G.R. No.

L-46240 November 3, 1939

MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants, G.R. No. L-20240 December 31, 1965
vs. BECK, defendant-appellee.
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
The plaintiff brought this action to compel the defendant to return her certain furniture vs.
which she lent him for his use. She appealed from the judgment of the Court of First JOSE GRIJALDO, defendant-appellant.
Instance of Manila which ordered that the defendant return to her the three has heaters
and the four electric lamps found in the possession of the Sheriff of said city, that she call Office of the Solicitor General for plaintiff-appellee.
for the other furniture from the said sheriff of Manila at her own expense, and that the fees Isabelo P. Samson for defendant-appellant.
which the Sheriff may charge for the deposit of the furniture be paid pro rata by both ZALDIVAR, J.:
parties, without pronouncement as to the costs.
In the year 1943 appellant Jose Grijaldo obtained five loans from the branch office of the
The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. Bank of Taiwan, Ltd. in Bacolod City, in the total sum of P1,281.97 with interest at the rate
H. del Pilar street, No. 1175. On January 14, 1936, upon the novation of the contract of of 6% per annum, compounded quarterly. These loans are evidenced by five promissory
lease between the plaintiff and the defendant, the former gratuitously granted to the latter notes executed by the appellant in favor of the Bank of Taiwan, Ltd., as follows: On June
the use of the furniture described in the third paragraph of the stipulation of facts, subject 1, 1943, P600.00; on June 3, 1943, P159.11; on June 18, 1943, P22.86; on August 9,
to the condition that the defendant would return them to the plaintiff upon the latter's 1943,P300.00; on August 13, 1943, P200.00, all notes without due dates, but because the
demand. The plaintiff sold the property to Maria Lopez and Rosario Lopez and on loans were due one year after they were incurred. To secure the payment of the loans the
September 14, 1936, these three notified the defendant of the conveyance, giving him appellant executed a chattel mortgage on the standing crops on his land, Lot No. 1494
sixty days to vacate the premises under one of the clauses of the contract of lease. There known as Hacienda Campugas in Hinigiran, Negros Occidental.
after the plaintiff required the defendant to return all the furniture transferred to him for
them in the house where they were found. On Nov. 5, 1936, the defendant, through By virtue of Vesting Order No. P-4, dated January 21, 1946, and under the authority
another person, wrote to the plaintiff reiterating that she may call for the furniture in the provided for in the Trading with the Enemy Act, as amended, the assets in the Philippines
ground floor of the house. On the 7th of the same month, the defendant wrote another of the Bank of Taiwan, Ltd. were vested in the Government of the United States. Pursuant
letter to the plaintiff informing her that he could not give up the three gas heaters and the to the Philippine Property Act of 1946 of the United States, these assets, including the
four electric lamps because he would use them until the 15th of the same month when the loans in question, were subsequently transferred to the Republic of the Philippines by the
lease in due to expire. The plaintiff refused to get the furniture in view of the fact that the Government of the United States under Transfer Agreement dated July 20, 1954. These
defendant had declined to make delivery of all of them. On November 15th, before assets were among the properties that were placed under the administration of the Board
vacating the house, the defendant deposited with the Sheriff all the furniture belonging to of Liquidators created under Executive Order No. 372, dated November 24, 1950, and in
the plaintiff and they are now on deposit in the warehouse situated at No. 1521, Rizal accordance with Republic Acts Nos. 8 and 477 and other pertinent laws.
Avenue, in the custody of the said sheriff.
On September 29, 1954 the appellee, Republic of the Philippines, represented by the
In their seven assigned errors the plaintiffs contend that the trial court incorrectly applied Chairman of the Board of Liquidators, made a written extrajudicial demand upon the
the law: in holding that they violated the contract by not calling for all the furniture on Nov. appellant for the payment of the account in question. The record shows that the appellant
5, 1936, when the defendant placed them at their disposal; in not ordering the defendant had actually received the written demand for payment, but he failed to pay.
to pay them the value of the furniture in case they are not delivered; in holding that they
should get all the furniture from the Sheriff at their expenses; in ordering them to pay-half The aggregate amount due as principal of the five loans in question, computed under the
of the expenses claimed by the Sheriff for the deposit of the furniture; in ruling that both Ballantyne scale of values as of the time that the loans were incurred in 1943, was
parties should pay their respective legal expenses or the costs; and in denying pay their P889.64; and the interest due thereon at the rate of 6% per annum compounded quarterly,
respective legal expenses or the costs; and in denying the motions for reconsideration and computed as of December 31, 1959 was P2,377.23.
new trial. To dispose of the case, it is only necessary to decide whether the defendant On January 17, 1961 the appellee filed a complaint in the Justice of the Peace Court of
complied w/ his obligation to return the furniture upon the plaintiff's demand; whether the Hinigaran, Negros Occidental, to collect from the appellant the unpaid account in question.
latter is bound to bear the deposit fees thereof, & whether she is entitled to the costs of The Justice of the Peace Of Hinigaran, after hearing, dismissed the case on the ground
litigation. that the action had prescribed. The appellee appealed to the Court of First Instance of
The contract entered into between the parties is one of commadatum, because under it Negros Occidental and on March 26, 1962 the court a quo rendered a decision ordering
the plaintiff gratuitously granted the use of the furniture to the defendant, reserving for the appellant to pay the appellee the sum of P2,377.23 as of December 31, 1959, plus
herself the ownership thereof; by this contract the defendant bound himself to return the interest at the rate of 6% per annum compounded quarterly from the date of the filing of
furniture to the plaintiff, upon the latters demand (clause 7 of the contract, Exhibit A; the complaint until full payment was made. The appellant was also ordered to pay the sum
articles 1740, paragraph 1, and 1741 of the Civil Code). The obligation voluntarily equivalent to 10% of the amount due as attorney's fees and costs.
assumed by the defendant to return the furniture upon the plaintiff's demand, means that The appellant appealed directly to this Court. During the pendency of this appeal the
he should return all of them to the plaintiff at the latter's residence or house. The appellant Jose Grijaldo died. Upon motion by the Solicitor General this Court, in a
defendant did not comply with this obligation when he merely placed them at the disposal resolution of May 13, 1963, required Manuel Lagtapon, Jacinto Lagtapon, Ruben
of the plaintiff, retaining for his benefit the three gas heaters and the four eletric lamps. Lagtapon and Anita L. Aguilar, who are the legal heirs of Jose Grijaldo to appear and be
The provisions of article 1169 of the Civil Code cited by counsel for the parties are not substituted as appellants in accordance with Section 17 of Rule 3 of the Rules of Court.
squarely applicable. The trial court, therefore, erred when it came to the legal conclusion
that the plaintiff failed to comply with her obligation to get the furniture when they were In the present appeal the appellant contends: (1) that the appellee has no cause of action
offered to her. against the appellant; (2) that if the appellee has a cause of action at all, that action had
prescribed; and (3) that the lower court erred in ordering the appellant to pay the amount
As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon of P2,377.23.
the latter's demand, the Court could not legally compel her to bear the expenses
occasioned by the deposit of the furniture at the defendant's behest. The latter, as bailee, In discussing the first point of contention, the appellant maintains that the appellee has no
was not entitled to place the furniture on deposit; nor was the plaintiff under a duty to privity of contract with the appellant. It is claimed that the transaction between the Taiwan
accept the offer to return the furniture, because the defendant wanted to retain the three Bank, Ltd. and the appellant, so that the appellee, Republic of the Philippines, could not
gas heaters and the four electric lamps. legally bring action against the appellant for the enforcement of the obligation involved in
said transaction. This contention has no merit. It is true that the Bank of Taiwan, Ltd. was
As to the value of the furniture, we do not believe that the plaintiff is entitled to the the original creditor and the transaction between the appellant and the Bank of Taiwan
payment thereof by the defendant in case of his inability to return some of the furniture was a private contract of loan. However, pursuant to the Trading with the Enemy Act, as
because under paragraph 6 of the stipulation of facts, the defendant has neither agreed to amended, and Executive Order No. 9095 of the United States; and under Vesting Order
nor admitted the correctness of the said value. Should the defendant fail to deliver some No. P-4, dated January 21, 1946, the properties of the Bank of Taiwan, Ltd., an entity
of the furniture, the value thereof should be latter determined by the trial Court through which was declared to be under the jurisdiction of the enemy country (Japan), were vested
evidence which the parties may desire to present. in the United States Government and the Republic of the Philippines, the assets of the
The costs in both instances should be borne by the defendant because the plaintiff is the Bank of Taiwan, Ltd. were transferred to and vested in the Republic of the Philippines.
prevailing party (section 487 of the Code of Civil Procedure). The defendant was the one The successive transfer of the rights over the loans in question from the Bank of Taiwan,
who breached the contract of commodatum, and without any reason he refused to return Ltd. to the United States Government, and from the United States Government to the
and deliver all the furniture upon the plaintiff's demand. In these circumstances, it is just government of the Republic of the Philippines, made the Republic of the Philippines the
and equitable that he pay the legal expenses and other judicial costs which the plaintiff successor of the rights, title and interest in said loans, thereby creating a privity of contract
would not have otherwise defrayed. between the appellee and the appellant. In defining the word "privy" this Court, in a case,
said:
The appealed judgment is modified and the defendant is ordered to return and deliver to
the plaintiff, in the residence to return and deliver to the plaintiff, in the residence or house The word "privy" denotes the idea of succession ... hence an assignee of a
of the latter, all the furniture described in paragraph 3 of the stipulation of facts Exhibit A. credit, and one subrogated to it, etc. will be privies; in short, he who by
The expenses which may be occasioned by the delivery to and deposit of the furniture succession is placed in the position of one of those who contracted the
with the Sheriff shall be for the account of the defendant. the defendant shall pay the costs judicial relation and executed the private document and appears to be
in both instances. So ordered.
 substituting him in the personal rights and obligation is a privy (Alpurto vs. should be done is to evaluate the loans on the basis of the Ballantyne Scale as of the time
Perez, 38 Phil. 785, 790). the loans became due, and that was in June 1944. This contention of the appellant is also
without merit.
The United States of America acting as a belligerent sovereign power seized the assets of
the Bank of Taiwan, Ltd. which belonged to an enemy country. The confiscation of the The decision of the court a quo ordered the appellant to pay the sum of P2,377.23 as of
assets of the Bank of Taiwan, Ltd. being an involuntary act of war, and sanctioned by December 31, 1959, plus interest rate of 6% per annum compounded quarterly from the
international law, the United States succeeded to the rights and interests of said Bank of date of the filing of the complaint. The sum total of the five loans obtained by the appellant
Taiwan, Ltd. over the assets of said bank. As successor in interest in, and transferee of, from the Bank of Taiwan, Ltd. was P1,281.97 in Japanese war notes. Computed under the
the property rights of the United States of America over the loans in question, the Republic Ballantyne Scale of values as of June 1943, this sum of P1,281.97 in Japanese war notes
of the Philippines had thereby become a privy to the original contracts of loan between the in June 1943 is equivalent to P889.64 in genuine Philippine currency which was
Bank of Taiwan, Ltd. and the appellant. It follows, therefore, that the Republic of the considered the aggregate amount due as principal of the five loans, and the amount of
Philippines has a legal right to bring the present action against the appellant Jose Grijaldo. P2,377.23 as of December 31, 1959 was arrived at after computing the interest on the
principal sum of P889.64 compounded quarterly from the time the obligations were
The appellant likewise maintains, in support of his contention that the appellee has no incurred in 1943.
cause of action, that because the loans were secured by a chattel mortgage on the
standing crops on a land owned by him and these crops were lost or destroyed through It is the stand of the appellee that the Ballantyne scale of values should be applied as of
enemy action his obligation to pay the loans was thereby extinguished. This argument is the time the obligation was incurred, and that was in June 1943. This stand of the appellee
untenable. The terms of the promissory notes and the chattel mortgage that the appellant was upheld by the lower court; and the decision of the lower court is supported by the
executed in favor of the Bank of Taiwan, Ltd. do not support the claim of appellant. The ruling of this Court in the case of Hilado vs. De la Costa (G.R. No. L-150, April 30, 1949;
obligation of the appellant under the five promissory notes was not to deliver a 46 O.G. 5472), which states:
determinate thing namely, the crops to be harvested from his land, or the value of the
crops that would be harvested from his land. Rather, his obligation was to pay a generic ... Contracts stipulating for payments presumably in Japanese war notes may
thing — the amount of money representing the total sum of the five loans, with interest. be enforced in our Courts after the liberation to the extent of the just obligation
The transaction between the appellant and the Bank of Taiwan, Ltd. was a series of five of the contracting parties and, as said notes have become worthless, in order
contracts of simple loan of sums of money. "By a contract of (simple) loan, one of the that justice may be done and the party entitled to be paid can recover their
parties delivers to another ... money or other consumable thing upon the condition that the actual value in Philippine Currency, what the debtor or defendant bank should
same amount of the same kind and quality shall be paid." (Article 1933, Civil Code) The return or pay is the value of the Japanese military notes in relation to the peso
obligation of the appellant under the five promissory notes evidencing the loans in in Philippine Currency obtaining on the date when and at the place where the
questions is to pay the value thereof; that is, to deliver a sum of money — a clear case of obligation was incurred unless the parties had agreed otherwise. ... . (italics
an obligation to deliver, a generic thing. Article 1263 of the Civil Code provides: supplied)

In an obligation to deliver a generic thing, the loss or destruction of anything IN VIEW OF THE FOREGOING, the decision appealed from is affirmed, with costs
of the same kind does not extinguish the obligation. against the appellant. Inasmuch as the appellant Jose Grijaldo died during the pendency
of this appeal, his estate must answer in the execution of the judgment in the present
The chattel mortgage on the crops growing on appellant's land simply stood as a security case.
for the fulfillment of appellant's obligation covered by the five promissory notes, and the
loss of the crops did not extinguish his obligation to pay, because the account could still Bengzon, C.J., Concepcion, Barrera, Regala, Bautista Angelo, Reyes, J.B.L., Makalintal
be paid from other sources aside from the mortgaged crops. and Bengzon, J.P., JJ., concur.

In his second point of contention, the appellant maintains that the action of the appellee
had prescribed. The appellant points out that the loans became due on June 1, 1944; and
when the complaint was filed on January 17,1961 a period of more than 16 years had
already elapsed — far beyond the period of ten years when an action based on a written
contract should be brought to court.
This contention of the appellant has no merit. Firstly, it should be considered that the
complaint in the present case was brought by the Republic of the Philippines not as a
nominal party but in the exercise of its sovereign functions, to protect the interests of the
State over a public property. Under paragraph 4 of Article 1108 of the Civil Code
prescription, both acquisitive and extinctive, does not run against the State. This Court has
held that the statute of limitations does not run against the right of action of the
Government of the Philippines (Government of the Philippine Islands vs. Monte de
Piedad, etc., 35 Phil. 738-751).Secondly, the running of the period of prescription of the
action to collect the loan from the appellant was interrupted by the moratorium laws
(Executive Orders No. 25, dated November 18, 1944; Executive Order No. 32. dated
March 10, 1945; and Republic Act No. 342, approved on July 26, 1948). The loan in
question, as evidenced by the five promissory notes, were incurred in the year 1943, or
during the period of Japanese occupation of the Philippines. This case is squarely covered
by Executive Order No. 25, which became effective on November 18, 1944, providing for
the suspension of payments of debts incurred after December 31, 1941. The period of
prescription was, therefore, suspended beginning November 18, 1944. This Court, in the
case of Rutter vs. Esteban (L-3708, May 18, 1953, 93 Phil. 68), declared on May 18, 1953
that the Moratorium Laws, R.A. No. 342 and Executive Orders Nos. 25 and 32, are
unconstitutional; but in that case this Court ruled that the moratorium laws had suspended
the prescriptive period until May 18, 1953. This ruling was categorically reiterated in the
decision in the case of Manila Motors vs. Flores, L-9396, August 16, 1956. It follows,
therefore, that the prescriptive period in the case now before US was suspended from
November 18,1944, when Executive Orders Nos. 25 and 32 were declared
unconstitutional by this Court. Computed accordingly, the prescriptive period was
suspended for 8 years and 6 months. By the appellant's own admission, the cause of
action on the five promissory notes in question arose on June 1, 1944. The complaint in
the present case was filed on January 17, 1961, or after a period of 16 years, 6 months
and 16 days when the cause of action arose. If the prescriptive period was not interrupted
by the moratorium laws, the action would have prescribed already; but, as We have
stated, the prescriptive period was suspended by the moratorium laws for a period of 8
years and 6 months. If we deduct the period of suspension (8 years and 6 months) from
the period that elapsed from the time the cause of action arose to the time when the
complaint was filed (16 years, 6 months and 16 days) there remains a period of 8 years
and 16 days. In other words, the prescriptive period ran for only 8 years and 16 days.
There still remained a period of one year, 11 months and 14 days of the prescriptive
period when the complaint was filed.
In his third point of contention the appellant maintains that the lower court erred in
ordering him to pay the amount of P2,377.23. It is claimed by the appellant that it was
error on the part of the lower court to apply the Ballantyne Scale of values in evaluating
the Japanese war notes as of June 1943 when the loans were incurred, because what
G.R. No. L-4150 February 10, 1910 From the foregoing it may be logically inferred that the carabaos loaned or given on
commodatum to the now deceased Magdaleno Jimenea were ten in number; that they, or
FELIX DE LOS SANTOS, plaintiff-appelle, at any rate the six surviving ones, have not been returned to the owner thereof, Felix de
vs. los Santos, and that it is not true that the latter sold to the former three carabaos that the
AGUSTINA JARRA, administratrix of the estate of Magdaleno Jimenea, purchaser was already using; therefore, as the said six carabaos were not the property of
deceased, defendant-appellant. the deceased nor of any of his descendants, it is the duty of the administratrix of the
Matias Hilado, for appellant. estate to return them or indemnify the owner for their value.
Jose Felix Martinez, for appellee. The Civil Code, in dealing with loans in general, from which generic denomination the
TORRES, J.: specific one of commodatum is derived, establishes prescriptions in relation to the last-
mentioned contract by the following articles:
On the 1st of September, 1906, Felix de los Santos brought suit against Agustina Jarra,
the administratrix of the estate of Magdaleno Jimenea, alleging that in the latter part of ART. 1740. By the contract of loan, one of the parties delivers to the other,
1901 Jimenea borrowed and obtained from the plaintiff ten first-class carabaos, to be used either anything not perishable, in order that the latter may use it during a
at the animal-power mill of his hacienda during the season of 1901-2, without recompense certain period and return it to the former, in which case it is called
or remuneration whatever for the use thereof, under the sole condition that they should be commodatum, or money or any other perishable thing, under the condition to
returned to the owner as soon as the work at the mill was terminated; that Magdaleno return an equal amount of the same kind and quality, in which case it is
Jimenea, however, did not return the carabaos, notwithstanding the fact that the plaintiff merely called a loan.
claimed their return after the work at the mill was finished; that Magdaleno Jimenea died Commodatum is essentially gratuitous.
on the 28th of October, 1904, and the defendant herein was appointed by the Court of
First Instance of Occidental Negros administratrix of his estate and she took over the A simple loan may be gratuitous, or made under a stipulation to pay interest.
administration of the same and is still performing her duties as such administratrix; that the
plaintiff presented his claim to the commissioners of the estate of Jimenea, within the legal ART. 1741. The bailee acquires retains the ownership of the thing loaned.
term, for the return of the said ten carabaos, but the said commissioners rejected his claim The bailee acquires the use thereof, but not its fruits; if any compensation is
as appears in their report; therefore, the plaintiff prayed that judgment be entered against involved, to be paid by the person requiring the use, the agreement ceases to
the defendant as administratrix of the estate of the deceased, ordering her to return the be a commodatum.
ten first-class carabaos loaned to the late Jimenea, or their present value, and to pay the ART. 1742. The obligations and rights which arise from the commodatum
costs. pass to the heirs of both contracting parties, unless the loan has been in
The defendant was duly summoned, and on the 25th of September, 1906, she demurred consideration for the person of the bailee, in which case his heirs shall not
in writing to the complaint on the ground that it was vague; but on the 2d of October of the have the right to continue using the thing loaned.
same year, in answer to the complaint, she said that it was true that the late Magdaleno The carabaos delivered to be used not being returned by the defendant upon demand,
Jimenea asked the plaintiff to loan him ten carabaos, but that he only obtained three there is no doubt that she is under obligation to indemnify the owner thereof by paying him
second-class animals, which were afterwards transferred by sale by the plaintiff to the said their value.
Jimenea; that she denied the allegations contained in paragraph 3 of the complaint; for all
of which she asked the court to absolve her of the complaint with the cost against the Article 1101 of said code reads:
plaintiff.
Those who in fulfilling their obligations are guilty of fraud, negligence, or
By a writing dated the 11th of December, 1906, Attorney Jose Felix Martinez notified the delay, and those who in any manner whatsoever act in contravention of the
defendant and her counsel, Matias Hilado, that he had made an agreement with the stipulations of the same, shall be subjected to indemnify for the losses and
plaintiff to the effect that the latter would not compromise the controversy without his damages caused thereby.
consent, and that as fees for his professional services he was to receive one half of the
amount allowed in the judgment if the same were entered in favor of the plaintiff. The obligation of the bailee or of his successors to return either the thing loaned or its
value, is sustained by the supreme tribunal of Sapin. In its decision of March 21, 1895, it
The case came up for trial, evidence was adduced by both parties, and either exhibits sets out with precision the legal doctrine touching commodatum as follows:
were made of record. On the 10th of January, 1907, the court below entered judgment
sentencing Agustina Jarra, as administratrix of the estate of Magdaleno Jimenea, to return Although it is true that in a contract of commodatum the bailor retains the
to the plaintiff, Felix de los Santos, the remaining six second and third class carabaos, or ownership of the thing loaned, and at the expiration of the period, or after the
the value thereof at the rate of P120 each, or a total of P720 with the costs. use for which it was loaned has been accomplished, it is the imperative duty
of the bailee to return the thing itself to its owner, or to pay him damages if
Counsel for the defendant excepted to the foregoing judgment, and, by a writing dated through the fault of the bailee the thing should have been lost or injured, it is
January 19, moved for anew trial on the ground that the findings of fact were openly and clear that where public securities are involved, the trial court, in deferring to
manifestly contrary to the weight of the evidence. The motion was overruled, the the claim of the bailor that the amount loaned be returned him by the bailee in
defendant duly excepted, and in due course submitted the corresponding bill of bonds of the same class as those which constituted the contract, thereby
exceptions, which was approved and submitted to this court. properly applies law 9 of title 11 of partida 5.
The defendant has admitted that Magdaleno Jimenea asked the plaintiff for the loan of ten With regard to the third assignment of error, based on the fact that the plaintiff Santos had
carabaos which are now claimed by the latter, as shown by two letters addressed by the not appealed from the decision of the commissioners rejecting his claim for the recovery of
said Jimenea to Felix de los Santos; but in her answer the said defendant alleged that the his carabaos, it is sufficient to estate that we are not dealing with a claim for the payment
late Jimenea only obtained three second-class carabaos, which were subsequently sold to of a certain sum, the collection of a debt from the estate, or payment for losses and
him by the owner, Santos; therefore, in order to decide this litigation it is indispensable damages (sec. 119, Code of Civil Procedure), but with the exclusion from the inventory of
that proof be forthcoming that Jimenea only received three carabaos from his son-in-law the property of the late Jimenea, or from his capital, of six carabaos which did not belong
Santos, and that they were sold by the latter to him. to him, and which formed no part of the inheritance.
The record discloses that it has been fully proven from the testimony of a sufficient The demand for the exclusion of the said carabaos belonging to a third party and which
number of witnesses that the plaintiff, Santos, sent in charge of various persons the ten did not form part of the property of the deceased, must be the subject of a direct decision
carabaos requested by his father-in-law, Magdaleno Jimenea, in the two letters produced of the court in an ordinary action, wherein the right of the third party to the property which
at the trial by the plaintiff, and that Jimenea received them in the presence of some of saidhe seeks to have excluded from the inheritance and the right of the deceased has been
persons, one being a brother of said Jimenea, who saw the animals arrive at the hacienda discussed, and rendered in view of the result of the evidence adduced by the
where it was proposed to employ them. Four died of rinderpest, and it is for this reason administrator of the estate and of the claimant, since it is so provided by the second part
that the judgment appealed from only deals with six surviving carabaos. of section 699 and by section 703 of the Code of Civil Procedure; the refusal of the
commissioners before whom the plaintiff unnecessarily appeared can not affect nor
The alleged purchase of three carabaos by Jimenea from his son-in-law Santos is not reduce the unquestionable right of ownership of the latter, inasmuch as there is no law nor
evidenced by any trustworthy documents such as those of transfer, nor were the principle of justice authorizing the successors of the late Jimenea to enrich themselves at
declarations of the witnesses presented by the defendant affirming it satisfactory; for said the cost and to the prejudice of Felix de los Santos.
reason it can not be considered that Jimenea only received three carabaos on loan from
his son-in-law, and that he afterwards kept them definitely by virtue of the purchase. For the reasons above set forth, by which the errors assigned to the judgment appealed
from have been refuted, and considering that the same is in accordance with the law and
By the laws in force the transfer of large cattle was and is still made by means of official the merits of the case, it is our opinion that it should be affirmed and we do hereby affirm it
documents issued by the local authorities; these documents constitute the title of with the costs against the appellant. So ordered.
ownership of the carabao or horse so acquired. Furthermore, not only should the
purchaser be provided with a new certificate or credential, a document which has not been
produced in evidence by the defendant, nor has the loss of the same been shown in the
case, but the old documents ought to be on file in the municipality, or they should have
been delivered to the new purchaser, and in the case at bar neither did the defendant
present the old credential on which should be stated the name of the previous owner of
each of the three carabaos said to have been sold by the plaintiff.
G.R. No. L-8321 October 14, 1913 Nor did the decree of the lower court that ordered the sale have the least influence in our
previous decision to require our making any finding in regard thereto, for, with or without
ALEJANDRA MINA, ET AL., plaintiffs-appellants, that decree, the Supreme Court had to decide the ownership of the lot consistently with its
vs. titles and not in accordance with the judicial acts or proceedings had prior to the setting up
RUPERTA PASCUAL, ET AL., defendants-appellees. of the issue in respect to the ownership of the property that was the subject of the judicial
N. Segundo for appellants. decree.
Iñigo Bitanga for appellees. What is essentially pertinent to the case is the fact that the defendant agree that the
plaintiffs have the ownership, and they themselves only the use, of the said lot.
On this premise, the nullity of the sale of the lot is in all respects quite evident, whatsoever
ARELLANO, C.J.: be the manner in which the sale was effected, whether judicially or extrajudicially.

