usury Law ceiling on interest
rates was lifted by Central Bank Circular No. 905, there is nothing in the said
circular which grants respondent bank carte blanche authority to raise interest
rates to levels which either enslave the borrower or lead to a hemorrhaging of their
assets.[3]
In its comment[4], respondent bank maintained that petitioner, by signing
the Deed of Mortgage and Promissory Note, knowingly and freely consented to its
terms and conditions. A contract between the parties must not be impaired. The
interest rate of 24% per annum is not usurious and does not violate the Usury Law.
[5]

(1) The terms and conditions of the Deed of Mortgage and the
Promissory Note are legal and not usurious.
The plaintiff freely signed the Deed of Mortgage and the
Promissory Note with full knowledge of its terms and conditions.
The interest rate of 24% per annum is not usurious and does not
violate the Usury Law (Act 2655) as amended by P.D. No. 166.
The rate of interest, including commissions, premiums, fees and
other charges, on a loan or forbearance of any money etc.,
regardless of maturity x x x, shall not be subject to any ceiling
under or pursuant to the Usury Law, as amended (CB Circular no.
905). Hence, the 24% interest per annum is allowed under P.D.
No. 166.
For sometime now, usury has been legally non-existent. Interest
can now be as lender and borrower may agree upon (Verdejo v.
CA, Jan. 29, 1988. 157 SCRA 743).
The imposition of penalties in case the obligation is not fulfilled is
not prohibited by the Usury Law. Parties to a contract of loan may
validly agree upon the imposition of penalty charges in case of
delay or non-payment of the loan. The purpose is to compel the
debtor to pay his debt on time (Go Chioco v. Martinez, 45 Phil.
256, 265).
(2) The closure of Banco Filipino did not suspend or stop its usual
and normal banking operations like the collection of loan
receivables and foreclosures of mortgages.
In view of the foregoing, plaintiffs failed to substantiate their
cause of action against the defendant.[2]

36 | P a g e

The petition lacks merit.

Article 1956 of the Civil Code provides that no interest shall be due unless
it has been expressly stipulated in writing. Here, the parties agreed in writing
on February 11, 1982 that the rate of interest on the petitioners loan shall be 24%
per annum.
At the time the parties entered into the loan transaction, the applicable law
was the Usury Law (Act 2655), as amended by P.D. No. 166, which provides that
the rate of interest for the forbearance of money when secured by a mortgage upon
real estate, should not be more than 6% per annum or the maximum rate
prescribed by the Monetary Board of the Central Bank of the Philippines in force at
the time the loan was granted. Central Bank Circular No. 783, which took effect
on July 1, 1981, removed the ceiling on interest rates on a certain class of loans,
thus:
SECTION 2. The interest rate on a loan forbearance
of any money, goods, or credits with a maturity of more
than seven hundred thirty (730) days shall not be subject
to any ceiling.[6]
In the present case, the term of the subject loan is for a period of 10
years. Considering that its maturity is more than 730 days, the interest rate is not
subject to any ceiling following the above provision. Therefore, the 24% interest
rate agreed upon by parties does not violate the Usury Law, as amended by P.D.
116.
This Court has consistently held that for sometime now, usury has been
legally non-inexistent and that interest can now be charged as lender and borrower
may agree upon.[7] As a matter of fact, Section 1 of Central Bank Circular No. 905
states that:

SECTION 1. The rate of interest, including commissions,

premiums, fees and other charges , on a loan or forbearance of
any money, goods, or credits, regardless of maturity and whether
secured or unsecured, that may be charged or collected by any
person, whether natural or judicial, shall not be subject to any
ceiling prescribed under or pursuant to the Usury Law, as
amended.[8]
Moreover, in Trade & Investment Development Corporation of the
Philippines v. Roblett Industrial Construction Corporation, [9] this Court has ruled
that:
With the suspension of the Usury Law and the removal of
interest ceiling, the parties are free to stipulate the interest to be
imposed on monetary obligations. Absent any evidence of fraud,
undue influence, or any vice of consent exercised by one party
against the other, the interest rate agreed upon is binding upon
them.

There is no indication in the records that any of the incidents which vitiate
consent on the part of petitioners is present. Indeed, the interest rate agreed upon
is binding on them. With respect to the penalty and service charges, the same are
unconscionable or excessive.
Petitioners invoke this Courts rulings in Almeda vs. Court of
Appeals[10] and Medel vs. Court of Appeals[11] to show that the interest rate in the
subject promissory note is unconscionable. Their reliance on these cases is
misplaced. In Almeda, what this Court struck down as being unconscionable and
excessive was the unilateral increase in the interest rates from 18% to 68%. This
Court ruled thus:

It is plainly obvious, therefore, from the undisputed facts

of the case that respondent bank unilaterally altered the terms
of its contract by increasing the interest rates of 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 the interest rate provision of the credit
agreement signed between the parties is that petitioners were
bound merely to pay 21% interest x x x.
Petitioners also cannot find refuge in Medel. In this case, what this Court declared
as unconscionable was the imposition of a 66% interest rate per annum. In the
instant case, the interest rate is only 24% per annum, agreed upon by both
parties. By no means can it be considered unconscionable or excessive.

37 | P a g e

Verily, petitioners cannot now renege on their obligation to comply with

what is incumbent upon them under the loan agreement. A contract is the law
between the parties and they are bound by its stipulations. [12]
Petitioners further contend that during the closure of respondent bank
(from January 1, 1985 to July 1, 1994), it lost its function as a banking institution
and, therefore, could no longer charge interests and institute foreclosure
proceedings.
In the case of Banco Filipino Savings & Mortgage Bank vs. Monetary Board, Central
Bank of the Philippines,[13] this Court ruled that the banks closure did not diminish
the authority and powers of the designated liquidator to effectuate and carry on the
administration of the bank, thus:
x x x. We did not prohibit however acts such as receiving
collectibles and receivables or paying off creditors claims and
other transactions pertaining to the normal operations of a
bank.There is no doubt that that the prosecution of suits for
collection and the foreclosure of mortgages against debtors of the
bank by the liquidator are among the usual and ordinary
transactions pertaining to the administration of a bank. x x x.
Likewise, in Banco Filipino Savings and Mortgage Bank vs. Ybaez,[14] where one of
the issues was whether respondent bank can collect interest on its loans during its
period of liquidation and closure, this Court held:
In Banco Filipino Savings and Mortgage Bank v. Monetary
Board, the validity of the closure and receivership of Banco Filipino
was put in issue. But the pendency of the case did not diminish
the authority of the designated liquidator to administer and
continue the banks transactions. The Court allowed the bank
liquidator to continue receiving collectibles and receivables or
paying off creditors claims and other transactions pertaining to
normal operations of a bank. Among these transactions were the
prosecution of suits against debtors for collection and for
foreclosure of mortgages. The bank was allowed to collect
interests on its loans while under liquidation, provided that
the interests were legal.
In fine, we hold that the interest rate on the loan agreed upon between the parties
is not excessive or unconscionable; and that during the closure of respondent bank,
it could still function as a bonding institution, hence, could continue collecting
interests from petitioners.
WHEREFORE, we DENY the petition and AFFIRM the challenged Decision
and Resolution of the Court of Appeals in CA-G.R. CV No. 47732. Costs against
petitioners.
SO ORDERED.

THIRD DIVISION

SPOUSES RAMON M. NISCE G.R. No. 167434

and A. NATIVIDAD PARASNISCE,
Petitioners, Present:

YNARES-SANTIAGO, J.,
Chairperson,
- versus - AUSTRIA-MARTINEZ,
CALLEJO, SR., and
CHICO-NAZARIO, JJ.

EQUITABLE PCI BANK, INC.,

Respondent.
Promulgated:
February 19, 2007

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

38 | P a g e

DECISION

Giovanni P. Nisce (P16,665,439.77 and US$57,306.59). They insisted, however, that

the suretyship agreement was null and void for the following reasons:

CALLEJO, SR., J.:

On November 26, 2002, Equitable PCI Bank [1] (Bank) as creditor-mortgagee filed a
petition for extrajudicial foreclosure before the Office of the Clerk of Court as ExOfficioSheriff of the Regional Trial Court (RTC) of Makati City. It sought to foreclose
the following real estate mortgage contracts executed by the spouses Ramon and
Natividad Nisce over two parcels of land covered by Transfer Certificate of Title
(TCT) Nos. S-83466 and S-83467 of the Registry of Deeds of Rizal: one
dated February 26, 1974; two (2) sets of Additional Real Estate Mortgage
dated September 27, 1978 and June 3, 1996; and an Amendment to Real Estate
Mortgage dated February 28, 2000. The mortgage contracts were executed by the
spouses Nisce to secure their obligation under Promissory Note Nos. 1042793 and
BD-150369, including a Suretyship Agreement executed by Natividad. The
obligation of the Nisce spouses totaled P34,087,725.76 broken down as follows:

(a) x x x [I]t was executed without the knowledge and consent of

plaintiff Ramon M. Nisce, who is by law the administrator of the
conjugal partnership;

(b) The suretyship agreement did not redound to the benefit of

the conjugal partnership and therefore did not bind the same;

(c) Assuming, arguendo, that the suretyship contract was valid

and binding, any obligation arising therefrom is not covered by
plaintiffs real estate mortgages which were constituted to secure
the payment of certain specific obligations only.[8]

Spouses Ramon & Natividad Nisce - - - - - P17,422,285.99

Natividad P. Nisce (surety) - - - - - - - - - - US$57,306.59
and - - - - - - - - - - - - P16,665,439.77[2]

On December 2, 2002, the Ex-Officio Sheriff set the sale at public auction at 10:00
a.m. on January 14, 2003,[3] or on January 30, 2003 in the event the public auction
would not take place on the earlier setting.

On January 28, 2003, the Nisce spouses filed before the RTC of Makati City a
complaint for nullity of the Suretyship Agreement, damages and legal compensation
with prayer for injunctive relief against the Bank and the Ex-Officio Sheriff. They
alleged the following: in a letter [4] dated December 7, 2000 they had requested the
bank (through their lawyer-son Atty. Rosanno P. Nisce) to setoff the peso equivalent
of their obligation against their US dollar account with PCI Capital Asia Limited
(Hong Kong), a subsidiary of the Bank, under Certificate Deposit No. 01612 [5] and
Account No. 090-0104 (Passbook No. 83-3041); [6] the Bank accepted their offer and
requested for an estimate of the balance of their account; they complied with the
Banks request and in a letter dated February 11, 2002, informed it that the
estimated balance of their account as of December 1991 (including the 11.875%
per annum interest) was US$51,000.42, [7] and that as of December 2002,
Natividads US dollar deposit with it amounted to at least P9,000,000.00; they were
surprised when they received a letter from the Bank demanding payment of their
loan account, and later a petition for extrajudicial foreclosure.

The spouses Nisce also pointed out that the petition for foreclosure filed by
the Bank included the alleged obligation of Natividad as surety for the loan of Vista
Norte Trading Corporation, a company owned and managed by their son Dino

39 | P a g e

The spouses Nisce likewise alleged that since they and the Bank were creditors and
debtors with respect to each other, their obligations should have been offset by legal
compensation to the extent of their account with the Bank.

To support their plea for a writ of preliminary and prohibitory injunction, the
spouses Nisce alleged that the amount for which their property was being sold at
public auction (P34,087,725.76) was grossly excessive; the US dollar deposit of
Natividad with PCI Capital Asia Ltd. (Hong Kong), and the obligation covered by the
suretyship agreement had not been deducted. They insisted that their property
rights would be violated if the sale at public auction would push through. Thus, the
spouses Nisce prayed that they be granted the following reliefs:
(1) that upon the filing of this Complaint and/or after due notice
and summary hearing, the Honorable Court immediately issue a
temporary restraining order (TRO) restraining defendants, their
representatives and/or deputies, and other persons acting for and
on their behalf from proceeding with the extrajudicial foreclosure
sale of plaintiffs mortgaged properties on 30 January 2003 or on
any other dates subsequent thereto;

(2) that after due notice and hearing and posting of the
appropriate bond, the Honorable Court convert the TRO to a writ
of preliminary prohibitory injunction;

(3) that after trial on the merits, the Honorable Court render
judgment

(a)

making the
permanent;

(b)

ordering defendant Bank to set off the present peso

value of Mrs. Nisces US dollar time deposit, inclusive
of stipulated interest, against plaintiffs loan
obligations with defendant Bank;

(c)

declaring the Deed of Suretyship dated 25 May

1998 null and valid and without any binding effect as
to plaintiff spouses, and ordering defendant Bank to
exclude the amounts covered by said suretyship
contract from plaintiffs obligations with defendant
Bank;

(d)

preliminary

ordering defendant
following sums:

Bank

injunction

to

pay

final

plaintiffs

(i)

at least P3,000,000.00 as moral

damages;

(ii)

at
least P1,500,000.00
exemplary damages; and

(iii)

at least P500,000.00 as attorneys

fees and for other expenses of
litigation.

and

the

as

Plaintiffs further pray for costs of suit and such other

reliefs as may be deemed just and equitable. [9]

On same day, the Bank filed an Amended Petition with the Office of the
Executive Judge for extrajudicial foreclosure of the Real Estate Mortgage to satisfy
the spouses loan account of P30,533,552.24, exclusive of interests, penalties and
other charges; and the amounts of P16,665,439.77 and US$57,306.59 covered by
the suretyship agreement executed by Natividad Nisce. [10]

In its Answer to the complaint, the Bank alleged that the spouses had no
cause of action for legal compensation since PCI Capital was a different corporation
with a separate and distinct personality; if at all, offsetting may occur only with
respect to the spouses US$500.00 deposit account in its Paseo de Roxas branch.

In the meantime, the Ex-Officio Sheriff set the sale at public auction
at 10:00 a.m. on March 5 and 27, 2003. [11] The spouses Nisce then filed a
Supplemental Complaint with plea for a temporary restraining order to enjoin the
sale at public auction.[12] Thereafter, the RTC conducted hearings on the plaintiffs
plea for a temporary restraining order, and the parties adduced testimonial and
documentary evidence on their respective arguments.

The Case for the Spouses Nisce

Natividad frequently traveled abroad and needed a facility with easy access
to foreign exchange. She inquired from E.P. Nery, the Bank Manager for PCI Bank
Paseo de Roxas Branch, about opening an account. He assured her that she would
be able to access it from anywhere in the world. She and Nery also agreed that any
balance of account remaining at maturity date would be rolled over until further
instructions, or until she terminated the facility.[13] Convinced, Natividad deposited
US$20,500.00 on July 19, 1984, and was issued Passbook No. 83-3041.[14] Upon her
request, the bank transferred the US$20,000.00 to PCI Capital Asia Ltd. in Hong
Kong via cable order.[15]
On July 11, 1996, the spouses Nisce secured a P20,000,000.00 loan from
the Bank under Promissory Note No. BD-150369. [16] The maturity date of the loan
was July 11, 2001, payable in monthly installments at 16.731% interest per annum.
To secure the payment of the loan account, they executed an Amendment to the
Real Estate Mortgage over the properties [17] located in Makati City covered by TCT
Nos. S-83466 and S-83467.[18] They later secured another loan of P13,089,936.90
on March 1, 2000 (to mature on March 1, 2005) payable quarterly at 13.9869%
interest per annum; this loan agreement is evidenced by Promissory Note (PN) No.
1042793[19] and covered by a Real Estate Mortgage[20] executed on February 28,
2000. They made a partial payment of P13,866,666.50 on the principal of their loan
account covered by PN No. BD-150369, andP5,348,239.82 on the interests.
[21]
These payments are evidenced by receipts and checks. [22] However, there were
payments totaling P4,600,000.00 received by the Bank but were not covered by
checks or receipts.[23] As of September 2000, the balance of their loan account
under PN No. BD-150369 was only P4,333,333.46.[24] They also made partial
payment on their loan account under PN No. 1042793 which, as of May 30, 2001,
amounted to P2,218,793.61.[25]

On July 20, 1984, PCI Capital issued Certificate of Deposit No. CD-01612;
proof of receipt of the US$20,000.00 transferred to it by PCI Bank Paseo de
Roxas Branch as requested by Natividad. The deposit account was to earn interest
at the rate of 11.875% per annum, and would mature on October 22, 1984,
thereafter to be payable at the office of the depositary in Hong Kong upon
presentation of the Certificate of Deposit.
[26]

In the meantime, the parties agreed to have the sale at public auction
reset to January 30, 2003.

40 | P a g e

In June 1991, two sons of the Nisce spouses were stranded in Hong
Kong. Natividad called the Bank and requested for a partial release of her dollar
deposit to her sons. However, she was informed that according to its computer
records, no such dollar account existed. Sometime in November 1991, she
submitted her US dollar passbook with a xerox copy of the Certificate of Deposit for
the PCIB to determine the whereabouts of the account. [27] She reiterated her
request to the Bank on January 27, 1992[28] andSeptember 11, 2000.[29]

The spouses Nisce presented rebuttal documentary evidence to show that

PCI Capital was registered in Hong Kong as a corporation under Registration No.
84555 on February 27, 1989[43] with an authorized capital stock of 50,000,000 (with
par value of HKD1.00); the PCIB subscribed to 29,039,993 issued shares at the par
value of HKD1.00 per share;[44] on October 25, 2004, the corporate name of PCI
Capital was changed to PCI Express Padala (HK) Ltd.;[45] and the stockholdings of
PCIB remained at 29,039,999 shares.[46]

In the meantime, in 1994, the Equitable Banking Corporation and the PCIB
were merged under the corporate name Equitable PCI Bank.

