PEOPLE vs.

CONCEPCION
FACTS:
Venancio Concepcion, President of the Philippine National
Bank and a member of the Board thereof, authorized an
extension of credit in favor of "Puno y Concepcion, S. en C. to
the manager of the Aparri branch of the Philippine National
Bank. "Puno y Concepcion, S. en C." was a co-partnership
where Concepcion is a partner. Subsequently, Concepcion was
charged and found guilty in the Court of First Instance of
Cagayan with violation of section 35 of Act No. 2747. Section
35 of Act No. 2747 provides that the National Bank shall not,
directly or
indirectly, grant loans to any of the members of the board of
directors of the bank nor to agents of the branch banks.
Counsel for the defense argue that the documents of record do
not prove that authority to make a loan was given, but only
show the concession of a credit. They averred that the granting
of a credit to the co-partnership "Puno y Concepcion, S. en C."
by Venancio Concepcion, President of the Philippine National
Bank, is not a "loan" within the meaning of section 35 of Act
No. 2747.
ISSUE: Whether or not the granting of a credit of P300,000 to
the co-partnership "Puno y
Concepcion, S. en C." by Venancio Concepcion, President of
the Philippine National Bank, a"loan" within the meaning of
section 35 of Act No. 2747.
HELD:
The Supreme Court ruled in the affirmative. The "credit" of an
individual means his ability to borrow money by virtue of the
confidence or trust reposed by a lender that he will pay what
he may promise. A "loan" means the delivery by one party and
the receipt by the other party of a given sum of money, upon
an agreement, express or implied, to repay the sum loaned,
with or without interest. The concession of a "credit"
necessarily involves the granting of "loans" up to the limit of the
amount fixed in the "credit".
DISPOSITIVE PORTION:
Judgment is affirmed, with the costs of this instance against
the appellant. So ordered.
-----------XXX---------G.R. No. L-17474
October 25, 1962
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
JOSE V. BAGTAS, defendant,
FELICIDAD M. BAGTAS, Administratrix of the Intestate
Estate left by the late Jose V. Bagtas, petitioner-appellant.
FACTS:
On 8 May 1948 Jose V. Bagtas borrowed from the Republic of
the Philippines through the Bureau of Animal Industry three
bulls: a Red Sindhi with a book value of P1,176.46, a Bhagnari,
of P1,320.56 and a Sahiniwal, of P744.46, for a period of one
year from 8 May 1948 to 7 May 1949 for breeding purposes
subject to a government charge of breeding fee of 10% of the
book value of the bulls. Upon the expiration on 7 May 1949 of
the contract, the borrower asked for a renewal for another
period of one year. However, the Secretary of Agriculture and
Natural Resources approved a renewal thereof of only one bull
for another year from 8 May 1949 to 7 May 1950 and
requested the return of the other two. On 25 March 1950 Jose
V. Bagtas wrote to the Director of Animal Industry that he would
pay the value of the three bulls. On 17 October 1950 he
reiterated his desire to buy them at a value with a deduction of

yearly depreciation to be approved by the Auditor General. On

19 October 1950 the Director of Animal Industry advised him
that the book value of the three bulls could not be reduced and
that they either be returned or their book value paid not later
than 31 October 1950. Jose V. Bagtas failed to pay the book
value of the three bulls or to return them. So, on 20 December
1950 in the Court of First Instance of Manila the Republic of
the Philippines commenced an action against him praying that
he be ordered to return the three bulls loaned to him or to pay
their book value in the total sum of P3,241.45 and the unpaid
breeding fee in the sum of P199.62, both with interests, and
costs; and that other just and equitable relief be granted in
(civil No. 12818).
On 5 July 1951 Jose V. Bagtas, through counsel Navarro,
Rosete and Manalo, answered that because of the bad peace
and order situation in Cagayan Valley, particularly in the barrio
of Baggao, and of the pending appeal he had taken to the
Secretary of Agriculture and Natural Resources and the
President of the Philippines from the refusal by the Director of
Animal Industry to deduct from the book value of the bulls
corresponding yearly depreciation of 8% from the date of
acquisition, to which depreciation the Auditor General did not
object, he could not return the animals nor pay their value and
prayed for the dismissal of the complaint.
RTC RULING:
After hearing, on 30 July 1956 the trial court render judgment

. . . sentencing the latter (defendant) to pay the sum of

P3,625.09 the total value of the three bulls plus the breeding
fees in the amount of P626.17 with interest on both sums of
(at) the legal rate from the filing of this complaint and costs.
On 9 October 1958 the plaintiff moved ex parte for a writ of
execution which the court granted on 18 October and issued
on 11 November 1958. On 2 December 1958 granted an exparte motion filed by the plaintiff on November 1958 for the
appointment of a special sheriff to serve the writ outside
Manila. Of this order appointing a special sheriff, on 6
December 1958, Felicidad M. Bagtas, the surviving spouse of
the defendant Jose Bagtas who died on 23 October 1951 and
as administratrix of his estate, was notified. On 7 January 1959
she file a motion alleging that on 26 June 1952 the two bull
Sindhi and Bhagnari were returned to the Bureau Animal of
Industry and that sometime in November 1958 the third bull,
the Sahiniwal, died from gunshot wound inflicted during a Huk
raid on Hacienda Felicidad Intal, and praying that the writ of
execution be quashed and that a writ of preliminary injunction
be issued. On 31 January 1959 the plaintiff objected to her
motion. On 6 February 1959 she filed a reply thereto. On the
same day, 6 February, the Court denied her motion. Hence,
this appeal certified by the Court of Appeals to this Court as
stated at the beginning of this opinion.
ISSUE:
WON Bagtas is liable for the death of the bull?
SC RULING:
It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the
appellant by the late defendant, returned the Sindhi and
Bhagnari bulls to Roman Remorin, Superintendent of the NVB
Station, Bureau of Animal Industry, Bayombong, Nueva
Vizcaya, as evidenced by a memorandum receipt signed by
the latter (Exhibit 2). That is why in its objection of 31 January
1959 to the appellant's motion to quash the writ of execution
the appellee prays "that another writ of execution in the sum of
P859.53 be issued against the estate of defendant deceased
Jose V. Bagtas." She cannot be held liable for the two bulls
which already had been returned to and received by the
appellee.
The appellant contends that the Sahiniwal bull was accidentally
killed during a raid by the Huk in November 1953 upon the
surrounding barrios of Hacienda Felicidad Intal, Baggao,