Francisco Fontanilla and Andres Fontanilla were brothers. Francisco Fontanilla acquired He who has only the use of a thing cannot validly sell the thing itself. The effect of the sale
during his lifetime, on March 12, 1874, a lot in the center of the town of Laoag, the capital being a transfer of the ownership of the thing, it is evident that he who has only the mere
of the Province of Ilocos Norte, the property having been awarded to him through its use of the thing cannot transfer its ownership. The sale of a thing effected by one who is
purchase at a public auction held by the alcalde mayor of that province. The lot has a not its owner is null and void. The defendants never were the owners of the lot sold. The
frontage of 120 meters and a depth of 15. sale of it by them is necessarily null and void. On cannot convey to another what he has
never had himself.
Andres Fontanilla, with the consent of his brother Francisco, erected a warehouse on a
part of the said lot, embracing 14 meters of its frontage by 11 meters of its depth. The returns of the auction contain the following statements:

Francisco Fontanilla, the former owner of the lot, being dead, the herein plaintiffs, I, Ruperta Pascual, the guardian of the minors, etc., by virtue of the
Alejandro Mina, et al., were recognized without discussion as his heirs. authorization conferred upon me on the 31st of July, 1909, by the Court of
First Instance of Ilocos Norte, proceeded with the sale at public auction of the
Andres Fontanilla, the former owner of the warehouse, also having died, the children of six-sevenths part of the one-half of the warehouse constructed of rubble
Ruperta Pascual were recognized likes without discussion, though it is not said how, and stone, etc.
consequently are entitled to the said building, or rather, as Ruperta Pascual herself stated,
to only six-sevenths of one-half of it, the other half belonging, as it appears, to the plaintiffs Whereas I, Ruperta Pascual, the guardian of the minors, etc., sold at public
themselves, and the remaining one-seventh of the first one-half to the children of one of auction all the land and all the rights title, interest, and ownership in the said
the plaintiffs, Elena de Villanueva. The fact is that the plaintiffs and the defendants are property to Cu Joco, who was the highest bidder, etc.
virtually, to all appearance, the owners of the warehouse; while the plaintiffs are Therefore, . . . I cede and deliver forever to the said purchaser, Cu Joco, his
undoubtedly, the owners of the part of the lot occupied by that building, as well as of the heirs and assigns, all the interest, ownership and inheritance rights and others
remainder thereof. that, as the guardian of the said minors, I have and may have in the said
This was the state of affairs, when, on May 6, 1909, Ruperta Pascual, as the guardian of property, etc.
her minor children, the herein defendants, petitioned the Curt of First Instance of Ilocos The purchaser could not acquire anything more than the interest that might be held by a
Norte for authorization to sell "the six-sevenths of the one-half of the warehouse, of 14 byperson to whom realty in possession of the vendor might be sold, for at a judicial auction
11 meters, together with its lot." The plaintiffs — that is Alejandra Mina, et al. — opposednothing else is disposed of. What the minor children of Ruperta Pascual had in their
the petition of Ruperta Pascual for the reason that the latter had included therein the lot possession was the ownership of the six-sevenths part of one-half of the warehouse and
occupied by the warehouse, which they claimed was their exclusive property. All this the use of the lot occupied by his building. This, and nothing more, could the Chinaman
action was taken in a special proceeding in reguardianship. Cu Joco acquire at that sale: not the ownership of the lot; neither the other half, nor the
The plaintiffs did more than oppose Pascual's petition; they requested the court, through remaining one-seventh of the said first half, of the warehouse. Consequently, the sale
motion, to decide the question of the ownership of the lot before it pass upon the petition made to him of this one-seventh of one-half and the entire other half of the building was
for the sale of the warehouse. But the court before determining the matter of the null and void, and likewise with still more reason the sale of the lot the building occupies.
ownership of the lot occupied by the warehouse, ordered the sale of this building, saying: The purchaser could and should have known what it was that was offered for sale and
While the trial continues with respect to the ownership of the lot, the court what it was that he purchased. There is nothing that can justify the acquisition by the
orders the sale at public auction of the said warehouse and of the lot on which purchaser of the warehouse of the ownership of the lot that this building occupies, since
it is built, with the present boundaries of the land and condition of the building, the minors represented by Ruperta Pascual never were the owners of the said lot, nor
at a price of not less than P2,890 Philippine currency . . . . were they ever considered to be such.

So, the warehouse, together with the lot on which it stands, was sold to Cu Joco, the other The trial court, in the judgment rendered, held that there were no grounds for the
defendant in this case, for the price mentioned. requested annulment of the sale, and that the plaintiffs were entitled to the P600
deposited with the clerk of the court as the value of the lot in question. The defendants,
The plaintiffs insisted upon a decision of the question of the ownership of the lot, and the Ruperta Pascual and the Chinaman Cu Joco, were absolved from the complaint, without
court decided it by holding that this land belonged to the owner of the warehouse which express finding as to costs.
had been built thereon thirty years before.
The plaintiffs cannot be obliged to acquiesce in or allow the sale made and be compelled
The plaintiffs appealed and this court reversed the judgment of the lower court and held to accept the price set on the lot by expert appraisers, not even though the plaintiffs be
that the appellants were the owners of the lot in question. 1 considered as coowner of the warehouse. It would be much indeed that, on the ground of
coownership, they should have to abide by and tolerate the sale of the said building, which
When the judgment became final and executory, a writ of execution issued and the point this court does not decide as it is not a question submitted to us for decision, but, as
plaintiffs were given possession of the lot; but soon thereafter the trial court annulled this regards the sale of the lot, it is in all respects impossible to hold that the plaintiffs must
possession for the reason that it affected Cu Joco, who had not been a party to the suit in abide by it and tolerate, it, and this conclusion is based on the fact that they did not give
which that writ was served. their consent (art. 1261, Civil Code), and only the contracting parties who have given it are
It was then that the plaintiffs commenced the present action for the purpose of having the obliged to comply (art. 1091, idem).
sale of the said lot declared null and void and of no force and effect. The sole purpose of the action in the beginning was to obtain an annulment of the sale of
An agreement was had ad to the facts, the ninth paragraph of which is as follows: the lot; but subsequently the plaintiffs, through motion, asked for an amendment by their
complaint in the sense that the action should be deemed to be one for the recovery of
9. That the herein plaintiffs excepted to the judgment and appealed therefrom possession of a lot and for the annulment of its sale. The plaintiff's petition was opposed
to the Supreme Court which found for them by holding that they are the by the defendant's attorney, but was allowed by the court; therefore the complaint seeks,
owners of the lot in question, although there existed and still exists a after the judicial annulment of the sale of the lot, to have the defendants sentenced
commodatum by virtue of which the guardianship (meaning the defendants) immediately to deliver the same to the plaintiffs.
had and has the use, and the plaintiffs the ownership, of the property, with no
finding concerning the decree of the lower court that ordered the sale. Such a finding appears to be in harmony with the decision rendered by the Supreme Court
in previous suit, wherein it was held that the ownership of the lot lay in the plaintiffs, and
The obvious purport of the cause "although there existed and still exists a commodatum," for this reason steps were taken to give possession thereof to the defendants; but, as the
etc., appears to be that it is a part of the decision of the Supreme Court and that, while purchaser Cu Joco was not a party to that suit, the present action is strictly one for recover
finding the plaintiffs to be the owners of the lot, we recognized in principle the existence of against Cu Joco to compel him, once the sale has been annulled, to deliver the lot to its
a commodatum under which the defendants held the lot. Nothing could be more inexact. lawful owners, the plaintiffs.
Possibly, also, the meaning of that clause is that, notwithstanding the finding made by the
Supreme Court that the plaintiffs were the owners, these former and the defendants agree As respects this action for recovery, this Supreme Court finds:
that there existed, and still exists, a commodatum, etc. But such an agreement would not 1. That it is a fact admitted by the litigating parties, both in this and in the
affect the truth of the contents of the decision of this court, and the opinions held by the previous suit, that Andres Fontanilla, the defendants' predecessor in interest,
litigants in regard to this point could have no bearing whatever on the present decision. erected the warehouse on the lot, some thirty years ago, with the explicit
 consent of his brother Francisco Fontanilla, the plaintiff's predecessor in
interest.
2. That it also appears to be an admitted fact that the plaintiffs and the
defendants are the coowners of the warehouse.
3. That it is a fact explicitly admitted in the agreement, that neither Andres
Fontanilla nor his successors paid any consideration or price whatever for the
use of the lot occupied by the said building; whence it is, perhaps, that both
parties have denominated that use a commodatum.
Upon the premise of these facts, or even merely upon that of the first of them, the
sentencing of the defendants to deliver the lot to the plaintiffs does not follow as a
necessary corollary of the judicial declaration of ownership made in the previous suit, nor
of that of the nullity of the sale of the lot, made in the present case.
The defendants do not hold lawful possession of the lot in question.1awphil.net
But, although both litigating parties may have agreed in their idea of the commodatum, on
account of its not being, as indeed it is not, a question of fact but of law, yet that
denomination given by them to the use of the lot granted by Francisco Fontanilla to his
brother, Andres Fontanilla, is not acceptable. Contracts are not to be interpreted in
conformity with the name that the parties thereto agree to give them, but must be
construed, duly considering their constitutive elements, as they are defined and
denominated by law.
By the contract of loan, one of the parties delivers to the other, either anything
not perishable, in order that the latter may use it during the certain period and
return it to the former, in which case it is called commodatum . . . (art. 1740,
Civil Code).
It is, therefore, an essential feature of the commodatum that the use of the thing belonging
to another shall for a certain period. Francisco Fontanilla did not fix any definite period or
time during which Andres Fontanilla could have the use of the lot whereon the latter was
to erect a stone warehouse of considerable value, and so it is that for the past thirty years
of the lot has been used by both Andres and his successors in interest. The present
contention of the plaintiffs that Cu Joco, now in possession of the lot, should pay rent for it
at the rate of P5 a month, would destroy the theory of the commodatum sustained by
them, since, according to the second paragraph of the aforecited article 1740,
"commodatum is essentially gratuitous," and, if what the plaintiffs themselves aver on
page 7 of their brief is to be believed, it never entered Francisco's mind to limit the period
during which his brother Andres was to have the use of the lot, because he expected that
the warehouse would eventually fall into the hands of his son, Fructuoso Fontanilla, called
the adopted son of Andres, which did not come to pass for the reason that Fructuoso died
before his uncle Andres. With that expectation in view, it appears more likely that
Francisco intended to allow his brother Andres a surface right; but this right supposes the
payment of an annual rent, and Andres had the gratuitous use of the lot.
Hence, as the facts aforestated only show that a building was erected on another's
ground, the question should be decided in accordance with the statutes that, thirty years
ago, governed accessions to real estate, and which were Laws 41 and 42, title 28, of the
third Partida, nearly identical with the provisions of articles 361 and 362 of the Civil Code.
So, then, pursuant to article 361, the owner of the land on which a building is erected in
good faith has a right to appropriate such edifice to himself, after payment of the indemnity
prescribed in articles 453 and 454, or to oblige the builder to pay him the value of the land.
Such, and no other, is the right to which the plaintiff are entitled.
For the foregoing reasons, it is only necessary to annul the sale of the said lot which was
made by Ruperta Pascual, in representation of her minor children, to Cu Joco, and to
maintain the latter in the use of the lot until the plaintiffs shall choose one or the other of
the two rights granted them by article 361 of the Civil Code.1awphil.net
The judgment appealed from is reversed and the sale of the lot in question is held to be
null and void and of no force or effect. No special finding is made as to the costs of both
instances.
Torres, Johnson, Carson, Moreland and Trent, JJ., concur.
G.R. No. L-23559 October 4, 1971 The Usury Law penalizes any person or corporation who, for any loan or renewal thereof
or forbearance, shall collect or receive a higher rate or greater sum or value than is
AURELIO G. BRIONES, plaintiff-appellee, allowed by law, and provides further that, in such case, the debtor may recover the whole
vs. interest, commissions, premiums, penalties and surcharges paid or delivered, with costs
PRIMITIVO P. CAMMAYO, ET AL., defendants-appellants. and attorney's fees, in an appropriate action against his creditor, within two (2) years after
DIZON, J.: such payment or delivery (Section 6, Act 2655, as amended by Acts 3291 and 3998).

On February 22, 1962, Aurelio G. Briones filed an action in the Municipal Court of Manila Construing the above provision, We held in Go Chioco vs. Martinez, 45 Phil. 256 that even
against Primitivo, Nicasio, Pedro, Hilario and Artemio, all surnamed Cammayo, to recover if the contract of loan is declared usurious the creditor is entitled to collect the money
from them, jointly and severally, the amount of P1,500.00, plus damages, attorney's fees actually loaned and the legal interest due thereon.
and costs of suit. The defendants answered the complaint with specific denials and the In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court likewise declared that, in any
following special defenses and compulsory counterclaim: 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.
By way of — 739.
SPECIAL DEFENSES In all the above cited cases it was recognized and held that under Act 2655 a usurious
contract is void; that the creditor had no right of action to recover the interest in excess of
Defendants allege: the lawful rate; but that this did not mean that the debtor may keep the principal received
4. Defendants executed the real estate mortgage, Annex "A" of the complaint, as by him as loan — thus unjustly enriching himself to the damage of the creditor.
security for the loan of P1,200.00 given to defendant Primitivo P. Cammayo upon Then in Lopez and Javelona vs. El Hogar Filipino, 47 249, We also held that the standing
the usurious agreement that defendant pays to the plaintiff and that the plaintiff jurisprudence of this Court on the question under consideration was clearly to the effect
reserve and secure, as in fact plaintiff reserved and secured himself, out of the that the Usury Law, by its letter and spirit, did not deprive the lender of his right to recover
alleged loan of P1,500.00 as interest the sum of P300.00 for one year; from the borrower the money actually loaned to and enjoyed by the latter. This Court went
5. That although the mortgage contract, Annex "A" was executed for securing the further to say that the Usury Law did not provide for the forfeiture of the capital in favor of
payment of P1,500.00 for a period of one year, without interest, the truth and the the debtor in usurious contracts, and that while the forfeiture might appear to be
real fact is that plaintiff delivered to the defendant Primitivo P. Cammayo only the convenient as a drastic measure to eradicate the evil of usury, the legal question involved
sum of P1,200.00 and withheld the sum of P300.00 which was intended as advance should not be resolved on the basis of convenience.
interest for one year; Other cases upholding the same principle are Palileo vs. Cosio, 97 Phil. 919 and Pascua
6. That on account of said loan of P1,200.00, defendant Primitivo P. Cammayo paid vs. Perez, L-19554, January 31, 1964, 10 SCRA 199, 200-202. In the latter We expressly
to the plaintiff during the period from October 1955 to July 1956 the total sum of held that when a contract is found to be tainted with usury "the only right of the respondent
P330.00 which plaintiff, illegally and unlawfully refuse to acknowledge as part (creditor) ... was merely to collect the amount of the loan, plus interest due thereon."
payment of the account but as in interest of the said loan for an extension of another The view has been expressed, however, that the ruling thus consistently adhered to
term of one year; should now be abandoned because Article 1957 of the new Civil Code — a subsequent
7. That said contract of loan entered into between plaintiff and defendant Primitivo law — provides that contracts and stipulations, under any cloak or device whatever,
P. Cammayo is a usurious contract and is contrary to law, morals, good customs, intended to circumvent the laws against usury, shall be void, and that in such cases "the
public order or public policy and is, therefore, in existent and void from the power may recover in accordance with the laws on usury." From this the conclusion is
beginning (Art. 1407 Civil Code); drawn that the whole contract is void and that, therefore, the creditor has no right to
recover — not even his capital.
And as —
The meaning and scope of our ruling in the cases mentioned heretofore is clearly stated,
COMPULSORY COUNTERCLAIM 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
Defendants replead all their allegations in the preceding paragraphs; whether a creditor in a usurious contract may or may not recover the principal of the loan,
8. That plaintiff, by taking and receiving interest in excess of that allowed by law, and, in the affirmative, whether or not he may also recover interest thereon at the legal
with full intention to violate the law, at the expense of the defendants, committed a rate, We said the following:
flagrant violation of Act 2655, otherwise known as the Usury Law, causing the ... .
defendants damages and attorney's fees, the amount of which will be proven at the
trial; The court found that there remained due from defendants an unpaid principal
amount of P20,287.50; that plaintiff charged usurious interests, of which P1,048.15
9. That this is the second time this same case is filed before this court, the first had actually been deducted in advance by plaintiff from the loan; that said amount
having been previously filed and docketed in this court as Civil Case No. 75845 of P1,048.15 should therefore be deducted from the unpaid principal of P20,287.50,
(Branch VII) and the same was dismissed by the Court of First Instance of Manila leaving a balance of P19,247.35 still payable to the plaintiff. Said court held that
on July 13, 1961 in Civil Case No. 43121 (Branch XVII) and for repeatedly bringing notwithstanding the usurious interests charged, plaintiff is not barred from collecting
this case to the court, harassing and persecuting defendants in that manner, the principal of the loan or its balance of P19,247.35. Accordingly, it stated in the
defendants have suffered mental anguish and anxiety for which they should be dispositive portion of the decision, thus:
compensated for moral damages.
WHEREFORE, judgment is hereby rendered, ordering the defendant partnership to
On September 7, 1962, Briones filed an unverified reply in which he merely denied the pay to the plaintiff the amount of P19,247.35, with legal interest thereon from May
allegations of the counterclaim. Thereupon the defendants moved for the rendition of a 29, 1964 until paid, plus an additional sum of P2,000.00 as damages for attorney's
summary judgment on the ground that, upon the record, there was no genuine issue of fee; and, in case the assets of defendant partnership be insufficient to satisfy this
fact between the parties. The Municipal Court granted the motion and rendered judgment judgment in full, ordering the defendant David Syjueco to pay to the plaintiff one-half
sentencing the defendants to pay the plaintiff the sum of P1,500.00, with interests thereon (½) of the unsatisfied portion of this judgment.
at the legal rate from February 22, 1962, plus the sum of P150.00 as attorney's fees. From
this judgment, the defendants appealed to the Court of First Instance of Manila where, With costs against the defendants.
according to the appealed decision, "defendant has asked for summary judgment and
plaintiff has agreed to the same." (Record on Appeal p. 21). Having found the motion for Appealing directly to Us, defendants raise two questions of law: (1) In a loan with
summary judgment to be in order, the court then, proceeded to render judgment as usurious interest, may the creditor recover the principal of the loan? (2) Should
follows: attorney's fees be awarded in plaintiff's favor?

