Eastern Shipping Lines vs.

Court of Appeals
GRN 97412 July 12, 1994.
EASTERN SHIPPING LINES, INC., petitioner, vs. HON. COURT OF APPEALS AND MERCANTILE
INSURANCE COMPANY, INC., respondents.
PETITION for review of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Alojado & Garcia and Jimenea, Dala & Zaragoza for petitioner.
Zapa Law Office for private respondent.
VITUG, J.:
The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a
shipment of goods can be a solidary, or joint and several, liability of the common carrier, the arrastre
operator and the customs broker; (b) whether the payment of legal interest on an award for loss or damage
is to be computed from the time the complaint is filed or from the date the decision appealed from is
rendered; and (c) whether the applicable rate of interest, referred to above, is twelve percent (12%) or six
percent (6%).
The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed facts
that have led to the controversy are hereunder reproduced:
'This is an action against defendants shipping company, arrastre operator and broker-forwarder for
damages sustained by a shipment while in defendants' custody, filed by the instirer-subrogee who paid the
consigne the value of such losses/damages,
"On December 4, 1981, two Fiber drums of iboflavin were shipped from Yokohama, Japan for delivery
vessel 'SS EASTERN COMET owned by defendant Eastern Shipping Lines, Inc. under Bill of Lading
No. YMA-8 (Exh. B). The shipment was insured under plaintiffs Marine Insurance, Policy No. 81401177
for P36, 382, 466.38.
'Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the custody of
defendant Metro Port Service, Inc.
The latter excepted to one drum, said to be in bad order, which damage, was unknown to plaintiff.
"On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from defendant
Metro Port Service, Inc., one drum opened and without seal (per 'Request for Bad Order Survey.' (Exh.
D).
"On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of the shipment to
the consignee's warehouse. The latter excepted to one drum which contained spillages, while the rest of
the contents was adulterated/fake (per 'Bad Order Waybill' No. 10649, Exh. E).
"Plaintiff contended that due to the losses/damage sustained by said drum, the consignee suffered losses
totaling P19,032.95, due to the fault and negligence of defendants. Claims were presented against
defendants who failed and refused to pay the same (Exhs. H, I, J, K, L).

"As a consequence of the losses sustained, plaintiff was compelled to pay the consignee P19,032.95 under
the aforestated marine insurance policy, so that it became subrogated to all the rights of action of said
consignee against defendants (per 'Form of Subrogation,"Release' and Philbanking check, Exhs. M, N,
and O)." (pp. 85-86, Rollo.)
There were, to be sure, other factual issues that confronted both courts. Here, the appellate court said:
"Defendants riled their respective answers, traversing the material allegations of the complaint contending
that: As for defendant Eastern Shipping it alleged that the shipment was discharged in good order from
the vessel unto the custody of Metro Port Service so that any damage/losses incurred after the shipment
was incurred after the shipment was turned over to the latter, is no longer its liability (p. 17, Record);
Metroport averred that although subject shipment was discharged unto its custody, portion of the same
was already in bad order (p. 11, Record); Allied Brokerage alleged that plaintiff has no cause of action
against it, not having negligent or at fault for the shipment was already in damage and bad order condition
when received by it, but nonetheless, it still exercised extra ordinary care and diligence in the
handling/delivery of the cargo to consignee in the same condition shipment was received by it.
"From the evidence the court found the following:
"'The issues are:
'1 . Whether or not the shipment sustained losses/damages;
'2. Whether or not these losses/damages were sustained.
while in the custody of defendants (in whose respectived, if determinable);
'3. Whether or not defendant(s) should be held liable for the losses/damages (see plaintiffs pre-Trial Brief,
Records, p.34; Allied's pre-Trial Brief, adapting plaintiffs Records, p. 38),'
'As to the first issue, there can be no doubt that the shipment sustained losses/damages. The two, drums
were shipped in good order and condition, as clearly shown by the Bill of Lading and Commercial
Invoice which do not indicate any damages drum that was shipped (Exhs. B and C). But when on
December 12, 1981 the shipment was delivered to defendant Metro Port Service, Inc., it excepted to one
drum in bad order.
'Correspondingly, as to the second issue, it follows that the losses/damages were sustained while in the
respective and/or successive custody and possession of defendants carrier (Eastern), arrastre operator
(Metro Port) and broker (Allied Brokerage). This becomes evident when the Marine Cargo Survey Report
(Exh. G), with its 'Additional Survey Notes,' am considered. In the latter notes, it is stated that when the
shipment was 'landed on vessel' to dock of Pier # 15, South Harbor, Manila on December 12, 1981,' it was
observed that 'one (1) fiber drum (was) in damaged condition, covered by the vessel's Agent's Bad Order
Tally Sheet No. 86427.' The report further states that when defendant Allied Brokerage withdrew the
shipment from defendant arrastre operator's custody on January 7, 1982, one drum was found opened
without seal, cello bag partly torn but contents intact. Net unrecovered spillage was 15 kgs. The report
went on to state that when the drums reached the consignee, one drum was found with adulterated/faked
contents. It is obvious, therefore, that these losses/damages occurred before the shipment reached the
consignee while under the successive custodies of defendants. Under Art. 1737 of the New Civil Code,
the common carrier's duty to observe extraordinary diligence in the vigilance of goods remains in full
force and effect even if the goods are temporarily unloaded and stored in transit in the warehouse of the
carrier at the place of destination, until the consignee has been advised and has had reasonable
opportunity to remove or dispose of the goods (Art. 1738, NCC). Defendant Eastern Shipping's own
exhibit, the Turn-Over Survey of Bad Order Cargoes' (Exhs. 3-Eastern) states that on December 12, 1981
one drum was found 'open.'

"and thus held:

'WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:
A. Ordering defendant- to pay plaintiff, jointly and severally:
1. The amount of P19,032.95, with the present legal interest of 12% per annum from October 1, 1982, the
date of filing of this complaints, until fully paid (the liability of defendant Eastern Shipping, Inc. shall not
exceed US$500 per case or the CIE value of the loss, whichever is lesser, while the liability of defendant
Metro Port Service, Inc. shall be to the extent of the actual invoice value of each package, crate box or
container in no case to exceed P5,000.00 each, pursuant to Section 6. 01 of the Management Contract);
2. P3,000.00 as attorney's fees, and 3. Costs.
B. Dismissing the counterclaims and crossclaim of defendant/cross-claimant Allied Brokerage
Corporation.
SO ORDERED.' (p. 207, Record).
'Dissatisfied, defendant's recourse to US. 'no appeal is devoid of merit,
"After a careful scrutiny of the evidence on record. We find that the conclusion drawn therefrom is
correct. As there is sufficient evidence that the shipment sustained damage while in the successive
possession of appellants, and therefore they are liable to the appellee, as subrogee for the amount it paid
to the consignee." (pp. 87-89, Rollo.)
The Court of Appeals thus affirmed in toto the judgment of the court a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse of
discretion on the part of the appellate court when I. IT HELD PETITIONER CARRIER JOINTLY AND
SEVERALLY LL433LE WITH THE ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE
CLAIM OF PRIVATE RESPONDENT AS GRANTED IN THE QUESTIONED DECISION;
II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE RESPONDENT
SHOULD COMMENCE FROM THE DATE OF THE FILING OF THE COMPLAINT AT THE RATE
OF TWELVE PFRCENT FOR ANNUM INSTEAD OF FROM THE DATE OF THE DECISION OF
THE TRIAL COURT AND ONLY AT THE RATE OF SIX PERCENT PER ANNUM, PRIVATE
RESPONDENTS CLAIM BEING INDISPUTABLY UNLIQUIDATED.
The petition is, in part, granted.
In this decision, we have begun by saying that the questions raised by petitioner carrier are not all that
novel. Indeed, we do have a fairly good number of previous decisions this Court can merely tack to.
The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the time
the articles are surrendered to or unconditionally placed in the possession of, and received by, the carrier
for transportation until delivered to, or until the lapse of a reasonable time for their acceptance by, the
person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA
646; Kui Bai vs. Dollar Steamship Lines, 62 Phil. 863). When the goods shipped either are lost or arrive
in damaged condition, a presumption arises against the carrier of its failure to observe that diligence, and
there need not be an express finding of negligence to hold it liable (Art. 1735, Civil Code; Philippine
National Railways vs. Court of Appeals, 139 SCRA 87; Metro Port Service, Inc. vs. Court of Appeals,
131 SCRA 365). There are, of course, exceptional cases when such presumption of fault is not observed

but these cases, enumerated in Article 17341 of the Civil Code, are exclusive, not one of which can be
applied to this case.
The question of charging both the carrier and the arrastre operator with the obligation of properly
delivering the goods to Art. 1734. Common carriers are responsible for the loss, destrution, or
deterioration of the goods, unless the same is due to any of the following causes only:
(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;
(2) Act of the public enemy in war, whether international or civil;
(3) Act or omission of the shipper or owner of the goods;
(4) The character of the goods or defects in the packing or in the containers;
(5) Order or act ompetent public authority.
the consignee has, too, be passed upon by the Court. In Fireman's Fund Insurance, Co. vs. Metro Port
Service, Inc. (182 SCRA 455), we have explained, in holding the carrier and the arrastre operator liable in
solidum, thus:
"The legal relationship between the consignee and the arrastre operator is akin to that of a depositor and
warehouseman (Lua Klan v. Manila Railroad Co., 19 SCRA 5 [1967]. The relationship between the
consignee and the common carrier is similar to that of the consignee and the arastre operator (Northern
Motors, Inc. v. Prince Line, et al., 107 Phil. 253 [1960]). Since it is the duty of the ARRASTRE to take
good care of the goods that are in its, custody and to deliver them in good condition to the consignee,
such responsibility also devolves upon the CARRIER. Both the ARRASTRE and the CARRIER are
therefore charged with the obligation to deliver the goods in good condition to the consignee."
We do not, of course, imply by the above pronouncement that the arrastre operator and the customs
broker are themselves always and neccessarily liable solidarily with the carrier, or viceversa, no,r that
attendant facts in a given case may not vary the rule. The instant petition has been brought solely by
Eastern Shipping Lines which, being the carrier and not having been able to rebut the presumption of
fault, is, in any event, to be held liable in this particular case. A factual finding of both the court a quo and
the appellate court, we take note, is that "there is sufficient evidence that the shipment sustained damage
while in the successive possession of appellants" (the herein petitioner among them). Accordingly, the
liability imposed on Eastern Shipping Lines, Inc., the sole petitioner in this case, is inevitable regardless
of whether there are others solidarily liable with it.
It is over the issue of legal interest adjudged by the appellate court that deserves more than just a passing
remark.
Let us first see a chronological recitation of the major rulings of this Court:
The early case of Malayan Insurance Co., Inc., vs. Manila Port Service,2 decided3 on 15 May 1969,
involved a suit for recovery of money arising out of short deliveries and pilferage of good,. In this case,
appellee Malayan Insurance (the plaintiff in the lower court) averred in its complaint that the total amount
of its claim for the value of the undelivered goods amounted to P3,947.20. This demand, however, was
neither established in its totality nor definitely ascertained. In the stipulation of facts later entered into by
the parties, in lieu of proof, the amount of P1,447.51 was agreed upon. The trial court rendered judgment
ordering the appellants (defendants) Manila Port Service and Manila Railroad Company to pay appellee
Malayan Insurance the sum of P1,447.51 with legal interest thereon from the date the complaint was filed
on 28 December 1962 until full payment thereof. The appellants then assailed, inter alia, the award of
legal interest. In sustaining the appellants, this Court ruled:

"Interest upon an obligation which calls for the payment of money, absent a stipulation, is the legal rate.
Such interest normally is allowable from the date of demand, judicial or extrajudicial. The trial court
opted for judicial demand as the starting point.
"But then upon the provisions of Article 2213 of the Civil Code, interest 'cannot be recovered upon
unliquidated claims or damages, except when the demand can be established with reasonable certainty!
And as was held by this Court in Rivera vs. Perez,4 L-6998, February 29, 1956, if the suit were for
damages, 'unliquidated and not known until definitely ascertained, assessed and determined by the courts
after proof (Montilla c. Corporacion de P. P. Agustinos, 25 Phil. 447, Lichauco v, Guzman, 38 Phil. 302),'
then, interest 'should be from the date of the decision."' (Italics supplied)
The case of Reformina vs. Tomol,5 rendered on 11 October 1985, was for "Recovery of Damages for
Injury to Person and Loss of Property." After trial, the lower court decreed:
"WHEREFORE, judgment is hereby rendered in favor of the plaintifs and third pay defendants and
against the defendants and third party plaintiffs as follows:
"Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay jointly and
severally the following persons:
"(a) . . . . .
"x x x x x x "(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00 which is
the value of the boat F B Pacita III together with its accessories, fishing gear and equipment minus
P80,000.00 which is the value of the insurance recovered and the amount of P10,000.00 a month as the
estimated monthly lose suffered by them as a result of the fire of May 6, 1969 up to the time they are
actually paid or already the total sum of P379,000.00 as of June 4, 1972 with legal interest from the filing
of the complaint until paid and to pay attorney's fees of P5,000.00 with costs against defendants and third
party plaintiffs." (Italics supplied.)
On appeal to the Court of Appeals, the latter modified the amount of damages awarded but sustained the
trial court in adjudging legal interest from the filing of the complaint until fully paid. When the appellate
court's decision became final, the case was remanded to the lower court for execution, and this was when
the trial court issued its assailed resolution which applied the 6% interest per annum prescribed in Article
2209 of the Civil Code. In their petition for review on certiorari, the petitioners contended that Central
Bank Circular No. 416, providing thus "By virtue of the authority granted to it under Section 1 of Act
2655, as amended, Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that
the rate of interest for the loan, or forbearance of any money, goods, or credits and the rate allowed in
judgments, in the absence of express contract as to such rate of interest, shall be twelve (12%) percent per
annum. This Circular shall take effect immediately." (Italics found in the text)should have, instead, been applied. This Court6 ruled:
The judgment spoken of and reffered to are judgment in litigations involving loans or forbearance of any
money, goods or credits. Any other kind of monetary judgement which has nothing to do with, nor
involving loans or surbearance of any money, goods or credits does not fall within the coverage of the
said law for it is not within the ambit of the authority granted to the Central Bank.
"xxxx xxx xxx "Coining to the case at bar, the decision herein sought to be executed is one rendered in
an Action for Damages for injury to persons and loss of property and does not involve any loan, much
less forbearances of any money, goods or credits. As correctly argued by the private respondents, the law
applicable to the said case is Article 2209 of the New Civil Code which reads 'Art. 2209.-If the obligation
consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages,