On March 24, 2003, the RTC issued an Order [47] granting the spouses
Nisces plea for a writ of preliminary injunction on a bond of P10,000,000.00. The
dispositive portion of the Order reads:

In a letter dated December 7, 2000, Natividad confirmed to the Bank,

through Ms. Shellane R. Casaysayan, her offer to settle their loan account by
offsetting the peso equivalent of her dollar account with PCI Capital under Account
No. 090-0104.[30] Their son, Atty. Rosanno Nisce, later wrote the Bank, declaring
that the estimated balance of the US dollar account with PCI Capital as of December
1991 was US$51,000.42.[31] Atty. Nisce corroborated this in his testimony, and
stated that Ms. Casaysayan had declared that she would refer the matter to her
superiors.[32] A certain Rene Esteven also told him that another offer to setoff his
parents account had been accepted, and he was assured that its implementation
was being processed.[33] On cross examination, Atty. Nisce declared that there was
no response to his request for setoff,[34] and that Esteven assured him that the Bank
would look for the records of his mothers US dollar savings deposit. [35] He was later
told that the Bank had accepted the offer to setoff the account.[36]

The Case for the Bank

The Bank adduced evidence that, as of January 31, 2003, the balance of
the spouses account under the two promissory notes, including interest and
penalties, wasP30,533,552.24.[37] It had agreed to restructure their loans on March
31, 1998, but they nevertheless failed to pay despite repeated demands. [38] The
spouses had also been furnished with a statement of their account as of June 2001.
Thus, under the terms of the Real Estate Mortgage and Promissory Notes, it had the
right to the remedy of foreclosure. It insisted that there is no showing in its records
that the spouses had delivered checks amounting to P4,600,000.00.[39]

According to the Bank, Natividads US$20,000.00 deposit with the PCIB

Paseo de Roxas branch was transferred to PCI Capital via cable order,[40] and that it
later issued Certificate of Deposit No. 01612 (Non-transferrable). [41] In a letter
dated May 9, 2001, it informed Natividad that it had acted merely as a conduit in
facilitating the transfer of the funds, and that her deposit was made with PCI Capital
and not with PCIB. PCI Capital had a separate and distinct personality from the
PCIB, and a claim against the former cannot be made against the latter. It was later
advised that PCI Capital had already ceased operations. [42]

41 | P a g e

WHEREFORE, in order not to render the judgment

ineffectual, upon filing by the plaintiffs and the approval thereof
by the court of a bond in the amount of Php10,000,000.00, which
shall answer for any damage should the court finally decide that
plaintiffs are not entitled thereto, let a writ of preliminary
injunction issue enjoining defendants Equitable-PCI Bank, Atty.
Engracio M. Escasinas, Jr., and any person or entity acting for and
in their behalf from proceeding with the extrajudicial foreclosure
sale of TCT Nos. 437678 and 437679 registered in the names of
the plaintiffs.[48]

After weighing the parties arguments along with their documentary

evidence, the RTC declared that justice would be best served if a writ of preliminary
injunction would be issued to preserve the status quo. It had yet to resolve the
issue of setoff since only Natividad dealt with the Bank regarding her dollar account.
It also had to resolve the issue of whether the Bank had failed to credit the amount
of P4,600,000.00 to the spouses Nisces account under PN No. BD-150369, and their
claim that the Bank had effectively accelerated the respective maturity dates of
their loan.[49] The spouses Nisce posted the requisite bond which was approved by
the RTC.

The Bank opted not to file a motion for reconsideration of the order, and
instead assailed the trial courts order before the CA via petition for certiorari under
Rule 65 of the Rules of Court. The Bank alleged that the RTC had acted without or in
excess of its jurisdiction, or with grave abuse of its discretion amounting to lack or
excess of jurisdiction when it issued the assailed order; [50] the spouses Nisce had
failed to prove the requisites for the issuance of a writ of preliminary injunction;
respondents claim that their account with petitioner had been extinguished by legal
compensation has no factual and legal basis. It further asserted that according to
the evidence, Natividad made the US$20,000.00 deposit with PCI Capital before it
merged with Equitable Bank hence, the Bank was not the debtor of Natividad
relative to the dollar account. The Bank cited the ruling of this Court in Escao

v. Heirs of Escao and Navarro[51] to support its arguments. It insisted that the
spouses Nisce had failed to establish irreparable injury in case of denial of their plea
for injunctive relief.

The spouses, for their part, pointed out that the Bank failed to file a motion
for reconsideration of the trial courts order, a condition sine qua non to the filing of
a petition for certiorari under Rule 65 of the Rules of Court. Moreover, the error
committed by the trial court is a mere error of judgment not correctible
by certiorari; hence, the petition should have been dismissed outright by the
CA. They reiterated their claim that they had made a partial payment
of P4,600,000.00 on their loan account which petitioner failed to credit in their
favor. The Bank had agreed to debit their US dollar savings deposit in the PCI
Capital as payment of their loan account. They insisted that they had never
deposited their US dollar account with PCI Capital but with the Bank, and that they
had never defaulted on their loan account. Contrary to the Banks claim, they would
have suffered irreparable injury had the trial court not enjoined the extrajudicial
foreclosure of the real estate mortgage.

On December 22, 2004, the CA rendered judgment granting the petition

and nullifying the assailed Order of the RTC. [52] The appellate court declared that a
petition forcertiorari under Rule 65 of the Rules of Court may be filed despite the
failure
to
file
a
motion
for
reconsideration,
particularly in instances where the issue raised is one of law; where the error is
patent; the assailed order is void, or the questions raised are the same as those
already ruled upon by the lower court. According to the appellate court, the issue
raised before it was purely one of law: whether the loan account of the spouses was
extinguished by legal compensation. Thus, a motion for the reconsideration of the
assailed order was not a prerequisite to a petition for certiorari under Rule 65.

The appellate court further declared that the trial court committed grave
abuse of its discretion in issuing the assailed order, since no plausible reason was
given by the spouses Nisce to justify the injunction of the extrajudicial foreclosure of
the real estate mortgage. Given their admission that they had not settled the
obligations secured by the mortgage, the Bank had a clear right to seek the remedy
of foreclosure.

The CA further declared as devoid of factual basis the spouses Nisces

argument that the Bank should have applied, by way of legal compensation, the
peso equivalent of their time deposit with PCI Capital as partial settlement of their
obligations. It held that for compensation to take place, the requirements set forth
in Articles 1278 and 1279 of the Civil Code of the Philippines must be present; in
this case, the parties are not mutually creditors and debtors of each other. It
pointed out that the time deposit which the spouses Nisce sought to offset against
their obligations to the Bank is maintained with PCI Capital. Even if PCI Capital is a
subsidiary of the Bank, compensation cannot validly take place because the Bank
and PCI Capital are two separate and distinct corporations. It pointed out the settled
principle that a corporation has a personality separate and distinct from its
stockholders and from other corporations to which it may be connected.

42 | P a g e

The CA further declared that the alleged P4,600,000.00 payment on PN No.

BD-150369 was not pleaded in the spouses complaint and supplemental complaint
before the court a quo. What they alleged, aside from legal compensation, was that
the mortgage is not liable for the obligation of Natividad Nisce as surety for the
loans obtained by a trading firm owned and managed by their son. The CA further
pointed out that the Bank precisely amended the petition for foreclosure sale
by deleting the claim for Natividads obligation as surety. The appellate court
concluded that the injunctive writ was issued by the RTC without factual and legal
basis.[53]

The spouses Nisce moved to have the decision reconsidered, but the
appellate court denied the motion. They thus filed the instant petition for review on
the following grounds:

5.1. THE HONORABLE COURT OF APPEALS ERRED IN TAKING

COGNIZANCE OF THE PETITION FOR CERTIORARI DESPITE THE
BANKS FAILURE TO FILE A MOTION FOR RECONSIDERATION
WITH THE TRIAL COURT.

5.2. THE HONORABLE COURT OF APPEALS COMMITTED

REVERSIBLE ERROR WHEN IT PREMATURELY RULED ON THE
MERITS OF THE MAIN CASE.

5.3. THE HONORABLE COURT OF APPEALS ERRED IN

HOLDING THAT RESPONDENT JUDGE HAD COMMITTED GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION IN ISSUING A TEMPORARY RESTRAINING ORDER
AND A WRIT OF PRELIMINARY INJUNCTION IN FAVOR OF THE
SPOUSES NISCE.[54]
Petitioners aver that the CA erred in not dismissing respondent Banks
petition for certiorari outright because of the absence of a condition precedent: the
filing of a motion for reconsideration of the assailed Order of the RTC before filing
the petition for certiorari in the CA. They insist that respondent banks failure to file
a motion for reconsideration of the assailed Order deprived the RTC of its option to
resolve the issue of whether it erred in issuing the writ of preliminary injunction in
their favor.

Petitioners insist that in resolving whether a petition for a writ of

preliminary injunction should be granted, the trial court and the appellate court are
not to resolve the merits of the main case. In this case, however, the CA resolved
the bone of contention of the parties in the trial court: whether the loan account of
petitioners with respondent bank had been extinguished by legal compensation
against petitioner Natividad Nisces US dollar savings account with PCI Capital
in Hong Kong. The CA reversed the assailed order of the trial court by resolving the
main issue in the trial court on its merits, and declaring that the US dollar savings

deposit of the petitioner Natividad Nisce with the PCI Capital cannot be used to
offset the loan account of petitioners with respondent bank. In fine, according to
petitioners, the CA preempted the ruling of the RTC on the main issue even before
the parties could be given an opportunity to complete the presentation of their
respective evidences. Petitioners point out that in the assailed Order, the RTC
declared that to determine whether respondent had credited petitioners for the
amount of P4,600,000.00 under PN No. BD-150369 and whether respondent as
mortgagee-creditor accelerated the maturities of the two (2) promissory notes
executed by petitioner, there was a need for a full-blown trial and an exhaustive
consideration of the evidence of the parties.

Petitioners further insist that a petition for a writ of certiorari is designed

solely to correct errors of jurisdiction and not errors of judgment, such as errors in
the findings and conclusions of the trial court. Petitioners maintain that the trial
courts erroneous findings and conclusions (according to respondent bank) are not
the proper subjects for a petition for certiorari. Contrary to the findings of the CA,
they did not admit in the trial court that they were in default in the payment of their
loan obligations. They had always maintained that they had no outstanding
obligation to respondent bank precisely because their loan account had been offset
by the US dollar deposit of petitioner Natividad Nisce, and that they had made
check payments of P4,600,000.00 which respondent bank had not credited in their
favor. Likewise erroneous is the CA ruling that they would not suffer irreparable
damage or injury if their properties would be sold at public auction following the
extrajudicial foreclosure of the mortgage. Petitioners point out that their conjugal
home stands on the subject properties and would be lost if sold at public
auction. Besides, petitioners aver, the injury to respondent bank resulting from the
issuance of a writ of preliminary injunction is amply secured by the P10,000,000.00
injunction bond which they had posted.

For its part, respondent avers that, as held by the CA, the requirement of
the filing of a motion for reconsideration of the assailed Order admits of exceptions,
such as where the issue presented in the appellate court is the same issue
presented and resolved by the trial court. It insists that petitioners failed to prove a
clear legal right to injunctive relief; hence, the trial court committed grave abuse of
discretion in issuing a writ of preliminary injunction.

Respondent maintains that the sole issue involved in the petition

for certiorari of respondent in the CA was whether or not the trial court committed
grave abuse of its discretion in issuing the writ of preliminary injunction.
Necessarily, the CA would have to delve into the circumstances behind such
issuance. In so doing, the CA had to consider and calibrate the testimonial and
documentary evidence adduced by the parties. However, the RTC and the CA did not
resolve with finality the threshold factual and legal issue of whether the loan
account of petitioners had been paid in full before it filed its petition for extrajudicial
foreclosure of the real estate mortgage.

The Petition in the

Court of Appeals
Not Premature
The general rule is that before filing a petition for certiorari under Rule 65 of the
Rules of Court, the petitioner is mandated to comply with a condition precedent: the
filing of a motion for reconsideration of the assailed order, and the subsequent
denial of the court a quo. It must be stressed that a petition for certiorari is an
extraordinary remedy and should be filed only as a last resort. The filing of a motion
for reconsideration is intended to afford the public respondent an opportunity to
correct any actual error attributed to it by way of re-examination of the legal and
factual issues.[55] However, the rule is subject to the following recognized
exceptions:

(a) where the order is a patent nullity, as where the

court a quo has no jurisdiction; (b) where the questions raised in
the certiorari proceeding have been duly raised and passed upon
by the lower court, or are the same as those raised and passed
upon in the lower court; (c) where there is an urgent necessity for
the resolution of the question and any further delay would
prejudice the interests of the Government or of the petitioner or
the subject matter of the action is perishable; (d) where, under
the circumstances, a motion for reconsideration would be useless;
(e) where petitioner was deprived of due process and there is
extreme urgency for relief; (f) where, in a criminal case, relief
from an order of arrest is urgent and the granting of such relief by
the trial court is improbable; (g) where the proceedings in the
lower court are a nullity for lack of due process; (h) where the
proceedings was ex parte or in which the petitioner had no
opportunity to object; and (i) where the issue raised is one purely
of law or public interest is involved.[56]

As will be shown later, the March 24, 2003 Order of the trial court granting
petitioners plea for a writ of preliminary injunction was issued with grave abuse of
discretion amounting to excess or lack of jurisdiction and thus a nullity. If the trial
court issues a writ of preliminary injunction despite the absence of proof of a legal
right and the injury sustained by the plaintiff, the writ is a nullity.[57]
Petitioners Are Not
Entitled to a Writ of
Preliminary Prohibitory
Injunction

The Ruling of the Court

43 | P a g e

Section 3, Rule 58 of the Rules of Court provides that a preliminary

injunction may be granted when the following have been established:

possibility of irreparable damage without proof of an actual existing right is not a

ground for a preliminary injunction.[60]

(a) That the applicant is entitled to the relief demanded,

and the whole or part of such relief consists in restraining the
commission or continuance of the act or acts complained of, or in
requiring the performance of an act or acts, either for a limited
period or perpetually;

However, to establish the essential requisites for a preliminary injunction,

the evidence to be submitted by the plaintiff need not be conclusive and complete.
[61]
The plaintiffs are only required to show that they have an ostensible right to the
final relief prayed for in their complaint. [62] A writ of preliminary injunction is
generally based solely on initial or incomplete evidence. [63] Such evidence need only
be a sampling intended merely to give the court an evidence of justification for a
preliminary injunction pending the decision on the merits of the case, and is not
conclusive of the principal action which has yet to be decided. [64]

(b) That the commission, continuance or nonperformance

of the act or acts complained of during the litigation would
probably work injustice to the applicant; or

(c) That a party, court, agency or a person is doing,

threatening, or is attempting to do, or is procuring or suffering to
be done, some act or acts probably in violation of the rights of the
applicant respecting the subject of the action or proceeding, and
tendering to render the judgment ineffectual.

The grant of a preliminary injunction in a case rests on the sound discretion of the
court with the caveat that it should be made with great caution. The exercise of
sound judicial discretion by the lower court should not be interfered with except in
cases of manifest abuse. Injunction is a preservative remedy for the protection of
the parties substantive rights and interests. The sole aim of a preliminary injunction
is to preserve the status quo within the last actual status that preceded the pending
controversy until the merits of the case can be heard fully. Moreover, a petition for a
preliminary injunction is an equitable remedy, and one who comes to claim for
equity must do so with clean hands. It is to be resorted to by a litigant to prevent or
preserve a right or interest where there is a pressing necessity to avoid injurious
consequences which cannot be remedied under any standard of compensation. A
petition for a writ of preliminary injunction rests upon an alleged existence of an
emergency or of a special reason for such a writ before the case can be regularly
tried. By issuing a writ of preliminary injunction, the court can thereby prevent a
threatened or continued irreparable injury to the plaintiff before a judgment can be
rendered on the claim.[58]

The plaintiff praying for a writ of preliminary injunction must further establish that
he or she has a present and unmistakable right to be protected; that the facts
against which injunction is directed violate such right; [59] and there is a special and
paramount necessity for the writ to prevent serious damages. In the absence of
proof of a legal right and the injury sustained by the plaintiff, an order for the
issuance of a writ of preliminary injunction will be nullified. Thus, where the
plaintiffs right is doubtful or disputed, a preliminary injunction is not proper. The

44 | P a g e

It bears stressing that findings of the trial court granting or denying a

petition for a writ of preliminary injunction based on the evidence on record are
merely provisional until after the trial on the merits of the case shall have been
concluded.[65]

The trial court, in granting or dismissing an application for a writ of

preliminary injunction based on the pleadings of the parties and their respective
evidence must state in its order the findings and conclusions based on the evidence
and the law. This is to enable the appellate court to determine whether the trial
court committed grave abuse of its discretion amounting to excess or lack of
jurisdiction in resolving, one way or the other, the plea for injunctive relief. The trial
courts exercise of its judicial discretion whether to grant or deny an application for a
writ of preliminary injunction involves the assessment and evaluation of the
evidence, and its findings of facts are ordinarily binding and conclusive on the
appellate court and this Court.[66]

We agree with respondents contention that as creditor-mortgagee, it has

the right under the real estate mortgage contract and the amendment thereto to
foreclose extrajudicially, the real estate mortgage and sell the property at public
auction, considering that petitioners had failed to pay their loans, plus interests and
other incremental amounts as provided for in the deeds. Petitioners contend,
however, that if respondent bank extrajudicially forecloses the real estate mortgage
and has petitioners property sold at public auction for an amount in excess of the
balance of their loan account, petitioners contractual and substantive rights under
the real estate mortgage would be violated; in such a case, the extrajudicial
foreclosure sale may be enjoined by a writ of preliminary injunction.

Respondent bank sought the extrajudicial foreclosure of the real estate

mortgage and was to sell the property at public auction for P30,533,552.24. The
amount is based on Promissory Notes No. 1042793 and BD-150369, interests,
penalty charges, and attorneys fees, as of January 31, 2003, exclusive of all
interests, penalties, other charges, and foreclosure costs accruing thereafter.
[67]
Petitioners asserted before the trial court that respondents sought the
extrajudicial foreclosure of the mortgaged deed for an amount far in excess of what

they owed, because the latter failed to credit P4,600,000.00 paid in checks but
without any receipts having been issued therefor; and the P9,000,000.00 peso
equivalent of the US$20,000.00 deposit of petitioner Natividad Nisce with PCIB
under Passbook No. 83-3041 and Certificate of Deposit No. CD-01612 issued by PCI
Capital onJuly 23, 1984. Petitioners maintain that the US$20,000.00 dollar deposit
should be setoff against their account with respondent against their loan account,
on their claim that respondent is their debtor insofar as said deposit is concerned.
It was the burden of petitioners, as plaintiffs below, to adduce
preponderant evidence to prove their claim that respondent bank was the debtor of
petitioner Natividad Nisce relative to her dollar deposit with PCIB, and later
transferred to PCI Capital in Hong Kong, a subsidiary of respondent Bank.
Petitioners, however, failed to discharge their burden.

