Republic of the Philippines of the writ of possession pending the final disposition of Civil Case No. 99-4376.
lippines of the writ of possession pending the final disposition of Civil Case No. 99-4376. Against this Order, respondents
SUPREME COURT
SECOND DIVISION
G.R. Nos. 150773 & 153599 September 30, 2005
SPOUSES DAVID B. CARPO & and RECHILDA S. CARPO, Petitioners,
vs.
ELEANOR CHUA and ELMA DY NG, Respondent.
DECISION
Tinga, J.:
Before this Court are two consolidated petitions for review. The first, docketed as G.R. No. 150773, assails
the Decision1 of the Regional Trial Court (RTC), Branch 26 of Naga City dated 26 October 2001 in Civil Case No.
99-4376. RTC Judge Filemon B. Montenegro dismissed the complaint 2 for annulment of real estate mortgage and
consequent foreclosure proceedings filed by the spouses David B. Carpo and Rechilda S. Carpo (petitioners).
The second, docketed as G.R. No. 153599, seeks to annul the Court of Appeals’ Decision3 dated 30 April 2002 in
CA-G.R. SP No. 57297. The Court of Appeals Third Division annulled and set aside the orders of Judge Corazon
A. Tordilla to suspend the sheriff’s enforcement of the writ of possession.
The cases stemmed from a loan contracted by petitioners. On 18 July 1995, they borrowed from Eleanor Chua and
Elma Dy Ng (respondents) the amount of One Hundred Seventy-Five Thousand Pesos (₱175,000.00), payable
within six (6) months with an interest rate of six percent (6%) per month. To secure the payment of the loan,
petitioners mortgaged their residential house and lot situated at San Francisco, Magarao, Camarines Sur, which lot
is covered by Transfer Certificate of Title (TCT) No. 23180. Petitioners failed to pay the loan upon demand.
Consequently, the real estate mortgage was extrajudicially foreclosed and the mortgaged property sold at a public
auction on 8 July 1996. The house and lot was awarded to respondents, who were the only bidders, for the amount
of Three Hundred Sixty-Seven Thousand Four Hundred Fifty-Seven Pesos and Eighty Centavos (₱367,457.80).
Upon failure of petitioners to exercise their right of redemption, a certificate of sale was issued on 5 September 1997
by Sheriff Rolando A. Borja. TCT No. 23180 was cancelled and in its stead, TCT No. 29338 was issued in the name
of respondents.
Despite the issuance of the TCT, petitioners continued to occupy the said house and lot, prompting respondents to
file a petition for writ of possession with the RTC docketed as Special Proceedings (SP) No. 98-1665. On 23 March
1999, RTC Judge Ernesto A. Miguel issued an Order4 for the issuance of a writ of possession.
On 23 July 1999, petitioners filed a complaint for annulment of real estate mortgage and the consequent foreclosure
proceedings, docketed as Civil Case No. 99-4376 of the RTC. Petitioners consigned the amount of Two Hundred
Fifty-Seven Thousand One Hundred Ninety-Seven Pesos and Twenty-Six Centavos (₱257,197.26) with the RTC.
Meanwhile, in SP No. 98-1665, a temporary restraining order was issued upon motion on 3 August 1999, enjoining
the enforcement of the writ of possession. In an Order5 dated 6 January 2000, the RTC suspended the enforcement
filed a petition for certiorari and mandamus before the Court of Appeals, docketed as CA-G.R. SP No. 57297.
During the pendency of the case before the Court of Appeals, RTC Judge Filemon B. Montenegro dismissed the
complaint in Civil Case No. 99-4376 on the ground that it was filed out of time and barred by laches. The RTC
proceeded from the premise that the complaint was one for annulment of a voidable contract and thus barred by the
four-year prescriptive period. Hence, the first petition for review now under consideration was filed with this Court,
assailing the dismissal of the complaint.
The second petition for review was filed with the Court after the Court of Appeals on 30 April 2002 annulled and
set aside the RTC orders in SP No. 98-1665 on the ground that it was the ministerial duty of the lower court to issue
the writ of possession when title over the mortgaged property had been consolidated in the mortgagee.
This Court ordered the consolidation of the two cases, on motion of petitioners.
In G.R. No. 150773, petitioners claim that following the Court’s ruling in Medel v. Court of Appeals6 the rate of
interest stipulated in the principal loan agreement is clearly null and void. Consequently, they also argue that the
nullity of the agreed interest rate affects the validity of the real estate mortgage. Notably, while petitioners were
silent in their petition on the issues of prescription and laches on which the RTC grounded the dismissal of the
complaint, they belatedly raised the matters in their Memorandum. Nonetheless, these points warrant brief comment.
On the other hand, petitioners argue in G.R. No. 153599 that the RTC did not commit any grave abuse of discretion
when it issued the orders dated 3 August 1999 and 6 January 2000, and that these orders could not have been "the
proper subjects of a petition for certiorari and mandamus". More accurately, the justiciable issues before us are
whether the Court of Appeals could properly entertain the petition for certiorari from the timeliness aspect, and
whether the appellate court correctly concluded that the writ of possession could no longer be stayed.
We first resolve the petition in G.R. No. 150773.
Petitioners contend that the agreed rate of interest of 6% per month or 72% per annum is so excessive, iniquitous,
unconscionable and exorbitant that it should have been declared null and void. Instead of dismissing their complaint,
they aver that the lower court should have declared them liable to respondents for the original amount of the loan
plus 12% interest per annum and 1% monthly penalty charge as liquidated damages,7 in view of the ruling in Medel
v. Court of Appeals.8
In Medel, the Court found that the interest stipulated at 5.5% per month or 66% per annum was so iniquitous or
unconscionable as to render the stipulation void.
Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in the
promissory note iniquitous or unconscionable, and, hence, contrary to morals ("contra bonos mores"), if not against
the law. The stipulation is void. The Court shall reduce equitably liquidated damages, whether intended as an
indemnity or a penalty if they are iniquitous or unconscionable.9
In a long line of cases, this Court has invalidated similar stipulations on interest rates for being excessive, iniquitous,
unconscionable and exorbitant. In Solangon v. Salazar,10 we annulled the stipulation of 6% per month or 72% per
annum interest on a ₱60,000.00 loan. In Imperial v. Jaucian,11 we reduced the interest rate from 16% to 1.167% per
month or 14% per annum. In Ruiz v. Court of Appeals,12 we equitably reduced the agreed 3% per month or 36% per
annum interest to 1% per month or 12% per annum interest. The 10% and 8% interest rates per month on a
₱1,000,000.00 loan were reduced to 12% per annum in Cuaton v. Salud.13 Recently, this Court, in Arrofo v.
Quino,14 reduced the 7% interest per month on a ₱15,000.00 loan amounting to 84% interest per annum to 18% per
annum.
There is no need to unsettle the principle affirmed in Medel and like cases. From that perspective, it is apparent that
the stipulated interest in the subject loan is excessive, iniquitous, unconscionable and exorbitant. Pursuant to the
freedom of contract principle embodied in Article 1306 of the Civil Code, contracting parties 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. In the ordinary course, the codal provision may be invoked to
annul the excessive stipulated interest.
In the case at bar, the stipulated interest rate is 6% per month, or 72% per annum. By the standards set in the above-
cited cases, this stipulation is similarly invalid. However, the RTC refused to apply the principle cited and employed
in Medel on the ground that Medel did not pertain to the annulment of a real estate mortgage,15 as it was a case for
annulment of the loan contract itself. The question thus sensibly arises whether the invalidity of the stipulation on
interest carries with it the invalidity of the principal obligation.
The question is crucial to the present petition even if the subject thereof is not the annulment of the loan contract
but that of the mortgage contract. The consideration of the mortgage contract is the same as that of the principal
contract from which it receives life, and without which it cannot exist as an independent contract. Being a mere
accessory contract, the validity of the mortgage contract would depend on the validity of the loan secured by it. 16
Notably in Medel, the Court did not invalidate the entire loan obligation despite the inequitability of the stipulated
interest, but instead reduced the rate of interest to the more reasonable rate of 12% per annum. The same remedial
approach to the wrongful interest rates involved was employed or affirmed by the Court
in Solangon, Imperial, Ruiz, Cuaton, and Arrofo.
The Court’s ultimate affirmation in the cases cited of the validity of the principal loan obligation side by side with
the invalidation of the interest rates thereupon is congruent with the rule that a usurious loan transaction is not a
complete nullity but defective only with respect to the agreed interest.
We are aware that the Court of Appeals, on certain occasions, had ruled that a usurious loan is wholly null and void
both as to the loan and as to the usurious interest.17 However, this Court adopted the contrary rule,
as comprehensively discussed in Briones v. Cammayo:18
In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court likewise declared that, in any event, the debtor in a
usurious contract of loan should pay the creditor the amount which he justly owes him, citing in support of this
ruling its previous decisions in Go Chioco, Supra, Aguilar vs. Rubiato, et al., 40 Phil. 570, and Delgado vs. Duque
Valgona, 44 Phil. 739.
....
Then in Lopez and Javelona vs. El Hogar Filipino, 47 Phil. 249, We also held that the standing jurisprudence of this
Court on the question under consideration was clearly to the effect that the Usury Law, by its letter and spirit, did
not deprive the lender of his right to recover from the borrower the money actually loaned to and enjoyed by the
latter. This Court went further to say that the Usury Law did not provide for the forfeiture of the capital in favor of
the debtor in usurious contracts, and that while the forfeiture might appear to be convenient as a drastic measure to
eradicate the evil of usury, the legal question involved should not be resolved on the basis of convenience.
Other cases upholding the same principle are Palileo vs. Cosio, 97 Phil. 919 and Pascua vs. Perez, L-19554, January
31, 1964, 10 SCRA 199, 200-202. In the latter We expressly held that when a contract is found to be tainted with
usury "the only right of the respondent (creditor) . . . was merely to collect the amount of the loan, plus interest due
thereon."
The view has been expressed, however, that the ruling thus consistently adhered to should now be abandoned
because Article 1957 of the new Civil Code — a subsequent law — provides that contracts and stipulations, under
any cloak or device whatever, intended to circumvent the laws against usury, shall be void, and that in such cases
"the borrower may recover in accordance with the laws on usury." From this the conclusion is drawn that the whole
contract is void and that, therefore, the creditor has no right to recover — not even his capital.
The meaning and scope of our ruling in the cases mentioned heretofore is clearly stated, and the view referred to in
the preceding paragraph is adequately answered, in Angel Jose, etc. vs. Chelda Enterprises, et al. (L-25704, April
24, 1968). On the question of whether a creditor in a usurious contract may or may not recover the principal of the
loan, and, in the affirmative, whether or not he may also recover interest thereon at the legal rate, We said the
following:
". . . .
Appealing directly to Us, defendants raise two questions of law: (1) In a loan with usurious interest, may the creditor
recover the principal of the loan? (2) Should attorney's fees be awarded in plaintiff's favor?"
Great reliance is made by appellants on Art. 1411 of the New Civil Code . . . .
Since, according to the appellants, a usurious loan is void due to illegality of cause or object, the rule of pari delicto
expressed in Article 1411, supra, applies, so that neither party can bring action against each other. Said rule,
however, appellants add, is modified as to the borrower, by express provision of the law (Art. 1413, New Civil
Code), allowing the borrower to recover interest paid in excess of the interest allowed by the Usury Law. As to the
lender, no exception is made to the rule; hence, he cannot recover on the contract. So — they continue — the New
Civil Code provisions must be upheld as against the Usury Law, under which a loan with usurious interest is not
totally void, because of Article 1961 of the New Civil Code, that: "Usurious contracts shall be governed by the
Usury Law and other special laws, so far as they are not inconsistent with this Code."
We do not agree with such reasoning. Article 1411 of the New Civil Code is not new; it is the same as Article 1305
of the Old Civil Code. Therefore, said provision is no warrant for departing from previous interpretation that, as
provided in the Usury Law (Act No. 2655, as amended), a loan with usurious interest is not totally void only as to
the interest.
. . . [a]ppellants fail to consider that a contract of loan with usurious interest consists of principal and
accessory stipulations; the principal one is to pay the debt; the accessory stipulation is to pay interest thereon.
And said two stipulations are divisible in the sense that the former can still stand without the latter. Article
1273, Civil Code, attests to this: "The renunciation of the principal debt shall extinguish the accessory
obligations; but the waiver of the latter shall leave the former in force."
The question therefore to resolve is whether the illegal terms as to payment of interest likewise renders a
nullity the legal terms as to payments of the principal debt. Article 1420 of the New Civil Code provides in
this regard: "In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter
may be enforced."
In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt,
which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies only as to the
prestation to pay the stipulated interest; hence, being separable, the latter only should be deemed void, since
it is the only one that is illegal.
....
The principal debt remaining without stipulation for payment of interest can thus be recovered by judicial action.
And in case of such demand, and the debtor incurs in delay, the debt earns interest from the date of the demand (in
this case from the filing of the complaint). Such interest is not due to stipulation, for there was none, the same being
void. Rather, it is due to the general provision of law that in obligations to pay money, where the debtor incurs in
delay, he has to pay interest by way of damages (Art. 2209, Civil Code). The court a quo therefore, did not err in
ordering defendants to pay the principal debt with interest thereon at the legal rate, from the date of filing of the
complaint."19
The Court’s wholehearted affirmation of the rule that the principal obligation subsists despite the nullity of the
stipulated interest is evinced by its subsequent rulings, cited above, in all of which the main obligation was upheld
and the offending interest rate merely corrected. Hence, it is clear and settled that the principal loan obligation still
stands and remains valid. By the same token, since the mortgage contract derives its vitality from the validity of the
principal obligation, the invalid stipulation on interest rate is similarly insufficient to render void the ancillary
mortgage contract.
It should be noted that had the Court declared the loan and mortgage agreements void for being contrary to public
policy, no prescriptive period could have run.20 Such benefit is obviously not available to petitioners.
Yet the RTC pronounced that the complaint was barred by the four-year prescriptive period provided in Article 1391
of the Civil Code, which governs voidable contracts. This conclusion was derived from the allegation in the
complaint that the consent of petitioners was vitiated through undue influence. While the RTC correctly
acknowledged the rule of prescription for voidable contracts, it erred in applying the rule in this case. We are hard
put to conclude in this case that there was any undue influence in the first place.
There is ultimately no showing that petitioners’ consent to the loan and mortgage agreements was vitiated by undue
influence. The financial condition of petitioners may have motivated them to contract with respondents, but undue
influence cannot be attributed to respondents simply because they had lent money. Article 1391, in relation to Article
1390 of the Civil Code, grants the aggrieved party the right to obtain the annulment of contract on account of factors
which vitiate consent. Article 1337 defines the concept of undue influence, as follows:
There is undue influence when a person takes improper advantage of his power over the will of another, depriving
the latter of a reasonable freedom of choice. The following circumstances shall be considered: the confidential,
family, spiritual and other relations between the parties or the fact that the person alleged to have been unduly
influenced was suffering from mental weakness, or was ignorant or in financial distress.
While petitioners were allegedly financially distressed, it must be proven that there is deprivation of their free
agency. In other words, for undue influence to be present, the influence exerted must have so overpowered or
subjugated the mind of a contracting party as to destroy his free agency, making him express the will of another
rather than his own.21 The alleged lingering financial woes of petitioners per se cannot be equated with the presence
of undue influence.
The RTC had likewise concluded that petitioners were barred by laches from assailing the validity of the real estate
mortgage. We wholeheartedly agree. If indeed petitioners unwillingly gave their consent to the agreement, they
should have raised this issue as early as in the foreclosure proceedings. It was only when the writ of possession was
issued did petitioners challenge the stipulations in the loan contract in their action for annulment of mortgage.
Evidently, petitioners slept on their rights. The Court of Appeals succinctly made the following observations:
In all these proceedings starting from the foreclosure, followed by the issuance of a provisional certificate of sale;
then the definite certificate of sale; then the issuance of TCT No. 29338 in favor of the defendants and finally the
petition for the issuance of the writ of possession in favor of the defendants, there is no showing that plaintiffs
questioned the validity of these proceedings. It was only after the issuance of the writ of possession in favor of the
defendants, that plaintiffs allegedly tendered to the defendants the amount of ₱260,000.00 which the defendants
refused. In all these proceedings, why did plaintiffs sleep on their rights?22
Clearly then, with the absence of undue influence, petitioners have no cause of action. Even assuming undue
influence vitiated their consent to the loan contract, their action would already be barred by prescription when they
filed it. Moreover, petitioners had clearly slept on their rights as they failed to timely assail the validity of the
mortgage agreement. The denial of the petition in G.R. No. 150773 is warranted.
We now resolve the petition in G.R. No. 153599.
Petitioners claim that the assailed RTC orders dated 3 August 1999 and 6 January 2000 could no longer be
questioned in a special civil action for certiorari and mandamus as the reglementary period for such action had
already elapsed.
It must be noted that the Order dated 3 August 1999 suspending the enforcement of the writ of possession had a
period of effectivity of only twenty (20) days from 3 August 1999, or until 23 August 1999. Thus, upon the expiration
of the twenty (20)-day period, the said Order became functus officio. Thus, there is really no sense in assailing the
validity of this Order, mooted as it was. For the same reason, the validity of the order need not have been assailed
by respondents in their special civil action before the Court of Appeals.
On the other hand, the Order dated 6 January 2000 is in the nature of a writ of injunction whose period of efficacy
is indefinite. It may be properly assailed by way of the special civil action for certiorari, as it is interlocutory in
nature.
As a rule, the special civil action for certiorari under Rule 65 must be filed not later than sixty (60) days from notice
of the judgment or order.23 Petitioners argue that the 3 August 1999 Order could no longer be assailed by
respondents in a special civil action for certiorari before the Court of Appeals, as the petition was filed beyond sixty
(60) days following respondents’ receipt of the Order. Considering that the 3 August 1999 Order had
become functus officio in the first place, this argument deserves scant consideration.
Petitioners further claim that the 6 January 2000 Order could not have likewise been the subject of a special civil
action for certiorari, as it is according to them a final order, as opposed to an interlocutory order. That the 6 January
2000 Order is interlocutory in nature should be beyond doubt. An order is interlocutory if its effects would only be
provisional in character and would still leave substantial proceedings to be further had by the issuing court in order
to put the controversy to rest.24 The injunctive relief granted by the order is definitely final, but merely provisional,
its effectivity hinging on the ultimate outcome of the then pending action for annulment of real estate mortgage.
Indeed, an interlocutory order hardly puts to a close, or disposes of, a case or a disputed issue leaving nothing else
to be done by the court in respect thereto, as is characteristic of a final order.
Since the 6 January 2000 Order is not a final order, but rather interlocutory in nature, we cannot agree with
petitioners who insist that it may be assailed only through an appeal perfected within fifteen (15) days from receipt
thereof by respondents. It is axiomatic that an interlocutory order cannot be challenged by an appeal,
but is susceptible to review only through the special civil action of certiorari. 25 The sixty (60)-day reglementary
period for special civil actions under Rule 65 applies, and respondents’ petition was filed with the Court of Appeals
well within the period.
Accordingly, no error can be attributed to the Court of Appeals in granting the petition for certiorari and mandamus.
As pointed out by respondents, the remedy of mandamus lies to compel the performance of a ministerial duty. The
issuance of a writ of possession to a purchaser in an extrajudicial foreclosure is merely a ministerial function. 26
Thus, we also affirm the Court of Appeals’ ruling to set aside the RTC orders enjoining the enforcement of the writ
of possession.27 The purchaser in a foreclosure sale is entitled as a matter of right to a writ of possession, regardless
of whether or not there is a pending suit for annulment of the mortgage or the foreclosure proceedings. An injunction
to prohibit the issuance or enforcement of the writ is entirely out of place.28
One final note. The issue on the validity of the stipulated interest rates, regrettably for petitioners, was not raised at
the earliest possible opportunity. It should be pointed out though that since an excessive stipulated interest rate may
be void for being contrary to public policy, an action to annul said interest rate does not prescribe. Such indeed is
the remedy; it is not the action for annulment of the ancillary real estate mortgage. Despite the nullity of the stipulated
interest rate, the principal loan obligation subsists, and along with it the mortgage that serves as collateral security
for it.
WHEREFORE, in view of all the foregoing, the petitions are DENIED. Costs against petitioners.
SO ORDERED.
[G.R. No. 138677. February 12, 2002]
TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners, vs. HON. COURT OF APPEALS &
SECURITY BANK & TRUST COMPANY, respondents.
DECISION
VITUG, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, assailing the
decision and resolutions of the Court of Appeals in CA-G.R. CV No. 34594, entitled "Security Bank and Trust Co.
vs. Tolomeo Ligutan, et al."
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained on 11 May 1981 a loan in the amount of
P120,000.00 from respondent Security Bank and Trust Company. Petitioners executed a promissory note binding
themselves, jointly and severally, to pay the sum borrowed with an interest of 15.189% per annum upon maturity
and to pay a penalty of 5% every month on the outstanding principal and interest in case of default. In addition,
petitioners agreed to pay 10% of the total amount due by way of attorneys fees if the matter were indorsed to a
lawyer for collection or if a suit were instituted to enforce payment. The obligation matured on 8 September 1981;
the bank, however, granted an extension but only up until 29 December 1981.
Despite several demands from the bank, petitioners failed to settle the debt which, as of 20 May 1982,
amounted to P114,416.10. On 30 September 1982, the bank sent a final demand letter to petitioners informing them
that they had five days within which to make full payment. Since petitioners still defaulted on their obligation, the
bank filed on 3 November 1982, with the Regional Trial Court of Makati, Branch 143, a complaint for recovery of
the due amount.
After petitioners had filed a joint answer to the complaint, the bank presented its evidence and, on 27 March
1985, rested its case. Petitioners, instead of introducing their own evidence, had the hearing of the case reset on two
consecutive occasions. In view of the absence of petitioners and their counsel on 28 August 1985, the third hearing
date, the bank moved, and the trial court resolved, to consider the case submitted for decision.
Two years later, or on 23 October 1987, petitioners filed a motion for reconsideration of the order of the trial
court declaring them as having waived their right to present evidence and prayed that they be allowed to prove their
case. The court a quo denied the motion in an order, dated 5 September 1988, and on 20 October 1989, it rendered
its decision,[1] the dispositive portion of which read:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, ordering the latter
to pay, jointly and severally, to the plaintiff, as follows:
"1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum, 2% service charge
and 5% per month penalty charge, commencing on 20 May 1982 until fully paid;
"2. To pay the further sum equivalent to 10% of the total amount of indebtedness for and as attorneys
fees; and
"3. To pay the costs of the suit.[2]
Petitioners interposed an appeal with the Court of Appeals, questioning the rejection by the trial court of their
motion to present evidence and assailing the imposition of the 2% service charge, the 5% per month penalty charge
and 10% attorney's fees. In its decision[3] of 7 March 1996, the appellate court affirmed the judgment of the trial
court except on the matter of the 2% service charge which was deleted pursuant to Central Bank Circular No.
783. Not fully satisfied with the decision of the appellate court, both parties filed their respective motions for
reconsideration.[4] Petitioners prayed for the reduction of the 5% stipulated penalty for being unconscionable. The
bank, on the other hand, asked that the payment of interest and penalty be commenced not from the date of filing of
complaint but from the time of default as so stipulated in the contract of the parties.
On 28 October 1998, the Court of Appeals resolved the two motions thusly:
We find merit in plaintiff-appellees claim that the principal sum of P114,416.00 with interest thereon must
commence not on the date of filing of the complaint as we have previously held in our decision but on the date when
the obligation became due.
Default generally begins from the moment the creditor demands the performance of the obligation. However,
demand is not necessary to render the obligor in default when the obligation or the law so provides.
In the case at bar, defendants-appellants executed a promissory note where they undertook to pay the obligation on
its maturity date 'without necessity of demand.' They also agreed to pay the interest in case of non-payment from
the date of default.
xxxxxxxxx
While we maintain that defendants-appellants must be bound by the contract which they acknowledged and signed,
we take cognizance of their plea for the application of the provisions of Article 1229 x xx.
Considering that defendants-appellants partially complied with their obligation under the promissory note by the
reduction of the original amount of P120,000.00 to P114,416.00 and in order that they will finally settle their
obligation, it is our view and we so hold that in the interest of justice and public policy, a penalty of 3% per month
or 36% per annum would suffice.
xxxxxxxxx
WHEREFORE, the decision sought to be reconsidered is hereby MODIFIED. The defendants-
appellants Tolomeo Ligutan and Leonidas dela Llana are hereby ordered to pay the plaintiff-appellee Security Bank
and Trust Company the following:
1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum and 3% per
month penalty charge commencing May 20, 1982 until fully paid;
2. The sum equivalent to 10% of the total amount of the indebtedness as and for attorneys fees. [5]
On 16 November 1998, petitioners filed an omnibus motion for reconsideration and to admit newly discovered
evidence,[6] alleging that while the case was pending before the trial court, petitioner Tolomeo Ligutan and his
wife Bienvenida Ligutan executed a real estate mortgage on 18 January 1984 to secure the existing indebtedness of
petitioners Ligutan and delaLlana with the bank. Petitioners contended that the execution of the real estate mortgage
had the effect of novating the contract between them and the bank. Petitioners further averred that the mortgage
was extrajudicially foreclosed on 26 August 1986, that they were not informed about it, and the bank did not credit
them with the proceeds of the sale. The appellate court denied the omnibus motion for reconsideration and to admit
newly discovered evidence, ratiocinating that such a second motion for reconsideration cannot be entertained under
Section 2, Rule 52, of the 1997 Rules of Civil Procedure. Furthermore, the appellate court said, the newly-discovered
evidence being invoked by petitioners had actually been known to them when the case was brought on appeal and
when the first motion for reconsideration was filed.[7]
Aggrieved by the decision and resolutions of the Court of Appeals, petitioners elevated their case to this Court
on 9 July 1999 via a petition for review on certiorari under Rule 45 of the Rules of Court, submitting thusly -
I. The respondent Court of Appeals seriously erred in not holding that the 15.189% interest and the
penalty of three (3%) percent per month or thirty-six (36%) percent per annum imposed
by private respondent bank on petitioners loan obligation are still manifestly exorbitant,
iniquitous and unconscionable.
II. The respondent Court of Appeals gravely erred in not reducing to a reasonable level the ten (10%)
percent award of attorneys fees which is highly and grossly excessive, unreasonable and
unconscionable.
III. The respondent Court of Appeals gravely erred in not admitting petitioners newly discovered
evidence which could not have been timely produced during the trial of this case.
IV. The respondent Court of Appeals seriously erred in not holding that there was a novation of the
cause of action of private respondents complaint in the instant case due to the subsequent
execution of the real estate mortgage during the pendency of this case and the subsequent
foreclosure of the mortgage.[8]
Respondent bank, which did not take an appeal, would, however, have it that the penalty sought to be deleted
by petitioners was even insufficient to fully cover and compensate for the cost of money brought about by the radical
devaluation and decrease in the purchasing power of the peso, particularly vis-a-vis the U.S. dollar, taking into
account the time frame of its occurrence. The Bank would stress that only the amount of P5,584.00 had been remitted
out of the entire loan of P120,000.00.[9]
A penalty clause, expressly recognized by law,[10] is an accessory undertaking to assume greater liability on
the part of an obligor in case of breach of an obligation. It functions to strengthen the coercive force of the
obligation[11] and to provide, in effect, for what could be the liquidated damages resulting from such a breach. The
obligor would then be bound to pay the stipulated indemnity without the necessity of proof on the existence and on
the measure of damages caused by the breach.[12] Although a court may not at liberty ignore the freedom of the
parties to agree on such terms and conditions as they see fit that contravene neither law nor morals, good customs,
public order or public policy, a stipulated penalty, nevertheless, may be equitably reduced by the courts if it is
iniquitous or unconscionable or if the principal obligation has been partly or irregularly complied with. [13]
The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly objective. Its
resolution would depend on such factors as, but not necessarily confined to, the type, extent and purpose of the
penalty, the nature of the obligation, the mode of breach and its consequences, the supervening realities, the standing
and relationship of the parties, and the like, the application of which, by and large, is addressed to the sound
discretion of the court. In Rizal Commercial Banking Corp. vs. Court of Appeals,[14] just an example, the Court has
tempered the penalty charges after taking into account the debtors pitiful situation and its offer to settle the entire
obligation with the creditor bank. The stipulated penalty might likewise be reduced when a partial or irregular
performance is made by the debtor.[15] The stipulated penalty might even be deleted such as when there has been
substantial performance in good faith by the obligor,[16] when the penalty clause itself suffers from fatal infirmity,
or when exceptional circumstances so exist as to warrant it.[17]
The Court of Appeals, exercising its good judgment in the instant case, has reduced the penalty interest from
5% a month to 3% a month which petitioner still disputes. Given the circumstances, not to mention the repeated acts
of breach by petitioners of their contractual obligation, the Court sees no cogent ground to modify the ruling of the
appellate court..
Anent the stipulated interest of 15.189% per annum, petitioners, for the first time, question its reasonableness
and prays that the Court reduce the amount. This contention is a fresh issue that has not been raised and ventilated
before the courts below. In any event, the interest stipulation, on its face, does not appear as being that excessive. The
essence or rationale for the payment of interest, quite often referred to as cost of money, is not exactly the same as
that of a surcharge or a penalty. A penalty stipulation is not necessarily preclusive of interest, if there is an agreement
to that effect, the two being distinct concepts which may separately be demanded. [18] What may justify a court in
not allowing the creditor to impose full surcharges and penalties, despite an express stipulation therefor in a valid
agreement, may not equally justify the non-payment or reduction of interest. Indeed, the interest prescribed in loan
financing arrangements is a fundamental part of the banking business and the core of a bank's existence. [19]
Petitioners next assail the award of 10% of the total amount of indebtedness by way of attorney's fees for
being grossly excessive, exorbitant and unconscionable vis-a-vis the time spent and the extent of services rendered
by counsel for the bank and the nature of the case. Bearing in mind that the rate of attorneys fees has been agreed to
by the parties and intended to answer not only for litigation expenses but also for collection efforts as well, the
Court, like the appellate court, deems the award of 10% attorneys fees to be reasonable.
Neither can the appellate court be held to have erred in rejecting petitioners' call for a new trial or to admit
newly discovered evidence. As the appellate court so held in its resolution of 14 May 1999 -
Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second motion for reconsideration of a judgment
or final resolution by the same party shall be entertained. Considering that the instant motion is already a second
motion for reconsideration, the same must therefore be denied.
Furthermore, it would appear from the records available to this court that the newly-discovered evidence being
invoked by defendants-appellants have actually been existent when the case was brought on appeal to this court as
well as when the first motion for reconsideration was filed. Hence, it is quite surprising why defendants-appellants
raised the alleged newly-discovered evidence only at this stage when they could have done so in the earlier pleadings
filed before this court.
The propriety or acceptability of such a second motion for reconsideration is not contingent upon the averment of
'new' grounds to assail the judgment, i.e., grounds other than those theretofore presented and rejected. Otherwise,
attainment of finality of a judgment might be stayed off indefinitely, depending on the partys ingenuousness or
cleverness in conceiving and formulating 'additional flaws' or 'newly discovered errors' therein, or thinking up some
injury or prejudice to the rights of the movant for reconsideration.[20]
At any rate, the subsequent execution of the real estate mortgage as security for the existing loan would not have
resulted in the extinguishment of the original contract of loan because of novation. Petitioners acknowledge that the
real estate mortgage contract does not contain any express stipulation by the parties intending it to supersede the
existing loan agreement between the petitioners and the bank.[21] Respondent bank has correctly postulated that the
mortgage is but an accessory contract to secure the loan in the promissory note.
Extinctive novation requires, first, a previous valid obligation; second, the agreement of all the parties to the
new contract; third, the extinguishment of the obligation; and fourth, the validity of the new one.[22] In order that an
obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligation be on every point incompatible with each other.[23] An
obligation to pay a sum of money is not extinctively novated by a new instrument which merely changes the terms
of payment or adding compatible covenants or where the old contract is merely supplemented by the new
one.[24] When not expressed, incompatibility is required so as to ensure that the parties have indeed intended
such novation despite their failure to express it in categorical terms. The incompatibility, to be sure, should take
place in any of the essential elements of the obligation, i.e., (1) the juridical relation or tie, such as from a
mere commodatum to lease of things, or from negotiorum gestio to agency, or from a mortgage to antichresis,[25] or
from a sale to one of loan;[26] (2) the object or principal conditions, such as a change of the nature of the prestation;
or (3) the subjects, such as the substitution of a debtor[27] or the subrogation of the creditor. Extinctive novation does
not necessarily imply that the new agreement should be complete by itself; certain terms and conditions may be
carried, expressly or by implication, over to the new obligation.
WHEREFORE, the petition is DENIED.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 97412 July 12, 1994
EASTERN SHIPPING LINES, INC., petitioner,
vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents.
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.
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 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.