there being no stipulation to the contrary, shall be the payment of interest agreed upon, and in the absence
of stipulation, the legal interest which is six percent per annum.'"
The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz 7 promulgated on 28 July
1986. The case was for damages occasioned by an injury to person and loss of property. The trial court
awarded private respondent Pedro Manabat actual and compensatory damages in the amount of
P72,500.00 with legal interest thereon from the filing of the complaint until fully paid. Relying on the
Reformina v. Tomol case, this Court8 modified the interest award from 12% to 6% interest per annum but
sustained the time computation thereof, i.e., from the filing of the complaint until fully paid.
In Nakpil and Sons vs. Court of Appeals,9 the trial court, in an action for the recovery of damages arising
from the collapse of a building, ordered, inter alia, the "defendant United Construction Co., Inc. (one of
the petitioners) x x x to pay the plaintiff, x x x, the bum of P989,335.68 with interest at the legal rate jrom
November 29, 1968, the date of the filing of the complaint until full payment x x x." Save from the
modification of the amount granted by the lower court, the Court of Appeals sustained the trial court's
decision. When taken to this Court for review, the case, on 03 October 1986, was decided, thus:
"WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and
environmental circumstances of this case, we deem it reasonable to render a decision imposing, as We do
hereby impose, upon the defendant and the third-party defendants (with the exception of Roman Ozaeta)
a solidary (Art. 1723, Civil Code, Supra, p. 10) indemnity in favor of the Philippine Bar Association of
FIVE MILLION (P5,000,000.00) Pesos to cover all damages (with the exception of attorney's fees)
occasioned by the loss of the building (including interest charges and lost rentals) and an additional ONE
HUNDRED THOUSAND (P100,000.00) Pesos as and for attorney's fees, the total sum being payable
upon the finality of this decision. Upon failure to pay on such finality, twelve (12%) per cent interest per
annum shall be imposed upon aforementioned amounts from finality until paid. Solidary costs against the
defendant and third-party defendants (except Roman Ozaeta)." (Italics supplied)
A motion for reconsideration was filed by United Construction, contending that "the interest of twelve
(12%) percent per annum imposed on the total amount of the monetary award was in contravention of
law." The Court10 ruled out the applicability of the Reformina and Philippine Rabbit Bus Lines cases
and, in its resolution of 15 April 1988, it explained:
"There should be no dispute that the imposition of 12% interest pursuant to Central Bank Circular No.
416 x x x is applicable only in the following: (1) loans; (21 forbearance rqny money, moods or credit; and
(3) rate allowed in judgments (judgments spoken of refer to judgments involving loans or forbearance of
any money, goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143 SCRA 160-161 [1986];
Reformina v. Tomol, Jr., 139 SCRA 260 [1985]). It is true that in the instant case, there is neither a loan or
a forbearance, but then no interest is actually imposed provided the sums referred to in the judgment are
paid upon the finality of the judgment. It is delay in the payment of such final judgment, that will muse
the imposition of the interest.
"It will be noted that in the cases already adverted to, the rate of interest is imposed on the total sum, from
the filing of the complaint until paid; in other words, as art of the judgment for damages. Clearly, they are
not applicable to the instant case." (Italics supplied)
The subsequent case of American Express International, Inc., vs. Intermediate Appellate Court11 was a
petition for review on certiorari from the decision, dated 27 February 1985, of the then Intermediate
Appellate Court reducing the amount of moral and exemplary damages awarded by the trial court, to
P240,000.00 and P100,000.00, respectively, and its resolution, dated 29 April 1985, restoring the amount
of damages awarded by the trial court, i.e., P2,000,000.00 as moral damages and P400,000.00 as

exemplary damages with interest thereon at 12% per annum. from notice of judgment, plus costs of suit.
In a decision of 09 November 1988, this Court, while recognizing the right of the private respondent to
recover damages, held the award, however, for moral damages by the trial court, later sustained by the
IAC, to be inconceivably large. The Court" thus set aside the decision of the appellate court and rendered
a new one, "ordering the petitioner to pay private respondent the sum of One Hundred Thousand
(P100,000.00) Pesos as moral damages, with six (6%) percent interest thereon computed from the finality
of this decision until paid." (Italics supplied)
Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz13 which arose from a
breach of employment contract, For having been illegally dismissed, the petitioner was awarded by the
trial court moral and exemplary damages without, however, providing any legal interest thereon. When
the decision was appealed to the Court of Appeals, the latter held:
"WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental dated
October 31, 1972 is affirmed in all respects, with the modification that defendants-appellants, except
defendantappellant Merton Munn, are ordered to pay, jointly and severally, the amounts stated in the
dispositive portion of the decision, including the sum of P1,400.00 in concept of compensatory damages,
With interest at the legal rate from the date of the filing of the complaint until fully paid." (Italics
supplied)
The petition for review to this Court was denied. The records were thereupon transmitted to the trial
court, and an entry of judgment was made. The writ of execution issued by the trial court directed that
only compensatory damages should earn interest at 6% per annum from the date of the filing of the
complaint. Ascribing grave abuse of discretion on the part of the trial judge, a petition for certiorari
assailed the said order. This Court said:
"x x x, it is to be noted that the Court of Appeals ordered the payment of interest 'at the legal rate' from the
time of the filing of the complaint. x x x. Said circular [Central Bank Circular No. 416] does not apply to
actions based on a breach of employment contract like the case at bar." (Italics supplied)
The Court reiferated that the 6% interest per annum on the damages should be computed from the time
the complaint was filed until the amount is fully paid.
Quite recently, the Court had another occasion to rule an the matter. National Power Corporation vs.
Angas,14 decided on 08 May 1992, involved the expropriation of certain parcels of land. After
conducting a hearing on the complaints foreminent domain,
are trial court ordered the petitioner to pay the private respondents certain sums of money as just
compensation for their lands so expropriated "with legal interest thereon x x x until fully paid."
Again, in applying the 6% legal interest per annum under the Civil Code, the Court15 declared:
"x x x, Miss transaction involved is clearly not a loan or forbearance of money, goods or credits but
expropriation of certain parcels of land for a public purpose, the payment of which is without stipulation
regarding interest, and the interest adjudged by the trial court is in the nature of indemnity for damages.
The legal interest required to be paid on the amount of just compensation for the properties expropriated
is manifestly in the form of indemnity for damages for the delay in the payment thereof. Therefore, since
the kind of interest involved in the joint judgment of the lower court sought to be enforced in this case is
interest by way of damages, and not by way of earnings from loans, etc. Art. 2209 of the Civil Code shall
apply."
Concededly, there have been seeming variances in the above holdings. The cases can perhaps be
classified into two groups according to the similarity of the issues involved and the corresponding rulings

rendered by the court. The "first group" would consist of the cases of Reformina v. Tomol (1985),
Philippine Rabbit Bus Lines v. Cruz (1986), Florendo v. Ruiz (1989) and National Power Corporation v.
Angas (1992). In the "second group" would be Malayan Insurance Company v. Manila Port Service
(1969), Nakpil and Sons v. Court of Appeals (1988), and American Express International v. Intermediate
Appellate Court (1988).
In the 'first group," the basic issue focuses on the application of either the 6% (under the Civil Code) or
12% (under the Central Bank Circular) interest per annurn. It is easily discernible in these cases that there
has been a consistent holding that the Central Bank Circular imposing the 12% interest per annum applies
only to loans or forbearance16 of money, goods or credits,
on the equities of each case, on the award of interest. Nonetheless, it may not be unwise, by way of
clarification and reconciliation, to suggest the following rules of thumb for future guidance.
I -. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, delicts or quasidelicts18 is breached, the contravenor can be held liable for damages.19 The provisions under Title XVIII
on "Damages" of the Civil Code govern in determining the measure of recoverable damages.20
II.- With regard particularly to an award of interest in the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.21
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded.22 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 116923 of the Civil
Code.
When an obligation, no constituting loans or forbearance of money is breached an interest on the amount
of damages awarded may he imposed at the discretion of the court24 at the rate of 6% per a annum.25 No
interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand
can be established with reasonable certainy.26 Accordingly, where the demand is established with
reasonable certainty, the interest shah begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to run only from the date the Judgment of the court is
made (at which time the quantification of damages maybe deemed to have been reasonably ascertain. 1).
The actual base for the computation of legal interest shall, in any case, be on the amount finally
adjudged.
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 on, this interim period being deemed to be by then an equivalent to a
forbearance of credit.
WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the
MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due computed
from the decision, dated 03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in
lieu of SIX PERCENT (6%), shall be imposed on such amount upon finality or this decision until the
payment thereof.
SO ORDERED.

G.R. No. 97412 July 12, 1994

EASTERN SHIPPING LINES, INC., petitioner,
vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents.
Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.
Zapa Law Office for private respondent.

VITUG, J.:
The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on
a shipment of goods can be a solidary, or joint and several, liability of the common carrier, the
arrastre operator and the customs broker; (b) whether the payment of legal interest on an award
for loss or damage is to be computed from the time the complaint is filed or from the date the
decision appealed from is rendered; and (c) whether the applicable rate of interest, referred to
above, is twelve percent (12%) or six percent (6%).
The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and
undisputed facts that have led to the controversy are hereunder reproduced:
This is an action against defendants shipping company, arrastre operator and
broker-forwarder for damages sustained by a shipment while in defendants'
custody, filed by the insurer-subrogee who paid the consignee the value of such
losses/damages.
On December 4, 1981, two fiber drums of riboflavin were shipped from
Yokohama, Japan for delivery vessel "SS EASTERN COMET" owned by
defendant Eastern Shipping Lines under Bill of Lading
No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance
Policy No. 81/01177 for P36,382,466.38.
Upon arrival of the shipment in Manila on December 12, 1981, it was discharged
unto the custody of defendant Metro Port Service, Inc. The latter excepted to one
drum, said to be in bad order, which damage was unknown to plaintiff.
On January 7, 1982 defendant Allied Brokerage Corporation received the
shipment from defendant Metro Port Service, Inc., one drum opened and without
seal (per "Request for Bad Order Survey." Exh. D).
On January 8 and 14, 1982, defendant Allied Brokerage Corporation made
deliveries of the shipment to the consignee's warehouse. The latter excepted to
one drum which contained spillages, while the rest of the contents was
adulterated/fake (per "Bad Order Waybill" No. 10649, Exh. E).

Plaintiff contended that due to the losses/damage sustained by said drum, the
consignee suffered losses totaling P19,032.95, due to the fault and negligence of
defendants. Claims were presented against defendants who failed and refused to
pay the same (Exhs. H, I, J, K, L).
As a consequence of the losses sustained, plaintiff was compelled to pay the
consignee P19,032.95 under the aforestated marine insurance policy, so that it
became subrogated to all the rights of action of said consignee against
defendants (per "Form of Subrogation", "Release" and Philbanking check, Exhs.
M, N, and O). (pp. 85-86, Rollo.)
There were, to be sure, other factual issues that confronted both courts. Here, the appellate
court said:
Defendants filed their respective answers, traversing the material allegations of
the complaint contending that: As for defendant Eastern Shipping it alleged that
the shipment was discharged in good order from the vessel unto the custody of
Metro Port Service so that any damage/losses incurred after the shipment was
incurred after the shipment was turned over to the latter, is no longer its liability
(p. 17, Record); Metroport averred that although subject shipment was
discharged unto its custody, portion of the same was already in bad order (p. 11,
Record); Allied Brokerage alleged that plaintiff has no cause of action against it,
not having negligent or at fault for the shipment was already in damage and bad
order condition when received by it, but nonetheless, it still exercised extra
ordinary care and diligence in the handling/delivery of the cargo to consignee in
the same condition shipment was received by it.
From the evidence the court found the following:
The issues are:
1. Whether or not the shipment sustained losses/damages;
2. Whether or not these losses/damages were sustained while in
the custody of defendants (in whose respective custody, if
determinable);
3. Whether or not defendant(s) should be held liable for the
losses/damages (see plaintiff's pre-Trial Brief, Records, p. 34;
Allied's pre-Trial Brief, adopting plaintiff's Records, p. 38).
As to the first issue, there can be no doubt that the shipment
sustained losses/damages. The two drums were shipped in good
order and condition, as clearly shown by the Bill of Lading and
Commercial Invoice which do not indicate any damages drum that
was shipped (Exhs. B and C). But when on December 12, 1981
the shipment was delivered to defendant Metro Port Service, Inc.,
it excepted to one drum in bad order.

Correspondingly, as to the second issue, it follows that the

losses/damages were sustained while in the respective and/or
successive custody and possession of defendants carrier
(Eastern), arrastre operator (Metro Port) and broker (Allied
Brokerage). This becomes evident when the Marine Cargo Survey
Report (Exh. G), with its "Additional Survey Notes", are
considered. In the latter notes, it is stated that when the shipment
was "landed on vessel" to dock of Pier # 15, South Harbor, Manila
on December 12, 1981, it was observed that "one (1) fiber drum
(was) in damaged condition, covered by the vessel's Agent's Bad
Order Tally Sheet No. 86427." The report further states that when
defendant Allied Brokerage withdrew the shipment from defendant
arrastre operator's custody on January 7, 1982, one drum was
found opened without seal, cello bag partly torn but contents
intact. Net unrecovered spillages was
15 kgs. The report went on to state that when the drums reached
the consignee, one drum was found with adulterated/faked
contents. It is obvious, therefore, that these losses/damages
occurred before the shipment reached the consignee while under
the successive custodies of defendants. Under Art. 1737 of the
New Civil Code, the common carrier's duty to observe
extraordinary diligence in the vigilance of goods remains in full
force and effect even if the goods are temporarily unloaded and
stored in transit in the warehouse of the carrier at the place of
destination, until the consignee has been advised and has had
reasonable opportunity to remove or dispose of the goods (Art.
1738, NCC). Defendant Eastern Shipping's own exhibit, the "TurnOver Survey of Bad Order Cargoes" (Exhs. 3-Eastern) states that
on December 12, 1981 one drum was found "open".
and thus held:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby
rendered:
A. Ordering defendants to pay plaintiff, jointly and severally:
1. The amount of P19,032.95, with the present legal interest of
12% per annum from October 1, 1982, the date of filing of this
complaints, until fully paid (the liability of defendant Eastern
Shipping, Inc. shall not exceed US$500 per case or the CIF value
of the loss, whichever is lesser, while the liability of defendant
Metro Port Service, Inc. shall be to the extent of the actual invoice
value of each package, crate box or container in no case to
exceed P5,000.00 each, pursuant to Section 6.01 of the
Management Contract);
2. P3,000.00 as attorney's fees, and
3. Costs.

B. Dismissing the counterclaims and crossclaim of

defendant/cross-claimant Allied Brokerage
Corporation.
SO ORDERED. (p. 207, Record).
Dissatisfied, defendant's recourse to US.
The appeal is devoid of merit.
After a careful scrutiny of the evidence on record. We find that the conclusion
drawn therefrom is correct. As there is sufficient evidence that the shipment
sustained damage while in the successive possession of appellants, and
therefore they are liable to the appellee, as subrogee for the amount it paid to the
consignee. (pp. 87-89, Rollo.)
The Court of Appeals thus affirmed in toto the judgment of the court
a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave
abuse of discretion on the part of the appellate court when
I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH
THE ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF
PRIVATE RESPONDENT AS GRANTED IN THE QUESTIONED DECISION;
II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE
RESPONDENT SHOULD COMMENCE FROM THE DATE OF THE FILING OF
THE COMPLAINT AT THE RATE OF TWELVE PERCENT PER ANNUM
INSTEAD OF FROM THE DATE OF THE DECISION OF THE TRIAL COURT
AND ONLY AT THE RATE OF SIX PERCENT PER ANNUM, PRIVATE
RESPONDENT'S CLAIM BEING INDISPUTABLY UNLIQUIDATED.
The petition is, in part, granted.
In this decision, we have begun by saying that the questions raised by petitioner carrier are not
all that novel. Indeed, we do have a fairly good number of previous decisions this Court can
merely tack to.
The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from
the time the articles are surrendered to or unconditionally placed in the possession of, and
received by, the carrier for transportation until delivered to, or until the lapse of a reasonable
time for their acceptance by, the person entitled to receive them (Arts. 1736-1738, Civil Code;
Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863).
When the goods shipped either are lost or arrive in damaged condition, a presumption arises
against the carrier of its failure to observe that diligence, and there need not be an express
finding of negligence to hold it liable (Art. 1735, Civil Code; Philippine National Railways vs.
Court of Appeals, 139 SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA 365).
There are, of course, exceptional cases when such presumption of fault is not observed but

these cases, enumerated in Article 1734 1 of the Civil Code, are exclusive, not one of which can
be applied to this case.
The question of charging both the carrier and the arrastre operator with the obligation of
properly delivering the goods to the consignee has, too, been passed upon by the Court. In
Fireman's Fund Insurance vs. Metro Port Services (182 SCRA 455), we have explained, in
holding the carrier and the arrastre operator liable in solidum, thus:
The legal relationship between the consignee and the arrastre operator is akin to
that of a depositor and warehouseman (Lua Kian v. Manila Railroad Co., 19
SCRA 5 [1967]. The relationship between the consignee and the common carrier
is similar to that of the consignee and the arrastre operator (Northern Motors, Inc.
v. Prince Line, et al., 107 Phil. 253 [1960]). Since it is the duty of the ARRASTRE
to take good care of the goods that are in its custody and to deliver them in good
condition to the consignee, such responsibility also devolves upon the CARRIER.
Both the ARRASTRE and the CARRIER are therefore charged with the obligation
to deliver the goods in good condition to the consignee.
We do not, of course, imply by the above pronouncement that the arrastre operator and the
customs broker are themselves always and necessarily liable solidarily with the carrier, or viceversa, nor that attendant facts in a given case may not vary the rule. The instant petition has
been brought solely by Eastern Shipping Lines, which, being the carrier and not having been
able to rebut the presumption of fault, is, in any event, to be held liable in this particular case. A
factual finding of both the court a quo and the appellate court, we take note, is that "there is
sufficient evidence that the shipment sustained damage while in the successive possession of
appellants" (the herein petitioner among them). Accordingly, the liability imposed on Eastern
Shipping Lines, Inc., the sole petitioner in this case, is inevitable regardless of whether there are
others solidarily liable with it.
It is over the issue of legal interest adjudged by the appellate court that deserves more than just
a passing remark.
Let us first see a chronological recitation of the major rulings of this Court:
The early case of Malayan Insurance Co., Inc., vs. Manila Port
Service, 2 decided 3 on 15 May 1969, involved a suit for recovery of money arising out of short
deliveries and pilferage of goods. In this case, appellee Malayan Insurance (the plaintiff in the
lower court) averred in its complaint that the total amount of its claim for the value of the
undelivered goods amounted to P3,947.20. This demand, however, was neither established in
its totality nor definitely ascertained. In the stipulation of facts later entered into by the parties, in
lieu of proof, the amount of P1,447.51 was agreed upon. The trial court rendered judgment
ordering the appellants (defendants) Manila Port Service and Manila Railroad Company to pay
appellee Malayan Insurance the sum of P1,447.51 with legal interest thereon from the date the
complaint was filed on 28 December 1962 until full payment thereof. The appellants then
assailed, inter alia, the award of legal interest. In sustaining the appellants, this Court ruled:
Interest upon an obligation which calls for the payment of money, absent a
stipulation, is the legal rate. Such interest normally is allowable from the date of
demand, judicial or extrajudicial. The trial court opted for judicial demand as the
starting point.