Cagayan, where the animal was kept, and that as such death
was due to force majeure she is relieved from the duty of
returning the bull or paying its value to the appellee. The
contention is without merit. The loan by the appellee to the late
defendant Jose V. Bagtas of the three bulls for breeding
purposes for a period of one year from 8 May 1948 to 7 May
1949, later on renewed for another year as regards one bull,
was subject to the payment by the borrower of breeding fee of
10% of the book value of the bulls. The appellant contends that
the contract was commodatum and that, for that reason, as the
appellee retained ownership or title to the bull it should suffer
its loss due to force majeure. A contract ofcommodatum is
essentially gratuitous. If the breeding fee be considered a
compensation, then the contract would be a lease of the bull.
Under article 1671 of the Civil Code the lessee would be
subject to the responsibilities of a possessor in bad faith,
because she had continued possession of the bull after the
expiry of the contract. And even if the contract be
commodatum, still the appellant is liable, because article 1942
of the Civil Code provides that a bailee in a contract of
commodatum
. . . is liable for loss of the things, even if it should be through a
fortuitous event:
(2) If he keeps it longer than the period stipulated . . .
(3) If the thing loaned has been delivered with appraisal of its
value, unless there is a stipulation exempting the bailee from
responsibility in case of a fortuitous event;
The original period of the loan was from 8 May 1948 to 7 May
1949. The loan of one bull was renewed for another period of
one year to end on 8 May 1950. But the appellant kept and
used the bull until November 1953 when during a Huk raid it
was killed by stray bullets. Furthermore, when lent and
delivered to the deceased husband of the appellant the bulls
had each an appraised book value, to with: the Sindhi, at
P1,176.46, the Bhagnari at P1,320.56 and the Sahiniwal at
P744.46. It was not stipulated that in case of loss of the bull
due to fortuitous event the late husband of the appellant would
be exempt from liability.
The appellant's contention that the demand or prayer by the
appellee for the return of the bull or the payment of its value
being a money claim should be presented or filed in the
intestate proceedings of the defendant who died on 23 October
1951, is not altogether without merit. However, the claim that
his civil personality having ceased to exist the trial court lost
jurisdiction over the case against him, is untenable, because
section 17 of Rule 3 of the Rules of Court provides that
After a party dies and the claim is not thereby extinguished, the
court shall order, upon proper notice, the legal representative
of the deceased to appear and to be substituted for the
deceased, within a period of thirty (30) days, or within such
time as may be granted. . . .
and after the defendant's death on 23 October 1951 his
counsel failed to comply with section 16 of Rule 3 which
provides that
Whenever a party to a pending case dies . . . it shall be the
duty of his attorney to inform the court promptly of such death .
. . and to give the name and residence of the executory
administrator, guardian, or other legal representative of the
deceased . . . .
The notice by the probate court and its publication in the Voz
de Manila that Felicidad M. Bagtas had been issue letters of
administration of the estate of the late Jose Bagtas and that "all
persons having claims for monopoly against the deceased
Jose V. Bagtas, arising from contract express or implied,
whether the same be due, not due, or contingent, for funeral
expenses and expenses of the last sickness of the said
decedent, and judgment for monopoly against him, to file said
claims with the Clerk of this Court at the City Hall Bldg.,
Highway 54, Quezon City, within six (6) months from the date

of the first publication of this order, serving a copy thereof upon

the aforementioned Felicidad M. Bagtas, the appointed
administratrix of the estate of the said deceased," is not a
notice to the court and the appellee who were to be notified of
the defendant's death in accordance with the above-quoted
rule, and there was no reason for such failure to notify,
because the attorney who appeared for the defendant was the
same who represented the administratrix in the special
proceedings instituted for the administration and settlement of
his estate. The appellee or its attorney or representative could
not be expected to know of the death of the defendant or of the
administration proceedings of his estate instituted in another
court that if the attorney for the deceased defendant did not
notify the plaintiff or its attorney of such death as required by
the rule.
As the appellant already had returned the two bulls to the
appellee, the estate of the late defendant is only liable for the
sum of P859.63, the value of the bull which has not been
returned to the appellee, because it was killed while in the
custody of the administratrix of his estate. This is the amount
prayed for by the appellee in its objection on 31 January 1959
to the motion filed on 7 January 1959 by the appellant for the
quashing of the writ of execution.
Special proceedings for the administration and settlement of
the estate of the deceased Jose V. Bagtas having been
instituted in the Court of First Instance of Rizal (Q-200), the
money judgment rendered in favor of the appellee cannot be
enforced by means of a writ of execution but must be
presented to the probate court for payment by the appellant,
the administratrix appointed by the court.
ACCORDINGLY, the writ of execution appealed from is set
aside, without pronouncement as to costs.
----------XXX---------QUINTOS v. BECK Nov. 3, 1939
FACTS:
The Beck was a tenant of the Quintos and as such
occupied the latter's house on M. H. del Pilar street, No. 1175.
On January 14, 1936, upon the novation of the contract of
lease between the Quintos and the Beck, the former
gratuitously granted to the latter the use of the furniture (three
has heaters and the four electric lamps), subject to the
condition that the defendant would return them to the Quintos
upon the latter's demand.
Quintos sold the property to Maria Lopez and Rosario
Lopez and on September 14, 1936, these three notified Beck
of the conveyance, giving him 60 days to vacate the premises
under one of the clauses of the contract of lease. Thereafter,
Quintos required the Beck to return all the furniture transferred
to him for them in the house where they were found. On
November 5, 1936, Beck, through another person, wrote to
Quintos reiterating that she may call for the furniture in the
ground floor of the house. On the 7th of the same month, Beck
wrote another letter to Quintos informing her that he could not
give up the three gas heaters and the four electric lamps
because he would use them until the 15th of the same month
when the lease in due to expire. Quintos refused to get the
furniture in view of the fact that the Beck had declined to make
delivery of all of them. On
November 15th, before
vacating the house, Beck deposited with the Sheriff all the
furniture belonging to Quintos and they are now on deposit in
the warehouse situated at No. 1521, Rizal Avenue, in the
custody of the said sheriff.
RTC: Quintos violated the contract by not calling for all the
furniture on November 5, 1936, when the defendant placed
them at their disposal; in not ordering the Beck to pay them the

value of the furniture in case they are not delivered; in holding

that Quintos should get all the furniture from the Sheriff at their
expenses; in ordering Quintos to pay-half of the expenses
claimed by the Sheriff for the deposit of the furniture; in ruling
that both parties should pay their respective legal expenses or
the costs
SC: Appealed judgment is modified and the Beck is ordered to
return and deliver to Quintos, in the residence to return and
deliver to Quintos, in the residence or house of the latter, all
the furniture described. The expenses which may be
occasioned by the delivery to and deposit of the furniture with
the Sheriff shall be for the account of Beck, Beck shall pay the
costs in both instances.
The contract entered into between the parties is one of
commadatum, because under it the plaintiff gratuitously
granted the use of the furniture to the defendant, reserving for
herself the ownership thereof; by this contract the defendant
bound himself to return the furniture to the plaintiff, upon the
latters demand (clause 7 of the contract, Exhibit A; articles
1740, paragraph 1, and 1741 of the Civil Code). The obligation
voluntarily assumed by the defendant to return the furniture
upon the plaintiff's demand, means that he should return all of
them to the plaintiff at the latter's residence or house. Beck did
not comply with this obligation when he merely placed them at
the disposal of Quintos, retaining for his benefit the three gas
heaters and the four eletric lamps. The provisions of article
1169 of the Civil Code cited by counsel for the parties are not
squarely applicable. The trial court, therefore, erred when it
came to the legal conclusion that Quintos failed to comply with
her obligation to get the furniture when they were offered to
her.
As Beck had voluntarily undertaken to return all the furniture to
Quintos, upon the latter's demand, the Court could not legally
compel her to bear the expenses occasioned by the deposit of
the furniture at the Beck's behest. The latter, as bailee, was not
entitled to place the furniture on deposit; nor was Quintos
under a duty to accept the offer to return the furniture, because
Beck wanted to retain the three gas heaters and the four
electric lamps.
As to the value of the furniture, we do not believe that Quintos
is entitled to the payment thereof by Beck in case of his
inability to return some of the furniture because under
paragraph 6 of the stipulation of facts, Beck has neither agreed
to nor admitted the correctness of the said value. Should Beck
fail to deliver some of the furniture, the value thereof should be
latter determined by the trial Court through evidence which the
parties may desire to present.
The costs in both instances should be borne by the defendant
because the plaintiff is the prevailing party (section 487 of the
Code of Civil Procedure). Beck was the one who breached the
contract of commodatum, and without any reason he refused
to return and deliver all the furniture upon the Quintos
demand. In these circumstances, it is just and equitable that he
pay the legal expenses and other judicial costs which the
plaintiff would not have otherwise defrayed.
----------XXX--------No. L-24968. April 27, 1972.
SAURA IMPORT & EXPORT CO., INC, plaintiff-appellee, vs.
DEVELOPMENT BANK OF THE PHILIPPINES, defendantappellant. Saura Import & Export Co., Inc. vs. Development
Bank of the Phil., 44 SCRA 445, No. L-24968 April 27, 1972
PRINCIPLE:
Civil Law; Obligations and Contracts; When contract of simple
loan perfected.Where an application for a loan of money was
approved by resolution of the defendant corporation and the
corresponding mortgage was executed and registered, there

arises a perfected-consensual contract of loan.