Correspondingly, as to the second issue, it follows that the losses/damages SO ORDERED. (p. 207, Record).
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 Dissatisfied, defendant's recourse to US.
Cargo Survey Report (Exh. G), with its "Additional Survey Notes", are
considered. In the latter notes, it is stated that when the shipment was The appeal is devoid of merit.
"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 After a careful scrutiny of the evidence on record. We find that the conclusion drawn therefrom
condition, covered by the vessel's Agent's Bad Order Tally Sheet is correct. As there is sufficient evidence that the shipment sustained damage while in the
No. 86427." The report further states that when defendant Allied Brokerage successive possession of appellants, and therefore they are liable to the appellee, as subrogee
withdrew the shipment from defendant arrastre operator's custody on for the amount it paid to the consignee. (pp. 87-89, Rollo.)
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 The Court of Appeals thus affirmed in toto the judgment of the court
consignee, one drum was found with adulterated/faked contents. It is a quo.
obvious, therefore, that these losses/damages occurred before the shipment
reached the consignee while under the successive custodies of defendants. In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse of discretion on
Under Art. 1737 of the New Civil Code, the common carrier's duty to 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 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 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 vice-versa, 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 decided3 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 Court6 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 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)
. . . 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 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 . . . 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 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 Court12 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. 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 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,14decided 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 Court15 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 forbearance16 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,17depending 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-delicts18 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.
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 court24 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
Date Hired = August 1990
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 Rate = ₱198/day
be imposed on such amount upon finality of this decision until the payment thereof.
Date of Decision = Aug. 18, 1998
SO ORDERED.
Length of Service = 8 yrs. & 1 month
Republic of the Philippines ₱198.00 x 26 days x 8 months = ₱41,184.00
SUPREME COURT
Manila BACKWAGES

EN BANC Date Dismissed = January 24, 1997

Rate per day = ₱196.00

G.R. No. 189871 August 13, 2013
Date of Decisions = Aug. 18, 1998
DARIO NACAR, PETITIONER,
a) 1/24/97 to 2/5/98 = 12.36 mos.
vs.
GALLERY FRAMES AND/OR FELIPE BORDEY, JR., RESPONDENTS. ₱196.00/day x 12.36 mos. = ₱62,986.56

DECISION b) 2/6/98 to 8/18/98 = 6.4 months

Prevailing Rate per day = ₱62,986.00

PERALTA, J.:
₱198.00 x 26 days x 6.4 mos. = ₱32,947.20
This is a petition for review on certiorari assailing the Decision 1 dated September 23, 2008 of the Court of Appeals
(CA) in CA-G.R. SP No. 98591, and the Resolution2 dated October 9, 2009 denying petitioner’s motion for TOTAL = ₱95.933.76
reconsideration.
xxxx
The factual antecedents are undisputed.
WHEREFORE, premises considered, judgment is hereby rendered finding respondents guilty of constructive
Petitioner Dario Nacar filed a complaint for constructive dismissal before the Arbitration Branch of the National dismissal and are therefore, ordered:
Labor Relations Commission (NLRC) against respondents Gallery Frames (GF) and/or Felipe Bordey, Jr., docketed
as NLRC NCR Case No. 01-00519-97.
To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred eighty-six pesos and
3
56/100 (₱62,986.56) Pesos representing his separation pay;
On October 15, 1998, the Labor Arbiter rendered a Decision in favor of petitioner and found that he was dismissed
from employment without a valid or just cause. Thus, petitioner was awarded backwages and separation pay in lieu
of reinstatement in the amount of ₱158,919.92. The dispositive portion of the decision, reads: To pay jointly and severally the complainant the amount of nine (sic) five thousand nine hundred thirty-three and
36/100 (₱95,933.36) representing his backwages; and
With the foregoing, we find and so rule that respondents failed to discharge the burden of showing that complainant
was dismissed from employment for a just or valid cause. All the more, it is clear from the records that complainant All other claims are hereby dismissed for lack of merit.
was never afforded due process before he was terminated. As such, we are perforce constrained to grant
complainant’s prayer for the payments of separation pay in lieu of reinstatement to his former position, considering SO ORDERED.4
the strained relationship between the parties, and his apparent reluctance to be reinstated, computed only up to
promulgation of this decision as follows: Respondents appealed to the NLRC, but it was dismissed for lack of merit in the Resolution5 dated February 29,
2000. Accordingly, the NLRC sustained the decision of the Labor Arbiter. Respondents filed a motion for
reconsideration, but it was denied.6
SEPARATION PAY
Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On August 24, 2000, the CA issued
a Resolution dismissing the petition. Respondents filed a Motion for Reconsideration, but it was likewise denied in
a Resolution dated May 8, 2001.7
Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332. Finding no reversible error
on the part of the CA, this Court denied the petition in the Resolution dated April 17, 2002. 8
An Entry of Judgment was later issued certifying that the resolution became final and executory on May 27,
2002.9The case was, thereafter, referred back to the Labor Arbiter. A pre-execution conference was consequently
scheduled, but respondents failed to appear.10
On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his backwages be computed
from the date of his dismissal on January 24, 1997 up to the finality of the Resolution of the Supreme Court on May
27, 2002.11 Upon recomputation, the Computation and Examination Unit of the NLRC arrived at an updated amount
in the sum of ₱471,320.31.12
On December 2, 2002, a Writ of Execution 13 was issued by the Labor Arbiter ordering the Sheriff to collect from
respondents the total amount of ₱471,320.31. Respondents filed a Motion to Quash Writ of Execution, arguing,
among other things, that since the Labor Arbiter awarded separation pay of ₱62,986.56 and limited backwages of
₱95,933.36, no more recomputation is required to be made of the said awards. They claimed that after the decision
becomes final and executory, the same cannot be altered or amended anymore. 14 On January 13, 2003, the Labor
Arbiter issued an Order15 denying the motion. Thus, an Alias Writ of Execution 16 was issued on January 14, 2003.
Respondents again appealed before the NLRC, which on June 30, 2003 issued a Resolution 17 granting the appeal in
favor of the respondents and ordered the recomputation of the judgment award.
On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the NLRC to be final and
executory. Consequently, another pre-execution conference was held, but respondents failed to appear on time.
Meanwhile, petitioner moved that an Alias Writ of Execution be issued to enforce the earlier recomputed judgment
award in the sum of ₱471,320.31.18
The records of the case were again forwarded to the Computation and Examination Unit for recomputation, where
the judgment award of petitioner was reassessed to be in the total amount of only ₱147,560.19.
Petitioner then moved that a writ of execution be issued ordering respondents to pay him the original amount as
determined by the Labor Arbiter in his Decision dated October 15, 1998, pending the final computation of his
backwages and separation pay.
On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the judgment award that was
due to petitioner in the amount of ₱147,560.19, which petitioner eventually received.
Petitioner then filed a Manifestation and Motion praying for the re-computation of the monetary award to include
the appropriate interests.19
On May 10, 2005, the Labor Arbiter issued an Order20 granting the motion, but only up to the amount of ₱11,459.73.
The Labor Arbiter reasoned that it is the October 15, 1998 Decision that should be enforced considering that it was
the one that became final and executory. However, the Labor Arbiter reasoned that since the decision states that the
separation pay and backwages are computed only up to the promulgation of the said decision, it is the amount of
₱158,919.92 that should be executed. Thus, since petitioner already received ₱147,560.19, he is only entitled to the
balance of ₱11,459.73.
Petitioner then appealed before the NLRC,21 which appeal was denied by the NLRC in its Resolution22 dated
September 27, 2006. Petitioner filed a Motion for Reconsideration, but it was likewise denied in the
Resolution23dated January 31, 2007.
Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No. 98591.
On September 23, 2008, the CA rendered a Decision24 denying the petition. The CA opined that since petitioner no
longer appealed the October 15, 1998 Decision of the Labor Arbiter, which already became final and executory, a
belated correction thereof is no longer allowed. The CA stated that there is nothing left to be done except to enforce
the said judgment. Consequently, it can no longer be modified in any respect, except to correct clerical errors or
mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution 25 dated October 9, 2009.
Hence, the petition assigning the lone error:
I
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED, COMMITTED
GRAVE ABUSE OF DISCRETION AND DECIDED CONTRARY TO LAW IN UPHOLDING THE
QUESTIONED RESOLUTIONS OF THE NLRC WHICH, IN TURN, SUSTAINED THE MAY 10, 2005 ORDER
OF LABOR ARBITER MAGAT MAKING THE DISPOSITIVE PORTION OF THE OCTOBER 15, 1998
DECISION OF LABOR ARBITER LUSTRIA SUBSERVIENT TO AN OPINION EXPRESSED IN THE BODY
OF THE SAME DECISION.26
Petitioner argues that notwithstanding the fact that there was a computation of backwages in the Labor Arbiter’s
decision, the same is not final until reinstatement is made or until finality of the decision, in case of an award of
separation pay. Petitioner maintains that considering that the October 15, 1998 decision of the Labor Arbiter did not
become final and executory until the April 17, 2002 Resolution of the Supreme Court in G.R. No. 151332 was
entered in the Book of Entries on May 27, 2002, the reckoning point for the computation of the backwages and
separation pay should be on May 27, 2002 and not when the decision of the Labor Arbiter was rendered on October
15, 1998. Further, petitioner posits that he is also entitled to the payment of interest from the finality of the decision
until full payment by the respondents.
On their part, respondents assert that since only separation pay and limited backwages were awarded to petitioner
by the October 15, 1998 decision of the Labor Arbiter, no more recomputation is required to be made of said awards.
Respondents insist that since the decision clearly stated that the separation pay and backwages are "computed only
up to [the] promulgation of this decision," and considering that petitioner no longer appealed the decision, petitioner
is only entitled to the award as computed by the Labor Arbiter in the total amount of ₱158,919.92. Respondents
added that it was only during the execution proceedings that the petitioner questioned the award, long after the
decision had become final and executory. Respondents contend that to allow the further recomputation of the
backwages to be awarded to petitioner at this point of the proceedings would substantially vary the decision of the
Labor Arbiter as it violates the rule on immutability of judgments.
The petition is meritorious.
The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v. Court of Appeals (Sixth
Division),27 wherein the issue submitted to the Court for resolution was the propriety of the computation of the
awards made, and whether this violated the principle of immutability of judgment. Like in the present case, it was a
distinct feature of the judgment of the Labor Arbiter in the above-cited case that the decision already provided for
the computation of the payable separation pay and backwages due and did not further order the computation of the
monetary awards up to the time of the finality of the judgment. Also in Session Delights, the dismissed employee
failed to appeal the decision of the labor arbiter. The Court clarified, thus:
In concrete terms, the question is whether a re-computation in the course of execution of the labor arbiter's original
computation of the awards made, pegged as of the time the decision was rendered and confirmed with modification
by a final CA decision, is legally proper. The question is posed, given that the petitioner did not immediately pay
the awards stated in the original labor arbiter's decision; it delayed payment because it continued with the litigation
until final judgment at the CA level.
A source of misunderstanding in implementing the final decision in this case proceeds from the way the original
labor arbiter framed his decision. The decision consists essentially of two parts.
The first is that part of the decision that cannot now be disputed because it has been confirmed with finality. This is
the finding of the illegality of the dismissal and the awards of separation pay in lieu of reinstatement, backwages,
attorney's fees, and legal interests.
The second part is the computation of the awards made. On its face, the computation the labor arbiter made shows
that it was time-bound as can be seen from the figures used in the computation. This part, being merely a computation
of what the first part of the decision established and declared, can, by its nature, be re-computed. This is the part,
too, that the petitioner now posits should no longer be re-computed because the computation is already in the labor
arbiter's decision that the CA had affirmed. The public and private respondents, on the other hand, posit that a re-
computation is necessary because the relief in an illegal dismissal decision goes all the way up to reinstatement if
reinstatement is to be made, or up to the finality of the decision, if separation pay is to be given in lieu reinstatement.
That the labor arbiter's decision, at the same time that it found that an illegal dismissal had taken place, also made a
computation of the award, is understandable in light of Section 3, Rule VIII of the then NLRC Rules of Procedure
which requires that a computation be made. This Section in part states:
[T]he Labor Arbiter of origin, in cases involving monetary awards and at all events, as far as practicable, shall
embody in any such decision or order the detailed and full amount awarded.
Clearly implied from this original computation is its currency up to the finality of the labor arbiter's decision. As we
noted above, this implication is apparent from the terms of the computation itself, and no question would have arisen
had the parties terminated the case and implemented the decision at that point.
However, the petitioner disagreed with the labor arbiter's findings on all counts - i.e., on the finding of illegality as
well as on all the consequent awards made. Hence, the petitioner appealed the case to the NLRC which, in turn,
affirmed the labor arbiter's decision. By law, the NLRC decision is final, reviewable only by the CA on jurisdictional
grounds.
The petitioner appropriately sought to nullify the NLRC decision on jurisdictional grounds through a timely filed
Rule 65 petition for certiorari. The CA decision, finding that NLRC exceeded its authority in affirming the payment
of 13th month pay and indemnity, lapsed to finality and was subsequently returned to the labor arbiter of origin for
execution.
It was at this point that the present case arose. Focusing on the core illegal dismissal portion of the original labor
arbiter's decision, the implementing labor arbiter ordered the award re-computed; he apparently read the figures
originally ordered to be paid to be the computation due had the case been terminated and implemented at the labor
arbiter's level. Thus, the labor arbiter re-computed the award to include the separation pay and the backwages due
up to the finality of the CA decision that fully terminated the case on the merits. Unfortunately, the labor arbiter's
approved computation went beyond the finality of the CA decision (July 29, 2003) and included as well the payment
for awards the final CA decision had deleted - specifically, the proportionate 13th month pay and the indemnity
awards. Hence, the CA issued the decision now questioned in the present petition.
We see no error in the CA decision confirming that a re-computation is necessary as it essentially considered the
labor arbiter's original decision in accordance with its basic component parts as we discussed above. To reiterate,
the first part contains the finding of illegality and its monetary consequences; the second part is the computation of
the awards or monetary consequences of the illegal dismissal, computed as of the time of the labor arbiter's original
decision.28
Consequently, from the above disquisitions, under the terms of the decision which is sought to be executed by the
petitioner, no essential change is made by a recomputation as this step is a necessary consequence that flows from
the nature of the illegality of dismissal declared by the Labor Arbiter in that decision. 29 A recomputation (or an
original computation, if no previous computation has been made) is a part of the law – specifically, Article 279 of
the Labor Code and the established jurisprudence on this provision – that is read into the decision. By the nature of
an illegal dismissal case, the reliefs continue to add up until full satisfaction, as expressed under Article 279 of the
Labor Code. The recomputation of the consequences of illegal dismissal upon execution of the decision does not
constitute an alteration or amendment of the final decision being implemented. The illegal dismissal ruling stands;
only the computation of monetary consequences of this dismissal is affected, and this is not a violation of the
principle of immutability of final judgments.30
That the amount respondents shall now pay has greatly increased is a consequence that it cannot avoid as it is the
risk that it ran when it continued to seek recourses against the Labor Arbiter's decision. Article 279 provides for the
consequences of illegal dismissal in no uncertain terms, qualified only by jurisprudence in its interpretation of when
separation pay in lieu of reinstatement is allowed. When that happens, the finality of the illegal dismissal decision
becomes the reckoning point instead of the reinstatement that the law decrees. In allowing separation pay, the final
decision effectively declares that the employment relationship ended so that separation pay and backwages are to
be computed up to that point.31
Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines, Inc. v. Court of
Appeals,32 the Court laid down the guidelines regarding the manner of computing legal interest, to wit:
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum.
No interest, however, shall be adjudged on unliquidated claims or damages except when or until the
 demand can be established with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be 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.33
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796 dated
May 16, 2013, approved the amendment of Section 234 of Circular No. 905, Series of 1982 and, accordingly, issued
Circular No. 799,35 Series of 2013, effective July 1, 2013, the pertinent portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following revisions governing the
rate of interest in the absence of stipulation in loan contracts, thereby amending Section 2 of Circular No. 905, Series
of 1982:
Section 1. 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 an express contract as to such rate of interest, shall be six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.1 36 of the Manual of Regulations for Banks and Sections
4305Q.1,37 4305S.338 and 4303P.139 of the Manual of Regulations for Non-Bank Financial Institutions are hereby
amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that would govern the
parties, the rate of legal interest for loans or forbearance of any money, goods or credits and the rate allowed in
judgments shall no longer be twelve percent (12%) per annum - as reflected in the case of Eastern Shipping
Lines40and Subsection X305.1 of the Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1
of the Manual of Regulations for Non-Bank Financial Institutions, before its amendment by BSP-MB Circular No.
799 - but will now be six percent (6%) per annum effective July 1, 2013. It should be noted, nonetheless, that the
new rate could only be applied prospectively and not retroactively. Consequently, the twelve percent (12%) per
annum legal interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of six percent (6%) per
annum shall be the prevailing rate of interest when applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B. Olaguer v. Bangko Sentral
Monetary Board,41 this Court affirmed the authority of the BSP-MB to set interest rates and to issue and enforce
Circulars when it ruled that "the BSP-MB may prescribe the maximum rate or rates of interest for all loans or
renewals thereof or the forbearance of any money, goods or credits, including those for loans of low priority such
as consumer loans, as well as such loans made by pawnshops, finance companies and similar credit institutions. It
even authorizes the BSP-MB to prescribe different maximum rate or rates for different types of borrowings,
including deposits and deposit substitutes, or loans of financial intermediaries."
Nonetheless, with regard to those judgments that have become final and executory prior to July 1, 2013, said
judgments shall not be disturbed and shall continue to be implemented applying the rate of interest fixed
therein.1awp++i1
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Lines 42 are
accordingly modified to embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts
is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the measure of recoverable damages.1âwphi1
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:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest
shall be 6% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil Code.
When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of
damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however,
shall be adjudged on unliquidated claims or damages, except when or until the demand can be established with
reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin
to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty
cannot be 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.
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 6% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall not be
disturbed and shall continue to be implemented applying the rate of interest fixed therein.
WHEREFORE, premises considered, the Decision dated September 23, 2008 of the Court of Appeals in CA-G.R.
SP No. 98591, and the Resolution dated October 9, 2009 are REVERSED and SET ASIDE. Respondents are
Ordered to Pay petitioner:
(1) backwages computed from the time petitioner was illegally dismissed on January 24, 1997 up to May
27, 2002, when the Resolution of this Court in G.R. No. 151332 became final and executory;
(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one month pay per year
of service; and
 (3) interest of twelve percent (12%) per annum of the total monetary awards, computed from May 27, b) Title
2002 to June 30, 2013 and six percent (6%) per annum from July 1, 2013 until their full satisfaction. c) Tax Declaration
d) Affidavit of Aggregate Landholding Vendor/Vendee
The Labor Arbiter is hereby ORDERED to make another recomputation of the total monetary benefits awarded and e) Certification from the Provl. Assessors as to Landholdings of Vendor/Vendee
due to petitioner in accordance with this Decision. f) Affidavit of Non-Tenancy
g) Deed of Absolute Sale
SO ORDERED. xxxx