Judgment is, therefore, rendered, ordering Defendant to pay plaintiff the sum of
P1,180.00 with interest thereon at the legal rate from October 16, 1962 until fully
paid. This judgment represents Defendant's debt of P1,500.00 less usurious interest
of P120.00 and the additional sum of P200.00 as attorney's fees or a total deduction
of P320.00. Plaintiff shall pay the costs.
In the present appeal defendants claim that the trial court erred in sentencing them to pay
the principal of the loan notwithstanding its finding that the same was tainted with usury,
and erred likewise in not dismissing the case.
It is not now disputed that the contract of loan in question was tainted with usury. The only
questions to be resolved, therefore, are firstly, whether the creditor is entitled to collect
from the debtor the amount representing the principal obligation; secondly, in the
affirmative, if he is entitled to collect interests thereon, and if so, at what rate.
Great reliance is made by appellants on Art. 1411 of the New Civil Code which
states:
ART. 1411. 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 action against each other, and both shall be prosecuted.
Moreover, the provisions of the Penal Code relative to the disposal of effects or
instruments of a crime shall be applicable to the things or the price of the contract.
This rule shall be applicable when only one of the parties is guilty; but the innocent
one may claim what he has given, and shall not be bound to comply with his
promise.
 Since, according to the appellants, a usurious loan is void due to illegality of cause In arriving at the above conclusion We also considered our decision in Mulet vs. The
or object, the rule of pari delicto expressed in Article 1411, supra, applies, so that People of the Philippines (73 Phil. p. 60), but found that the same does not apply to the
neither party can bring action against each other. Said rule, however, appellants present case. The facts therein involved were as follows:
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 On July 25, 1929, Alejandra Rubillos and Espectacion Rubillos
allowed by the Usury Law. As to the lender, no exception is made to the rule; hence, secured from petitioner Miguel Mulet a loan of P550, payable
he cannot recover on the contract. So — they continue — the New Civil Code within 5 years at 30 per cent interest per annum. In the deed of
provisions must be upheld as against the Usury Law, under which a loan with mortgage executed by the Rubillos as a security; the sum of
usurious interest is not totally void, because of Article 1961 of the New Civil Code, P1,375 was made to appear as the capital of the loan. This
that: "Usurious contracts shall be governed by the Usury Law and other special amount obviously represented the actual loan of P550 and the
laws, so far as they are not inconsistent with this Code. (Emphasis ours.) . total interest of P825 computed at 30 per cent per annum for 5
years. Within four years of following the execution of the
We do not agree with such reasoning, Article 1411 of the New Civil Code is not mortgage, the debtors made partial payments aggregating
new; it is the same as Article 1305 of the Old Civil Code. Therefore, said provision is P278.27, on account of interest. Thereafter, the debtors paid the
no warrant for departing from previous interpretation that, as provided in the Usury whole capital of P550, due to petitioner's promise to condone the
Law (Act No. 2655, as amended), a loan with usurious interest is not totally void unpaid interest upon payment of such capital. But to their
only as to the interest. surprise, petitioner informed them that they were still indebted in
the sum of P546.73 which represented the balance of the
True, as stated in Article 1411 of the New Civil Code, the rule of pari delicto applies usurious interest. And in consideration of this amount, petitioner
where a contract's nullity proceeds from illegality of the cause or object of said pressed upon the debtors to execute in October, 1933, in his
contract. favor, a deed of sale with pacto de retro of a parcel of land, in
However, appellants fail to consider that a contract of loan with usurious interest substitution of the original mortgage which was cancelled. From
consists of principal and accessory stipulations; the principal one is to pay the debt; the date of the execution of the new deed up to 1936, petitioner
the accessory stipulation is to pay interest thereon. received, as his share of the products of the land, the total sum of
P480. Prosecuted on November 18, 1936, for the violation of the
And said two stipulations are divisible in the sense that the former can still stand Usury Law, petitioner was convicted by the trial court, and on
without the latter. Article 1273, Civil Code, attests to this: "The renunciation of the appeal, the judgment was affirmed by the Court of Appeals. The
principal debt shall extinguish the accessory obligations; but the waiver of the latter instant petition for certiorari is directed at that portion of the
shall leave the former in force." decision of the appellate court ordering petitioner to return to the
offended parties the sum of P373.27, representing interests
The question therefore to resolve is whether the illegal terms as to payment of received by him in excess of that allowed by law.
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 It was Mulet's claim that, as the amount of P373.27 had been paid more than two years
divisible contract, if the illegal terms can be separated from the legal ones, the latter prior to the filing of the complaint for usury against him, its return could no longer be
may be enforced." ordered in accordance with the prescriptive period provided therefor in Section 6 of the
Usury Law. Said amount was made up of the usurious interest amounting to P278.27 paid
In simple loan with stipulation of usurious interest, the prestation of the debtor to pay to Mulet, in cash, and the sum of P480.00 paid to him in kind, from the total of which two
the principal debt, which is the cause of the contract (Article 1350, Civil Code), is not amounts 14% interest allowed by law — amounting to P385.85 — was deducted. Our
illegal. The illegality lies only as to the prestation to pay the stipulated interest; decision was that Mulet should return the amount of P480.00 which represented the value
hence, being separable, the latter only should be deemed void, since it is the only of the produce of the land sold to him under pacto de retrowhich, with the unpaid balance
one that is illegal. of the usurious interest, was the consideration of the transaction — meaning thepacto de
Neither is there a conflict between the New Civil Code and the Usury Law. Under retro sale. This Court then said:
the latter, in Sec. 6, any person who for a loan shall have paid a higher rate or ... . This last amount is not usurious interest on the capital of the
greater sum or value than is allowed in said law, may recover the whole interest loan but the value of the produce of the land sold to petitioner
paid. The New Civil Code, in Article 1413 states: "Interest paid in excess of the under pacto de retro with the unpaid balance of the usurious
interest allowed by the usury laws may be recovered by the debtor, with interest interest (P546.73) as the consideration of the transaction. This
thereon from the date of payment." Article 1413, in speaking of "interest paid in consideration, because contrary to law, is illicit, and the contract
excess of the interest allowed by the usury laws" means the whole usurious interest; which results therefrom, null and void. (Art. 1275, Civil Code).
that is, in a loan of P1,000, with interest of 20% per annum or P200 for one year, if And, under the provisions of article 1305, in connection with
the borrower pays said P200, the whole P200 is the usurious interest, not just that article 1303, of the Civil Code, when the nullity of a contract
part thereof in excess of the interest allowed by law. It is in this case that the law arises from the illegality of the consideration which in itself
does not allow division. The whole stipulation as to interest is void, since payment of constitutes a felony, the guilty party shall be subject to criminal
said interest is illegal. The only change effected, therefore, by Article 1413, New proceeding while the innocent party may recover whatever he
Civil Code, is not to provide for the recovery of the interest paid in excess of that has given, including the fruits thereof. (emphasis supplied).
allowed by law, which the Usury Law already provided for, but to add that the same
can be recovered "with interest thereon from the date of payment." It is clear, therefore, that in the Mulet case, the principal of the obligation had been fully
paid by the debtor to the creditor; that the latter was not sentenced to pay it back to the
The foregoing interpretation is reached with the philosophy of usury legislation in former, and that what this Court declared recoverable by the debtor were only the
mind; to discourage stipulations on usurious interest, said stipulations are treated as usurious interest paid as well as the fruits of the property sold under pacto de retro.
wholly void, so that the loan becomes one without stipulation as to payment of
interest. It should not, however, be interpreted to mean forfeiture even of the IN VIEW OF THE FOREGOING, the decision, appealed from is modified in the sense that
principal, for this would unjustly enrich the borrower at the expense of the lender. appellee may recover from appellant the principal of the loan (P1,180.00) only, with
Furthermore, penal sanctions are available against a usurious lender, as a further interest thereon at the legal rate of 6% per annum from the date of the filing of the
deterrence to usury. complaint. With costs.
The principal debt remaining without stipulation for payment of interest can thus be Makalintal, Zaldivar, Teehankee, Villamor and Makasiar, JJ., concur.
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.
In answer to the contention that the forfeiture of the principal of the usurious loan is
necessary to punish the usurer, We say this: Under the Usury Law there is already
provision for adequate punishment for the usurer namely, criminal prosecution where, if
convicted, he may be sentence to pay a fine of not less than P50 nor more than P500, or
imprisonment of not less than 30 days nor more than one year, or both, in the discretion of
the court. He may further be sentenced to return the entire sum received as interest, with
subsidiary imprisonment in case of non-payment thereof. lt is, of course, to be assumed
that this last penalty may be imposed only if the return of the entire sum received as
interest had not yet been the subject of judgment in a civil action involving the usurious
contract of load.
G.R. No. L-19189 November 27, 1922 Much time has been spent by counsel for both parties in discussing the question, of
FROILAN LOPEZ, plaintiff-appellant, vs. SALVADOR V. DEL ROSARIO and BENITA whether the defendant acted as the agent of the plaintiff, in taking out insurance on the
QUIOGUE DE V. DEL ROSARIO, defendants-appellants. contents of the bodega, or whether the defendant acted as a reinsurer of the copra. Giving
a natural expression to the terms of the warehouse receipts, the first hypothesis is the
MALCOLM, J.: correct one. The agency can be deduced from the warehouse receipts, the insurance
Both parties to this action appeal from the judgment of Judge Simplicio del Rosario of the policies, and the circumstances surrounding the transaction.
Court of First Instance of Manila awarding the plaintiff the sum of 88,495.21 with legal After all, however, this is not so vitally important, for it might well be — although we do not
interest from May 13, 1921, without special finding as to costs. have to decide — that under any aspect of the case, the defendant would be liable. The
The many points pressed by contending counsel can be best disposed of by, first, making law is that a policy effected by bailee and covering by its terms his own property and
a statement of the facts; next, considering plaintiff's appeal; next, considering defendant's property held in trust; inures, in the event of a loss, equally and proportionately to the
appeal; and, lastly, rendering judgment. benefit of all the owners of the property insured. Even if one secured insurance covering
STATEMENT OF THE FACTS his own goods and goods stored with him, and even if the owner of the stored goods did
not request or know of the insurance, and did not ratify it before the payment of the loss,
On and prior to June 6, 1920, Benita Quiogue de V. del Rosario, whom we will hereafter yet it has been held by a reputable court that the warehouseman is liable to the owner of
call Mrs. Del Rosario, was the owner of a bonded warehouse situated in the City of such stored goods for his share. (Snow vs. Carr [1878], 61 Ala., 363; 32 Am. Rep., 3;
Manila. She was engaged in the business of a warehouse keeper, and stored copra and Broussard vs.South Texas Rice Co., [1910], 103 Tex., 535; Ann. Cas., 1913-A, 142, and
other merchandise in the said building. Among the persons who had copra deposited in note; Home Insurance Co. of New York vs. Baltimore Warehouse Co. [1876], 93 U. S.,
the Del Rosario warehouse was Froilan Lopez, the holder of fourteen warehouse receipts 527.)
in his own name, and the name of Elias T. Zamora. (Exhibits C, D, and R.)
Moreover, it has not escaped our notice that in two documents, one the agreement for
The warehouse receipts, or negotiable warrants, or quedans (as they are variously arbitration, and the other the statement of claim of Mrs. Del Rosario, against the insurance
termed) of Lopez named a declared value of P107,990.40 (Exhibits L-1 to L-13). The companies, she acknowledged her responsibility to the owners of the stored merchandise,
warehouse receipts provided: (1) For insurance at the rate of 1 per cent per month on the against risk of loss by fire. (Exhibits B and C-3.) The award of the arbitrators covered not
declared value; (2) the company reserves to itself the right to raise and/or lower the rates alone Mrs. Del Rosario's warehouse but the products stored in the warehouse by Lopez
of storage and/or of insurance on giving one calendar month's notice in writing; (3) this and others.
warrant carries no insurance unless so noted on the face hereof, cost of which is in
addition to storage; (4) the time for which storage and/or insurance is charged is thirty (30) Plaintiff's rights to the insurance money have not been forfeited by failure to pay the
days; (5) payment for storage and/or insurance, etc., shall be made in advance, and/or insurance provided for in the warehouse receipts. A preponderance of the proof does not
within five (5) days after presentation of bill. It is admitted that insurance was paid by demonstrate that the plaintiff ever ordered the cancellation of his insurance with the
Lopez to May 18, 1920, but not thereafter. defendant. Nor is it shown that the plaintiff ever refused to pay the insurance when the
bills were presented to him, and that notice of an intention to cancel the insurance was
Mrs. Del Rosario secured insurance on the warehouse and its contents with the National ever given the plaintiff.
Insurance Co., Inc., the Commercial Union Insurance Company, the Alliance Insurance
Company, the South British Insurance Co., Ltd., and the British Traders Insurance Co., The record of the proceedings before the board of arbitrators, and its report and findings,
Ltd., in the amount of P404,800. All the policies were in the name of Sra. Benita Quiogue were properly taken into consideration by the trial court as a basis for the determination of
de V. del Rosario, with the exception of one of the National Insurance Company, Inc., for the amount due from the defendant to the plaintiff. In a case of contributing policies,
P40,000, in favor of the Compañia Coprera de Tayabas. (Exhibits N, O, P, R-1 to R-4.) adjustments of loss made by an expert or by a board of arbitrators may be submitted to
the court not as evidence of the facts stated therein, or as obligatory, but for the purpose
The warehouse of Mrs. Del Rosario and its contents were destroyed by fire on June 6, of assisting the court in calculating the amount of liability. (Home Insurance
1920. The warehouse was a total loss, while of the copra stored therein, only an amount Co. vs. Baltimore Warehouse Co., supra.)
equal to P49,985 was salvaged.
Counsel for the defendant have dwelt at length on the phraseology of the policies of the
Following an unsuccessful attempt by Henry Hunter Bayne, Fire Loss Adjuster, to effect a National Insurance Company, Inc. Special emphasis has been laid upon one policy
settlement between the insurance companies and Mrs. Del Rosario, the latter, on August (Exhibit 9) in the name of the Compañia Coprera de Tayabas. In this connection it may be
24, 1920, authorized Attorney F. C. Fisher to negotiate with the various insurance said that three members of the court, including the writer of this opinion, have been
companies. (Exhibit A.) As a result, an agreement between Mrs. Del Rosario and the favorable impressed by this argument, and would have preferred at least to eliminate the
insurance companies to submit the matter to administration was executed in September, policy for which premiums were paid, not by Mrs. Del Rosario on behalf of Lopez and
1920. (Exhibit B.) Mrs. Del Rosario laid claim before the arbitrators, Messrs. Muir and others, but by Compañia Coprera de Tayabas. A majority of the court, however, believe
Campbell, to P419,683.95, and the proceeds of the salvage sale. The arbitrators in their that all the assets should be marshalled and that the plaintiff should receive the benefit
report allowed Mrs. Del Rosario P363,610, which, with the addition of the money received accruing from the gross amount realized from all the policies. Consequently, no deduction
from the salvaged copra amounting to P49,985, and interest, made a total of P414,258, for this claim can be made.
collected by her from the companies. (Exhibits E, F, G, H, and Q.)
The remaining contention of the defendant that the plaintiff cannot claim the benefits of the
Mrs. Del Rosario seems to have satisfied all of the persons who had copra stored in her agency without sharing in the expenses, is well taken. Although the plaintiff did not
warehouse, including the stockholders in the Compañia Coprera de Tayabas (whose expressly authorize the agreement to submit the matter to arbitration, yet on his own
stock she took over), with the exception of Froilan Lopez, the plaintiff. Ineffectual attempts theory of the case, Mrs. Del Rosario was acting as his agent in securing insurance, while
by Mrs. Del Rosario to effect a compromise with Lopez first for P71,994, later raised to he benefits from the amicable adjustment of the insurance claims. As no intimation is
P72,724, and finally reduced to P17,000, were made. (Exhibits Y, 1, 3, 4, 6, 7, 8, 12.) But made that the expenses were exorbitant, we necessarily accept the statement of the same
Lopez stubbornly contended, or, at least, his attorney contended for him, that he should appearing in Exhibits Q and 8.
receive not a centavo less than P88,595.43. (Exhibits 4, 5.)
Of the insurance money, totalling P414,258, P382,558 was for copra and the remainder
PLAINTIFF'S APPEAL for buildings, corn, etc. The expenses for collecting the P414,258 totalled P33,600.
Plaintiff, by means of his assignment of error, lays claim to P88,595.43 in lieu of 382,558/414,258 of 33,600 equals P31,028.85, the proportionate part of the expenses
P88,495.21 allowed by the trial court. The slight difference of P100.22 is asked for so that with reference to the copra. Of the expenses amounting, as we have said, to P31,028.85,
plaintiff can participate in the interest money which accrued on the amount received for plaintiff would be liable for his proportionate share or 88,595.43/382,558.00 of P31,028.85
the salvaged copra. (Exhibits EE and FF.) Defendant makes no specific denial of this or P7,185.875.
claim. We think the additional sum should accrue to the plaintiff. The parties finally agree that the plaintiff at the time of the fire was indebted to the
Plaintiff's second and third assignment of error present the point that the defendant has defendant for storage and insurance in the sum of P315.90.
fraudulently — and even criminally — refrained from paying the plaintiff, and that the JUDGMENT
plaintiff should recover interest at the rate of 12 per cent per annum. We fail to grasp
plaintiff's point of view. The defendant has not sought to elude her moral and legal In resume, the result is to sustain plaintiff's first assignment of error and to overrule his
obligations. The controversy is merely one which unfortunately all too often arises second and third assignments of error, to overrule defendant's assignment of error 1, 2, 3,
and 4 in toto and to accede to defendant's assignments of error, 5, 6, and 7 in part. If our
between litigious persons. Plaintiff has exactly the rights of any litigant, equally situated,
and no more. mathematics are correct, and the amounts can be figured in several different ways,
plaintiff is entitled to P88,595.43 minus P7,185.88, his share of the expenses, minus
It has been the constant practice of the court to make article 1108 of the Civil Code the P315.90, due for insurance and storage, or approximately a net amount of P81,093.65,
basis for the calculation of interest. Damages in the form of interest at the rate of 12 per with legal interest. This sum the defendant must disgorge.
cent, as claimed by the plaintiff, are too remote and speculative to be allowed. The
deprivation of an opportunity for making money which might have proved beneficial or Wherefore, judgment is modified and the plaintiff shall have and recover from the
might have been ruinous is of too uncertain character to be weighed in the even balances defendants the sum of P81,093.65, with interest at 6 per cent per annum from May 13,
of the law. (Civil Code, art. 1108; Gonzales Quiros vs. Palanca Tan-Guinlay [1906], 5 1921, until paid. Without special finding as to costs in either instance, it is so ordered.
Phil., 675; Tin Fian vs. Tan [1909], 14 Phil., 126; Sun Life Insurance Co. of
Canada vs. Rueda Hermanos & Co. and Delgado [1918], 37 Phil., 844; Scævola, Codigo
Civil, vol. 19, p. 576; 8 R. C. L., 463; 17 C. J., 864.)
DEFENDANT'S APPEAL
Counsel for defendant have adroitly and ingeniously attempted to avoid all liability.
However, we remain unimpressed by many of these arguments.lawph!l.net
G.R. No. L-22201 January 12, 1925 construction of the south cemetery on the site here indicated as the conditions of the said
site are appropriate for the purpose."
JACOBO ZOBEL, ET AL., plaintiffs-appellants,
vs. On September 10, 1920, the report of the committee was received by the Municipal Board
THE CITY OF MANILA, defendant-appellant. and a resolution of the following tenor was adopted:
Fisher, DeWitt, Perkins and Brady for plaintiffs-appellants. Endorsement of the committee on cemeteries recommending the approval of
City Fiscal Guevara and Araneta and Zaragoza for defendant-appellant. the site selected by the Mayor for the south cemetery situated at the San
Pedro Macati Estate, containing approximately twenty-five hectares. The
STREET, J.: recommendation is approved and it is ordered that the matter be returned to
This action was instituted in the Court of First Instance of the City of Manila on May 24, the Mayor inviting his attention to this approval.
1923, by the minors Jacobo Zobel, Alfonso Zobel, and Mercedes Zobel, under the After the adoption of this resolution, on September 23, 1920, the Honorable Ramon J.
guardianship of Fernando Zobel, to recover of the City of Manila the amount of the first Fernandez, at that time Mayor of the City of Manila, and acting on its behalf, and Mr.
two installments of the purchase price of a tract of land located in the Province of Rizal Enrique Zobel, as guardian of the appellees, acting on their behalf, entered into a
near the corporate limits of the City of Manila, which has been conveyed by the guardian preliminary contract in writing, prepared by the city fiscal of the City of Manila, embodying
of the minor-plaintiffs by deed (Exhibit E) dated 21st of February, 1922, said installments therein the terms of the agreement under which the City of Manila was to buy and the
amounting respectively to P41,666.66 and with interest upon the first installment from May appellees were to sell the tract of land in question. (Exhibit C.)
21, 1922, and upon the second from the date of the making of the contract. Upon hearing
the cause the trial judge gave judgment in favor of the plaintiffs to recover both the On December 10, 1920, the Municipal Board of Manila adopted a resolution requesting
principal sums claimed, amounting to P83,333.32, with interest upon only one installment authority pursuant to Act No. 2894 to issue bonds for the construction of works and
at the rate of five per centum per annum. From this judgment the plaintiffs appealed from permanent improvements in the amount of P5,500,000. This resolution was duly
so much of the decision as failed to allow interest on both installments at the rate claimed approved, the bonds mentioned were issued and sold, and on February 21, 1922, there
in the complaint, while the defendant appealed from so much of the judgment as was was an unexpended balance from the proceeds of these bonds, amounting to
favorable to the plaintiffs. For convenience in the disposition of the controverted points, P1,341,994.35, which was available to defray the cost of the south cemetery project.
the appeal of the defendant will first be considered.
The preliminary contract bears date of September 23, 1920; but on account of delay in the
It appears that for several years the responsible officials of the City of Manila have preparation of the plans and technical description of the property necessary to make
appreciated the necessity for the establishment of a cemetery near the city and on the possible its transfer under the Land Registration Act, it was not until February, 1922, that
south side of the Pasig River. Admittedly the only tract of land available for this purpose the final deed of conveyance (Exhibit E) was executed.
consists of a part of the Hacienda San Pedro Macati, belonging to the plaintiffs, who are
minors. This estate lies in the Province of Rizal, beyond the corporate limits of the city, but On February 20, 1922, the Municipal Board of Manila adopted a resolution (Resolution
one of its corners juts into the southern, or southeastern suburbs of the city, in such No. 31, series of 1922) making an appropriation in the amount of P180,000 from the public
manner as to bring the desired tract close to populous centres. The hacienda, it may be works and permanent improvements bond issue fund of the city for the purpose of the
stated, has never been built upon improved for city purposes and forms a solid block, south cemetery. This resolution was approved by the Secretary of the Interior in
practically untraversed by public streets or roads. Owing to the character of the subsoil the accordance with the provisions of section 1 of Act No. 2894.
land has little value for agricultural purposes, which is the only use to which it has The day after Resolution No. 31 was adopted, the appellees' guardian, acting on their
heretofore been put; and it is taxed in the Province of Rizal on the low basis of agricultural
behalf, with the approval of the Court of First Instance of the City of Manila, and the
land. Honorable Ramon J. Fernandez, acting on behalf of the City of Manila, executed a final
In February, 1920, the Municipal Board of the City of Manila passed an ordinance (No. deed of sale of the land in question. (Exhibit E.) This deed was drafted under the direction
726) appropriating the sum of P703,750 to be used for "the establishment of a cemetery in of the city fiscal of the City of Manila. On February 24, 1922, said deed was filed for record
the south district of Manila and the acquisition of the land necessary therefor." with the register of deeds of the Province of Rizal, together with appellees' certificates of
title. Thereupon transfer certificates of title were duly issued to the City of Manila as
In consequence of the passage of this resolution the Honorable Ramon J. Fernandez, at owner.
that time the Mayor of the City, entered into negotiations with the guardian of the
appellees, the result of which was a letter, written July 1, 1920, in which the appellees After the execution and delivery to it of the deed of sale to the land in question, and the
offered to sell to the city upon the terms therein set forth twenty-five hectares of the San issuance to it of the certificates of title thereto under the Land Registration Act, the City of
Pedro Macati Estate for cemetery purposes (Exhibit A). Manila took possession of the property and placed boundary monuments on the corners
of the land conveyed to it to mark the limits thereof.
Upon receipt of this letter the Mayor endorsed it for recommendation and comment to the
city engineer, and made request in writing of the Honorable Francis Burton Harrison, then By the terms of the conveyance the purchase price of P250,000 was to be paid in six
Governor-General, that he designate some one to continue negotiations for the purchase installments of P41,666.66 each, the first to be made three months after the date of the
of the land. execution of the deed, and the remainder in yearly installments thereafter. The first
installment was not to bear interest but the remaining installments were to bear interest at
On July 10, 1920, the city engineer returned the papers to the Mayor, stating that in his the rate of five per centum per annum. On the date of the execution of the deed of sale,
opinion the site selected was "the best location available and the only one suitable for ample funds were available to meet the payments, as appears from a statement in the
cemetery purposes on the south side of the city." record signed by the chief of the department of finance of the City of Manila.
On July 23, 1920, Governor-General Harrison appointed the city engineer, Mr. Artiaga, a In anticipation of the falling due of the first installment of the purchase price, the city
committee of one to negotiate for the purchase of a tract of land to be used for the treasurer, on March 24, 1924, prepared and signed a warrant on the city depository for a
proposed south cemetery, whereupon the city engineer referred the communication of the sum sufficient to cover said installment. This warrant was then sent to the district auditor,
Mayor to the Director of Health, requesting his concurrence. On August 18, 1920, the one Crisanto Ticman, to be countersigned by him. Upon looking into the matter the fact
Director of Health returned the papers to the Mayor, concurring in the recommendation came to Ticman's attention that the land which was being acquired by the city was
that the tract of land in question be purchased. Thereafter the city engineer reported to the assessed on the tax books of the Province of Rizal as uncultivated agricultural land, at a
Mayor that the proposed site was desirable and recommended its purchase at the rate of valuation of about sixty pesos per hectare. Observing the disparity between this valuation
one peso per square meter. On August 26, 1920, the city engineer sent to the Governor- and the price which the city had contracted to pay, Ticman refused to countersign the
General a copy of his report to the Mayor. warrant and addressed a letter to the Insular Auditor, E.M. Fullington, suggesting that the
sale should not be permitted to go through and observing that if the city would institute
Two or three days after the receipt of Mr. Artiaga's report, the Mayor referred the letter of condemnation proceedings it would surely get the land for very much less than the
offer and the other papers connected with the case, including the report of the city stipulated price of P250,000. The Insular Auditor approved the course taken by his
engineer, to the Municipal Board, requesting that the Board concur in his selection of the subordinate and reported the matter to Governor-General Wood, who, through his
San Pedro Macati site for the location of the proposed south cemetery. On August 31, secretary, appointed a committee of three, composed of Colonel C.E. Nathorst, of the
1920, the Municipal Board, at a meeting at which all the members were present, adopted Philippine Constabulary, Mr. M. del Rosario, district auditor for Rizal, and the city
unanimously a resolution which reads as follows: engineer, Mr. Artiaga, to investigate the matter and report to him. The result of the inquiry
Endorsement by the Mayor requesting concurrence of the Board regarding was that the majority of the committee expressed the view that not more than fifty
the land selected by his office for the proposed south cemetery, namely, a centavos per square meter should be paid for the land, while Artiaga maintained his
parcel of land of the San Pedro Macati Estate belonging to Mr. Enrique Zobel, former position that the price of one peso per square meter represented a reasonable
who is willing to sell it at the rate of one peso per square meter, apart from a valuation.
tract of land which he offers to cede gratuitously to give access to the The Nathorst report was forwarded to the Mayor by the secretary to the Governor-
cemetery from Calle Vito Cruz, referred to the committee on cemeteries for General, through the office of the Insular Auditor, with the indorsement, by authority of the
comment and recommendation. Governor-General, that the action of the Auditor in refusing to countersign the warrant in