Same; Extinguishment of obligations by mutual desistance.
Where after approval of his loan, the borrower, instead of
insisting for its release, asked that the mortgage given as
security be cancelled and the creditor acceded thereto, the
action taken by both parties was in the nature of mutual
desistancewhat Manresa terms mutuo disensowhich is a
mode of extinguishing obligations. It is a concept that derives
from, the principle that since mutual agreement can create a
contract, mutual disagreement by the parties can cause its
extinguishment. Saura Import & Export Co., Inc. vs.
Development Bank of the Phil., 44 SCRA 445, No. L-24968
April 27, 1972
FACTS
Saura Inc. applied to the Rehabilitation Finance Corporation
(RFC), before its conversion into DBP, for an industrial loan of
P500,000.00, to be used for the construction of a factory
building (for the manufacture of jute sacks); to pay the balance
of the purchase price of the jute mill machinery and equipment;
and as additional working capital.
RFC passed Resolution No. 145 approving the loan application
for P500,000.00, to be secured by a first mortgage on the
factory building to be constructed, the land site thereof, and the
machinery and equipment to be installed.
Saura, Inc. was officially notified of the resolution. however,
evidently having otherwise been informed of its approval,
Saura, Inc. wrote a letter to RFC, requesting a modification of
the terms laid down by it.
In view of such request RFC approved Resolution No. 736,
designating of the members of its Board of Governors, for
certain reasons stated in the resolution, "to reexamine all the
aspects of this approved loan ... with special reference as to
the advisability of financing this particular project based on
present conditions obtaining in the operations of jute mills, and
to submit his findings thereon at the next meeting of the
Board."
Saura, Inc. wrote RFC that China Engineers, Ltd. had again
agreed to act as co-signer for the loan, and asked that the
necessary documents be prepared in accordance with the
terms and conditions specified in Resolution No. 145. In
connection with the reexamination of the project to be financed
with the loan applied for, as stated in Resolution No. 736, the
parties named their respective committees of engineers and
technical men to meet with each other and undertake the
necessary studies, although in appointing its own committee
Saura, Inc. made the observation that the same "should not be
taken as an acquiescence on (its) part to novate, or accept
new conditions to, the agreement already) entered into,"
referring to its acceptance of the terms and conditions
mentioned in Resolution No. 145.
The loan documents were executed: the promissory note, with
F.R. Halling, representing China Engineers, Ltd., as one of the
co-signers; and the corresponding deed of mortgage, which
was duly registered.
It appears, however, that despite the formal execution of the
loan agreement the reexamination contemplated in Resolution
No. 736 proceeded. In a meeting of the RFC Board of
Governors, at which Ramon Saura, President of Saura, Inc.,
was present, it was decided to reduce the loan from
P500,000.00 to P300,000.00. Resolution No. 3989 was
approved.
F.R. Halling, who had signed the promissory note for China
Engineers Ltd. jointly and severally with the other RFC that his
company no longer to of the loan and therefore considered the
same as cancelled as far as it was concerned. A follow-up
letter requested RFC that the registration of the mortgage be
withdrawn.
In the meantime Saura, Inc. had written RFC requesting that
the loan of P500,000.00 be granted. The request was denied

by RFC, which added in its letter-reply that it was "constrained

to consider as cancelled the loan of P300,000.00 ... in view of
a notification ... from the China Engineers Ltd., expressing their
desire to consider the loan insofar as they are concerned."
Saura, Inc. took exception to the cancellation of the loan and
informed RFC that China Engineers, Ltd. "will at any time
reinstate their signature as co-signer of the note if RFC
releases to us the P500,000.00 originally approved by you.".
RFC then passed Resolution No. 9083, restoring the loan to
the original amount of P500,000.00, "it appearing that China
Engineers, Ltd. is now willing to sign the promissory notes
jointly with the borrower-corporation.
The action thus taken was communicated to Saura, Inc. in a
letter of RFC, wherein it was explained that the certification by
the Department of Agriculture and Natural Resources was
required "as the intention of the original approval (of the loan)
is to develop the manufacture of sacks on the basis of locally
available raw materials."
This point is important, and sheds light on the subsequent
actuations of the parties. Saura, Inc. does not deny that the
factory he was building in Davao was for the manufacture of
bags from local raw materials.
This fact, according to defendant DBP, is what moved RFC to
approve the loan application in the first place, and to require, in
its Resolution No. 9083, a certification from the Department of
Agriculture and Natural Resources as to the availability of local
raw materials to provide adequately for the requirements of the
factory.
Saura, Inc. itself confirmed the defendant's stand impliedly in
its letter : (1) stating that according to a special study made by
the Bureau of Forestry "kenaf will not be available in sufficient
quantity this year or probably even next year;" (2) requesting
"assurances (from RFC) that my company and associates will
be able to bring in sufficient jute materials as may be
necessary for the full operation of the jute mill;" and (3) asking
that releases of the loan. (IN SHORT SAURA INC COULD
NOT COMPLY WITH THE REQUIREMENT-- APPROVAL
FROM DANR)
The negotiations came to a standstill. Saura, Inc. did not
pursue the matter further. Instead, it requested RFC to cancel
the mortgage, and so, RFC executed the corresponding deed
of cancellation and delivered it to Ramon F. Saura himself as
president of Saura, Inc.
It appears that the cancellation was requested to make way for
the registration of a mortgage contract, executed on August 6,
1954, over the same property in favor of the Prudential Bank
and Trust Co., under which contract Saura, Inc. had up to
December 31 of the same year within which to pay its
obligation on the trust receipt heretofore mentioned. It appears
further that for failure to pay the said obligation the Prudential
Bank and Trust Co. sued Saura, Inc. on May 15, 1955.
On January 9, 1964, ahnost 9 years after the mortgage in favor
of RFC was cancelled at the request of Saura, Inc., the latter
commenced the present suit for damages, alleging failure of
RFC (as predecessor of the defendant DBP) to comply with its
obligation to release the proceeds of the loan applied for and
approved, thereby preventing the plaintiff from completing or
paying contractual commitments it had entered into, in
connection with its jute mill project.
The trial court rendered judgment for the plaintiff, ruling that
there was a perfected contract between the parties and that
the defendant was guilty of breach thereof.
ISSUES
Whether or not there was a perfected contract between the
parties.
Was there a real contract of loan which would warrant recovery
of damages arising out of breach of such contract?
HELD