Republic of the Philippines 4. Vendee shall be informed as to the status of DAR clearance within 10 days upon signing of the
Supreme Court documents.
Baguio City
xxxx
FIRST DIVISION
6. Regarding the house located within the perimeter of the subject [lot] owned by spouses [Magbago], said
HERMOJINA ESTORES, - vs- G.R. No. 175139 house shall be moved outside the perimeter of this subject property to the 300 sq. m. area allocated for
[it]. Vendor hereby accepts the responsibility of seeing to it that such agreement is carried out before
SPOUSES ARTURO and full payment of the sale is made by vendee.
LAURA SUPANGAN, Promulgated:
Respondents. April 18, 2012 7. If and after the vendor has completed all necessary documents for registration of the title and the vendee
fails to complete payment as per agreement, a forfeiture fee of 25% or downpayment, shall be
applied. However, if the vendor fails to complete necessary documents within thirty days without any
DECISION sufficient reason, or without informing the vendee of its status, vendee has the right to demand return
of full amount of down payment.
DEL CASTILLO, J.:
xxxx
The only issue posed before us is the propriety of the imposition of interest and attorneys fees.
9. As to the boundaries and partition of the lots (15,018 sq. m. and 300 sq. m.) Vendee shall be informed
Assailed in this Petition for Review[1] filed under Rule 45 of the Rules of Court is the May 12, 2006 Decision[2] of the Court of immediately of its approval by the LRC.
Appeals (CA) in CA-G.R. CV No. 83123, the dispositive portion of which reads:
10. The vendor assures the vendee of a peaceful transfer of ownership.
WHEREFORE, the appealed decision is MODIFIED. The rate of interest shall be six percent
(6%) per annum, computed from September 27, 2000 until its full payment before finality of the x x x x [6]
judgment. If the adjudged principal and the interest (or any part thereof) remain unpaid thereafter, the
interest rate shall be adjusted to twelve percent (12%) per annum, computed from the time the judgment
becomes final and executory until it is fully satisfied. The award of attorneys fees is hereby reduced After almost seven years from the time of the execution of the contract and notwithstanding payment of P3.5 million
to P100,000.00. Costs against the defendants-appellants. on the part of respondent-spouses, petitioner still failed to comply with her obligation as expressly provided in paragraphs 4, 6, 7,
9 and 10 of the contract. Hence, in a letter[7] dated September 27, 2000, respondent-spouses demanded the return of the amount
SO ORDERED.[3] of P3.5 million within 15 days from receipt of the letter. In reply,[8] petitioner acknowledged receipt of the P3.5 million and
Also assailed is the August 31, 2006 Resolution[4] denying the motion for reconsideration. promised to return the same within 120 days.Respondent-spouses were amenable to the proposal provided an interest of 12%
compounded annually shall be imposed on the P3.5 million.[9] When petitioner still failed to return the amount despite demand,
Factual Antecedents respondent-spouses were constrained to file a Complaint[10] for sum of money before the Regional Trial Court (RTC) of Malabon
against herein petitioner as well as Roberto U. Arias (Arias) who allegedly acted as petitioners agent. The case was docketed as
On October 3, 1993, petitioner Hermojina Estores and respondent-spouses Arturo and Laura Supangan entered into a Conditional Civil Case No. 3201-MN and raffled off to Branch 170. In their complaint, respondent-spouses prayed that petitioner and Arias
Deed of Sale[5] whereby petitioner offered to sell, and respondent-spouses offered to buy, a parcel of land covered by Transfer be ordered to:
Certificate of Title No. TCT No. 98720 located at Naic, Cavite for the sum of P4.7 million. The parties likewise stipulated, among
others, to wit: 1. Pay the principal amount of P3,500,000.00 plus interest of 12% compounded annually
starting October 1, 1993 or an estimated amount of P8,558,591.65;
xxxx
2. Pay the following items of damages:
1. Vendor will secure approved clearance from DAR requirements of which are (sic):
a) Letter request a) Moral damages in the amount of P100,000.00;
 b) Actual damages in the amount of P100,000.00;
c) Exemplary damages in the amount of P100,000.00;
d) [Attorneys] fee in the amount of P50,000.00 plus 20% of recoverable amount
from the [petitioner].
e) [C]ost of suit.[11]
In their Answer with Counterclaim,[12] petitioner and Arias averred that they are willing to return the principal amount
of P3.5 million but without any interest as the same was not agreed upon. In their Pre-Trial Brief,[13] they reiterated that the only
remaining issue between the parties is the imposition of interest. They argued that since the Conditional Deed of Sale provided
only for the return of the downpayment in case of breach, they cannot be held liable to pay legal interest as well.[14]
In its Pre-Trial Order[15] dated June 29, 2001, the RTC noted that the parties agreed that the principal amount of 3.5
million pesos should be returned to the [respondent-spouses] by the [petitioner] and the issue remaining [is] whether x x x
[respondent-spouses] are entitled to legal interest thereon, damages and attorneys fees.[16]
Trial ensued thereafter. After the presentation of the respondent-spouses evidence, the trial court set the presentation of
Arias and petitioners evidence on September 3, 2003.[17]However, despite several postponements, petitioner and Arias failed to
appear hence they were deemed to have waived the presentation of their evidence. Consequently, the case was deemed submitted
for decision.[18]
Ruling of the Regional Trial Court
On May 7, 2004, the RTC rendered its Decision[19] finding respondent-spouses entitled to interest but only at the rate of 6% per
annum and not 12% as prayed by them.[20] It also found respondent-spouses entitled to attorneys fees as they were compelled to
litigate to protect their interest.[21]
The dispositive portion of the RTC Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the [respondent-
spouses] and ordering the [petitioner and Roberto Arias] to jointly and severally:
1. Pay [respondent-spouses] the principal amount of Three Million Five Hundred
Thousand pesos (P3,500,000.00) with an interest of 6% compounded annually starting October 1, 1993 and
attorneys fee in the amount of Fifty Thousand pesos (P50,000.00) plus 20% of the recoverable amount from
the defendants and cost of the suit.
The Compulsory Counter Claim is hereby dismissed for lack of factual evidence.
SO ORDERED.[22]
Ruling of the Court of Appeals
Aggrieved, petitioner and Arias filed their notice of appeal.[23] The CA noted that the only issue submitted for its resolution is
whether it is proper to impose interest for an obligation that does not involve a loan or forbearance of money in the absence of
stipulation of the parties.[24]
On May 12, 2006, the CA rendered the assailed Decision affirming the ruling of the RTC finding the imposition of 6%
interest proper.[25] However, the same shall start to run only from September 27, 2000 when respondent-spouses formally
demanded the return of their money and not from October 1993 when the contract was executed as held by the RTC. The CA also
modified the RTCs ruling as regards the liability of Arias. It held that Arias could not be held solidarily liable with petitioner
because he merely acted as agent of the latter. Moreover, there was no showing that he expressly bound himself to be personally
liable or that he exceeded the limits of his authority. More importantly, there was even no showing that Arias was authorized to
act as agent of petitioner.[26] Anent the award of attorneys fees, the CA found the award by the trial court (P50,000.00 plus 20% of
the recoverable amount) excessive[27] and thus reduced the same to P100,000.00.[28]
The dispositive portion of the CA Decision reads:
WHEREFORE, the appealed decision is MODIFIED. The rate of interest shall be six percent (6%) per
annum, computed from September 27, 2000 until its full payment before finality of the judgment. If the
adjudged principal and the interest (or any part thereof) remain[s] unpaid thereafter, the interest rate shall be
adjusted to twelve percent (12%) per annum, computed from the time the judgment becomes final and
executory until it is fully satisfied. The award of attorneys fees is hereby reduced to P100,000.00. Costs
against the [petitioner].
SO ORDERED.[29]
Petitioner moved for reconsideration which was denied in the August 31, 2006 Resolution of the CA.
Hence, this petition raising the sole issue of whether the imposition of interest and attorneys fees is proper.
Petitioners Arguments
Petitioner insists that she is not bound to pay interest on the P3.5 million because the Conditional Deed of Sale only provided for
the return of the downpayment in case of failure to comply with her obligations. Petitioner also argues that the award of attorneys
fees in favor of the respondent-spouses is unwarranted because it cannot be said that the latter won over the former since the CA
even sustained her contention that the imposition of 12% interest compounded annually is totally uncalled for.
Respondent-spouses Arguments
Respondent-spouses aver that it is only fair that interest be imposed on the amount they paid considering that petitioner failed to
return the amount upon demand and had been using the P3.5 million for her benefit. Moreover, it is undisputed that petitioner
failed to perform her obligations to relocate the house outside the perimeter of the subject property and to complete the necessary
documents. As regards the attorneys fees, they claim that they are entitled to the same because they were forced to litigate when
petitioner unjustly withheld the amount. Besides, the amount awarded by the CA is even smaller compared to the filing fees they
paid.
Our Ruling
The petition lacks merit.
Interest may be imposed even in the absence of
stipulation in the contract.
We sustain the ruling of both the RTC and the CA that it is proper to impose interest notwithstanding the absence of
stipulation in the contract. Article 2210 of the Civil Code expressly provides that [i]nterest may, in the discretion of the court, be
allowed upon damages awarded for breach of contract. In this case, there is no question that petitioner is legally obligated to return
the P3.5 million because of her failure to fulfill the obligation under the Conditional Deed of Sale, despite demand. She has in fact
admitted that the conditions were not fulfilled and that she was willing to return the full amount of P3.5 million but has not actually
done so. Petitioner enjoyed the use of the money from the time it was given to her[30] until now. Thus, she is already in default of
her obligation from the date of demand, i.e., on September 27, 2000.
The interest at the rate of 12% is applicable in the
instant case.
Anent the interest rate, the general rule is that the applicable rate of interest shall be computed in accordance with the
stipulation of the parties.[31] Absent any stipulation, the applicable rate of interest shall be 12% per annum when the obligation
arises out of a loan or a forbearance of money, goods or credits. In other cases, it shall be six percent (6%).[32] In this case, the
parties did not stipulate as to the applicable rate of interest. The only question remaining therefore is whether the 6% as provided
under Article 2209 of the Civil Code, or 12% under Central Bank Circular No. 416, is due.
The contract involved in this case is admittedly not a loan but a Conditional Deed of Sale. However, the contract
provides that the seller (petitioner) must return the payment made by the buyer (respondent-spouses) if the conditions are not
fulfilled. There is no question that they have in fact, not been fulfilled as the seller (petitioner) has admitted this. Notwithstanding
demand by the buyer (respondent-spouses), the seller (petitioner) has failed to return the money and
should be considered in default from the time that demand was made on September 27, 2000.
Even if the transaction involved a Conditional Deed of Sale, can the stipulation governing the return of the money be
considered as a forbearance of money which required payment of interest at the rate of 12%? We believe so.
In Crismina Garments, Inc. v. Court of Appeals,[33] forbearance was defined as a contractual obligation of lender or
creditor to refrain during a given period of time, from requiring the borrower or debtor to repay a loan or debt then due and
payable. This definition describes a loan where a debtor is given a period within which to pay a loan or debt. In such case,
forbearance of money, goods or credits will have no distinct definition from a loan. We believe however, that the phrase
forbearance of money, goods or credits is meant to have a separate meaning from a loan, otherwise there would have been no need
to add that phrase as a loan is already sufficiently defined in the Civil Code.[34] Forbearance of money, goods or credits should
therefore refer to arrangements other than loan agreements, where a person acquiesces to the temporary use of his money, goods
or credits pending happening of certain events or fulfillment of certain conditions. In this case, the respondent-spouses parted with
their money even before the conditions were fulfilled. They have therefore allowed or granted forbearance to the seller (petitioner)
to use their money pending fulfillment of the conditions. They were deprived of the use of their money for the period pending
fulfillment of the conditions and when those conditions were breached, they are entitled not only to the return of the principal
amount paid, but also to compensation for the use of their money. And the compensation for the use of their money, absent any
stipulation, should be the same rate of legal interest applicable to a loan since the use or deprivation of funds is similar to a loan.
Petitioners unwarranted withholding of the money which rightfully pertains to respondent-spouses amounts to
forbearance of money which can be considered as an involuntary loan.Thus, the applicable rate of interest is 12% per
annum. In Eastern Shipping Lines, Inc. v. Court of Appeals,[35]cited in Crismina Garments, Inc. v. Court of Appeals,[36] the Court
suggested the following guidelines:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,
delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The
provisions under Title XVIII on Damages of the Civil Code govern in determining the
measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed,
as follows:
1. When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially demanded. In the absence
of stipulation, the rate of interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages except when or until the demand can
be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be 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.[37]
Eastern Shipping Lines, Inc. v. Court of Appeals[38]and its predecessor case, Reformina v. Tongol[39] both involved torts
cases and hence, there was no forbearance of money, goods, or credits. Further, the amount claimed (i.e., damages) could not be
established with reasonable certainty at the time the claim was made. Hence, we arrived at a different ruling in those cases.
Since the date of demand which is September 27, 2000 was satisfactorily established during trial, then the interest rate
of 12% should be reckoned from said date of demand until the principal amount and the interest thereon is fully satisfied.
The award of attorneys fees is warranted.
Under Article 2208 of the Civil Code, attorneys fees may be recovered:
xxxx
(2) When the defendants act or omission has compelled the plaintiff to litigate with third persons or to incur
expenses to protect his interest;
xxxx
(11) In any other case where the court deems it just and equitable that attorneys fees and expenses of
litigation should be recovered.
In all cases, the attorneys fees and expenses of litigation must be reasonable.
 Considering the circumstances of the instant case, we find respondent-spouses entitled to recover attorneys fees. There
is no doubt that they were forced to litigate to protect their interest, i.e., to recover their money. However, we find the amount To completely avail themselves of the P2.35 Million credit line extended to them by UCPB, the spouses
of P50,000.00 more appropriate in line with the policy enunciated in Article 2208 of the Civil Code that the award of attorneys Beluso executed two more promissory notes for a total of P350,000.00:
fees must always be reasonable.
PN # Date of PN Maturity Date Amount Secured
WHEREFORE, the Petition for Review is DENIED. The May 12, 2006 Decision of the Court of Appeals in CA- 97-00363-1 11 December 1997 28 February 1998 P 200,000
G.R. CV No. 83123 is AFFIRMED with MODIFICATIONSthat the rate of interest shall be twelve percent (12%) per annum, 98-00002-4 2 January 1998 28 February 1998 P 150,000
computed from September 27, 2000 until fully satisfied. The award of attorneys fees is further reduced to P50,000.00.

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

In any case, UCPB applied interest rates on the different promissory notes ranging from 18% to
UNITED COCONUT PLANTERS BANK, G.R. No. 159912 34%. From 1996 to February 1998 the spouses Beluso were able to pay the total sum of P763,692.03.
Petitioner,
- versus - Promulgated: From 28 February 1998 to 10 June 1998, UCPB continued to charge interest and penalty on the
SPOUSES SAMUEL and ODETTE BELUSO, obligations of the spouses Beluso, as follows:
Respondents. August 17, 2007
PN # Amount Secured Interest Penalty Total
DECISION 97-00363-1 P 200,000 31% 36% P 225,313.24
CHICO-NAZARIO, J.: 97-00366-6 P 700,000 30.17% 32.786% (102 P 795,294.72
(7 days) days)
97-00368-2 P 1,300,000 28% 30.41% (102 P 1,462,124.54
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, which seeks to annul the (2 days) days)
Court of Appeals Decision[1] dated 21 January 2003 and its Resolution[2] dated 9 September 2003 in CA-G.R. CV 98-00002-4 P 150,000 33% 36% P 170,034.71
No. 67318. The assailed Court of Appeals Decision and Resolution affirmed in turn the Decision [3] dated 23 March (102 days)
2000 and Order[4] dated 8 May 2000 of the Regional Trial Court (RTC), Branch 65 of Makati City, in Civil Case
No. 99-314, declaring void the interest rate provided in the promissory notes executed by the respondents Spouses
Samuel and Odette Beluso (spouses Beluso) in favor of petitioner United Coconut Planters Bank (UCPB).
The spouses Beluso, however, failed to make any payment of the foregoing amounts.
The procedural and factual antecedents of this case are as follows:
On 2 September 1998, UCPB demanded that the spouses Beluso pay their total obligation
of P2,932,543.00 plus 25% attorneys fees, but the spouses Beluso failed to comply therewith. On 28 December
On 16 April 1996, UCPB granted the spouses Beluso a Promissory Notes Line under a Credit Agreement
1998, UCPB foreclosed the properties mortgaged by the spouses Beluso to secure their credit line, which, by that
whereby the latter could avail from the former credit of up to a maximum amount of P1.2 Million pesos for a term
time, already ballooned to P3,784,603.00.
ending on 30 April 1997. The spouses Beluso constituted, other than their promissory notes, a real estate mortgage
over parcels of land in Roxas City, covered by Transfer Certificates of Title No. T-31539 and T-27828, as additional
On 9 February 1999, the spouses Beluso filed a Petition for Annulment, Accounting and Damages against
security for the obligation. The Credit Agreement was subsequently amended to increase the amount of the
UCPB with the RTC of Makati City.
Promissory Notes Line to a maximum of P2.35 Million pesos and to extend the term thereof to 28 February 1998.
On 23 March 2000, the RTC ruled in favor of the spouses Beluso, disposing of the case as follows:
The spouses Beluso availed themselves of the credit line under the following Promissory Notes:
PREMISES CONSIDERED, judgment is hereby rendered declaring the interest rate
PN # Date of PN Maturity Date Amount Secured used by [UCPB] void and the foreclosure and Sheriffs Certificate of Sale void. [UCPB] is
8314-96-00083-3 29 April 1996 27 August 1996 P 700,000 hereby ordered to return to [the spouses Beluso] the properties subject of the foreclosure; to pay
8314-96-00085-0 2 May 1996 30 August 1996 P 500,000 [the spouses Beluso] the amount of P50,000.00 by way of attorneys fees; and to pay the costs
8314-96-000292-2 20 November 1996 20 March 1997 P 800,000 of suit.[The spouses Beluso] are hereby ordered to pay [UCPB] the sum of P1,560,308.00.[5]