But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be
recovered upon unliquidated claims or damages, except when the demand can
be established with reasonable certainty." And as was held by this Court in
Rivera vs. Perez, 4 L-6998, February 29, 1956, if the suit were for damages,
"unliquidated and not known until definitely ascertained, assessed and
determined by the courts after proof (Montilla c. Corporacion de P.P. Agustinos,
25 Phil. 447; Lichauco v. Guzman,
38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis
supplied)
The case of Reformina vs. Tomol, 5 rendered on 11 October 1985, was for "Recovery of
Damages for Injury to Person and Loss of Property." After trial, the lower court decreed:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third
party defendants and against the defendants and third party plaintiffs as follows:
Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to
pay jointly and severally the following persons:
xxx xxx xxx
(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of
P131,084.00 which is the value of the boat F B Pacita III together with its
accessories, fishing gear and equipment minus P80,000.00 which is the value of
the insurance recovered and the amount of P10,000.00 a month as the estimated
monthly loss suffered by them as a result of the fire of May 6, 1969 up to the time
they are actually paid or already the total sum of P370,000.00 as of June 4, 1972
with legal interest from the filing of the complaint until paid and to pay attorney's
fees of P5,000.00 with costs against defendants and third party plaintiffs.
(Emphasis supplied.)
On appeal to the Court of Appeals, the latter modified the amount of damages awarded
but sustained the trial court in adjudging legal interest from the filing of the complaint
until fully paid. When the appellate court's decision became final, the case was
remanded to the lower court for execution, and this was when the trial court issued its
assailed resolution which applied the 6% interest per annum prescribed in Article 2209 of
the Civil Code. In their petition for review on certiorari, the petitioners contended that
Central Bank Circular
No. 416, providing thus
By virtue of the authority granted to it under Section 1 of Act 2655, as amended,
Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed
that the rate of interest for the loan, or forbearance of any money, goods, or
credits and the rate allowed in judgments, in the absence of express contract as
to such rate of interest, shall be twelve (12%) percent per annum. This Circular
shall take effect immediately. (Emphasis found in the text)
should have, instead, been applied. This Court 6 ruled:

The judgments spoken of and referred to are judgments in litigations involving

loans or forbearance of any money, goods or credits. Any other kind of monetary
judgment which has nothing to do with, nor involving loans or forbearance of any
money, goods or credits does not fall within the coverage of the said law for it is
not within the ambit of the authority granted to the Central Bank.
xxx xxx xxx
Coming to the case at bar, the decision herein sought to be executed is one
rendered in an Action for Damages for injury to persons and loss of property and
does not involve any loan, much less forbearances of any money, goods or
credits. As correctly argued by the private respondents, the law applicable to the
said case is Article 2209 of the New Civil Code which reads
Art. 2209. If the obligation consists in the payment of a sum of
money, and the debtor incurs in delay, the indemnity for damages,
there being no stipulation to the contrary, shall be the payment of
interest agreed upon, and in the absence of stipulation, the legal
interest which is six percent per annum.
The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz, 7 promulgated on 28
July 1986. The case was for damages occasioned by an injury to person and loss of property.
The trial court awarded private respondent Pedro Manabat actual and compensatory damages
in the amount of P72,500.00 with legal interest thereon from the filing of the complaint until fully
paid. Relying on the Reformina v. Tomol case, this Court 8 modified the interest award from 12%
to 6% interest per annum but sustained the time computation thereof, i.e., from the filing of the
complaint until fully paid.
In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an action for the recovery of
damages arising from the collapse of a building, ordered,
inter alia, the "defendant United Construction Co., Inc. (one of the petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from
November 29, 1968, the date of the filing of the complaint until full payment . . . ." Save from the
modification of the amount granted by the lower court, the Court of Appeals sustained the trial
court's decision. When taken to this Court for review, the case, on 03 October 1986, was
decided, thus:
WHEREFORE, the decision appealed from is hereby MODIFIED and considering
the special and environmental circumstances of this case, we deem it reasonable
to render a decision imposing, as We do hereby impose, upon the defendant and
the third-party defendants (with the exception of Roman Ozaeta) a solidary (Art.
1723, Civil Code, Supra.
p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION
(P5,000,000.00) Pesos to cover all damages (with the exception to attorney's
fees) occasioned by the loss of the building (including interest charges and lost
rentals) and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as
and for attorney's fees, the total sum being payable upon the finality of this
decision. Upon failure to pay on such finality, twelve (12%) per cent interest per
annum shall be imposed upon aforementioned amounts from finality until paid.

Solidary costs against the defendant and third-party defendants (Except Roman
Ozaeta). (Emphasis supplied)
A motion for reconsideration was filed by United Construction, contending that "the
interest of twelve (12%) per cent per annum imposed on the total amount of the
monetary award was in contravention of law." The Court 10 ruled out the applicability of
the Reformina and Philippine Rabbit Bus Lines cases and, in its resolution of 15 April
1988, it explained:
There should be no dispute that the imposition of 12% interest pursuant to
Central Bank Circular No. 416 . . . is applicable only in the following: (1) loans; (2)
forbearance of any money, goods or credit; and
(3) rate allowed in judgments (judgments spoken of refer to judgments involving
loans or forbearance of any money, goods or credits. (Philippine Rabbit Bus
Lines Inc. v. Cruz, 143 SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA
260 [1985]). It is true that in the instant case, there is neither a loan or a
forbearance, but then no interest is actually imposed provided the sums referred
to in the judgment are paid upon the finality of the judgment. It is delay in the
payment of such final judgment, that will cause the imposition of the interest.
It will be noted that in the cases already adverted to, the rate of interest is
imposed on the total sum, from the filing of the complaint until paid; in other
words, as part of the judgment for damages. Clearly, they are not applicable to
the instant case. (Emphasis supplied.)
The subsequent case of American Express International, Inc., vs. Intermediate Appellate Court
11
was a petition for review on certiorari from the decision, dated 27 February 1985, of the then
Intermediate Appellate Court reducing the amount of moral and exemplary damages awarded
by the trial court, to P240,000.00 and P100,000.00, respectively, and its resolution, dated 29
April 1985, restoring the amount of damages awarded by the trial court, i.e., P2,000,000.00 as
moral damages and P400,000.00 as exemplary damages with interest thereon at 12% per
annum from notice of judgment, plus costs of suit. In a decision of 09 November 1988, this
Court, while recognizing the right of the private respondent to recover damages, held the award,
however, for moral damages by the trial court, later sustained by the IAC, to be inconceivably
large. The Court 12 thus set aside the decision of the appellate court and rendered a new one,
"ordering the petitioner to pay private respondent the sum of One Hundred Thousand
(P100,000.00) Pesos as moral damages, with
six (6%) percent interest thereon computed from the finality of this decision until paid.
(Emphasis supplied)
Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz 13 which arose
from a breach of employment contract. For having been illegally dismissed, the petitioner was
awarded by the trial court moral and exemplary damages without, however, providing any legal
interest thereon. When the decision was appealed to the Court of Appeals, the latter held:
WHEREFORE, except as modified hereinabove the decision of the CFI of
Negros Oriental dated October 31, 1972 is affirmed in all respects, with the
modification that defendants-appellants, except defendant-appellant Merton
Munn, are ordered to pay, jointly and severally, the amounts stated in the
dispositive portion of the decision, including the sum of P1,400.00 in concept of

compensatory damages, with interest at the legal rate from the date of the filing
of the complaint until fully paid (Emphasis supplied.)
The petition for review to this Court was denied. The records were thereupon transmitted
to the trial court, and an entry of judgment was made. The writ of execution issued by
the trial court directed that only compensatory damages should earn interest at 6% per
annum from the date of the filing of the complaint. Ascribing grave abuse of discretion on
the part of the trial judge, a petition for certiorari assailed the said order. This Court said:
. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at
the legal rate" from the time of the filing of the complaint. . . Said circular [Central
Bank Circular No. 416] does not apply to actions based on a breach of
employment contract like the case at bar. (Emphasis supplied)
The Court reiterated that the 6% interest per annum on the damages should be
computed from the time the complaint was filed until the amount is fully paid.
Quite recently, the Court had another occasion to rule on the matter. National Power
Corporation vs. Angas, 14 decided on 08 May 1992, involved the expropriation of certain parcels
of land. After conducting a hearing on the complaints for eminent domain, the trial court ordered
the petitioner to pay the private respondents certain sums of money as just compensation for
their lands so expropriated "with legal interest thereon . . . until fully paid." Again, in applying the
6% legal interest per annum under the Civil Code, the Court 15 declared:
. . . , (T)he transaction involved is clearly not a loan or forbearance of money,
goods or credits but expropriation of certain parcels of land for a public purpose,
the payment of which is without stipulation regarding interest, and the interest
adjudged by the trial court is in the nature of indemnity for damages. The legal
interest required to be paid on the amount of just compensation for the properties
expropriated is manifestly in the form of indemnity for damages for the delay in
the payment thereof. Therefore, since the kind of interest involved in the joint
judgment of the lower court sought to be enforced in this case is interest by way
of damages, and not by way of earnings from loans, etc. Art. 2209 of the Civil
Code shall apply.
Concededly, there have been seeming variances in the above holdings. The cases can perhaps
be classified into two groups according to the similarity of the issues involved and the
corresponding rulings rendered by the court. The "first group" would consist of the cases of
Reformina v. Tomol (1985), Philippine Rabbit Bus Lines v. Cruz (1986), Florendo v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second group" would be Malayan
Insurance Company v. Manila Port Service (1969), Nakpil and Sons v. Court of Appeals (1988),
and American Express International v. Intermediate Appellate Court (1988).
In the "first group", the basic issue focuses on the application of either the 6% (under the Civil
Code) or 12% (under the Central Bank Circular) interest per annum. It is easily discernible in
these cases that there has been a consistent holding that the Central Bank Circular imposing
the 12% interest per annum applies only to loans or forbearance 16 of money, goods or credits,
as well as to judgments involving such loan or forbearance of money, goods or credits, and that
the 6% interest under the Civil Code governs when the transaction involves the payment of
indemnities in the concept of damage arising from the breach or a delay in the performance of

obligations in general. Observe, too, that in these cases, a common time frame in the
computation of the 6% interest per annum has been applied, i.e., from the time the complaint is
filed until the adjudged amount is fully paid.
The "second group", did not alter the pronounced rule on the application of the 6% or 12%
interest per annum, 17 depending on whether or not the amount involved is a loan or
forbearance, on the one hand, or one of indemnity for damage, on the other hand. Unlike,
however, the "first group" which remained consistent in holding that the running of the legal
interest should be from the time of the filing of the complaint until fully paid, the "second group"
varied on the commencement of the running of the legal interest.
Malayan held that the amount awarded should bear legal interest from the date of the decision
of the court a quo, explaining that "if the suit were for damages, 'unliquidated and not known
until definitely ascertained, assessed and determined by the courts after proof,' then, interest
'should be from the date of the decision.'" American Express International v. IAC, introduced a
different time frame for reckoning the 6% interest by ordering it to be "computed from the finality
of (the) decision until paid." The Nakpil and Sons case ruled that 12% interest per annum should
be imposed from the finality of the decision until the judgment amount is paid.
The ostensible discord is not difficult to explain. The factual circumstances may have called for
different applications, guided by the rule that the courts are vested with discretion, depending on
the equities of each case, on the award of interest. Nonetheless, it may not be unwise, by way
of clarification and reconciliation, to suggest the following rules of thumb for future guidance.
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts 18 is breached, the contravenor can be held liable for damages. 19 The provisions
under Title XVIII on "Damages" of the Civil Code govern in determining the measure of
recoverable damages. 20
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been stipulated
in writing. 21 Furthermore, the interest due shall itself earn legal interest from the time it is
judicially demanded. 22 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.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest
on the amount of damages awarded may be imposed at the discretion of the court 24 at the rate
of 6% per annum. 25 No interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable certainty. 26 Accordingly,
where the demand is established with reasonable certainty, the interest shall begin to run from
the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual
base for the computation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit.
WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the
MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due
computed from the decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX
PERCENT (6%), shall be imposed on such amount upon finality of this decision until the
payment thereof.
SO ORDERED.

G.R. No. 131622. November 27, 1998LETICIA Y. MEDEL

vs.
CA
FACTS: 1985, Servando Franco and Leticia Medel obtained a loan from Veronica Gonzales, who was
engaged in the moneylending business under the name "Gonzales Credit Enterprises", in the amount of
P50,000.00, payable in two months. Veronicagave only the amount of P
47,000.00, to the borrowers, as she retained P3,000.00, as advance interest for one month at 6%
per month. Servado and Leticia executed a promissory note for P50,000.00, to evidence the loan, payable
on January 7, 1986.On November 1985, Servando and Leticia obtained from Veronica another loan in the
amount of P90,000.00, payable in twomonths, at 6% interest per month. They executed a promissory note
to evidence the loan, maturing on January 19, 1986. Theyreceived only P84,000.00, out of the proceeds of
the loan.On maturity of the two promissory notes, the borrowers failed to pay the indebtedness.On 1986,
Servando and Leticia secured from Veronica still another loan in the amount of P300,000.00, maturing in
one month,secured by a real estate mortgage over a property belonging to Leticia Makalintal Yaptinchay,
who issued a special power of attorney in favor of Leticia Medel, authorizing her to execute the mortgage.

Servando and Leticia executed a promissory note in favor of Veronica to pay the sum of P300,000.00,
after a month, or on July 11, 1986. However, only the sum of P275,000.00, was given to them out of the
proceeds of the loan. Like the previous loans, Servando and Medel failed to pay the third loan on
maturity. On July 1986, Servando and Leticia sought from Veronica another loan in the amount of
P60,000.00, bringing their indebtedness to a total of P500,000.00, payable on August 23, 1986. The
executed a promissory note, reading as follows:"FOR VALUE RECEIVED, I/WE jointly and severally promise to
pay to the order of VERONICA R. GONZALES the sum of (
P
500,000.00) Philippine Currency with interest thereon at the rate of 5.5 PER CENT per month plus 2%
service charge per annum from date hereof until fully paid according to the amortization schedule
contained herein. (Underscoring supplied)"Should I/WE fail to pay any amortization or portion hereof
when due, all the other installments together with all interest accrued shall immediately be due and
payable and I/WE hereby agree to pay an additional amount equivalent to one per cent (1%) per month of
the amount due and demandable as penalty charges in the form of liquidated damages until fully paidOn
maturity of the loan, the borrowers failed to pay the indebtedness of P500,000.00, plus interests and
penalties.1990, Veronica filed with the RTC a complaint for collection of the full amount of the loan
including interests and other charges. RTC- ruled that although the Usury Law had been repealed, the
interest charged by the plaintiffs on the loans was unconscionable and "revolting to the conscience".
Hence, the trial court applied "the provision of the New [Civil] Code" that the "legal rate of interest for
loan or forbearance of money, goods or credit is 12% per annum."CA- that "the Usury Law having
become 'legally inexistent' with the promulgation by the Central Bank in 1982 of Circular No.905, the
lender and borrower could agree on any interest that may be charged on the loan".
ISSUE: WON the stipulated rate of interest at 5.5% per month on the loan in the sum of P500,000.00, that
plaintiffs extended to the defendants is usurious. In other words, is the Usury Law still effective, or has it
been repealed by Central Bank Circular No.905 pursuant to its powers under P.D. No. 116, as amended by
P.D. No. 1684?
SC- We agree with petitioners that the stipulated rate of interest at 5.5% per month on the P500,000.00
loan is excessive, iniquitous, unconscionable and exorbitant. However, we cannot consider the rate
"usurious" because this Court has consistently held that Circulr No. 905 of the Central Bank, adopted on
December 22, 1982, has expressly removed the interest ceilings prescribed by the Usury Law and that the
Usury Law is now "legally inexistent". Nevertheless, we find the interest at 5.5% per month, or 66% per
annum, stipulated upon by the parties in the promissory note iniquitous or unconscionable, and, hence,
contrary to morals ("
contra bonos mores
"), if not against the law.
The stipulation is void. RTCS decision is hereby affirmed.