We hold that there was indeed a perfected consensual

contract, as recognized in Article 1934 of the Civil Code, which
provides:
ART. 1954. An accepted promise to deliver something, by way
of commodatum or simple loan is binding upon the parties, but
the commodatum or simple loan itself shall not be perferted
until the delivery of the object of the contract.
There was undoubtedly offer and acceptance in this case: the
application of Saura, Inc. for a loan of P500,000.00 was
approved by resolution of the defendant, and the
corresponding mortgage was executed and registered. But this
fact alone falls short of resolving the basic claim that the
defendant failed to fulfill its obligation and the plaintiff is
therefore entitled to recover damages.
It should be noted that RFC entertained the loan application of
Saura, Inc. on the assumption that the factory to be
constructed would utilize locally grown raw materials,
principally kenaf. There is no serious dispute about this. It was
in line with such assumption that when RFC, by Resolution No.
9083 approved on December 17, 1954, restored the loan to the
original amount of P500,000.00. it imposed two conditions, to
wit: "(1) that the raw materials needed by the borrowercorporation to carry out its operation are available in the
immediate vicinity; and (2) that there is prospect of increased
production thereof to provide adequately for the requirements
of the factory." The imposition of those conditions was by no
means a deviation from the terms of the agreement, but rather
a step in its implementation. There was nothing in said
conditions that contradicted the terms laid down in RFC
Resolution No. 145, passed on January 7, 1954, namely
"that the proceeds of the loan shall be utilized exclusively for
the following purposes: for construction of factory building
P250,000.00; for payment of the balance of purchase price of
machinery and equipment P240,900.00; for working capital
P9,100.00." Evidently Saura, Inc. realized that it could not
meet the conditions required by RFC, and so wrote its letter of
January 21, 1955, stating that local jute "will not be able in
sufficient quantity this year or probably next year," and asking
that out of the loan agreed upon the sum of P67,586.09 be
released "for raw materials and labor." This was a deviation
from the terms laid down in Resolution No. 145 and embodied
in the mortgage contract, implying as it did a diversion of part
of the proceeds of the loan to purposes other than those
agreed upon.
When RFC turned down the request in its letter of January 25,
1955 the negotiations which had been going on for the
implementation of the agreement reached an impasse. Saura,
Inc. obviously was in no position to comply with RFC's
conditions. So instead of doing so and insisting that the loan be
released as agreed upon, Saura, Inc. asked that the mortgage
be cancelled, which was done on June 15, 1955. The action
thus taken by both parties was in the nature cf mutual
desistance what Manresa terms "mutuo disenso" 1 which
is a mode of extinguishing obligations. It is a concept that
derives from the principle that since mutual agreement can
create a contract, mutual disagreement by the parties can
cause its extinguishment. 2
The subsequent conduct of Saura, Inc. confirms this
desistance. It did not protest against any alleged breach of
contract by RFC, or even point out that the latter's stand was
legally unjustified. Its request for cancellation of the mortgage
carried no reservation of whatever rights it believed it might
have against RFC for the latter's non-compliance. In 1962 it
even applied with DBP for another loan to finance a rice and
corn project, which application was disapproved. It was only in
1964, nine years after the loan agreement had been cancelled
at its own request, that Saura, Inc. brought this action for
damages.All these circumstances demonstrate beyond doubt
that the said agreement had been extinguished by mutual

desistance and that on the initiative of the plaintiff-appellee

itself.
With this view we take of the case, we find it unnecessary to
consider and resolve the other issues raised in the respective
briefs of the parties.
WHEREFORE, the judgment appealed from is reversed and
the complaint dismissed, with costs against the plaintiffappellee.
----------XXX---------CASE TITLE: G.R. No. L-40824 February 23, 1989
GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner,
vs.
COURT OF APPEALS and MR. & MRS. ISABELO R.
RACHO, respondents.
The Government Corporate Counsel for petitioner.
Lorenzo A. Sales for private respondents.
PRINCIPLE: Credit Transaction
FACTS:
Mr. and Mrs. Racho, together with the spouses Lagasca,
executed a deed of mortgage, dated November 13, 1957, in
favor of petitioner Government Service Insurance System
(GSIS) and subsequently, another deed of mortgage, dated
April 14, 1958, in connection with two loans granted by the
latter in the sums of P 11,500.00 and P 3,000.00, respectively.
A parcel of land covered by TCT No. 38989 of the Register of
Deed of Quezon City, co-owned by said mortgagor spouses,
was given as security under the aforesaid two deeds. 2 They
also executed a 'promissory note" which states in part:
... for value received, we the undersigned ... JOINTLY,
SEVERALLY and SOLIDARILY, promise to pay the
GOVERNMENT SERVICE INSURANCE SYSTEM the sum of .
. . (P 11,500.00) Philippine Currency, with interest at the rate of
six (6%) per centum compounded monthly payable in . . .
(120)equal monthly installments of . . . (P 127.65) each.
On July 11, 1961, the Lagasca spouses executed an
instrument denominated "Assumption of Mortgage" under
which they obligated themselves to assume the aforesaid
obligation to the GSIS and to secure the release of the
mortgage covering that portion of the land belonging to herein
private respondents and which was mortgaged to the GSIS.
This undertaking was not fulfilled.
Upon failure of the mortgagors to comply with the conditions of
the mortgage, particularly the payment of the amortizations
due, GSIS extrajudicially foreclosed the mortgage and caused
the mortgaged property to be sold at public auction on
December 3, 1962.
More than two years thereafter, or on August 23, 1965, herein
Sps. Racho filed a complaint against the petitioner and the
Lagasca spouses in the former Court of First Instance of
Quezon City, praying that the extrajudicial foreclosure "made
on, their property and all other documents executed in relation
thereto in favor of the Government Service Insurance System"
be declared null and void. It was further prayed that they be
allowed to recover said property, and/or the GSIS be ordered
to pay them the value thereof, and/or they be allowed to
repurchase the land. Additionally, they asked for actual and
moral damages and attorney's fees.
In their aforesaid complaint, Sps. Racho alleged that they
signed the mortgage contracts not as sureties or guarantors for
the Lagasca spouses but they merely gave their common
property to the said co-owners who were solely benefited by
the loans from the GSIS.

DECISIOPN OF LOWER COURTS

TRIAL COURT: dismissing the complaint for failure to establish
a cause of action.
COURT OF APPEALS: In view of all the foregoing, the
judgment appealed from is hereby reversed, and another one
entered (1) declaring the foreclosure of the mortgage void
insofar as it affects the share of the appellants; (2) directing the
GSIS to reconvey to appellants their share of the mortgaged
property, or the value thereof if already sold to third party, in the
sum of P 35,000.00, and (3) ordering the appellees Flaviano
Lagasca and Esther Lagasca to pay the appellants the sum of
P 10,00.00 as moral damages, P 5,000.00 as attorney's fees,
and costs.
RATIO DECIDENDI OF SUPREME COURT
both parties relied on the provisions of Section 29 of Act No.
2031, otherwise known as the Negotiable Instruments Law,
which provide that an accommodation party is one who has
signed an instrument as maker, drawer, acceptor of indorser
without receiving value therefor, but is held liable on the
instrument to a holder for value although the latter knew him to
be only an accommodation party.
This approach of both parties appears to be misdirected and
their reliance misplaced. The promissory note hereinbefore
quoted, as well as the mortgage deeds subject of this case, are
clearly not negotiable instruments. These documents do not
comply with the fourth requisite to be considered as such
under Section 1 of Act No. 2031 because they are neither
payable to order nor to bearer. The note is payable to a
specified party, the GSIS. Absent the aforesaid requisite, the
provisions of Act No. 2031 would not apply; governance shall
be afforded, instead, by the provisions of the Civil Code and
special laws on mortgages.
As earlier indicated, the factual findings of respondent court
are that private respondents signed the documents "only to
give their consent to the mortgage as required by GSIS", with
the latter having full knowledge that the loans secured thereby
were solely for the benefit of the Lagasca spouses. This
appears to be duly supported by sufficient evidence on record.
Indeed, it would be unusual for the GSIS to arrange for and
deduct the monthly amortizations on the loans from the salary
as an army officer of Flaviano Lagasca without likewise
affecting deductions from the salary of Isabelo Racho who was
also an army sergeant. Then there is also the undisputed fact,
as already stated, that the Lagasca spouses executed a socalled "Assumption of Mortgage" promising to exclude private
respondents and their share of the mortgaged property from
liability to the mortgagee. There is no intimation that the former
executed such instrument for a consideration, thus confirming
that they did so pursuant to their original agreement.
The parol evidence rule cannot be used by petitioner as a
shield in this case for it is clear that there was no objection in
the court below regarding the admissibility of the testimony and
documents that were presented to prove that the private
respondents signed the mortgage papers just to accommodate
their co-owners, the Lagasca spouses. Besides, the
introduction of such evidence falls under the exception to said
rule, there being allegations in the complaint of private
respondents in the court below regarding the failure of the
mortgage contracts to express the true agreement of the
parties.
However, contrary to the holding of the respondent court, it
cannot be said that private respondents are without liability
under the aforesaid mortgage contracts. The factual context of
this case is precisely what is contemplated in the last
paragraph of Article 2085 of the Civil Code to the effect that
third persons who are not parties to the principal obligation
may secure the latter by pledging or mortgaging their own
property