Under Article 1278 of the New Civil Code, compensation shall take place
when two persons, in their own right, are creditors and debtors of each other. In
order that compensation may be proper, petitioners were burdened to establish the
following:

(1) That each one of the obligors be bound principally,

and that he be at the same time a principal creditor of the other;

(2) That both debts consist in a sum of money, or if the

things due are consumable, they be of the same kind, and also of
the same quality if the latter has been stated;

As its minimum, compensation presupposes two persons who, in their own

right and as principals, are mutually indebted to each other respecting equally
demandable and liquidated obligations over any of which no retention or
controversy commenced and communicated in due time to the debtor exists.
Compensation, be it legal or conventional, requires confluence in the parties of the
characters of mutual debtors and creditors, although their rights as such creditors
or their obligations as such debtors need not spring from one and the same contract
or transaction.[71]

Article 1980 of the New Civil Code provides that fixed, savings and current
deposits of money in banks and similar institutions shall be governed by the
provisions concerning simple loans. Under Article 1953, of the same Code, a person
who secures a loan of money or any other fungible thing acquires the ownership
thereof, and is bound to pay the creditor an equal amount of the same kind and
quality. The relationship of the depositors and the Bank or similar institution is that
of creditor-debtor. Such deposit may be setoff against the obligation of the depositor
with the bank or similar institution.

When petitioner Natividad Nisce deposited her US$20,500.00 with the PCIB
on July 19, 1984, PCIB became the debtor of petitioner. However, when upon
petitioners request, the amount of US$20,000.00 was transferred to PCI Capital
(which forthwith issued Certificate of Deposit No. 01612), PCI Capital, in turn,
became the debtor of Natividad Nisce. Indeed, a certificate of deposit is a written
acknowledgment by a bank or borrower of the receipt of a sum of money or deposit
which the Bank or borrower promises to pay to the depositor, to the order of the
depositor; or to some other person; or to his order whereby the relation of debtor
and creditor between the bank and the depositor is created. [72] The issuance of a
certificate of deposit in exchange for currency creates a debtor-creditor relationship.
[73]

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or

controversy, commenced by third persons and communicated in
due time to the debtor.[68]

Compensation takes effect by operation of law when all the requisites

mentioned in Article 1279 of the New Civil Code are present and extinguishes both
debts to the concurrent amount even though the creditors and debtors are not
aware of the compensation. Legal compensation operates even against the will of
the interested parties and even without their consent. [69] Such compensation takes
place ipso jure; its effects arise on the very day on which all requisites concur.[70]

Admittedly, PCI Capital is a subsidiary of respondent Bank. Even then, PCI

Capital [PCI Express Padala (HK) Ltd.] has an independent and separate juridical
personality from that of the respondent Bank, its parent company; hence, any claim
against the subsidiary is not a claim against the parent company and vice versa.
[74]
The evidence on record shows that PCIB, which had been merged with Equitable
Bank, owns almost all of the stocks of PCI Capital. However, the fact that a
corporation owns all of the stocks of another corporation, taken alone, is not
sufficient to justify their being treated as one entity. If used to perform legitimate
functions, a subsidiarys separate existence shall be respected, and the liability of
the parent corporation, as well as the subsidiary shall be confined to those arising in
their respective business.[75] A corporation has a separate personality distinct from
its stockholders and from other corporations to which it may be conducted. This
separate and distinct personality of a corporation is a fiction created by law for
convenience and to prevent injustice.

This Court, in Martinez v. Court of Appeals [76] held that, being a mere
fiction of law, peculiar situations or valid grounds can exist to warrant, albeit
sparingly, the disregard of its independent being and the piercing of the corporate

45 | P a g e

veil. The veil of separate corporate personality may be lifted when, inter alia, the
corporation is merely an adjunct, a business conduit or an alter ego of another
corporation or where the corporation is so organized and controlled and its affairs
are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation; or when the corporation is used as a cloak or cover
for fraud or illegality; or to work injustice; or where necessary to achieve equity or
for the protection of the creditors. In those cases where valid grounds exist for
piercing the veil of corporate entity, the corporation will be considered as a mere
association of persons. The liability will directly attach to them. [77]

The Court likewise declared in the same case that the test in determining the
application of the instrumentality or alter ego doctrine is as follows:
1. Control, not mere majority or complete stock control, but
complete dominion, not only of finances but of policy and business
practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate
mind, will or existence of its own;

On the P4,600,000.00 paid in checks allegedly remitted by petitioners to

respondent in partial payment of their loan account, petitioners failed to adduce in
evidence the checks to show that, indeed, the checks were drawn by petitioners and
delivered to respondent, and that respondent was able to cash the checks. The only
evidence adduced by petitioners is a piece of paper listing the serial numbers of the
checks and the amount of each check:

PAYMENTS MADE & RECEIVED BY EBC BUT W/O RECEIPTS

1. Dec. 29, 1997 - EBC-0000039462 - P2,000,000.00

2. Jan. 22, 1998 - EBC-213016118C - 1,000,000.00
3. Feb. 24, 1998 - UB -0000074619 - 800,000.00
4. Mar. 23, 1998 - EBC-213016121C - 800,000.00
-----------------

2. Such control must have been used by the defendant to commit

fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in contravention of
plaintiffs legal rights; and

3. The aforesaid control and breach of duty must proximately

cause the injury or unjust loss complaint of.

The Court emphasized that the absence of any one of these elements
prevents piercing the corporate veil. In applying the instrumentality or alter ego
doctrine, the courts are concerned with reality and not form, with how the
corporation operated and the individual defendants relationship to that operation. [78]

P4,600,000.00[79]

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of

merit. The Decision of the Court of Appeals is AFFIRMED. Costs against petitioners.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

Petitioners failed to adduce sufficient evidence to justify the piercing of the

veil of corporate entity and render respondent Bank liable for the US$20,000.00
deposit of petitioner Natividad Nisce as debtor.

G.R. No. 91494 July 14, 1995

On hindsight, petitioners could have spared themselves the expenses and

tribulation of a litigation had they just withdrawn their deposit from the PCI Capital
and remitted the same to respondent. However, petitioner insisted on their
contention of setoff.

THE CONSOLIDATED BANK AND TRUST CORPORATION

(SOLIDBANK), petitioner,
vs.
THE HONORABLE COURT OF APPEALS, GEORGE AND GEORGE TRADE, INC.,
GEORGE KING TIM PUA and PUA KE SENG, respondents.

46 | P a g e

QUIASON, J.:
This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court
of the Decision of the Court of Appeals in CA-G.R. CV No. 00922.
I
The factual antecedents, as found by the trial court and adopted by the Court of
Appeals, are as follows:
On April 22, 1977, defendant George King Tim Pua, in his personal
capacity, applied for, and was granted, by plaintiff bank a loan for the sum
of P500,000.00 for which he executed a promissory note (Exhibit 1) for the
same amount, payable on August 22, 1977.
On April 29, 1977, defendant George King Tim Pua, in his personal capacity
applied for, and was granted, by the plaintiff bank a loan for the sum of
P400,000.00, for which he executed a promissory note (Exhibit 1-A) for the
same amount, payable on August 29, 1979.
On May 6, 1977, defendant George King Tim Pua, in his personal capacity,
gain secured a loan from the plaintiff for the sum of P400,000.00, for which
he executed a promissory note (Exhibit 1-B) for the same amount, payable
on September 5, 1977.
On February 21, 1977, defendant George King Tim Pua, in his personal
capacity, applied for, and was granted, by the plaintiff bank three (3)
separate loans in the amounts of P220,000.00, P450,000.00 and
P65,000.00, for which he executed three separate promissory notes
(Exhibits 1-C to 1-E), payable on May 23, 1977.
On January 23, 1979, defendant George and George Trade Inc., through
defendant George King Tim Pua, obtained a loan of P300,000.00 from the
plaintiff, for which defendant George King Tim Pua executed a promissory
note (Exhibit A) on behalf of defendant corporation, with defendants
George King Tim Pua and Pua Ke Seng as co-makers, which loan bears an
interest of 13.23% per annum and is payable on June 22, 1979.
On April 19, 1979, defendant George and George Trade Inc., through
defendant George King Tim Pua, applied for, and was granted, another loan
of P200,000.00 from the plaintiff bank, for which defendant George King
Tim Pua executed a promissory note (Exhibit B) on behalf of defendant
corporation, with defendants George King Tim Pua and Pua Ke Seng as comakers, which loan bears an interest of 14% per annum and is payable on
May 21, 1979.
On August 2, 1979, defendant George and George Trade Inc., through
defendant George King Tim Pua, once more secured a loan for
P150,000.00, for which defendant George King Tim Pua executed a
promissory note (Exhibit C) on behalf of defendant corporation, with

47 | P a g e

defendants George King Tim Pua and Pua Ke Seng as co-makers, which
loan bears an interest of 14% per annum and is payable on September 17,
1979.
The three promissory notes (Exhibits A, B and C) covering loans in the
corporate account of defendant George and George Trade Inc. provides
(sic) also that in case of default of payment, the defendants agree to pay
interest at an increased rate of 14% per annum on the amount due,
compounded monthly, until fully paid, as well as an additional sum
equivalent to 10% of the total amount due as and for attorney's fees in
addition to expenses and costs of suit, such amount to bear interest at the
rate of 1% per month until paid.
Under the two promissory notes (Exhibits B and C), the defendants further
bound themselves to pay a penalty at the rate of 3% per annum on the
amount due until fully paid.
In order to secure the payment of defendant George King Tim Pua's
obligation with the plaintiff, he assigned unto the latter the proceeds of a
fire insurance policy issued by the Kerr Insurance Company in the amount
of P2,908,485.00
The proceeds of the insurance policy were subsequently paid to the plaintiff
which applied the same to the personal account of defendant George King
Tim Pua. The personal account of defendant George King Tim Pua was fully
satisfied through the remittances of the fire insurance proceeds (Rollo, pp.
53-55).
According to petitioner bank, after it had deducted from the insurance proceeds the
entirety of respondent George King Tim Pua's personal account, there remained of
the insurance proceeds the amount of P383,302.42. It then proceeded to apply said
amount to the unpaid loans of respondent George and George Trade, Inc. which
amounted to P671,772.22 as of September 7, 1979, thus leaving a balance of
P288,469.80 of the loans.
Petitioner instituted on April 7, 1980 an action (Civil Case No. 130915) against
private respondents before the then Court of First Instance of Manila for the
recovery of the unpaid balances on the three promissory notes, including attorney's
fees equivalent to 10% of the amount recoverable.
In their Answer with Special and Affirmative Defenses and Counterclaim, private
respondents claimed that the loans had been extinguished by way of payment
through the assignment by respondent George King Tim Pua of the fire insurance
proceeds and that it was in fact petitioner which owed them by reason of its failure
to return to the latter the balance of said insurance proceeds.
No amicable settlement having been reached between the parties, trial ensued. On
November 4, 1982, the trial court rendered judgment, finding for petitioner. The
dispositive portion of the decision reads:

PREMISES CONSIDERED, judgment is hereby rendered ordering defendants

George and George Trade, Inc., George King Tim Pua and Pua Ke Seng,
jointly and severally, to pay plaintiff, The Consolidated Bank and Trust
Corporation (Solidbank) the sum of P228,469.80, with interest thereon at
the legal rate from March 28, 1980, until the same is fully paid, and
attorney's fees in the sum of P25,000.00, with costs of suit.

Payable August 22, 1977

Loan II

29-Apr-77

400,000.00

400000.00

For lack of merit, the counterclaim filed by the defendants is dismissed

(Rollo, p. 174).
Payable August 29, 1977

On appeal by private respondents, the Court of Appeals reversed the decision of the
trial court, decreeing as follows:
WHEREFORE, the decision appealed from herein is REVERSED, and
plaintiff-appellee Consolidated Bank and Trust Corporation (Solidbank) is
instead ordered to pay appellant George King Tim Pua the amount of
P466,182.39, with legal interest thereon per annum from September 8,
1979 until said amount is fully paid, plus P10,000.00 attorney's fees and
the costs of this suit (Rollo, p. 14).
Failing to secure a reconsideration of said decision, petitioner is now before the
Court on a petition for review oncertiorari.
Simply stated, the issue in this petition is whether private respondents are indebted
to petitioners in the amount of P288,469.80 as held by the then Court of First
Instance of Manila or whether said private respondents are entitled to
reimbursement from petitioner in the amount of P466,182.39 as decreed by the
Court of Appeals?
The issues raised are factual. As a general rule, the findings of the Court of Appeals
upon factual questions are conclusive and ought not to be disturbed. There are,
however, exceptions to the rule. One of the exceptions is when the findings of fact
of the Court of Appeals are contrary to those of the trial court (Massive
Construction, Inc. v. Intermediate Appellate Court, 223 SCRA 1 [1993]).
In the instant case, the findings of fact of the Court of Appeals are contrary to the
findings of the trial court. Under such circumstance, this Court may review the
findings of fact of the Court of Appeals and may scrutinize the evidence on record.
The records show that respondent George King Tim Pua had two sets of accounts
with petitioner bank: his personal account and his account for George and George
Trade, Inc. For his personal account, he obtained from petitioner on different dates
six separate loans with different due dates, viz:

Loan I

22-Apr-77

48 | P a g e

500,000.00

Loan III

5/6/77

Payable September 5, 1977

Loan IV

(a) 2/21/1977

220,000.00

(b)

450,000.00

(c)

65,000.00

Payable on May 3, 1977

TOTAL

735,000.00

2,035,000.00

===========
=

All of these loans bore a 14% rate of interest, which was to be

compounded monthly, in case of failure on the part of respondent George
King Tim Pua to pay on maturity. In which case, he further undertook to
pay an additional sum equivalent to 10% of the total amount due but in no
case less than P200.00 as attorney's fees. The maturity dates of the loans
were extended up to either December 1 or December 5, 1977 and all
interests were paid up to March 5, 1978.
Under the account of George and George Trade, Inc., respondent George
King Tim Pua, together with his co-maker, respondent Pua Ke Seng,
obtained the following loans:

Loan A

23-Jan-79

An additional sum equivalent to 10% of the total amount due, but not less
than P200.00, was to be imposed as and for attorney's fees. Interest were
paid on the loans up to their date of maturity.
The records further show that payments were made as follows:

September 12, 1978

230,000.00

October 28, 1978

149,000.00

November 28, 1978

100,000.00

June 8, 1979

525,000.00

300,000.00

Payable June 22, 1979

Loan B

19-Apr-79

200,000.00
September 6, 1979

2,383,485.00

Payable May 21, 1979

Loan C

8/2/79

150,000.00
TOTAL PAYMENTS

Payable Sept. 17, 1979

3,387,985.00

===========

TOTAL

650,000.00

============

Based on the foregoing figures, the accounts of respondents George King

Tim Pua and George and George Trade, Inc. with petitioner Bank should
stand as of September 6, 1979, thus:
GEORGE KING TIM PUA

The first loan bore an annual interest of 13.23%, which was to be

increased to 14% in case of failure to pay on due date, compounded
monthly, until fully paid. An additional amount equivalent to 10% of the
total amount but not less than P200.00 was to be imposed in case of
failure to pay on due date as attorney's fees. The second and third loans
bore an interest rate of 14% per annum and carried a penalty of 3% per
annum on the amount due in case of failure to pay on the date of maturity.