The three promissory notes were renewed several times. On 30 April 1997, the payment of the principal
and interest of the latter two promissory notes were debited from the spouses Belusos account with UCPB; yet, a
consolidated loan for P1.3 Million was again released to the spouses Beluso under one promissory note with a due
date of 28 February 1998.
On 8 May 2000, the RTC denied UCPBs Motion for Reconsideration,[6] prompting UCPB to appeal the
RTC Decision with the Court of Appeals. The Court of Appeals affirmed the RTC Decision, to wit:
WHEREFORE, premises considered, the decision dated March 23, 2000 of the
Regional Trial Court, Branch 65, Makati City in Civil Case No. 99-314 is hereby AFFIRMED
 subject to the modification that defendant-appellant UCPB is not liable for attorneys fees or the
costs of suit.[7]
On 9 September 2003, the Court of Appeals denied UCPBs Motion for Reconsideration for lack of
merit. UCPB thus filed the present petition, submitting the following issues for our resolution:
I quantified in the face of the promissory notes, it was nonetheless categorically fixed, at the time of execution thereof,
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS
AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL
COURT WHICH DECLARED VOID THE PROVISION ON INTEREST RATE AGREED
UPON BETWEEN PETITIONER AND RESPONDENTS
II
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS
AND REVERSIBLE ERROR WHEN IT AFFIRMED THE COMPUTATION BY THE TRIAL
COURT OF RESPONDENTS INDEBTEDNESS AND ORDERED RESPONDENTS TO PAY
PETITIONER THE AMOUNT OF ONLY ONE MILLION FIVE HUNDRED SIXTY
THOUSAND THREE HUNDRED EIGHT PESOS (P1,560,308.00)
III
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS
AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL
COURT WHICH ANNULLED THE FORECLOSURE BY PETITIONER OF THE SUBJECT
PROPERTIES DUE TO AN ALLEGED INCORRECT COMPUTATION OF RESPONDENTS
INDEBTEDNESS
IV
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS
AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL
COURT WHICH FOUND PETITIONER LIABLE FOR VIOLATION OF THE TRUTH IN
LENDING ACT
V cannot be left to the will of one of them.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS
AND REVERSIBLE ERROR WHEN IT FAILED TO ORDER THE DISMISSAL OF THE
CASE BECAUSE THE RESPONDENTS ARE GUILTY OF FORUM SHOPPING[8]
Validity of the Interest Rates
The Court of Appeals held that the imposition of interest in the following provision found in the
promissory notes of the spouses Beluso is void, as the interest rates and the bases therefor were determined solely
by petitioner UCPB:
FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS. SAMUEL AND
ODETTE BELUSO (BORROWER), jointly and severally promise to pay to UNITED
COCONUT PLANTERS BANK (LENDER) or order at UCPB Bldg., Makati Avenue, Makati
City, Philippines, the sum of ______________ PESOS, (P_____), Philippine Currency, with
interest thereon at the rate indicative of DBD retail rate or as determined by the Branch Head.[9]
UCPB asserts that this is a reversible error, and claims that while the interest rate was not numerically
at the rate indicative of the DBD retail rate. UCPB contends that said provision must be read with another stipulation
in the promissory notes subjecting to review the interest rate as fixed:
The interest rate shall be subject to review and may be increased or decreased by the
LENDER considering among others the prevailing financial and monetary conditions; or the
rate of interest and charges which other banks or financial institutions charge or offer to charge
for similar accommodations; and/or the resulting profitability to the LENDER after due
consideration of all dealings with the BORROWER.[10]
In this regard, UCPB avers that these are valid reference rates akin to a prevailing rate or prime rate
allowed by this Court in Polotan v. Court of Appeals.[11]Furthermore, UCPB argues that even if the proviso as
determined by the branch head is considered void, such a declaration would not ipso facto render the connecting
clause indicative of DBD retail rate void in view of the separability clause of the Credit Agreement, which reads:
Section 9.08 Separability Clause. If any one or more of the provisions contained in
this AGREEMENT, or documents executed in connection herewith shall be declared invalid,
illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining
provisions hereof shall not in any way be affected or impaired. [12]
According to UCPB, the imposition of the questioned interest rates did not infringe on the principle of
mutuality of contracts, because the spouses Beluso had the liberty to choose whether or not to renew their credit line
at the new interest rates pegged by petitioner.[13] UCPB also claims that assuming there was any defect in the
mutuality of the contract at the time of its inception, such defect was cured by the subsequent conduct of the spouses
Beluso in availing themselves of the credit line from April 1996 to February 1998 without airing any protest with
respect to the interest rates imposed by UCPB. According to UCPB, therefore, the spouses Beluso are in estoppel.[14]
We agree with the Court of Appeals, and find no merit in the contentions of UCPB.
Article 1308 of the Civil Code provides:
Art. 1308. The contract must bind both contracting parties; its validity or compliance
We applied this provision in Philippine National Bank v. Court of Appeals,[15] where we held:
In order that obligations arising from contracts may have the force of law between the
parties, there must be mutuality between the parties based on their essential equality. A contract
containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled
will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555).
Hence, even assuming that the P1.8 million loan agreement between the PNB and the private
respondent gave the PNB a license (although in fact there was none) to increase the interest rate
at will during the term of the loan, that license would have been null and void for being violative
of the principle of mutuality essential in contracts. It would have invested the loan agreement
with the character of a contract of adhesion, where the parties do not bargain on equal footing,
the weaker party's (the debtor) participation being reduced to the alternative "to take it or leave
 it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap
for the weaker party whom the courts of justice must protect against abuse and imposition.
The provision stating that the interest shall be at the rate indicative of DBD retail rate or as determined
by the Branch Head is indeed dependent solely on the will of petitioner UCPB. Under such provision, petitioner
UCPB has two choices on what the interest rate shall be: (1) a rate indicative of the DBD retail rate; or (2) a rate as
determined by the Branch Head. As UCPB is given this choice, the rate should be categorically determinable
in both choices. If either of these two choices presents an opportunity for UCPB to fix the rate at will, the bank can
easily choose such an option, thus making the entire interest rate provision violative of the principle of mutuality of
contracts.
Not just one, but rather both, of these choices are dependent solely on the will of UCPB. Clearly, a rate
as determined by the Branch Head gives the latter unfettered discretion on what the rate may be. The Branch Head
may choose any rate he or she desires. As regards the rate indicative of the DBD retail rate, the same cannot be
considered as valid for being akin to a prevailing rate or prime rate allowed by this Court in Polotan. The interest
rate in Polotan reads:
The Cardholder agrees to pay interest per annum at 3% plus the prime rate of Security Bank and
Trust Company. x x x.[16]
In this provision in Polotan, there is a fixed margin over the reference rate: 3%. Thus, the parties can easily
determine the interest rate by applying simple arithmetic. On the other hand, the provision in the case at bar does
not specify any margin above or below the DBD retail rate. UCPB can peg the interest at any percentage above or
below the DBD retail rate, again giving it unfettered discretion in determining the interest rate.
The stipulation in the promissory notes subjecting the interest rate to review does not render the imposition by UCPB
of interest rates on the obligations of the spouses Beluso valid. According to said stipulation:
The interest rate shall be subject to review and may be increased or decreased by the
LENDER considering among others the prevailing financial and monetary conditions; or the
rate of interest and charges which other banks or financial institutions charge or offer to charge
for similar accommodations; and/or the resulting profitability to the LENDER after due
consideration of all dealings with the BORROWER.[17]
It should be pointed out that the authority to review the interest rate was given UCPB alone as the lender. Moreover,
UCPB may apply the considerations enumerated in this provision as it wishes. As worded in the above provision,
UCPB may give as much weight as it desires to each of the following considerations: (1) the prevailing financial
and monetary condition; (2) the rate of interest and charges which other banks or financial institutions charge or
offer to charge for similar accommodations; and/or (3) the resulting profitability to the LENDER (UCPB) after due
consideration of all dealings with the BORROWER (the spouses Beluso). Again, as in the case of the interest rate
provision, there is no fixed margin above or below these considerations.
In view of the foregoing, the Separability Clause cannot save either of the two options of UCPB as to the
interest to be imposed, as both options violate the principle of mutuality of contracts.
UCPB likewise failed to convince us that the spouses Beluso were in estoppel.
Estoppel cannot be predicated on an illegal act. As between the parties to a contract, validity cannot be
given to it by estoppel if it is prohibited by law or is against public policy. [18]
The interest rate provisions in the case at bar are illegal not only because of the provisions of the Civil
Code on mutuality of contracts, but also, as shall be discussed later, because they violate the Truth in Lending
Act. Not disclosing the true finance charges in connection with the extensions of credit is, furthermore, a form of
deception which we cannot countenance. It is against the policy of the State as stated in the Truth in Lending Act:
Sec. 2. Declaration of Policy. It is hereby declared to be the policy of the State to
protect its citizens from a lack of awareness of the true cost of credit to the user by assuring a
full disclosure of such cost with a view of preventing the uninformed use of credit to the
detriment of the national economy.[19]
Moreover, while the spouses Beluso indeed agreed to renew the credit line, the offending provisions are
found in the promissory notes themselves, not in the credit line.In fixing the interest rates in the promissory notes to
cover the renewed credit line, UCPB still reserved to itself the same two options (1) a rate indicative of the DBD
retail rate; or (2) a rate as determined by the Branch Head.
Error in Computation
UCPB asserts that while both the RTC and the Court of Appeals voided the interest rates imposed by
UCPB, both failed to include in their computation of the outstanding obligation of the spouses Beluso the legal rate
of interest of 12% per annum. Furthermore, the penalty charges were also deleted in the decisions of the RTC and
the Court of Appeals. Section 2.04, Article II on Interest and other Bank Charges of the subject Credit Agreement,
provides:
Section 2.04 Penalty Charges. In addition to the interest provided for in Section 2.01
of this ARTICLE, any principal obligation of the CLIENT hereunder which is not paid when
due shall be subject to a penalty charge of one percent (1%) of the amount of such obligation
per month computed from due date until the obligation is paid in full. If the bank accelerates teh
(sic) payment of availments hereunder pursuant to ARTICLE VIII hereof, the penalty charge
shall be used on the total principal amount outstanding and unpaid computed from the date of
acceleration until the obligation is paid in full.[20]
Paragraph 4 of the promissory notes also states:
In case of non-payment of this Promissory Note (Note) at maturity, I/We, jointly and
severally, agree to pay an additional sum equivalent to twenty-five percent (25%) of the total
due on the Note as attorneys fee, aside from the expenses and costs of collection whether
actually incurred or not, and a penalty charge of one percent (1%) per month on the total amount
due and unpaid from date of default until fully paid. [21]
Petitioner further claims that it is likewise entitled to attorneys fees, pursuant to Section 9.06 of the Credit
Agreement, thus:
If the BANK shall require the services of counsel for the enforcement of its rights
under this AGREEMENT, the Note(s), the collaterals and other related documents, the BANK
shall be entitled to recover attorneys fees equivalent to not less than twenty-five percent (25%)
of the total amounts due and outstanding exclusive of costs and other expenses. [22]
Another alleged computational error pointed out by UCPB is the negation of the Compounding Interest
agreed upon by the parties under Section 2.02 of the Credit Agreement:
 Section 2.02 Compounding Interest. Interest not paid when due shall form part of the principal
and shall be subject to the same interest rate as herein stipulated.[23]
and paragraph 3 of the subject promissory notes:
Interest not paid when due shall be added to, and become part of the principal and shall likewise
bear interest at the same rate.[24]
UCPB lastly avers that the application of the spouses Belusos payments in the disputed computation does
not reflect the parties agreement. The RTC deducted the payment made by the spouses Beluso amounting
to P763,693.00 from the principal of P2,350,000.00. This was allegedly inconsistent with the Credit Agreement, as
well as with the agreement of the parties as to the facts of the case. In paragraph 7 of the spouses Belusos
Manifestation and Motion on Proposed Stipulation of Facts and Issues vis--vis UCPBs Manifestation, the parties
agreed that the amount of P763,693.00 was applied to the interest and not to the principal, in accord with Section
3.03, Article II of the Credit Agreement on Order of the Application of Payments, which provides:
Section 3.03 Application of Payment. Payments made by the CLIENT shall be applied
in accordance with the following order of preference:
1. Accounts receivable and other out-of-pocket expenses
2. Front-end Fee, Origination Fee, Attorneys Fee and other expenses of collection;
3. Penalty charges;
4. Past due interest;
5. Principal amortization/Payment in arrears;
6. Advance interest;
7. Outstanding balance; and
8. All other obligations of CLIENT to the BANK, if any.[25]
Thus, according to UCPB, the interest charges, penalty charges, and attorneys fees had been erroneously
excluded by the RTC and the Court of Appeals from the computation of the total amount due and demandable from
spouses Beluso.
The spouses Belusos defense as to all these issues is that the demand made by UCPB is for a considerably
bigger amount and, therefore, the demand should be considered void. There being no valid demand, according to
the spouses Beluso, there would be no default, and therefore the interests and penalties would not commence to
run. As it was likewise improper to foreclose the mortgaged properties or file a case against the spouses Beluso,
attorneys fees were not warranted.
We agree with UCPB on this score. Default commences upon judicial or extrajudicial demand.[26] The
excess amount in such a demand does not nullify the demand itself, which is valid with respect to the proper
amount. A contrary ruling would put commercial transactions in disarray, as validity of demands would be
dependent on the exactness of the computations thereof, which are too often contested.
There being a valid demand on the part of UCPB, albeit excessive, the spouses Beluso are considered in
default with respect to the proper amount and, therefore, the interests and the penalties began to run at that point.
As regards the award of 12% legal interest in favor of petitioner, the RTC actually recognized that said
legal interest should be imposed, thus: There being no valid stipulation as to interest, the legal rate of interest shall
be charged.[27] It seems that the RTC inadvertently overlooked its non-inclusion in its computation.
The spouses Beluso had even originally asked for the RTC to impose this legal rate of interest in both the
body and the prayer of its petition with the RTC:
12. Since the provision on the fixing of the rate of interest by the sole will of the
respondent Bank is null and void, only the legal rate of interest which is 12% per annum can be
legally charged and imposed by the bank, which would amount to only about P599,000.00 since
1996 up to August 31, 1998.
xxxx
WHEREFORE, in view of the foregoing, petiitoners pray for judgment or order:
xxxx
2. By way of example for the public good against the Banks taking unfair advantage
of the weaker party to their contract, declaring the legal rate of 12% per annum, as the imposable
rate of interest up to February 28, 1999 on the loan of 2.350 million.[28]
All these show that the spouses Beluso had acknowledged before the RTC their obligation to pay a 12% legal interest
on their loans. When the RTC failed to include the 12% legal interest in its computation, however, the spouses
Beluso merely defended in the appellate courts this non-inclusion, as the same was beneficial to them. We see,
however, sufficient basis to impose a 12% legal interest in favor of petitioner in the case at bar, as what we have
voided is merely the stipulated rate of interest and not the stipulation that the loan shall earn interest.
We must likewise uphold the contract stipulation providing the compounding of interest. The provisions
in the Credit Agreement and in the promissory notes providing for the compounding of interest were neither nullified
by the RTC or the Court of Appeals, nor assailed by the spouses Beluso in their petition with the RTC. The
compounding of interests has furthermore been declared by this Court to be legal. We have held in Tan v. Court of
Appeals,[29] that:
Without prejudice to the provisions of Article 2212, interest due and unpaid shall not
earn interest. However, the contracting parties may by stipulation capitalize the interest
due and unpaid, which as added principal, shall earn new interest.
As regards the imposition of penalties, however, although we are likewise upholding the imposition
thereof in the contract, we find the rate iniquitous. Like in the case of grossly excessive interests, the penalty
stipulated in the contract may also be reduced by the courts if it is iniquitous or unconscionable. [30]
We find the penalty imposed by UCPB, ranging from 30.41% to 36%, to be iniquitous considering the
fact that this penalty is already over and above the compounded interest likewise imposed in the contract. If a 36%
interest in itself has been declared unconscionable by this Court,[31] what more a 30.41% to 36% penalty, over and
above the payment of compounded interest? UCPB itself must have realized this, as it gave us a sample computation
of the spouses Belusos obligation if both the interest and the penalty charge are reduced to 12%.
As regards the attorneys fees, the spouses Beluso can actually be liable therefor even if there had been no
demand. Filing a case in court is the judicial demand referred to in Article 1169[32] of the Civil Code, which would
put the obligor in delay.
The RTC, however, also held UCPB liable for attorneys fees in this case, as the spouses Beluso were
forced to litigate the issue on the illegality of the interest rate provision of the promissory notes. The award of
attorneys fees, it must be recalled, falls under the sound discretion of the court. [33] Since both parties were forced to
litigate to protect their respective rights, and both are entitled to the award of attorneys fees from the other, practical
reasons dictate that we set off or compensate both parties liabilities for attorneys fees. Therefore, instead of awarding
attorneys fees in favor of petitioner, we shall merely affirm the deletion of the award of attorneys fees to the spouses
Beluso.
In sum, we hold that spouses Beluso should still be held liable for a compounded legal interest of 12%
per annum and a penalty charge of 12% per annum. We also hold that, instead of awarding attorneys fees in favor
of petitioner, we shall merely affirm the deletion of the award of attorneys fees to the spouses Beluso.
Annulment of the Foreclosure Sale
Properties of spouses Beluso had been foreclosed, titles to which had already been consolidated on 19
February 2001 and 20 March 2001 in the name of UCPB, as the spouses Beluso failed to exercise their right of
redemption which expired on 25 March 2000. The RTC, however, annulled the foreclosure of mortgage based on
an alleged incorrect computation of the spouses Belusos indebtedness.
UCPB alleges that none of the grounds for the annulment of a foreclosure sale are present in the case at
bar. Furthermore, the annulment of the foreclosure proceedings and the certificates of sale were mooted by the
subsequent issuance of new certificates of title in the name of said bank. UCPB claims that the spouses Belusos
action for annulment of foreclosure constitutes a collateral attack on its certificates of title, an act proscribed by
Section 48 of Presidential Decree No. 1529, otherwise known as the Property Registration Decree, which provides:
Section 48. Certificate not subject to collateral attack. A certificate of title shall not
be subject to collateral attack. It cannot be altered, modified or cancelled except in a direct
proceeding in accordance with law.
The spouses Beluso retort that since they had the right to refuse payment of an excessive demand on their
account, they cannot be said to be in default for refusing to pay the same. Consequently, according to the spouses
Beluso, the enforcement of such illegal and overcharged demand through foreclosure of mortgage should be voided.
We agree with UCPB and affirm the validity of the foreclosure proceedings. Since we already found that
a valid demand was made by UCPB upon the spouses Beluso, despite being excessive, the spouses Beluso are
considered in default with respect to the proper amount of their obligation to UCPB and, thus, the property they
mortgaged to secure such amounts may be foreclosed. Consequently, proceeds of the foreclosure sale should be
applied to the extent of the amounts to which UCPB is rightfully entitled.
As argued by UCPB, none of the grounds for the annulment of a foreclosure sale are present in this case. The
grounds for the proper annulment of the foreclosure sale are the following: (1) that there was fraud, collusion,
accident, mutual mistake, breach of trust or misconduct by the purchaser; (2) that the sale had not been fairly and
regularly conducted; or (3) that the price was inadequate and the inadequacy was so great as to shock the conscience
of the court.[34]
Liability for Violation of Truth in Lending Act
The RTC, affirmed by the Court of Appeals, imposed a fine of P26,000.00 for UCPBs alleged violation
of Republic Act No. 3765, otherwise known as the Truth in Lending Act.
UCPB challenges this imposition, on the argument that Section 6(a) of the Truth in Lending Act which
mandates the filing of an action to recover such penalty must be made under the following circumstances:
Section 6. (a) Any creditor who in connection with any credit transaction fails to
disclose to any person any information in violation of this Act or any regulation issued
thereunder shall be liable to such person in the amount of P100 or in an amount equal to twice
the finance charge required by such creditor in connection with such transaction, whichever is
greater, except that such liability shall not exceed P2,000 on any credit transaction. Action to
recover such penalty may be brought by such person within one year from the date of the
occurrence of the violation, in any court of competent jurisdiction. x x x (Emphasis ours.)
According to UCPB, the Court of Appeals even stated that [a]dmittedly the original complaint did not
explicitly allege a violation of the Truth in Lending Act and no action to formally admit the amended petition [which
expressly alleges violation of the Truth in Lending Act] was made either by [respondents] spouses Beluso and the
lower court. x x x.[35]
UCPB further claims that the action to recover the penalty for the violation of the Truth in Lending Act
had been barred by the one-year prescriptive period provided for in the Act. UCPB asserts that per the records of
the case, the latest of the subject promissory notes had been executed on 2 January 1998, but the original petition of
the spouses Beluso was filed before the RTC on 9 February 1999, which was after the expiration of the period to
file the same on 2 January 1999.
On the matter of allegation of the violation of the Truth in Lending Act, the Court of Appeals ruled:
Admittedly the original complaint did not explicitly allege a violation of the Truth in Lending
Act and no action to formally admit the amended petition was made either by [respondents]
spouses Beluso and the lower court. In such transactions, the debtor and the lending institutions
do not deal on an equal footing and this law was intended to protect the public from hidden or
undisclosed charges on their loan obligations, requiring a full disclosure thereof by the
lender. We find that its infringement may be inferred or implied from allegations that when
[respondents] spouses Beluso executed the promissory notes, the interest rate chargeable
thereon were left blank. Thus, [petitioner] UCPB failed to discharge its duty to disclose in full
to [respondents] Spouses Beluso the charges applicable on their loans.[36]
We agree with the Court of Appeals. The allegations in the complaint, much more than the title thereof,
are controlling. Other than that stated by the Court of Appeals, we find that the allegation of violation of the Truth
in Lending Act can also be inferred from the same allegation in the complaint we discussed earlier:
b.) In unilaterally imposing an increased interest rates (sic) respondent bank has relied
on the provision of their promissory note granting respondent bank the power to unilaterally fix
the interest rates, which rate was not determined in the promissory note but was left solely to
the will of the Branch Head of the respondent Bank, x x x. [37]
The allegation that the promissory notes grant UCPB the power to unilaterally fix the interest rates
certainly also means that the promissory notes do not contain a clear statement in writing of (6) the finance charge
expressed in terms of pesos and centavos; and (7) the percentage that the finance charge bears to the amount to be
financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation.[38] Furthermore, the
spouses Belusos prayer for such other reliefs just and equitable in the premises should be deemed to include the civil
penalty provided for in Section 6(a) of the Truth in Lending Act.
 UCPBs contention that this action to recover the penalty for the violation of the Truth in Lending Act has
already prescribed is likewise without merit. The penalty for the violation of the act is P100 or an amount equal to
twice the finance charge required by such creditor in connection with such transaction, whichever is greater, except
that such liability shall not exceed P2,000.00 on any credit transaction.[39] As this penalty depends on the finance
charge required of the borrower, the borrowers cause of action would only accrue when such finance charge is
required. In the case at bar, the date of the demand for payment of the finance charge is 2 September 1998, while
the foreclosure was made on 28 December 1998. The filing of the case on 9 February 1999 is therefore within the
one-year prescriptive period.
UCPB argues that a violation of the Truth in Lending Act, being a criminal offense, cannot be inferred
nor implied from the allegations made in the complaint.[40]Pertinent provisions of the Act read:
Sec. 6. (a) Any creditor who in connection with any credit transaction fails to disclose
to any person any information in violation of this Act or any regulation issued thereunder shall
be liable to such person in the amount of P100 or in an amount equal to twice the finance charge
required by such creditor in connection with such transaction, whichever is the greater, except
that such liability shall not exceed P2,000 on any credit transaction. Action to recover such
penalty may be brought by such person within one year from the date of the occurrence of the
violation, in any court of competent jurisdiction. In any action under this subsection in which
any person is entitled to a recovery, the creditor shall be liable for reasonable attorneys fees and
court costs as determined by the court.
xxxx
(c) Any person who willfully violates any provision of this Act or any
regulation issued thereunder shall be fined by not less than P1,000 or more than P5,000 or
imprisonment for not less than 6 months, nor more than one year or both.
As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act, the violation of the said Act gives rise to
both criminal and civil liabilities. Section 6(c) considers a criminal offense the willful violation of the Act, imposing
the penalty therefor of fine, imprisonment or both. Section 6(a), on the other hand, clearly provides for a civil cause
of action for failure to disclose any information of the required information to any person in violation of the Act. The
penalty therefor is an amount of P100 or in an amount equal to twice the finance charge required by the creditor in
connection with such transaction, whichever is greater, except that the liability shall not exceed P2,000.00 on any
credit transaction. The action to recover such penalty may be instituted by the aggrieved private person separately
and independently from the criminal case for the same offense.
In the case at bar, therefore, the civil action to recover the penalty under Section 6(a) of the Truth in
Lending Act had been jointly instituted with (1) the action to declare the interests in the promissory notes void, and
(2) the action to declare the foreclosure void. This joinder is allowed under Rule 2, Section 5 of the Rules of Court,
which provides:
SEC. 5. Joinder of causes of action.A party may in one pleading assert, in the
alternative or otherwise, as many causes of action as he may have against an opposing party,
subject to the following conditions:
(a) The party joining the causes of action shall comply with the rules on joinder of
parties;
(b) The joinder shall not include special civil actions or actions governed by special
rules;
(c) Where the causes of action are between the same parties but pertain to different
venues or jurisdictions, the joinder may be allowed in the Regional Trial Court provided one of
the causes of action falls within the jurisdiction of said court and the venue lies therein; and
(d) Where the claims in all the causes of action are principally for recovery of money,
the aggregate amount claimed shall be the test of jurisdiction.
In attacking the RTCs disposition on the violation of the Truth in Lending Act since the same was not
alleged in the complaint, UCPB is actually asserting a violation of due process. Indeed, due process mandates that
a defendant should be sufficiently apprised of the matters he or she would be defending himself or herself
against. However, in the 1 July 1999 pre-trial brief filed by the spouses Beluso before the RTC, the claim for civil
sanctions for violation of the Truth in Lending Act was expressly alleged, thus:
Moreover, since from the start, respondent bank violated the Truth in Lending Act in not
informing the borrower in writing before the execution of the Promissory Notes of the interest
rate expressed as a percentage of the total loan, the respondent bank instead is liable to pay
petitioners double the amount the bank is charging petitioners by way of sanction for its
violation.[41]
In the same pre-trial brief, the spouses Beluso also expressly raised the following issue:
b.) Does the expression indicative rate of DBD retail (sic) comply with the Truth in
Lending Act provision to express the interest rate as a simple annual percentage of the loan? [42]
These assertions are so clear and unequivocal that any attempt of UCPB to feign ignorance of the assertion
of this issue in this case as to prevent it from putting up a defense thereto is plainly hogwash.
Petitioner further posits that it is the Metropolitan Trial Court which has jurisdiction to try and adjudicate
the alleged violation of the Truth in Lending Act, considering that the present action allegedly involved a single
credit transaction as there was only one Promissory Note Line.
We disagree. We have already ruled that the action to recover the penalty under Section 6(a) of the Truth
in Lending Act had been jointly instituted with (1) the action to declare the interests in the promissory notes void,
and (2) the action to declare the foreclosure void. There had been no question that the above actions belong to the
jurisdiction of the RTC. Subsection (c) of the above-quoted Section 5 of the Rules of Court on Joinder of Causes of
Action provides:
(c) Where the causes of action are between the same parties but pertain to different
venues or jurisdictions, the joinder may be allowed in the Regional Trial Court provided one of
the causes of action falls within the jurisdiction of said court and the venue lies therein.
Furthermore, opening a credit line does not create a credit transaction of loan or mutuum, since the former
is merely a preparatory contract to the contract of loan or mutuum. Under such credit line, the bank is merely obliged,
for the considerations specified therefor, to lend to the other party amounts not exceeding the limit provided. The
credit transaction thus occurred not when the credit line was opened, but rather when the credit line was availed
of. In the case at bar, the violation of the Truth in Lending Act allegedly occurred not when the parties executed the
Credit Agreement, where no interest rate was mentioned, but when the parties executed the promissory notes, where
the allegedly offending interest rate was stipulated.
 UCPB further argues that since the spouses Beluso were duly given copies of the subject promissory notes
after their execution, then they were duly notified of the terms thereof, in substantial compliance with the Truth in
Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the disclosure
statement must be furnished prior to the consummation of the transaction:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to
the consummation of the transaction, a clear statement in writing setting forth, to the extent
applicable and in accordance with rules and regulations prescribed by the Board, the following
information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2)
(4) the charges, individually itemized, which are paid or to be paid by such person
in connection with the transaction but which are not incident to the extension of
credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed expressed
as a simple annual rate on the outstanding unpaid balance of the obligation.
The rationale of this provision is to protect users of credit from a lack of awareness of the true cost thereof,
proceeding from the experience that banks are able to conceal such true cost by hidden charges, uncertainty of
interest rates, deduction of interests from the loaned amount, and the like. The law thereby seeks to protect debtors
by permitting them to fully appreciate the true cost of their loan, to enable them to give full consent to the contract,
and to properly evaluate their options in arriving at business decisions. Upholding UCPBs claim of substantial
compliance would defeat these purposes of the Truth in Lending Act. The belated discovery of the true cost of credit
will too often not be able to reverse the ill effects of an already consummated business decision.
In addition, the promissory notes, the copies of which were presented to the spouses Beluso after
execution, are not sufficient notification from UCPB. As earlier discussed, the interest rate provision therein does
not sufficiently indicate with particularity the interest rate to be applied to the loan covered by said promissory notes.
Forum Shopping
UCPB had earlier moved to dismiss the petition (originally Case No. 99-314 in RTC, Makati City) on the
ground that the spouses Beluso instituted another case (Civil Case No. V-7227) before the RTC of Roxas City,
involving the same parties and issues. UCPB claims that while Civil Case No. V-7227 initially appears to be a
different action, as it prayed for the issuance of a temporary restraining order and/or injunction to stop foreclosure
of spouses Belusos properties, it poses issues which are similar to those of the present case.[43] To prove its point,
UCPB cited the spouses Belusos Amended Petition in Civil Case No. V-7227, which contains similar allegations as
those in the present case. The RTC of Makati denied UCPBs Motion to Dismiss Case No. 99-314 for lack of
merit. Petitioner UCPB raised the same issue with the Court of Appeals, and is raising the same issue with us now.
The spouses Beluso claim that the issue in Civil Case No. V-7227 before the RTC of Roxas City, a Petition
for Injunction Against Foreclosure, is the propriety of the foreclosure before the true account of spouses Beluso is
determined. On the other hand, the issue in Case No. 99-314 before the RTC of Makati City is the validity of the
interest rate provision. The spouses Beluso claim that Civil Case No. V-7227 has become moot because, before the
RTC of Roxas City could act on the restraining order, UCPB proceeded with the foreclosure and auction sale. As
the act sought to be restrained by Civil Case No. V-7227 has already been accomplished, the spouses Beluso had to
file a different action, that of Annulment of the Foreclosure Sale, Case No. 99-314 with the RTC, Makati City.
Even if we assume for the sake of argument, however, that only one cause of action is involved in the two
civil actions, namely, the violation of the right of the spouses Beluso not to have their property foreclosed for an
amount they do not owe, the Rules of Court nevertheless allows the filing of the second action. Civil Case No. V-
7227 was dismissed by the RTC of Roxas City before the filing of Case No. 99-314 with the RTC of Makati City,
since the venue of litigation as provided for in the Credit Agreement is in Makati City.
Rule 16, Section 5 bars the refiling of an action previously dismissed only in the following instances:
SEC. 5. Effect of dismissal.Subject to the right of appeal, an order granting a motion
to dismiss based on paragraphs (f), (h) and (i) of section 1 hereof shall bar the refiling of the
same action or claim. (n)
Improper venue as a ground for the dismissal of an action is found in paragraph (c) of Section 1, not in
paragraphs (f), (h) and (i):
SECTION 1. Grounds.Within the time for but before filing the answer to the
complaint or pleading asserting a claim, a motion to dismiss may be made on any of the
following grounds:
(a) That the court has no jurisdiction over the person of the defending party;
(b) That the court has no jurisdiction over the subject matter of the claim;
(c) That venue is improperly laid;
(d) That the plaintiff has no legal capacity to sue;
(e) That there is another action pending between the same parties for the same cause;
(f) That the cause of action is barred by a prior judgment or by the statute of
limitations;
(g) That the pleading asserting the claim states no cause of action;
(h) That the claim or demand set forth in the plaintiffs pleading has been paid,
waived, abandoned, or otherwise extinguished;
(i) That the claim on which the action is founded is unenforceable under the
provisions of the statute of frauds; and
 (j) That a condition precedent for filing the claim has not been complied 1. In addition to the sum of P2,350,000.00 as determined by the courts a quo, respondent
with.[44] (Emphases supplied.) spouses Samuel and Odette Beluso are also liable for the following amounts:
a. Penalty of 12% per annum on the amount due[46] from the date of demand; and
b. Compounded legal interest of 12% per annum on the amount due[47] from date of demand;
When an action is dismissed on the motion of the other party, it is only when the ground for the dismissal 2. The following amounts shall be deducted from the liability of the spouses Samuel and Odette
of an action is found in paragraphs (f), (h) and (i) that the action cannot be refiled. As regards all the other grounds, Beluso:
the complainant is allowed to file same action, but should take care that, this time, it is filed with the proper court a. Payments made by the spouses in the amount of P763,692.00. These payments shall be
or after the accomplishment of the erstwhile absent condition precedent, as the case may be. applied to the date of actual payment of the following in the order that they are listed, to
wit:
UCPB, however, brings to the attention of this Court a Motion for Reconsideration filed by the spouses i. penalty charges due and demandable as of the time of payment;
Beluso on 15 January 1999 with the RTC of Roxas City, which Motion had not yet been ruled upon when the spouses ii. interest due and demandable as of the time of payment;
Beluso filed Civil Case No. 99-314 with the RTC of Makati. Hence, there were allegedly two pending actions iii. principal amortization/payment in arrears as of the time of payment;
between the same parties on the same issue at the time of the filing of Civil Case No. 99-314 on 9 February 1999 with iv. outstanding balance.
the RTC of Makati. This will still not change our findings. It is indeed the general rule that in cases where there are b. Penalty under Republic Act No. 3765 in the amount of P26,000.00. This amount shall be
two pending actions between the same parties on the same issue, it should be the later case that should be deducted from the liability of the spouses Samuel and Odette Beluso on 9 February
dismissed.However, this rule is not absolute. According to this Court in Allied Banking Corporation v. Court of 1999 to the following in the order that they are listed, to wit:
Appeals[45]: i. penalty charges due and demandable as of time of payment;
ii. interest due and demandable as of the time of payment;
In these cases, it is evident that the first action was filed in anticipation of the filing of iii. principal amortization/payment in arrears as of the time of payment;
the later action and the purpose is to preempt the later suit or provide a basis for seeking the iv. outstanding balance.
dismissal of the second action. 3. The foreclosure of mortgage is hereby declared VALID. Consequently, the amounts which
the Regional Trial Court and the Court of Appeals ordered respondents to pay, as modified in
Even if this is not the purpose for the filing of the first action, it may nevertheless this Decision, shall be deducted from the proceeds of the foreclosure sale.
be dismissed if the later action is the more appropriate vehicle for the ventilation of the
issues between the parties. Thus, in Ramos v. Peralta, it was held:
SO ORDERED.
[T]he rule on litis pendentia does not require that the later case
should yield to the earlier case. What is required merely is that there be
another pending action, not a prior pending action. Considering the broader Republic of the Philippines
scope of inquiry involved in Civil Case No. 4102 and the location of the SUPREME COURT
property involved, no error was committed by the lower court in deferring Manila
to the Bataan court's jurisdiction.