So long as valid consent was given, the fact that the loans
were solely for the benefit of the Lagasca spouses would not
invalidate the mortgage with respect to private respondents'
share in the property. In consenting thereto, even assuming
that private respondents may not be assuming personal liability
for the debt, their share in the property shall nevertheless
secure and respond for the performance of the principal
obligation. The parties to the mortgage could not have
intended that the same would apply only to the aliquot portion
of the Lagasca spouses in the property, otherwise the consent
of the private respondents would not have been required.
The supposed requirement of prior demand on the private
respondents would not be in point here since the mortgage
contracts created obligations with specific terms for the
compliance thereof. The facts further show that the private
respondents expressly bound themselves as solidary debtors
in the promissory note hereinbefore quoted.
Coming now to the extrajudicial foreclosure effected by GSIS,
We cannot agree with the ruling of respondent court that lack
of notice to the private respondents of the extrajudicial
foreclosure sale impairs the validity thereof. In Bonnevie, et al.
vs. Court of appeals, et al., the Court ruled that Act No. 3135,
as amended, does not require personal notice on the
mortgagor, quoting the requirement on notice in such cases as
follows:
Section 3. Notice shall be given by posting notices of sale for
not less than twenty days in at least three public places of the
municipality where the property is situated, and if such property
is worth more than four hundred pesos, such notice shall also
be published once a week for at least three consecutive weeks
in a newspaper of general circulation in the municipality or city.
There is no showing that the foregoing requirement on notice
was not complied with in the foreclosure sale complained of.
The respondent court, therefore, erred in annulling the
mortgage insofar as it affected the share of private
respondents or in directing reconveyance of their property or
the payment of the value thereof Indubitably, whether or not
private respondents herein benefited from the loan, the
mortgage and the extrajudicial foreclosure proceedings were
valid.
WHEREFORE, judgment is hereby rendered REVERSING the
decision of the respondent Court of Appeals and
REINSTATING the decision of the court a quo in Civil Case No.
Q-9418 thereof.
----------XXX---------G.R. No. 115324, 19 February 2003
PRODUCERS BANK OF THE PHILIPPINES (now First
International Bank) v. CA and FRANKLIN VIVES
J. Callejo, Sr.
In 1979, Vives was asked by his neighbor and friend Sanchez
to help her friend and town mate, Col. Doronilla, in
incorporating his business, the Sterela Marketing and Services.
Vives was asked to deposit in a bank a certain amount of
money in the bank account of Sterela for purposes of
incorporation. She assured that Vives that he could withdraw
his money from said account within a months time. Relying on
the representations of Sanchez and Doronilla, Vives issued a
check in the amount of 200,000 in favor of Sterela.
Vives learned that Sterela was no longer holding office in the
address previously given to him. Alarmed, he and his wife
went to the bank to verify if their money was still intact, and
was thereafter informed by the bank manager that part of the
money had been withdrawn by Doronilla, and that only 90,000
remained therein. Vives was also informed that they could not

withdraw said remaining amount because it had to answer for

some postdated checks issued by Doronilla.
Vives tried to get in touch with Doronilla through Sanchez. He
later received a letter from Doronilla, assuring him that his
money was intact and would be returned to him. Doronilla
issued a postdated check for 212,000 in favor of Vives.
However, upon presentment thereof by Vives to the drawee
bank, the check was dishonored. Doronilla requested Vives to
present the same the next succeeding month but when the
latter presented the check, it was dishonored again.
Vives instituted an action for recovery of sum of money in the
RTC of Pasig and filed a criminal action for violation of BP 22.
RTC rendered a decision favoring Vives and holding Doronilla
and Producers Bank to pay the former jointly and severally the
subject amount including payment of moral damages,
exemplary damages and attorneys fees. The MR was likewise
denied by the appellate court.
ISSUE: W/N THE TRANSACTION BETWEEN DORONILLA
AND VIVES WAS ONE OF SIMPLE LOAN AND NOT
ACCOMMODATION
Ratio: The court finds no merit in the petition. There was no
error committed by the CA when it ruled that the transaction
between Vives and Doronilla was a commodatum and not
mutuum. Article 1933 distinguishes between the two kinds of
loans: by the contract of loan, one of the parties delivers to
another, either something not consumable so that the latter
may use the same for a certain time and return it, in which
case the contract is called commdatum; or money or other
consumable thing, upon the condition that the same amount of
the same kind and quality shall be paid, in which case the
contract is simply called a loan or mutuum. Commodatum is
essentially gratuitous while simple loan may be gratuitous or
with a stipulation to pay interest. In commodatum, the bailor
retains the ownership of the thing loaned, while in simple loan,
ownership passes to the borrower.
The foregoing provisions seems to imply that if the subject of
the contract is a consumable thing, such as money, the
contract would be a mutuum. However, there are some
instances where a commodatum may have for its object a
consumable thing. Article 1936 provides: Consumable goods
may be the subject of commodatum if the purpose of the
contract is not the consumption of the object, as when it is
merely for exhibition.
If consumable goods are loaned only for purposes of
exhibition, or when the intention of the parties is to lend
consumable goods and to have the very same goods returned
at the end of the period agreed upon, the loan is a
commodatum and not a mutuum. The rule is that the intention
of the parties thereto shall be accorded primordial
consideration in determining the actual character of a contract.
In case of doubt, the contemporaneous and subsequent cast of
the parties shall be considered in such determination.
As correctly pointed out by the CA and RTC, the evidence
show that Vives agreed to deposit his money in the savings
account of Sterela specifically for the purpose of making it
appear that said firm had sufficient capitalization for
incorporation, the promise that the amount shall be returned
within 30 days. Vives merely accommodated Doronilla by
lending his money without consideration, as favor to his good
friend Sanchez. It was clear to the parties to the transaction
that the money would not be removed from Sterelas savings
account and would be returned to Vives after 30 days.