49 | P a g e

Loan I (Promissory Note No. 55658) P 500,000.00

14% interest, compounded monthly
Interest paid up to March 5, 1978
Add:
Interest, March 6 to Sept. 12, 1978 37,219.46


Total P 537,219.46
Less: Payment September 12, 1978 230,000.00

Balance, September 12, 1978 P 307,219.46

Add:
Interest September 13 to Oct. 28, 1978
14%, compounded monthly 5,492.63

Total P 312,712.09

14% Interest, compounded monthly

Interest paid up to March 7, 1978
Add:
Interest March 8, 1978 to Sept. 6, 1979 92,634.60

Total P 492,634.60
Loan IV (Promissory Note No. 54221) P 220,000.00
(Promissory Note No. 54222) 450,000.00
(Promissory Note No. 54223) 65,000.00
P 735,000.00

Less: Payment, October 28, 1978 149,500.00

Balance, October 28, 1978 P 163,212.09

Add:
Interest October 29 to Nov. 28, 1978
14%, compounded monthly 1,904.68

Total P 165,116.77
Less: Payment November 28, 1978 100,000.00

Balance, November 28, 1978 P 65,116.77

Add:
Interest November 29, 1978 to June 8,
1979, 14%, compounded monthly 4,962.35

Total P 70,079.12

14% Interest, compounded monthly

Interest paid up to March 7, 1978
Add:
Interest March 8, 1978 to Sept. 6, 1979 170,216.17

Total P 905,216.17
LOANS II, III and IV, as of Sept. 6, 1979
Loan II P 21,666.46
Loan III 492,634.60
Loan IV 905,216.17 P 1,419,517.23
Less: Payment, September 6, 1979 2,383,485.00

BALANCE OF INSURANCE PROCEEDS P 963,967.77

Loan II (Promissory Note No. 55828) P 400,000.00

GEORGE AND GEORGE TRADE, INC
14% Interest, compounded monthly
Interest paid up to March 5, 1978
Add:
Interest March 6, 1978 to June 8, 1979 76,587.34

Total P 476,587.34
LOANS I and II, as of June 8, 1979
Loan I P 70,079.12
Loan II 476,587.34
P 546,666.46
Less: Payment, June 8, 1979 525,000.00

Balance, June 8, 1979 P 21,666.46

Loan III (Promissory Note No. 55991) P 400,000.00

50 | P a g e

Loan A (Promissory Note No. 790591) P 300,000.00

14% Interest, compounded monthly
Interest paid up to June 22, 1979
Add:
Interest from June 23, 1979 to
Sept. 6, 1979 8,691.63

Total P 308,691.63
Balance of Insurance Proceeds
after payment of Loan A P 655,276.14
Loan B (Promissory Note No. 792805) P 200,000.00
14% Interest per annum
Interest paid up to May 21, 1979

Add:
Interest from May 22, 1979 to
Sept. 6, 1979 8,208.22
Penalty of 3% per annum 1,831.07

Total P 210,039.29
Balance of Insurance Proceeds
after payment of Loan B P 445,236.85
Loan C (Promissory Note No. 794730) P 150,000.00
14% Interest per annum
Interest paid up to Sept. 17, 1979
Balance of Insurance Proceeds
after payment of all loans P 295,236.85
Less: Trust Receipts Obligations 291,620.00

Amount Refundable to
Respondent George King Tim Pua P 3,616.85
============
The 14% interest rate charged by petitioner was within the limits set by
Section 3 of the Usury Law, as amended.
The charging of compounded interest has been held as proper as long as
the payment thereof has been agreed upon by the parties. In Mambulao
Lumber Company v. Philippine National Bank, 22 SCRA 359 (1968), we
ruled that the parties may, by stipulation, capitalize the interest due and
unpaid, which as added principal shall earn new interest. In the instant
case, private respondents agreed to the payment of 14% interest per
annum, compounded monthly, should they fail to pay the principal loan on
the date of maturity.
As to handling charges, banks are authorized under Central Bank Circular
No. 504 to collect such charges on loans over P500,000.00 with a maturity
of 730 days or less at the rate of 2% per annum, on the principal or the
outstanding balance thereof, whichever is lower; 1.75% on loans over
P500,000.00 but not over P1,000,000.00; 1.50% on loans over
P1,000,000.00 but not over 2,000,000.00, etc. Section 7 of the same
Circular, however, provides that all banks and non-bank financial
intermediaries authorized to engage in quasi-banking functions are
required to strictly adhere to the provisions of Republic Act No. 3765
otherwise known as the "Truth in Lending Act" and shall make the true and
effective cost of borrowing an integral part of every loan contract. The
promissory notes signed by private respondents do not contain any
stipulation on the payment of handling charges. Petitioner bank cannot,
therefore, charge private respondents such handling charges.

51 | P a g e

The payment of penalty is sanctioned by law, although the penalty may be

reduced by the courts if it is iniquitous or unconscionable (Equitable
Banking Corporation v. Liwanag, 32 SCRA 293 [1970]). The payment of
penalty was provided for under the terms and conditions of the promissory
notes for Loans B and C of George and George Trade, Inc. The penalty
actually imposed, being only 3% per annum of the unpaid balance of the
principal of said Loan B, is considered reasonable and proper.
The same cannot, however, be said of the payment being insisted upon by
petitioner of the attorney's fees stipulated in all the promissory notes,
consisting of 10% of the total amount due and payable. A stipulation
regarding the payment of attorney's fees is neither illegal nor immoral and
is enforceable as the law between the parties as long as such stipulation
does not contravene law, good morals, good customs, public order or public
policy (Social Security Commission v. Almeda, 168 SCRA 474 [1988];
Reparations Commission v. Visayan Packing Corporation, 193 SCRA 531
[1991]). As stated in the promissory notes, respondent George King Tim
Pua agreed to pay attorney's fees only "in addition to expenses and costs
of suit." In other words, petitioner is entitled to collect from respondent
George King Tim Pua the attorney's fees agreed upon only in case it was
compelled to litigate with third persons or to incur expenses to protect its
interest (China Airlines, Ltd. v. Intermediate Appellate Court, 169 SCRA
226 [1989]; Songcuan v. Intermediate Appellate Court, 191 SCRA 28
[1990]). These conditions are not obtaining in the case at bench. There
was no need for petitioner to litigate to protect its interest inasmuch as
private respondents had fully paid their obligations months before it filed
the complaint for recovery of sum of money. Neither has it been shown by
competent proof that petitioner had to engage the services of a lawyer or
incur expenses in collecting the fire insurance proceeds from Kerr and
Company.
The "Tentative Computation" to which respondent George King Tim Pua
allegedly affixed his initials to the item "Attorney's Fees, 10%" cannot be
taken as amending the stipulation contained in the promissory notes on the
payment of attorney's fees. The failure of said Tentative Computation to
express the true intent and agreement of the parties thereto was put in
issue in the Amended Answer with Special and Affirmative Defenses and
Counterclaim filed by private respondents before the trial court. The
corresponding testimony of respondent George King Tim Pua that he did
not understand the import of this item in the Tentative Computation
remains unrebutted.
The award of attorney's fees lies within the discretion of the court and
depends upon the circumstances of each case. However, the discretion of
the court to award attorney's fees under Article 2208 of the Civil Code of
the Philippines demands factual, legal and equitable justification, without
which the award is a conclusion without a premise and improperly left to
speculation and conjecture. It becomes a violation of the proscription
against the imposition of a penalty on the right to litigate (Universal
Shipping Lines, Inc. v. Intermediate Appellate Court, 188 SCRA 170
[1990]). The reason for the award must be stated in the text of the court's
decision. If it is stated only in the dispositive portion of the decision, the
same shall be disallowed. As to the award of attorney's fees being an

exception rather than the rule, it is necessary for the court to make
findings of fact and law that would bring the case within the exception and
justify the grant of the award (Refractories Corporation of the Philippines v.
Intermediate Appellate Court, 176 SCRA 539 [1989]).
In this case, the Court of Appeals strictly followed the above-stated
standard set by this Court. The award of P10,000.00 as attorney's fees to
private respondents was reasonable and justified as they were compelled
to litigate and incur expenses to protect their interest.
WHEREFORE, the Decision of the Court of Appeals is AFFIRMED with the
MODIFICATION that the amount which petitioner is ordered to reimburse
respondent George King Tim Pua is reduced to THREE THOUSAND SIX
HUNDRED SIXTEEN & 65/100 PESOS (P3,616.65), with legal interest
thereon from September 8, 1979 until said amount is fully paid. No
pronouncement as to costs.

THIRD DIVISION

UNITED COCONUT PLANTERS BANK,

G.R. No. 159912

Petitioner,

SO ORDERED.

Present:

- versus -

YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO,

SPOUSES SAMUEL and ODETTE BELUSO,

NACHURA, and

Respondents.

REYES, JJ.

Promulgated:

August 17, 2007

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

52 | P a g e

DECISION

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
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.

CHICO-NAZARIO, J.:

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:

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 PN #
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 97-00363-1
interest rate provided in the promissory notes executed by the respondents Spouses
Samuel and Odette Beluso (spouses Beluso) in favor of petitioner United Coconut 98-00002-4
Planters Bank (UCPB).

The procedural and factual antecedents of this case are as follows:

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

Maturity Date

11 December 1997

28 February 1998

P 200,000

2 January 1998

28 February 1998

P 150,000

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:

PN #

Amount Secured

Interest

Penalty

Total

97-00363-1

P 200,000

31%

36%

P 225,313.24

97-00366-6

P 700,000

30.17%

32.786%
(102 days)

P 795,294.72

30.41% (102
days)

P 1,462,124.54

36%

P 170,034.71

(7 days)
97-00368-2

P 1,300,000

28%
(2 days)

98-00002-4

P 150,000

33%
(102 days)

53 | P a g e

Amount Secured

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.

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:

Date of PN

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,

prompting UCPB to appeal the RTC Decision with the Court of Appeals. The Court
of Appeals affirmed the RTC Decision, to wit:

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

[6]

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:

54 | P a g e

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

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]

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.

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:
[15]

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:

55 | P a g e

We applied this provision in Philippine National Bank v. Court of Appeals,

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:

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.

The Cardholder agrees to pay interest per annum at 3% plus the

prime rate of Security Bank and Trust Company. x x x.[16]

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]

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 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:

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:

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]

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]

56 | P a g e

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]

twenty-five percent (25%) of the total amounts

outstanding exclusive of costs and other expenses. [22]

due

and

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--vis UCPBs 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:
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

57 | P a g e

1.

Accounts
expenses

receivable

2.

Front-end Fee, Origination Fee, Attorneys Fee and

other expenses of collection;

3.

Penalty charges;

4.

Past due interest;

and

other

out-of-pocket

5.

Principal amortization/Payment in arrears;

6.

Advance interest;

7.

Outstanding balance; and

8.

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.

All other obligations of CLIENT to the BANK, if any.

[25]

xxxx

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:

58 | P a g e

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.

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]

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.

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.

59 | P a g e

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

60 | P a g e

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.

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:

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.

(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.

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.

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 the1 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:

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:

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. 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:

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.

61 | P a g e

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.

(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)
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:

62 | P a g e

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.

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;

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)

(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.)

63 | P a g e

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

64 | P a g e

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
hereby AFFIRMED with the following MODIFICATIONS:

1.

of

Appeals

is

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
demandable as of the time of payment;

and

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

iv.
b.

outstanding balance.

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.
penalty charges due and
demandable as of time of payment;
ii.
interest
due
demandable as of the time of payment;

and

iii.
principal
amortization/payment in arrears as of the time of
payment;
iv.
3.

outstanding balance.

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.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

65 | P a g e

G.R. No. 90027 March 3, 1993

CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,
vs.
THE HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST
COMPANY, respondents.
Dolorfino & Dominguez Law Offices for petitioner.
Danilo B. Banares for private respondent.

DAVIDE, JR., J.:

Is the contractual relation between a commercial bank and another party in a
contract of rent of a safety deposit box with respect to its contents placed by the
latter one of bailor and bailee or one of lessor and lessee?
This is the crux of the present controversy.
On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses
Ramon and Paula Pugao entered into an agreement whereby the former purchased
from the latter two (2) parcels of land for a consideration of P350,625.00. Of this
amount, P75,725.00 was paid as downpayment while the balance was covered by
three (3) postdated checks. Among the terms and conditions of the agreement
embodied in a Memorandum of True and Actual Agreement of Sale of Land were
that the titles to the lots shall be transferred to the petitioner upon full payment of
the purchase price and that the owner's copies of the certificates of titles thereto,
Transfer Certificates of Title (TCT) Nos. 284655 and 292434, shall be deposited in a
safety deposit box of any bank. The same could be withdrawn only upon the joint
signatures of a representative of the petitioner and the Pugaos upon full payment of
the purchase price. Petitioner, through Sergio Aguirre, and the Pugaos then rented
Safety Deposit Box No. 1448 of private respondent Security Bank and Trust
Company, a domestic banking corporation hereinafter referred to as the respondent
Bank. For this purpose, both signed a contract of lease (Exhibit "2") which
contains, inter alia, the following conditions:

After the execution of the contract, two (2) renter's keys were given to the renters
one to Aguirre (for the petitioner) and the other to the Pugaos. A guard key
remained in the possession of the respondent Bank. The safety deposit box has two
(2) keyholes, one for the guard key and the other for the renter's key, and can be
opened only with the use of both keys. Petitioner claims that the certificates of title
were placed inside the said box.
Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the
two (2) lots at a price of P225.00 per square meter which, as petitioner alleged in
its complaint, translates to a profit of P100.00 per square meter or a total of
P280,500.00 for the entire property. Mrs. Ramos demanded the execution of a deed
of sale which necessarily entailed the production of the certificates of title. In view
thereof, Aguirre, accompanied by the Pugaos, then proceeded to the respondent
Bank on 4 October 1979 to open the safety deposit box and get the certificates of
title. However, when opened in the presence of the Bank's representative, the box
yielded no such certificates. Because of the delay in the reconstitution of the title,
Mrs. Ramos withdrew her earlier offer to purchase the lots; as a consequence
thereof, the petitioner allegedly failed to realize the expected profit of P280,500.00.
Hence, the latter filed on 1 September 1980 a complaint 2 for damages against the
respondent Bank with the Court of First Instance (now Regional Trial Court) of Pasig,
Metro Manila which docketed the same as Civil Case No. 38382.
In its Answer with Counterclaim, 3 respondent Bank alleged that the petitioner has
no cause of action because of paragraphs 13 and 14 of the contract of lease (Exhibit
"2"); corollarily, loss of any of the items or articles contained in the box could not
give rise to an action against it. It then interposed a counterclaim for exemplary
damages as well as attorney's fees in the amount of P20,000.00. Petitioner
subsequently filed an answer to the counterclaim. 4
In due course, the trial court, now designated as Branch 161 of the Regional Trial
Court (RTC) of Pasig, Metro Manila, rendered a decision 5 adverse to the petitioner
on 8 December 1986, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered
dismissing plaintiff's complaint.
On defendant's counterclaim, judgment is hereby rendered
ordering plaintiff to pay defendant the amount of FIVE THOUSAND
(P5,000.00) PESOS as attorney's fees.
With costs against plaintiff. 6

13. The bank is not a depositary of the contents of the safe and it
has neither the possession nor control of the same.
14. The bank has no interest whatsoever in said contents, except
herein expressly provided, and it assumes absolutely no liability in
connection therewith. 1

66 | P a g e

The unfavorable verdict is based on the trial court's conclusion that under
paragraphs 13 and 14 of the contract of lease, the Bank has no liability for the loss
of the certificates of title. The court declared that the said provisions are binding on
the parties.

Its motion for reconsideration 7 having been denied, petitioner appealed from the
adverse decision to the respondent Court of Appeals which docketed the appeal as
CA-G.R. CV No. 15150. Petitioner urged the respondent Court to reverse the
challenged decision because the trial court erred in (a) absolving the respondent
Bank from liability from the loss, (b) not declaring as null and void, for being
contrary to law, public order and public policy, the provisions in the contract for
lease of the safety deposit box absolving the Bank from any liability for loss, (c) not
concluding that in this jurisdiction, as well as under American jurisprudence, the
liability of the Bank is settled and (d) awarding attorney's fees to the Bank and
denying the petitioner's prayer for nominal and exemplary damages and attorney's
fees. 8
In its Decision promulgated on 4 July 1989, 9 respondent Court affirmed the
appealed decision principally on the theory that the contract (Exhibit "2") executed
by the petitioner and respondent Bank is in the nature of a contract of lease by
virtue of which the petitioner and its co-renter were given control over the safety
deposit box and its contents while the Bank retained no right to open the said box
because it had neither the possession nor control over it and its contents. As such,
the contract is governed by Article 1643 of the Civil Code 10 which provides:
Art. 1643. In the lease of things, one of the parties binds himself
to give to another the enjoyment or use of a thing for a price
certain, and for a period which may be definite or indefinite.
However, no lease for more than ninety-nine years shall be valid.
It invoked Tolentino vs. Gonzales 11 which held that the owner of the
property loses his control over the property leased during the period of the
contract and Article 1975 of the Civil Code which provides:
Art. 1975. The depositary holding certificates, bonds, securities or
instruments which earn interest shall be bound to collect the latter
when it becomes due, and to take such steps as may be necessary
in order that the securities may preserve their value and the rights
corresponding to them according to law.
The above provision shall not apply to contracts for the rent of
safety deposit boxes.
and then concluded that "[c]learly, the defendant-appellee is not under any
duty to maintain the contents of the box. The stipulation absolving the
defendant-appellee from liability is in accordance with the nature of the
contract of lease and cannot be regarded as contrary to law, public order
and public policy." 12 The appellate court was quick to add, however, that
under the contract of lease of the safety deposit box, respondent Bank is
not completely free from liability as it may still be made answerable in case
unauthorized persons enter into the vault area or when the rented box is
forced open. Thus, as expressly provided for in stipulation number 8 of the
contract in question:

67 | P a g e

8. The Bank shall use due diligence that no unauthorized person

shall be admitted to any rented safe and beyond this, the Bank
will not be responsible for the contents of any safe rented from
it. 13
Its motion for reconsideration 14 having been denied in the respondent Court's
Resolution of 28 August 1989, 15petitioner took this recourse under Rule 45 of the
Rules of Court and urges Us to review and set aside the respondent Court's ruling.
Petitioner avers that both the respondent Court and the trial court (a) did not
properly and legally apply the correct law in this case, (b) acted with grave abuse of
discretion or in excess of jurisdiction amounting to lack thereof and (c) set a
precedent that is contrary to, or is a departure from precedents adhered to and
affirmed by decisions of this Court and precepts in American jurisprudence adopted
in the Philippines. It reiterates the arguments it had raised in its motion to
reconsider the trial court's decision, the brief submitted to the respondent Court and
the motion to reconsider the latter's decision. In a nutshell, petitioner maintains
that regardless of nomenclature, the contract for the rent of the safety deposit box
(Exhibit "2") is actually a contract of deposit governed by Title XII, Book IV of the
Civil Code of the
Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the
loss of the certificates of title pursuant to Article 1972 of the said Code which
provides:
Art. 1972. The depositary is obliged to keep the thing safely and
to return it, when required, to the depositor, or to his heirs and
successors, or to the person who may have been designated in
the contract. His responsibility, with regard to the safekeeping and
the loss of the thing, shall be governed by the provisions of Title I
of this Book.
If the deposit is gratuitous, this fact shall be taken into account in
determining the degree of care that the depositary must observe.
Petitioner then quotes a passage from American Jurisprudence 17 which is
supposed to expound on the prevailing rule in the United States, to wit:
The prevailing rule appears to be that where a safe-deposit
company leases a safe-deposit box or safe and the lessee takes
possession of the box or safe and places therein his securities or
other valuables, the relation of bailee and bail or is created
between the parties to the transaction as to such securities or
other valuables; the fact that the
safe-deposit company does not know, and that it is not expected
that it shall know, the character or description of the property
which is deposited in such safe-deposit box or safe does not
change that relation. That access to the contents of the safedeposit box can be had only by the use of a key retained by the
lessee ( whether it is the sole key or one to be used in connection
with one retained by the lessor) does not operate to alter the

foregoing rule. The argument that there is not, in such a case, a

delivery of exclusive possession and control to the deposit
company, and that therefore the situation is entirely different from
that of ordinary bailment, has been generally rejected by the
courts, usually on the ground that as possession must be either in
the depositor or in the company, it should reasonably be
considered as in the latter rather than in the former, since the
company is, by the nature of the contract, given absolute control
of access to the property, and the depositor cannot gain access
thereto without the consent and active participation of the
company. . . . (citations omitted).
and a segment from Words and Phrases 18 which states that a contract for
the rental of a bank safety deposit box in consideration of a fixed amount
at stated periods is a bailment for hire.
Petitioner further argues that conditions 13 and 14 of the questioned contract are
contrary to law and public policy and should be declared null and void. In support
thereof, it cites Article 1306 of the Civil Code which provides that parties to a
contract may establish such stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law, morals, good customs,
public order or public policy.
After the respondent Bank filed its comment, this Court gave due course to the
petition and required the parties to simultaneously submit their respective
Memoranda.