In accordance with this resolution, the matter was referred to the committee on cemeteries any amount in excess of fifty centavos per square meter was approved.
of the Municipal Board of the City of Manila. Under date of September 10, 1920, that Meanwhile on May 21, 1922, the first installment of the purchase price of the land had
committee returned the papers to the Municipal Board "recommending the approval of the fallen due, and on June 7, 1922, Mr. Zobel, guardian of the appellees, addressed a letter
to the Mayor, reminding him that payment had not been made. On August 7, 1922, the
Mayor replied to Mr. Zobel's letter, stating that while he recognized the obligation of the contract was made, Ordinance No. 726, appropriating the sum of P703,750 for the
city to carry out its contract, nevertheless, in view of the intervention of the Governor- proposed cemetery was in force. This in our opinion is a sufficient compliance with the
General in the matter, he would take no further action. The result was that payment of the legal requirement; and the circumstance that before the definitive contract was made this
installment then due was not effected, and a similar default occurred later with respect to money was reverted to the general funds of the city did not have the effect of nullifying
the second installment. said contract. The question whether the contract is valid depends upon the situation
existing at the time the first agreement was made.
This cause was tried in the lower court upon an agreed statements of fact, necessarily
somewhat elaborate in its details. After the cause had been decided an error was The second question to be considered has reference to the applicability of section 607 of
discovered in the transcription of Resolution No. 31, series of 1922, into the agreed the Administrative Code to contracts made by the City of Manila. In the second paragraph
statements of fact, which was this: In the authentic resolution there appears a paragraph of said section it is declared that no contract involving the expenditure by any province,
cancelling Resolution No. 276, series of 1921, but in the transcription of said resolution municipality, township, or settlement of two thousand pesos or more shall be entered into
into the agreed statements the first two figures of the cancelled resolution were so or authorized until the treasurer of the political division concerned shall have certified to
transposed as to make it appear that Ordinance No. 726 was cancelled. It so happened the officer entering into such contract that funds have been duly appropriated for such
that both Ordinance No. 726 and Resolution No. 276 related in part to the same subject, purpose and that the amount necessary to cover the proposed contract is available for
namely, the south cemetery; with the result that no one concerned in the litigation expenditure on account thereof. It is admitted that no such certificate was made by the
discovered the error, and the cause was tried in the lower court on the erroneous treasurer of Manila at the time the contract now in question was made. We are of the
supposition that Ordinance No. 726 had been repealed in so far as relates to south opinion that the provision cited has no application to contracts of a chartered city, such as
cemetery by said Resolution No. 31, series of 1922. This error appears to have been first the City of Manila. Upon examining said provision (sec. 607) it will be found that the term
discovered by the attorneys for the appellees after the cause was brought to this court chartered city, or other similar expression, such as would include the City of Manila, is not
upon appeal, and investigations were conducted by them which revealed the further fact used; and it is quite manifest from the careful use of terms in said section that chartered
that on May 10, 1921, the Municipal Board had passed an ordinance (No. 966) reverting cities were intended to be excluded. In this connection the definitions of "province,"
to the general funds the unexpended balance of the amount theretofore appropriated for "municipality," and "chartered city," given in section 2 of the Administrative Code are
the south cemetery in Ordinance No. 726. instructive. The circumstance that for certain purposes the City of Manila has the status
both of a province and a municipality (as is true in the distribution of revenue) is not
In view of the discovery of the error above-mentioned the appellees, on July 12, 1924, inconsistent with this conclusion.
filed a motion in this court, asking to be relieved from the erroneous stipulation upon the
point mentioned and that the court should admit as evidence the affidavits showing the The next contention is that the contract in question is void because the approval of the city
facts to be as stated in the motion. The motion was opposed by the appellant, and this council was not expressed in the form of an ordinance. The provisions of law applicable
court deferred decision on the motion until the case should be considered on the merits. upon this point are found partly in section 2434, subsection (i), as amended by section 4
As it now becomes proper to pass upon the matter, we will say that while it is not clear of Act No. 2774 of the Philippine Legislature, and partly in section 2443 of the
that the error alluded to affects the fundamentals of the case, yet the mistake is obvious Administrative Code. Subsection (i) of section 2434, as it originally stood in the
and the situation is one where the appellees are entitled to be relieved from any prejudicial Administrative Code, among other things declared that the Mayor shall represent the city
results. Furthermore, it is desirable for the court to be able to state the facts with in all its business matters and sign on its behalf all its bonds, contracts and obligations
truthfulness. We shall therefore assume that the records stand corrected, with leave to the made in accordance with law or lawful ordinance or resolution. The corresponding
appellant's attorneys to show that the facts stated in the motion are erroneous, in the provision in the amendatory Act (No. 2774) makes it his duty to represent the city in all its
contingency that they desire to contest the same. business matters and sign on its behalf all its bonds, contracts and obligations made in
accordance with the laws or ordinances. Section 2443 of the Administrative Code, as it
In dismissing this matter we may observe that the general situation with reference to the now and at all times has stood, clearly recognizes the power of the board to
appropriations available for the south cemetery may be summed up in the statement that adopt resolutions creating liability, and in the same section the Mayor is given authority to
at the time the preliminary contract (Exhibit C) was executed on September 23, 1920, veto such resolutions.
there existed an appropriation of the general funds of the city under Ordinance No. 726, of
the sum of P703,750 available for the purpose of establishing the south cemetery; while at Now, from the omission of the word "resolution" from the amendment of subsection (i) of
the time the definitive contract of sale (Exhibit E) was made, on February 21, 1922, there section 2434, it is argued that it was the intention of the Legislature to suppress the power
existed an appropriation from the public works and permanent improvements bond issue of the Municipal Board to authorize the making of contracts by resolution. The validity of
fund in the amount of P180,000 for the same purpose, though the appropriation from the this contention cannot be admitted; for even supposing that the Legislature may have
general funds was then no longer available. entertained the purpose attributed to it in amending subsection (i) of section 2434, this
intention was not fully accomplished by said amendment alone, the other provision (sec.
The opposition of the auditing department to the carrying of this contract into effect 2443) having remained without alteration. But we incline to the view that the expression
undoubtedly had its origin in a desire on the part of the district auditor to protect the "laws or ordinances," found in the amendment of subsection (i) of section 2434, is there
interests of the city, based on the conviction that if the contract could be nullified and used in a sense broad enough to include resolutions. The reason for this is that we find
condemnation proceedings instituted the amount to be paid by the city would be the same verbal change in two other paragraphs of the same section, in respect to which
considerably less than that named in the contract. Conceding the propriety of this point of there can be no doubt that resolution was intended to be included in the broader
view, the consideration is one that in no wise affects the legal aspects of the case; and it is expression. Thus, in subsection (a) of section 2434 of the Administrative Code, it was
but fair to say that the terms of purchase were apparently as favorable to the city as could made the duty of the Mayor to see that the "laws, ordinances and resolutions" should be
be arranged by negotiation with the representative of the owners. At any rate the good faithfully executed and enforced. In subsection (m) of the same section it was made the
faith of the city officials concerned in the deal is not called in question. We observe duty of the Mayor "to perform such other executive duties as may be prescribed by law or
furthermore that in the Nathorst report the principal reason assigned for estimating the be required of him by ordinance or resolution of the board." In the two corresponding
price that should be paid by the city at fifty centavos per square meter, instead of one provisions of the amendatory Act (No. 2774) the word "resolution," or "resolutions," is
peso per square meter as agreed, is that the construction by the city of the road to the omitted and the inclusive expression "laws and ordinances" or "law or ordinance" is used.
cemetery will considerably increase the commercial value of the remainder of the estate. Can it be maintained that the intention of the Legislature in making these changes was to
Considered as a basis for the proposed reduction in the price of the land to be taken, this relieve the Mayor of all executive responsibility as to the enforcement of resolutions?
suggestion is only partially sound. Even in condemnation proceedings the law does not Certainly not: he has the same duty to enforce lawful resolutions as to enforce any law or
unqualifiedly permit the offsetting of incidental benefits against the actual value of the ordinance. Yet if the argument relied upon by the appellant is valid as to the effect of the
property taken. The rule, we take it, is that incidental benefits may be set off against omission of the word resolution in subsection (i), it would necessarily follow that the Mayor
incidental damage but not against the basic value of the property. Otherwise an owner has no administrative responsibility whatever as to the enforcement of resolutions.
could be deprived of his property without any compensation at all, as where, for instance, It is next insisted that the resolution of the Board dated September 10, 1920, approving
only a small part of an entire parcel is taken for certain uses, with incidental benefit to the the Mayor's action with respect to the cemetery site, was intended merely as an
remainder. It follows that, even upon the face of the report itself, the fact that the agreed expression by the Board of its approval of the location of the land chosen for the site,
price is excessive is not demonstrated; and it is to be remembered that by the deed without any commitment as to the terms upon which the property was to be acquired. We
conveying the cemetery site to the city the plaintiffs have gratuitously transferred many are of the opinion that this is not a fair interpretation of the resolution. At the time the
thousands of square meters to the city for the construction of a road to the cemetery, with resolution was adopted, the Board had before it the offer made by the guardian of the
the result that if this land be included in the estimate the price of the whole is less than plaintiffs, stating the terms upon which the sale would be made. This offer was
eighty centavos per square meter. The circumstance that the land in question is assessed accompanied by the favorable report and recommendation of the city engineer, the
on the tax books of the Province of Rizal at sixty pesos per hectare is of little moment approval of the proposed site by the Director of Health, and the recommendation of the
when we come to consider the value of the land in relation with its propinquity to the City committee on cemeteries of the Board that the cemetery be constructed on the site
of Manila and its utility for the purpose for which it is inevitably destined to be used. indicated. The indorsement by which the Board, with all members present, referred the
The brief of the defendant as appellant raises several questions of a purely legal nature, matter to this committee expressly recites that the price to be paid for the land was at the
which will be discussed in the order of their logical sequence; and we shall first consider rate of one peso per square meter, apart from the tract to be ceded gratuitously to give
that which relates to the antecedent appropriation necessary before a binding contract can access to the cemetery. In the light of these facts it is impossible to suppose that any
be made requiring the expenditure of public funds. The provision of law here applicable is member of the Board was unaware of the conditions upon which the land was to be
found in section 606 of the Administrative Code, wherein it is declared that no contract acquired. Again, it is obvious that the matter before the Board was not the mere question
involving the expenditure of public funds shall be made until there is an appropriation of a choice between one or more available tracts of land then at the disposal of the city. It
therefor, the unexpended balance of which, free from other obligations, is sufficient to had reference to the only tract available for cemetery purposes. There was no possible
cover the proposed expenditure. As we have already seen, at the time the preliminary
choice as between competitive lots, and the sole question was whether this lot was As already stated, the first installment fell due on May 21, 1922, and extrajudicial demand
acceptable under the terms stated in the offer. for payment appears to have been made in a letter dated June 7, 1922, from the guardian
of the plaintiffs addressed to the Mayor. Under the first paragraph of article 1100 of the
Considered as a mere expression of the preference of the Board as to the location of the Civil Code and under article 1108 of the same Code, interest should be allowed upon this
cemetery, the resolution was wholly without efficacy and could not advance the installment at the rate of six per centum per annum. Under section 510 of the Code of Civil
negotiations in the slightest degree. We are of the opinion that the intention was to Procedure, the interest thus accruing must be consolidated with the principal as of the
approve the construction of the cemetery on the site chosen and on the terms expressed date of the judgment of the lower court; after which interest upon the whole shall be
in the offer. As a consequence the Mayor was clothed with authority to execute the computed at the same rate.
contract which he subsequently made.
With respect to the second installment interest must be allowed at the contract rate of five
The attorneys for the appellant further insist that, even supposing the resolution to have per centum per annum from the date of the execution of the final deed of sale, or February
constituted a sufficient approval of the contract in the terms expressed in the offer, 21, 1922; and under article 1109 of the Civil Code the interest that had accrued up to the
nevertheless the efficacy of the resolution was destroyed by the subsequent introduction date of the filing of the complaint (May 24, 1923) must be consolidated as of that date with
of material changes into the agreement. In this connection reference is made to a portion the capital, after which the whole shall bear interest at the contract rate of five per centum
of clause V of the deed, in which it is declared that the land shall be used exclusively for a per annum until paid. Where interest is contracted for at a given rate the contract
cemetery to be known as South Cemetery. The insertion of this term in the contract is obligation to pay interest is not merged in the judgment but remains in full force until the
supposed to constitute a material variance from the offer. We are unable to agree with this debt is paid. The circumstance that the rate here stipulated was less than the lawful rate
contention, as the clause to which exception is taken seems to be a mere unfolding of does not alter the case.
what was implicit, if not actually expressed in the offer. The letter of offer (Exhibit A) used
the name South Cemetery to identify the proposed burial ground, and the fact that the In connection with liability for interest it may be well to point out that section 510 of the
land was intended solely for cemetery purposes was patent throughout the negotiations. It Code of Civil Procedure is applicable only to debts and claims with respect to which no
will be borne in mind that the city has no authority to acquire land for speculative or stipulation for interest has been made, and article 1109 of the Civil Code, providing for
commercial uses, and as no other purpose for this acquisition has been suggested than interest upon interest, is applicable only to obligations containing a stipulation for interest.
for the establishment of a cemetery, we think that no material mistake was committed by Furthermore, it will be noted that, though section 510 of the Code of Civil Procedure
the city fiscal in stating in the deed that the property should be used exclusively for that provides that interest shall be added "until the date of the final judgment," this is not to be
purpose. understood as inhibiting the collection of interest thereafter accruing until the judgment is
paid. A demand established by judgment must be understood as bearing interest whether
Another reason advanced for supposing the contract for the purchase of this property to expressly so stated or not. Finally, it hardly needs be said, a municipal corporation does
be invalid, or at least unenforcible, is that the Insular Auditor has refused to countersign not enjoy immunity from liability for interest, when assessed as damages for the
the warrant for the first installment of the purchase price; and it is insisted for the nonpayment of a debt, to the same extent as the general government.
defendant that this action on his part is conclusive against the plaintiffs. Their sole
recourse, so it is claimed, is, or rather was, by way of administrative appeal from the Our conclusion is that no error was committed by the trial court in giving judgment in favor
action of the Auditor to the Governor-General. The suggestion is in our opinion without of the plaintiffs upon both causes of action, but the amount awarded must be modified to
merit. The general provisions of law defining the jurisdiction and powers of the Auditor and conform to the rules above stated with respect to the computation of interest, with the
which, if literally construed, would seem to make him absolute arbiter of all claims of any result that the plaintiffs shall recover of the defendant, upon the first cause of action, the
sort against all branches of the Government must be considered to be qualified as regards sum of P45,652.84, as of the date of January 11, 1924, with interest thereafter at the rate
the contract rights of persons dealing with the city by the more specific provisions of six per centum per annum until the judgment shall be paid; and upon the second cause
declaring how and by whom contracts can be made which will be binding on it. It was not of action the sum of P44,283.04, as of the date of May 24, 1923, with interest thereafter at
intended that the Auditor should possess a general veto power over all city contracts, and the rate of five per centum per annum until the judgment shall be paid. The plaintiffs will
his refusal to countersign the warrant referred to is of no moment in this action to enforce also recover costs of both instances. As thus modified, the judgment is affirmed. So
the legal liability of the city. ordered.
Finally, exception is taken to the refusal of the trial court to require the Insular Auditor to Malcolm, Villamor, and Ostrand, JJ., concur.
be brought in as a party defendant. The course pursued by the court was in our opinion
correct. The action is based exclusively upon the legal liability of the city, and no relief is
sought against the Auditor. He was therefore not a necessary or even a proper party to
the action. Of course if the claim had been based upon an obligation of the Insular
Government, no action would have lain directly against the debtor, in the absence of its
consent to be sued. In such case the plaintiffs' only remedy would have been by the writ
of mandamus to compel the Auditor to countersign a warrant for the amount due. But the
debtor in this case is a municipal corporation, which does not enjoy the State's immunity
from suit, and the action can be maintained directly against it without the intervention of
the Auditor.
What has been said suffices to dispose of the contentions made in behalf of the defendant
as appellant, and we accordingly pass to the errors assigned in behalf of the plaintiffs as
appellants with respect to the matter of interest. The facts here pertinent are these: By the
final deed of sale, dated February 21, 1922, the city undertook to pay the total purchase
price of P250,000 in six installments. The first was in the amount of P41,666.70 payable
on May 21, 1922. The other five were in the amount of P41,666.66 each, successively
falling due on May 21, 1923, and on the same date in each succeeding year until all
should be paid.
The following stipulation with respect to interest is found in clause III of this contract:
Of the installments above stipulated, the first (which will fall due three months
after the execution of this writing) shall draw no interest; but the five later
installments shall draw interest at the rate of five per centum (5%) per annum,
payable to the creditors upon the date when they shall respectively fall due.
From this it will be seen that the agreement as to interest differs in case of the two
installments here sued on; and the situation with respect to each will therefore be dealt
with separately.
As to the first installment, which was to fall due at three months, it was stipulated that it
should bear no interest. The trial judge appears to have considered that this stipulation
deprived the plaintiffs of the right to interest after default, and no interest whatever was
allowed by him upon this installment. This was error. The stipulation that this installment
should draw no interest was made in the expectation that the obligation would be paid
upon the date stipulated. After default occurred the defendant became liable for interest as
damages regardless of the absence of any express stipulation for interest and regardless
of the statement that this installment should draw no interest. This statement in the
contract was evidently intended merely to govern the rights of the parties with respect to
interest for the three-month period between the making of the contract and the date when
the installment was to become due. With respect to the plaintiffs' right to interest after
default the situation is to be treated precisely as if nothing had been said about interest at
all.
G.R. No. L-59096 October 11, 1985 absence of express contract as to such rate of interest, shall be twelve (12%) per
cent per annum. This Circular shall take effect immediately. (Italics supplied)
PACITA F. REFORMINA and HEIRS OF FRANCISCO REFORMINA, petitioners,
vs. includes the judgment sought to be executed in this case, because it is covered by the
THE HONORABLE VALERIANO P. TOMOL, JR., as Judge of the CFI, Branch XI, phrase 2nd the rate allowed in judgments in the absence of express contract as to such
CEBU CITY, SHELL REFINING COMPANY (PHILS.), INC., and MICHAEL, rate of interest ... " in the aforequoted circular.
INC., respondents.
The petition is devoid of merit. Consequently, its dismissal is in order.
CUEVAS, J.:
Central Bank Circular No. 416 which took effect on July 29, 1974 was issued and
How much, by way of legal interest, should a judgment debtor pay the judgment creditor- promulgated by the Monetary Board pursuant to the authority granted to the Central Bank
is the issue raised by the REFORMINAS (herein petitioners) in this Petition for Review on by P.D. No. 116, which amended Act No. 2655, otherwise known as the Usury Law. The
certiorari of the Resolution of the Hon. respondent Judge Valeriano P. Tomol, Jr. of the amendment from which said authority emanated reads as follows—
then Court of First Instance of Cebu-Branch XI, issued in Civil Case No.
R-11279, an action for Recovery of Damages for injury to Person and Loss of Property. Section 1-a. The Monetary Board is hereby authorized to prescribe the maximum
rate or rates of interest for the loan or renewal thereof or the forbearance of any
The dispositive portion of the assailed Resolution reads as follows— money, goods or credits, and to change such rate or rates whenever warranted by
prevailing economic and social conditions: Provided, That such changes shall not
In light (sic) of the foregoing, the considered view here that by legal interest is be made oftener than once every twelve months.
meant six (6%) percent as provided for by Article 2209 of the Civil Code. Let a writ
of execution be issued. In the exercise of the authority herein granted, the Monetary Board may prescribe
higher maximum rates for consumer loans or renewals thereof as well as such loans
SO ORDERED.1 made by pawnshops, finance companies and other similar credit institutions
Petitioners' motion for the reconsideration of the questioned Resolution having been although the rates prescribed for these institutions need not necessarily be uniform.
denied, they now come before Us through the instant petition praying for the setting aside (Italics supplied)
of the said Resolution and for a declaration that the judgment in their favor should bear Acting pursuant to this grant of authority, the Monetary Board increased the rate of legal
legal interest at the rate of twelve (12%) percent per annum pursuant to Central Bank Circ. interest from that of six (6%) percent per annum originally allowed under Section I of Act
No. 416 dated July 29, 1974. No. 2655 to twelve (12%) percent per annum.
Hereunder are the pertinent antecedents: It will be noted that Act No. 2655 deals with interest on (1) loans; (2) forbearances of any
On June 7, 1972, judgment was rendered by the Court of First instance of Cebu in Civil money, goods, or credits; and (3) rate allowed in judgments.
Case No. R-11279, 2 the dispositive portion of which reads— The issue now is—what kind of judgment is referred to under the said law. Petitioners
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party maintain that it covers all kinds of monetary judgment.
defendants and against the defendants and third party plaintiffs as follows: The contention is devoid of merit.
Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay jointly The judgments spoken of and referred to are Judgments in litigations involving loans or
and severally the following persons: forbearance of any 'money, goods or credits. Any other kind of monetary judgment which
(a) ... 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
xxx xxx xxx granted to the Central Bank. The Monetary Board may not tread on forbidden grounds. It
cannot rewrite other laws. That function is vested solely with the legislative authority. It is
(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00 axiomatic in legal hermeneutics that statutes should be construed as a whole and not as a
which is the value of the boat F B Pacita Ill together with its accessories, fishing series of disconnected articles and phrases. In the absence of a clear contrary intention,
gear and equipment minus P80,000.00 which is the value of the insurance words and phrases in statutes should not be interpreted in isolation from one another. 4 A
recovered and the amount of P10,000.00 a month as the estimated monthly loss word or phrase in a statute is always used in association with other words or phrases and
suffered by them as a result of the fire of May 6, 1969 up to the time they are its meaning may thus be modified or restricted by the latter.5
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 Another formidable argument against the tenability of petitioners' stand are the whereases
P5,000.00 with costs against defendants and third party plaintiffs. of PD No. 116 w/c brought about the grant of authority to the Central Bank & w/c reads
thus—
On appeal to the then CA, the trial court's judgment was modified to reads as follows—
WHEREAS, the interest rate, together with other monetary and credit policy
WHEREFORE. the judgment appealed from is modified such that defendants- instruments, performs a vital role in mobilizing domestic savings and attracting
appellants Shell Refining Co. (Phils.), Inc. and Michael, Incorporated are hereby capital resources into preferred areas of investments;
ordered to pay ... The two (2) defendants- appellants are also directed to pay
P100,000.00 with legal interests from the filing of the complaint until paid as WHEREAS, the monetary authorities have recognized the need to amend the present
compensatory and moral damages and P41,000.00 compensation for the value of Usury. Law to allow for more flexible interest rate ceilings that would be more responsive
the lost boat with legal interest from the filing of the complaint until fully paid to to the requirements of changing economic conditions;
Pacita F. Reformina and the heirs of Francisco Reformina. The liability of the two
defendants for an the awards is solidary. WHEREAS, the availability of adequate capital resources is, among other factors, a
decisive element in the achievement of the declared objective of accelerating the growth
xxx xxx xxx of the national economy.
Except as modified above, the rest of the judgment appealed from is affirmed. The Coming to the case at bar, the decision herein sought to be executed is one rendered in
defendants-appellants shall pay costs in favor of the plaintiffs. Appellants Shell and an Action for Damages for injury to persons and loss of property and does not involve any
Michael and third party defendant Anita L. Abellanosa shall shoulder their respective loan, much less forbearances of any money, goods or credits. As correctly argued by the
costs. private respondents, the law applicable to the said case is Art. 2209 of the NCC which
reads—
SO ORDERED. 3
Art. 2209. If the obligation consists in the payment of a sum of money, and the
The said decision having become final on October 24, 1980, the case was remanded to debtor incurs in delay, the indemnity for damages, there being no stipulation to
the lower court for execution and this is where the controversy started. In the computation the contrary, shall be the payment of interest agreed upon, and in the absence of
of the "legal interest" decreed in the judgment sought to be executed, petitioners claim that stipulation, the legal interest which is six percent per annum.
the "legal interest" should be at the rate of twelve (12%) percent per annum, invoking in
support of their aforesaid submission, Central Bank of the Philippines Circular No. 416. The above provision remains untouched despite the grant of authority to the Central Bank
Upon the other hand, private respondents insist that said legal interest should be at the by Act No. 2655, as amended. To make Central Bank Circular No. 416 applicable to any
rate of six (6%) percent per annum only, pursuant to and by authority of Article 2209 of the case other than those specifically provided for by the Usury Law will make the same of
New Civil Code in relation to Articles 2210 and 2211 thereof. doubtful constitutionality since the Monetary Board will be exercising legislative functions
which was beyond the intendment of P.D. No. 116.
In support of their stand, petitioners contend that Central Bank Circular No. 416 which
provides — IN VIEW OF THE FOREGOING CONSIDERATIONS, and finding the instant petition to be
without merit, the same is hereby DISMISSED with costs against petitioners. SO
By virtue of the authority granted to it under Section 1 of Act 2655, as amended, ORDERED.
otherwise known as the "Usury Law" the Monetary Board in its Resolution No. 1622
dated July 29, 1974, has prescribed that the rate of interest for the loan or
forbearance of any money, goods, or credits and the rate allowed in judgments, in the
G.R. No. L-30771 May 28, 1984 their passage. Procedural laws are retrospective in that sense
and to that extent. 5
LIAM LAW, plaintiff-appellee,
vs. ... Section 24(d), Republic Act No. 876, known as the Arbitration
OLYMPIC SAWMILL CO. and ELINO LEE CHI, defendants-appellants. Law, which took effect on 19 December 1953, and may be
retroactively applied to the case at bar because it is procedural in
Felizardo S.M. de Guzman for plaintiff-appellee. nature. ... 6
Mariano M. de Joya for defendants-appellants. WHEREFORE, the appealed judgment is hereby affirmed, without pronouncement as to
costs.