The attempt of Doronilla to return to Vives the 200,000

together with additional 12,000 (interest representing a
mutuum), did not convert the transaction from a commodatum
into a mutuum because such was not the intent of the parties
and because the additional 12,000 corresponds the fruits of the
lending of the 200,000. Article 1935 states that the bailee in
commodatum acquires the use of the thing loaned but not its
fruits. Hence, it was only proper for Doronilla to remit to Vives
the interest accruing to the latters money deposited with the
bank.
Dispo: Petition is denied (under 20180, bank is liable for Vives
loss and is solidarily liable with Doronilla for the return of
200,000 since it is clear that bank failed to prove that it
exercised due diligence to prevent the uauthorized
withdrawals from Sterelas savings account).
----------XXX---------BPI INVESTMENT CORPORATION, petitioner, vs. HON.
COURT OF APPEALS and ALS MANAGEMENT &
DEVELOPMENT CORPORATION, respondents.
LOAN
FACTS:
Frank Roa obtained a loan at an interest rate of 16 1/4% per
annum from Ayala Investment and Development Corporation
(AIDC), the predecessor of petitioner BPIIC, for the
construction of a house on his lot in New Alabang Village,
Muntinlupa. Said house and lot were mortgaged to AIDC to
secure the loan. Thereafter Roa sold the house and lot to
private respondents ALS and Antonio Litonjua for P850,000.
They paid P350,000 in cash and assumed the P500,000
balance of Roas indebtedness with AIDC. The latter, however,
was not willing to extend the old interest rate to private
respondents and proposed to grant them a new loan of
P500,000 to be applied to Roas debt and secured by the same
property, at an interest rate of 20% per annum and service fee
of 1% per annum on the outstanding principal balance payable
within ten years in equal monthly amortization of P9,996.58
and penalty interest at the rate of 21% per annum per day from
the date the amortization became due and payable. The new
rate was materialize and a new contract was executed.
On August 13, 1982, ALS and Litonjua updated Roas
arrearages by paying BPIIC the sum of P190,601.35. This
reduced Roas principal balance to P457,204.90 which, in turn,
was liquidated when BPIIC applied thereto the proceeds of
private respondents loan of P500,000.
On September 13, 1982, BPIIC released to private
respondents P7,146.87, purporting to be what was left of their
loan after full payment of Roas loan.
In June 1984, BPIIC instituted foreclosure proceedings against
private respondents on the ground that they failed to pay the
mortgage indebtedness.
RTC held that private respondents were not in default in the
payment of their monthly amortization, hence, the extrajudicial
foreclosure conducted by BPIIC was premature and made in
bad faith. It awarded private respondents the amount of
P300,000 for moral damages, P50,000 for exemplary
damages, and P50,000 for attorneys fees and expenses for
litigation. It likewise dismissed the foreclosure suit for being
premature.
Both parties appealed to the Court of Appeals. However,
private respondents appeal was dismissed for non-payment of
docket fees. (CIV PRO ATA ITO)
In its decision, the Court of Appeals reasoned that a simple
loan is perfected only upon the delivery of the object of the

contract. The contract of loan between BPIIC and ALS &

Litonjua was perfected only on September 13, 1982, the date
when BPIIC released the purported balance of the P500,000
loan after deducting therefrom the value of Roas indebtedness.
Thus, payment of the monthly amortization should commence
only a month after the said date, as can be inferred from the
stipulations in the contract. This, despite the express
agreement of the parties that payment shall commence on May
1, 1981. From October 1982 to June 1984, the total
amortization due was only P194,960.43. Evidence showed that
private respondents had an overpayment, because as of June
1984, they already paid a total amount of P201,791.96.
Therefore, there was no basis for BPIIC to extrajudicially
foreclose the mortgage and cause the publication in
newspapers concerning private respondents delinquency in the
payment of their loan. This fact constituted sufficient ground for
moral damages in favor of private respondents.
ISSUE: WHETHER OR NOT A CONTRACT OF LOAN IS A
CONSENSUAL CONTRACT?
We agree with private respondents. A loan contract is not a
consensual contract but a real contract. It is perfected only
upon the delivery of the object of the contract.[5] Petitioner
misapplied Bonnevie. The contract in Bonnevie declared by
this Court as a perfected consensual contract falls under the
first clause of Article 1934, Civil Code. It is an accepted
promise to deliver something by way of simple loan.
In Saura Import and Export Co. Inc. vs. Development Bank of
the Philippines, 44 SCRA 445, petitioner applied for a loan of
P500,000 with respondent bank. The latter approved the
application through a board resolution. Thereafter, the
corresponding mortgage was executed and registered.
However, because of acts attributable to petitioner, the loan
was not released. Later, petitioner instituted an action for
damages. We recognized in this case, a perfected consensual
contract which under normal circumstances could have made
the bank liable for not releasing the loan. However, since the
fault was attributable to petitioner therein, the court did not
award it damages.
A perfected consensual contract, as shown above, can give
rise to an action for damages. However, said contract does not
constitute the real contract of loan which requires the delivery
of the object of the contract for its perfection and which gives
rise to obligations only on the part of the borrower.
In the present case, the loan contract between BPI, on the one
hand, and ALS and Litonjua, on the other, was perfected only
on September 13, 1982, the date of the second release of the
loan. Following the intentions of the parties on the
commencement of the monthly amortization, as found by the
Court of Appeals, private respondents obligation to pay
commenced only on October 13, 1982, a month after the
perfection of the contract.
We also agree with private respondents that a contract of loan
involves a reciprocal obligation, wherein the obligation or
promise of each party is the consideration for that of the other.
[8] As averred by private respondents, the promise of BPIIC to
extend and deliver the loan is upon the consideration that ALS
and Litonjua shall pay the monthly amortization commencing
on May 1, 1981, one month after the supposed release of the
loan. It is a basic principle in reciprocal obligations that neither
party incurs in delay, if the other does not comply or is not
ready to comply in a proper manner with what is incumbent
upon him. Only when a party has performed his part of the
contract can he demand that the other party also fulfills his own
obligation and if the latter fails, default sets in. Consequently,
petitioner could only demand for the payment of the monthly
amortization after September 13, 1982 for it was only then
when it complied with its obligation under the loan contract.
Therefore, in computing the amount due as of the date when
BPIIC extrajudicially caused the foreclosure of the mortgage,

the starting date is October 13, 1982 and not May 1, 1981.
SO ORDERED.
HELD: WHEREFORE, the decision dated February 28, 1997,
of the Court of Appeals and its resolution dated April 21, 1998,
are AFFIRMED WITH MODIFICATION as to the award of
damages. The award of moral and exemplary damages in
favor of private respondents is DELETED, but the award to
them of attorneys fees in the amount of P50,000 is UPHELD.
Additionally, petitioner is ORDERED to pay private
respondents P25,000 as nominal damages. Costs against
petitioner.
----------XXX---------PANTALEON v. AMERICAN EXPRESS
FACTS: After the Amsterdam incident that happened involving
the delay of American Express Card to approve his credit card
purchases worth US$13,826.00 at the Coster store, Pantaleon
commenced a complaint for moral and exemplary damages
before the RTC against American Express. He said that he and
his family experienced inconvenience and humiliation due to
the delays in credit authorization. RTC rendered a decision in
favor of Pantaleon. CA reversed the award of damages in favor
of Pantaleon, holding that AmEx had not breached its
obligations to Pantaleon, as the purchase at Coster deviated
from Pantaleon's established charge purchase pattern.
ISSUE:
1. Whether or not AmEx had committed a breach of its
obligations to Pantaleon.
2. Whether or not AmEx is liable for damages.
RULING:
1. Yes. The popular notion that credit card purchases are
approved within seconds, there really is no strict, legally
determinative point of demarcation on how long must it take for
a credit card company to approve or disapprove a customers
purchase, much less one specifically contracted upon by the
parties. One hour appears to be patently unreasonable length
of time to approve or disapprove a credit card purchase.
The culpable failure of AmEx herein is not the failure to timely
approve petitioners purchase, but the more elemental failure
to timely act on the same, whether favorably or unfavorably.
Even assuming that AmExs credit authorizers did not have
sufficient basis on hand to make a judgment, we see no reason
why it could not have promptly informed Pantaleon the reason
for the delay, and duly advised him that resolving the same
could take some time.
2. Yes. The reason why Pantaleon is entitled to damages is not
simply because AmEx incurred delay, but because the delay,
for which culpability lies under Article 1170, led to the particular
injuries under Article 2217 of the Civil Code for which moral
damages are remunerative. The somewhat unusual attending
circumstances to the purchase at Coster that there was a
deadline for the completion of that purchase by petitioner
before any delay would redound to the injury of his several
traveling companions gave rise to the moral shock, mental
anguish, serious anxiety, wounded feelings and social
humiliation sustained by Pantaleon, as concluded by the RTC.
DISPOSITIVE PORTION:
WHEREFORE, the petition is GRANTED. The assailed
Decision of the Court of Appeals is REVERSED and SET
ASIDE. The Decision of the Regional Trial Court of Makati,
Branch 145 in Civil Case No. 92-1665 is hereby REINSTATED.
Costs against respondent.