We observe, however, that the deposit theory itself does not altogether find
unanimous support even in American jurisprudence. We agree with the petitioner
that under the latter, the prevailing rule is that the relation between a bank renting
out safe-deposit boxes and its customer with respect to the contents of the box is
that of a bail or and bailee, the bailment being for hire and mutual benefit. 21 This is
just the prevailing view because:
There is, however, some support for the view that the relationship
in question might be more properly characterized as that of
landlord and tenant, or lessor and lessee. It has also been
suggested that it should be characterized as that of licensor and
licensee. The relation between a bank, safe-deposit company, or
storage company, and the renter of a safe-deposit box therein, is
often described as contractual, express or implied, oral or written,
in whole or in part. But there is apparently no jurisdiction in which
any rule other than that applicable to bailments governs questions
of the liability and rights of the parties in respect of loss of the
contents of safe-deposit boxes. 22 (citations omitted)
In the context of our laws which authorize banking institutions to rent out safety
deposit boxes, it is clear that in this jurisdiction, the prevailing rule in the United
States has been adopted. Section 72 of the General Banking Act 23 pertinently
provides:
Sec. 72. In addition to the operations specifically authorized
elsewhere in this Act, banking institutions other than building and
loan associations may perform the following services:

The petition is partly meritorious.

We agree with the petitioner's contention that the contract for the rent of the safety
deposit box is not an ordinary contract of lease as defined in Article 1643 of the Civil
Code. However, We do not fully subscribe to its view that the same is a contract of
deposit that is to be strictly governed by the provisions in the Civil Code on
deposit; 19the contract in the case at bar is a special kind of deposit. It cannot be
characterized as an ordinary contract of lease under Article 1643 because the full
and absolute possession and control of the safety deposit box was not given to the
joint renters the petitioner and the Pugaos. The guard key of the box remained
with the respondent Bank; without this key, neither of the renters could open the
box. On the other hand, the respondent Bank could not likewise open the box
without the renter's key. In this case, the said key had a duplicate which was made
so that both renters could have access to the box.
Hence, the authorities cited by the respondent Court 20 on this point do not apply.
Neither could Article 1975, also relied upon by the respondent Court, be invoked as
an argument against the deposit theory. Obviously, the first paragraph of such
provision cannot apply to a depositary of certificates, bonds, securities or
instruments which earn interest if such documents are kept in a rented safety
deposit box. It is clear that the depositary cannot open the box without the renter
being present.

68 | P a g e

(a) Receive in custody funds, documents, and

valuable objects, and rent safety deposit boxes
for the safeguarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted under subsections
(a), (b) and (c) of this section asdepositories or as
agents. . . . 24 (emphasis supplied)
Note that the primary function is still found within the parameters of a contract
of deposit, i.e., the receiving in custody of funds, documents and other valuable
objects for safekeeping. The renting out of the safety deposit boxes is not
independent from, but related to or in conjunction with, this principal function. A
contract of deposit may be entered into orally or in writing 25 and, pursuant to
Article 1306 of the Civil Code, the parties thereto may establish such stipulations,
clauses, terms and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order or public policy. The
depositary's responsibility for the safekeeping of the objects deposited in the case at
bar is governed by Title I, Book IV of the Civil Code. Accordingly, the depositary
would be liable if, in performing its obligation, it is found guilty of fraud, negligence,

delay or contravention of the tenor of the agreement. 26 In the absence of any

stipulation prescribing the degree of diligence required, that of a good father of a
family is to be observed. 27 Hence, any stipulation exempting the depositary from
any liability arising from the loss of the thing deposited on account of fraud,
negligence or delay would be void for being contrary to law and public policy. In the
instant case, petitioner maintains that conditions 13 and 14 of the questioned
contract of lease of the safety deposit box, which read:
13. The bank is not a depositary of the contents of the safe and it
has neither the possession nor control of the same.
14. The bank has no interest whatsoever in said contents, except
herein expressly provided, and it assumes absolutely no liability in
connection therewith. 28
are void as they are contrary to law and public policy. We find Ourselves in
agreement with this proposition for indeed, said provisions are inconsistent
with the respondent Bank's responsibility as a depositary under Section
72(a) of the General Banking Act. Both exempt the latter from any liability
except as contemplated in condition 8 thereof which limits its duty to
exercise reasonable diligence only with respect to who shall be admitted to
any rented safe, to wit:
8. The Bank shall use due diligence that no unauthorized person
shall be admitted to any rented safe and beyond this, the Bank
will not be responsible for the contents of any safe rented from
it. 29
Furthermore, condition 13 stands on a wrong premise and is contrary to
the actual practice of the Bank. It is not correct to assert that the Bank has
neither the possession nor control of the contents of the box since in fact,
the safety deposit box itself is located in its premises and is under its
absolute control; moreover, the respondent Bank keeps the guard key to
the said box. As stated earlier, renters cannot open their respective boxes
unless the Bank cooperates by presenting and using this guard key. Clearly
then, to the extent above stated, the foregoing conditions in the contract in
question are void and ineffective. It has been said:
With respect to property deposited in a safe-deposit box by a
customer of a safe-deposit company, the parties, since the
relation is a contractual one, may by special contract define their
respective duties or provide for increasing or limiting the liability
of the deposit company, provided such contract is not in violation
of law or public policy. It must clearly appear that there actually
was such a special contract, however, in order to vary the ordinary
obligations implied by law from the relationship of the parties;
liability of the deposit company will not be enlarged or restricted
by words of doubtful meaning. The company, in renting
safe-deposit boxes, cannot exempt itself from liability for loss of

69 | P a g e

the contents by its own fraud or negligence or that of its agents or

servants, and if a provision of the contract may be construed as
an attempt to do so, it will be held ineffective for the purpose.
Although it has been held that the lessor of a safe-deposit box
cannot limit its liability for loss of the contents thereof through its
own negligence, the view has been taken that such a lessor may
limits its liability to some extent by agreement or
stipulation. 30 (citations omitted)
Thus, we reach the same conclusion which the Court of Appeals arrived at, that is,
that the petition should be dismissed, but on grounds quite different from those
relied upon by the Court of Appeals. In the instant case, the respondent Bank's
exoneration cannot, contrary to the holding of the Court of Appeals, be based on or
proceed from a characterization of the impugned contract as a contract of lease, but
rather on the fact that no competent proof was presented to show that respondent
Bank was aware of the agreement between the petitioner and the Pugaos to the
effect that the certificates of title were withdrawable from the safety deposit box
only upon both parties' joint signatures, and that no evidence was submitted to
reveal that the loss of the certificates of title was due to the fraud or negligence of
the respondent Bank. This in turn flows from this Court's determination that the
contract involved was one of deposit. Since both the petitioner and the Pugaos
agreed that each should have one (1) renter's key, it was obvious that either of
them could ask the Bank for access to the safety deposit box and, with the use of
such key and the Bank's own guard key, could open the said box, without the other
renter being present.
Since, however, the petitioner cannot be blamed for the filing of the complaint and
no bad faith on its part had been established, the trial court erred in condemning
the petitioner to pay the respondent Bank attorney's fees. To this extent, the
Decision (dispositive portion) of public respondent Court of Appeals must be
modified.
WHEREFORE, the Petition for Review is partially GRANTED by deleting the award for
attorney's fees from the 4 July 1989 Decision of the respondent Court of Appeals in
CA-G.R. CV No. 15150. As modified, and subject to the pronouncement We made
above on the nature of the relationship between the parties in a contract of lease of
safety deposit boxes, the dispositive portion of the said Decision is hereby
AFFIRMED and the instant Petition for Review is otherwise DENIED for lack of merit.
No pronouncement as to costs.
SO ORDERED.

month; provided that the rentals for the 1st 5 years less a discount of eleven (11)
percent per annum computed on a monthly diminishing balance, shall be paid to
LESSOR upon compliance of the three (3) conditions provided in clause (2) above.
LESSEE also agrees to pay lessor, the sum of Six Thousand Pesos (P6,000.00) as
demolition expenses, upon effectivity of this lease.
The rental herein provided for is in any event the maximum rental which LESSOR
may collect during the term of this lease or any renewal or extension
thereof. LESSEE further agrees for thirty (30) days after written notice of such
default has actually been delivered to the General Manager of Caltex (Philippines),
Inc. LESSOR shall then have the right to terminate this lease on thirty (30) days
written notice to LESSEE. xxx xxx xxx [3]
THIRD DIVISION
Thus, based on the foregoing provisions of the lease contract, the monthly
rental was fixed at P3,500.00 for the first ten years, and at P4,200.00 for the
succeeding ten years of the lease.

[G.R. No. 137798. October 4, 2000]

LUCIA

R.
SINGSON, petitioner,
INC. respondent.

vs.

CALTEX

(PHILIPPINES),

DECISION
GONZAGA-REYES, J.:
Petitioner seeks a review on certiorari of the decision of the former Special
Second Division of the Court of Appeals dated November 27, 1998, [1] affirming the
decision of the Regional Trial Court of Manila, Branch 25 [2] which dismissed
petitioner's action for reformation of contract and adjustment of rentals.
The facts of the case are undisputed --Petitioner and respondent entered into a contract of lease on July 16, 1968
over a parcel of land in Cubao, Quezon City. The land, which had an area of 1,400
square meters and was covered by Transfer Certificates of Title No. 43329 and
81636 issued by the Register of Deeds of Quezon City, was to be used by
respondent as a gasoline service station.
The contract of lease provides that the lease shall run for a period of twenty
(20) years and shall abide by the following rental rates:
xxx xxx xxx xxx
Rental. --- The LESSEE agrees to pay the following rental for said premises:
P2.50/sq.m. per month from the 1st to 10th years and P3.00/sq.m. per month from
the 11th to 20th years, payable monthly in advance within the 1st 15 days of each

70 | P a g e

On June 23, 1983, or five years before the expiration of the lease contract,
petitioner asked respondent to adjust or increase the amount of rentals citing that
the country was experiencing extraordinary inflation. In a letter dated August 3,
1983, respondent refused petitioner's request and declared that the terms of the
lease contract are clear as to the rental amounts therein provided being "the
maximum rental which the lessor may collect during the term of the lease." [4]
On September 21, 1983, petitioner instituted a complaint before the RTC
praying for, among other things, the payment by respondent of adjusted rentals
based on the value of the Philippine peso at the time the contract of lease was
executed. The complaint invoked Article 1250 of the Civil Code, stating that since
the execution of the contract of lease in 1968 an extraordinary inflation had
supervened resulting from the deterioration of worldwide economic conditions, a
circumstance that was not foreseen and could not have been reasonably foreseen
by the parties at the time they entered into contract.
To substantiate its allegation of extraordinary inflation, petitioner presented as
witness Mr. Narciso Uy, Assistant Director of the Supervising and Examining Sector
of the Central Bank, who attested that the inflation rate increased abruptly during
the period 1982 to 1985, caused mainly by the devaluation of the peso. [5] Petitioner
also submitted into evidence a certification of the official inflation rates from 1966 to
1986 prepared by the National Economic Development Authority ("NEDA") based on
consumer price index, which reflected that at the time the parties entered into the
subject contract, the inflation rate was only 2.06%; then, it soared to 34.51% in
1974, and in 1984, reached a high of 50.34%.[6]
In a decision rendered on July 15, 1991, the RTC dismissed the complaint for
lack of merit. This judgment was affirmed by the Court of Appeals. Both courts
found that petitioner was unable to prove the existence of extraordinary inflation
from 1968 to 1983 (or from the year of the execution of the contract up to the year

of the filing of the complaint before the RTC) as to justify an adjustment or increase
in the rentals based upon the provisions of Article 1250 of the Civil Code.
The Court of Appeals declared that although, admittedly, there was an
economic inflation during the period in question, it was not such as to call for the
application of Article 1250 which is made to apply only to "violent and sudden
changes in the price level or uncommon or unusual decrease of the value of the
currency. (It) does not contemplate of a normal or ordinary decline in the
purchasing power of the peso."[7]
The Court of Appeals also found similarly with the trial court that the terms of
rental in the contract of lease dated July 16, 1968 are clear and unequivocal as to
the specific amount of the rental rates and the fact that the rentals therein provided
shall be the "maximum rental" which petitioner as lessor may collect. Absent any
showing that such contractual provisions are contrary to law, morals, good customs,
public order or public policy, the Court of Appeals held that there was no basis for
not acknowledging their binding effect upon the parties. It also upheld the
application by the trial court of the ruling in Filipino Pipe and Foundry Corporation
vs. National Waterworks and Sewerage Authority, 161 SCRA 32, where the Court
held that although there has been a decline in the purchasing power of the
Philippine peso during the period 1961 to 1971, such downward fall of the currency
could not be considered "extraordinary" and was simply a universal trend that has
not spared the Philippines.
Thus, the dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, in view of the foregoing, the appeal is hereby DISMISSED and the
decision appealed from is hereby AFFIRMED.
SO ORDERED.[8]
Petitioner's motion for reconsideration of the above decision was denied by the
Court of Appeals in a resolution dated March 10, 1999.
Aggrieved, petitioner filed this petition for review on certiorari where she
assails as erroneous the decision of the Court of Appeals, specifically, (1) in ruling
that Article 1250 of the Civil Code is inapplicable to the instant case, (2) in not
recognizing the applicability of the principle of rebus sic stantibus, and (3) in
applying the ruling in Filipino Pipe and Foundry Corporation vs. NAWASA.
Petitioner contends that the monthly rental of P3.00 per square meter is
patently inequitable. Based on the inflation rates supplied by NEDA, there was an
unusual increase in inflation that could not have been foreseen by the parties;
otherwise, they would not have entered into a relatively long-term contract of
lease. She argued that the rentals in this case should not be regarded by their
quantitative or nominal value, but as "debts of value", that is, the rental rates
should be adjusted to reflect the value of the peso at the time the lease was
contracted.[9]

71 | P a g e

Petitioner also insists that the factual milieu of the present case is distinct from
that in Filipino Pipe and Foundry Corporation vs. NAWASA. She pointed out that the
inflation experienced by the country during the period 1961 to 1971 (the pertinent
time period in the Filipino Pipe case) had a lowest of 1.35% in 1969 and a highest of
15.03% in 1971, whereas in the instant case, involving the period 1968 to 1983,
there had been highly abnormal inflation rates like 34.51% in 1974 (triggered by
the OPEC oil price increases in 1973) and 50.34% in 1984 (caused by the
assassination of Benigno Aquino, Jr. in 1983). Petitioner argues that the placing of
the country under martial rule in 1972, the OPEC oil price increases in 1973, and
the Aquino assassination which triggered the EDSA revolution, were fortuitous
events that drastically affected the Philippine economy and were beyond the
reasonable contemplation of the parties.
To further bolster her arguments, petitioner invokes by analogy the principle
of rebus sic stantibus in public international law, under which a vital change of
circumstances justifies a state's unilateral withdrawal from a treaty. In the herein
case, petitioner posits that in pegging the monthly rental rates of P2.50 and P3.00
per square meter, respectively, the parties were guided by the economic conditions
prevalent in 1968, when the Philippines faced robust economic prospects. Petitioner
contends that between her and respondent, a corporation engaged in high stakes
business and employing economic and business experts, it is the latter who had the
unmistakable advantage to analyze the feasibility of entering into a 20-year lease
contract at such meager rates.
The only issue crucial to the present appeal is whether there existed an
extraordinary inflation during the period 1968 to 1983 that would call for the
application of Article 1250 of the Civil Code and justify an adjustment or increase of
the rentals between the parties.
Article 1250 of the Civil Code states:
In case an extraordinary inflation or deflation of the currency stipulated should
supervene, the value of the currency at the time of the establishment of the
obligation shall be the basis of payment, unless there is an agreement to the
contrary.
Article 1250 was inserted in the Civil Code of 1950 to abate the uncertainty
and confusion that affected contracts entered into or payments made during World
War II, and to help provide a just solution to future cases. [10] The Court has, in more
than one occasion, been asked to interpret the provisions of Article 1250, and to
expound on the scope and limits of "extraordinary inflation".
We have held extraordinary inflation to exist when there is a decrease or
increase in the purchasing power of the Philippine currency which is unusual or
beyond the common fluctuation in the value of said currency, and such increase or
decrease could not have been reasonably foreseen or was manifestly beyond the
contemplation of the parties at the time of the establishment of the obligation. [11]

An example of extraordinary inflation, as cited by the Court in Filipino Pipe and