LETICIA Y. MEDEL DR. RAFAEL MEDEL and SERVANDO FRANCO, petitioners, vs.
COURT OF APPEALS, SPOUSES VERONICA R. GONZALES and DANILO G. GONZALES,
JR., doing lending business under the trade name and style "GONZALES CREDIT
ENTERPRISES", respondents.
DECISION
PARDO, J.:

The case before the Court is a petition for review on certiorari, under Rule 45 of the Revised
Rules of Court, seeking to set aside the decision of the Court of Appeals,i[1] and its resolution
denying reconsideration,ii[2] the dispositive portion of which decision reads as follows:
"WHEREFORE, the appealed judgment is hereby MODIFIED such that
defendants are hereby ordered to pay the plaintiff: the sum of P500,000.00, plus
5.5% per month interest and 2% service charge per annum effective July 23,
1986, plus 1% per month of the total amount due and demandable as penalty
charges effective August 23, 1986, until the entire amount is fully paid.
"The award to the plaintiff of P50,000.00 as attorney's fees is affirmed.
And so is the imposition of costs against the defendants.
SO ORDERED."iii[3]
The Court required the respondents to comment on the petition,iv[4] which was filed on April 3,
1998,v[5] and the petitioners to reply thereto, which was filed on May 29, 1998.vi[6] We now
resolve to give due course to the petition and decide the case.
The facts of the case, as found by the Court of Appeals in its decision, which are considered
binding and conclusive on the parties herein, as the appeal is limited to questions of law, are as
follows:
On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia)
obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was engaged in the money
lending business under the name "Gonzales Credit Enterprises", in the amount of P50,000.00,
payable in two months. Veronica gave only the amount of P47,000.00, to the borrowers, as she
retained P3,000.00, as advance interest for one month at 6% per month. Servado and Leticia
executed a promissory note for P50,000.00, to evidence the loan, payable on January 7, 1986.
On November 19, 1985, Servando and Leticia obtained from Veronica another loan in the
amount of P90,000.00, payable in two months, at 6% interest per month. They executed a
promissory note to evidence the loan, maturing on January 19, 1986. They received only
P84,000.00, out of the proceeds of the loan.
On maturity of the two promissory notes, the borrowers failed to pay the indebtedness.
On June 11, 1986, Servando and Leticia secured from Veronica still another loan in the amount
of P300,000.00, maturing in one month, secured by a real estate mortgage over a property
belonging to Leticia Makalintal Yaptinchay, who issued a special power of attorney in favor of
Leticia Medel, authorizing her to execute the mortgage. Servando and Leticia executed a
promissory note in favor of Veronica to pay the sum of P300,000.00, after a month, or on July
11, 1986. However, only the sum of P275,000.00, was given to them out of the proceeds of the
loan.
Like the previous loans, Servando and Medel failed to pay the third loan on maturity.

On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel,
consolidated all their previous unpaid loans totaling P440,000.00, and sought from Veronica
another loan in the amount of P60,000.00, bringing their indebtedness to a total of P500,000.00,
payable on August 23, 1986. The executed a promissory note, reading as follows:
"Baliwag, Bulacan July 23, 1986
"Maturity Date August 23, 1986
"P500,000.00
"FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of
VERONICA R. GONZALES doing business in the business style of GONZALES
CREDIT ENTERPRISES, Filipino, of legal age, married to Danilo G. Gonzales, Jr., of
Baliwag Bulacan, the sum of PESOS ........ FIVE HUNDRED THOUSAND .....
(P500,000.00) Philippine Currency with interest thereon at the rate of 5.5 PER CENT
per month plus 2% service charge per annum from date hereof until fully paid according
to the amortization schedule contained herein. (Underscoring supplied)
"Payment will be made in full at the maturity date.
"Should I/WE fail to pay any amortization or portion hereof when due, all the other
installments together with all interest accrued shall immediately be due and payable and
I/WE hereby agree to pay an additional amount equivalent to one per cent (1%) per
month of the amount due and demandable as penalty charges in the form of liquidated
damages until fully paid; and the further sum of TWENTY FIVE PER CENT (25%)
thereon in full, without deductions as Attorney's Fee whether actually incurred or not, of
the total amount due and demandable, exclusive of costs and judicial or extra judicial
expenses. (Underscoring supplied)
"I, WE further agree that in the event the present rate of interest on loan is increased by
law or the Central Bank of the Philippines, the holder shall have the option to apply and
collect the increased interest charges without notice although the original interest have
already been collected wholly or partially unless the contrary is required by law.
"It is also a special condition of this contract that the parties herein agree that the
amount of peso-obligation under this agreement is based on the present value of peso,
and if there be any change in the value thereof, due to extraordinary inflation or
deflation, or any other cause or reason, then the peso-obligation herein contracted shall
be adjusted in accordance with the value of the peso then prevailing at the time of the
complete fulfillment of obligation.
"Demand and notice of dishonor waived. Holder may accept partial payments and grant
renewals of this note or extension of payments, reserving rights against each and all
indorsers and all parties to this note.
"IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors
waive all his/their rights under the provisions of Section 12, Rule 39, of the Revised
Rules of Court."

On maturity of the loan, the borrowers failed to pay the indebtedness of P500,000.00, plus
interests and penalties, evidenced by the above-quoted promissory note.
On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G. Gonzales, filed
with the Regional Trial Court of Bulacan, Branch 16, at Malolos, Bulacan, a complaint for
collection of the full amount of the loan including interests and other charges.
In his answer to the complaint filed with the trial court on April 5, 1990, defendant Servando
alleged that he did not obtain any loan from the plaintiffs; that it was defendants Leticia and Dr.
Rafael Medel who borrowed from the plaintiffs the sum of P500,000.00, and actually received
the amount and benefited therefrom; that the loan was secured by a real estate mortgage executed
in favor of the plaintiffs, and that he (Servando Franco) signed the promissory note only as a
witness.
In their separate answer filed on April 10,1990, defendants Leticia and Rafael Medel alleged that
the loan was the transaction of Leticia Yaptinchay, who executed a mortgage in favor of the
plaintiffs over a parcel of real estate situated in San Juan, Batangas; that the interest rate is
excessive at 5.5% per month with additional service charge of 2% per annum, and penalty charge
of 1% per month; that the stipulation for attorney's fees of 25% ofthe amount due is
unconscionable, illegal and excessive, and that substantial payments made were applied to
interest, penalties and other charges.
After due trial, the lower court declared that the due execution and genuineness of the four
promissory notes had been duly proved, and ruled that although the Usury Law had been
repealed, the interest charged by the plaintiffs on the loans was unconscionable and "revolting to
the conscience". Hence, the trial court applied "the provision of the New [Civil] Code" that the
"legal rate of interest for loan or forbearance of money, goods or credit is 12% per annum."vii[7]
Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive portion of
which reads as follows:
"WHEREFORE, premises considered, judgment is hereby rendered, as follows:
"1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally, to pay
plaintiffs the amount of P47,000.00 plus 12% interest per annum from November 7, 1985 and
1% per month as penalty, until the entire amount is paid in full.
"2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly and
severally the amount of P84,000.00 with 12% interest per annum and 1% per cent per month as
penalty from November 19,1985 until the whole amount is fully paid;
"3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount of
P285,000.00 plus 12% interest per annum and 1% per month as penalty from July 11, 1986, until
the whole amount is fully paid;

"4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount of P50,000.00 as
attorney's fees;
"5. All counterclaims are hereby dismissed.
"With costs against the defendants."viii[8]
In due time, both plaintiffs and defendants appealed to the Court of Appeals.
In their appeal, plaintiffs-appellants argued that the promissory note, which consolidated all the
unpaid loans of the defendants, is the law that governs the parties. They further argued that
Circular No. 416 of the Central Bank prescribing the rate of interest for loans or forbearance of
money, goods or credit at 12% per annum, applies only in the absence of a stipulation on interest
rate, but not when the parties agreed thereon.
The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the Usury Law
having become 'legally inexistent' with the promulgation by the Central Bank in 1982 of Circular
No. 905, the lender and borrower could agree on any interest that may be charged on the loan".ix
[9] The Court of Appeals further held that "the imposition of 'an additional amount equivalent to
1% per month of the amount due and demandable as penalty charges in the form of liquidated
damages until fully paid' was allowed by law".x[10]
Accordingly, on March 21, 1997, the Court of Appeals promulgated it decision reversing that of
the Regional Trial Court, disposing as follows:
"WHEREFORE, the appealed judgment is hereby MODIFIED such that
defendants are hereby ordered to pay the plaintiffs the sum of P500,000.00, plus
5.5% per month interest and 2% service charge per annum effective July 23,
1986, plus 1% per month of the total amount due and demandable as penalty
charges effective August 24, 1986, until the entire amount is fully paid.
"The award to the plaintiffs of P50,000.00 as attorney's fees is affirmed.
And so is the imposition of costs against the defendants.
"SO OREDERED."xi[11]
On April 15, 1997, defendants-appellants filed a motion for reconsideration of the said decision.
By resolution dated November 25, 1997, the Court of Appeals denied the motion.xii[12]
Hence, defendants interposed the present recourse via petition for review on certiorari.xiii[13]
We find the petition meritorious.
Basically, the issue revolves on the validity of the interest rate stipulated upon. Thus, the
question presented is whether or not the stipulated rate of interest at 5.5% per month on the loan
in the sum of P500,000.00, that plaintiffs extended to the defendants is usurious. In other words,
is the Usury Law still effective, or has it been repealed by Central Bank Circular No. 905,

adopted on December 22, 1982, pursuant to its powers under P.D. No. 116, as amended by P.D.
No. 1684?
We agree with petitioners that the stipulated rate of interest at 5.5% per month on the
P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant.13 However, we can not
consider the rate "usurious" because this Court has consistently held that Circulr No. 905 of the
Central Bank, adopted on December 22, 1982, has expressly removed the interest ceilings
prescribed by the Usury Lawxiv[14] and that the Usury Law is now "legally inexistent".xv[15]
In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61xvi[16] the
Court held that CB Circular No. 905 "did not repeal nor in anyway amend the Usury Law but
simply suspended the latter's effectivity." Indeed, we have held that "a Central Bank Circular can
not repeal a law. Only a law can repeal another law."xvii[17] In the recent case of Florendo vs.
Court of Appealsxviii[18], the Court reiterated the ruling that "by virtue of CB Circular 905, the
Usury Law has been rendered ineffective". "Usury has been legally non-existent in our
jurisdiction. Interest can now be charged as lender and borrower may agree upon."xix[19]
Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the
parties in the promissory note iniquitous or unconscionable, and, hence, contrary to morals
("contra bonos mores"), if not against the law.xx[20] The stipulation is void.xxi[21] The courts
shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they
are iniquitous or unconscionable.xxii[22]
Consequently, the Court of Appeals erred in upholding the stipulation of the parties. Rather, we
agree with the trial court that, under the circumstances, interest at 12% per annum, and an
additional 1% a month penalty charge as liquidated damages may be more reasonable.
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of
Appeals promulgated on March 21, 1997, and its resolution dated November 25, 1997. Instead,
we render judgment REVIVING and AFFIRMING the decision dated December 9, 1991, of the
Regional Trial Court of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No. 134-M-90,
involving the same parties.
No pronouncement as to costs in this instance
SO ORDERED.

i
Tan v. Valdehueza
Facts: Defendants herein, Arador, Rediculo, Pacita, Concepcion and Rosario, all surnamed Valdehueza, are
brothers and sisters; the parcel of land described in the first cause of action was the subject matter of the public
auction sale wherein the plaintiff was the highest bidder and as such a Certificate of Salewas executed in favor of
LUCIA TAN the herein plaintiff. Due to the failure of defendant Arador Valdehueza to redeem the said land
within the period of one year as being provided by law, an ABSOLUTE DEED OF SALE in favor of the plaintiff
LUCIA; that defendants ARADOR VALDEHUEZA and REDICULO VALDEHUEZA have executed two
documents of DEED OFPACTO DE RETRO SALE in favor of the plaintiff herein, LUCIA TAN of two portions
of a parcel of land which is described in the second cause of action with the total amount of P1,500; that from
the execution of the Deed of Sale with right to repurchase mentioned in the second cause of action, defendants
Arador Valdehueza and Rediculo Valdehueza remained in the possession of the land.A complaint for injunction
filed by Tan to enjoin the Valdehuezas "from entering the parcel of land and gathering the nuts therein ...." This
complaint and the counterclaim were subsequently dismissed for failure of the parties"to seek for the immediate
trial thereof, thus evincing lack of interest on their part to proceed with the case.robles virtual law library The
Deed of Pacto de Retro referred to was not registered in the Registry of Deeds, while the 2nd Deed of Pacto de
Retro was registered.
Issue: Whether the transactions between the parties were simple loan?
Held: NO. Under article 1875 of the Civil Code of 1889, registration was a necessary requisite for the validity of
a mortgage even as between the parties,but under article 2125 of the new Civil Code (in effect since August
30,1950),this is no longer so.The Valdehuezas having remained in possession of the land and the realty taxes
having been paid by them, the contracts which purported to be pacto deretro transactions are presumed to be
equitable mortgages, 5 whether registered or not, there being no third parties involved.
ii

iiiLUCIA TAN, plaintiff-appellee,

vs.
ARADOR VALDEHUEZA and REDICULO VALDEHUEZA, defendants-appellants.
Alaric P. Acosta for plaintiff-appellee.
Lorenzo P. de Guzman for defendants-appellants.

CASTRO, J.:
This appeal was certified to this Court by the Court of Appeals as involving questions purely of law.
The decision a quo was rendered by the Court of First Instance of Misamis Occidental (Branch I) in an
action instituted by the plaintiff-appellee Lucia Tan against the defendants-appellants Arador
Valdehueza and Rediculo Valdehueza (docketed as civil case 2574) for (a) declaration of ownership
and recovery of possession of the parcel of land described in the first cause of action of the complaint,
and (b) consolidation of ownership of two portions of another parcel of (unregistered) land described in
the second cause of action of the complaint, purportedly sold to the plaintiff in two separate deeds of
pacto de retro.