Given, therefore, the pendency of two actions, the following are the relevant THIRD DIVISION
considerations in determining which action should be dismissed: (1) the date of filing, with
preference generally given to the first action filed to be retained; (2) whether the action sought G.R. No. L-66826 August 19, 1988
to be dismissed was filed merely to preempt the later action or to anticipate its filing and lay the
basis for its dismissal; and (3) whether the action is the appropriate vehicle for litigating the BANK OF THE PHILIPPINE ISLANDS, petitioner,
issues between the parties. vs.
THE INTERMEDIATE APPELLATE COURT and ZSHORNACK respondents.
In the case at bar, Civil Case No. V-7227 before the RTC of Roxas City was an action for injunction
against a foreclosure sale that has already been held, while Civil Case No. 99-314 before the RTC of Makati City CORTES, J.:
includes an action for the annulment of said foreclosure, an action certainly more proper in view of the execution of
the foreclosure sale. The former case was improperly filed in Roxas City, while the latter was filed in Makati City, The original parties to this case were Rizaldy T. Zshornack and the Commercial Bank and Trust Company of the
the proper venue of the action as mandated by the Credit Agreement. It is evident, therefore, that Civil Case No. 99- Philippines [hereafter referred to as "COMTRUST."] In 1980, the Bank of the Philippine Islands (hereafter referred
314 is the more appropriate vehicle for litigating the issues between the parties, as compared to Civil Case No. V- to as BPI absorbed COMTRUST through a corporate merger, and was substituted as party to the case.
7227. Thus, we rule that the RTC of Makati City was not in error in not dismissing Civil Case No. 99-314.
Rizaldy Zshornack initiated proceedings on June 28,1976 by filing in the Court of First Instance of Rizal —
WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED with the
Caloocan City a complaint against COMTRUST alleging four causes of action. Except for the third cause of action,
following MODIFICATIONS:
the CFI ruled in favor of Zshornack. The bank appealed to the Intermediate Appellate Court which modified the CFI
decision absolving the bank from liability on the fourth cause of action. The pertinent portions of the judgment, as
modified, read:
IN VIEW OF THE FOREGOING, the Court renders judgment as follows:
1. Ordering the defendant COMTRUST to restore to the dollar savings account of plaintiff (No.
25-4109) the amount of U.S $1,000.00 as of October 27, 1975 to earn interest together with the
remaining balance of the said account at the rate fixed by the bank for dollar deposits under
Central Bank Circular 343;
2. Ordering defendant COMTRUST to return to the plaintiff the amount of U.S. $3,000.00
immediately upon the finality of this decision, without interest for the reason that the said
amount was merely held in custody for safekeeping, but was not actually deposited with the
defendant COMTRUST because being cash currency, it cannot by law be deposited with
plaintiffs dollar account and defendant's only obligation is to return the same to plaintiff upon
demand;
xxx xxx xxx
5. Ordering defendant COMTRUST to pay plaintiff in the amount of P8,000.00 as damages in
the concept of litigation expenses and attorney's fees suffered by plaintiff as a result of the failure
of the defendant bank to restore to his (plaintiffs) account the amount of U.S. $1,000.00 and to
return to him (plaintiff) the U.S. $3,000.00 cash left for safekeeping.
Costs against defendant COMTRUST.
SO ORDERED. [Rollo, pp. 47-48.]
Undaunted, the bank comes to this Court praying that it be totally absolved from any liability to Zshornack. The
latter not having appealed the Court of Appeals decision, the issues facing this Court are limited to the bank's liability
with regard to the first and second causes of action and its liability for damages.
1. We first consider the first cause of action, On the dates material to this case, Rizaldy Zshornack and his wife,
Shirley Gorospe, maintained in COMTRUST, Quezon City Branch, a dollar savings account and a peso current
account.
On October 27, 1975, an application for a dollar draft was accomplished by Virgilio V. Garcia, Assistant Branch
Manager of COMTRUST Quezon City, payable to a certain Leovigilda D. Dizon in the amount of $1,000.00. In the
application, Garcia indicated that the amount was to be charged to Dollar Savings Acct. No. 25-4109, the savings
account of the Zshornacks; the charges for commission, documentary stamp tax and others totalling P17.46 were to
be charged to Current Acct. No. 210465-29, again, the current account of the Zshornacks. There was no indication
of the name of the purchaser of the dollar draft.
On the same date, October 27,1975, COMTRUST, under the signature of Virgilio V. Garcia, issued a check payable
to the order of Leovigilda D. Dizon in the sum of US $1,000 drawn on the Chase Manhattan Bank, New York, with
an indication that it was to be charged to Dollar Savings Acct. No. 25-4109.
When Zshornack noticed the withdrawal of US$1,000.00 from his account, he demanded an explanation from the
bank. In answer, COMTRUST claimed that the peso value of the withdrawal was given to Atty. Ernesto Zshornack,
Jr., brother of Rizaldy, on October 27, 1975 when he (Ernesto) encashed with COMTRUST a cashier's check for
P8,450.00 issued by the Manila Banking Corporation payable to Ernesto.
Upon consideration of the foregoing facts, this Court finds no reason to disturb the ruling of both the trial court and
the Appellate Court on the first cause of action. Petitioner must be held liable for the unauthorized withdrawal of
US$1,000.00 from private respondent's dollar account.
In its desperate attempt to justify its act of withdrawing from its depositor's savings account, the bank has adopted
inconsistent theories. First, it still maintains that the peso value of the amount withdrawn was given to Atty. Ernesto
Zshornack, Jr. when the latter encashed the Manilabank Cashier's Check. At the same time, the bank claims that the
withdrawal was made pursuant to an agreement where Zshornack allegedly authorized the bank to withdraw from
his dollar savings account such amount which, when converted to pesos, would be needed to fund his peso current
account. If indeed the peso equivalent of the amount withdrawn from the dollar account was credited to the peso
current account, why did the bank still have to pay Ernesto?
At any rate, both explanations are unavailing. With regard to the first explanation, petitioner bank has not shown
how the transaction involving the cashier's check is related to the transaction involving the dollar draft in favor of
Dizon financed by the withdrawal from Rizaldy's dollar account. The two transactions appear entirely independent
of each other. Moreover, Ernesto Zshornack, Jr., possesses a personality distinct and separate from Rizaldy
Zshornack. Payment made to Ernesto cannot be considered payment to Rizaldy.
As to the second explanation, even if we assume that there was such an agreement, the evidence do not show that
the withdrawal was made pursuant to it. Instead, the record reveals that the amount withdrawn was used to finance
a dollar draft in favor of Leovigilda D. Dizon, and not to fund the current account of the Zshornacks. There is no
proof whatsoever that peso Current Account No. 210-465-29 was ever credited with the peso equivalent of the
US$1,000.00 withdrawn on October 27, 1975 from Dollar Savings Account No. 25-4109.
2. As for the second cause of action, the complaint filed with the trial court alleged that on December 8, 1975,
Zshornack entrusted to COMTRUST, thru Garcia, US $3,000.00 cash (popularly known as greenbacks)
for safekeeping, and that the agreement was embodied in a document, a copy of which was attached to and made
part of the complaint. The document reads:
Makati Cable Address:
Philippines "COMTRUST"
COMMERCIAL BANK AND TRUST COMPANY
of the Philippines
Quezon City Branch December 8, 1975
MR. RIZALDY T. ZSHORNACK
&/OR MRS SHIRLEY E. ZSHORNACK
 Sir/Madam:
We acknowledged (sic) having received from you today the sum of US
DOLLARS: THREE THOUSAND ONLY (US$3,000.00) for
safekeeping.Received by: (Sgd.) VIRGILIO V. GARCIA
It was also alleged in the complaint that despite demands, the bank refused to return the money.
In its answer, COMTRUST averred that the US$3,000 was credited to Zshornack's peso current account at prevailing
conversion rates.
It must be emphasized that COMTRUST did not deny specifically under oath the authenticity and due execution of
the above instrument.
During trial, it was established that on December 8, 1975 Zshornack indeed delivered to the bank US $3,000 for
safekeeping. When he requested the return of the money on May 10, 1976, COMTRUST explained that the sum
was disposed of in this manner: US$2,000.00 was sold on December 29, 1975 and the peso proceeds amounting to
P14,920.00 were deposited to Zshornack's current account per deposit slip accomplished by Garcia; the remaining
US$1,000.00 was sold on February 3, 1976 and the peso proceeds amounting to P8,350.00 were deposited to his
current account per deposit slip also accomplished by Garcia.
Aside from asserting that the US$3,000.00 was properly credited to Zshornack's current account at prevailing
conversion rates, BPI now posits another ground to defeat private respondent's claim. It now argues that the contract
embodied in the document is the contract of depositum (as defined in Article 1962, New Civil Code), which banks
do not enter into. The bank alleges that Garcia exceeded his powers when he entered into the transaction. Hence, it
is claimed, the bank cannot be liable under the contract, and the obligation is purely personal to Garcia.
Before we go into the nature of the contract entered into, an important point which arises on the pleadings, must be
considered.
The second cause of action is based on a document purporting to be signed by COMTRUST, a copy of which
document was attached to the complaint. In short, the second cause of action was based on an actionable document.
It was therefore incumbent upon the bank to specifically deny under oath the due execution of the document, as
prescribed under Rule 8, Section 8, if it desired: (1) to question the authority of Garcia to bind the corporation; and
(2) to deny its capacity to enter into such contract. [See, E.B. Merchant v. International Banking Corporation, 6 Phil.
314 (1906).] No sworn answer denying the due execution of the document in question, or questioning the authority
of Garcia to bind the bank, or denying the bank's capacity to enter into the contract, was ever filed. Hence, the bank
is deemed to have admitted not only Garcia's authority, but also the bank's power, to enter into the contract in
question.
In the past, this Court had occasion to explain the reason behind this procedural requirement.
The reason for the rule enunciated in the foregoing authorities will, we think, be readily
appreciated. In dealing with corporations the public at large is bound to rely to a large extent
upon outward appearances. If a man is found acting for a corporation with the external indicia
of authority, any person, not having notice of want of authority, may usually rely upon those
appearances; and if it be found that the directors had permitted the agent to exercise that
authority and thereby held him out as a person competent to bind the corporation, or had
acquiesced in a contract and retained the benefit supposed to have been conferred by it, the
corporation will be bound, notwithstanding the actual authority may never have been granted
... Whether a particular officer actually possesses the authority which he assumes to exercise is
frequently known to very few, and the proof of it usually is not readily accessible to the stranger
who deals with the corporation on the faith of the ostensible authority exercised by some of the
corporate officers. It is therefore reasonable, in a case where an officer of a corporation has
made a contract in its name, that the corporation should be required, if it denies his authority, to
state such defense in its answer. By this means the plaintiff is apprised of the fact that the agent's
authority is contested; and he is given an opportunity to adduce evidence showing either that the
authority existed or that the contract was ratified and approved. [Ramirez v. Orientalist Co. and
Fernandez, 38 Phil. 634, 645- 646 (1918).]
Petitioner's argument must also be rejected for another reason. The practical effect of absolving a corporation from
liability every time an officer enters into a contract which is beyond corporate powers, even without the proper
allegation or proof that the corporation has not authorized nor ratified the officer's act, is to cast corporations in so
perfect a mold that transgressions and wrongs by such artificial beings become impossible [Bissell v. Michigan
Southern and N.I.R. Cos 22 N.Y 258 (1860).] "To say that a corporation has no right to do unauthorized acts is only
to put forth a very plain truism but to say that such bodies have no power or capacity to err is to impute to them an
excellence which does not belong to any created existence with which we are acquainted. The distinction between
power and right is no more to be lost sight of in respect to artificial than in respect to natural persons." [Ibid.]
Having determined that Garcia's act of entering into the contract binds the corporation, we now determine the correct
nature of the contract, and its legal consequences, including its enforceability.
The document which embodies the contract states that the US$3,000.00 was received by the bank for safekeeping.
The subsequent acts of the parties also show that the intent of the parties was really for the bank to safely keep the
dollars and to return it to Zshornack at a later time, Thus, Zshornack demanded the return of the money on May 10,
1976, or over five months later.
The above arrangement is that contract defined under Article 1962, New Civil Code, which reads:
Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to
another, with the obligation of safely keeping it and of returning the same. If the safekeeping of
the thing delivered is not the principal purpose of the contract, there is no deposit but some other
contract.
Note that the object of the contract between Zshornack and COMTRUST was foreign exchange. Hence, the
transaction was covered by Central Bank Circular No. 20, Restrictions on Gold and Foreign Exchange Transactions,
promulgated on December 9, 1949, which was in force at the time the parties entered into the transaction involved
in this case. The circular provides:
xxx xxx xxx
2. Transactions in the assets described below and all dealings in them of whatever nature,
including, where applicable their exportation and importation, shall NOT be effected, except
with respect to deposit accounts included in sub-paragraphs (b) and (c) of this paragraph, when
such deposit accounts are owned by and in the name of, banks.
 (a) Any and all assets, provided they are held through, in, or with banks or
banking institutions located in the Philippines, including money, checks,
drafts, bullions bank drafts, deposit accounts (demand, time and savings),
all debts, indebtedness or obligations, financial brokers and investment
houses, notes, debentures, stocks, bonds, coupons, bank acceptances,
mortgages, pledges, liens or other rights in the nature of security, expressed
in foreign currencies, or if payable abroad, irrespective of the currency in
which they are expressed, and belonging to any person, firm, partnership,
association, branch office, agency, company or other unincorporated body
or corporation residing or located within the Philippines;
(b) Any and all assets of the kinds included and/or described in
subparagraph (a) above, whether or not held through, in, or with banks or
banking institutions, and existent within the Philippines, which belong to
any person, firm, partnership, association, branch office, agency, company
or other unincorporated body or corporation not residing or located within
the Philippines;
(c) Any and all assets existent within the Philippines including money,
checks, drafts, bullions, bank drafts, all debts, indebtedness or obligations,
financial securities commonly dealt in by bankers, brokers and investment
houses, notes, debentures, stock, bonds, coupons, bank acceptances,
mortgages, pledges, liens or other rights in the nature of security expressed
in foreign currencies, or if payable abroad, irrespective of the currency in
which they are expressed, and belonging to any person, firm, partnership,
association, branch office, agency, company or other unincorporated body
or corporation residing or located within the Philippines.
xxx xxx xxx
4. (a) All receipts of foreign exchange shall be sold daily to the Central Bank by those authorized
to deal in foreign exchange. All receipts of foreign exchange by any person, firm, partnership,
association, branch office, agency, company or other unincorporated body or corporation shall
be sold to the authorized agents of the Central Bank by the recipients within one business day
following the receipt of such foreign exchange. Any person, firm, partnership, association,
branch office, agency, company or other unincorporated body or corporation, residing or located
within the Philippines, who acquires on and after the date of this Circular foreign exchange shall
not, unless licensed by the Central Bank, dispose of such foreign exchange in whole or in part,
nor receive less than its full value, nor delay taking ownership thereof except as such delay is
customary; Provided, further, That within one day upon taking ownership, or receiving payment,
of foreign exchange the aforementioned persons and entities shall sell such foreign exchange to
designated agents of the Central Bank.
xxx xxx xxx
8. Strict observance of the provisions of this Circular is enjoined; and any person, firm or
corporation, foreign or domestic, who being bound to the observance thereof, or of such other
rules, regulations or directives as may hereafter be issued in implementation of this Circular,
shall fail or refuse to comply with, or abide by, or shall violate the same, shall be subject to the
penal sanctions provided in the Central Bank Act.
xxx xxx xxx
Paragraph 4 (a) above was modified by Section 6 of Central Bank Circular No. 281, Regulations on Foreign
Exchange, promulgated on November 26, 1969 by limiting its coverage to Philippine residents only. Section 6
provides:
SEC. 6. All receipts of foreign exchange by any resident person, firm, company or corporation
shall be sold to authorized agents of the Central Bank by the recipients within one business day
following the receipt of such foreign exchange. Any resident person, firm, company or
corporation residing or located within the Philippines, who acquires foreign exchange shall not,
unless authorized by the Central Bank, dispose of such foreign exchange in whole or in part, nor
receive less than its full value, nor delay taking ownership thereof except as such delay is
customary; Provided, That, within one business day upon taking ownership or receiving
payment of foreign exchange the aforementioned persons and entities shall sell such foreign
exchange to the authorized agents of the Central Bank.
As earlier stated, the document and the subsequent acts of the parties show that they intended the bank to safekeep
the foreign exchange, and return it later to Zshornack, who alleged in his complaint that he is a Philippine resident.
The parties did not intended to sell the US dollars to the Central Bank within one business day from receipt.
Otherwise, the contract of depositum would never have been entered into at all.
Since the mere safekeeping of the greenbacks, without selling them to the Central Bank within one business day
from receipt, is a transaction which is not authorized by CB Circular No. 20, it must be considered as one which
falls under the general class of prohibited transactions. Hence, pursuant to Article 5 of the Civil Code, it is void,
having been executed against the provisions of a mandatory/prohibitory law. More importantly, it affords neither of
the parties a cause of action against the other. "When the nullity proceeds from the illegality of the cause or object
of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no cause
of action against each other. . ." [Art. 1411, New Civil Code.] The only remedy is one on behalf of the State to
prosecute the parties for violating the law.
We thus rule that Zshornack cannot recover under the second cause of action.
3. Lastly, we find the P8,000.00 awarded by the courts a quo as damages in the concept of litigation expenses and
attorney's fees to be reasonable. The award is sustained.
WHEREFORE, the decision appealed from is hereby MODIFIED. Petitioner is ordered to restore to the dollar
savings account of private respondent the amount of US$1,000.00 as of October 27, 1975 to earn interest at the rate
fixed by the bank for dollar savings deposits. Petitioner is further ordered to pay private respondent the amount of
P8,000.00 as damages. The other causes of action of private respondent are ordered dismissed.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-6913 November 21, 1913
THE ROMAN CATHOLIC BISHOP OF JARO, plaintiff-appellee,
vs.
GREGORIO DE LA PEÑA, administrator of the estate of Father Agustin de la Peña, defendant-appellant.
MORELAND, J.:
This is an appeal by the defendant from a judgment of the Court of First Instance of Iloilo, awarding to the plaintiff
the sum of P6,641, with interest at the legal rate from the beginning of the action.
It is established in this case that the plaintiff is the trustee of a charitable bequest made for the construction of a leper
hospital and that father Agustin de la Peña was the duly authorized representative of the plaintiff to receive the
legacy. The defendant is the administrator of the estate of Father De la Peña.
In the year 1898 the books Father De la Peña, as trustee, showed that he had on hand as such trustee the sum of
P6,641, collected by him for the charitable purposes aforesaid. In the same year he deposited in his personal account
P19,000 in the Hongkong and Shanghai Bank at Iloilo. Shortly thereafter and during the war of the revolution, Father
De la Peña was arrested by the military authorities as a political prisoner, and while thus detained made an order on
said bank in favor of the United States Army officer under whose charge he then was for the sum thus deposited in
said bank. The arrest of Father De la Peña and the confiscation of the funds in the bank were the result of the claim
of the military authorities that he was an insurgent and that the funds thus deposited had been collected by him for
revolutionary purposes. The money was taken from the bank by the military authorities by virtue of such order, was
confiscated and turned over to the Government.
While there is considerable dispute in the case over the question whether the P6,641 of trust funds was included in
the P19,000 deposited as aforesaid, nevertheless, a careful examination of the case leads us to the conclusion that
said trust funds were a part of the funds deposited and which were removed and confiscated by the military
authorities of the United States.
That branch of the law known in England and America as the law of trusts had no exact counterpart in the Roman
law and has none under the Spanish law. In this jurisdiction, therefore, Father De la Peña's liability is determined
by those portions of the Civil Code which relate to obligations. (Book 4, Title 1.)
Although the Civil Code states that "a person obliged to give something is also bound to preserve it with the diligence
pertaining to a good father of a family" (art. 1094), it also provides, following the principle of the Roman law, major
casus est, cui humana infirmitas resistere non potest, that "no one shall be liable for events which could not be
foreseen, or which having been foreseen were inevitable, with the exception of the cases expressly mentioned in the
law or those in which the obligation so declares." (Art. 1105.)
By placing the money in the bank and mixing it with his personal funds De la Peña did not thereby assume an
obligation different from that under which he would have lain if such deposit had not been made, nor did he thereby
make himself liable to repay the money at all hazards. If the had been forcibly taken from his pocket or from his
house by the military forces of one of the combatants during a state of war, it is clear that under the provisions of
the Civil Code he would have been exempt from responsibility. The fact that he placed the trust fund in the bank in
his personal account does not add to his responsibility. Such deposit did not make him a debtor who must respond
at all hazards.
We do not enter into a discussion for the purpose of determining whether he acted more or less negligently by
depositing the money in the bank than he would if he had left it in his home; or whether he was more or less negligent
by depositing the money in his personal account than he would have been if he had deposited it in a separate account
as trustee. We regard such discussion as substantially fruitless, inasmuch as the precise question is not one of
negligence. There was no law prohibiting him from depositing it as he did and there was no law which changed his
responsibility be reason of the deposit. While it may be true that one who is under obligation to do or give a thing
is in duty bound, when he sees events approaching the results of which will be dangerous to his trust, to take all
reasonable means and measures to escape or, if unavoidable, to temper the effects of those events, we do not feel
constrained to hold that, in choosing between two means equally legal, he is culpably negligent in selecting one
whereas he would not have been if he had selected the other.
The court, therefore, finds and declares that the money which is the subject matter of this action was deposited by
Father De la Peña in the Hongkong and Shanghai Banking Corporation of Iloilo; that said money was forcibly taken
from the bank by the armed forces of the United States during the war of the insurrection; and that said Father De
la Peña was not responsible for its loss.
The judgment is therefore reversed, and it is decreed that the plaintiff shall take nothing by his complaint.
Separate Opinions
TRENT, J., dissenting:
I dissent. Technically speaking, whether Father De la Peña was a trustee or an agent of the plaintiff his books showed
that in 1898 he had in his possession as trustee or agent the sum of P6,641 belonging to the plaintiff as the head of
the church. This money was then clothed with all the immunities and protection with which the law seeks to invest
trust funds. But when De la Peña mixed this trust fund with his own and deposited the whole in the bank to
hispersonal account or credit, he by this act stamped on the said fund his own private marks and unclothed it of all
the protection it had. If this money had been deposited in the name of De la Peña as trustee or agent of the plaintiff,
I think that it may be presumed that the military authorities would not have confiscated it for the reason that they
were looking for insurgent funds only. Again, the plaintiff had no reason to suppose that De la Peña would attempt
to strip the fund of its identity, nor had he said or done anything which tended to relieve De la Peña from the legal
reponsibility which pertains to the care and custody of trust funds.
The Supreme Court of the United States in the United State vs. Thomas (82 U. S., 337), at page 343, said: "Trustees
are only bound to exercise the same care and solicitude with regard to the trust property which they would exercise
with regard to their own. Equity will not exact more of them. They are not liable for a loss by theft without their
fault. But this exemption ceases when they mix the trust-money with their own, whereby it loses its identity, and
they become mere debtors."
If this proposition is sound and is applicable to cases arising in this jurisdiction, and I entertain no doubt on this
point, the liability of the estate of De la Peña cannot be doubted. But this court in the majority opinion says: "The
fact that he (Agustin de la Peña) placed the trust fund in the bank in his personal account does not add to his
responsibility. Such deposit did not make him a debtor who must respond at all hazards. . . . There was no law
prohibiting him from depositing it as he did, and there was no law which changed his responsibility, by reason of
the deposit."
I assume that the court in using the language which appears in the latter part of the above quotation meant to say
that there was no statutory law regulating the question. Questions of this character are not usually governed by
statutory law. The law is to be found in the very nature of the trust itself, and, as a general rule, the courts say what
facts are necessary to hold the trustee as a debtor.
If De la Peña, after depositing the trust fund in his personal account, had used this money for speculative purposes,
such as the buying and selling of sugar or other products of the country, thereby becoming a debtor, there would
have been no doubt as to the liability of his estate. Whether he used this money for that purpose the record is silent,
but it will be noted that a considerable length of time intervened from the time of the deposit until the funds were
confiscated by the military authorities. In fact the record shows that De la Peña deposited on June 27, 1898, P5,259,
on June 28 of that year P3,280, and on August 5 of the same year P6,000. The record also shows that these funds
were withdrawn and again deposited all together on the 29th of May, 1900, this last deposit amounting to P18,970.
These facts strongly indicate that De la Peña had as a matter of fact been using the money in violation of the trust
imposed in him. lawph!1.net
If the doctrine announced in the majority opinion be followed in cases hereafter arising in this jurisdiction trust
funds will be placed in precarious condition. The position of the trustee will cease to be one of trust.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 90027 March 3, 1993
CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,
vs.
THE HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.
DAVIDE, JR., J.:
Is the contractual relation between a commercial bank and another party in a contract of rent of a safety deposit box
with respect to its contents placed by the latter one of bailor and bailee or one of lessor and lessee?
This is the crux of the present controversy.
On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses Ramon and Paula Pugao entered
into an agreement whereby the former purchased from the latter two (2) parcels of land for a consideration of
P350,625.00. Of this amount, P75,725.00 was paid as downpayment while the balance was covered by three (3)
postdated checks. Among the terms and conditions of the agreement embodied in a Memorandum of True and Actual
Agreement of Sale of Land were that the titles to the lots shall be transferred to the petitioner upon full payment of
the purchase price and that the owner's copies of the certificates of titles thereto, Transfer Certificates of Title (TCT)
Nos. 284655 and 292434, shall be deposited in a safety deposit box of any bank. The same could be withdrawn only
upon the joint signatures of a representative of the petitioner and the Pugaos upon full payment of the purchase
price. Petitioner, through Sergio Aguirre, and the Pugaos then rented Safety Deposit Box No. 1448 of private
respondent Security Bank and Trust Company, a domestic banking corporation hereinafter referred to as the
respondent Bank. For this purpose, both signed a contract of lease (Exhibit "2") which contains, inter alia, the
following conditions:
13. The bank is not a depositary of the contents of the safe and it has neither the possession nor
control of the same.
14. The bank has no interest whatsoever in said contents, except herein expressly provided, and
it assumes absolutely no liability in connection therewith.1
After the execution of the contract, two (2) renter's keys were given to the renters — one to Aguirre (for the
petitioner) and the other to the Pugaos. A guard key remained in the possession of the respondent Bank. The safety
deposit box has two (2) keyholes, one for the guard key and the other for the renter's key, and can be opened only
with the use of both keys. Petitioner claims that the certificates of title were placed inside the said box.
Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots at a price of P225.00
per square meter which, as petitioner alleged in its complaint, translates to a profit of P100.00 per square meter or a
total of P280,500.00 for the entire property. Mrs. Ramos demanded the execution of a deed of sale which necessarily
entailed the production of the certificates of title. In view thereof, Aguirre, accompanied by the Pugaos, then
proceeded to the respondent Bank on 4 October 1979 to open the safety deposit box and get the certificates of title.
However, when opened in the presence of the Bank's representative, the box yielded no such certificates. Because
of the delay in the reconstitution of the title, Mrs. Ramos withdrew her earlier offer to purchase the lots; as a
consequence thereof, the petitioner allegedly failed to realize the expected profit of P280,500.00. Hence, the latter
filed on 1 September 1980 a complaint2 for damages against the respondent Bank with the Court of First Instance
(now Regional Trial Court) of Pasig, Metro Manila which docketed the same as Civil Case No. 38382.
In its Answer with Counterclaim,3 respondent Bank alleged that the petitioner has no cause of action because of
paragraphs 13 and 14 of the contract of lease (Exhibit "2"); corollarily, loss of any of the items or articles contained
in the box could not give rise to an action against it. It then interposed a counterclaim for exemplary damages as
well as attorney's fees in the amount of P20,000.00. Petitioner subsequently filed an answer to the counterclaim.4
In due course, the trial court, now designated as Branch 161 of the Regional Trial Court (RTC) of Pasig, Metro
Manila, rendered a decision5 adverse to the petitioner on 8 December 1986, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered dismissing plaintiff's
complaint.
On defendant's counterclaim, judgment is hereby rendered ordering plaintiff to pay defendant
the amount of FIVE THOUSAND (P5,000.00) PESOS as attorney's fees.
With costs against plaintiff.6
The unfavorable verdict is based on the trial court's conclusion that under paragraphs 13 and 14 of the contract of
lease, the Bank has no liability for the loss of the certificates of title. The court declared that the said provisions are
binding on the parties.
Its motion for reconsideration7 having been denied, petitioner appealed from the adverse decision to the respondent
Court of Appeals which docketed the appeal as CA-G.R. CV No. 15150. Petitioner urged the respondent Court to
reverse the challenged decision because the trial court erred in (a) absolving the respondent Bank from liability from
the loss, (b) not declaring as null and void, for being contrary to law, public order and public policy, the provisions
in the contract for lease of the safety deposit box absolving the Bank from any liability for loss, (c) not concluding
that in this jurisdiction, as well as under American jurisprudence, the liability of the Bank is settled and (d) awarding
attorney's fees to the Bank and denying the petitioner's prayer for nominal and exemplary damages and attorney's
fees.8
In its Decision promulgated on 4 July 1989,9 respondent Court affirmed the appealed decision principally on the
theory that the contract (Exhibit "2") executed by the petitioner and respondent Bank is in the nature of a contract
of lease by virtue of which the petitioner and its co-renter were given control over the safety deposit box and its
contents while the Bank retained no right to open the said box because it had neither the possession nor control over
it and its contents. As such, the contract is governed by Article 1643 of the Civil Code 10 which provides:
Art. 1643. In the lease of things, one of the parties binds himself to give to another the enjoyment
or use of a thing for a price certain, and for a period which may be definite or indefinite.
However, no lease for more than ninety-nine years shall be valid.
It invoked Tolentino vs. Gonzales 11 — which held that the owner of the property loses his control over
the property leased during the period of the contract — and Article 1975 of the Civil Code which provides:
Art. 1975. The depositary holding certificates, bonds, securities or instruments which earn
interest shall be bound to collect the latter when it becomes due, and to take such steps as may
be necessary in order that the securities may preserve their value and the rights corresponding
to them according to law.
The above provision shall not apply to contracts for the rent of safety deposit boxes.
and then concluded that "[c]learly, the defendant-appellee is not under any duty to maintain the contents
of the box. The stipulation absolving the defendant-appellee from liability is in accordance with the nature
of the contract of lease and cannot be regarded as contrary to law, public order and public policy." 12 The
appellate court was quick to add, however, that under the contract of lease of the safety deposit box,
respondent Bank is not completely free from liability as it may still be made answerable in case
unauthorized persons enter into the vault area or when the rented box is forced open. Thus, as expressly
provided for in stipulation number 8 of the contract in question:
8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented
safe and beyond this, the Bank will not be responsible for the contents of any safe rented from
it. 13
Its motion for reconsideration 14 having been denied in the respondent Court's Resolution of 28 August
1989, 15petitioner took this recourse under Rule 45 of the Rules of Court and urges Us to review and set aside the
respondent Court's ruling. Petitioner avers that both the respondent Court and the trial court (a) did not properly and
legally apply the correct law in this case, (b) acted with grave abuse of discretion or in excess of jurisdiction
amounting to lack thereof and (c) set a precedent that is contrary to, or is a departure from precedents adhered to
and affirmed by decisions of this Court and precepts in American jurisprudence adopted in the Philippines. It
reiterates the arguments it had raised in its motion to reconsider the trial court's decision, the brief submitted to the
respondent Court and the motion to reconsider the latter's decision. In a nutshell, petitioner maintains that regardless
of nomenclature, the contract for the rent of the safety deposit box (Exhibit "2") is actually a contract of deposit
governed by Title XII, Book IV of the Civil Code of the
Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the loss of the certificates of title
pursuant to Article 1972 of the said Code which provides:
Art. 1972. The depositary is obliged to keep the thing safely and to return it, when required, to
the depositor, or to his heirs and successors, or to the person who may have been designated in
the contract. His responsibility, with regard to the safekeeping and the loss of the thing, shall be
governed by the provisions of Title I of this Book.
If the deposit is gratuitous, this fact shall be taken into account in determining the degree of care
that the depositary must observe.
Petitioner then quotes a passage from American Jurisprudence 17 which is supposed to expound on the
prevailing rule in the United States, to wit:
The prevailing rule appears to be that where a safe-deposit company leases a safe-deposit box
or safe and the lessee takes possession of the box or safe and places therein his securities or
other valuables, the relation of bailee and bail or is created between the parties to the transaction
as to such securities or other valuables; the fact that the
safe-deposit company does not know, and that it is not expected that it shall know, the character