----------XXX---------G.R. No. 187678

April 10, 2013
SPOUSES IGNACIO F. JUICO and ALICE P. JUICO,
Petitioners,
vs.
CHINA BANKING CORPORATION, Respondent.
FACTS:
Spouses Ignacio F. Juico and Alice P. Juico (petitioners)
obtained a loan from China Banking Corporation (respondent)
as evidenced by two Promissory Notes both dated October 6,
1998 and numbered 507-001051-3 and 507-001052-0, for the
sums of P6,216,000 and P4, 139,000, respectively. The loan
was secured by a Real Estate Mortgage (REM) over
petitioners property located at 49 Greensville St., White Plains,
Quezon City covered by Transfer Certificate of Title (TCT) No.
RT-103568 (167394) PR-41208 of the Register of Deeds of
Quezon City. When petitioners failed to pay the monthly
amortizations due, respondent demanded the full payment of
the outstanding balance with accrued monthly interests. On
September 5, 2000, petitioners received respondents last
demand letter dated August 29, 2000. As of February 23, 2001,
the amount due on the two promissory notes totaled
P19,201,776.63 representing the principal, interests, penalties
and attorneys fees. On the same day, the mortgaged property
was sold at public auction, with respondent as highest bidder
for the amount of P10,300,000. On May 8, 2001, petitioners
received a demand letter dated May 2, 2001 from respondent
for the payment ofP8,901,776.63, the amount of deficiency
after applying the proceeds of the foreclosure sale to the
mortgage debt. As its demand remained unheeded,
respondent filed a collection suit in the trial court. In its
Complaint, respondent prayed that judgment be rendered
ordering the petitioners to pay jointly and severally:
(1)P8,901,776.63 representing the amount of deficiency, plus
interests at the legal rate, from February 23, 2001 until fully
paid; (2) an additional amount equivalent to 1/10 of 1% per day
of the total amount, until fully paid, as penalty; (3) an amount
equivalent to 10% of the foregoing amounts as attorneys fees;
and (4) expenses of litigation and costs of suit.
In their Answer, petitioners admitted the existence of the debt
but interposed, by way of special and affirmative defense, that
the complaint states no cause of action considering that the
principal of the loan was already paid when the mortgaged
property was extrajudicially foreclosed and sold for
P10,300,000. Petitioners contended that should they be held
liable for any deficiency, it should be only for P55,000
representing the difference between the total outstanding
obligation of P10,355,000 and the bid price of P10,300,000.
Petitioners also argued that even assuming there is a cause of
action, such deficiency cannot be enforced by respondent
because it consists only of the penalty and/or compounded
interest on the accrued interest which is generally not favored
under the Civil Code. By way of counterclaim, petitioners
prayed that respondent be ordered to pay P100,000 in
attorneys fees and costs of suit.
At the trial, respondent presented Ms. Annabelle Cokai Yu, its
Senior Loans Assistant, as witness. She testified that she
handled the account of petitioners and assisted them in
processing their loan application. She called them monthly to
inform them of the prevailing rates to be used in computing
interest due on their loan. As of the date of the public auction,
petitioners outstanding balance was P19,201,776.63 based on
the statement of account which she prepared.

Petitioners thereafter received a demand letter dated May 2,

2001 from respondents counsel for the deficiency amount of
P8,901,776.63. Ms. Yu further testified that based on the
Statement of Account dated March 15, 2002 which she
prepared, the outstanding balance of petitioners was
P15,190,961.48.
On cross-examination, Ms. Yu reiterated that the interest rate
changes every month based on the prevailing market rate and
she notified petitioners of the prevailing rate by calling them
monthly before their account becomes past due. When asked if
there was any written authority from petitioners for respondent
to increase the interest rate unilaterally, she answered that
petitioners signed a promissory note indicating that they
agreed to pay interest at the prevailing rate.
Petitioner Ignacio F. Juico testified that prior to the release of
the loan, he was required to sign a blank promissory note and
was informed that the interest rate on the loan will be based on
prevailing market rates. Every month, respondent informs him
by telephone of the prevailing interest rate. At first, he was able
to pay his monthly amortizations but when he started to incur
delay in his payments due to the financial crisis, respondent
pressured him to pay in full, including charges and interests for
the delay. His property was eventually foreclosed and was sold
at public auction.
On cross-examination, petitioner testified that he is a Doctor of
Medicine and also engaged in the business of distributing
medical supplies. He admitted having read the promissory
notes and that he is aware of his obligation under them before
he signed the same.
RTC RULING:
RTC ruled in favor of respondent.
WHEREFORE, premises considered, the Complaint is hereby
sustained, and Judgment is rendered ordering herein
defendants to pay jointly and severally to plaintiff, the following:
1. P8,901,776.63 representing the amount of the deficiency
owing to the plaintiff, plus interest thereon at the legal rate after
February 23, 2001;
2. An amount equivalent to 10% of the total amount due as and
for attorneys fees, there being stipulation therefor in the
promissory notes;
3. Costs of suit.
CA RULING:
When the case was elevated to the CA, the latter affirmed the
trial courts decision. The CA recognized respondents right to
claim the deficiency from the debtor where the proceeds of the
sale in an extrajudicial foreclosure of mortgage are insufficient
to cover the amount of the debt. Also, it found as valid the
stipulation in the promissory notes that interest will be based
on the prevailing rate. It noted that the parties agreed on the
interest rate which was not unilaterally imposed by the bank
but was the rate offered daily by all commercial banks as
approved by the Monetary Board. Having signed the
promissory notes, the CA ruled that petitioners are bound by
the stipulations contained therein.
ISSUE:
WON the interest rates imposed upon them by respondent are
valid.
SC RULING:
The appeal is partly meritorious.
The principle of mutuality of contracts is expressed in Article
1308 of the Civil Code, which provides:
Article 1308. The contract must bind both contracting parties;
its validity or compliance cannot be left to the will of one of
them. Article 1956 of the Civil Code likewise ordains that "no
interest shall be due unless it has been expressly stipulated in
writing."
The binding effect of any agreement between parties to a