MELENCIO-HERRERA, J.: SO ORDERED.

This is an appeal by defendants from a Decision rendered by the then Court of First
Instance of Bulacan. The appeal was originally taken to the then Court of Appeals, which
endorsed it to this instance stating that the issue involved was one of law.
It appears that on or about September 7, 1957, plaintiff loaned P10,000.00, without
interest, to defendant partnership and defendant Elino Lee Chi, as the managing partner.
The loan became ultimately due on January 31, 1960, but was not paid on that date, with
the debtors asking for an extension of three months, or up to April 30, 1960.
On March 17, 1960, the parties executed another loan document. Payment of the
P10,000.00 was extended to April 30, 1960, but the obligation was increased by
P6,000.00 as follows:
That the sum of SIX THOUSAND PESOS (P6,000.00), Philippine
currency shall form part of the principal obligation to answer for
attorney's fees, legal interest, and other cost incident thereto to
be paid unto the creditor and his successors in interest upon the
termination of this agreement.
Defendants again failed to pay their obligation by April 30, 1960 and, on September 23,
1960, plaintiff instituted this collection case. Defendants admitted the P10,000.00 principal
obligation, but claimed that the additional P6,000.00 constituted usurious interest.
Upon application of plaintiff, the Trial Court issued, on the same date of September 23,
1960, a writ of Attachment on real and personal properties of defendants located at
Karanglan, Nueva Ecija. After the Writ of Attachment was implemented, proceedings
before the Trial Court versed principally in regards to the attachment.
On January 18, 1961, an Order was issued by the Trial Court stating that "after
considering the manifestation of both counsel in Chambers, the Court hereby allows both
parties to simultaneously submit a Motion for Summary Judgment. 1 The plaintiff filed his
Motion for Summary Judgment on January 31, 1961, while defendants filed theirs on
February 2, 196l. 2
On June 26, 1961, the Trial Court rendered decision ordering defendants to pay plaintiff
"the amount of P10,000.00 plus the further sum of P6,000.00 by way of liquidated
damages . . . with legal rate of interest on both amounts from April 30, 1960." It is from this
judgment that defendants have appealed.
We have decided to affirm.
Under Article 1354 of the Civil Code, in regards to the agreement of the parties relative to
the P6,000.00 obligation, "it is presumed that it exists and is lawful, unless the debtor
proves the contrary". No evidentiary hearing having been held, it has to be concluded that
defendants had not proven that the P6,000.00 obligation was illegal. Confirming the Trial
Court's finding, we view the P6,000.00 obligation as liquidated damages suffered by
plaintiff, as of March 17, 1960, representing loss of interest income, attorney's fees and
incidentals.
The main thrust of defendants' appeal is the allegation in their Answer that the P6,000.00
constituted usurious interest. They insist the claim of usury should have been deemed
admitted by plaintiff as it was "not denied specifically and under oath". 3
Section 9 of the Usury Law (Act 2655) provided:
SEC. 9. The person or corporation sued shall file its answer in
writing under oath to any complaint brought or filed against said
person or corporation before a competent court to recover the
money or other personal or real property, seeds or agricultural
products, charged or received in violation of the provisions of this
Act. The lack of taking an oath to an answer to a complaint will
mean the admission of the facts contained in the latter.
The foregoing provision envisages a complaint filed against an entity which has committed
usury, for the recovery of the usurious interest paid. In that case, if the entity sued shall
not file its answer under oath denying the allegation of usury, the defendant shall be
deemed to have admitted the usury. The provision does not apply to a case, as in the
present, where it is the defendant, not the plaintiff, who is alleging usury.
Moreover, for sometime now, usury has been legally non-existent. Interest can now be
charged as lender and borrower may agree upon. 4 The Rules of Court in regards to
allegations of usury, procedural in nature, should be considered repealed with retroactive
effect.
Statutes regulating the procedure of the courts will be construed
as applicable to actions pending and undetermined at the time of
G.R. No. L-46591 July 28, 1987
BANCO FILIPINO SAVINGS and MORTGAGE BANK, petitioner,
vs.
HON. MIGUEL NAVARRO, Presiding Judge, Court of First Instance of Manila,
Branch XXXI and FLORANTE DEL VALLE, respondents.
MELENCIO-HERRERA, J.:
This is a Petition to review on certiorari the Decision of respondent Court, the dispositive
portion of which decrees:
WHEREFORE, the Court finds that the enforcement of the escalation clause
retroactively before the lapse of the 15-year period stated in the promissory note is
contrary to Sec. 3 of Presidential Decree No. 116 and Sec. 109 of Republic Act No.
265, and hereby declares null and void the said escalation clause. The respondent
Banco Filipino Savings and Mortgage Bank is hereby ordered to desist from
enforcing the increased rate of interest on petitioner's loan.
SO ORDERED.
The facts are not in dispute:
On May 20, 1975, respondent Florante del Valle (the BORROWER) obtained a loan
We trust the above guidelines would help you resolve your problems regarding additional
secured by a real estate mortgage (the LOAN, for short) from petitioner BANCO
FILIPINO in the sum of Forty-one Thousand Three Hundred (P41,300.00) Pesos, payable interest charges of Banco Filipino.
1
by banks and non-banks performing quasi-banking functions on loans already existing as
of January 3, 1976, in the light of Central Bank Circulars Nos. 492-498:
l. Only banks and non-bank financial intermediaries performing quasi-banking
functions may increase interest rates on loans already existings of January 2, 1976,
provided that:
a. The pertinent loan contracts/documents contain escalation clauses expressly
authorizing lending bank or non-bank performing quasi-banking functions to
increase the rate of interest stipulated in the contract, in the event that any law or
Central Bank regulation is promulgated increasing the maximum interest rate for
loans; and
b. Said loans were directly granted by them and the remaining maturities thereof
were more than 730 days as of January 2, 1976; and
2. The increase in the rate of interest can be effective only as of January 2, 1976 or on
a later date.
The foregoing guidelines, however, shall not be understood as precluding affected parties
from questioning before a competent court of justice the legality or validity of such
escalation clauses.