or description of the property which is deposited in such safe-deposit box or safe does not change
that relation. That access to the contents of the 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 18 which states that a contract for the rental of a bank safety deposit
box in consideration of a fixed amount at stated periods is a bailment for hire.
Petitioner further argues that conditions 13 and 14 of the questioned contract are contrary to law and public policy
and should be declared null and void. In support thereof, it cites Article 1306 of the Civil Code which provides that
parties to a contract may establish such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order or public policy.
After the respondent Bank filed its comment, this Court gave due course to the petition and required the parties to
simultaneously submit their respective Memoranda.
The petition is partly meritorious.
We agree with the petitioner's contention that the contract for the rent of the safety deposit box is not an ordinary
contract of lease as defined in Article 1643 of the Civil Code. However, We do not fully subscribe to its view that
the same is a contract of deposit that is to be strictly governed by the provisions in the Civil Code on deposit; 19 the
contract in the case at bar is a special kind of deposit. It cannot be characterized as an ordinary contract of lease
under Article 1643 because the full and absolute possession and control of the safety deposit box was not given to
the joint renters — the petitioner and the Pugaos. The guard key of the box remained with the respondent Bank;
without this key, neither of the renters could open the box. On the other hand, the respondent Bank could not likewise
open the box without the renter's key. In this case, the said key had a duplicate which was made so that both renters
could have access to the box.
Hence, the authorities cited by the respondent Court 20 on this point do not apply. Neither could Article 1975, also
relied upon by the respondent Court, be invoked as an argument against the deposit theory. Obviously, the first
paragraph of such provision cannot apply to a depositary of certificates, bonds, securities or instruments which earn
interest if such documents are kept in a rented safety deposit box. It is clear that the depositary cannot open the box
without the renter being present.
We observe, however, that the deposit theory itself does not altogether find unanimous support even in American
jurisprudence. We agree with the petitioner that under the latter, the prevailing rule is that the relation between a
bank renting out safe-deposit boxes and its customer with respect to the contents of the box is that of a bail or and
bailee, the bailment being for hire and mutual benefit. 21 This is just the prevailing view because:
There is, however, some support for the view that the relationship in question might be more
properly characterized as that of landlord and tenant, or lessor and lessee. It has also been
suggested that it should be characterized as that of licensor and licensee. The relation between
a bank, safe-deposit company, or storage company, and the renter of a safe-deposit box therein,
is often described as contractual, express or implied, oral or written, in whole or in part. But
there is apparently no jurisdiction in which any rule other than that applicable to bailments
governs questions of the liability and rights of the parties in respect of loss of the contents of
safe-deposit boxes. 22 (citations omitted)
In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is clear that in this
jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of the General Banking
Act 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
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 25 and, pursuant to Article 1306 of the Civil Code, the parties thereto may establish
such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order or public policy. The depositary's responsibility for the safekeeping of the objects
deposited in the case at bar is governed by Title I, Book IV of the Civil Code. Accordingly, the depositary would be
liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of
the agreement. 26 In the absence of any stipulation prescribing the degree of diligence required, that of a good father
of a family is to be observed. 27 Hence, any stipulation exempting the depositary from any liability arising from the
loss of the thing deposited on account of fraud, negligence or delay would be void for being contrary to law and
public policy. In the instant case, petitioner maintains that conditions 13 and 14 of the questioned contract of lease
of the safety deposit box, which read:
13. The bank is not a depositary of the contents of the safe and it has neither the possession nor
control of the same.
14. The bank has no interest whatsoever in said contents, except herein expressly provided, and
it assumes absolutely no liability in connection therewith. 28
are void as they are contrary to law and public policy. We find Ourselves in agreement with this
proposition for indeed, said provisions are inconsistent with the respondent Bank's responsibility as a
depositary under Section 72(a) of the General Banking Act. Both exempt the latter from any liability
except as contemplated in condition 8 thereof which limits its duty to exercise reasonable diligence only
with respect to who shall be admitted to any rented safe, to wit:
8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented
safe and beyond this, the Bank will not be responsible for the contents of any safe rented from
it. 29
Furthermore, condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank. It
is not correct to assert that the Bank has neither the possession nor control of the contents of the box since
in fact, the safety deposit box itself is located in its premises and is under its absolute control; moreover,
the respondent Bank keeps the guard key to the said box. As stated earlier, renters cannot open their
respective boxes unless the Bank cooperates by presenting and using this guard key. Clearly then, to the
extent above stated, the foregoing conditions in the contract in question are void and ineffective. It has
been said:
With respect to property deposited in a safe-deposit box by a customer of a safe-deposit
company, the parties, since the relation is a contractual one, may by special contract define their
respective duties or provide for increasing or limiting the liability of the deposit company,
provided such contract is not in violation of law or public policy. It must clearly appear that
there actually was such a special contract, however, in order to vary the ordinary obligations
implied by law from the relationship of the parties; liability of the deposit company will not be
enlarged or restricted by words of doubtful meaning. The company, in renting
safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own fraud
or negligence or that of its agents or servants, and if a provision of the contract may be construed
as an attempt to do so, it will be held ineffective for the purpose. Although it has been held that
the lessor of a safe-deposit box cannot limit its liability for loss of the contents thereof through
its own negligence, the view has been taken that such a lessor may limits its liability to some
extent by agreement or stipulation. 30 (citations omitted)
Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that the petition should be
dismissed, but on grounds quite different from those relied upon by the Court of Appeals. In the instant case, the
respondent Bank's exoneration cannot, contrary to the holding of the Court of Appeals, be based on or proceed from
a characterization of the impugned contract as a contract of lease, but rather on the fact that no competent proof was
presented to show that respondent Bank was aware of the agreement between the petitioner and the Pugaos to the
effect that the certificates of title were withdrawable from the safety deposit box only upon both parties' joint
signatures, and that no evidence was submitted to reveal that the loss of the certificates of title was due to the fraud
or negligence of the respondent Bank. This in turn flows from this Court's determination that the contract involved
was one of deposit. Since both the petitioner and the Pugaos agreed that each should have one (1) renter's key, it
was obvious that either of them could ask the Bank for access to the safety deposit box and, with the use of such
key and the Bank's own guard key, could open the said box, without the other renter being present.
Since, however, the petitioner cannot be blamed for the filing of the complaint and no bad faith on its part had been
established, the trial court erred in condemning the petitioner to pay the respondent Bank attorney's fees. To this
extent, the Decision (dispositive portion) of public respondent Court of Appeals must be modified.
WHEREFORE, the Petition for Review is partially GRANTED by deleting the award for attorney's fees from the 4
July 1989 Decision of the respondent Court of Appeals in CA-G.R. CV No. 15150. As modified, and subject to the
pronouncement We made above on the nature of the relationship between the parties in a contract of lease of safety
deposit boxes, the dispositive portion of the said Decision is hereby AFFIRMED and the instant Petition for Review
is otherwise DENIED for lack of merit.
No pronouncement as to costs.
SO ORDERED.
[G.R. No. 126780. February 17, 2005]
YHT REALTY CORPORATION, ERLINDA LAINEZ and ANICIA PAYAM, petitioners, vs. THE COURT
OF APPEALS and MAURICE McLOUGHLIN, respondents.
DECISION
TINGA, J.:
The primary question of interest before this Court is the only legal issue in the case: It is whether a hotel may
evade liability for the loss of items left with it for safekeeping by its guests, by having these guests execute written
waivers holding the establishment or its employees free from blame for such loss in light of Article 2003 of the Civil
Code which voids such waivers.
Before this Court is a Rule 45 petition for review of the Decision[1] dated 19 October 1995 of the Court of
Appeals which affirmed the Decision[2] dated 16 December 1991 of the Regional Trial Court (RTC), Branch 13, of
Manila, finding YHT Realty Corporation, Brunhilda Mata-Tan (Tan), Erlinda Lainez (Lainez) and Anicia Payam
(Payam) jointly and solidarily liable for damages in an action filed by Maurice McLoughlin (McLoughlin) for the
loss of his American and Australian dollars deposited in the safety deposit box of Tropicana Copacabana Apartment
Hotel, owned and operated by YHT Realty Corporation.
The factual backdrop of the case follow.
Private respondent McLoughlin, an Australian businessman-philanthropist, used to stay at Sheraton Hotel
during his trips to the Philippines prior to 1984 when he met Tan. Tan befriended McLoughlin by showing him
around, introducing him to important people, accompanying him in visiting impoverished street children and
assisting him in buying gifts for the children and in distributing the same to charitable institutions for poor children.
Tan convinced McLoughlin to transfer from Sheraton Hotel to Tropicana where Lainez, Payam and Danilo Lopez
were employed. Lopez served as manager of the hotel while Lainez and Payam had custody of the keys for the safety
deposit boxes of Tropicana. Tan took care of McLoughlins booking at the Tropicana where he started staying during
his trips to the Philippines from December 1984 to September 1987. [3]
On 30 October 1987, McLoughlin arrived from Australia and registered with Tropicana. He rented a safety
deposit box as it was his practice to rent a safety deposit box every time he registered at Tropicana in previous trips.
As a tourist, McLoughlin was aware of the procedure observed by Tropicana relative to its safety deposit boxes.
The safety deposit box could only be opened through the use of two keys, one of which is given to the registered
guest, and the other remaining in the possession of the management of the hotel. When a registered guest wished to
open his safety deposit box, he alone could personally request the management who then would assign one of its
employees to accompany the guest and assist him in opening the safety deposit box with the two keys. [4]
McLoughlin allegedly placed the following in his safety deposit box: Fifteen Thousand US Dollars
(US$15,000.00) which he placed in two envelopes, one envelope containing Ten Thousand US Dollars
(US$10,000.00) and the other envelope Five Thousand US Dollars (US$5,000.00); Ten Thousand Australian Dollars
(AUS$10,000.00) which he also placed in another envelope; two (2) other envelopes containing letters and credit
cards; two (2) bankbooks; and a checkbook, arranged side by side inside the safety deposit box. [5]
On 12 December 1987, before leaving for a brief trip to Hongkong, McLoughlin opened his safety deposit
box with his key and with the key of the management and took therefrom the envelope containing Five Thousand
US Dollars (US$5,000.00), the envelope containing Ten Thousand Australian Dollars (AUS$10,000.00), his
passports and his credit cards.[6]McLoughlin left the other items in the box as he did not check out of his room at
the Tropicana during his short visit to Hongkong. When he arrived in Hongkong, he opened the envelope which
contained Five Thousand US Dollars (US$5,000.00) and discovered upon counting that only Three Thousand US
Dollars (US$3,000.00) were enclosed therein.[7] Since he had no idea whether somebody else had tampered with his
safety deposit box, he thought that it was just a result of bad accounting since he did not spend anything from that
envelope.[8]
After returning to Manila, he checked out of Tropicana on 18 December 1987 and left for Australia. When he
arrived in Australia, he discovered that the envelope with Ten Thousand US Dollars (US$10,000.00) was short of
Five Thousand US Dollars (US$5,000). He also noticed that the jewelry which he bought in Hongkong and stored
in the safety deposit box upon his return to Tropicana was likewise missing, except for a diamond bracelet. [9]
When McLoughlin came back to the Philippines on 4 April 1988, he asked Lainez if some money and/or
jewelry which he had lost were found and returned to her or to the management. However, Lainez told him that no
one in the hotel found such things and none were turned over to the management. He again registered at Tropicana
and rented a safety deposit box. He placed therein one (1) envelope containing Fifteen Thousand US Dollars
(US$15,000.00), another envelope containing Ten Thousand Australian Dollars (AUS$10,000.00) and other
envelopes containing his traveling papers/documents. On 16 April 1988, McLoughlin requested Lainez and Payam
to open his safety deposit box. He noticed that in the envelope containing Fifteen Thousand US Dollars
(US$15,000.00), Two Thousand US Dollars (US$2,000.00) were missing and in the envelope previously containing
Ten Thousand Australian Dollars (AUS$10,000.00), Four Thousand Five Hundred Australian Dollars
(AUS$4,500.00) were missing.[10]
When McLoughlin discovered the loss, he immediately confronted Lainez and Payam who admitted that Tan
opened the safety deposit box with the key assigned to him. [11]McLoughlin went up to his room where Tan was
staying and confronted her. Tan admitted that she had stolen McLoughlins key and was able to open the safety
deposit box with the assistance of Lopez, Payam and Lainez. [12] Lopez also told McLoughlin that Tan stole the key
assigned to McLoughlin while the latter was asleep.[13]
McLoughlin requested the management for an investigation of the incident. Lopez got in touch with Tan and
arranged for a meeting with the police and McLoughlin. When the police did not arrive, Lopez and Tan went to the
room of McLoughlin at Tropicana and thereat, Lopez wrote on a piece of paper a promissory note dated 21 April
1988. The promissory note reads as follows:
I promise to pay Mr. Maurice McLoughlin the amount of AUS$4,000.00 and US$2,000.00 or its equivalent in
Philippine currency on or before May 5, 1988.[14]
 Lopez requested Tan to sign the promissory note which the latter did and Lopez also signed as a witness.
Despite the execution of promissory note by Tan, McLoughlin insisted that it must be the hotel who must assume
responsibility for the loss he suffered. However, Lopez refused to accept the responsibility relying on the conditions
for renting the safety deposit box entitled Undertaking For the Use Of Safety Deposit Box,[15] specifically paragraphs
(2) and (4) thereof, to wit:
2. To release and hold free and blameless TROPICANA APARTMENT HOTEL from any liability
arising from any loss in the contents and/or use of the said deposit box for any cause whatsoever,
including but not limited to the presentation or use thereof by any other person should the key be lost;
...
4. To return the key and execute the RELEASE in favor of TROPICANA APARTMENT HOTEL upon
giving up the use of the box.[16]
On 17 May 1988, McLoughlin went back to Australia and he consulted his lawyers as to the validity of the
abovementioned stipulations. They opined that the stipulations are void for being violative of universal hotel
practices and customs. His lawyers prepared a letter dated 30 May 1988 which was signed by McLoughlin and sent
to President Corazon Aquino.[17] The Office of the President referred the letter to the Department of Justice (DOJ)
which forwarded the same to the Western Police District (WPD).[18]
After receiving a copy of the indorsement in Australia, McLoughlin came to the Philippines and registered
again as a hotel guest of Tropicana. McLoughlin went to Malacaňang to follow up on his letter but he was instructed
to go to the DOJ. The DOJ directed him to proceed to the WPD for documentation. But McLoughlin went back to
Australia as he had an urgent business matter to attend to.
For several times, McLoughlin left for Australia to attend to his business and came back to the Philippines to
follow up on his letter to the President but he failed to obtain any concrete assistance. [19]
McLoughlin left again for Australia and upon his return to the Philippines on 25 August 1989 to pursue his
claims against petitioners, the WPD conducted an investigation which resulted in the preparation of an affidavit
which was forwarded to the Manila City Fiscals Office. Said affidavit became the basis of preliminary investigation.
However, McLoughlin left again for Australia without receiving the notice of the hearing on 24 November 1989.
Thus, the case at the Fiscals Office was dismissed for failure to prosecute. Mcloughlin requested the reinstatement
of the criminal charge for theft. In the meantime, McLoughlin and his lawyers wrote letters of demand to those
having responsibility to pay the damage. Then he left again for Australia.
Upon his return on 22 October 1990, he registered at the Echelon Towers at Malate, Manila. Meetings were
held between McLoughlin and his lawyer which resulted to the filing of a complaint for damages on 3 December
1990 against YHT Realty Corporation, Lopez, Lainez, Payam and Tan (defendants) for the loss of McLoughlins
money which was discovered on 16 April 1988. After filing the complaint, McLoughlin left again for Australia to
attend to an urgent business matter. Tan and Lopez, however, were not served with summons, and trial proceeded
with only Lainez, Payam and YHT Realty Corporation as defendants.
After defendants had filed their Pre-Trial Brief admitting that they had previously allowed and assisted Tan
to open the safety deposit box, McLoughlin filed an Amended/Supplemental Complaint[20] dated 10 June 1991 which
included another incident of loss of money and jewelry in the safety deposit box rented by McLoughlin in the same
hotel which took place prior to 16 April 1988.[21] The trial court admitted the Amended/Supplemental Complaint.
During the trial of the case, McLoughlin had been in and out of the country to attend to urgent business in
Australia, and while staying in the Philippines to attend the hearing, he incurred expenses for hotel bills, airfare and
other transportation expenses, long distance calls to Australia, Meralco power expenses, and expenses for food and
maintenance, among others.[22]
After trial, the RTC of Manila rendered judgment in favor of McLoughlin, the dispositive portion of which
reads:
WHEREFORE, above premises considered, judgment is hereby rendered by this Court in favor of plaintiff and
against the defendants, to wit:
1. Ordering defendants, jointly and severally, to pay plaintiff the sum of US$11,400.00 or its equivalent
in Philippine Currency of P342,000.00, more or less, and the sum of AUS$4,500.00 or its
equivalent in Philippine Currency of P99,000.00, or a total of P441,000.00, more or less, with 12%
interest from April 16 1988 until said amount has been paid to plaintiff (Item 1, Exhibit CC);
2. Ordering defendants, jointly and severally to pay plaintiff the sum of P3,674,238.00 as actual and
consequential damages arising from the loss of his Australian and American dollars and jewelries
complained against and in prosecuting his claim and rights administratively and judicially (Items
II, III, IV, V, VI, VII, VIII, and IX, Exh. CC);
3. Ordering defendants, jointly and severally, to pay plaintiff the sum of P500,000.00 as moral damages
(Item X, Exh. CC);
4. Ordering defendants, jointly and severally, to pay plaintiff the sum of P350,000.00 as exemplary
damages (Item XI, Exh. CC);
5. And ordering defendants, jointly and severally, to pay litigation expenses in the sum of P200,000.00
(Item XII, Exh. CC);
6. Ordering defendants, jointly and severally, to pay plaintiff the sum of P200,000.00 as attorneys fees,
and a fee of P3,000.00 for every appearance; and
7. Plus costs of suit.
SO ORDERED.[23]
The trial court found that McLoughlins allegations as to the fact of loss and as to the amount of money he lost
were sufficiently shown by his direct and straightforward manner of testifying in court and found him to be credible
and worthy of belief as it was established that McLoughlins money, kept in Tropicanas safety deposit box, was taken
by Tan without McLoughlins consent. The taking was effected through the use of the master key which was in the
possession of the management. Payam and Lainez allowed Tan to use the master key without authority from
McLoughlin. The trial court added that if McLoughlin had not lost his dollars, he would not have gone through the
trouble and personal inconvenience of seeking aid and assistance from the Office of the President, DOJ, police
authorities and the City Fiscals Office in his desire to recover his losses from the hotel management and Tan. [24]
As regards the loss of Seven Thousand US Dollars (US$7,000.00) and jewelry worth approximately One
Thousand Two Hundred US Dollars (US$1,200.00) which allegedly occurred during his stay at Tropicana previous
to 4 April 1988, no claim was made by McLoughlin for such losses in his complaint dated 21 November 1990
because he was not sure how they were lost and who the responsible persons were. But considering the admission
of the defendants in their pre-trial brief that on three previous occasions they allowed Tan to open the box, the trial
court opined that it was logical and reasonable to presume that his personal assets consisting of Seven Thousand US
Dollars (US$7,000.00) and jewelry were taken by Tan from the safety deposit box without McLoughlins consent
through the cooperation of Payam and Lainez.[25]
 The trial court also found that defendants acted with gross negligence in the performance and exercise of their
duties and obligations as innkeepers and were therefore liable to answer for the losses incurred by McLoughlin. [26]
Moreover, the trial court ruled that paragraphs (2) and (4) of the Undertaking For The Use Of Safety Deposit
Box are not valid for being contrary to the express mandate of Article 2003 of the New Civil Code and against public
policy.[27] Thus, there being fraud or wanton conduct on the part of defendants, they should be responsible for all
damages which may be attributed to the non-performance of their contractual obligations.[28]
The Court of Appeals affirmed the disquisitions made by the lower court except as to the amount of damages
awarded. The decretal text of the appellate courts decision reads:
THE FOREGOING CONSIDERED, the appealed Decision is hereby AFFIRMED but modified as follows:
The appellants are directed jointly and severally to pay the plaintiff/appellee the following amounts:
1) P153,200.00 representing the peso equivalent of US$2,000.00 and AUS$4,500.00;
2) P308,880.80, representing the peso value for the air fares from Sidney [sic] to Manila and back for a
total of eleven (11) trips;
3) One-half of P336,207.05 or P168,103.52 representing payment to Tropicana Apartment Hotel;
4) One-half of P152,683.57 or P76,341.785 representing payment to Echelon Tower;
5) One-half of P179,863.20 or P89,931.60 for the taxi xxx transportation from the residence to Sidney
[sic] Airport and from MIA to the hotel here in Manila, for the eleven (11) trips;
6) One-half of P7,801.94 or P3,900.97 representing Meralco power expenses;
7) One-half of P356,400.00 or P178,000.00 representing expenses for food and maintenance;
8) P50,000.00 for moral damages;
9) P10,000.00 as exemplary damages; and
10) P200,000 representing attorneys fees.
With costs.
SO ORDERED.[29]
Unperturbed, YHT Realty Corporation, Lainez and Payam went to this Court in this appeal by certiorari.
Petitioners submit for resolution by this Court the following issues: (a) whether the appellate courts conclusion
on the alleged prior existence and subsequent loss of the subject money and jewelry is supported by the evidence on
record; (b) whether the finding of gross negligence on the part of petitioners in the performance of their duties as
innkeepers is supported by the evidence on record; (c) whether the Undertaking For The Use of Safety Deposit Box
admittedly executed by private respondent is null and void; and (d) whether the damages awarded to private
respondent, as well as the amounts thereof, are proper under the circumstances. [30]
The petition is devoid of merit.
It is worthy of note that the thrust of Rule 45 is the resolution only of questions of law and any peripheral
factual question addressed to this Court is beyond the bounds of this mode of review.
Petitioners point out that the evidence on record is insufficient to prove the fact of prior existence of the dollars
and the jewelry which had been lost while deposited in the safety deposit boxes of Tropicana, the basis of the trial
court and the appellate court being the sole testimony of McLoughlin as to the contents thereof. Likewise, petitioners
dispute the finding of gross negligence on their part as not supported by the evidence on record.
We are not persuaded. We adhere to the findings of the trial court as affirmed by the appellate court that the
fact of loss was established by the credible testimony in open court by McLoughlin. Such findings are factual and
therefore beyond the ambit of the present petition.
The trial court had the occasion to observe the demeanor of McLoughlin while testifying which reflected the
veracity of the facts testified to by him. On this score, we give full credence to the appreciation of testimonial
evidence by the trial court especially if what is at issue is the credibility of the witness. The oft-repeated principle is
that where the credibility of a witness is an issue, the established rule is that great respect is accorded to the evaluation
of the credibility of witnesses by the trial court.[31] The trial court is in the best position to assess the credibility of
witnesses and their testimonies because of its unique opportunity to observe the witnesses firsthand and note their
demeanor, conduct and attitude under grilling examination.[32]
We are also not impressed by petitioners argument that the finding of gross negligence by the lower court as
affirmed by the appellate court is not supported by evidence. The evidence reveals that two keys are required to
open the safety deposit boxes of Tropicana. One key is assigned to the guest while the other remains in the possession
of the management. If the guest desires to open his safety deposit box, he must request the management for the other
key to open the same. In other words, the guest alone cannot open the safety deposit box without the assistance of
the management or its employees. With more reason that access to the safety deposit box should be denied if the
one requesting for the opening of the safety deposit box is a stranger. Thus, in case of loss of any item deposited in
the safety deposit box, it is inevitable to conclude that the management had at least a hand in the consummation of
the taking, unless the reason for the loss is force majeure.
Noteworthy is the fact that Payam and Lainez, who were employees of Tropicana, had custody of the master
key of the management when the loss took place. In fact, they even admitted that they assisted Tan on three separate
occasions in opening McLoughlins safety deposit box.[33] This only proves that Tropicana had prior knowledge that
a person aside from the registered guest had access to the safety deposit box. Yet the management failed to notify
McLoughlin of the incident and waited for him to discover the taking before it disclosed the matter to him. Therefore,
Tropicana should be held responsible for the damage suffered by McLoughlin by reason of the negligence of its
employees.
The management should have guarded against the occurrence of this incident considering that Payam admitted
in open court that she assisted Tan three times in opening the safety deposit box of McLoughlin at around 6:30 A.M.
to 7:30 A.M. while the latter was still asleep.[34] In light of the circumstances surrounding this case, it is undeniable
that without the acquiescence of the employees of Tropicana to the opening of the safety deposit box, the loss of
McLoughlins money could and should have been avoided.
The management contends, however, that McLoughlin, by his act, made its employees believe that Tan was
his spouse for she was always with him most of the time. The evidence on record, however, is bereft of any showing
that McLoughlin introduced Tan to the management as his wife. Such an inference from the act of McLoughlin will
not exculpate the petitioners from liability in the absence of any showing that he made the management believe that
Tan was his wife or was duly authorized to have access to the safety deposit box. Mere close companionship and
intimacy are not enough to warrant such conclusion considering that what is involved in the instant case is the very
safety of McLoughlins deposit. If only petitioners exercised due diligence in taking care of McLoughlins safety
deposit box, they should have confronted him as to his relationship with Tan considering that the latter had been
observed opening McLoughlins safety deposit box a number of times at the early hours of the morning. Tans acts
should have prompted the management to investigate her relationship with McLoughlin. Then, petitioners would
have exercised due diligence required of them. Failure to do so warrants the conclusion that the management had
been remiss in complying with the obligations imposed upon hotel-keepers under the law.
Under Article 1170 of the New Civil Code, those who, in the performance of their obligations, are guilty of
negligence, are liable for damages. As to who shall bear the burden of paying damages, Article 2180, paragraph (4)
of the same Code provides that the owners and managers of an establishment or enterprise are likewise responsible
for damages caused by their employees in the service of the branches in which the latter are employed or on the
occasion of their functions. Also, this Court has ruled that if an employee is found negligent, it is presumed that the
employer was negligent in selecting and/or supervising him for it is hard for the victim to prove the negligence of
such employer.[35] Thus, given the fact that the loss of McLoughlins money was consummated through the
negligence of Tropicanas employees in allowing Tan to open the safety deposit box without the guests consent, both
the assisting employees and YHT Realty Corporation itself, as owner and operator of Tropicana, should be held
solidarily liable pursuant to Article 2193.[36]
The issue of whether the Undertaking For The Use of Safety Deposit Box executed by McLoughlin is tainted
with nullity presents a legal question appropriate for resolution in this petition. Notably, both the trial court and the
appellate court found the same to be null and void. We find no reason to reverse their common conclusion. Article
2003 is controlling, thus:
Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is not
liable for the articles brought by the guest. Any stipulation between the hotel-keeper and the guest whereby the
responsibility of the former as set forth in Articles 1998 to 2001 [37] is suppressed or diminished shall be void.
Article 2003 was incorporated in the New Civil Code as an expression of public policy precisely to apply to
situations such as that presented in this case. The hotel business like the common carriers business is imbued with
public interest. Catering to the public, hotelkeepers are bound to provide not only lodging for hotel guests and
security to their persons and belongings. The twin duty constitutes the essence of the business. The law in turn does
not allow such duty to the public to be negated or diluted by any contrary stipulation in so-called undertakings that
ordinarily appear in prepared forms imposed by hotel keepers on guests for their signature.
In an early case,[38] the Court of Appeals through its then Presiding Justice (later Associate Justice of the
Court) Jose P. Bengzon, ruled that to hold hotelkeepers or innkeeper liable for the effects of their guests, it is not
necessary that they be actually delivered to the innkeepers or their employees. It is enough that such effects are
within the hotel or inn.[39] With greater reason should the liability of the hotelkeeper be enforced when the missing
items are taken without the guests knowledge and consent from a safety deposit box provided by the hotel itself, as
in this case.
Paragraphs (2) and (4) of the undertaking manifestly contravene Article 2003 of the New Civil Code for they
allow Tropicana to be released from liability arising from any loss in the contents and/or use of the safety deposit
box for any cause whatsoever.[40] Evidently, the undertaking was intended to bar any claim against Tropicana for
any loss of the contents of the safety deposit box whether or not negligence was incurred by Tropicana or its
employees. The New Civil Code is explicit that the responsibility of the hotel-keeper shall extend to loss of, or injury
to, the personal property of the guests even if caused by servants or employees of the keepers of hotels or inns as
well as by strangers, except as it may proceed from any force majeure.[41] It is the loss through force majeure that
may spare the hotel-keeper from liability. In the case at bar, there is no showing that the act of the thief or robber
was done with the use of arms or through an irresistible force to qualify the same as force majeure.[42]
Petitioners likewise anchor their defense on Article 2002[43] which exempts the hotel-keeper from liability if
the loss is due to the acts of his guest, his family, or visitors. Even a cursory reading of the provision would lead us
to reject petitioners contention. The justification they raise would render nugatory the public interest sought to be
protected by the provision. What if the negligence of the employer or its employees facilitated the consummation of
a crime committed by the registered guests relatives or visitor? Should the law exculpate the hotel from liability
since the loss was due to the act of the visitor of the registered guest of the hotel? Hence, this provision presupposes
that the hotel-keeper is not guilty of concurrent negligence or has not contributed in any degree to the occurrence of
the loss. A depositary is not responsible for the loss of goods by theft, unless his actionable negligence contributes
to the loss.[44]
In the case at bar, the responsibility of securing the safety deposit box was shared not only by the guest himself
but also by the management since two keys are necessary to open the safety deposit box. Without the assistance of
hotel employees, the loss would not have occurred. Thus, Tropicana was guilty of concurrent negligence in allowing
Tan, who was not the registered guest, to open the safety deposit box of McLoughlin, even assuming that the latter
was also guilty of negligence in allowing another person to use his key. To rule otherwise would result in
undermining the safety of the safety deposit boxes in hotels for the management will be given imprimatur to allow
any person, under the pretense of being a family member or a visitor of the guest, to have access to the safety deposit
box without fear of any liability that will attach thereafter in case such person turns out to be a complete stranger.
This will allow the hotel to evade responsibility for any liability incurred by its employees in conspiracy with the
guests relatives and visitors.
Petitioners contend that McLoughlins case was mounted on the theory of contract, but the trial court and the
appellate court upheld the grant of the claims of the latter on the basis of tort.[45] There is nothing anomalous in how
the lower courts decided the controversy for this Court has pronounced a jurisprudential rule that tort liability can
exist even if there are already contractual relations. The act that breaks the contract may also be tort. [46]
As to damages awarded to McLoughlin, we see no reason to modify the amounts awarded by the appellate
court for the same were based on facts and law. It is within the province of lower courts to settle factual issues such
as the proper amount of damages awarded and such finding is binding upon this Court especially if sufficiently
proven by evidence and not unconscionable or excessive. Thus, the appellate court correctly awarded McLoughlin
Two Thousand US Dollars (US$2,000.00) and Four Thousand Five Hundred Australian dollars (AUS$4,500.00) or
their peso equivalent at the time of payment,[47] being the amounts duly proven by evidence.[48] The alleged loss that
took place prior to 16 April 1988 was not considered since the amounts alleged to have been taken were not
sufficiently established by evidence. The appellate court also correctly awarded the sum of P308,880.80,
representing the peso value for the air fares from Sydney to Manila and back for a total of eleven (11) trips; [49] one-
half of P336,207.05 or P168,103.52 representing payment to Tropicana;[50] one-half of P152,683.57 or P76,341.785
representing payment to Echelon Tower;[51] one-half of P179,863.20 or P89,931.60 for the taxi or transportation
expenses from McLoughlins residence to Sydney Airport and from MIA to the hotel here in Manila, for the eleven
(11) trips;[52] one-half of P7,801.94 or P3,900.97 representing Meralco power expenses;[53] one-half of P356,400.00
or P178,000.00 representing expenses for food and maintenance.[54]
The amount of P50,000.00 for moral damages is reasonable. Although trial courts are given discretion to
determine the amount of moral damages, the appellate court may modify or change the amount awarded when it is
palpably and scandalously excessive. Moral damages are not intended to enrich a complainant at the expense of a
defendant. They are awarded only to enable the injured party to obtain means, diversion or amusements that will
serve to alleviate the moral suffering he has undergone, by reason of defendants culpable action. [55]
The awards of P10,000.00 as exemplary damages and P200,000.00 representing attorneys fees are likewise
sustained.
WHEREFORE, foregoing premises considered, the Decision of the Court of Appeals dated 19 October 1995
is hereby AFFIRMED. Petitioners are directed, jointly and severally, to pay private respondent the following
amounts:
 (1) US$2,000.00 and AUS$4,500.00 or their peso equivalent at the time of payment; SO ORDERED.