contract is premised on two settled principles: (1) that any

obligation arising from contract has the force of law between
the parties; and (2) that there must be mutuality between the
parties based on their essential equality. Any contract which
appears to be heavily weighed in favor of one of the parties so
as to lead to an unconscionable result is void. Any stipulation
regarding the validity or compliance of the contract which is left
solely to the will of one of the parties, is likewise, invalid.
Escalation clauses refer to stipulations allowing an increase in
the interest rate agreed upon by the contracting parties. This
Court has long recognized that there is nothing inherently
wrong with escalation clauses which are valid stipulations in
commercial contracts to maintain fiscal stability and to retain
the value of money in long term contracts. Hence, such
stipulations are not void per se.
Nevertheless, an escalation clause "which grants the creditor
an unbridled right to adjust the interest independently and
upwardly, completely depriving the debtor of the right to assent
to an important modification in the agreement" is void. A
stipulation of such nature violates the principle of mutuality of
contracts. Thus, this Court has previously nullified the
unilateral determination and imposition by creditor banks of
increases in the rate of interest provided in loan contracts.
In Banco Filipino Savings & Mortgage Bank v. Navarro, the
escalation clause stated: "I/We hereby authorize Banco Filipino
to correspondingly increase the interest rate stipulated in this
contract without advance notice to me/us in the event a law
should be enacted increasing the lawful rates of interest that
may be charged on this particular kind of loan." While
escalation clauses in general are considered valid, we ruled
that Banco Filipino may not increase the interest on
respondent borrowers loan, pursuant to Circular No. 494
issued by the Monetary Board on January 2, 1976, because
said circular is not a law although it has the force and effect of
law and the escalation clause has no provision for reduction of
the stipulated interest "in the event that the applicable
maximum rate of interest is reduced by law or by the Monetary
Board" (de-escalation clause).
Subsequently, in Insular Bank of Asia and America v. Spouses
Salazar we reiterated that escalation clauses are valid
stipulations but their enforceability are subject to certain
conditions. The increase of interest rate from 19% to 21% per
annum made by petitioner bank was disallowed because it did
not comply with the guidelines adopted by the Monetary Board
to govern interest rate adjustments by banks and non-banks
performing quasi-banking functions.
In the 1991 case of Philippine National Bank v. Court of
Appeals, the promissory notes authorized PNB to increase the
stipulated interest per annum "within the limits allowed by law
at any time depending on whatever policy PNB may adopt in
the future; Provided, that, the interest rate on this note shall be
correspondingly decreased in the event that the applicable
maximum interest rate is reduced by law or by the Monetary
Board." This Court declared the increases (from 18% to 32%,
then to 41% and then to 48%) unilaterally imposed by PNB to
be in violation of the principle of mutuality essential in
contracts.
It is now settled that an escalation clause is void where the
creditor unilaterally determines and imposes an increase in the
stipulated rate of interest without the express conformity of the
debtor. Such unbridled right given to creditors to adjust the
interest independently and upwardly would completely take
away from the debtors the right to assent to an important
modification in their agreement and would also negate the
element of mutuality in their contracts. While a ceiling on
interest rates under the Usury Law was already lifted under
Central Bank Circular No. 905, nothing therein "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 two promissory notes signed by petitioners provide:
I/We hereby authorize the CHINA BANKING CORPORATION
to increase or decrease as the case may be, the interest
rate/service charge presently stipulated in this note without any
advance notice to me/us in the event a law or Central Bank
regulation is passed or promulgated by the Central Bank of the
Philippines or appropriate government entities, increasing or
decreasing such interest rate or service charge.36
Such escalation clause is similar to that involved in the case of
Floirendo, Jr. v. Metropolitan Bank and Trust Company37
where this Court ruled:
The provision in the promissory note authorizing respondent
bank to increase, decrease or otherwise change from time to
time the rate of interest and/or bank charges "without advance
notice" to petitioner, "in the event of change in the interest rate
prescribed by law or the Monetary Board of the Central Bank of
the Philippines," does not give respondent bank unrestrained
freedom to charge any rate other than that which was agreed
upon. Here, the monthly upward/downward adjustment of
interest rate is left to the will of respondent bank alone. It
violates the essence of mutuality of the contract.
In this case, the trial and appellate courts, in upholding the
validity of the escalation clause, underscored the fact that there
was actually no fixed rate of interest stipulated in the
promissory notes as this was made dependent on prevailing
rates in the market. The subject promissory notes contained
the following condition written after the first paragraph:
With one year grace period on principal and thereafter payable
in 54 equal monthly instalments to start on the second year.
Interest at the prevailing rates payable quarterly in arrears.
In Polotan, Sr. v. CA (Eleventh Div.), petitioner cardholder
assailed the trial and appellate courts in ruling for the validity of
the escalation clause in the Cardholders Agreement. On
petitioners contention that the interest rate was unilaterally
imposed and based on the standards and rate formulated
solely by respondent credit card company, we held:
The contractual provision in question states that "if there
occurs any change in the prevailing market rates, the new
interest rate shall be the guiding rate in computing the interest
due on the outstanding obligation without need of serving
notice to the Cardholder other than the required posting on the
monthly statement served to the Cardholder." This could not be
considered an escalation clause for the reason that it neither
states an increase nor a decrease in interest rate. Said clause
simply states that the interest rate should be based on the
prevailing market rate.
Interpreting it differently, while said clause does not expressly
stipulate a reduction in interest rate, it nevertheless provides a
leeway for the interest rate to be reduced in case the prevailing
market rates dictate its reduction.
Admittedly, the second paragraph of the questioned proviso
which provides that "the Cardholder hereby authorizes Security
Diners to correspondingly increase the rate of such interest in
the event of changes in prevailing market rates x x x" is an
escalation clause. However, it cannot be said to be dependent
solely on the will of private respondent as it is also dependent
on the prevailing market rates.
Escalation clauses are not basically wrong or legally
objectionable as long as they are not solely potestative but
based on reasonable and valid grounds. Obviously, the
fluctuation in the market rates is beyond the control of private
respondent. (Emphasis supplied.)
In interpreting a contract, its provisions should not be read in
isolation but in relation to each other and in their entirety so as
to render them effective, having in mind the intention of the
parties and the purpose to be achieved. The various
stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that sense which may result

from all of them taken jointly.

Here, the escalation clause in the promissory notes authorizing
the respondent to adjust the rate of interest on the basis of a
law or regulation issued by the Central Bank of the Philippines,
should be read together with the statement after the first
paragraph where no rate of interest was fixed as it would be
based on prevailing market rates. While the latter is not strictly
an escalation clause, its clear import was that interest rates
would vary as determined by prevailing market rates. Evidently,
the parties intended the interest on petitioners loan, including
any upward or downward adjustment, to be determined by the
prevailing market rates and not dictated by respondents policy.
It may also be mentioned that since the deregulation of bank
rates in 1983, the Central Bank has shifted to a marketoriented interest rate policy.
There is no indication that petitioners were coerced into
agreeing with the foregoing provisions of the promissory notes.
In fact, petitioner Ignacio, a physician engaged in the medical
supply business, admitted having understood his obligations
before signing them. At no time did petitioners protest the new
rates imposed on their loan even when their property was
foreclosed by respondent.
This notwithstanding, we hold that the escalation clause is still
void because it grants respondent the power to impose an
increased rate of interest without a written notice to petitioners
and their written consent. Respondents monthly telephone
calls to petitioners advising them of the prevailing interest rates
would not suffice. A detailed billing statement based on the
new imposed interest with corresponding computation of the
total debt should have been provided by the respondent to
enable petitioners to make an informed decision. An
appropriate form must also be signed by the petitioners to
indicate their conformity to the new rates. Compliance with
these requisites is essential to preserve the mutuality of
contracts. For indeed, one-sided impositions do not have the
force of law between the parties, because such impositions are
not based on the parties essential equality.45
Modifications in the rate of interest for loans pursuant to an
escalation clause must be the result of an agreement between
the parties. Unless such important change in the contract
terms is mutually agreed upon, it has no binding effect. In the
absence of consent on the part of the petitioners to the
modifications in the interest rates, the adjusted rates cannot
bind them. Hence, we consider as invalid the interest rates in
excess of 15%, the rate charged for the first year.
Based on the August 29, 2000 demand letter of China Bank,
petitioners total principal obligation under the two promissory
notes which they failed to settle is P10,355,000. However, due
to China Banks unilateral increases in the interest rates from
15% to as high as 24.50% and penalty charge of 1/10 of 1%
per day or 36.5% per annum for the period November 4, 1999
to February 23, 2001, petitioners balance ballooned to
P19,201,776.63. Note that the original amount of principal loan
almost doubled in only 16 months. The Court also finds the
penalty charges imposed excessive and arbitrary, hence the
same is hereby reduced to 1% per month or 12% per
annum.1wphi1
DISPOSITIVE PORTION:
WHEREFORE, the petition for review on certiorari is PARTLY
GRANTED. The February 20, 2009 Decision and April 27,
2009 Resolution of the Court of Appeals in CA G.R. CV No.
80338 are hereby MODIFIED. Petitioners Spouses Ignacio F.
Juico and Alice P. Juico are hereby ORDERED to pay jointly
and severally respondent China Banking Corporation P4, 7
61 ,865. 79 representing the amount of deficiency inclusive of
interest, penalty charge and attorney's fees. Said amount shall
bear interest at 12% per annum, reckoned from the time of the
filing of the complaint until its full satisfaction.
No pronouncement as to costs.