After the issues were joined, the parties submitted the following stipulation of facts:
1. That parties admit the legal capacity of plaintiff to sue; that defendants herein,
Arador, Rediculo, Pacita, Concepcion and Rosario, all surnamed Valdehueza, are
brothers and sisters; that the answer filed by Arador and Rediculo stand as the answer
of Pacita, Concepcion and Rosario.
2. That the parties admit the identity of the land in the first cause of action.
3. That the parcel of land described in the first cause of action was the subject matter of
the public auction sale held on May 6, 1955 at the Capitol Building in Oroquieta,
Misamis Occidental, wherein the plaintiff was the highest bidder and as such a
Certificate of Sale was executed by MR. VICENTE D. ROA who was then the Ex-Officio
Provincial Sheriff in favor of LUCIA TAN the herein plaintiff. Due to the failure of
defendant Arador Valdehueza to redeem the said land within the period of one year as
being provided by law, MR. VICENTE D. ROA who was then the Ex-Officio Provincial
Sheriff executed an ABSOLUTE DEED OF SALE in favor of the plaintiff LUCIA TAN.
A copy of the NOTICE OF SHERIFFS SALE is hereby marked as 'Annex A', the
CERTIFICATE OF SALE is marked as 'Annex B' and the ABSOLUTE DEED OF SALE
is hereby marked as Annex C and all of which are made as integral parts of this
stipulation of facts.
4. That the party-plaintiff is the same plaintiff in Civil Case No. 2002; that the parties
defendants Arador, Rediculo and Pacita, all Valdehueza were the same partiesdefendants in the same said Civil Case No. 2002; the complaint in Civil Case No. 2002
to be marked as Exhibit 1; the answer as Exhibit 2 and the order dated May 22, 1963
as Exhibit 3, and said exhibits are made integral part of this stipulation.
5. That defendants ARADOR VALDEHUEZA and REDICULO VALDEHUEZA have
executed two documents of DEED OF PACTO DE RETRO SALE in favor of the plaintiff
herein, LUCIA TAN of two portions of a parcel of land which is described in the second
cause of action with the total amount of ONE THOUSAND FIVE HUNDRED PESOS
(P1,500.00), Philippine Currency, copies of said documents are marked as 'Annex D'
and Annex E', respectively and made as integral parts of this stipulation of facts.
6. That from the execution of the Deed of Sale with right to repurchase mentioned in
the second cause of action, defendants Arador Valdehueza and Rediculo Valdehueza
remained in the possession of the land; that land taxes to the said land were paid by
the same said defendants.
Civil case 2002 referred to in stipulation of fact no. 4 was a complaint for injunction filed
by Tan on July 24, 1957 against the Valdehuezas, to enjoin them "from entering the
above-described parcel of land and gathering the nuts therein ...." This complaint and
the counterclaim were subsequently dismissed for failure of the parties "to seek for the
immediate trial thereof, thus evincing lack of interest on their part to proceed with the
case. 1
The Deed of Pacto de Retro referred to in stipulation of fact no. 5 as "Annex D" (dated August 5, 1955)
was not registered in the Registry of Deeds, while the Deed of Pacto de Retro referred to as "Annex
E" (dated March 15, 1955) was registered.

On the basis of the stipulation of facts and the annexes, the trial court rendered judgment, as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff:
1. Declaring Lucia Tan the absolute owner of the property described in the first cause of
action of the amended complaint; and ordering the herein defendants not to encroach
and molest her in the exercise of her proprietary rights; and, from which property they
must be dispossessed;
2. Ordering the defendants, Arador Valdehueza and Rediculo Valdehueza jointly and
severally to pay to the plaintiff, Lucia Tan, on Annex 'E' the amount of P1,200, with legal
interest of 6% as of August 15, 1966, within 90 days to be deposited with the Office of
the Court within 90 days from the date of service of this decision, and that in default of
such payment the property shall be sold in accordance with the Rules of Court for the
release of the mortgage debt, plus costs;
3. And as regards the land covered by deed of pacto de retro annex 'D', the herein
defendants Arador Valdehueza and Rediculo Valdehueza are hereby ordered to pay the
plaintiff the amount of P300 with legal interest of 6% from August 15, 1966, the said
land serving as guaranty of the said amount of payment;
4. Sentencing the defendants Arador Valdehueza and Rediculo Valdehueza to pay
jointly and severally to the herein plaintiff Lucia Tan the amount of 1,000.00 as
attorney's fees; and .
5. To pay the costs of the proceedings.
The Valdehuezas appealed, assigning the following errors:
That the lower court erred in failing to adjudge on the first cause of action that there
exists res judicata; and
That the lower court erred in making a finding on the second cause of action that the
transactions between the parties were simple loan, instead, it should be declared as
equitable mortgage.
We affirm in part and modify in part.
1. Relying on Section 3 of Rule 17 of the Rules of Court which pertinently provides that a dismissal for
failure to prosecute "shall have the effect of an adjudication upon the merits," the Valdehuezas submit
that the dismissal of civil case 2002 operated, upon the principle of res judicata, as a bar to the first
cause of action in civil case 2574. We rule that this contention is untenable as the causes of action in
the two cases are not identical. Case 2002 was for injunction against the entry into and the gathering
of nuts from the land, while case 2574 seeks to "remove any doubt or cloud of the plaintiff's ownership
..." (Amended complaint, Rec. on App., p. 27), with a prayer for declaration of ownership and recovery
of possession.
Applying the test of absence of inconsistency between prior and subsequent judgments, 2 we hold that
the failure of Tan, in case 2002, to secure an injunction against the Valdehuezas to prevent them from
entering the land and gathering nuts is not inconsistent with her being adjudged, in case 2574, as
owner of the land with right to recover possession thereof. Case 2002 involved only the possession of

the land and the fruits thereof, while case 2574 involves ownership of the land, with possession as a
mere attribute of ownership. The judgment in the first case could not and did not encompass the
judgment in the second, although the second judgment would encompass the first. Moreover, the new
Civil Code provides that suitors in actions to quiet title "need not be in possession of said property. 3
2. The trial court treated the registered deed of pacto de retro as an equitable mortgage but
considered the unregistered deed of pacto de retro "as a mere case of simple loan, secured by the
property thus sold under pacto de retro," on the ground that no suit lies to foreclose an unregistered
mortgage. It would appear that the trial judge had not updated himself on law and jurisprudence; he
cited, in support of his ruling, article 1875 of the old Civil Code and decisions of this Court circa 1910
and 1912.
Under article 1875 of the Civil Code of 1889, registration was a necessary requisite for the validity of a
mortgage even as between the parties, but under article 2125 of the new Civil Code (in effect since
August 30,1950), this is no longer so. 4
If the instrument is not recorded, the mortgage is nonetheless binding between the
parties. (Article 2125, 2nd sentence).
The Valdehuezas having remained in possession of the land and the realty taxes having been paid by
them, the contracts which purported to be pacto de retro transactions are presumed to be equitable
mortgages, 5 whether registered or not, there being no third parties involved.
3. The Valdehuezas claim that their answer to the complaint of the plaintiff affirmed that they remained
in possession of the land and gave the proceeds of the harvest to the plaintiff; it is thus argued that
they would suffer double prejudice if they are to pay legal interest on the amounts stated in the pacto
de retro contracts, as the lower court has directed, and that therefore the court should have ordered
evidence to be adduced on the harvest.
The record does not support this claim. Nowhere in the original and the amended complaints is an
allegation of delivery to the plaintiff of the harvest from the land involved in the second cause of action.
Hence, the defendants' answer had none to affirm.
In submitting their stipulation of facts, the parties prayed "for its approval and maybe made the basis
of the decision of this Honorable Court. " (emphasis supplied) This, the court did. It cannot therefore
be faulted for not receiving evidence on who profited from the harvest.
4. The imposition of legal interest on the amounts subject of the equitable mortgages, P1,200 and
P300, respectively, is without legal basis, for, "No interest shall be due unless it has been expressly
stipulated in writing." (Article 1956, new Civil Code) Furthermore, the plaintiff did not pray for such
interest; her thesis was a consolidation of ownership, which was properly rejected, the contracts being
equitable mortgages.
With the definitive resolution of the rights of the parties as discussed above, we find it needless to
pass upon the plaintiffs petition for receivership. Should the circumstances so warrant, she may
address the said petition to the court a quo.
ACCORDINGLY, the judgment a quo is hereby modified, as follows: (a) the amounts of P1,200 and
P300 mentioned in Annexes E and D shall bear interest at six percent per annum from the finality of
this decision; and (b) the parcel of land covered by Annex D shall be treated in the same manner as
that covered by Annex E, should the defendants fail to pay to the plaintiff the sum of P300 within 90

days from the finality of this decision. In all other respects the judgment is affirmed. No costs.

iv
v
vi
vii
viii
ix
x
xi
xii
xiii
ISIDRO S. VILLARUEL, plaintiff-appellee,
vs.
ALBINA ALVAYDA and her husband, BUENAVENTURA VICENCIO, defendants-appellants.
Ampig & Villa and Francisco & Lualhati for appellants.
F. Fernandez Yanson for appellee.
VILLAMOR, J.:
The complaint is upon two cause of action. The first is for the collection of a mortgage credit of P46,000, plus
P2,500 for expenses of litigation and attorney's fees; and the second, for the recovery of the sum of P500, alleged
to have been borrowed by the defendants from Messrs. Ledesma Brothers for the account of the plaintiff.
The plaintiff prays that judgment be rendered against the defendants:
(a) For the payment of their mortgage debt with interest thereon, after deducting the P1,000 paid on July
30, 1921, and the P3,501.83 paid on the 29th day of August, 1922.
(b) For the payment of the P2,500 fixed for expenses of litigation and attorney's fees, and the sum of
P500 alleged in paragraph VI of the complaint, and the costs of the action.
(c) Ordering the sale of the property mortgaged, with the improvements thereon, should the amount of
the judgment not be satisfied within the period prescribed by the law, the proceeds of the sale to be
applied upon the payment of the amounts claimed, with interest thereon and the costs.
(d) Directing the defendants, in the event that the proceeds of said sale are not sufficient to cover the
amounts claimed in the complaint, to pay the plaintiff such balance as, according to the record, they may

be personally liable for.

The defendants admit the execution of the deeds of mortgage Exhibits A, and B, as well as the payments made
on account of the debt, namely, P1,000 on July 30, 1921, and P3,501.83 on August 29, 1922; but they allege as a
defense that the contract entered into with the plaintiff is usurious, on account of the latter having collected an
interest equivalent to 24 per centum; and as a counterclaim they pray that the plaintiff be compelled to return to
them the sum of P13,872, which he had collected from them as interest, plus P3,000 for expenses of litigation
and attorney's fees.
His Honor, the judge who tried this case, in a well reasoned decision, disposed of the first cause of action (a)
ordering the defendants Albina Alvayda and Buenaventura Vicencio to pay to plaintiff Isidro S. Villaruel jointly
the sum of P44,642.93 with interest thereon at 12 per centum from December 26, 1922, the date of the
complaint, until full payment; (b) sentencing them also to pay the plaintiff the sum of P2,500 as attorney's fees
and expenses of litigation; (c) ordering that these payments be made within the period of three (3) months, and
that, if after said period the amount of the judgment was not paid, the property mortgaged described in the deed
Exhibit A be sold at public auction, the proceeds of the sale to be applied upon the payment already mentioned.
Upon the second cause of action, the defendants were sentenced to pay the plaintiff the sum of P550 with legal
interest thereon from the filing of the complaint until full payment. As to the cross-complaint, the plaintiff was
absolved therefrom. As to the counterclaim, the plaintiff was likewise absolved from the same. The defendants
were sentenced to pay the costs.
The appellants complaint of the trial court not having held the contract in question to be usurious, nor ordered
the return to the defendants of the interest paid to the plaintiff, or the payment of the expenses of litigation and
attorney's fees.
An explanation of the items stated in Exhibits A and B is found in the following part of the judgment:
It appears from the testimony of the plaintiff and his Exhibit F (which the defendant Buenaventura
Vicencio admits having written personally, and which appears to have been delivered by him to the
plaintiff), that the amount paid on May 11, 1920, was P30,000, as was also testified to by the defendant
Vicencio himself; and in this sum of P30,000 was included the interest for one year at 12 per cent, which
is P3,600. It also appears that in August, 1920, the P6,000 was paid by the plaintiff to the defendant, and
thus the P39,600 stated in the deed Exhibit A was completed.
Subsequent to the deed Exhibit A the defendant Vicencio became indebted to the plaintiff in several
amounts, which are set out in detail in Exhibit F as follows:
Interest at 12 per cent on P6,000 from August, 1920, to May, 1921P540.00Paid in cash (January
13th)580.00Paid in cash (May 12th, 1921)20.00Commission on sale84.28Cash 50.00
Total1,274.28At the maturity of the deed Exhibit a in May, 1921, as the defendants asked for an
extension of one year and an increase of the credit, a liquidation was made between the plaintiff and the
defendant, and capitalizing all the sums due on the date, the following result was obtained:Amount of
the deed Exhibit AP39,600.00Amounts subsequently due 1,274.2840,874.28Interest upon this sum a 12
per cent from May, 1921, to May, 19224,905.01They made a total of45,779.29And to make it a round
number there was added 220.71To make exactly46,000.00which is the amount stated in the document
Exhibit B, renewing the document Exhibit A.
With respect to the P220.71, the plaintiff advanced to the defendant the sum of P218, as stated in
Exhibit F, and the plaintiff testified, without contradiction, that he paid the remaining P2.71 to
the defendant Vicencio.

As to the sum of P46,000 stated in the deed of mortgage Exhibit B after charging the proper
interest and deducting the amounts paid by the said defendant, namely, P1,000 on July 31, 1921,
and P3,501.83 on August 29, 1922 (as appears in Exhibits F and C, in paragraph V of the
complaint, in the amended answer of the defendants and in Exhibit E), with the reciprocal
interest accruing upon these sums, it results that in December 26, 1922, the date of the
complaint, there was a debit balance of P44,642.93. This constitutes the first cause of action of
the complaint.
With reference to the second cause of action, it appears from Exhibit C that on September 1,
1922, the defendant took the sum of P500 on account, the interest of which does not appear to
have been the subject of any stipulation.
It also appears proven that in clause C of Exhibit B the sum of P2,500 was fixed as attorney's
fees and expenses of litigation should proceeding be instituted for the foreclosure of the
mortgage.
After studying the record, we are convinced that the findings of the trial court are supported by the
evidence.
The contention of the appellants that the appelle has collected from them double interest upon the
principal sum of P30,000 is groundless. According to the contract Exhibit A, the principal of P30,000
should draw interest at the rate of 12 per centum per annum (from May 11, 1920, to the same date of
May, 1921), that is, P3,600, which amount was by agreement of the parties included in Exhibit A, like
the P6,000 that the defendants may have subsequently received, which they in fact received in the month
of August, 1920. But it does not appear that upon the original principal of P30,000 a new interest was
ever charged at the time of the liquidation of accounts that the contracting parties made on May 11,
1921, for the extension of the period and the renewal of the mortgage Exhibit B, where the sum of
P46,000 is stated.
To obtain this last amount, the sum of P3,600 was taken into account, which is the interest of the original
principal of P30,000 at 12 per centum, and which instead of being paid by the debtors was made a part
of the principal debt then due. And we do not believe that there has been any illegality in it, for, as was
held in Government of the Philippine Islands vs. Schenkel and Gonzales (43 Phil., 616), the interest due
constitutes, from the moment it is due, a new principal by agreement of the parties and the interest it
earned should not be considered as accruing upon the original debt.
In support of the contention of the appellants, Exhibit 1 was introduced, dated May 31, 1921, written and
signed by the appellee, regarding the sum of P5,520, the amount of the interest of the principal of
P465,000 stated in Exhibit B.
The trial court found it proven that the plaintiff executed and signed Exhibit 1 in order to prevent the
defendants from again being charged with the interest of the principal of P46,000 in the event of the
death of said plaintiff and of his heirs, ignorant of the transaction, trying to enforce the stipulation in the
deed Exhibit B. We see in this error whatsoever justifying the reversal of the judgment appealed from. If
it were true that the defendants paid the plaintiff on May 31, 1921, the sum of P5,520, as interest on the
principal of P46,000, it cannot be conceived how the defendant Vicencio, who drew the document
Exhibit F containing the liquidation, on July 31, 1921, that is to say, two months after Exhibit 1, has
failed to include therein the respectable sum of P5,520.
The judgment appealed from, being in accordance with law, must be, as is hereby, affirmed with the
costs against the appellants. So ordered.