(2) P308,880.80, representing the peso value for the air fares from Sydney to Manila and back for a total of
eleven (11) trips;
(3) One-half of P336,207.05 or P168,103.52 representing payment to Tropicana Copacabana Apartment
Hotel;
— proceeded to render judgment, not "in favor of the PNB against Noah's Ark Sugar Refinery, et al.," but in favor
of the latter and its co-defendants. That judgment has been appealed by PNB to this Court "on pure questions of
law."
No dispute exists about the facts which gave rise to the controversy at bar.

(4) One-half of P152,683.57 or P76,341.785 representing payment to Echelon Tower; In accordance with Act No. 2137, the Warehouse Receipts Law, Noah's Ark Sugar Refinery issued on several dates
warehouse receipts (quedans) as follows:
(5) One-half of P179,863.20 or P89,931.60 for the taxi or transportation expense from McLoughlins
residence to Sydney Airport and from MIA to the hotel here in Manila, for the eleven (11) trips; March 1, 1989, receipt No. 18062 covering sugar deposited by Rosa Sy;

(6) One-half of P7,801.94 or P3,900.97 representing Meralco power expenses; March 7, 1989, receipt No. 18080 covering sugar deposited by RNS Merchandising (Rosa Ng
Sy);
(7) One-half of P356,400.00 or P178,200.00 representing expenses for food and maintenance;
March 21, 1989, receipt No. 18081 covering sugar deposited by RNS Merchandising;
(8) P50,000.00 for moral damages;
March 31, 1989, receipt No. 18086 covering sugar deposited by St. Therese Merchandising; and
(9) P10,000.00 as exemplary damages; and
April 1, 1989, receipt No. 18087 covering sugar deposited by RNS Merchandising.
(10) P200,000 representing attorneys fees.
The receipts are substantially in the form, and contain the terms, prescribed for negotiable warehouse receipts by
With costs. Section 2 of the law.