and to be amortized within fifteen (15) years at twelve (12%) per cent interest annually. Very truly yours,
Hence, the LOAN still had more than 730 days to run by January 2, 1976, the date when
(Sgd.) MERCEDES C. PAREDES
CIRCULAR No. 494 was issued by the Central Bank. Director
Stamped on the promissory note evidencing the loan is an Escalation Clause, reading as Contending that CIRCULAR No. 494 is not the law contemplated in the Escalation Clause
follows: of the promissory note, the BORROWER filed suit against BANCO FILIPINO for
I/We hereby authorize Banco Filipino to correspondingly increase the interest rate "Declaratory Relief" with respondent Court, praying that the Escalation Clause be declared
stipulated in this contract without advance notice to me/us in the event law should null and void and that BANCO FILIPINO be ordered to desist from enforcing the increased
be enacted increasing the lawful rates of interest that may be charged on this rate of interest on the BORROWER's real estate loan.
particular kind of loan. For its part, BANCO FILIPINO maintained that the Escalation Clause signed by the
The Escalation Clause is based upon Central Bank CIRCULAR No. 494 issued on BORROWER authorized it to increase the interest rate once a law was passed increasing
January 2, 1976, the pertinent portion of which reads: the rate of interest and that its authority to increase was provided for by CIRCULAR No.
494.
3. The maximum rate of interest, including commissions, premiums, fees and other
charges on loans with maturity of more than seven hundred thirty (730) days, by In its judgment, respondent Court nullified the Escalation Clause and ordered BANCO
banking institutions, including thrift banks and rural banks, or by financial FILIPINO to desist from enforcing the increased rate of interest on the BORROWER's
intermediaries authorized to engage in quasi-banking functions shall be nineteen loan. It reasoned out that P.D. No. 116 does not expressly grant the Central Bank
percent (19%) per annum. authority to maximize interest rates with retroactive effect and that BANCO FILIPINO
cannot legally impose a higher rate of interest before the expiration of the 15-year period
xxx xxx xxx
in which the loan is to be paid other than the 12% per annum in force at the time of the
7. Except as provided in this Circular and Circular No. 493, loans or renewals execution of the loan.
thereof shall continue to be governed by the Usury Law, as amended."
It is from that Decision in favor of the BORROWER that BANCO FILIPINO has come to
CIRCULAR No. 494 was issued pursuant to the authority granted to the Monetary Board this instance on review by Certiorari. We gave due course to the Petition, the question
by Presidential Decree No. 116 (Amending Further Certain Sections of the Usury Law) being one of law.
promulgated on January 29, 1973, the applicable section of which provides:
On February 24, 1983, the parties represented by their respective counsel, not only
Sec. 2. The same Act is hereby amended by adding the following section moved to withdraw the appeal on the ground that it had become moot and academic
immediately after section one thereof, which reads as follows: "because of recent developments in the rules and regulations of the Central Bank," but
Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate also prayed that "the decision rendered in the Court of First Instance be therefore vacated
or rates of interest for the loan or renewal thereof or the forbearance of any money, and declared of no force and effect as if the case was never filed," since the parties would
goods or credits, and to change such rate or rates whenever warranted by like to end this matter once and for all."
prevailing economic and social conditions: Provided, that such changes shall not be However, "considering the subject matter of the controversy in which many persons
made oftener than once every twelve months. similarly situated are interested and because of the need for a definite ruling on the
The same grant of authority appears in P.D. No. 858, promulgated on December 31, question," the Court, in its Resolution of February 24, 1983, impleaded the Central Bank
1975, except that the limitation on the frequency of changes was eliminated. and required it to submit its Comment, and encouraged homeowners similarly situated as
the BORROWER to intervene in the proceedings.
On the strength of CIRCULAR No. 494 BANCO FILIPINO gave notice to the BORROWER
on June 30, 1976 of the increase of interest rate on the LOAN from 12% to 17% per At the hearing on February 24, 1983, one Leopoldo Z. So, a mortgage homeowner at B.F.
annum effective on March 1, 1976. Resort Subdivision, was present and manifested that he was in a similar situation as the
BORROWER. Since then, he has written several letters to the Court, pleading for early
On September 24, 1976, Ms. Mercedes C. Paderes of the Central Bank wrote a letter to resolution of the case. The Court allowed the intervention of Lolita Perono 2and issued a
the BORROWER as follows: temporary restraining order enjoining the Regional Trial Court (Pasay City Branch) in the
September 24, 1976 case entitled "Banco Filipino Savings and Mortgage Bank vs. Lolita Perono" from issuing a
writ of possession over her mortgaged property. Also snowed to intervene were Enrique
Mr. Florante del Valle Tabalon, Jose Llopis, et als., who had obtained loans with Identical escalation clauses
14 Palanca Street from Apex Mortgage and Loans Corporation, apparently an affiliate of BANCO FILIPINO,
B.F. Homes, Paranaque Upon motion of Jose Llopis, a Temporary Restraining Order was likewise issued enjoining
Rizal the foreclosure of his real estate mortgage by BANCO FILIPINO.
Dear Mr. del Valle: The Court made it explicit, however, that intervention was allowed only for the purpose of
This refers to your letter dated August 28, 1976 addressed to the Governor, Central Bank "joining in the discussion of the legal issue involved in this proceedings, to wit, the validity
of the Philippines, seeking clarification and our official stand on Banco Filipino's recent of the so-called "escalation clause," or its applicability to existing contracts of loan."
decision to raise interest rates on lots bought on installment from 12% to 17% per annum. The Central Bank has submitted its Comment and Supplemental Comment and like
A verification made by our Examiner of the copy of your Promissory Note on file with BANCO FILIPINO, has taken the position that the issuance of its Circulars is a valid
Banco Filipino showed that the following escalation clause with your signature is stamped exercise of its authority to scribe maximum rates of interest and that, based on general
on the Promissory Note: principles of contract, the Escalation Clause is a valid provision in the loan agreement
provided that "(1) the increased rate imposed or charged by petitioner does not exceed
I /We hereby authorize Banco Filipino to correspondingly increase the interest rate
the ceiling fixed by law or the Monetary Board; (2) the increase is made effective not
stipulated in this contract without advance notice to me/us in the event a law should
earlier than the effectivity of the law or regulation authorizing such an increase; and (3) the
be enacted increasing the lawful rates of interest that may be charged on this
remaining maturities of the loans are more than 730 days as of the effectivity of the law or
particular kind of loan.
regulation authorizing such an increase. However, with respect to loan agreements
In this connection, please be advised that the Monetary Board, in its Resolution No. 1155
dated June 11, 1976, adopted the following guidelines to govern interest rate adjustments
entered into,on or after March 17, 1980, such agreement, in order to be valid, must also 586. The Usury Law, as amended by Acts Nos. 3291, 3998 and 4070, became effective
include a de-escalation clause as required by Presidential Decree No. 1684."3 on May 1, 1916. It provided for the maximum yearly interest of 12% for loans secured by a
The substantial question in this case is not really whether the Escalation Clause is a valid mortgage upon registered real estate (Section 2), and a maximum annual interest of 14%
for loans covered by security other than mortgage upon registered real estate (Section 3).
or void stipulation. There should be no question that the clause is valid.
Significant is the separate treatment of registered real estate loans and other loans not
Some contracts contain what is known as an "escalator clause," which is defined as secured by mortgage upon registered real estate. It appears clear in the Usury Law that
one in which the contract fixes a base price but contains a provision that in the the policy is to make interest rates for loans guaranteed by registered real estate lower
event of specified cost increases, the seller or contractor may raise the price up to a than those for loans guaranteed by properties other than registered realty.
fixed percentage of the base. Attacks on such a clause have usually been based on
On June 15, 1948, Congress approved Republic Act No. 265, creating the Central Bank,
the claim that, because of the open price-provision, the contract was too indefinite to
be enforceable and did not evidence an actual meeting of the minds of the parties, and establishing the Monetary Board. That law9 provides that "the Monetary Board may,
within the limits prescribed in the Usury law, fix the maximum rates of interest which
or that the arrangement left the price to be determined arbitrarily by one party so
that the contract lacked mutuality. In most instances, however, these attacks have banks may charge for different types of loans and for any other credit operations, ... " and
that "any modification in the maximum interest rates permitted for the borrowing or lending
been unsuccessful.4
operations of the banks shall apply only to future operations and not to those made prior
The Court further finds as a matter of law that the cost of living index adjustment, or to the date on which the modification becomes effective" (Section 109).1avvphi1
escalator clause, is not substantively unconscionable.
On January 29, 1973, P.D. No. 116 was promulgated amending the Usury Law. The
Cost of living index adjustment clauses are widely used in commercial contracts in Decree gave authority to the Monetary Board "to prescribe maximum rates of interest for
an effort to maintain fiscal stability and to retain "real dollar" value to the price terms the loan or renewal thereof or the forbearance of any money goods or credits, and to
of long term contracts. The provision is a common one, and has been universally change such rate or rates whenever warranted by prevailing economic and social
upheld and enforced. Indeed, the Federal government has recognized the efficacy conditions. In one section,10 the Monetary Board could prescribe the maximum rate of
of escalator clauses in tying Social Security benefits to the cost of living index, 42 interest for loans secured by mortgage upon registered real estate or by any document
U.S.C.s 415(i). Pension benefits and labor contracts negotiated by most of the conveying such real estate or an interest therein and, in another separate section,11 the
major labor unions are other examples. That inflation, expected or otherwise, will Monetary Board was also granted authority to fix the maximum interest rate for loans
cause a particular bargain to be more costly in terms of total dollars than originally secured by types of security other than registered real property. The two sections read:
contemplated can be of little solace to the plaintiffs.5
SEC. 3. Section two of the same Act is hereby amended to read as follows:
What should be resolved is whether BANCO FILIPINO can increase the interest rate on
the LOAN from 12% to 17% per annum under the Escalation Clause. It is our considered SEC. 2. No person or corporation shall directly or indirectly take or receive in
money or other property, real or personal, or choses in action, a higher rate of
opinion that it may not.
interest or greater sum or value, including commissions, premiums, fines and
The Escalation Clause reads as follows: penalties, for the loan or renewal thereof or forbearance of money, goods, or
I/We hereby authorize Banco Filipino to correspondingly increase the interest credits, where such loan or renewal or forbearance is secured in whole or in part
rate stipulated in this contract without advance notice to me/us in the event by a mortgage upon real estate the title to which is duly registered or by any
a law increasing the lawful rates of interest that may be charged on this document conveying such real estate or an interest therein, than twelve per
particular kind of loan. (Paragraphing and emphasis supplied) centum per annum or the maximum rate prescribed by the Monetary Board and
in force at the time the loan or renewal thereof or forbearance is granted:
It is clear from the stipulation between the parties that the interest rate may be increased Provided, That the rate of interest under this section or the maximum rate of
"in the event a law should be enacted increasing the lawful rate of interest that may be interest that may be prescribed by the Monetary Board under this section may
charged on this particular kind of loan." " The Escalation Clause was dependent on an likewise apply to loans secured by other types of security as may be specified by
increase of rate made by "law" alone. the Monetary Board.
CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular SEC. 4. Section three of the same Act is hereby amended to read as follows:
duly issued is not strictly a statute or a law, it has, however, the force and effect of
law." (Italics supplied). "An administrative regulation adopted pursuant to law has the
6 SEC. 3. No person or corporation shall directly or indirectly demand, take,
force and effect of law."7 "That administrative rules and regulations have the force of law receive, or agree to charge in money or other property, real or personal, a higher
can no longer be questioned. "8 rate or greater sum or value for the loan or forbearance of money, goods, or
credits, where such loan or forbearance is not secured as provided in Section
The distinction between a law and an administrative regulation is recognized in the two hereof, than fourteen per centum per annum or the maximum rate or rates
Monetary Board guidelines quoted in the letter to the BORROWER of Ms. Paderes of prescribed by the Monetary Board and in force at the time the loan or
September 24, 1976 (supra). According to the guidelines, for a loan's interest to be subject forbearance is granted.
to the increases provided in CIRCULAR No. 494, there must be an Escalation Clause
allowing the increase "in the event that any law or Central Bank regulation is promulgated Apparent then is that the separate treatment for the two classes of loans was maintained.
increasing the maximum interest rate for loans." The guidelines thus presuppose that a Yet, CIRCULAR No. 494 makes no distinction as to the types of loans that it is applicable
Central Bank regulation is not within the term "any law." to unlike Circular No. 586 dated January 1, 1978 and Circular No. 705 dated December 1,
1979, which fix the effective rate of interest on loan transactions with maturities of more
The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, than 730 days to not exceeding 19% per annum (Circular No. 586) and not exceeding
adding sec. 7-a to the Usury Law, providing that parties to an agreement pertaining to a 21% per annum (Circular No. 705) "on both secured and unsecured loans as defined by
loan could stipulate that the rate of interest agreed upon may be increased in the event the Usury Law, as amended."
that the applicable max rate of interest is increased "by law or by the Monetary Board." To
quote: In the absence of any indication in CIRCULAR No. 494 as to which particular type of loan
was meant by the Monetary Board, the more equitable construction is to limit CIRCULAR
Sec. 7-a Parties to an agreement pertaining to a loan or forbearance of money, goods No. 494 to loans guaranteed by securities other than mortgage upon registered realty.
or credits may stipulate that the rate of interest agreed upon may be increased in the
event that the applicable maximum rate of interest is increased by law or by the WHEREFORE, the Court rules that while an escalation clause like the one in question can
Monetary Board: ordinarily be held valid, nevertheless, petitioner Banco Filipino cannot rely thereon to raise
the interest on the borrower's loan from 12% to 17% per annum because Circular No. 494
Provided, That such stipulation shall be valid only if there is also a stipulation in the of the Monetary Board was not the "law" contemplated by the parties, nor should said
agreement that the rate of interest agreed upon shall be reduced in the event that the Circular be held as applicable to loans secured by registered real estate in the absence of
applicable maximum rate of interest is reduced by law or by the Monetary Board; any such specific indication and in contravention of the policy behind the Usury Law. The
Provided, further, That the adjustment in the rate of interest agreed upon shall take judgment appealed from is, therefore, hereby affirmed in so far as it orders petitioner
effect on or after the effectivity of the increase or decrease in the maximum rate of Banco Filipino to desist from enforcing the increased rate of interest on petitioner's loan.
interest. The Temporary Restraining Orders heretofore issued are hereby made permanent if the
It is now clear that from March 17, 1980, escalation clauses to be valid should specifically escalation clauses are Identical to the one herein and the loans involved have applied the
provide: (1) that there can be an increase in interest if increased by law or by the increased rate of interest authorized by Central Bank Circular No. 494. SO ORDERED.
Monetary Board; and (2) in order for such stipulation to be valid, it must include a
provision for reduction of the stipulated interest "in the event that the applicable maximum
rate of interest is reduced by law or by the Monetary Board."
While P.D. No. 1684 is not to be given retroactive effect, the absence of a de-escalation
clause in the Escalation Clause in question provides another reason why it should not be
given effect because of its one-sidedness in favor of the lender.
2. The Escalation Clause specifically stipulated that the increase in interest rate was to be
"on this particular kind of loan, " meaning one secured by registered real estate mortgage.
Paragraph 7 of CIRCULAR No. 494 specifically directs that "loans or renewals continue to
be governed by the Usury Law, as amended." So do Circular No. 586 of the Central Bank,
which superseded Circular No. 494, and Circular No. 705, which superseded Circular No.
G.R. No. 75223 March 14, 1990 charges by way of liquidated damages should the note be unpaid or is not renewed on
due date. Likewise stipulated in the covering Real Estate Mortgage Contracts and the
PHILIPPINE NATIONAL BANK, petitioner Amendment to Real Estate Mortgage of February 12, 1979 that "this account is also
vs. subject to the upward revision of interest rate as may be imposed by the mortgagee PNB."
IAC and SPOUSES FERMIN MAGLASANG and ANTONIA SEDIGO, respondents. By these explicit contractual clauses, the private respondents fully agreed to an upward
PARAS, J.: revision of interest rates on their accounts depending on the rule, regulation, or policy that
the petitioner may adopt. At the time when said promissory notes and Amendment of Real
This is a petition to review on certiorari the decision of the Intermediate Appellate Estate Mortgage were executed by private respondent Fermin Maglasang, Presidential
Court, * now Court of Appeals, rendered in AC-G.R. CV No. 07678 modifying the decision Decree No. 116 (amending further certain sections of Act No. 2655, as amended,
of the Regional Trial Court of Ormoc City. otherwise known as the "Usury Law") had long been promulgated on January 29, 1973,
and was already in full force and effect in the Philippines.
The factual background of this case is as follows:
Pursuant to Presidential Decree No. 116, the Monetary Board issued Central Bank
The petitioner, a government banking institution, extended financial assistance to the Circular No. 705 on December 1, 1979, prescribing the maximum rate of interest on loan
private respondents in the form of loans, the total amount of which is P82,682.39 as transactions with maturities of more than seven hundred thirty (730) days and shall not
embodied in the promissory notes that the latter have executed on various dates from exceed twenty-one percent (21%) per annum. Hence, the upward revision of interest rate
February 5, 1976 to May 18, 1979, the payment of which to come from the proceeds of as stipulated in the Promissory Notes and Amendment of Real Estate Mortgage dated
sugar sales of the private respondents. The promissory notes bore 12% interest per February 12, 1975, is in accordance with Presidential Decree No. 116 promulgated on
annum plus 1% interest as penalty charge in case of default in the payments. January 29, 1973 and Central Bank Circular No. 705 issued on December 1, 1979, and
On January 16, 1969, the private respondents mortgaged several real estate properties in the imposition of 21% rate of interest on the loan obligations of private respondents is
favor of the petitioner as security of their loans, which mortgage was amended on within the limits prescribed by law.
December 17, 1969, December 22, 1970 and February 12, 1975, as to the consideration On the other hand, the private respondents maintain that the collection of service charge
thereof. and liquidated damages in excess of the maximum 12% interest originally agreed, are
When the price of sugar went down in 1977, the private respondents incurred deficits in illegal and void for being contrary to or prohibited under Section 2 of Act No. 2655, as
the payment of their loans. amended by Act No. 4070.

On December 1, 1979, the Monetary Board of the Central Bank, by virtue of Presidential
Decree No. 116, issued CB Circular No. 705 increasing the ceiling on the rate of interest
on both secured and unsecured loans up to no more than 21% per annum. In view of this
development, the PNB Board of Directors revised its lending interest rates on the medium
and long-term loans effective June 1, 1980, per PNB board resolution dated May 26,
1980.
The private respondents also insist that the Court of Appeals committed mathematical
error in computing the 12% interest due their deficiencies. According to them, their total
deficiency is P45,427.02 and the total 12% interest of the said amount is P15,731.08,
hence, their total liability is in the amount of P61,158.10. Since the proceeds of the sale of
their mortgaged properties are P63,000.00, there is still a residue in the amount of
P1,841.90 from the proceeds of the sale which is recoverable or collectible by them.