Foundry Corporation vs. NAWASA, supra, is that which happened to the
deutschmark in 1920. Thus:
"More recently, in the 1920s, Germany experienced a case of hyperinflation. In early
1921, the value of the German mark was 4.2 to the U.S. dollar. By May of the same
year, it had stumbled to 62 to the U.S. dollar. And as prices went up rapidly, so that
by October 1923, it had reached 4.2 trillion to the U.S. dollar!" (Bernardo M.
Villegas & Victor R. Abola, Economics, An Introduction [Third Edition]).
As reported, "prices were going up every week, then every day, then every
hour. Women were paid several times a day so that they could rush out and
exchange their money for something of value before what little purchasing power
was left dissolved in their hands. Some workers tried to beat the constantly rising
prices by throwing their money out of the windows to their waiting wives, who
would rush to unload the nearly worthless paper. A postage stamp cost millions of
marks and a loaf of bread, billions." (Sidney Rutberg, "The Money Balloon", New
York: Simon and Schuster, 1975, p. 19, cited in "Economics, An Introduction" by
Villegas & Abola, 3rd Ed.)
The supervening of extraordinary inflation is never assumed. [12] The party
alleging it must lay down the factual basis for the application of Article 1250.
Thus, in the Filipino Pipe case, the Court acknowledged that the voluminous
records and statistics submitted by plaintiff-appellant proved that there has been a
decline in the purchasing power of the Philippine peso, but this downward fall
cannot be considered "extraordinary" but was simply a universal trend that has not
spared our country.[13] Similarly, in Huibonhoa vs. Court of Appeals,[14] the Court
dismissed plaintiff-appellant's unsubstantiated allegation that the Aquino
assassination in 1983 caused building and construction costs to double during the
period July 1983 to February 1984. In Serra vs. Court of Appeals,[15] the Court again
did not consider the decline in the peso's purchasing power from 1983 to 1985 to be
so great as to result in an extraordinary inflation.
Like the Serra and Huibonhoa cases, the instant case also raises as basis for
the application of Article 1250 the Philippine economic crisis in the early 1980s --when, based on petitioner's evidence, the inflation rate rose to 50.34% in 1984. We
hold that there is no legal or factual basis to support petitioner's allegation of the
existence of extraordinary inflation during this period, or, for that matter, the entire
time frame of 1968 to 1983, to merit the adjustment of the rentals in the lease
contract dated July 16, 1968. Although by petitioner's evidence there was a decided
decline in the purchasing power of the Philippine peso throughout this period, we
are hard put to treat this as an "extraordinary inflation" within the meaning and
intent of Article 1250. Rather, we adopt with approval the following observations of
the Court of Appeals on petitioner's evidence, especially the NEDA certification of
inflation rates based on consumer price index:
xxx (a) from the period 1966 to 1986, the official inflation rate never exceeded
100% in any single year; (b) the highest official inflation rate recorded was in 1984

72 | P a g e

which reached only 50.34%; (c) over a twenty one (21) year period, the Philippines
experienced a single-digit inflation in ten (10) years (i.e., 1966, 1967, 1968, 1969,
1975, 1976, 1977, 1978, 1983 and 1986); (d) in other years (i.e., 1970, 1971,
1972, 1973, 1974, 1979, 1980, 1981, 1982, 1984 and 1989) when the Philippines
experienced double-digit inflation rates, the average of those rates was only
20.88%; (e) while there was a decline in the purchasing power of the Philippine
currency from the period 1966 to 1986, such cannot be considered as
extraordinary; rather, it is a normal erosion of the value of the Philippine peso which
is a characteristic of most currencies.[16]
"Erosion" is indeed an accurate description of the trend of decline in the value
of the peso in the past three to four decades. Unfortunate as this trend may be, it is
certainly distinct from the phenomenon contemplated by Article 1250.
Moreover, this Court has held that the effects of extraordinary inflation are not
to be applied without an official declaration thereof by competent authorities. [17]
Lastly, the provisions on rentals in the lease contract dated July 16, 1968
between petitioner and respondent are clear and categorical, and we have no
reason to suppose that such lease contract does not reflect or express their true
intention and agreement. The contract is the law between the parties and if there is
indeed reason to adjust the rent, the parties could have by themselves negotiated
the amendment of the contract.[18]
WHEREFORE, the petition seeking the reversal of the decision of the Court of
Appeals in CA-G.R. CV No. 54115 is DENIED.
SO ORDERED.

CITIBANK, N.A. (Formerly FirstNational

City Bank)
and
INVESTORS
FINANCE
CORPORATION, doing business under the
name and style of FNCB Finance,
Petitioners,

G.R. No. 156132

Present:

YNARES-SANTIAGO, J.,

- versus-

Chairperson,
AUSTRIA-MARTINEZ,
MODESTA R. SABENIANO,

CALLEJO, SR., and

Respondent.

CHICO-NAZARIO, JJ.

Promulgated:

February 6, 2007
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

RESOLUTION

CHICO-NAZARIO, J.:

On 16 October 2006, this Court promulgated its Decision [1] in the aboveentitled case, the dispositive portion of which reads
IN VIEW OF THE FOREGOING, the instant Petition
is PARTLY GRANTED. The assailed Decision of the Court of
Appeals in CA-G.R. No. 51930, dated 26 March 2002, as already
modified by its Resolution, dated 20 November 2002, is
hereby AFFIRMED WITH MODIFICATION, as follows

THIRD DIVISION

73 | P a g e

1. PNs No. 23356 and 23357 are DECLARED subsisting

and outstanding. Petitioner Citibank is ORDERED to return to
respondent the principal amounts of the said PNs, amounting to
Three Hundred Eighteen Thousand Eight Hundred Ninety-Seven
Pesos and Thirty-Four Centavos (P318,897.34) and Two Hundred

Three Thousand One Hundred Fifty Pesos (P203,150.00),

respectively, plus the stipulated interest of Fourteen and a half
percent (14.5%) per annum, beginning 17 March 1977;
2. The remittance of One Hundred Forty-Nine Thousand
Six Hundred Thirty Two US Dollars and Ninety-Nine Cents
(US$149,632.99) from respondents Citibank-Geneva accounts to
petitioner Citibank in Manila, and the application of the same
against respondents outstanding loans with the latter,
is DECLARED illegal,
null
and
void. Petitioner
Citibank
is ORDERED to refund to respondent the said amount, or its
equivalent in Philippine currency using the exchange rate at the
time of payment, plus the stipulated interest for each of the
fiduciary placements and current accounts involved, beginning 26
October 1979;
3. Petitioner Citibank is ORDERED to pay respondent
moral damages in the amount of Three Hundred Thousand Pesos
(P300,000.00); exemplary damages in the amount of Two
Hundred Fifty Thousand Pesos (P250,000.00); and attorneys fees
in the amount of Two Hundred Thousand Pesos (P200,000.00);
and
4. Respondent is ORDERED to pay petitioner Citibank
the balance of her outstanding loans, which, from the respective
dates of their maturity to 5 September 1979, was computed to be
in the sum of One Million Sixty-Nine Thousand Eight Hundred
Forty-Seven Pesos and Forty Centavos (P1,069,847.40), inclusive
of interest. These outstanding loans shall continue to earn
interest, at the rates stipulated in the corresponding PNs, from 5
September 1979 until payment thereof.
Subsequent thereto, respondent Modesta R. Sabeniano filed an Urgent
Motion to Clarify and/or Confirm Decision with Notice of Judgment on 20
October 2006; while, petitioners Citibank, N.A. and FNCB Finance [2] filed their
Motion for Partial Reconsideration of the foregoing Decision on 6 November
2006.
The facts of the case, as determined by this Court in its Decision, may
be summarized as follows.
Respondent was a client of petitioners. She had several deposits and
market placements with petitioners, among which were her savings account
with the local branch of petitioner Citibank (Citibank-Manila [3]); money market
placements with petitioner FNCB Finance; and dollar accounts with
the Geneva branch of petitioner Citibank (Citibank-Geneva). At the same time,
respondent had outstanding loans with petitioner Citibank, incurred at CitibankManila, the principal amounts aggregating to P1,920,000.00, all of which had
become due and demandable by May 1979. Despite repeated demands by
petitioner Citibank, respondent failed to pay her outstanding loans. Thus,
petitioner Citibank used respondents deposits and money market placements to
off-set and liquidate her outstanding obligations, as follows

74 | P a g e

Respondents outstanding obligation (principal and interest as of

26 October 1979)
Less:
Proceeds from respondents money market placements
with petitioner FNCB Finance (principal and interest as
of 5 September 1979)
Deposits in respondents bank accounts with petitioner
Citibank
Proceeds of respondents money market placements and
dollar accounts with Citibank-Geneva (peso equivalent
as of 26 October 1979)
Balance of respondents obligation
Respondent, however, denied having any outstanding loans with
petitioner Citibank. She likewise denied that she was duly informed of the offsetting or compensation thereof made by petitioner Citibank using her deposits
and money market placements with petitioners. Hence, respondent sought to
recover her deposits and money market placements.
Respondent instituted a complaint for Accounting, Sum of Money and
Damages against petitioners, docketed as Civil Case No. 11336, before the
Regional Trial Court (RTC) of Makati City. After trial proper, which lasted for a
decade,
the
RTC
rendered
a
Decision [4] on 24
August
1995,
the dispositive portion of which reads
WHEREFORE, in view of all the foregoing, decision is
hereby rendered as follows:
(1) Declaring as illegal, null and void the setoff effected
by the defendant Bank [petitioner Citibank] of plaintiffs
[respondent Sabeniano] dollar deposit with Citibank, Switzerland,
in the amount of US$149,632.99, and ordering the said defendant
[petitioner Citibank] to refund the said amount to the plaintiff with
legal interest at the rate of twelve percent (12%) per annum,
compounded yearly, from 31 October 1979 until fully paid, or its
peso equivalent at the time of payment;
(2) Declaring the plaintiff [respondent Sabeniano]
indebted to the defendant Bank [petitioner Citibank] in the
amount of P1,069,847.40 as of 5 September 1979 and ordering
the plaintiff [respondent Sabeniano] to pay said amount, however,
there shall be no interest and penalty charges from the time the
illegal setoff was effected on 31 October 1979;
(3) Dismissing all other claims
interposed by the parties against each other.

and

counterclaims

Costs against the defendant Bank.

All the parties appealed the afore-mentioned RTC Decision to the Court
of Appeals, docketed as CA-G.R. CV No. 51930. On 26 March 2002, the
appellate court promulgated its Decision,[5] ruling entirely in favor of
respondent, to wit

Wherefore, premises considered, the assailed 24 August

1995 Decision of the court a quo is hereby AFFIRMED with
MODIFICATION, as follows:

1. Declaring as illegal, null and void the set-off effected

by the defendant-appellant Bank of the plaintiff-appellants dollar
deposit with Citibank, Switzerland, in the amount of
US$149,632.99, and ordering defendant-appellant Citibank to
refund the said amount to the plaintiff-appellant with legal interest
at the rate of twelve percent (12%) per annum, compounded
yearly, from 31 October 1979 until fully paid, or its peso
equivalent at the time of payment;

2. As defendant-appellant Citibank failed to

competent evidence the alleged indebtedness
appellant, the set-off of P1,069,847.40 in the
Ms. Sabenianois hereby declared as without legal
basis;

establish by
of plaintiffaccount of
and factual

3. As defendants-appellants failed to account the

following plaintiff-appellants money market placements, savings
account and current accounts, the former is hereby ordered to
return the same, in accordance with the terms and conditions
agreed upon by the contending parties as evidenced by the
certificates of investments, to wit:

(v) The Two Million (P2,000,000.00)

money
market
placements
of
Ms. Sabeniano with the Ayala Investment &
Development Corporation (AIDC) with legal
interest at the rate of twelve percent (12%) per
annum compounded yearly, from 30 September
1976 until fully paid;

4. Ordering defendants-appellants to jointly and severally

pay the plaintiff-appellant the sum of FIVE HUNDRED THOUSAND
PESOS (P500,000.00) by way of moral damages, FIVE HUNDRED
THOUSAND PESOS (P500,000.00) as exemplary damages, and
ONE HUNDRED THOUSAND PESOS (P100,000.00) as attorneys
fees.
Acting on petitioners Motion for Partial Reconsideration, the Court of
Appeals issued a Resolution,[6] dated 20 November 2002, modifying its earlier
Decision, thus
WHEREFORE, premises considered, the instant Motion
for Reconsideration is PARTIALLY GRANTED as Sub-paragraph
(V) paragraph 3 of the assailed Decisions dispositiveportion is
hereby ordered DELETED.

(i) Citibank NNPN Serial No. 023356

(Cancels and Supersedes NNPN No. 22526)
issued on 17 March 1977, P318,897.34 with
14.50% interest p.a.;

The challenged 26 March 2002 Decision of the Court

is AFFIRMED with MODIFICATION.

(ii) Citibank NNPN Serial No. 23357

(Cancels and Supersedes NNPN No. 22528)
issued on 17 March 1977, P203,150.00 with
14.50 interest p.a.;

Since the Court of Appeals Decision, dated 26 March 2002, as modified by

the Resolution of the same court, dated 20 November 2002, was still principally in
favor of respondent, petitioners filed the instant Petition for Review
on Certiorari under Rule 45 of the Revised Rules of Court. After giving due course to
the instant Petition, this Court promulgated on 16 October 2006 its Decision, now
subject of petitioners Motion for Partial Reconsideration.

(iii) FNCB NNPN Serial No. 05757

(Cancels and Supersedes NNPN No. 04952),
issued on 02 June 1977, P500,000.00 with 17%
interest p.a.;

(iv) FNCB NNPN Serial No. 05758

(Cancels and Supersedes NNPN No. 04962),

75 | P a g e

issued on 02 June 1977, P500,000.00 with 17%

interest per annum;

Among the numerous grounds raised by petitioners in their Motion for

Partial Reconsideration, this Court shall address and discuss herein only particular
points that had not been considered or discussed in its Decision. Even in
consideration of these points though, this Court remains unconvinced that it should
modify or reverse in any way its disposition of the case in its earlier Decision.

As to the off-setting or
compensation
of
respondents
outstanding
loan
balance
with
her
dollar deposits in CitibankGeneva

Petitioners take exception to the following findings made by this Court in its
Decision, dated 16 October 2006, disallowing the off-setting or compensation of the
balance of respondents outstanding loans using her dollar deposits in CitibankGeneva

Without the Declaration of Pledge, petitioner Citibank had no

authority to demand the remittance of respondents dollar
accounts with Citibank-Geneva and to apply them to her
outstanding loans. It cannot effect legal compensation under
Article 1278 of the Civil Code since, petitioner Citibank itself
admitted that Citibank-Geneva is a distinct and separate entity. As
for the dollar accounts, respondent was the creditor and CitibankGeneva is the debtor; and as for the outstanding loans, petitioner
Citibank was the creditor and respondent was the debtor. The
parties in these transactions were evidently not the principal
creditor of each other.

Petitioners maintain that respondents Declaration of Pledge, by virtue of

which she supposedly assigned her dollar accounts with Citibank-Geneva as security
for her loans with petitioner Citibank, is authentic and, thus, valid and binding upon
respondent. Alternatively, petitioners aver that even without said Declaration of
Pledge, the off-setting or compensation made by petitioner Citibank using
respondents dollar accounts with Citibank-Geneva to liquidate the balance of her
outstanding loans with Citibank-Manila was expressly authorized by respondent
herself in the promissory notes (PNs) she signed for her loans, as well as sanctioned
by Articles 1278 to 1290 of the Civil Code. This alternative argument is anchored on
the premise that all branches of petitioner Citibank in the Philippines and abroad are
part of a single worldwide corporate entity and share the same juridical
personality. In connection therewith, petitioners deny that they ever admitted that
Citibank-Manila and Citibank-Geneva are distinct and separate entities.

Petitioners call the attention of this Court to the following provision found
in all of the PNs[7] executed by respondent for her loans

At or after the maturity of this note, or when same

becomes due under any of the provisions hereof, any money,
stocks, bonds, or other property of any kind whatsoever, on
deposit or otherwise, to the credit of the undersigned on the
books of CITIBANK, N.A. in transit or in their possession, may

76 | P a g e

without notice be applied at the discretion of the said bank to the

full or partial payment of this note.

It is the petitioners contention that the term Citibank, N.A. used therein should be
deemed to refer to all branches of petitioner Citibank in the Philippines and abroad;
thus, giving petitioner Citibank the authority to apply as payment for the PNs even
respondents dollar accounts with Citibank-Geneva. Still proceeding from the premise
that all branches of petitioner Citibank should be considered as a single entity, then
it should not matter that the respondent obtained the loans from Citibank-Manila
and her deposits were with Citibank-Geneva. Respondent should be considered the
debtor (for the loans) and creditor (for her deposits) of the same entity, petitioner
Citibank. Since petitioner Citibank and respondent were principal creditors of each
other, in compliance with the requirements under Article 1279 of the Civil Code,
[8]
then the former could have very well used off-setting or compensation to
extinguish the parties obligations to one another. And even without the PNs, offsetting or compensation was still authorized because according to Article 1286 of
the Civil Code, Compensation takes place by operation of law, even though the
debts may be payable at different places, but there shall be an indemnity for
expenses of exchange or transportation to the place of payment.
Pertinent provisions of Republic Act No. 8791, otherwise known as the
General Banking Law of 2000, governing bank branches are reproduced below
SEC. 20. Bank Branches. Universal or commercial banks
may open branches or other offices within or outside
the Philippines upon prior approval of the Bangko Sentral.
Branching by all other banks shall be governed by
pertinent laws.
A bank may, subject to prior approval of the Monetary
Board, use any or all of its branches as outlets for the
presentation and/or sale of the financial products of its allied
undertaking or its investment house units.
A bank authorized to establish branches or other offices
shall be responsible for all business conducted in such branches
and offices to the same extent and in the same manner as though
such business had all been conducted in the head office. A bank
and its branches and offices shall be treated as one unit.

xxxx

SEC. 72. Transacting Business in the Philippines. The

entry of foreign banks in the Philippines through the establishment
of branches shall be governed by the provisions of the Foreign
Banks Liberalization Act.

The
conduct
of
offshore
banking
business
in
the Philippines shall be governed by the provisions of Presidential
Decree No. 1034, otherwise known as the Offshore Banking
System Decree.

xxxx

SEC. 74. Local Branches of Foreign Banks. In case of a

foreign bank which has more than one (1) branch in
the Philippines, all such branches shall be treated as one (1) unit
for the purpose of this Act, and all references to the Philippine
branches of foreign banks shall be held to refer to such units.

SEC. 75. Head Office Guarantee. In order to provide

effective protection of the interests of the depositors and other
creditors of Philippine branches of a foreign bank, the head office
of such branches shall fully guarantee the prompt payment of all
liabilities of its Philippine branch.
Residents and citizens of the Philippines who are creditors
of a branch in the Philippines of a foreign bank shall have
preferential rights to the assets of such branch in accordance with
existing laws.