1
xiv
xv
xvi
xvii
xviii
xix
xx
xxiREFORMINA v TOMOL, JR
FACTS: A fire occurred burning the boat FB Pacita III and fishing gear of the Reforminas.Consequently, they
filed an action for recovery of damages for injury to persons and loss of property.Judge Tomol, Jr awarded the
Reforminas damages with legal interest from the filing of the complaint until paid.He further rendered that by
legal interest meant 6% as provided for by Art 2209 CC.Reforminas contend that it should be 12% by virtue of
Central Bank Circular No. 416.
ISSUE: WON the legal interest is 6%
HELD: YESRATIO: C.B. Circular 416
which took effect July 29, 1974 pursuant to PD 116 which amended Act 2655 (Usury Law)
which raised the legal interest fro 6% to 12% applies only to forbearances of money, goods or credit and court
judgments.Such court judgment refers only to judgments in litigations involving loans or forbearance of any
money, goods or credit.Any other kind of monetary judgment does not fall under the coverage of said law for it
is not within the ambit of authority granted to the central Bank. Only the legislature can change the laws.In this
case, the the decision of the judge is one rendered in an action for damages arising from injury to persons and
loss of property and does not involve a loan much less forbearance of any money, goods or credit. The law
applicable is thus ART 2209 CC which states that: If the obligation consists in the payment of a sum of
money and the debtor incurs in delay, the indemnity for damages there being no stipulation to the
contrary shall be the payment of interest agreed upon, and in the absence of stipulation, the legal interest which
is 6% per annum.Plana Concurring and Dissenting:Under Sec 1 a of Act 2655 as amended by PD 116,
the authority of CB is to fix a maximum rate of interest on loans and not to prescribe a fixed interest
rate
Such authority given to CB is absolute and unqualified and therefore the delegation of power to it is void. Extent
and scope of actual damages
1. contracts and quasi-contracts
Art. 2201. In contracts and quasi-contracts, the damages for which the obligor who acted in good faith is liable
shall be those that are the natural and probable consequences of the breach of the obligation, and
which the parties have foreseen or could have reasonably foreseen at the time the obligation was constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all
damages which may be reasonably attributed to the non-performance of the obligation. (1107a)A r t . 2 2 1 5 .
In contracts, quasi-contracts, and quasi-delicts, the court ma y equitabl y mitigate the
d a m a g e s u n d e r circumstances other than the case referred to in the preceding article, as in the following
instances:(1) That the plaintiff himself has contravened the terms of the contract;(2) That the plaintiff has derived
some benefit as a result of the contract;(3) In cases where exemplary damages are to be awarded, that the

defendant acted upon the advice of counsel;(4) That the loss would have resulted in any event;(5) That since the
filing of the action, the defendant has done his best to lessen the plaintiff's loss or injury
PACITA F. REFORMINA and HEIRS OF FRANCISCO REFORMINA, petitioners,
vs.
THE HONORABLE VALERIANO P. TOMOL, JR., as Judge of the Court of First Instance, Branch
XI, CEBU CITY, SHELL REFINING COMPANY (PHILS.), INC., and MICHAEL, INCORPORATED,
respondents.
Mateo Canonoy for petitioners.
Reynaldo A. Pineda, Reyes, Santayana, Tayao and Picaso Law Office for respondent Shell.
Marcelo Fernan & Associates for respondent Michael, Inc.

CUEVAS, J.:
How much, by way of legal interest, should a judgment debtor pay the judgment creditor- is the issue
raised by the REFORMINAS (herein petitioners) in this Petition for Review on certiorari of the
Resolution of the Hon. respondent Judge Valeriano P. Tomol, Jr. of the then Court of First Instance of
Cebu-Branch XI, issued in Civil Case No.
R-11279, an action for Recovery of Damages for injury to Person and Loss of Property.
The dispositive portion of the assailed Resolution reads as follows
In light (sic) of the foregoing, the considered view here that by legal interest is meant
six (6%) percent as provided for by Article 2209 of the Civil Code. Let a writ of
execution be issued.
SO ORDERED. 1
Petitioners' motion for the reconsideration of the questioned Resolution having been denied, they now
come before Us through the instant petition praying for the setting aside of the said Resolution and for
a declaration that the judgment in their favor should bear legal interest at the rate of twelve (12%)
percent per annum pursuant to Central Bank Circular No. 416 dated July 29, 1974.
Hereunder are the pertinent antecedents:
On June 7, 1972, judgment was rendered by the Court of First instance of Cebu in Civil Case No. R11279, 2 the dispositive portion of which reads
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party
defendants and against the defendants and third party plaintiffs as follows:
Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay jointly and
severally the following persons:
(a) ...

xxx xxx xxx

(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00
which is the value of the boat F B Pacita Ill together with its accessories, fishing gear
and equipment minus P80,000.00 which is the value of the insurance recovered and
the amount of P10,000.00 a month as the estimated monthly loss suffered by them as a
result of the fire of May 6, 1969 up to the time they are actually paid or already the total
sum of P370,000.00 as of June 4, 1972 with legal interest from the filing of the
complaint until paid and to pay attorney's fees of P5,000.00 with costs against
defendants and third party plaintiffs.
On appeal to the then Court of Appeals, the trial court's judgment was modified to reads as follows
WHEREFORE. the judgment appealed from is modified such that defendantsappellants Shell Refining Co. (Phils.), Inc. and Michael, Incorporated are hereby
ordered to pay ... The two (2) defendants- appellants are also directed to pay
P100,000.00 with legal interests from the filing of the complaint until paid as
compensatory and moral damages and P41,000.00 compensation for the value of the
lost boat with legal interest from the filing of the complaint until fully paid to Pacita F.
Reformina and the heirs of Francisco Reformina. The liability of the two defendants for
an the awards is solidary.
xxx xxx xxx
Except as modified above, the rest of the judgment appealed from is affirmed. The defendantsappellants shall pay costs in favor of the plaintiffs. Appellants Shell and Michael and third party
defendant Anita L. Abellanosa shall shoulder their respective costs.
SO ORDERED. 3
The said decision having become final on October 24, 1980, the case was remanded to the lower
court for execution and this is where the controversy started. In the computation of the "legal interest"
decreed in the judgment sought to be executed, petitioners claim that the "legal interest" should be at
the rate of twelve (12%) percent per annum, invoking in support of their aforesaid submission, Central
Bank of the Philippines Circular No. 416. Upon the other hand, private respondents insist that said
legal interest should be at the rate of six (6%) percent per annum only, pursuant to and by authority of
Article 2209 of the New Civil Code in relation to Articles 2210 and 2211 thereof.
In support of their stand, petitioners contend that Central Bank Circular No. 416 which provides
By virtue of the authority granted to it under Section 1 of Act 2655, as amended,
otherwise known as the "Usury Law" the Monetary Board in its Resolution No. 1622
dated July 29, 1974, has prescribed that the rate of interest for the loan or forbearance
of any money, goods, or credits and the rate allowed in judgments, in the absence of
express contract as to such rate of interest, shall be twelve (12%) per cent per annum.
This Circular shall take effect immediately. (Italics supplied)
includes the judgment sought to be executed in this case, because it is covered by the phrase 2nd the
rate allowed in judgments in the absence of express contract as to such rate of interest ... " in the
aforequoted circular.

The petition is devoid of merit. Consequently, its dismissal is in order.

Central Bank Circular No. 416 which took effect on July 29, 1974 was issued and promulgated by the
Monetary Board pursuant to the authority granted to the Central Bank by P.D. No. 116, which
amended Act No. 2655, otherwise known as the Usury Law. The amendment from which said authority
emanated reads as follows
Section 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate
or rates of interest for the loan or renewal thereof or the forbearance of any money,
goods or credits, and to change such rate or rates whenever warranted by prevailing
economic and social conditions: Provided, That such changes shall not be made
oftener than once every twelve months.
In the exercise of the authority herein granted, the Monetary Board may prescribe
higher maximum rates for consumer loans or renewals thereof as well as such loans
made by pawnshops, finance companies and other similar credit institutions although
the rates prescribed for these institutions need not necessarily be uniform. (Italics
supplied)
Acting pursuant to this grant of authority, the Monetary Board increased the rate of legal interest from
that of six (6%) percent per annum originally allowed under Section I of Act No. 2655 to twelve (12%)
percent per annum.
It will be noted that Act No. 2655 deals with interest on (1) loans; (2) forbearances of any money,
goods, or credits; and (3) rate allowed in judgments.
The issue now iswhat kind of judgment is referred to under the said law. Petitioners maintain that it
covers all kinds of monetary judgment.
The contention is devoid of merit.
The judgments spoken of and referred to are Judgments in litigations involving loans or forbearance of
any 'money, goods or credits. Any other kind of monetary judgment which has nothing to do with, nor
involving loans or forbearance of any money, goods or credits does not fall within the coverage of the
said law for it is not within the ambit of the authority granted to the Central Bank. The Monetary Board
may not tread on forbidden grounds. It cannot rewrite other laws. That function is vested solely with
the legislative authority. It is axiomatic in legal hermeneutics that statutes should be construed as a
whole and not as a series of disconnected articles and phrases. In the absence of a clear contrary
intention, words and phrases in statutes should not be interpreted in isolation from one another. 4 A
word or phrase in a statute is always used in association with other words or phrases and its meaning
may thus be modified or restricted by the latter. 5
Another formidable argument against the tenability of petitioners' stand are the whereases of PD No.
116 which brought about the grant of authority to the Central Bank and which reads thus
WHEREAS, the interest rate, together with other monetary and credit policy
instruments, performs a vital role in mobilizing domestic savings and attracting capital
resources into preferred areas of investments;
WHEREAS, the monetary authorities have recognized the need to amend the present Usury. Law to
allow for more flexible interest rate ceilings that would be more responsive to the requirements of

changing economic conditions;

WHEREAS, the availability of adequate capital resources is, among other factors, a decisive element
in the achievement of the declared objective of accelerating the growth of the national economy.
Coming to the case at bar, the decision herein sought to be executed is one rendered in an Action for
Damages for injury to persons and loss of property and does not involve any loan, much less
forbearances of any money, goods or credits. As correctly argued by the private respondents, the law
applicable to the said case is Article 2209 of the New Civil Code which reads
Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary,
shall be the payment of interest agreed upon, and in the absence of stipulation, the
legal interest which is six percent per annum.
The above provision remains untouched despite the grant of authority to the Central Bank by Act No.
2655, as amended. To make Central Bank Circular No. 416 applicable to any case other than those
specifically provided for by the Usury Law will make the same of doubtful constitutionality since the
Monetary Board will be exercising legislative functions which was beyond the intendment of P.D. No.
116.
IN VIEW OF THE FOREGOING CONSIDERATIONS, and finding the instant petition to be without
merit, the same is hereby DISMISSED with costs against petitioners.
SO ORDERED.

AQUILES M. SAJO, plaintiff-appellant,

vs.
MERCEDES GUSTILO, ET AL., defendants-appellants.
Araneta and Zaragoza for plaintiff-appellant.
Fisher, Dewitt, Perkins and Brady and Enrique C. Locsin for defendants-appellants.

MALCOLM, J.:
Both parties appeal from the following decision and judgment:
The plaintiff in this case called Aquilles M. Sajo is suing the defendants Mercedes Gustilo, Leopoldo
Jereza and Antonio Gustilo for the payment of a promissory note dated January 4, 1922, for the sum of
twenty-eight thousand pesos, and quoted in the complaint filed herein, asking at the same time for the
foreclosure of a mortgage in connection with said promissory note for the reason that the said note was
not paid by any of the said defendants.
The defendants in this case filed an answer which reads as follows:

ANSWER
Come now the defendants and answering the complaint presented in this case allege:
1. That they admit the first paragraph of the complaint and also admit having executed in Manapla on
the 4th day of January, 1922, the receipt copied in the second paragraph of the complaint.
2. That to guarantee the registry and inscription of the mortgage executed by Mercedes Gustilo for the
hacienda Mercedes in favor of the fictitious person who appears as mortgage creditor in that document
executed in Manapla on the 4th of January, 1922 , Antonia Gustilo signed the receipt inserted in the
second paragraph of the complaint.
3. That said document of mortgage is recorded in the registry of deeds of Occidental Negros, and
according to what Herminio Maravilla induced Antonio Gustilo to believe, before she signed the receipt
inserted in the second paragraph of the complaint, said Antonia Gustilo would be the mortgage in the
registry of property.
4. That the delivery of the receipt inserted in the second paragraph of the complaint by Herminio
Maravilla to Jose Maravilla and by the latter to the herein plaintiff is without consideration and fictitious
and null and void.
5. That the real party in interest in this case, who is the real party plaintiff, is Herminio Maravilla, and
therefore there is a defect of parties litigant, and the said Jose Maravilla and Herminio Maravilla should
be included as parties plaintiffs.
6. That Herminio Maravilla had assumed liability for the amount of the receipt inserted in the second
paragraph of the complaint, and for a consideration had considered it as paid, cancelled and null and
void.
7. That the true and correct amount of the receipt inserted in the second paragraph of the complaint is
P23,000, the balance being usurious interests.lawphi1.net
Wherefore, we pray that it be declared that there is a defect of parties litigant in this case; that the
contract of loan evidenced by the receipt inserted in the second paragraph of the complaint be declared
usurious and null; that Antonia Gustilo be declared relieved from all responsibility on account of the
receipt aforesaid; that the defendants be absolved from the complaint with the costs of the proceedings in
their favor; and that they be granted any other remedy in accordance to which they may be entitled
although not prayed for in the complaint.
Bacolod, Occidental Negros, March 23, 1923.
(Sgd.) ENRIQUE C. LOCSIN
Attorney for defendants SWORN STATEMENT
I, Leopoldo Jereza, after having been legally sworn, depose: That I have read and understood the facts
alleged in the answer and that they are true according to my direct and personal knowledge of said facts.
(Sgd.) LEOPOLDO JEREZA
Signed and sworn to before me this 28th day of March, 1923, A. D. The affiant exhibited his cedula No.
F-1126117, issued in Manapla on January 24, 1923.

(Sgd.) PRIMITIVO BACHOCO

Justice of the Peace, Manapla
Reg. No. 57
Page No. 56
Book No. 2
Received copy today:

Attorney for the plaintiff I, Simplicio Tiberio, after having been legally sworn, depose: That Mr. A. P.
Seva is absent from Bacolod and has his office closed and that I sent copy of this answer by registered
mail to said Mr. A. P. Seva, as appears on post-office receipt No. 827002 hereto attached.
____________________
Signed and sworn to before me this 4th day of April, 1923, A. D. The affiant exhibited to me his cedula
No. F-1082290, issued in Bacolod on March 23, 1923.
__________________
The defendants further filed a supplementary pleading asking that the plaintiff be further adjudged to pay the
attorney's fees in this case.
This case was originally heard before the then Honorable Judge Eduardo Gutierrez David and was finally tried
before the undersigned. The plaintiff was represented by attorney A. P. Seva, Esq., and the defendants by
attorney Enrique C. Locsin, Esq. After the final hearing of the case, the attorney for the defendants was allowed
15 days time to file his written brief and the plaintiff was also allowed the same period of time to answer the
brief of the defendants. It appearing that up to this date, the attorney for the plaintiff has not filed any brief in
support of his contention although a considerable length of time had already elapsed, the court will have to
conclude that the said plaintiff has impliedly renounced the filing of any brief in this case.
After the court has carefully studied the evidence taken before the then Honorable Judge Gutierrez David in
connection with the evidence subsequently presented in this case, finds that the following facts have been
established: That the Exhibit A which is a promissory note was signed by Mercedes Gustilo and her husband
Leopoldo Jereza on the 4th of January, 1922, in the municipality of Manapla, Province of Occidental Negros,
and was subsequently signed by Antonia Gustilo; that said Exhibit A was executed in favor of Jose Maravilla and
was supported by a deed of mortgage marked as Exhibit B signed by Leopoldo Jereza and his wife Mercedes
Gustilo only; that Jose Maravilla by means of Exhibit C transferred and assigned said promissory note (Exhibit
A) and mortgage (Exhibit B) in favor of Aquiles M. Sajo, plaintiff herein, on the 16th of August, 1922; and that
the defendants herein failed to comply with the terms of the said promissory note and so the plaintiff herein
instituted the present action.
With regard to the evidence presented by the defendants in this case, the court found also that the following facts
have been conclusively established. That the original sum of P23,000 received by the defendants in this case was
obtained by them from one Herminio Maravilla as is supported by Exhibit 1 presented by the defendants in this
case and executed by the said defendants on November 24, 1920, and ratified before a notary public ex-officio,
Anastacio Villanueva, on the same date; that the said document recites that the defendants received the sum of
twenty-five thousand pesos when in fact the amount of money received by said defendants is only twenty-three
thousand pesos, because the sum of two thousand pesos was retained by said Herminio Maravilla as a payment
of an usurious interest which could not be very inserted in the said document; that the defendants having failed