When the private respondents defaulted in the payments of their loans, the petitioner The petition is without merit.
demanded not only the settlement of their outstanding obligation but also the payment of In Insular Bank of Asia and America v. Spouses Salazar, (159 SCRA 133 [1988]), the
the new interest rate of 21% per annum beginning June 1, 1980 per the PNB board Court ruled that the Escalation Clause is a valid provision in the loan agreement provided
resolution. that — (1) the increased rate imposed or charged does not exceed the ceiling fixed by law
For failure of the private respondents to settle their obligation, then in the amount of or the Monetary Board; (2) the increase is made effective not earlier than the effectivity of
P84,743.34, the petitioner foreclosed the mortgage. Since the proceeds of the auction the law or regulation authorizing such an increase; and (3) the remaining maturities of the
sale, P63,000.00 was not enough to satisfy private respondents' outstanding obligation, loans are more than 730 days as of the effectivity of the law or regulation authorizing such
the petitioner filed an action for deficiency judgment with the Court of First Instance of an increase.
Leyte against the private respondents. Likewise in Banco Filipino Savings and Mortgage Bank v. Navarro, (152 SCRA 346
After due trial, the trial court ** rendered its judgment on February 20, 1985, in favor of the [1987]), the Court said that for an Escalation Clause to be valid, it must include a de-
petitioner and against the private respondents, the dispositive portion of which reads as escalation clause. There can be an increase in interest if increased by law or by the
follows: Monetary Board; and in order for such stipulation to be valid, it must include a provision for
WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of reduction of the stipulated interest "in the event that the applicable maximum rate of
the plaintiff and against the defendants: interest is reduced by law or by the Monetary Board," as provided for in P.D. No. 1684,
1. Ordering the defendants to pay the plaintiff the amount of P21,743.34; said promulgated on March 17, 1980. There is no question that PNB board resolution dated
amount shall earn interest at 21 % per annum and 3% penalty charge starting May 26, 1980 contains such de-escalation clause, under paragraph 8 thereof, to wit:
November 27, 1981, until the whole obligation is fully paid; (8) To enable us to adjust interest rates in accordance with CB Circular letter of
2. Ordering the defendants to pay the plaintiff attorney's fees in the amount March 19, 1980, the covering promissory note for all short/medium/long terms loans
equivalent to 10% of the total amount due as of November 28, 1981; shall include the following conditions:
3. Ordering the defendants to pay the plaintiff the amount of P700.00 as litigation
expenses; and ordering the defendants also to pay the costs of this action. The Bank reserves the right to increase the interest rate within the limits
allowed by law or by the Monetary Board, provided, that the interest rate
SO ORDERED. (Records, p. 235). agreed upon shall be reduced in the event that the applicable maximum
The private respondents appealed to the Intermediate Appellate Court, docketed as AC- interest rate is reduced by law or by the Monetary Board: Provided, further, that
G.R. CV No. 07678. the adjustment in the interest rate shall take effect on or after the effectivity of
the increase or increase in the maximum rate of interest. (Exhibits, p. 77)
On June 30, 1986, the appellate court affirmed the decision of the trial court with
modification as follows: Central Bank Circular No. 705, authorizing the increase from 12% to 21% was issued on
December 1, 1979. The promissory notes executed by the private respondents show that
WHEREFORE, in view of the foregoing consideration, the appealed decision is they are all payable on demand but the records do not show when payment was
hereby AFFIRMED with modification as follows: demanded. Even granting that it was demanded on the effectivity of law, it is obvious that
the period of 730 days has not yet elapsed at the date the mortgaged properties were sold
1. Ordering the defendants to pay the plaintiff the amount of P12,551.16 at the public auction on November 27, 1981 (Certificate of Sheriff's Sale, Records of
which shall earn interest at 12% per annum and 1% penalty charge starting Exhibits, p. 84). Accordingly, as of December 1, 1979, the remaining maturity days of the
November 27, 1981 until fully paid; and loans were less than 730 days. Hence, the increased rate imposed or charged is not valid.
2. No other pronouncement as to attorney's fees and costs of suit.
SO ORDERED. The claim of private respondents that the respondent appellate court committed
(Rollo, p. 28) mathematical error in computing the 12% interest due their deficiencies is a factual issue.
Hence, this petition.
Absent the recognized exceptions, finding of facts of the Court of Appeals are conclusive
In the resolution of September 14, 1987, the Court gave due course to the petition and on the parties and Supreme Court on the tenet that this Court decides appeals which only
required the parties to submit simultaneously their respective memoranda within thirty (30) involve questions of law and that it is not the function of the Supreme Court to analyze and
days from notice (Rollo, p. 80). to weigh such evidence all over again, its jurisdiction being limited to reviewing errors of
law that might have been committed by the lower court (PNB v. CA, 159 SCRA 433
The main issue in this case is whether or not the revised rate of interest imposed on the [1988]).
loans of the private respondents is legal.
PREMISES CONSIDERED, the petition is hereby DENIED for lack of merit, and the
The petitioner contends that in all the promissory notes executed by the private assailed decision of the Court of Appeals is hereby AFFIRMED. SO ORDERED.
respondents, it is stipulated that the loans are to be paid together with the interest thereon
at the rate of 12% per annum until paid, which interest rate the Bank may, at any time
without notice, raise within the limits allowed by law, and also 1% per annum penalty
[G.R. No. 88880. April 30, 1991.] and instruments, in form and substance satisfactory to the Bank, in order to effectuate or
otherwise comply with such rules, regulations and policies." (p. 85, Rollo.)
PHILIPPINE NATIONAL BANK, Petitioner, v. THE HON. COURT OF APPEALS and
AMBROSIO PADILLA, Respondents. The Promissory Notes, in turn, uniformly authorized the PNB to increase the stipulated
18% interest per annum "within the limits allowed by law at any time depending on
SYLLABUS whatever policy it [PNB] may adopt in the future; Provided, that, the interest rate on this
note shall be correspondingly decreased in the event that the applicable maximum interest
1. COMMERCIAL LAW; BANKING LAWS; RATE OF INTEREST; INCREASE OF rate is reduced by law or by the Monetary Board." (pp. 85-86, Rollo; Emphasis ours.)
INTEREST RATE; NOT TO BE MADE OFTENER THAN ONCE A YEAR. — PNB, over
the objection of the private respondent, and without authority from the Monetary Board, The Real Estate Mortgage Contract likewise provided that:jgc:chanrobles.com.ph
within a period of only four (4) months, increased the 18% interest rate on the private
respondent’s loan obligation three (3) times: (a) to 32% in July 1984; (b) to 41% in "(k) INCREASE OF INTEREST RATE
October 1984; and (c) to 48% in November 1984. Those increases were null and void. "The rate of interest charged on the obligation secured by this mortgage as well as the
Although Section 2, P.D. No. 116 of January 29, 1973, authorizes the Monetary Board to interest on the amount which may have been advanced by the MORTGAGEE, in
prescribe the maximum rate or rates of interest for loans or renewal thereof and to change accordance with the provisions hereof, shall be subject during the life of this contract to
such rate or rates whenever warranted by prevailing economic and social conditions, it such an increase within the rate allowed by law, as the Board of Directors of the
expressly provides that "such changes shall not be made oftener than once every twelve MORTGAGEE may prescribe for its debtors." (p. 86, Rollo; Emphasis supplied.)
months. "If the Monetary Board itself was not authorized to make such changes oftener
than once a year, even less so may a bank which is subordinate to the Board. Four (4) months advance interest and incidental expenses/charges were deducted from
the loan, the net proceeds of which were released to the private respondent by crediting or
2. ID.; ID.; ID.; ID.; MAY BE INCREASED WITHIN LIMITS OF LAW; PNB CIRCULARS transferring the amount to his current account with the bank.
AND RESOLUTION ARE NEITHER LAWS NOR RESOLUTIONS OF MONETARY
BOARD. — While the private respondent-debtor did agree in the Deed of Real Estate On June 20, 1984, PNB informed the private respondent that (1) his credit line of P1.8
Mortgage (Exh. 5) that the interest rate may be increased during the life of the contract "to million "will expire on July 4, 1984," (2)" [i]f renewal of the line for another year is intended,
such increase within the rate allowed by law, as the Board of Directors of the please submit soonest possible your request," and (3) the "present policy of the Bank
MORTGAGEE may prescribe" (Exh. 5-e-1) or "within the limits allowed by law" requires at least 30% reduction of principal before your line can be renewed." (pp. 86-87,
(Promissory Notes, Exhs. 2, 3, and 4), no laws was ever passed in July to November 1984 Rollo.) Complying, private respondent on June 25, 1984, paid PNB P540,000 00 (30% of
increasing the interest rates on loans or renewals thereof to 32%, 41% and 48% (per P1.8 million) and requested that "the balance of P1,260,000.00 be renewed for another
annum), and no documents were executed and delivered by the debtor to effectuate the period of two (2) years under the same arrangement" and that "the increase of the interest
increases. The PNB relied on its own Board Resolution No. 681 (Exh. 10), PNB Circular rate of my mortgage loan be from 18% to 21%" (p. 87, Rollo.).
No. 40-79-84 (Exh. 13), and PNB Circular No. 40-129-84 (Exh. 15), but those resolution
and circulars are neither laws nor resolutions of the Monetary Board. On July 4, 1984, private respondent paid PNB P360,000.00.
On July 18, 1984, private respondent reiterated in writing his request that "the increase in
3. ID.; ID.; ID.; REMOVAL OF USURY LAW CEILING ON INTEREST RATES DOES NOT the rate of interest from 18% be fixed at 21% of 24%. (p. 87, Rollo.)
AUTHORIZE BANKS TO UNILATERALLY AND SUCCESSIVELY INCREASE INTEREST
RATES. — CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury law ceiling On July 26, 1984, private respondent made an additional payment of P100,000.
on interest rates — but it did not authorize the PNB, or any bank for that matter, to
unilaterally and successively increase the agreed interest rates from 18% to 48% within a On August 10, 1984, PNB informed private respondent that "we can not give due course
span of four (4) months, in violation of P.D. 116 which limits such changes to "once every to your request for preferential interest rate in view of the following reasons: Existing Loan
twelve months." Policies of the bank requires 32% for loan of more than one year; our present cost of
funds has substantially increased." (pp. 8788, Rollo.)
4. ID.; ID.; ID.; UNILATERAL ACTION TO INCREASE INTEREST RATES, A VIOLATION
OF ARTICLE 1308 OF CIVIL CODE. — Besides violating P.D. 116, the unilateral action of On August 17, 1984, private respondent further paid PNB P150,000.00.
the PNB in increasing the interest rate on the private respondent’s loan, violated the In a letter dated August 24, 1984 to PNB, private respondent announced that he would
mutuality of contracts ordained in Article 1308 of the civil Code: "ART. 1308. The contract "continue making further payments, and instead of a ‘loan of more than one year,’ I shall
must bind both contracting parties; its validity or compliance cannot be left to the will of pay the said loan before the lapse of one year or before July 4, 1985. . . . I reiterate my
one of them." request that the increase of my rate of interest from 18% ‘be fixed at 21% or 24%.’" (p. 88,
5. ID.; ID.; ID.; SUCCESSIVE INCREASE OF INTEREST RATES, A VIOLATION OF Rollo.)
ARTICLE 1956 OF CIVIL CODE. — PNB’s successive increases of the interest rate on
the private respondent’s loan, over the latter’s protest, were arbitrary as they violated an On September 12, 1984, private respondent paid PNB P160,000.00.
express provision of the Credit Agreement (Exh. 1) Section 9.01 that its terms "may be In letters dated September 12, 1984 and September 13, 1984, PNB informed private
amended only by an instrument in writing signed by the party to be bound as burdened by respondent that "the interest rate on your outstanding line/loan is hereby adjusted from
such amendment." The increases imposed by PNB also contravene Art. 1956 of the Civil 32% p.a. to 41% p.a. (35% prime rate + 6%) effective September 6, 1984;" and further
Code which provides that "no interest shall be due unless it has been expressly stipulated explained "why we can not grant your request for a lower rate of 21% or 24%." (pp. 88-89,
in writing." Rollo.)
In a letter dated September 24, 1984 to PNB, private respondent registered his protest
DECISION against the increase of interest rate from 18% to 32% on July 4, 1984 and from 32% to
GRIÑO-AQUINO, J.: 41% on September 6, 1984.

The Philippine National Bank (PNB) has appealed by certiorari from the decision On October 15, 1984, private respondent reiterated his request that the interest rate
promulgated on June 27, 1989 by the Court of Appeals in CA-G.R. CV No. 09791 entitled, should not be increased from 18% to 32% and from 32% to 41%. He also attached (as
"AMBROSIO PADILLA, plaintiff-appellant versus PHILIPPINE NATIONAL BANK, payment) a check for P140,000.00.
defendant-appellee," reversing the decision of the trial court which had dismissed the Like rubbing salt on the private respondent’s wound, the petitioner informed private
private respondent’s complaint "to annul interest increases." (p. 32, Rollo.) The Court of respondent on October 29, 1984, that "the interest rate on your outstanding line/loan is
Appeals rendered judgment: hereby adjusted from 41% p.a. to 48% p.a. (42% prime rate plus 6% spread) effective 25
". . . declaring the questioned increases of interest as unreasonable, excessive and October 1984." (p. 89, Rollo.)
arbitrary and ordering the defendant-appellee [PNB] to refund to the plaintiff-appellant the In November 1984, private respondent paid PNB P50,000.00 thus reducing his principal
amount of interest collected from July, 1984 in excess of twenty-four percent (24%) per loan obligation to P300,000.00.
annum. Costs against the defendant-appellee." (pp 14-15, Rollo.)
On December 18, 1984, private respondent filed in the Regional Trial Court of Manila a
In July 1982, the private respondent applied for, and was granted by petitioner PNB, a complaint against PNB entitled, "AMBROSIO PADILLA v. PHILIPPINE NATIONAL BANK"
credit line of 321.8 million, secured by a real estate mortgage, for a term of two (2) years, (Civil Case No. 84-28391), praying that judgment be rendered:
with 18% interest per annum. Private respondent executed in favor of the PNB a Credit
Agreement, two (2) promissory notes in the amount of P900,000.00 each, and a Real "a. Declaring that the unilateral increase of interest rates from 18% to 32%, then to 41%
Estate Mortgage Contract. and again to 48% are illegal, not valid nor binding on plaintiff, and that an adjustment of
his interest rate from 18% to 24% is reasonable, fair and just;
The Credit Agreement provided that "9.06 Other Conditions. The Borrowers hereby agree
"b. The interest rate on the P900,000.00 released on September 27, 1982 be counted
to be bound by the rules and regulations of the Central Bank and the current and general
from said date and not from July 4, 1984;
policies of the Bank and those which the Bank may adopt in the future, which may have
relation to or in any way affect the Line, which rules, regulations and policies are "c. The excess of interest payment collected by defendant bank by debiting plaintiffs
incorporated herein by reference as if set forth herein in full. Promptly upon receipt of a current account be refunded to plaintiff or credited to his current account;
written request from the Bank, the Borrowers shall execute and deliver such documents
"d. Pending the determination of the merits of this case, a restraining order and or a writ of In Banco Filipino Savings and Mortgage Bank v. Navarro, 15 SCRA 346 (1987), this Court
preliminary injunction be issued (1) to restrain and or enjoin defendant bank for [sic] disauthorized the bank from raising the interest rate on the borrowers’ loan from 12% to
collecting from plaintiff and/or debiting his current account with illegal and excessive 17% despite an escalation clause in the loan agreement signed by the debtors authorizing
increases of interest rates; and (2) to prevent defendant bank from declaring plaintiff in Banco Filipino "to correspondingly increase the interest rate stipulated in this contract
default for non-payment and from instituting any foreclosure proceeding, extrajudicial or without advance notice to me/us in the event a law should be enacted increasing the
judicial, of the valuable commercial property of plaintiff." (pp. 89-90, Rollo.) lawful rates of interest that may be charged on this particular kind of loan." (Emphasis
supplied.)
In its answer to the complaint, PNB denied that the increases in interest rates were illegal,
unilateral excessive and arbitrary and recited the reasons justifying said increases. In the Banco Filipino case, the bank relied on Section 3 of CB Circular No. 494 dated July
1, 1976 (72 O.G. No. 3, p. 676-J) which provided that "the maximum rate of interest,
On March 31, 1985, the private respondent paid the P300,000 balance of his obligation to including commissions premiums, fees and other charges on loans with a maturity of more
PNBN (Exh. 5). than 730 days by banking institution . . . shall be 19%."
The trial court rendered judgment on April 14, 1986, dismissing the complaint because the This Court disallowed the increase for the simple reason that said "Circular No. 494,
increases of interest were properly made. although it has the effect of law is not a law." Speaking through Mme. Justice Ameurfina
M. Herrera, this Court held:
The private respondent appealed to the Court of Appeals. On June 27, 1989, the Court of
Appeals reversed the trial court, hence, NB’s recourse to this Court by a petition for review "It is now clear that from March 17, 1980, escalation clauses to be valid should specifically
under Rule 45 of the Rules of Court. provide: (1) that there can be an increase in interest if increased by law or by the
Monetary Board; and (2) in order for such stipulation to be valid, it must include a
The assignments of error raised in PNB’s petition for review can be resolved into a single provision for reduction of the stipulated interest ‘in the event that the applicable maximum
legal issue of whether the bank, within the term of the loan which it granted to the private rate of interest is reduced by law or by the Monetary Board.’" p. 111, Rollo.).
respondent, may unilaterally change or increase the interest rate stipulated therein at will
and as often as it pleased. In the present case, the PNB relied on its own Board Resolution No. 681 (Exh. 10), PNB
Circular No. 40-79-84 (Exh. 13), and PNB Circular No. 40-129-84 (Exh. 15), but those
The answer to that question is no. resolution and circulars are neither laws nor resolutions of the Monetary Board.
In the first place, although Section 2, PD. No. 116 of January 29, 1973, authorizes the CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest
Monetary Board to prescribe the maximum rate or rates of interest for loans or renewal rates —
thereof and to change such rate or rates whenever warranted by prevailing economic and
social conditions, it expressly provides that "such changes shall not be made oftener than ". . . increases in interest rates are not subject to any ceiling prescribed by the Usury Law."
once every twelve months."
but it did not authorize the PNB, or any bank for that matter, to unilaterally and
In this case, PNB, over the objection of the private respondent, and without authority from successively increase the agreed interest rates from 18% to 48% within a span of four (4)
the Monetary Board, within a period of only four (4) months, increased the 18% interest months, in violation of PD. 116 which limits such changes to "once every twelve months."
rate on the private respondent’s loan obligation three (3) times: (a) to 32% in July 1984;
(b) to 41% in October 1984; and (c) to 48% in November 1984. Those increases were null Besides violating PD. 116, the unilateral action of the PNB in increasing the interest rate
and void, for if the Monetary Board itself was not authorized to make such changes on the private respondent’s loan, violated the mutuality of contracts ordained in Article
oftener than once a year, even less so may a bank which is subordinate to the Board. 1308 of the Civil Code:

Secondly, as pointed out by the Court of Appeals, while the private respondent-debtor did
agree in the Deed of Real Estate Mortgage (Exh. 5) that the interest rate may be
increased during the life of the contract "to such increase within the rate allowed by law,
as the Board of Directors of the MORTGAGEE may prescribe" (Exh. 5-e-1) or "within the
limits allowed by law" (Promissory Notes, Ex’s. 2, 3, and 4), no law was ever passed in
July to November 1984 increasing the interest rates on loans or renewals thereof to 32%,
41% and 48% (per annum), and no documents were executed and delivered by the debtor
to effectuate the increases. The Court of Appeals observed.
". . . We focus Our attention first of all on the agreement between the parties as embodied
in the following instruments, to wit: (1) Exhibit ‘1’ — Credit Agreement dated July 1, 1982;
(2) Exhibit ‘2’ — Promissory Note dated July 5, 1982; (3) Exhibit ‘(3)’ — Promissory Note
dated January 3, 1983; (4) Exhibit ‘4’ — Promissory Note, dated December 13, 1983; and
(5) Exhibit ‘5’ — Real Estate Mortgage contract dated July 1, 1982.
"Exhibit ‘1’ states in its portion marked Exhibit ‘1-g-1’:
"ART. 1308. The contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them."
In order that obligations arising from contracts may have the force of law between the
parties, there must be mutuality between the parties based on their essential equality. A
contract containing a condition which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties, is void (Garcia v. 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 v. 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.

‘9 .06 Other Conditions. The Borrowers hereby agree to be bound by the rules and
regulations of the Central Bank and the current and general policies of the Bank and those
which the Bank may adopt in the future, which may have relation to or in any way affect
the Line, which rules, regulations and policies are incorporated herein by reference as if
set forth herein in full. Promptly upon receipt of a written request from the Bank, the
Borrowers shall execute and deliver such documents and instruments, in form and
substance satisfactory to the Bank, in order to effectuate or otherwise comply with such
rules, regulations and policies.’
"Exhibits ‘2,’ ‘3,’ and ‘4’ in their portions respectively marked Exhibits ‘2-B,’ ‘3-B,’ and ‘4-B’
uniformly authorize the defendant bank to increase the stipulated interest rate of 18% per
annum ‘within the limits allowed by law at any time depending on whatever policy it may
adopt in the future: Provided, that, the interest rate on this note shall be correspondingly
decreased in the event that the applicable maximum interest rate is reduced by law or by
the Monetary Board.’
PNB’S successive increases of the interest rate on the private respondent’s loan, over the
latter’s protest, were arbitrary as they violated an express provision of the Credit
Agreement (Exh. 1) Section 9.01 that its terms "may be amended only by an instrument in
writing signed by the party to be bound as burdened by such amendment." The increases
imposed by PNB also contravene Art. 1956 of the Civil Code which provides that "no
interest shall be due unless it has been expressly stipulated in writing."
The debtor herein never agreed in writing to pay the interest increases fixed by the PNB
beyond 24% per annum, hence, he is not bound to pay a higher rate than that.
That an increase in the interest rate from 18% to 48% within a period of four (4) months is
excessive, as found by the Court of Appeals, is indisputable.
WHEREFORE, finding no reversible error in the decision of the Court of Appeals in CA-
G.R. CV No. 09791, the Court resolved to deny the petition for review for lack of merit,
with costs against the petitioner.SO ORDERED.

"Exhibit ‘5’ in its portion marked Exhibit ‘5-e-1’ stipulates:

‘(k) INCREASE OF INTEREST RATE
‘The rate of interest charged on the obligation secured by this mortgage as well as the
interest on the amount which may have been advanced by the MORTGAGEE, in
accordance with the provisions hereof, shall be subject during the life of this contract to
such an increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.’
"Clearly, then, the agreement between the parties authorized the defendant bank to
increase the interest rate beyond the original rate of 18% per annum but ‘within the limits
allowed by law’ or ‘within the rate allowed by law,’ it being declared the obligation of the
plaintiff as borrower to execute and deliver the corresponding documents and instruments
to effectuate the increase." (pp. 11-12, Rollo.)
G.R. No. 107569 November 8, 1994 4. Granting (private respondents') such other relief as may be found just and
PHILIPPINE NATIONAL BANK, petitioner, vs. equitable in the premises.4
CA, REMEDIOS JAYME-FERNANDEZ and AMADO FERNANDEZ, respondents. On February 26, 1990, the trial court dismissed private respondents' complaint in Civil
PUNO, J.: Case No. CEB-5610. On October 15, 1992, the Court of Appeals reversed the dismissal
with respect to petitioner bank, and disallowed the increases in interest rates.
Petitioner bank seeks the review of the decision, dated October 15, 1992, of the Court of
Appeals 1 in CA G.R. CV No. 27195, the dispositive portion of which reads as follows: Petitioner bank now contends that "respondent Court of Appeals committed grave error
when it ruled (1) that the increase in interest rates are unauthorized; (2) that the Credit
WHEREFORE, the judgment appealed from is hereby SET ASIDE and a new one is Agreement and the Promissory Notes are not the law between the parties; (3) that CB
entered ordering defendant-appellee PNB to re-apply the interest rate of 12% per Circular No. 773 and CB Circular No. 905 are not applicable; and (4) that private
annum to plaintiffs-appellants' (referring to herein private respondents) indebtedness respondents are not estopped from questioning the increase of rate interest made by
and to accordingly take the appropriate charges from plaintiffs-appellants' (private petitioner." 5
respondents') payment of P81,000.00 made on December 26, 1985. Any balance on
the indebtedness should, likewise, be charged interest at the rate of 12% per annum. The petition is bereft of merit.
SO ORDERED. In making the unilateral increases in interest rates, petitioner bank relied on the escalation
clause contained in their credit agreement which provides, as follows:
The parties do not dispute the facts as laid down by respondent court in its impugned
decision, viz.: The Bank reserves the right to increase the interest rate within the limits allowed by
law at any time depending on whatever policy it may adopt in the future
On April 7, 1982, (private respondents) as owners of a NACIDA-registered enterprise, and provided, that, the interest rate on this accommodation shall be correspondingly
obtained a loan under the Cottage Industry Guaranty Loan Fund (CIGLF) from the decreased in the event that the applicable maximum interest rate is reduced by law
Philippine National Bank (PNB) in the amount of Fifty Thousand (P50,000.00) Pesos, or by the Monetary Board. In either case, the adjustment in the interest rate agreed
as evidenced by a Credit Agreement. Under the Promissory Note covering the loan, the upon shall take effect on the effectivity date of the increase or decrease in maximum
loan was to be amortized over a period of three (3) years to end on March 29, 1985, at interest rate.
twelve (12%) percent interest annually.
This clause is authorized by Section 2 of Presidential Decree (P.D.)
To secure the loan, (private respondents) executed a Real Estate Mortgage over a No. 1684 which further amended Act No. 2655 ("The Usury Law"), as amended, thus:
1.5542-hectare parcel of unregistered agricultural land located at Cambang-ug, Toledo
City, which was appraised by the PNB at P1,062.52 and given a loan value of P531.26 Section 2. The same Act is hereby amended by adding a new section after Section
by the Bank. In addition, (private respondents) executed a Chattel Mortgage over a 7, to read as follows:
thermo plastic-forming machine, which had an appraisal value of P8,800 and a loan Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money,
value of P4,400.00. goods or credits may stipulate that the rate of interest agreed upon may be
The Credit Agreement provided inter alia, that — increased in the event that the applicable maximum rate of interest is increased by
law or by the Monetary Board; Provided, That such stipulation shall be valid only if
(a) The BANK reserves the right to increase the interest rate within the limits there is also a stipulation in the agreement that the rate of interest agreed upon
allowed by law at any time depending on whatever policy it may adopt in the shall be reduced in the event that the applicable maximum rate of interest is
future; Provided, that the interest rate on this accommodation shall be reduced by law or by the Monetary Board; Provided further, That the adjustment in
correspondingly decreased in the event that the applicable maximum interest is the rate of interest agreed upon shall take effect on or after the effectivity of the
reduced by law or by the Monetary Board. In either case, the adjustment in the increase or decrease in the maximum rate of interest.
interest rate agreed upon shall take effect on the effectivity date of the increase
or decrease in the maximum interest rate. Section 1 of P.D. No. 1684 also empowered the Central Bank's Monetary Board to
prescribe the maximum rates of interest for loans and certain forbearances. Pursuant to
The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any such authority, the Monetary Board issued Central Bank (C.B.) Circular No. 905, series of
time without notice, beyond the stipulated rate of 12% but only "within the limits allowed 1982, Section 5 of which provides:
by law."
Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial
The Real Estate Mortgage contract likewise provided that — Intermediaries) is hereby amended to read as follows:
(k) INCREASE OF INTEREST RATE: The rate of interest charged on the Sec. 1303. Interest and Other Charges. — The rate of interest, including
obligation secured by this mortgage as well as the interest on the amount which commissions, premiums, fees and other charges, on any loan, or
may have been advanced by the MORTGAGE, in accordance with the provision forbearance of any money, goods or credits, regardless of maturity and
hereof, shall be subject during the life of this contract to such an increase within whether secured or unsecured, shall not be subject to any ceiling
the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribed under or pursuant to the Usury Law, as amended.
prescribe for its debtors.
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to
On February 17, 1983, (private respondents) were granted an additional NACIDA loan stipulate freely regarding any subsequent adjustment in the interest rate that shall accrue
of Fifty Thousand (P50,000.00) Pesos by the PNB, for which (private respondents) on a loan or forbearance of money, goods or credits. In fine, they can agree to adjust,
executed another Promissory Note, which was to mature on April 1, 1985. Other than upward or downward, the interest previously stipulated. However, contrary to the stubborn
the date of maturity, the second promissory note contained the same terms and insistence of petitioner bank, the said law and circular did not authorize either party
stipulations as the previous note. The parties likewise executed a new Credit to unilaterally raise the interest rate without the other's consent.
Agreement, changing the amount of the loan from P50,000.00 to P100,000.00, but
otherwise preserving the stipulations contained in the original agreement. It is basic that there can be no contract in the true sense in the absence of the element of
agreement, or of mutual assent of the parties. If this assent is wanting on the part of the
As additional security for the loan, (private respondents) constituted another real estate one who contracts, his act has no more efficacy than if it had been done under duress or
mortgage over 2 parcels of registered land, with a combined area of 311 square by a person of unsound mind.6
meters, located at Guadalupe, Cebu City. The land, upon which several buildings are
standing, was appraised by the PNB to have a value of P40,000.00 and a loan value of Similarly, contract changes must be made with the consent of the contracting parties. The
P28,000.00. minds of all the parties must meet as to the proposed modification, especially when it
affects an important aspect of the agreement. In the case of loan contracts, it cannot be
In a letter dated August 1, 1984, the PNB informed (private respondents) "that the gainsaid that the rate of interest is always a vital component, for it can make or break a
interest rate of your CIGLF loan account with us is now 25% per annum plus a penalty capital venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of
of 6% per annum on past dues." The PNB further increased this interest rate to 30% on any binding effect.
October 15, 1984; and to 42% on October 25, 1984.
We cannot countenance petitioner bank's posturing that the escalation clause at bench
The records show that as of December 1985, (private respondents) had an outstanding gives it unbridled right tounilaterally upwardly adjust the interest on private respondents'
principal account of P81,000.00 of which P18,523.14 was credited to the principal, loan. That would completely take away from private respondents the right to assent to an
P57,488.89 to the interest, and the rest to penalty and other charges. Thus, as of said important modification in their agreement, and would negate the element of mutuality in
date, the unpaid principal obligation of (private respondent) amounted to P62,830.32. contracts. In PNB v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held —
Thereafter, (private respondents) exerted efforts to get the PNB to re-adopt the 12% . . . The unilateral action of the PNB in increasing the interest rate on the private
interest and to condone the present interest and penalties due; but to no respondent's loan violated the mutuality of contracts ordained in Art. 1308 of the CC:
avail. (Citations omitted.)
2
Art. 1308. The contract must bind both contracting parties; its validity or
On December 15, 1987, private respondents filed a suit for specific performance against compliance cannot be left to the will of one of them.
petitioner PNB and the NACIDA. It was docketed as Civil Case No. CEB-5610, and raffled
to the Regional Trial Court, 7th Judicial Region, Cebu City, Br. 7. 3 Private respondents In order that obligations arising from contracts may have the force or law between
prayed the trial court to order: the parties, there must be mutuality between the parties based on their essential
1. The PNB and NACIDA to issue in (private respondents') favor, a release of equality. A contract containing a condition which makes its fulfillment dependent
mortgage; exclusively upon the uncontrolled will of one of the contracting parties, is void . . . .
2. The PNB to pay pecuniary consequential damages for the destruction of (private Hence, even assuming that the . . . loan agreement between the PNB and the
respondents') enterprise; private respondent gave the PNB a license (although in fact there was none) to
3. The PNB to pay moral and exemplary damages as well as the costs of suit; and 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" . . . . Such a contract is a veritable trap for the weaker party whom the courts of
justice must protect against abuse and imposition. (Citation omitted.)
Private respondents are not also estopped from assailing the unilateral increases in
interest rate made by petitioner bank. No one receiving a proposal to change a contract to
which he is a party, is obliged to answer the proposal, and his silence per se cannot be
construed as an acceptance.7 In the case at bench, the circumstances do not show that
private respondents implicitly agreed to the proposed increases in interest rate which by
any standard were too sudden and too stiff.
IN VIEW THEREOF, the instant petition is DENIED for lack of merit, and the decision of
the Court of Appeals in CA-G.R. CV No. 27195, dated October 15, 1992, is AFFIRMED.
Costs against petitioner. SO ORDERED.
G.R. No. 101771 December 17, 1996 circulars of the Central Bank of the Philippines as the Provident Fund
Board of Trustees of the Mortgagee may prescribe for its debtors and
SPOUSES MARIANO and GILDA FLORENDO, petitioners, subject to the condition that the increase/decrease shall only take effect on
vs. the date of effectivity of said increase/decrease and shall only apply to the
COURT OF APPEALS and LAND BANK OF THE PHILIPPINES, respondents. remaining balance of the loan.
PANGANIBAN, J.:p c. and ManCom (Management Committee) Resolution No. 85-08, together with PF
May a bank unilaterally raise the interest rate on a housing loan granted an employee, by (Provident Fund) Memorandum Circular No. 85-08, which escalated the interest
reason of the voluntary resignation of the borrower? rates on outstanding housing loans of bank employees who voluntarily "secede"
(resign) from the Bank; the range of rates varied depending upon the number of
Such is the query raised in the petition for review on certiorari now before us, which years service rendered by the employees concerned. The rates were made
assails the Decision promulgated on June 19, 1991 by respondent Court of Appeals 1 in applicable to those who had previously resigned from the bank as well as those who
CA-G.R. CV No. 24956, upholding the validity and enforceability of the escalation by would be resigning in the future.
private respondent Land Bank of the Philippines of the applicable interest rate on the
housing loan taken out by petitioner-spouses. The trial court ruled in favor of respondent bank, and held that the bank was vested with
authority to increase the interest rate (and the corresponding monthly amortizations)
The Antecedent Facts pursuant to said escalation provisions in the housing loan agreement and the mortgage
contract. The dispositive portion of the said decision reads: 5
Petitioners filed an action for Injunction with Damages docketed as Civil Case No. 86-
38146 before the Regional Trial Court of Manila, Branch XXII against respondent bank. WHEREFORE, judgment is hereby rendered denying the instant suit for injunction
Both parties, after entering into a joint stipulation of facts, submitted the case for decision and declaring that the rate of interest on the loan agreement in question shall be
on the basis of said stipulation and memoranda. The stipulation reads in part: 2 17% per annum and the monthly amortization on said loan properly raised to
P2,064.75 a month, upon the finality of this judgment.
1. That (Petitioner) Gilda Florendo (was) an employee of (Respondent Bank) from
May 17, 1976 until August 16, 1984 when she voluntarily resigned. However, before xxx xxx xxx
her resignation, she applied for a housing loan of P148,000.00, payable within 25
years from (respondent bank's) Provident Fund on July 20, 1983; Petitioners promptly appealed, arguing that, inter alia, the increased rate of interest is
onerous and was imposed unilaterally, without the consent of the borrower-spouses.
2. That (petitioners) and (respondent bank), through the latter's duly authorized Respondent bank likewise appealed and contested the propriety of having the increased
representative, executed the Housing Loan Agreement, . . .; interest rate apply only upon the finality of the judgment and not from March 19, 1985.
3. That, together with the Housing Loan Agreement, (petitioners) and (respondent The respondent Court subsequently affirmed with modification the decision of the trial
bank), through the latter's authorized representative, also executed a Real Estate court, holding that: 6
Mortgage and Promissory
Note, . . .; . . . Among the salient provisions of the mortgage is paragraph (f) which provides
that the interest rate shall be subject, during the term of the loan, to such
4. That the loan . . . was actually given to (petitioner) Gilda Florendo, . . ., in her increases/decreases as may be allowed under the prevailing rules and/or circulars
capacity as employee of (respondent bank); of the Central Bank and as the Provident Fund of the Bank may prescribe for its
borrowers. In other words, the spouses agreed to the escalation of the interest rate
5. That on March 19, 1985, (respondent bank) increased the interest rate on on their original loan. Such an agreement is a contractual one and the spouses are
(petitioner's) loan from 9%per annum to 17%, the said increase to take effect on bound by it. Escalation clauses have been ruled to be valid stipulations in contracts
March 19, 1985; in order to maintain fiscal stability and to retain the value of money in long term
6. That the details of the increase are embodied in (Landbank's) ManCom contracts (Insular Bank of Asia and America vs. Spouses Epifania Salazar and
Resolution No. 85-08 dated March 19, 1985, . . . , and in a PF (Provident Fund) Ricardo Salazar, 159 SCRA 133). One of the conditions for the validity of an
Memorandum Circular (No. 85-08, Series of 1985), . . .; escalation clause such as the one which refers to an increase rate is that the
contract should also contain a proviso for a decrease when circumstances so
7. That (respondent bank) first informed (petitioners) of the said increase in a letter warrant it. Paragraph (f) referred to above contains such provision.
dated June 7, 1985, . . . . Enclosed with the letter are a copy of the PF Memo
Circular . . . and a Statement of Account as of May 31, 1985, . . .; A contract is binding on the parties no matter that a provision thereof later proves
onerous and which on hindsight, a party feels he should not have agreed to in the
8. That (petitioners) protested the increase in a letter dated June 11, 1985 to which first place.
(respondent bank) replied through a letter dated July 1, 1985, . . . Enclosed with the
letter is a Memorandum dated June 26, 1985 of (respondent bank's) legal counsel, and disposed as follows: 7
A.B. F. Gaviola, Jr., . . .; WHEREFORE, the dispositive part of the decision is MODIFIED in the sense that
9. That thereafter, (respondent bank) kept on demanding that (petitioner) pay the the interest of 17% on the balance of the loan of the spouses shall be computed
increased interest or the new monthly installments based on the increased interest starting July 1, 1985.
rate, but Plaintiff just as vehemently maintained that the said increase is unlawful Dissatisfied, the petitioners had recourse to this Court.
and unjustifiable. Because of (respondent bank's) repeated demands, (petitioners)
were forced to file the instant suit for Injunction and Damages; The Issues
10. That, just the same, despite (respondent bank's) demands that (petitioners) pay Petitioners ascribe to respondent Court "a grave and patent error" in not nullifying the
the increased interest or increased monthly installments, they (petitioners) have respondent bank's unilateral increase of the interest rate and monthly amortizations of the
faithfully paid and discharged their loan obligations, more particularly the monthly loan —
payment of the original stipulated installment of P1,248.72. Disregarding
(respondent bank's) repeated demand for increased interest and monthly 1. . . . (simply because of) a bare and unqualified stipulation that the interest rate
installment, (petitioners) are presently up-to-date in the payments of their obligations may be increased;
under the original contracts (Housing Loan Agreement, Promissory Note and Real 2. . . . on the ground that the increase has no basis in the contracts between the
Estate Mortgage) with (respondent bank); parties;
xxx xxx xxx 3. . . . on the ground that the increase violates Section 7-A of the Usury Law;
The clauses or provisions in the Housing Loan Agreement and the Real Estate Mortgage 4. . . . on the ground that the increase and the contractual provision that (respondent
referred to above as the basis for the escalation are: bank) relies upon for the increase are contrary to morals, good customs, public
a. Section I-F of Article VI of the Housing Loan Agreement, 3 which provides that, for order and public policy. 8
as long as the loan or any portion thereof or any sum that may be due and payable The key issue may be simply presented as follows: Did the respondent bank have a valid
under the said loan agreement remains outstanding, the borrower shall — and legal basis to impose an increased interest rate on the petitioners' housing loan?
f) Comply with all the rules and regulations of the program imposed by the The Court's Ruling
LENDER and to comply with all the rules and regulations that the Central Bank
of the Philippines has imposed or will impose in connection with the financing Basis for Increased Interest Rate
programs for bank officers and employees in the form of fringe benefits.
Petitioners argue that the HLA provision covers only administrative and other matters, and
b. Paragraph (f) of the Real Estate Mortgage 4 which states: does not include interest rates per se, since Article VI of the agreement deals with
insurance on and upkeep of the mortgaged property. As for the stipulation in the mortgage
The rate of interest charged on the obligation secured by this mortgage. . ., deed, they claim that it is vague because it does not state if the "prevailing" CB rules and
shall be subject, during the life of this contract, to such an regulations referred to therein are those prevailing at the time of the execution of these
increase/decrease in accordance with prevailing rules, regulations and contracts or at the time of the increase or decrease of the interest rate. They insist that the
bank's authority to escalate interest rates has not been shown to be "crystal-clear as a Thus, petitioners' contention that the escalation clause is violative of the said law is bereft
matter of fact" and established beyond doubt. The contracts being "contracts of adhesion," of any merit.
any vagueness in their provisions should be interpreted in favor of petitioners.
On the other hand, it will not be amiss to point out that the unilateral determination and
We note that Section 1-F of Article VI of the HLA cannot be read as an escalation clause imposition of increased interest rates by the herein respondent bank is obviously violative
as it does not make any reference to increases or decreases in the interest rate on loans. of the principle of mutuality of contracts ordained in Article 1308 of the Civil Code. As this
However, paragraph (f) of the mortgage contract is clearly and indubitably an escalation Court held in PNB: 16
provision, and therefore, the parties were and are bound by the said stipulation that "(t)he
rate of interest charged on the obligation secured by this mortgage . . ., shall be subject, In order that obligations arising from contracts may have the
during the life of this contract, to such an increase/decrease in accordance with prevailing force of law between the parties, there must
rules, regulations and circulars of the Central Bank of the Philippines as the Provident be mutuality between the parties based on their essential
Fund Board of Trustees of the Mortgagee (respondent bank) may prescribe for its debtors equality. A contract containing a condition which makes its
. . . ." 9 Contrary to petitioners' allegation, there is no vagueness in the aforequoted fulfillment dependent exclusively upon the uncontrolled will of one
proviso; even their own arguments (below) indicate that this provision is quite clear to of the contracting parties, is void (Garcia vs. Rita Legarda, Inc.,
them. 21 SCRA 555). Hence, even assuming that the . . . loan
agreement between the PNB and the private respondent gave
In Banco Filipino Savings & Mortgage Bank vs. Navarro, 10 this Court in essence ruled the PNB a license (although in fact there was none) to increase
that in general there is nothing inherently wrong with escalation clauses. In IBAA the interest rate at will during the term of the loan, that license
vs. Spouses Salazar, 11 the Court reiterated the rule that escalation clauses are valid would have been null and void for being violative of the principle
stipulations in commercial contracts to maintain fiscal stability and to retain the value of of mutuality essential in contracts. It would have invested the loan
money in long term contracts. agreement with the character of a contract of adhesion, where
the parties do not bargain on equal footing, the weaker party's
Application of the Escalation to Petitioners (the debtor) participation being reduced to the alternative "to take
Petitioners however insist that while ManCom Resolution No. 85-08 authorized a rate it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil
increase for resigned employees, it could not apply as to petitioner-employee because 85). Such a contract is a veritable trap for the weaker party whom
nowhere in the loan agreement or mortgage contract is it provided that petitioner- the courts of justice must protect against abuse and imposition.
wife's resignation will be a ground for the adjustment of interest rates, which is the very The respondent bank tried to sidestep this difficulty by averring that petitioner Gilda
bedrock of and the raison d'etre specified in said ManCom Resolution. Florendo as a former bank employee was very knowledgeable concerning respondent
They additionally contend that the escalation is violative of Section 7-A of the Usury Law bank's lending rates and procedures, and therefore, petitioners were "on an equal footing"
(Act No. 2655, as amended) which requires a law or MB act fixing an increased maximum with respondent bank as far as the subject loan contract was concerned. That may have
been true insofar as entering into the original loan agreement and mortgage contract was
rate of interest, and that escalation upon the will of the respondent bank is contrary to the
principle of mutuality of contracts, per Philippine National Bank vs.Court of Appeals. 12 concerned. However, that does not hold true when it comes to the determination and
imposition of escalated rates of interest as unilaterally provided in the ManCom
What is actually central to the disposition of this case is not really the validity of the Resolution, where she had no voice at all in its preparation and application.
escalation clause but the retroactive enforcement of the ManCom Resolution as against
petitioner-employee. In the case at bar, petitioners have put forth a telling argument that To allay fears that respondent bank will inordinately be prejudiced by being stuck with this
there is in fact no Central Bank rule, regulation or other issuance which would have "sweetheart loan" at patently concessionary interest rates, which according to respondent
triggered an application of the escalation clause as to her factual situation. bank is the "sweetest deal" anyone could obtain and is an act of generosity considering
that in 1985 lending rates in the banking industry were peaking well over 30% p.a., 17 we
In Banco Filipino, 13 this Court, speaking through Mme. Justice Ameurfina M. Herrera, need only point out that the bank had the option to impose in its loan contracts the
disallowed the bank from increasing the interest rate on the subject loan from 12% to 17% condition that resignation of an employee-borrower would be a ground for escalation. The
despite an escalation clause in the loan agreement authorizing the bank to fact is it did not. Hence, it must live with such omission. And it would be totally unfair to
"correspondingly increase the interest rate stipulated in this contract without advance now impose said condition, not to mention that it would violate the principle of mutuality of
notice to me/us in the event a law should be enacted increasing the lawful rates of consent in contracts. It goes without saying that such escalation ground can be included in
interest that may be charged on this particular kind of loan". In said case, the bank had future contracts — not to agreements already validly entered into.
relied upon a Central Bank circular as authority to up its rates. The Court ruled that CB
Circular No. 494, although it has the effect of law, is not a law, but an administrative Let it be clear that this Court understands respondent bank's position that the
regulation. concessional interest rate was really intended as a means to remunerate its employees
and thus an escalation due to resignation would have been a valid stipulation. But no such
In PNB vs. Court of Appeals, 14 this Court disallowed the increases in interest rate stipulation was in fact made, and thus the escalation provision could not be legally applied
imposed by the petitioner-bank therein, on the ground, among others, that said bank relied and enforced as against herein petitioners.
merely on its own Board Resolution (No. 681), PNB Circular No. 40-79-84, and PNB
Circular No. 40-129-84, which were neither laws nor resolutions of the Monetary Board. WHEREFORE, the petition is hereby GRANTED. The Court hereby REVERSES and
SETS ASIDE the challenged Decision of the Court of Appeals. The interest rate on the
In the case at bar, the loan was perfected on July 20, 1983. PD No. 116 became effective subject housing loan remains at nine (9) percent per annum and the monthly amortization
on January 29, 1973. CB Circular No. 416 was issued on July 29, 1974. CB Circ. 504 was at P1,248.72.
issued February 6, 1976. CB Circ. 706 was issued December 1, 1979. CB Circ. 905, lifting
any interest rate ceiling prescribed under or pursuant to the Usury Law, as amended, was SO ORDERED.
promulgated in 1982. These and other relevant CB issuances had already come into
existence prior to the perfection of the housing loan agreement and mortgage contract,
and thus it may be said that these regulations had been taken into consideration by the
contracting parties when they first entered into their loan contract. In light of the CB
issuances in force at that time, respondent bank was fully aware that it could have
imposed an interest rate higher than 9% per annum rate for the housing loans of its
employees, but it did not. In the subject loan, the respondent bank knowingly agreed that
the interest rate on petitioners' loan shall remain at 9% p.a. unless a CB issuance is
passed authorizing an increase (or decrease) in the rate on such employee loans and the
Provident Fund Board of Trustees acts accordingly. Thus, as far as the parties were
concerned, all other onerous factors, such as employee resignations, which could have
been used to trigger an application of the escalation clause were considered barred or
waived. If the intention were otherwise, they — especially respondent bank — should
have included such factors in their loan agreement.
ManCom Resolution No. 85-08, which is neither a rule nor a resolution of the Monetary
Board, cannot be used as basis for the escalation in lieu of CB issuances, since
paragraph (f) of the mortgage contract very categorically specifies that any interest rate
increase be in accordance with "prevailing rules, regulations and circulars of the Central
Bank . . . as the Provident Fund Board . . . may prescribe." The Banco
Filipino and PNB doctrines are applicable four-square in this case. As a matter of fact, the
said escalation clause further provides that the increased interest rate "shall only take
effect on the date of effectivity of (the) increase/decrease" authorized by the CB rule,
regulation or circular. Without such CB issuance, any proposed increased rate will never
become effective.
We have already mentioned (and now reiterate our holding in several
cases 15) that by virtue of CB Circular 905, the Usury Law has been rendered ineffective.