Republic Act No. 7721, otherwise known as the Foreign Banks Liberalization Law,
lays down the policies and regulations specifically concerning the establishment and
operation of local branches of foreign banks. Relevant provisions of the said statute
read

Sec. 2. Modes of Entry. - The Monetary Board may

authorize foreign banks to operate in the Philippine banking
system through any of the following modes of entry: (i) by
acquiring, purchasing or owning up to sixty percent (60%) of the
voting stock of an existing bank; (ii) by investing in up to sixty
percent (60%) of the voting stock of a new banking subsidiary
incorporated under the laws of the Philippines; or (iii) by
establishing branches with full banking authority: Provided, That a
foreign bank may avail itself of only one (1) mode of entry:
Provided, further, That a foreign bank or a Philippine corporation
may own up to a sixty percent (60%) of the voting stock of only
one (1) domestic bank or new banking subsidiary.

Sec. 5. Head Office Guarantee. - The head office of

foreign bank branches shall guarantee prompt payment of all
liabilities of its Philippine branches.

It is true that the afore-quoted Section 20 of the General Banking Law of

2000 expressly states that the bank and its branches shall be treated as one unit. It
should be pointed out, however, that the said provision applies to a universal [9] or
commercial bank,[10] duly established and organized as a Philippine corporation in
accordance with Section 8 of the same statute,[11] and authorized to establish
branches within or outside the Philippines.

The General Banking Law of 2000, however, does not make the same
categorical statement as regards to foreign banks and their branches in
the Philippines. What Section 74 of the said law provides is that in case of a foreign
bank with several branches in the country, all such branches shall be treated as
one unit. As to the relations between the local branches of a foreign bank and its
head office, Section 75 of the General Banking Law of 2000 and Section 5 of the
Foreign Banks Liberalization Law provide for a Home Office Guarantee, in which the
head office of the foreign bank shall guarantee prompt payment of all liabilities of its
Philippine branches. While the Home Office Guarantee is in accord with the principle
that these local branches, together with its head office, constitute but one legal
entity, it does not necessarily support the view that said principle is true and
applicable in all circumstances.

The Home Office Guarantee is included in Philippine statutes clearly for the
protection of the interests of the depositors and other creditors of the local branches
of a foreign bank.[12] Since the head office of the bank is located in another country
or state, such a guarantee is necessary so as to bring the head office within
Philippine jurisdiction, and to hold the same answerable for the liabilities of its
Philippine branches. Hence, the principle of the singular identity of that the local
branches and the head office of a foreign bank are more often invoked by the clients
in order to establish the accountability of the head office for the liabilities of its local
branches. It is under such attendant circumstances in which the American
authorities and jurisprudence presented by petitioners in their Motion for Partial
Reconsideration were rendered.

Now the question that remains to be answered is whether the foreign bank
can use the principle for a reverse purpose, in order to extend the liability of a client
to the foreign banks Philippine branch to its head office, as well as to its branches in
other countries. Thus, if a client obtains a loan from the foreign banks Philippine
branch, does it absolutely and automatically make the client a debtor, not just of the
Philippine branch, but also of the head office and all other branches of the foreign
bank around the world?This Court rules in the negative.

There being a dearth of Philippine authorities and jurisprudence on the

matter, this Court, just as what petitioners have done, turns to American authorities

77 | P a g e

and jurisprudence. American authorities and jurisprudence are significant herein

considering that the head office of petitioner Citibank is located in New York, United
States of America (U.S.A.).

Unlike Philippine statutes, the American legislation explicitly defines the

relations among foreign branches of an American bank. Section 25 of the United
States Federal Reserve Act[13] states that

Every national banking association operating foreign

branches shall conduct the accounts of each foreign branch
independently of the accounts of other foreign branches
established by it and of its home office, and shall at the end of
each fiscal period transfer to its general ledger the profit or loss
accrued at each branch as a separate item.

Contrary to petitioners assertion that the accounts of Citibank-Manila and CitibankGeneva should be deemed as a single account under its head office, the foregoing
provision mandates that the accounts of foreign branches of an American bank shall
be conducted independently of each other. Since the head office of petitioner
Citibank is in the U.S.A., then it is bound to treat its foreign branches in accordance
with the said provision. It is only at the end of its fiscal period that the bank is
required to transfer to its general ledger the profit or loss accrued at each branch,
but still reporting it as a separate item. It is by virtue of this provision that the
Circuit Court of Appeals of New York declared in Pan-American Bank and Trust Co.
v. National City Bank of New York [14] that a branch is not merely a tellers window; it
is a separate business entity.
The circumstances in the case of McGrath v. Agency of Chartered Bank
of India, Australia & China[15] are closest to the one at bar. In said case, the
Chartered Bank had branches in several countries, including one in Hamburg,
Germany and another in New York, U.S.A., and yet another in London, United
Kingdom. The New York branch entered in its books credit in favor of four German
firms. Said credit represents collections made from bills of exchange delivered by
the four German firms. The same four German firms subsequently became indebted
to the Hamburg branch. The London branch then requested for the transfer of the
credit in the name of the German firms from theNew York branch so as to be
applied or setoff against the indebtedness of the same firms to
the Hamburg branch. One of the question brought before the U.S. District Court of
New York was whether or not the debts and the alleged setoffs thereto are mutual,
which could be answered by determining first whether the New York and Hamburg
branches of Chartered Bank are individual business entities or are one and the same
entity. In denying the right of the Hamburg branch to setoff, the U.S. District Court
ratiocinated that
The structure of international banking houses such as
Chartered bank defies one rigorous description. Suffice it to say
for present analysis, branches or agencies of an international
bank have been held to be independent entities for a
variety of purposes (a) deposits payable only at branch where

78 | P a g e

made; Mutaugh v. Yokohama Specie Bank, Ltd., 1933, 149 Misc.

693, 269 N.Y.S. 65; Bluebird Undergarment Corp. v. Gomez,
1931, 139 Misc. 742, 249 N.Y.S. 319; (b) checks need be honored
only when drawn on branch where deposited; Chrzanowska v.
Corn Exchange Bank, 1916, 173 App. Div. 285, 159 N.Y.S. 385,
affirmed
1919,
225
N.Y.
728,
122
N.E.
877;
subpoena duces tecum on foreign banks record barred; In re
Harris, D.C.S.D.N.Y. 1939, 27 F. Supp. 480; (d) a foreign branch
separate for collection of forwarded paper; Pan-American Bank
and Trust Company v. National City Bank of New York, 2 Cir.,
1925, 6 F. 2d 762, certiorari denied 1925, 269 U.S. 554, 46 S. Ct.
18, 70 L. Ed. 408. Thus in law there is nothing innately
unitary about the organization of international banking
institutions.
Defendant, upon its oral argument and in its brief, relies
heavily on Sokoloff v. National City Bank of New York, 1928, 250
N.Y. 69, 164 N.E. 745, as authority for the proposition that
Chartered Bank, not the Hamburg or New York Agency, is
ultimately responsible for the amounts owing its German
customers and, conversely, it is to Chartered Bank that the
German firms owe their obligations. The Sokoloff case, aside from
its violently different fact situation, is centered on the legal
problem of default of payment and consequent breach of contract
by a branch bank. It does not stand for the principle that in
every instance an international bank with branches is but
one legal entity for all purposes. The defendant concedes in its
brief (p. 15) that there are purposes for which the various
agencies and branches of Chartered Bank may be treated in law
as separate entities. I fail to see the applicability of Sokoloff either
as a guide to or authority for the resolution of this problem. The
facts before me and the cases catalogued supra lend weight to the
view that we are dealing here with Agencies independent of one
another.
xxxx
I hold that for instant purposes the Hamburg Agency and
defendant were independent business entities, and the attempted
setoff may not be utilized by defendant against its debt to the
German firms obligated to the Hamburg Agency.
Going back to the instant Petition, although this Court concedes that
all the Philippine branches of petitioner Citibank should be treated as one unit
with its head office, it cannot be persuaded to declare that these Philippine
branches are likewise a single unit with the Geneva branch. It would be
stretching the principle way beyond its intended purpose.
Therefore, this Court maintains its original position in the Decision that
the off-setting or compensation of respondents loans with Citibank-Manila using
her dollar accounts with Citibank-Geneva cannot be effected. The parties cannot
be considered principal creditor of the other. As for the dollar accounts,
respondent was the creditor and Citibank-Geneva was the debtor; and as for
the outstanding loans, petitioner Citibank, particularly Citibank-Manila, was the

creditor and respondent was the debtor. Since legal compensation was not
possible, petitioner Citibank could only use respondents dollar accounts with
Citibank-Geneva to liquidate her loans if she had expressly authorized it to do
so by contract.
Respondent cannot be deemed to have authorized the use of her dollar
deposits with Citibank-Geneva to liquidate her loans with petitioner Citibank
when she signed thePNs[16] for her loans which all contained the provision that
At or after the maturity of this note, or when same
becomes due under any of the provisions hereof, any money,
stocks, bonds, or other property of any kind whatsoever, on
deposit or otherwise, to the credit of the undersigned on the
books of CITIBANK, N.A. in transit or in their possession, may
without notice be applied at the discretion of the said bank to the
full or partial payment of this note.
As has been established in the preceding discussion, Citibank, N.A. can only
refer to the local branches of petitioner Citibank together with its head
office. Unless there is any showing that respondent understood and expressly
agreed to a more far-reaching interpretation, the reference to Citibank, N.A.
cannot be extended to all other branches of petitioner Citibank all over the
world. Although theoretically, books of the branches form part of the books of
the head office, operationally and practically, each branch maintains its own
books which shall only be later integrated and balanced with the books of the
head office. Thus, it is very possible to identify and segregate the books of the
Philippine branches of petitioner Citibank from those of Citibank-Geneva, and to
limit the authority granted for application as payment of the PNs to respondents
deposits in the books of the former.
Moreover, the PNs can be considered a contract of adhesion, the PNs being in
standard printed form prepared by petitioner Citibank. Generally, stipulations in
a contract come about after deliberate drafting by the parties thereto, there are
certain contracts almost all the provisions of which have been drafted only by
one party, usually a corporation. Such contracts are called contracts of
adhesion, because the only participation of the party is the affixing of his
signature or his "adhesion" thereto. This being the case, the terms of such
contract are to be construed strictly against the party which prepared it. [17]
As for the supposed Declaration of Pledge of respondents dollar
accounts with Citibank-Geneva as security for the loans, this Court stands firm
on its ruling that the non-production thereof is fatal to petitioners cause in light
of respondents claim that her signature on such document was a forgery. It
bears to note that the original of the Declaration of Pledge is with CitibankGeneva, a branch of petitioner Citibank. As between respondent and petitioner
Citibank, the latter has better access to the document. The constant excuse
forwarded by petitioner Citibank that Citibank-Geneva refused to return
possession of the original Declaration of Pledge to Citibank-Manila only supports
this Courts finding in the preceding paragraphs that the two branches are
actually operating separately and independently of each other.
Further, petitioners keep playing up the fact that respondent, at the
beginning of the trial, refused to give her specimen signatures to help establish
whether her signature on the Declaration of Pledge was indeed

79 | P a g e

forged. Petitioners seem to forget that subsequently, respondent, on advice of

her new counsel, already offered to cooperate in whatever manner so as to
bring the original Declaration of Pledge before the RTC for inspection. The
exchange of the counsels for the opposing sides during the hearing on 24 July
1991 before the RTC reveals the apparent willingness of respondents counsel to
undertake whatever course of action necessary for the production of the
contested document, and the evasive, non-committal, and uncooperative
attitude of petitioners counsel.[18]
Lastly, this Courts ruling striking down the Declaration of Pledge is not
entirely based on respondents allegation of forgery. In its Decision, this Court
already extensively discussed why it found the said Declaration of Pledge highly
suspicious and irregular, to wit
First of all, it escapes this Court why petitioner Citibank
took care to have the Deeds of Assignment of the PNs notarized,
yet left the Declaration of Pledge unnotarized. This Court would
think that petitioner Citibank would take greater cautionary
measures with the preparation and execution of the Declaration of
Pledge because it involved respondents all present and future
fiduciary placements with a Citibank branch in another country,
specifically, in Geneva, Switzerland. While there is no express
legal requirement that the Declaration of Pledge had to be
notarized to be effective, even so, it could not enjoy the
same prima facie presumption of due execution that is extended
to notarized documents, and petitioner Citibank must discharge
the burden of proving due execution and authenticity of the
Declaration of Pledge.
Second, petitioner Citibank was unable to establish the
date when the Declaration of Pledge was actually executed. The
photocopy of the Declaration of Pledge submitted by petitioner
Citibank before the RTC was undated. It presented only a
photocopy of the pledge because it already forwarded the original
copy thereof to Citibank-Geneva when it requested for the
remittance
of
respondents
dollar
accounts
pursuant
thereto. Respondent, on the other hand, was able to secure a
copy of the Declaration of Pledge, certified by an officer of
Citibank-Geneva,
which
bore
the
date 24
September
1979. Respondent, however, presented her passport and plane
tickets to prove that she was out of the country on the said date
and could not have signed the pledge. Petitioner Citibank insisted
that the pledge was signed before 24 September 1979, but could
not provide an explanation as to how and why the said date was
written on the pledge.Although Mr. Tan testified that the
Declaration of Pledge was signed by respondent personally before
him, he could not give the exact date when the said signing took
place. It is important to note that the copy of the Declaration of
Pledge submitted by the respondent to the RTC was certified by an
officer of Citibank-Geneva, which had possession of the original
copy of the pledge.It is dated 24 September 1979, and this Court
shall abide by the presumption that the written document is truly
dated. Since it is undeniable that respondent was out of the

country on 24 September 1979, then she could not have executed

the pledge on the said date.
Third, the Declaration of Pledge was irregularly filled-out. The
pledge was in a standard printed form. It was constituted in favor
of Citibank, N.A., otherwise referred to therein as the Bank. It
should be noted, however, that in the space which should have
named the pledgor, the name of petitioner Citibank was
typewritten, to wit
The pledge right herewith constituted
shall secure all claims which the Bank now has
or in the future acquires against Citibank, N.A.,
Manila (full name and address of the Debtor),
regardless of the legal cause or the transaction
(for example
current account, securities
transactions, collections, credits, payments,
documentary credits and collections) which gives
rise thereto, and including principal, all
contractual and penalty interest, commissions,
charges, and costs.
The
pledge,
therefore,
made
no
sense,
the pledgor and pledgee being the same entity. Was a mistake
made by whoever filled-out the form? Yes, it could be a
possibility. Nonetheless, considering the value of such a
document, the mistake as to a significant detail in the pledge
could only be committed with gross carelessness on the part of
petitioner Citibank, and raised serious doubts as to the
authenticity and due execution of the same. The Declaration of
Pledge had passed through the hands of several bank officers in
the country and abroad, yet, surprisingly and implausibly, no one
noticed such a glaring mistake.
Lastly, respondent denied that it was her signature on the
Declaration of Pledge. She claimed that the signature was a
forgery. When a document is assailed on the basis of forgery, the
best evidence rule applies
Basic is the rule of evidence that when
the subject of inquiry is the contents of a
document, no evidence is admissible other than
the original document itself except in the
instances mentioned in Section 3, Rule 130 of
the Revised Rules of Court. Mere photocopies of
documents are inadmissible pursuant to the best
evidence rule. This is especially true when
the issue is that of forgery.
As a rule, forgery cannot be presumed
and must be proved by clear, positive and
convincing evidence and the burden of proof lies
on the party alleging forgery. The best evidence
of a forged signature in an instrument is the

80 | P a g e

instrument itself reflecting the alleged forged

signature. The fact of forgery can only be
established by a comparison between the
alleged forged signature and the authentic and
genuine signature of the person whose signature
is theorized upon to have been forged. Without
the original document containing the alleged
forged signature, one cannot make a definitive
comparison which would establish forgery. A
comparison based on a mere xerox copy or
reproduction of the document under controversy
cannot produce reliable results.
Respondent made several attempts to have the original
copy of the pledge produced before the RTC so as to have it
examined by experts. Yet, despite several Orders by the RTC,
petitioner Citibank failed to comply with the production of the
original Declaration of Pledge. It is admitted that Citibank-Geneva
had possession of the original copy of the pledge. While petitioner
Citibank in Manila and its branch in Geneva may be separate and
distinct entities, they are still incontestably related, and between
petitioner Citibank and respondent, the former had more influence
and resources to convince Citibank-Geneva to return, albeit
temporarily, the original Declaration of Pledge. Petitioner Citibank
did not present any evidence to convince this Court that it had
exerted diligent efforts to secure the original copy of the pledge,
nor did it proffer the reason why Citibank-Geneva obstinately
refused to give it back, when such document would have been
very vital to the case of petitioner Citibank. There is thus no
justification to allow the presentation of a mere photocopy of the
Declaration of Pledge in lieu of the original, and the photocopy of
the pledge presented by petitioner Citibank has nil probative
value. In addition, even if this Court cannot make a categorical
finding that respondents signature on the original copy of the
pledge was forged, it is persuaded that petitioner Citibank willfully
suppressed the presentation of the original document, and takes
into consideration the presumption that the evidence willfully
suppressed would be adverse to petitioner Citibank if produced.
As far as the Declaration of Pledge is concerned, petitioners failed to
submit any new evidence or argument that was not already considered by this
Court when it rendered its Decision.
As to the value of the dollar
deposits
in
CitibankGeneva ordered refunded
to respondent

In case petitioners are still ordered to refund to respondent the

amount of her dollar accounts with Citibank-Geneva, petitioners beseech this
Court to adjust the nominal values of respondents dollar accounts and/or her

overdue peso loans by using the values of the currencies stipulated at the time
the obligations were established in 1979, to address the alleged inequitable
consequences resulting from the extreme and extraordinary devaluation of the
Philippine currency that occurred in the course of the Asian crisis of
1997. Petitioners base their request on Article 1250 of the Civil Code which
reads, In case an extraordinary inflation or deflation of the currency stipulated
should supervene, the value of the currency at the time of the establishment of
the obligation shall be the basis of payment, unless there is an agreement to
the contrary.
It is well-settled that Article 1250 of the Civil Code becomes applicable
only when there is extraordinary inflation or deflation of the currency. Inflation
has been defined as the sharp increase of money or credit or both without a
corresponding increase in business transaction. There is inflation when there is
an increase in the volume of money and credit relative to available goods
resulting in a substantial and continuing rise in the general price level.
[19]
In Singson v. Caltex (Philippines), Inc.,[20] this Court already provided a
discourse as to what constitutes as extraordinary inflation or deflation of
currency, thus
We have held extraordinary inflation to exist when there
is a decrease or increase in the purchasing power of the Philippine
currency which is unusual or beyond the common fluctuation in
the value of said currency, and such increase or decrease could
not have been reasonably foreseen or was manifestly beyond the
contemplation of the parties at the time of the establishment of
the obligation.