to pay the said sum of twenty-five thousand pesos, a promissory note (Exhibit A) was executed by the said
defendants in favor of Jose Maravilla, a nephew of said Herminio Maravilla. for the sum of twenty-eight
thousand pesos, which promissory note is quoted in plaintiff's complaint and was supported by a deed of
mortgage as already stated above; that said Herminio Maravilla, being indebted to Julio Javellana for P400,000,
and fearing what might subsequently take place, had the said promissory note and deed of mortgage (Exhibits A
and B) placed in the name of Jose Maravilla and subsequently transferred by said Jose Maravilla to the plaintiff
herein.
It was further established in this case that Antonia Gustilo signed the said Exhibit A, because Leopoldo Jereza
and Mercedes Gustilo were required to furnish more security for the loan. The court cannot believe the
contention of Antonia Gustilo that she did not understand Exhibit A, of that she believed it to be the original
contract which she signed sometime ago.lawphi1.net
Several witnesses have testified in this case that the original sum received by Leopoldo Jereza and his wife
Mercedes Gustilo was twenty-five thousand pesos and that the two thousand pesos which is claimed by
Herminio Maravilla and his employee to have been delivered to Leopoldo Jereza and his wife Mercedes Gustilo
to make the original amount P25,000, cannot be believed by the court. The preponderance of evidence in this
regard is so overwhelming against the claim of the plaintiff that the court will have to give due credit in favor of
the defendants, that the original sum was only P23,000 and that the rest of the amount is for the usurious interest
thereon and cannot be recovered by the plaintiff. Furthermore the two checks which were issued by Herminio
Maravilla amount only to twenty-three thousand pesos and the testimonies of said Herminio Maravilla and his
aforesaid employee do not appear to be reasonable to the court.
The contention of the defendants that Herminio Maravilla simulated the transfer in favor of Jose Maravilla and
subsequently transferred by the latter to the plaintiff herein Aquiles M. Sajo appears supported by documentary
and circumstantial evidence in this case. The deed marked Exhibit 1 is in favor of Herminio Maravilla. Jose
Maravilla and Aquiles M. Sajo were proven in this case to be quite young and without much money or capital. In
fact Aquiles M. Sajo were proven in this case to be quite young and without much money or capital. In fact
Aquiles M. Sajo was a newly returned student from Manila and has only been borrowing money from his
relatives. From the whole evidence in this case, it really appears that Herminio Maravilla is behind the affair, and
that his nephew Maravilla and Aquiles M. Sajo are nothing but his tools in the said transactions. Herminio
Maravilla while testifying in this court stated as follows:
Q. Is it true that by means of fraud you caused Antonia Gustilo to sign Exhibit A? A. No, sir. That and
this transaction were made at their own request and in accordance with their own request and in
accordance with their wishes, because they wanted that the time of the mortgage be extended one more
year; but in those days the price of sugar had dropped, as also the prices of land whereas the amount of
the loan had increased to P28,000. So I told Don Leopoldo that that could not be done with the same
security, but if the security was increased I would have no objection in waiting.
Q. Did they give additional security? A. Yes.
Q. What did it consist of? A. He told me if you want real property we have no more, but if you want I
will look for a signature and then he brought me the signature of Dona Antonia Gustilo.
Q. Who did? A. He himself. He came to my house telling me that he had secured the signature of
Doa Antonia Gustilo, and it was about two or three days after that he returned to my house.
Q. Did you not induce Antonia Gustilo to sign this document making her believe that it was the same as
the previous document signed by her, telling her that after signing it her mortgage would become
liberated? A. I would not deceive anybody; that was a promissory note; she did not sign in the

mortgage document.
It clearly appears from the aforesaid testimony, Herminio Maravilla's connection in this case. Moreover, the
deputy sheriff, Mr. Pareas, was clearly informed that Aquiles M. Sajo is not the real plaintiff in this case, and so
the required fees were not paid by Sajo. This contention of the defendants is further corroborated by the fact that
neither Jose Maravilla nor Aquiles M. Sajo had required the defendants herein for the payment of the said
promissory note, Exhibit A, and that the only one who made the demand for payment was Herminio Maravilla in
his own behalf. It is, therefore, clear that Herminio Maravilla may have also been made plaintiff herein.
At the hearing of this case, the defendants offered in open court to the plaintiff Aquiles M. Sajo and to Herminio
Maravilla the payment of the original sum of P23,000 as a final settlement of the case, but the said offer was
rejected by the attorney for the plaintiff herein.
Although it appears that Herminio Maravilla may have been made also one of the plaintiffs herein, it further
appears impliedly from the circumstances herein that said Herminio Maravilla recognizes the right of the
plaintiff in this case to sue as an assignee of the action in his favor and it appearing from Exhibit C that the
plaintiff herein has acquired the right to sue without any objection from said Herminio Maravilla, who appeared
as one of the witnesses in favor of the plaintiff in this case, the court is of the opinion that a judgment in this case
for the legitimate debt of the defendant herein may be adjudged in favor of the said plaintiff for the purpose of
avoiding a multiplicity of suits. Furthermore, the action of the defendants herein in offering to the said plaintiff
in open court, the payment of the sum of P23,000, impliedly recognized the right of the said plaintiff to recover
the said amount. And it has already been held by the Supreme Court that a debtor should no enrich himself by
not paying the capital of the loan and that the creditor has the right to sue for its recovery. (See Official Gazette,
Feb. 5, 1924.)
With regard to the contention of the defendants that the plaintiff should be charged with the attorney's fees in this
case, the court believes that the defendants are not entitled to recover same, because strictly speaking up to the
present time they have not actually paid the usurious interest which they have agreed to pay, and they did not
even pay the real amount of money obtained by them from Herminio Maravilla nor a portion of same, and for
that reason the present suit for the recovery of the same has been filed.
In view of all the foregoing considerations, the court hereby adjudges Mercedes Gustilo, Leopoldo Jereza and
Antonia Gustilo to jointly and severally pay to plaintiff herein the amount of P23,000, with legal interest thereon
from the filing of the complaint which is March 2, 1923, until fully paid, and also to pay the costs of this action.
In default of payment of this judgment for the period of three months hereof, the property subject of the
mortgage marked Exhibit B shall be sold to realize the mortgage debt and costs and disposed of in accordance
with law.
It is so ordered.
Bacolod, Occidental Negros, February 24, 1925.
(Sgd.) DELFIN JARANILLA
Judge, Twenty-second Judicial District
An examination of the evidence of record shows the findings of the trial judge to conform to the proven facts.
The subtle arguments of skilled counsel have failed to disclose any prejudicial error in the judgment. These
statements should be sufficient to dispose of the appeals. However, for the satisfaction of the parties and their
attorneys, we will resolve all the assignments of error.

PLAINTIFF'S APPEAL
Assignment of error No. I. Whether defense of usury properly interposed and alleged by the defendants.
After the complaint was filed by the attorney for the plaintiff, the three defendants consisting of Mercedes
Gustilo and her husband, Leopoldo Jereza, and Antonia Gustilo, presented an answer signed by a lawyer as
"Attorney for the Defendants." The oath following was subscribed by Leopoldo Jereza only. It is now argued by
the plaintiff-appellant that this was in contravention of section 9 of the Usury Law, Act No. 2655 as amended,
providing "The person or corporation sued shall file its answer in writing under oath to any complaint brought or
filed against said person or corporation before a competent court to recover the money or other personal or real
property, seeds or agricultural products, charged or received in violation of the provisions of this Act. The lack of
taking an oath to an answer to a compliant will mean the admission of the facts contained in the latter."
It will be noted that while the law provides both affirmatively and negatively for the taking of an oath to an
answer to a complaint, the law says nothing as to whether all of the defendants must subscribe to the oath or
whether the verification of one is sufficient. In this instance, the oath was accomplished by the husband without
joining the wife. The better practice would be for the answer to be sworn to by the wife as well as by the
husband. It would likewise be the better practice for the plaintiff, after the answer setting up usury as a defense is
filed, in his replication or otherwise to raise the point of irregularity in defendants' answer. Where this is done, it
is easy for the defendants to so amend as to meet the situation. Here since the answer is verified by the husband,
and since the plaintiff did not by any means contest the sufficiency of the verification in the lower court, it would
be highly technical at this stage of the proceedings to throw the case out of court on such a specious excuse.
(Collard vs Smith [1860], 13 N. J. Eq., 43; Vanderveer vs Holcomb [1866], 17 N. J. Eq., 547; Hartley vs. James,
18 Abb. Pr. [N. Y.], 229.)
Assignment of error No. II. Whether the spouses Leopoldo Jereza and Mercedes Gustilo received of Herminio
Maravilla P23,000 with P2,000 usurious interest added to make up P25,000. The documents on their faces
call for twenty-five thousand pesos (P25,000). These documents have in their favor all the sanctity with which
the law surrounds them. The plaintiff's contention is thus supported by the instruments, and, in addition, by the
oral testimony of Herminio Maravilla, the real party in interest, and his cashier, Miguel Aldea.
It is the rule that he who alleges usury as a defense to an obligation must establish it by clear and satisfactory
evidence. The later cases reflecting the more liberal views now prevailing with regard to the taking of interest,
consider that usury, like other facts in civil cases, needs only a preponderance of the evidence to be established.
With these principles concerning the proof of usury in mind, we find the allegation here supported by the
testimony of the three defendants Antonia Gustilo, Leopoldo Jereza and Mercedes Gustilo. This evidence made
such an impression on the trial evidence in this regard as "overwhelmingly against the claim of the plaintiff."
Two details speak eloquently on behalf of this finding. The first is the simulated transfers from Herminio
Maravilla to Jose Maravilla, his nephew, to Aquiles M. Sajo, a young man, to defeat the rights of the creditors in
other actions, thus permitting of no sympathy for the nominal plaintiff and the real plaintiff. And the second and
more important detail is that two checks one for eleven thousand pesos (P11,000) and the other for twelve
thousand pesos (P12,000) were drawn on November 25, 1920, thus evidencing a consideration to the amount
of twenty-three thousand pesos (P23,000). Excepting the assertions of the plaintiff and his witness, no other
evidence exists that two thousand pesos (P2,000) in cash was turned over to the defendants. Certainly no receipt
for the money was taken. Under such conditions, we feel that the defendants have carried the burden of their
defense by a clear preponderance of the evidence. (Houghton vs. Burden [1912], 228 U. S., 161; Pusser vs
Thompson [1909], 132 Ga., 280; Abbott vs. Stone [1898], 172 Ill., 634; France vs. Munro [1908], 132 Iowa, 1;
Poppleton vs. Nelson [1885], 12 Ore., 349.)
Assignment of error No. III. Whether interest on P23,000 should be allowed at the rate of 12 per cent per
annum, or at the rate of 6 per cent annum, and whether the plaintiff should be allowed 10 per cent on P23,000
by way of damages. The Usury Law, as construed by this court, permits the creditor to recover the principal
but not the stipulated usurious interest. This could well be taken to mean a forfeiture of the right to any interest

so as not to arrive at a contradiction in terms. Nevertheless the court has fallen into the habit in cases of this
character of allowing the creditor the legal rate of interest on the judgment from the date of the filing of the
complaint. The right to damages falls with the denial of the plaintiff's right to usurious interest. (Go Chioco vs.
Martinez [1932], 45 Phil., 256; Gui Jong & Co. vs. Rivera and Avellar [1924], 45 Phil., 778.)
DEFENDANT'S APPEAL
Assignment of error No. I. Whether Antonia Gustilo should be condemned jointly and severally with Leopoldo
Jereza and Mercedes Gustilo to pay the judgment. Antonia Gustilo signed Exhibit A, the promissory note
sued on, as a maker. She is bound by her action.
Assignment of error No. II. Whether legal interest should be allowed on the judgment, and if so, for what
period of time. As has previously been pointed out, it is the practice of the court in usury cases to permit the
creditor to secure legal interest on his judgment. Counsel for the defense insists nevertheless that even if this be
so, legal interest should not be granted subsequent to his offer to pay the plaintiff the sum of twenty-three
thousand pesos (P23,000). As we read the record, however, the action of counsel in court was merely in the
nature of a gesture and was at most an offer to compromise which was not accepted by counsel for the plaintiff.
There is nothing, therefore, taking the facts out of the general rule.
Assignment of error No. III. Whether certain questions of the plaintiff should have been permitted.
Whatever the ruling of the trial judge, it does not constitute reversible error.
Assignment of error No. IV. Whether the defendants should be adjudged to pay the costs and whether the
defendants should recover attorney's fees from the plaintiff. The determination of costs was discretionary with
the trial judge. As the defendants had not really paid any usurious interest and as the honors of the battle were
about even, no mistake was made in the ruling of the trial judge concerning attorney's fees.
Assignment of error No. V. Whether the ruling of the trial judge permitting verbal evidence to be presented by
the plaintiff relating to the usurious character of the loan was proper, notwithstanding no answer to the defense
was presented under oath. Like some of the arguments for the plaintiff, this is an argument technical in
character. The defendants having set up the defense of usury and having offered oral testimony to vary the terms
of a written instrument, could not very well complain if the plaintiff was given the right of rebuttal. For all the
foregoing, the judgment appealed from is affirmed without special pronouncement as to costs in this instance.
Avancea, C. J., Street, Ostrand, Johns, Romualdez, and Villa-Real, JJ., concur.

G.R. No. L-21440

SUN BROS. APPLIANCES, INC., plaintiff-appellant,
vs.
ANGEL AL. CALUNTAD, defendant-appellee.
Dominador A. Alafriz and Associates for plaintiff-appellant.
Eusebio V. Navarro for defendant-appellee.
, J.:

Plaintiff filed before the Municipal Court of Manila a complaint based on a conditional sale of one G.E.
Television Set, Model 21, Console 1960, Serial No. 652548, under the condition that the price would be
P3,440.00, the down payment P894.00, and it would be paid in monthly installments of P142.00 each for
eighteen (18) months. Defendant only paid the amount of P1,442.00, leaving a balance of P1,988.00, which he
failed to pay since March, 1961, for which reason plaintiff prayed that if said balance is not paid, the property be
returned to plaintiff.
Defendant denied owing said balance of P1,988.00 for he contends that what he bought from plaintiff was a
Philco Television Set, Model 21, with a value of P1,700.00, payable within ninety (90) days, but that it was
destroyed by plaintiffs technicians and so it was replaced with a G.E. set on a cash basis, payable within ninety
(90) days, the advance payment on the original set to be credited on the second set. It was agreed that the true
market value of the G.E. set would be P1,500.00 but defendant made plaintiff sign a deed of sale for P3,440.00
thereby adding more than 150% to the original price. It is alleged that plaintiff in effect entered into a usurious
transaction under the guise of a contract of sale.
Apparently, the case was elevated to the court of first instance because of the question of law involved.
The allegation of usury made by defendant in his answer was not denied under oath by plaintiff and so the court
a quo considered said allegation as admitted under Section 1, Rule 9 of the Rules of Court. Hence, the court a
quo considered the transaction null and void and on that basis dismissed the complaint. Plaintiff brought this
case on appeal directly before this Court when its motion for reconsideration was denied on the plea that the
same merely involves questions of law.
Plaintiff in its complaint alleges that the transaction between the parties was a conditional sale the terms thereof
having been specified therein. Defendant in his answer admits that what he originally bought from plaintiff was
one Philco Television Set, Model 21, Console 1960, the terms of payment having been specified in the contract
of sale. Defendant admits that he failed to pay the purchase price within the term of ninety (90) days agreed
upon.
It appears, therefore, that the transaction that took place between the parties was a conditional sale based on an
installment plan, and not a loan, so that the alleged increase in the price of the article sold cannot be considered
as a mere pretext to cover a usurious loan. It has been held that The increase of the price is not interest within
the purview of the Usury Law, if the sale is made in good faith and not a mere pretext to cover a usurious loan
(Manila Trading & Supply Co. vs. Tamaraw Plantation Co., 47 Phil. 513). And elaborating on said case, this
Court said:
x x x The increase of the price, when the sale is on credit, serves not only to cover the expenses generally
entailed by such transactions on credit, but also to encourage cash sales, so useful to commerce. It is up to the
purchaser to decide which price he prefers in making the purchase. If he prefers to purchase for cash, he obtains
a 5 per cent reduction of the price; if, on the contrary, he prefers to buy on credit, he cannot complain of the
increase of the price demanded by the vendor.
In 27 R.C.L., p. 214, it is said: On principle and authority, the owner of property, whether real or personal, has a
perfect right to name the price on which he is willing to sell, and to refuse to accede to any other. He may offer
to sell at a designated price for cash or at a much higher price on credit, and a credit sale will not constitute usury
however great the difference between the two prices, unless the buying and selling was a mere pretense. And in
39 Cyc., p. 927, it is also established that: A vendor may well fix upon his property one price for cash and
another for credit, and the mere fact that the credit price exceeds the cost price by a greater percentage than is
permitted by the usury laws is a matter of concern to the parties but not to the courts, barring evidence of bad
faith. If the parties have acted in good faith such a transaction is not a loan, and not usurious.