SO ORDERED. Subsequently, warehouse receipts Numbered 18080 and 18081 (covering sugar deposited by RNS Merchandising)
were negotiated and indorsed to Luis T. Ramos; and receipts Numbered 18086 (sugar of St. Therese Merchandising),
18087 (sugar of RNS Merchandising) and 18062 (sugar of Rosa Sy) were negotiated and indorsed to Cresencia K.
G.R. No. 107243 September 1, 1993 Zoleta. Zoleta and Ramos then used the quedans as security for loans obtained by them from the Philippine National
Bank (PNB) in the amounts of P23.5 million and P15.6 million, respectively. These quedans they indorsed to the
PHILIPPINE NATIONAL BANK, petitioner, bank.
vs.
NOAH'S ARK SUGAR REFINERY, ALBERTO T. LOOYUKO, JIMMY T. GO, WILSON T. Both Zoleta and Ramos failed to pay their loans upon maturity on January 9, 1990. Consequently on March 16,
GO, respondents. 1990, PNB wrote to Noah's Ark Sugar Refinery (hereafter, simply Noah's Ark) demanding delivery of the sugar
covered by the quedans indorsed to it by Zoleta and Ramos. When Noah's Ark refused to comply with the demand,
NARVASA, C.J.: PNB filed with the Regional Trial Court of Manila a verified complaint for "Specific Performance with Damages
and Application for Writ of Attachment" against Noah's Ark, Alberto T. Looyuko, Jimmy T. Go, and Wilson T. Go,
The case at bar involves extraordinary situation in which a Regional Trial the last three being identified as "the Sole Proprietor, Managing Partner and Executive Vice President of Noah's
Judge — after receiving notice to the final and executory judgment of the Court of Appeals in a special civil action Ark, respectively."
of certiorari in which said Trial Judge was a respondent, and which judgment contained the following
disposition, viz.: The Court, by Order dated June 28, 1990, denied the application for preliminary attachment after conducting a
hearing thereon. It denied as well the motion for reconsideration thereafter filed by PNB, by Order dated August 22,
In issuing the questioned Orders, We find the respondent Court to have acted in grave abuse of 1990.
discretion which justify holding null and void and setting aside the Orders date May 2 and July
4, 1990 of respondent Court, and that a summary judgment be rendered forthwith in favor of the Noah's Ark and its co-defendants then filed their responsive pleading entitled "Answer with Counterclaim and Third
PNB against Noah's Ark Sugar Refinery, et al., as prayed for in petitioner's Motion for Summary Party Complaint," dated June 21, 1990 in which they claimed, inter alia, that they "are still the legal owners of the
Judgment. subject quedans and the quantity of sugar represented thereon," a claim founded on the following averments, to wit:
 . . . In an agreement dated April 1, 1989, defendants agreed to sell to Rosa Ng Sy of RNS
Merchandising and Teresita Ng of St. Therese Merchandising the total volume of sugar
indicated in the quedans stored at Noah's Ark Sugar Refinery for a total consideration of
P63,000,000.00, . . . The corresponding payments in the form of checks issued by the vendees
in favor of defendants were subsequently dishonored by the drawee banks by reason of
"payment stopped" and "drawn against insufficient funds," . . . Upon proper notification to said
vendees and plaintiff in due course, defendants refused to deliver to vendees therein the quantity
of sugar covered by subject quedans.
. . . Considering that the vendees and first indorsers of subject quedans did not acquire ownership
thereof, the subsequent indorsers and plaintiff itself did not acquire a better right of ownership
than the original vendees/first indorsers.
The defendants also adverted to PNB's supposed awareness "that subject quedans are not negotiable instruments
within the purview of the Warehouse Receipts Law but simply an internal guarantee of defendants in the sale of
their stocks of sugar. . . ."
The answer incorporated a third party complaint by Alberto Looyuko, Jimmy T. Go and Wilson T. Go ("doing
business under the name and style of Noah's Ark Sugar Refinery") against Rosa Ng Sy and Teresita Ng, praying
that the latter be ordered to deliver or return to them the quedans (eventually indorsed to the PNB and now subject
of this suit) and pay damages and litigation expenses.
The answer of Rosa Ng Sy and Teresita Ng, dated September 6, 1990, was essentially to the effect that the transaction
between them and Jimmy T. Go concerning the quedans and the sugar thereby covered was "bogus and simulated
(being part of the latter's) complex banking schemes and financial maneuvers;" that the simulated transaction "was
just a tolling scheme to
avoid VAT payment and other BIR assessments (considering that) as . . . confidentially intimated (by said Jimmy
Go) . . . Noah's Ark is under sequestration by the PCGG," and that the quedans "were in fact used by Noah's Ark
Executive Director, Luis T. Ramos, and one Cresenciana K. Zoleta as security for their loans from the bank . . . . (in
the aggregate amount) of P39.1 million pesos."
On January 31, 1991, PNB filed a "Motion for Summary Judgment." It asserted that "from the pleadings, documents,
and admissions on file, there is no genuine issue as to a material fact proper for trial and that plaintiff is entitled as
a matter of law, . . . (to) a summary judgment." It contended that the defenses set up by Noah's Ark, et al. in their
responsive pleading involve purely questions of law — i.e., (a) that the vendees of the sugar covered by
the quedans in dispute never acquired title to the goods because of their failure to pay the stipulated purchase price
and hence, ownership over the sugar was retained by Noah's Ark, et al.; and (b) PNB's action is premature since as
pledgee it failed to exercise the remedies provided in the contract of pledge and the Civil Code. And it specified in
no little detail the admissions and documents on record demonstrating the absence of any genuine factual issue. On
these premises, it prayed "that a summary judgment be rendered for plaintiff against the defendants for the reliefs
prayed for in the complaint," these reliefs being:
(a) to deliver to PNB the sugar stocks covered by the Warehouse Receipts/Quedans which are
now in the latter's possession as holder for value and in due course; or alternatively, to pay
plaintiff actual damages in the amount of P39.1 Million exclusive of interest, penalties and
charges; and
(b) to pay plaintiff attorney's fees, litigation expenses and judicial costs estimated at no less than
P1 Million; (and) such other reliefs just and equitable under the premises.
An opposition to the motion was presented by defendants Noah's Ark, et al., dated March 4, 1991, asserting the
existence of genuine issues, to wit: whether or not the sale was ever consummated considering that "the checks
issued by the first indorsees in payment of said quedans bounced," and whether or not PNB acquired ownership
over the quedans considering that "it did not dispose (of) said quedans under Art. 2112 of the Civil Code, as
specifically reflected in the contract of pledge," both contentions allegedly being "material facts which has (sic) to
be supported by evidence."
The third-party defendants (Rosa Ng Sy and Teresita Ng) also opposed the motion for summary judgment insofar
as concerned their counterclaim in relation to the third-party complaint asserted against them.
On May 2, 1991, the Trial Court issued an Order denying the motion for summary judgment on the ground that an
"examination of the pleadings and the record readily shows that there exists sharply conflicting claims among the
parties relative to the ownership of the sugar quedans as to whether or not the subject quedans falls (sic) squarely
within the coverage of the Warehouse Receipt Law and whether or not the transaction between plaintiff and third
party defendants is governed by contract of pledge that would require plaintiff's compliance with Art. 2112, Civil
Code on pledge as regards the disposition of the subjects quedans." PNB's for reconsideration was denied by Order
dated July 4, 1991.
PNB thereupon filed a petition for certiorari with the Court of Appeals, which was docketed as CA-G.R. SP No.
25938. This special civil action eventuated in a Decision promulgated on December 13, 1991 by the Sixth Division
of that Court, 1 nullifying and setting aside the challenged Orders of May 2, 1991 and July 4, 1991, and commanding
that "summary judgment be rendered forthwith in favor of the PNB against Noah's Ark Sugar Refinery, et al., as
prayed for in petitioner's Motion for Summary Judgment." Said the Appellate Court: 2
In issuing the questioned Orders, the respondent Court ruled that "questions of law should be
resolved after and not before, the questions of fact are properly litigated." A scrutiny of
defendants' affirmative defenses does not show material questions of facts as to the alleged non-
payment of purchase price by the vendees/first indorsers, and which non-payment is not
disputed by PNB as it does not materially affect PNB's title to the sugar stock as holder of the
negotiable quedans.
What is determinative of the propriety of summary judgment is not the existence of conflicting
claims for prior parties but whether from an examination of the pleadings, depositions,
admissions and documents on file, the defenses as to the main issue do not tender material
questions of fact (see Garcia vs. Court of Appeals 167 SCRA 815) or the issues thus tendered
are in fact sham, fictitious, contrived, set up in bad faith or so unsubstantial as not to constitute
genuine issues for trial. (See Vergara vs. Suelto, et al., 156 SCRA 753; Mercado, et al. vs. Court
of Appeals, 162 SCRA 75). The questioned Orders themselves do not specify what material
facts are in issue. (See Sec. 4, Rule 34, Rules of Court).
To require a trial notwithstanding pertinent allegations of the pleadings and other facts appearing
on record, would constitute a waste of time and an injustice to the PNB whose rights to relief to
which it is plainly entitled would be further delayed to its prejudice.
In issuing the questioned Orders, We find the respondent Court to have acted in grave abuse of
discretion which justify holding null and void and setting aside the Orders dated May 2 and July
4, 1990 of respondent Court, and that a summary judgment be rendered forthwith in favor of
the PNB against Noah's Ark Sugar Refinery, et al., as prayed for in the petitioner's Motion for
Summary Judgment.
 SO ORDERED.
Noah's Ark, et al. moved for reconsideration, but their motion was denied by the Appellate Tribunal's Resolution
dated March 6, 1991.
The judgment became final. Entry of Judgment was made on May 26, 1992. Thereafter the case was remanded to
the Court of origin.
On June 18, 1992, the Regional Trial Court rendered judgment, but not in accordance with the aforesaid decision of
the Court of Appeals. As stated in the opening paragraph of this opinion, instead of a summary judgment "in favor
of the PNB against Noah's Ark Sugar Refinery, et al., as prayed for in . . . (PNB)'s Motion for Summary Judgment,"
the Trial Court's verdict decreed the dismissal of "plaintiff's complaint against defendants Noah's Ark Sugar
Refinery, Alberto T. Looyuko, Jimmy Go and Wilson T. Go . . . . for lack of cause of action;" and dismissal as well
of the counterclaim pleaded by the latter against PNB, and of the third-party complaint, and the third-party
defendant's counterclaim.
The Trial Court declared that if "the only material facts established on the basis of the pleadings, documentary
evidence on record, admissions and stipulations during the hearing on PNB's application for a writ of preliminary
attachment, are the facts as alleged by plaintiff and accepted as established by the Court of Appeals, this Court will
have no difficulty in finding for plaintiff as prayed for in its motion for summary judgment. But are the facts alleged
by plaintiff the only material facts established on the basis of the pleadings, documentary evidence on record,
stipulations and admissions during the proceedings on the application for a writ of preliminary attachment?" To this
question the Trial Court gave a negative answer, it being its view that other facts, "as alleged by defendants . . . (and)
not disputed by PNB, have been likewise established."
The Trial Court later denied PNB's motion for reconsideration (by Order dated September 4, 1992), evidently finding
merit in the argument of Noah's Ark, et al., therein quoted, that "Certiorari as a mode of appeal involves the review
of judgment, award of final order on the merits, while the original action for certiorari and as a special civil action
is generally directed against an interlocutory order of the Court, prior to an appeal from the judgment of the main
case which in the case at bar is specific performance . . ."
Hence, this appeal.
In CA-G.R. SP No. 25938 above mentioned, after an extensive review of the entire record of the case before the
Regional Trial Court (including the admissions of Noah's Ark, et al. and the parties' stipulations of fact), as well as
the pleadings filed by the parties before it, the Court of Appeals arrived at the conclusion that a summary judgment
was proper since "there was no substantial controversy on a(ny) material fact, the only issues for the Court's
determination . . . (being) purely . . . questions of law, as follows:
1) Whether or not the non-payment of the purchase price for the sugar stock
evidenced by the quedans, by the original depositors/ vendees (RNS
Merchandising and St. Therese Merchandising) rendered invalid the
negotiation of said quedans by vendees/first indorsers to indorsers (Ramos
and Zoleta) and the subsequent negotiation of Ramos and Zoleta to PNB.
2) Whether or not PNB as indorsee/ pledgee of quedans was entitled to
delivery of sugar stocks from the warehouseman, Noah's Ark."
These legal questions were disposed of by the Appellate Court as follows:
The validity of the negotiation by RNS Merchandising and St. Therese Merchandising to Ramos
and Zoleta, and by the latter to PNB to secure a loan cannot be impaired by the fact that the
negotiation between Noah's Ark and RNS Merchandising and St. Therese Merchandising was
in breach of faith on the part of the merchandising firms or by the fact that the owner (Noah's
Ark) was deprived of the possession of the same by fraud, mistake or conversion of the person
to whom the warehouse receipt/quedan was subsequently negotiated if (PNB) paid value
therefor in good faith without notice of such breach of duty, fraud, mistake or conversion. (See
Article 1518, New Civil Code). And the creditor (PNB) whose debtor was the owner of the
negotiable document of title (warehouse receipt) shall be entitled to such aid from the court of
appropriate jurisdiction attaching such document or in satisfying the claim by means as is
allowed by law or in equity in regard to property which cannot be readily attached or levied
upon by ordinary process. (See Art. 1520, New Civil Code). If the quedans were negotiable in
form and duly indorsed to PNB (the creditor), the delivery of the quedans to PNB makes the
PNB the owner of the property covered by said quedans and on deposit with Noah's Ark, the
warehouseman. (See Sy Cong Bieng & Co. vs. Hongkong & Shanghai Bank Corp., 56 Phil.
598).
In the case at bar, We found that the factual bases underlying the defendant's affirmative
defenses (upon which PNB has moved for summary judgment) are not disputed and have been
stipulated by the parties and therefore do not require presentation of evidence. PNB's right to
enforce the obligation of Noah's Ark as a warehouseman, to deliver the sugar stock to PNB as
holder of the quedans, does not depend on the outcome of the third-party complaint because the
validity of the negotiation transferring title to the goods to PNB as holder of the quedans is not
affected by an act of RNS Merchandising and St. Therese Merchandising, in breach of trust,
fraud or conversion against Noah's Ark.
The Court considers the Appellate Court's conclusions of fact and law to be correct.
The Trial Judge's argument that the Appellate Court's decision failed to take account of other "material facts
established on the basis of the pleadings, documentary evidence on record, stipulations and admissions during the
proceedings on the application for a writ of preliminary attachment," is quite transparently specious. For the matters
cited by His Honor, as allegedly not examined by the Court of Appeals, were in fact duly considered by the latter
— i.e., that "the various postdated checks issued by the buyers (RNS Merchandising and St. Therese Merchandising)
in favor of Noah's Ark were dishonored when presented for payment . . (and hence) the buyers never acquired title
to the sugar evidenced by the quedans," 3 and that PNB "did not follow the procedure stated in Article 2112 of the
Civil Code." 4 In its decision, as just pointed out, the Court of Appeals explicitly ruled that the "validity of the
negotiation" of the quedans to PNB" cannot be impaired by the fact that the negotiation between Noah's Ark and
RNS Merchandising and St. Therese Merchandising was made in breach of faith on the part of the merchandising
firms or by the fact that the owner (Noah's Ark) was deprived of the possession of the same by fraud, mistake or
conversion . . ." 5 It also ruled that the quedans were negotiable documents and had been duly negotiated to the PNB
which thereby acquired the rights set out in Article 1513 of the Civil Code," 6 viz.:"
(1) Such title to the goods as the person negotiating the documents to him had or had ability to
convey to a purchaser in good faith for value and also such title to the goods as the person to
whose order the goods were to be delivered by the terms of the document had or had ability to
convey to a purchaser in good faith for value; and
 (2) The direct obligation of the bailee issuing the document to hold possession of the goods for
him according to the terms of the document as fully as if such bailee had contracted directly
with him.
The Court of Appeals found correctly that the indications in the pleadings to the contrary notwithstanding, no
substantial triable issue of fact actually existed, and that certain issues raised in answer, even if taken as established,
would not materially change the ultimate findings relative to the main claim. 7 Its decision is entirely in accord with
this Court's rulings regarding the propriety of summary judgments invoked by the Appellate Tribunal, i.e., Vergara,
Sr. v. Suelto, 8 and Mercado v. Court of Appeals. 9 According to Vergara, for instance, "even if the answer does
tender issues — and therefore a judgment on the pleadings is not proper — a summary judgment may still be
rendered on the plaintiff's motion if he can show to the Court's satisfaction that "except as to the amount of damages,
there is no genuine issue as to any material fact," 10 that is to say, the issues thus tendered are not genuine, are in
other words sham, fictitious, contrived, set up in bad faith, patently unsubstantial. 11 The determination may be made
by the Court on the basis of the pleadings, and the depositions, admissions and affidavits that the movant may
submit, as well as those which the defendant may present in turn."12
In any event, the conclusions of fact and law set out in the Appellate Court's decision are undeniably binding on all
the parties to the case, the respondent Regional Trial Judge included. Having been rendered by a competent court
within its jurisdiction, and having become final and executory, the decision now operates as the immutable law
among the parties, the respondent Trial Judge included; it has become the law of the case and may no longer, in
subsequent proceedings, be altered or modified in any way, much less reversed or set at naught, by the latter, or any
other judge, not even by the Supreme Court; it is an unalterable determination of the propriety of a summary
judgment in the action in question, and upon all the issues therein raised or which could have been raised relative to
the merits of said action.13
The Trial Judge may not evade compliance with the final judgment of the Court of Appeals on the theory that the
latter had acted only on a mere interlocutory order (the order denying PNB's motion for summary judgment), while
he had subsequently adjudged the action for specific performance on the merits. Quite obvious is that the Court of
Appeals had decided that a summary judgment was proper in said action of specific performance, that this was in
truth a determination of the merits of the suit, that that decision had become final and executory, and that the decision
expressly commanded His Honor to render such a judgment. Under the circumstances, the latter's duty was clear
and inescapable.
It was not within the Trial Judge's competence or discretion to take exception to, much less overturn, any of the
factual or legal conclusions laid down by the Court of Appeals in its verdict. He was as much bound thereby as the
private parties themselves. His only function was to implement and carry out the Appellate Tribunal's judgment. It
was an act of supererogation, of presumptuousness, on His Honor's part to disregard the Court's clear and categorical
command, and to dispose of the case in a manner diametrically opposed thereto. In doing so, the Trial Judge
committed grave error which must forthwith be corrected.
WHEREFORE, the Trial Judge's Decision in Civil Case No. 90-53023 dated June 18, 1992 is REVERSED and SET
ASIDE and a new one rendered conformably with the final and executory Decision of the Court of Appeals in CA-
G.R. SP No. 25938, ordering the private respondents, Noah's Ark Sugar Refinery, Alberto T. Looyuko, Jimmy T.
Go and William T. Go, jointly and severally:
a) to deliver to the petitioner Philippine National Bank, "the sugar stocks covered by the Warehouse
Receipts/Quedans which are now in the latter's possession as holder for value and in due course; or alternatively, to
pay (said) plaintiff actual damages in the amount of P39.1 Million," with legal interest thereon from the filing of the
complaint until full payment; and
b) to pay plaintiff Philippine National Bank attorney's fees, litigation expenses and judicial costs hereby fixed at the
amount of one hundred fifty thousand pesos (150,000.00), as well as the costs.
SO ORDERED.
[G.R. No. 119231. April 18, 1996]
PHILIPPINE NATIONAL BANK, petitioner, vs. HON. PRES. JUDGE BENITO C. SE,
JR., RTC, BR. 45, MANILA; NOAHS ARK SUGAR REFINERY; ALBERTO T. LOOYUKO,
JIMMY T. GO and WILSON T. GO, respondents.
SYLLABUS
1. COMMERCIAL LAW; WAREHOUSE RECEIPTS LAW; THE UNCONDITIONAL PRESENTMENT
OF THE RECEIPTS FOR PAYMENT CARRIED WITH IT THE ADMISSIONS OF THE
EXISTENCE AND VALIDITY OF THE TERMS, CONDITIONS AND STIPULATIONS WRITTEN
ON THE FACE OF THE WAREHOUSE RECEIPTS, INCLUDING THE UNQUALIFIED
RECOGNITION OF THE PAYMENT OF WAREHOUSEMANS LIEN FOR STORAGE FEES AND
PRESERVATION EXPENSES; CASE AT BAR. - Petitioner is in estoppel in disclaiming liability for the
payment of storage fees due the private respondents as warehouseman while claiming to be entitled to the
sugar stocks covered by the subject Warehouse Receipts on the basis of which it anchors its claim for payment
or delivery of the sugar stocks. The unconditional presentment of the receipts by the petitioner for payment
against private respondents on the strength of the provisions of the Warehouse Receipts Law (R.A. 2137)
carried with it the admission of the existence and validity of the terms, conditions and stipulations written on
the face of the Warehouse Receipts, including the unqualified recognition of the payment of warehousemans
lien for storage fees and preservation expenses. Petitioner may not now retrieve the sugar stocks without
paying the lien due private respondents as warehouseman.
2. ID.; ID.; ID.; WAREHOUSEMANS LIEN; POSSESSORY IN NATURE. - While the PNB is entitled to the
stocks of sugar as the endorsee of the quedans, delivery to it shall be effected only upon payment of the storage
fees. Imperative is the right of the warehouseman to demand payment of his lien at this juncture, because, in
accordance with Section 29 of the Warehouse Receipts Law, the warehouseman loses his lien upon goods by
surrendering possession thereof. In other words, the lien may be lost where the warehouseman surrenders the
possession of the goods without requiring payment of his lien, because a warehousemans lien is possessory in
nature.
APPEARANCES OF COUNSEL
Rolan A. Nieto for petitioner.
Madella & Cruz Law Offices for private respondents.
DECISION
HERMOSISIMA, JR., J.:
The source of conflict herein is the question as to whether the Philippine National Bank should pay storage
fees for sugar stocks covered by five (5) Warehouse Receipts stored in the warehouse of private respondents in the
face of the Court of Appeals decision (affirmed by the Supreme Court) declaring the Philippine National Bank as
the owner of the said sugar stocks and ordering their delivery to the said bank. From the same facts but on a different
perspective, it can be said that the issue is: Can the warehouseman enforce his warehousemans lien before delivering
the sugar stocks as ordered by the Court of Appeals or need he file a separate action to enforce payment of storage
fees?
 The herein petition seeks to annul: (1) the Resolution of respondent Judge Benito C. Se, Jr. of the Regional
Trial Court of Manila, Branch 45, dated December 20, 1994, in Civil Case No. 90-53023, authorizing reception of
evidence to establish the claim of respondents Noahs Ark Sugar Refinery, et al., for storage fees and preservation
expenses over sugar stocks covered by five (5) Warehouse Receipts which is in the nature of a warehousemans lien;
and (2) the Resolution of the said respondent Judge, dated March 1, 1995, declaring the validity of private
respondents warehousemans lien under Section 27 of Republic Act No 2137 and ordering that execution of the Court
of Appeals decision, dated December 13, 1991, be in effect held in abeyance until the full amount of the
warehousemans lien on the sugar stocks covered by five (5) quedans subject of the action shall have been satisfied
conformably with the provisions of Section 31 of Republic Act 2137.
Also prayed for by the petition is a Writ of Prohibition to require respondent RTC Judge to desist from further
proceeding with Civil Case No. 90-53023, except order the execution of the Supreme Court judgment; and a Writ
of Mandamus to compel respondent RTC Judge to issue a Writ of Execution in accordance with the said executory
Supreme Court decision.
THE FACTS
In accordance with Act No. 2137, the Warehouse Receipts Law, Noahs Ark Sugar Refinery issued on several
dates, the following Warehouse Receipts (Quedans): (a) March 1, 1989, Receipt No. 18062, covering sugar
deposited by Rosa Sy; (b) March 7, 1989, Receipt No. 18080, covering sugar deposited by RNS Merchandising
(Rosa Ng Sy); (c) March 21, 1989, Receipt No. 18081, covering sugar deposited by St. Therese Merchandising;
(d)March 31, 1989, Receipt No. 18086, covering sugar deposited by St. Therese Merchandising; and (e) April 1,
1989, Receipt No. 18087, covering sugar deposited by RNS Merchandising. The receipts are substantially in the
form, and contains the terms, prescribed for negotiable warehouse receipts by Section 2 of the law.
Subsequently, Warehouse Receipts Nos. 18080 and 18081 were negotiated and endorsed to Luis T. Ramos;
and Receipts Nos. 18086, 18087 and 18062 were negotiated and endorsed to Cresencia K. Zoleta. Ramos and Zoleta
then used the quedans as security for two loan agreements - one for P15.6 million and the other for P23.5 million -
obtained by them from the Philippine National Bank. The aforementioned quedans were endorsed by them to the
Philippine National Bank.
Luis T. Ramos and Cresencia K. Zoleta failed to pay their loans upon maturity on January 9, 1990.
Consequently, on March 16, 1990, the Philippine National Bank wrote to Noahs Ark Sugar Refinery demanding
delivery of the sugar stocks covered by the quedans endorsed to it by Zoleta and Ramos. Noahs Ark Sugar Refinery
refused to comply with the demand alleging ownership thereof, for which reason the Philippine National Bank filed
with the Regional Trial Court of Manila a verified complaint for Specific Performance with Damages and
Application for Writ of Attachment against Noahs Ark Sugar Refinery, Alberto T. Looyuko, Jimmy T. Go and
Wilson T. Go, the last three being identified as the sole proprietor, managing partner, and Executive Vice President
of Noahs Ark, respectively.
Respondent Judge Benito C. Se, Jr., in whose sala the case was raffled, denied the Application for Preliminary
Attachment. Reconsideration therefor was likewise denied.
Noahs Ark and its co-defendants filed an Answer with Counterclaim and Third-Party Complaint in which they
claimed that they are the owners of the subject quedans and the sugar represented therein, averring as they did that:
9.*** In an agreement dated April 1, 1989, defendants agreed to sell to Rosa Ng Sy of RNS Merchandising and
Teresita Ng of St. Therese Merchandising the total volume of sugar indicated in the quedans stored at
Noahs Ark Sugar Refinery for a total consideration of P63,000,000.00,
*** The corresponding payments in the form of checks issued by the vendees in favor of defendants were
subsequently dishonored by the drawee banks by reason of payment stopped and drawn against insufficient funds,
*** Upon proper notification to said vendees and plaintiff in due course, defendants refused to deliver to vendees
therein the quantity of sugar covered by the subject quedans.
10. *** Considering that the vendees and first endorsers of subject quedans did not acquire ownership thereof, the
subsequent endorsers and plaintiff itself did not acquire a better right of ownership than the original vendees/first
endorsers. 1
The Answer incorporated a Third-Party Complaint by Alberto T. Looyuko, Jimmy T. Go and Wilson T. Go,
doing business under the trade name and style Noahs Ark Sugar Refinery against Rosa Ng Sy and Teresita Ng,
praying that the latter be ordered to deliver or return to them the quedans (previously endorsed to PNB and the
subject of the suit) and pay damages and litigation expenses.
The Answer of Rosa Ng Sy and Teresita Ng, dated September 6, 1990, one of avoidance, is essentially to the
effect that the transaction between them, on the one hand, and Jimmy T. Go, on the other, concerning the quedans
and the sugar stocks covered by them was merely a simulated one being part of the latters complex banking schemes
and financial maneuvers, and thus, they are not answerable in damages to him.
On January 31, 1991, the Philippine National Bank filed a Motion for Summary Judgment in favor of the
plaintiff as against the defendants for the reliefs prayed for in the complaint.
On May 2, 1991, the Regional Trial Court issued an order denying the Motion for Summary Judgment.
Thereupon, the Philippine National Bank filed a Petition for Certiorari with the Court of Appeals, docketed as CA-
G.R. SP. No. 25938 on December 13, 1991.
Pertinent portions of the decision of the Court of Appeals read:
In issuing the questioned Orders, the respondent Court ruled that questions of law should be resolved after and not
before, the questions of fact are properly litigated. A scrutiny of defendants affirmative defenses does not show
material questions of fact as to the alleged nonpayment of purchase price by the vendees/first endorsers, and which
nonpayment is not disputed by PNB as it does not materially affect PNBs title to the sugar stocks as holder of the
negotiable quedans.
What is determinative of the propriety of summary judgment is not the existence of conflicting claims from prior
parties but whether from an examination of the pleadings, depositions, admissions and documents on file, the
defenses as to the main issue do not tender material questions of fact (see Garcia vs. Court of Appeals, 167 SCRA
815) or the issues thus tendered are in fact sham, fictitious, contrived, set up in bad faith or so unsubstantial as not
to constitute genuine issues for trial. (See Vergara vs. Suelto, et al., 156 SCRA 753; Mercado, et al. vs. Court of
Appeals, 162 SCRA 75). The questioned Orders themselves do not specify what material facts are in issue. (See Sec.
4, Rule 34, Rules of Court).
To require a trial notwithstanding pertinent allegations of the pleadings and other facts appearing on the record,
would constitute a waste of time and an injustice to the PNB whose rights to relief to which it is plainly entitled
would be further delayed to its prejudice.
In issuing the questioned Orders, We find the respondent Court to have acted in grave abuse of discretion which
justify holding null and void and setting aside the Orders dated May 2 and July 4, 1990 of respondent Court, and
that a summary judgment be rendered forthwith in favor of the PNB against Noahs Ark Sugar Refinery, et al., as
prayed for in petitioners Motion for Summary Judgment.2
 On December 13, 1991, the Court of Appeals nullified and set aside the orders of May 2 and July 4, 1990 of
the Regional Trial Court and ordered the trial court to render summary judgment in favor of the PNB. On June 18,
1992, the trial court rendered judgment dismissing plaintiffs complaint against private respondents for lack of cause
of action and likewise dismissed private respondents counterclaim against PNB and of the Third-Party Complaint
and the Third-Party Defendants Counterclaim. On September 4, 1992, the trial court denied PNBs Motion for
Reconsideration.
On June 9, 1992, the PNB filed an appeal from the RTC decision with the Supreme Court, G.R. No. 107243,
by way of a Petition for Review on Certiorari under Rule 45 of the Rules of Court. This Court rendered judgment
on September 1, 1993, the dispositive portion of which reads:
WHEREFORE, the trial judges decision in Civil Case No. 90-53023, dated June 18, 1992, is reversed and set aside
and a new one rendered conformably with the final and executory decision of the Court of Appeals in CA-G.R SP.
No. 25938, ordering the private respondents Noahs Ark Sugar Refinery, Alberto T. Looyuko, Jimmy T. Go and
Wilson T. Go, jointly and severally:
(a) to deliver to the petitioner Philippine National Bank, the sugar stocks covered by the Warehouse
Receipts/ Quedans which are now in the latters possession as holder for value and in due course;
or alternatively, to pay (said) plaintiff actual damages in the amount of P39.1 million, with legal
interest thereon from the filing of the complaint until full payment; and
(b) to pay plaintiff Philippine National Bank attorneys fees, litigation expenses and judicial costs hereby
fixed at the amount of One Hundred Fifty Thousand Pesos (P150,000.00) as well as the costs.
SO ORDERED.3
On September 29, 1993, private respondents moved for reconsideration of this decision. A
Supplemental/Second Motion for Reconsideration with leave of court was filed by private respondents on November
8, 1993. We denied private respondents motion on January 10, 1994. .
Private respondents filed a Motion Seeking Clarification of the Decision, dated September 1, 1993. We denied
this motion in this manner:
It bears stressing that the relief granted in this Courts decision of September 1, 1993 is precisely that set out in the
final and executory decision of the Court of Appeals in CA-G.R. SP No. 25938, dated December 13, 1991, which
was affirmed in toto by this Court and which became unalterable upon becoming final and executory. 4
Private respondents thereupon filed before the trial court an Omnibus Motion seeking among others the
deferment of the proceedings until private respondents are heard on their claim for warehousemans lien. On the
other hand, on August 22, 1994, the Philippine National Bank filed a Motion for the Issuance of a Writ of Execution
and an Opposition to the Omnibus Motion filed by private respondents.
The trial court granted private respondents Omnibus Motion on December 20, 1994 and set reception of
evidence on their claim for warehousemans lien. The resolution of the PNBs Motion for Execution was ordered
deferred until the determination of private respondents claim.
On February 21, 1995, private respondents claim for lien was heard and evidence was received in support
thereof. The trial court thereafter gave both parties five (5) days to file respective memoranda.
On February 28, 1995, the Philippine National Bank filed a Manifestation with Urgent Motion to Nullify
Court Proceedings. In adjudication thereof, the trial court issued the following order on March 1, 1995:
WHEREFORE, this court hereby finds that there exists in favor of the defendants a valid warehousemans lien under
Section 27 of Republic Act 2137 and accordingly, execution of the judgment is hereby ordered stayed and/ or
precluded until the full amount of defendants lien on the sugar stocks covered by the five (5) quedans subject of this
action shall have been satisfied conformably with the provisions of Section 31 of Republic Act 2137. 5
Consequently, the Philippine National Bank filed the herein petition to seek the nullification of the above-
assailed orders of respondent judge.
The PNB submits that:
I
PNBs RIGHT TO A WRIT OF EXECUTION IS SUPPORTED BY TWO FINAL AND EXECUTORY DECISIONS:
THE DECEMBER 13, 1991 COURT OF APPEALS DECISION IN CA-G.R. SP. NO. 25938; AND,
THE NOVEMBER 9, 1992 SUPREME COURT DECISION IN G.R NO. 107243. RESPONDENT RTCS
MINISTERIAL AND MANDATORY DUTY IS TO ISSUE THE WRIT OF EXECUTION TO IMPLEMENT THE
DECRETAL PORTION OF SAID SUPREME COURT DECISION
II
RESPONDENT RTC IS WITHOUT JURISDICTION TO HEAR PRIVATE RESPONDENTS OMNIBUS MOTION.
THE CLAIMS SET FORTH IN SAID MOTION: (1) WERE ALREADY REJECTED BY THE SUPREME COURT IN
ITS MARCH 9, 1994 RESOLUTION DENYING PRIVATE RESPONDENTS MOTION FOR CLARIFICATION OF
DECISION IN .G.R. NO. 107243; AND (2) ARE BARRED FOREVER BY PRIVATE RESPONDENTS FAILURE TO
INTERPOSE THEM IN THEIR ANSWER, AND FAILURE TO APPEAL FROM THE JUNE 18, 1992 RTC
DECISION IN CIVIL CASE NO. 90-52023
III
RESPONDENT RTCS ONLY JURISDICTION IS TO ISSUE THE WRIT TO EXECUTE THE SUPREME COURT
DECISION. THUS, PNB IS ENTITLED TO: (1) A WRIT OF CERTIORARI TO ANNUL THE RTC RESOLUTION
DATED DECEMBER 20, 1994 AND THE ORDER DATED FEBRUARY 7, 1995 AND ALL PROCEEDINGS
TAKEN BY THE RTC THEREAFTER; (2) A WRIT OF PROHIBITION TO PREVENT RESPONDENT RTC FROM
FURTHER PROCEEDING WITH CIVIL CASE NO. 90-53023 AND COMMITTING OTHER ACTS VIOLATIVE
OF THE SUPREME COURT DECISION IN G.R. NO. 107243; AND (3) A WRIT OF MANDAMUS TO COMPEL
RESPONDENT RTC TO ISSUE THE WRIT TO EXECUTE THE SUPREME COURT JUDGMENT IN FAVOR OF
PNB
The issues presented before us in this petition revolve around the legality of the questioned orders of
respondent judge, issued as they were after we had denied with finality private respondents contention that the PNB
could not compel them to deliver the stocks of sugar in their warehouse covered by the endorsed quedans or pay the
value of the said stocks of sugar.
Petitioners submission is on a technicality, that is, that private respondents have lost their right to recover
warehousemans lien on the sugar stocks covered by the five (5) Warehouse Receipts for the reason that they failed
to set up said claim in their Answer before the trial court and that private respondents did not appeal from the
decision in this regard, dated June 18, 1992. Petitioner asseverates that the denial by this Court on March 9, 1994 of
the motion seeking clarification of our decision, dated September 1, 1993, has foreclosed private respondents right
to enforce their warehousemans lien for storage fees and preservation expenses under the Warehouse Receipts Act.
 On the other hand, private respondents maintain that they could not have claimed the right to a warehouseman
s lien in their Answer to the complaint before the trial court as it would have been inconsistent with their stand that
they claim ownership of the stocks covered by the quedans since the checks issued for payment thereof were
dishonored. If they were still the owners, it would have been absurd for them to ask payment for storage fees and
preservation expenses. They further contend that our resolution, dated March 9, 1994, denying their motion for
clarification did not preclude their right to claim their warehousemans lien under Sections 27 and 31 of Republic
Act 2137, as our resolution merely affirmed and adopted the earlier decision, dated December 13, 1991, of the Court
of Appeals (6th Division) in CA-G.R. SP. No. 25938 and did not make any finding on the matter of the
warehouseman s lien.
We find for private respondents on the foregoing issue and so the petition necessarily must fail.
We have carefully examined our resolution, dated March 9, 1994, which denied Noahs Arks motion for
clarification of our decision, dated September 1, 1993, wherein we affirmed in full and adopted the Court of Appeals
earlier decision, dated December 13, 1991, in CA-G.R. SP. No. 25938. We are not persuaded by the petitioners
argument that our said resolution carried with it the denial of the warehousemans lien over the sugar stocks covered
by the subject Warehouse Receipts. We have simply resolved and upheld in our decision, dated September 1, 1993,
the propriety of summary judgment which was then assailed by private respondents. In effect, we ruled therein that,
considering the circumstances obtaining before the trial court, the issuance of the Warehouse Receipts not being
disputed by the private respondents, a summary judgment in favor of PNB was proper. We in effect further affirmed
the finding that Noahs Ark is a warehouseman which was obliged to deliver the sugar stocks covered by the
Warehouse Receipts pledged by Cresencia K. Zoleta and Luis T. Ramos to the petitioner pursuant to the pertinent
provisions of Republic Act 2137.
In disposing of the private respondents motion for clarification, we could not contemplate the matter of
warehousemans lien because the issue to be finally resolved then was the claim of private respondents for retaining
ownership of the stocks of sugar covered by the endorsed quedans. Stated otherwise, there was no point in taking
up the issue of warehousemans lien since the matter of ownership was as yet being determined. Neither could storage
fees be due then while no one has been declared the owner of the sugar stocks in question.
Of considerable relevance is the pertinent stipulation in the subject Warehouse Receipts which provides for
respondent Noahs Arks right to impose and collect warehousemans lien:
Storage of the refined sugar quantities mentioned herein shall be free up to one (1) week from the date of the quedans
covering said sugar and thereafter, storage fees shall be charged in accordance with the Refining Contract under
which the refined sugar covered by this Quedan was produced. 6
It is not disputed, therefore, that, under the subject Warehouse Receipts provision, storage fees are chargeable.
Petitioner anchors its claim against private respondents on the five (5) Warehouse Receipts issued by the latter
to third-party defendants Rosa Ng Sy of RNS Merchandising and Teresita Ng of St. Therese Merchandising, which
found their way to petitioner after they were negotiated to them by Luis T. Ramos and Cresencia K. Zoleta for a
loan of P39.1 Million. Accordingly, petitioner PNB is legally bound to stand by the express terms and conditions
on the face of the Warehouse Receipts as to the payment of storage fees. Even in the absence of such a provision,
law and equity dictate the payment of the warehouseman s lien pursuant to Sections 27 and 31 of the Warehouse
Receipts Law (R.A. 2137), to wit:
SECTION 27. What claims are included in the warehousemans lien. - Subject to the provisions of section thirty, a
warehouseman shall have lien on goods deposited or on the proceeds thereof in his hands, for all lawful charges
for storage and preservation of the goods; also for all lawful claims for money advanced, interest, insurance,
transportation, labor, weighing coopering and other charges and expenses in relation to such goods; also for all
reasonable charges and expenses for notice, and advertisement of sale, and for sale of the goods where default has
been made in satisfying the warehousemans lien.
xxx xxx xxx
SECTION 31. Warehouseman need not deliver until lien is satisfied. - A warehouseman having a lien valid against
the person demanding the goods may refuse to deliver the goods to him until the lien is satisfied.
After being declared not the owner, but the warehouseman, by the Court of Appeals on December 13, 1991 in
CA-G.R. SP. No. 25938, the decision having been affirmed by us on December 1, 1993, private respondents cannot
legally be deprived of their right to enforce their claim for warehousemans lien, for reasonable storage fees and
preservation expenses. Pursuant to Section 31 which we quote hereunder, the goods under storage may not be
delivered until said lien is satisfied.
SECTION 31. Warehouseman need not deliver until lien is satisfied. - A warehouseman having a lien valid against
the person demanding the goods may refuse to deliver the goods to him until the lien is satisfied.
Considering that petitioner does not deny the existence, validity and genuineness of the Warehouse Receipts
on which it anchors its claim for payment against private respondents, it cannot disclaim liability for the payment
of the storage fees stipulated therein. As contracts, the receipts must be respected by authority of Article 1159 of the
Civil Code, to wit:
ART. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be
complied with in good faith.
Petitioner is in estoppel in disclaiming liability for the payment of storage fees due the private respondents as
warehouseman while claiming to be entitled to the sugar stocks covered by the subject Warehouse Receipts on the
basis of which it anchors its claim for payment or delivery of the sugar stocks. The unconditional presentment of
the receipts by the petitioner for payment against private respondents on the strength of the provisions of the
Warehouse Receipts Law (R.A. 2137) carried with it the admission of the existence and validity of the terms,
conditions and stipulations written on the face of the Warehouse Receipts, including the unqualified recognition of
the payment of warehousemans lien for storage fees and preservation expenses. Petitioner may not now retrieve the
sugar stocks without paying the lien due private respondents as warehouseman.
In view of the foregoing, the rule may be simplified thus: While the PNB is entitled to the stocks of sugar as
the endorsee of the quedans, delivery to it shall be effected only upon payment of the storage fees.
Imperative is the right of the warehouseman to demand payment of his lien at this juncture, because, in
accordance with Section 29 of the Warehouse Receipts Law, the warehouseman loses his lien upon goods by
surrendering possession thereof. In other words, the lien may be lost where the warehouseman surrenders the
possession of the goods without requiring payment of his lien, because a warehousemans lien is possessory in nature.
We, therefore, uphold and sustain the validity of the assailed orders of public respondent, dated December 20,
1994 and March 1, 1995.
In fine, we fail to see any taint of abuse of discretion on the part of the public respondent in issuing the
questioned orders which recognized the legitimate right of Noahs Ark, after being declared as warehouseman, to
recover storage fees before it would release to the PNB sugar stocks covered by the five (5) Warehouse Receipts.
Our resolution, dated March 9, 1994, did not preclude private respondents unqualified right to establish its claim to
recover storage fees which is recognized under Republic Act No. 2137. Neither did the Court of Appeals decision,
dated December 13, 1991, restrict such right.
Our Resolutions reference to the decision by the Court of Appeals, dated December 13, 1991, in CA-G.R. SP.
No. 25938, was intended to guide the parties in the subsequent disposition of the case to its final end. We certainly
did not foreclose private respondents inherent right as warehouseman to collect storage fees and preservation
expenses as stipulated n the face of each of the Warehouse Receipts and as provided for in the Warehouse Receipts
Law (R.A. 2137).
WHEREFORE, the petition should be, as it is, hereby dismissed for lack of merit. The questioned orders
issued by public respondent judge are affirmed.
Costs against the petitioner.
SO ORDERED.