An example of extraordinary inflation, as cited by the

Court
in Filipino
Pipe
and
Foundry
Corporation
vs.
NAWASA, supra, is that which happened to the deutschmark in
1920. Thus:

"More recently, in the 1920s, Germany

experienced a case of hyperinflation. In early
1921, the value of the German mark was 4.2 to
the U.S. dollar. By May of the same year, it had
stumbled to 62 to the U.S. dollar. And as prices
went up rapidly, so that by October 1923, it had
reached 4.2 trillion to the U.S. dollar!" (Bernardo
M. Villegas & Victor R. Abola, Economics, An
Introduction [Third Edition]).

As reported, "prices were going up

every week, then every day, then every
hour. Women were paid several times a day so
that they could rush out and exchange their
money for something of value before what little
purchasing power was left dissolved in their

81 | P a g e

hands. Some workers tried to beat the

constantly rising prices by throwing their money
out of the windows to their waiting wives, who
would rush to unload the nearly worthless
paper. A postage stamp cost millions of marks
and
a
loaf
of
bread,
billions."
(Sidney Rutberg, "The Money Balloon", New
York: Simon and Schuster, 1975, p. 19, cited
in "Economics, An Introduction" by Villegas
& Abola, 3rd ed.)

The supervening of extraordinary inflation is never

assumed. The party alleging it must lay down the factual basis for
the application of Article 1250.

Thus, in the Filipino Pipe case, the Court acknowledged

that the voluminous records and statistics submitted by plaintiffappellant proved that there has been a decline in the purchasing
power of the Philippine peso, but this downward fall cannot be
considered "extraordinary" but was simply a universal trend that
has not spared our country. Similarly, in Huibonhoa vs. Court of
Appeals, the Court dismissed plaintiff-appellant's unsubstantiated
allegation that the Aquino assassination in 1983 caused building
and construction costs to double during the period July 1983 to
February 1984. In Serra vs. Court of Appeals, the Court again did
not consider the decline in the peso's purchasing power from 1983
to 1985 to be so great as to result in an extraordinary inflation.

Like the Serra and Huibonhoa cases, the instant case also
raises as basis for the application of Article 1250 the Philippine
economic crisis in the early 1980s --- when, based on petitioner's
evidence, the inflation rate rose to 50.34% in 1984. We hold that
there is no legal or factual basis to support petitioner's allegation
of the existence of extraordinary inflation during this period, or,
for that matter, the entire time frame of 1968 to 1983, to merit
the adjustment of the rentals in the lease contract dated July 16,
1968. Although by petitioner's evidence there was a decided
decline in the purchasing power of the Philippine peso throughout
this period, we are hard put to treat this as an "extraordinary
inflation" within the meaning and intent of Article 1250.

Rather, we adopt with approval the following observations

of the Court of Appeals on petitioner's evidence, especially the
NEDA certification of inflation rates based on consumer price
index:

xxx (a) from the period 1966 to 1986, the

official inflation rate never exceeded 100% in
any single year; (b) the highest official inflation
rate recorded was in 1984 which reached only
50.34%; (c) over a twenty one (21) year period,
the Philippines experienced a single-digit
inflation in ten (10) years (i.e., 1966, 1967,
1968, 1969, 1975, 1976, 1977, 1978, 1983 and
1986); (d) in other years (i.e., 1970, 1971,
1972, 1973, 1974, 1979, 1980, 1981, 1982,
1984
and
1989)
when
the
Philippines
experienced double-digit inflation rates, the
average of those rates was only 20.88%; (e)
while there was a decline in the purchasing
power of the Philippine currency from the period
1966 to 1986, such cannot be considered as
extraordinary; rather, it is a normal erosion of
the value of the Philippine peso which is a
characteristic of most currencies.

"Erosion" is indeed an accurate description of the trend of

decline in the value of the peso in the past three to four
decades. Unfortunate as this trend may be, it is certainly distinct
from the phenomenon contemplated by Article 1250.
Moreover, this Court has held that the effects of
extraordinary inflation are not to be applied without an official
declaration thereof by competent authorities.
The burden of proving that there had been extraordinary inflation or
deflation of the currency is upon the party that alleges it. Such circumstance
must be proven by competent evidence, and it cannot be merely assumed. In
this case, petitioners presented no proof as to how much, for instance, the price
index of goods and services had risen during the intervening period. [21] All the
information petitioners provided was the drop of the U.S. dollar-Philippine peso
exchange rate by 17 points from June 1997 to January 1998. While the said
figure was based on the statistics of the Bangko Sentral ng Pilipinas (BSP), it is
also significant to note that the BSP did not categorically declare that the same
constitute as an extraordinary inflation. The existence of extraordinary inflation
must be officially proclaimed by competent authorities, and the only competent
authority so far recognized by this Court to make such an official proclamation
is the BSP.[22]
Neither can this Court, by merely taking judicial notice of the Asian
currency crisis in 1997, already declare that there had been extraordinary
inflation. It should be recalled that the Philippines likewise experienced
economic crisis in the 1980s, yet this Court did not find that extraordinary
inflation took place during the said period so as to warrant the application of
Article 1250 of the Civil Code.

82 | P a g e

Furthermore, it is incontrovertible that Article 1250 of the Civil Code is

based on equitable considerations. Among the maxims of equity are (1) he who
seeks equity must do equity, and (2) he who comes into equity must come with
clean hands. The latter is a frequently stated maxim which is also expressed in the
principle that he who has done inequity shall not have equity.[23] Petitioner Citibank,
hence, cannot invoke Article 1250 of the Civil Code because it does not come to
court with clean hands. The delay in the recovery[24] by respondent of her dollar
accounts with Citibank-Geneva was due to the unlawful act of petitioner Citibank in
using the same to liquidate respondents loans.Petitioner Citibank even attempted to
justify the off-setting or compensation of respondents loans using her dollar
accounts with Citibank-Geneva by the presentation of a highly suspicious and
irregular, and even possibly forged, Declaration of Pledge.
The damage caused to respondent of the deprivation of her dollar accounts
for more than two decades is unquestionably relatively more extensive and
devastating, as compared to whatever damage petitioner Citibank, an international
banking corporation with undoubtedly substantial capital, may have suffered for
respondents non-payment of her loans. It must also be remembered that petitioner
Citibank had already considered respondents loans paid or liquidated by 26 October
1979 after it had fully effected compensation thereof using respondents deposits
and money market placements. All this time, respondents dollar accounts are
unlawfully in the possession of and are being used by petitioner Citibank for its
business transactions. In the meantime, respondents businesses failed and her
properties were foreclosed because she was denied access to her funds when she
needed them most. Taking these into consideration, respondents dollar accounts
with Citibank-Geneva must be deemed to be subsisting and continuously deposited
with petitioner Citibank all this while, and will only be presently withdrawn by
respondent. Therefore, petitioner Citibank should refund to respondent the U.S.
$149,632.99 taken from her Citibank-Geneva accounts, or its equivalent in
Philippine currency using the exchange rate at the time of payment, plus the
stipulated interest for each of the fiduciary placements and current accounts
involved, beginning 26 October 1979.
As to respondents Motion
to Clarify and/or Confirm
Decision with Notice of
Judgment

Respondent, in her Motion, is of the mistaken notion that the Court of Appeals
Decision, dated 26 March 2002, as modified by the Resolution of the same court,
dated 20 November 2002, would be implemented or executed together with this
Courts Decision.
This Court clarifies that its affirmation of the Decision of the Court of Appeals, as
modified, is only to the extent that it recognizes that petitioners had liabilities to the
respondent. However, this Courts Decision modified that of the appellate courts by
making its own determination of the specific liabilities of the petitioners to
respondent and the amounts thereof; as well as by recognizing that respondent also
had liabilities to petitioner Citibank and the amount thereof.

Thus, for purposes of execution, the parties need only refer to

the dispositive portion of this Courts Decision, dated 16 October 2006, should it
already become final andexecutory, without any further modifications.

As the last point, there is no merit in respondents Motion for this Court
to already declare its Decision, dated 16 October 2006, final and executory. A
judgment becomes final and executory by operation of law and, accordingly, the
finality of the judgment becomes a fact upon the lapse of the reglementary
period without an appeal or a motion for new trial or reconsideration being
filed.[25] This Court cannot arbitrarily disregard the reglementary period and
declare a judgment final and executory upon the mere motion of one party, for
to do so will be a culpable violation of the right of the other parties to due
process.
IN VIEW OF THE FOREGOING, petitioners Motion for Partial
Reconsideration of this Courts Decision, dated 16 October 2006, and respondents
Motion for this Court to declare the same Decision already final and executory, are
both DENIED for lack of merit.

SO ORDERED.
SECOND DIVISION
[G.R. No. 123817. December 17, 1999]
IBAAN RURAL BANK INC., petitioner, vs. THE COURT OF APPEALS and MR.
and MRS. RAMON TARNATE, respondents.
DECISION
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 CA-G.R. CV No. 32984 affirming with
modification the decision of the Regional Trial Court of Batangas, Branch 2, in Civil
Case No. 534, as well as the resolution of the Court of Appeals denying petitioners
motion for reconsideration.
The facts are as follows:
Spouses Cesar and Leonila Reyes were the owners of three (3) lots covered by
Transfer Certificate of Title (TCT) Nos. 33206, 33207 and 33208 of the Register of
Deeds of Lipa City. On March 21, 1976, the spouses mortgaged these lots to Ibaan
Rural Bank, Inc. [herein petitioner]. On June 11, 1976, with the knowledge and
consent of the petitioner, the spouses as sellers, and Mr. and Mrs. Ramon Tarnate

83 | P a g e

[herein private respondents] as buyers, entered into a Deed of Absolute Sale with
Assumption of Mortgage of the lots in question. Private respondents failed to pay
the loan and the bank extra-judicially foreclosed on the mortgaged lots. The
Provincial Sheriff conducted a public auction of the lots and awarded the lots to the
bank, the sole bidder. On December 13, 1978, the Provincial Sheriff issued a
Certificate of Sale which was registered on October 16, 1979. The certificate stated
that the redemption period expires two (2) years from the registration of the
sale. No notice of the extrajudicial foreclosure was given to the private
respondents. On September 23, 1981, private respondents offered to redeem the
foreclosed lots and tendered the redemption amount of P77,737.45. However,
petitioner Bank refused the redemption on the ground that it had consolidated its
titles over the lots. The Provincial Sheriff also denied the redemption on the ground
that private respondents did not appear on the title to be the owners of the lots.
Private respondents filed a complaint to compel the bank to allow their
redemption of the foreclosed lots. They alleged that the extra-judicial foreclosure
was null and void for lack of valid notice and demand upon them. They further
argued that they were entitled to redeem the foreclosed lots because they offered to
redeem and tendered the redemption price before October 16, 1981, the deadline of
the 2-year redemption period.
The bank opposed the redemption, contending that the private respondents
had no right to redeem the lots because they were not the real parties in interest;
that at the time they offered to redeem on September 23, 1981, the right to
redeem had prescribed, as more than one year had elapsed from the registration of
the Certificate of Sale on October 16, 1979; that there was no need of personal
notice to them because under Section 3 of Act 3135, only the posting of notice of
sale at three public places of the municipality where the properties are located was
required.[1]
After trial on the merits, the lower court ruled in favor of herein private
respondents and against the petitioner, thus:
WHEREFORE, in view of the foregoing, the Court renders judgment in favor of the
plaintiffs and against the defendants, to wit:
(a) Ordering the defendant Ibaan Rural Bank Inc., and Provincial Sheriff of Batangas
for the redemption of the foreclosed properties covered by Transfer Certificate of
Title Nos. T-33206, T-33207 and T-33208 of the Registry of Deeds, Lipa City by the
plaintiffs by paying the mortgaged obligation.
(b) Ordering the Provincial Sheriff of Batangas to cancel the Transfer Certificate of
Titles issued to defendant Ibaan Rural Bank, Inc. and its successors-in-interest and
to issue the corresponding Transfer of Certificate of Titles to plaintiffs upon payment
of the required legal fees.
(c) Ordering the defendant Ibaan Rural Bank, Inc., to pay plaintiffs moral damages
in the amount of P200,000.00, and attorneys fees in the sum of P20,000.00.

84 | P a g e

All other claims not having been duly proved are ordered DISMISSED.
Without pronouncement as to costs.
SO ORDERED.[2]
On appeal, the Court of Appeals affirmed with modification the decision of the
lower court. The dispositive portion of the CA decision reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED with the following
modifications:
1. The register of Deeds of Lipa City is hereby ordered to cancel the Certificate of
Titles issued to defendant Ibaan Rural Bank, Inc. and its successor-in-interest and
to issue the corresponding Transfer Certificate of Title to plaintiffs-appellees upon
proper redemption of the properties and payment of the required legal fees.
2. Defendant Ibaan Rural bank, is hereby ordered to pay to plaintiffs the amount of
P15,000.00 as attorneys fees.
3. The moral damages awarded in favor of plaintiffs is hereby ordered deleted.
SO ORDERED.[3]
A timely Motion for Reconsideration was filed by the petitioner but the same
was denied in a Resolution dated February 14, 1996. Hence, this petition.
Petitioner assigns the following errors:
1. THE RESPONDENT COURT ERRED AND, ACCORDINGLY, THE PETITIONER IS
ENTITLED TO A REVIEW OF ITS DECISION, WHEN IT SUSTAINED AVAILABILITY OF
REDEMPTION DESPITE THE LAPSE OF ONE YEAR FROM DATE OF REGISTRATION OF
THE CERTIFICATE OF SALE.
2. THE RESPONDENT COURT ERRED AND, ACCORDINGLY, THE PETITIONER IS
ENTITLED TO A REVIEW OF ITS DECISION, WHEN THE RESPONDENT COURT
ALLOWED RECOVERY OF ATTORNEYS FEES SIMPLY BECAUSE THE PETITIONER DID
NOT ALLOW THE PRIVATE RESPONDENTS TO EXERCISE BELATEDLY REDEMPTION
OF THE FORECLOSED PROPERTY.[4]
Essentially, two issues are raised for resolution. What was the period of
redemption: two years as unilaterally fixed by the sheriff in the contract, or one
year as fixed by law? May respondent court properly award attorneys fees solely on
the basis of the refusal of the bank to allow redemption?
We now resolve these issues.

When petitioner received a copy of the Certificate of Sale registered in the

Office of the Register of Deeds of Lipa City, it had actual and constructive knowledge
of the certificate and its contents. [5] For two years, it did not object to the two-year
redemption period provided in the certificate. Thus, it could be said that petitioner
consented to the two-year redemption period specially since it had time to object
and did not. When circumstances imply a duty to speak on the part of the person
for whom an obligation is proposed, his silence can be construed as consent. [6] By
its silence and inaction, petitioner misled private respondents to believe that they
had two years within which to redeem the mortgage. After the lapse of two years,
petitioner is estopped from asserting that the period for redemption was only one
year and that the period had already lapsed. Estoppel in pais arises when one, by
his acts, representations or admissions, or by his own silence when he ought to
speak out, intentionally or through culpable negligence, induces another to believe
certain facts to exist and such other rightfully relies and acts on such belief, so that
he will be prejudiced if the former is permitted to deny the existence of such facts. [7]
In affirming the decision of the trial court, the Court of Appeals relied on Lazo
vs. Republic Surety and Insurance Co., Inc., [8] where the court held that the one
year period of redemption provided in Act No. 3135 is only directory and can be
extended by agreement of the parties. True, but it bears noting that in Lazo the
parties voluntarily agreed to extend the redemption period. Thus, the concept of
legal redemption was converted by the parties in Lazo into conventional
redemption. This is not so in the instant case. There was no voluntary
agreement. In fact, the sheriff unilaterally and arbitrarily extended the period of
redemption to two (2) years in the Certificate of Sale. The parties were not even
privy to the extension made by the sheriff. Nonetheless, as above discussed, the
bank can not after the lapse of two years insist that the redemption period was one
year only.
Additionally, the rule on redemption is liberally interpreted in favor of the
original owner of a property. The fact alone that he is allowed the right to redeem
clearly demonstrates the solicitousness of the law in giving him another opportunity,
should his fortune improve, to recover his lost property.[9]
Lastly, petitioner is a banking institution on whom the public expects diligence,
meticulousness and mastery of its transactions. Had petitioner diligently reviewed
the Certificate of Sale it could have easily discovered that the period was extended
one year beyond the usual period for redemption. Banks, being greatly affected with
public interest, are expected to exercise a degree of diligence in the handling of its
affairs higher than that expected of an ordinary business firm. [10]
On the second issue, the award of attorneys fees must be disallowed for lack
of legal basis. The fact that private respondents were compelled to litigate and incur

85 | P a g e

expenses to protect and enforce their claim does not justify the award of attorneys
fees. The general rule is that attorneys fees cannot be recovered as part of damages
because of the public policy that no premium should be placed on the right to
litigate.[11] The award of attorneys fees must be deleted where the award of moral
and exemplary damages are eliminated.[12]
WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 32984 is
AFFIRMED, with the MODIFICATION that the award of attorneys fees is deleted. No
pronouncement as to costs.
SO ORDERED.