Defendants contention that the failure of plaintiff to specifically deny under oath the allegation of usury in his
answer constitutes an implied admission of usury is untenable. If it is alleged that defendant entered into a
contract of loan with plaintiff in which the latter collected a usurious interest there is need to deny the transaction
under oath, and if no oath is taken the only thing admitted is the allegation that the interest is usurious and not
that the contract entered into is a loan. The nature of the transaction is not admitted. The fact that what is alleged
is that the transaction was a loan under the guise of a conditional contract of sale and that by increasing its price
by 150% the consideration became usurious, such is not deemed admitted by the mere failure to deny the answer
under oath. This transaction must still be proven before usury can be invoked in the light of the following ruling
of this Court:
It may, of course, be held in general that only that for which the law requires an oath is deemed admitted, should
no oath be taken. If it is alleged in the complaint that the defendant, whether an individual or a corporation, has
entered into a contract of loan with the plaintiff, there is no need for a sworn answer. But if it be added that on
this loan the defendant has collected usurious interest, that is, interest in excess of the rate fixed by the law, then
there is need of an oath. In that case, if no oath is taken to the answer, the only thing admitted is the allegation
that the interest charged is usurious, not that the contract entered into is a loan, which is something that must be
proved independently of the admission, especially when, as in the one in question, this allegation is disputed.
The intervenor Hilarion Soriano not only alleges that the plaintiff charged, and that he paid him, usurious
interest, but also that the contract they made, under the guise of a sale subject to repurchase, according to its
terms, was in reality a contract of loan herein usurious interest was stipulated and collected. He should therefore
have shown by competent evidence that contract was really a loan. But, not only is there not a scintilla of
evidence to this effect, but, on the contrary, the evidence of record, which is the contract itself, shows
conclusively that it was a sale subject to repurchase. Wherefore, as the plaintiff and the intervenor did not enter
into a contract of loan by virtue of which usurious interest could be collected, and as the contract entered into
between them was a sale upon which usurious interest could not be collected, the admission established by the
law that such interest was in fact collected, does not exist. The law cannot presume an absurdity. In order that
this admission of the collection of usurious interest may be invoked, it is necessary first to establish the contract
by virtue of which interest could be collected. (Lo Bun Chay vs. Paulino, 54 Phil. 144, 147-148.)
The contract entered into between the parties being a conditional sale, the increase in price over the cash price
cannot be considered interest, and so the dismissal of the case by the court a quo is not justified.
Wherefore, the decision appealed from is reversed. The case is remanded to the lower court for further
proceedings, without pronouncement as to costs.
Bengzon, C.J., Concepcion, Reyes, J.B.L., Barrera, Regala, Makalintal, Bengzon, J.P., Zaldivar and Sanchez, JJ.,
concur.

Digest: Liam Law vs. Olympic Sawmill (GR L-30771, 28 May 1984)
Liam Law vs. Olympic Sawmill
GR L-30771, 28 May 1984First Division Melencio-Herrera (J)
Facts:
On 7 September 1957, Liam Law (plaintiff) loaned P10,000.00, without interest, to Olympic Sawmill Co. and
Elino Lee Chi, as the latters managing partner (defendants). The loan became ultimately due on 31 January

1960, but was not paid on that date, with the debtor sasking for an extension of 3 months, or up to 30 April 1960.
On 17 March 1960, the parties executed another loan document. Payment of the P10,000.00 was extended to 30
April 1960,but the obligation was increased by P6,000 which formed part of the principal obligation to answer
for attorneys fees, legal interest, and other cost incident thereto to be paid unto the creditor and his successors
in interest upon the termination of this agreement. The defendants again failed to pay their obligation. On 23
September 1960, the plaintiff instituted the collection case before the Court of First Instance of Bulacan. The
defendants admitted the P10,000.00 principal obligation, but claimed that the additional P6,000.00 constituted
usurious interest. Upon the plaintiffs application, the Trial Court issued a writ of Attachment on real and
personal properties of defendants. After the Writ of Attachment was implemented, proceedings before the Trial
Court versed principally in regards to the attachment. On 18 January 1961, an Order was issued by the Trial
Court allowing both parties to simultaneously submit a Motion for Summary Judgment. On 26 June 1961, the
Trial Court rendered decision ordering defendants to pay the plaintiff the amount of P10,000.00plus the further
sum of P6,000.00. The defendants appealed before the then court of Appeals, which endorsed it to the Supreme
Court stating that the issue involved was one of law.
Issue [1]:
Whether the allegation of usury should be made in writing and under oath, pursuant to Section 9 of the Usury
Law.
Held [1]:
Section 9 of the Usury Law provides that the person or corporation sued shall file its answer in writing under
oath to any complaint brought or filed against said person or corporation before a competent court to recover the
money or other personal or real property, seeds or agricultural products, charged or received in violation of the
provisions of this Act. The lack of taking an oath to an answer to a complaint will mean the admission of the
facts contained in the latter. It envisages a complaint filed against an entity which has committed usury, for the
recovery of the usurious interest paid. In that case, if the entity sued shall not file its answer under oath denying the
allegation of usury, the defendant shall be deemed to have
xxiiadmitted the usury. The provision does not apply to a case where it is the defendant, not theplaintiff, who is
alleging usury.
Issue [2]:
Whether the repeal of Rules of Court or any procedural law is with retroactive effect.
Held [2]:
The Court opined that the Rules of Court in regards to allegations of usury, procedural in nature, should be
considered repealed with retroactive effect. It has been previously held(People vs. Sumilang, and De Lopez, et
al. vs. Vda. de Fajardo, et al.) that statutes regulating the procedure of the courts will be construed as applicable
to actions pending and undetermined at the time of their passage. Procedural laws are retrospective in that sense
and to that extent.
Comments (required in assignment):
The last sentence of Section 11, Rule 9, of the 1997 Rules of Civil Procedure provides that Allegation of usury
in a complaint to recover usurious interest are deemed admitted if not denied under oath, and is similar in
context to Section 9 of Usury Law, which was raised in this 1984 case (although improperly applied). The
reiteration of matters pertaining to usury in the 1997 rules is perplexing as the 1984 decision itself admits that
usury has been legally non-existent; as interest can now be charged as lender and borrower may agree upon,
and that the Rules of Court in regards to allegations of usury,procedural in nature, should be considered
repealed with retroactive effect. These incongruent realities, however, are secondary only to the fact that a
mere Central Bank circular or memorandum effectively suspended the application of the Usury Law to a degree
tantamount to its repeal

LIAM LAW, plaintiff-appellee,

vs.

OLYMPIC SAWMILL CO. and ELINO LEE CHI, defendants-appellants.

Felizardo S.M. de Guzman for plaintiff-appellee.
Mariano M. de Joya for defendants-appellants.

MELENCIO-HERRERA, J.:
This is an appeal by defendants from a Decision rendered by the then Court of First Instance
of Bulacan. The appeal was originally taken to the then Court of Appeals, which endorsed it to
this instance stating that the issue involved was one of law.
It appears that on or about September 7, 1957, plaintiff loaned P10,000.00, without interest,
to defendant partnership and defendant Elino Lee Chi, as the managing partner. The loan
became ultimately due on January 31, 1960, but was not paid on that date, with the debtors
asking for an extension of three months, or up to April 30, 1960.
On March 17, 1960, the parties executed another loan document. Payment of the P10,000.00
was extended to April 30, 1960, but the obligation was increased by P6,000.00 as follows:
That the sum of SIX THOUSAND PESOS (P6,000.00), Philippine currency shall form part of the
principal obligation to answer for attorney's fees, legal interest, and other cost incident thereto to
be paid unto the creditor and his successors in interest upon the termination of this agreement.

Defendants again failed to pay their obligation by April 30, 1960 and, on September 23, 1960,
plaintiff instituted this collection case. Defendants admitted the P10,000.00 principal
obligation, but claimed that the additional P6,000.00 constituted usurious interest.
Upon application of plaintiff, the Trial Court issued, on the same date of September 23, 1960,
a writ of Attachment on real and personal properties of defendants located at Karanglan,
Nueva Ecija. After the Writ of Attachment was implemented, proceedings before the Trial
Court versed principally in regards to the attachment.
On January 18, 1961, an Order was issued by the Trial Court stating that "after considering
the manifestation of both counsel in Chambers, the Court hereby allows both parties to
simultaneously submit a Motion for Summary Judgment. 1 The plaintiff filed his Motion for
Summary Judgment on January 31, 1961, while defendants filed theirs on February 2, 196l.
On June 26, 1961, the Trial Court rendered decision ordering defendants to pay plaintiff "the
amount of P10,000.00 plus the further sum of P6,000.00 by way of liquidated damages . . .
with legal rate of interest on both amounts from April 30, 1960." It is from this judgment that
defendants have appealed.
We have decided to affirm.

Under Article 1354 of the Civil Code, in regards to the agreement of the parties relative to the
P6,000.00 obligation, "it is presumed that it exists and is lawful, unless the debtor proves the
contrary". No evidentiary hearing having been held, it has to be concluded that defendants
had not proven that the P6,000.00 obligation was illegal. Confirming the Trial Court's finding,
we view the P6,000.00 obligation as liquidated damages suffered by plaintiff, as of March 17,
1960, representing loss of interest income, attorney's fees and incidentals.
The main thrust of defendants' appeal is the allegation in their Answer that the P6,000.00
constituted usurious interest. They insist the claim of usury should have been deemed
admitted by plaintiff as it was "not denied specifically and under oath". 3
Section 9 of the Usury Law (Act 2655) provided:
SEC. 9. The person or corporation sued shall file its answer in writing under oath to any
complaint brought or filed against said person or corporation before a competent court to
recover the money or other personal or real property, seeds or agricultural products, charged or
received in violation of the provisions of this Act. The lack of taking an oath to an answer to a
complaint will mean the admission of the facts contained in the latter.

The foregoing provision envisages a complaint filed against an entity which has committed
usury, for the recovery of the usurious interest paid. In that case, if the entity sued shall not
file its answer under oath denying the allegation of usury, the defendant shall be deemed to
have admitted the usury. The provision does not apply to a case, as in the present, where it is
the defendant, not the plaintiff, who is alleging usury.
Moreover, for sometime now, usury has been legally non-existent. Interest can now be
charged as lender and borrower may agree upon. 4 The Rules of Court in regards to
allegations of usury, procedural in nature, should be considered repealed with retroactive
effect.
Statutes regulating the procedure of the courts will be construed as applicable to actions
pending and undetermined at the time of their passage. Procedural laws are retrospective in that
sense and to that extent. 5
... Section 24(d), Republic Act No. 876, known as the Arbitration Law, which took effect on 19
December 1953, and may be retroactively applied to the case at bar because it is procedural in
nature. ... 6

WHEREFORE, the appealed judgment is hereby affirmed, without pronouncement as to

costs.
SO ORDERED.

July 30, 1965

G.R. No. L-21451

DOMINADOR T. ALMEDA and JOSEFA MENDOZA-ALMEDA, plaintiffs-appellees,
vs.
CONCEPCION A. RUBIO and CLEMENTE S. RUBIO, defendants-appellants.
Rosales Law Office for plaintiffs-appellees.
Geronimo R. San Jose for defendants-appellants.
Paredes, J.:
In a complaint for the Consolidation of Ownership presented with the CFI of Camarines Sur, by
plaintiffs-appellees herein, said Court rendered judgment, the pertinent portions of which read:
There are other circumstances showing that the transaction was a mortgage and not a sale with right to
repurchase. The Rubios have remained in possession of the property as lessees. This gives rise to the
presumption that the contract is an equitable mortgage (Par. 2, Art. 1602, Civil Code; Dorado & Vista v.
Virina, 34 Phil. 264). There is also inadequacy of price. The present market value of the house and lot
in question is conservatively estimated at P20,000.00. The purchase price is P5,000.00, or only onefourth (1/4) of the value. This great inadequacy of the price also gives rise to the presumption that the
land was offered merely as security for a loan (Cabugao v. Lim, 50 Phil. 844; Par. 1, Art. 1602, Civil
Code).
All the foregoing show that Exhibit A is only an equitable mortgage and not a sale with right to
repurchase and that the actual amount of the loan is only P5,000.00.
WHEREFORE, decision is rendered declaring Exhibit A an equitable mortgage and ordering the
defendants to pay Josefa Almeda the sum of P5,000.00 plus interest at 12% per annum from the date of
the execution of Exhibit A until full payment is made, with cost against the plaintiff.
Defendants appealed to the Court of Appeals, claiming that the trial court erred in holding (1) that the
principal obligation of P5,000.00 must bear interest of 12% per annum; and (2) that the interest shall
begin to accrue from the date of the execution of the contract. The Court of Appeals, finding that the
two issues are purely legal in nature, certified the case to this Court.
Appellants lay great emphasis on Article 2209 of the new Civil Code which provides:
If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest
agreed upon, and in the absence of stipulation, the legal which is six percent per annum.
and on certain cases, enunciating that when there is no stipulation as to the rate of interest, the same
should be computed at the legal rate. They also contend that interest becomes due only when there is
demand, judicial or otherwise.
Appellees, upon the other hand, argue that if there was no stipulation as to the rate of interest in the
contract, it was because such stipulation has no place in a Deed of Sale with Repurchase.

We find the stand of appellees untenable. Having admitted that there was no stipulation, as to the
payment of interest, it becomes apparent that Article 2209 of the Civil Code comes into play. The said
article mandates that in the absence of stipulation as to interest, the rate is the legal one, which is 6%. It
results, therefore, that the imposition of 12% interest on the P5,000.00 by the trial court, has no legal
basis.
On the point, as to when the imposition of interest should commence, We also agree with the appellants
that it should be when demand for the payment was made. In the case at bar, since there is nothing on
record to show when demand was made upon the appellants, the computation of interest should be
reckoned from the presentation of the complaint on January 17, 1957 (Article 1169, N.C.C.; Gutierrez
Hermanos v. Mariano Fuentebella, 13 Phil. 78; Juaneza v. Palu-ay 55 O.G. [No. 43] 9050).
PREMISES CONSIDERED, the decision appealed from is modified, as herein indicated. All portions
of the decision on appeal, not inconsistent with this ruling, are affirmed. No pronouncement as to costs.
CA AGRO-INDUSTRIAL DEVELOPMENT CORP., Petitioner, vs. THE HONORABLE COURT
OF APPEALS and SECURITY BANK AND TRUST COMPANY, Respondents.
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?
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This is the crux of the present controversy.

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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:
13. The bank is not a depositary of the contents of the safe and it has neither the possession nor control
of the same.
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14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it
assumes absolutely no liability in connection therewith. 1
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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.
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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 2for 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.
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In its Answer with Counterclaim, 3respondent 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
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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.

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library

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.
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With costs against plaintiff. 6

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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.
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Its motion for reconsideration 7having 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
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In its Decision promulgated on 4 July 1989, 9respondent 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 10which 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.
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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." 12The 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:
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
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Its motion for reconsideration 14having 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. 16Accordingly, 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.
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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 17which 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 safe-deposit 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 18which 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.
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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.
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The petition is partly meritorious.

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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.

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Hence, the authorities cited by the respondent Court 20on 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.
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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. 21This 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 23pertinently 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:
(a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for the
safeguarding of such effects.
xxx xxx xxx

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The banks shall perform the services permitted under subsections (a), (b) and (c) of this section as
depositories 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 25and, 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. 26In the absence of any stipulation prescribing the degree of diligence required, that
of a good father of a family is to be observed. 27Hence, 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.
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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 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.
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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.
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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.
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No pronouncement as to costs.
SO ORDERED.

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