G.R. No.

L-48349 December 29, 1986

FRANCISCO HERRERA, plaintiff-appellant,
vs.
PETROPHIL CORPORATION, defendant-appellee.
Paterno R. Canlas Law Offices for plaintiff-appellant.

CRUZ, J.:

This is an appeal by the plaintiff-appellant from a decision rendered by the then Court of First Instance
of Rizal on a pure question of law. 1

The judgment appealed from was rendered on the pleadings, the parties having agreed during the
pretrial conference on the factual antecedents.

The facts are as follows: On December 5, 1969, the plaintiff-appellant and ESSO Standard Eastern. Inc.,
(later substituted by Petrophil Corporation) entered into a "Lease Agreement" whereby the former
leased to the latter a portion of his property for a period of twenty (20) years from said date, subject
inter alia to the following conditions:

3. Rental: The LESSEE shall pay the LESSOR a rental of Pl.40 sqm. per month on 400 sqm. and are to
be expropriated later on (sic) or P560 per month and Fl.40 per sqm. per month on 1,693 sqm. or
P2,370.21 per month or a total of P2,930.20 per month 2,093 sqm. more or less, payable yearly in
advance within the 1st twenty days of each year; provided, a financial aid in the sum of P15,000 to clear
the leased premises of existing improvements thereon is paid in this manner; P10,000 upon execution of
this lease and P5,000 upon delivery of leased premises free and clear of improvements thereon within
30 days from the date of execution of this agreement. The portion on the side of the leased premises
with an area of 365 sqrm. more or less, will be occupied by LESSEE without rental during the lifetime of
this lease. PROVIDED FINALLY, that the Lessor is paid 8 years advance rental based on P2,930.70 per
month discounted at 12% interest per annum or a total net amount of P130,288.47 before registration
of lease. Leased premises shall be delivered within 30 days after 1st partial payment of financial aid. 2

On December 31, 1969, pursuant to the said contract, the defendant-appellee paid to the plaintfff-
appellant advance rentals for the first eight years, subtracting therefrom the amount of P101,010.73,
the amount it computed as constituting the interest or discount for the first eight years, in the total sum
P180,288.47. On August 20, 1970, the defendant-appellee, explaining that there had been a mistake in
computation, paid to the appellant the additional sum of P2,182.70, thereby reducing the deducted
amount to only P98,828.03. 3

On October 14, 1974, the plaintiff-appellant sued the defendant-appellee for the sum of P98,828.03,
with interest, claiming this had been illegally deducted from him in violation of the Usury Law. 4 He also
prayed for moral damages and attorney's fees. In its answer, the defendant-appellee admitted the
factual allegations of the complaint but argued that the amount deducted was not usurious interest but
a given to it for paying the rentals in advance for eight years. 5 Judgment on the pleadings was rendered
for the defendant. 6

Plaintiff-appellant now prays for a reversal of that judgment, insisting that the lower court erred in the
computation of the interest collected out of the rentals paid for the first eight years; that such interest
was excessive and violative of the Usury Law; and that he had neither agreed to nor accepted the
defendant-appellant's computation of the total amount to be deducted for the eight years advance
rentals. 7
The thrust of the plaintiff-appellant's position is set forth in paragraph 6 of his complaint, which read:

6. The interest collected by defendant out of the rentals for the first eight years was excessive and
beyond that allowable by law, because the total interest on the said amount is only P33,755.90 at
P4,219.4880 per yearly rental; and considering that the interest should be computed excluding the first
year rental because at the time the amount of P281, 199.20 was paid it was already due under the lease
contract hence no interest should be collected from the rental for the first year, the amount of
P29,536.42 only as the total interest should have been deducted by defendant from the sum of
P281,299.20.

The defendant maintains that the correct amount of the discount is P98,828.03 and that the same is not
excessive and above that allowed by law.

As its title plainly indicates, the contract between the parties is one of lease and not of loan. It is clearly
denominated a "LEASE AGREEMENT." Nowhere in the contract is there any showing that the parties
intended a loan rather than a lease. The provision for the payment of rentals in advance cannot be
construed as a repayment of a loan because there was no grant or forbearance of money as to
constitute an indebtedness on the part of the lessor. On the contrary, the defendant-appellee was
discharging its obligation in advance by paying the eight years rentals, and it was for this advance
payment that it was getting a rebate or discount.

The provision for a discount is not unusual in lease contracts. As to its validity, it is settled that the
parties may establish such stipulations, clauses, terms and condition as they may want to include; and as
long as such agreements are not contrary to law, morals, good customs, public policy or public order,
they shall have the force of law between them. 8

There is no usury in this case because no money was given by the defendant-appellee to the plaintiff-
appellant, nor did it allow him to use its money already in his possession. 9 There was neither loan nor
forbearance but a mere discount which the plaintiff-appellant allowed the defendant-appellee to deduct
from the total payments because they were being made in advance for eight years. The discount was in
effect a reduction of the rentals which the lessor had the right to determine, and any reduction thereof,
by any amount, would not contravene the Usury Law.

The difference between a discount and a loan or forbearance is that the former does not have to be
repaid. The loan or forbearance is subject to repayment and is therefore governed by the laws on usury.
10

To constitute usury, "there must be loan or forbearance; the loan must be of money or something
circulating as money; it must be repayable absolutely and in all events; and something must be exacted
for the use of the money in excess of and in addition to interest allowed by law." 11

It has been held that the elements of usury are (1) a loan, express or implied; (2) an understanding
between the parties that the money lent shall or may be returned; that for such loan a greater rate or
interest that is allowed by law shall be paid, or agreed to be paid, as the case may be; and (4) a corrupt
intent to take more than the legal rate for the use of money loaned. Unless these four things concur in
every transaction, it is safe to affirm that no case of usury can be declared. 12

Concerning the computation of the deductible discount, the trial court declared:

As above-quoted, the 'Lease Agreement' expressly provides that the lessee (defendant) shag pay the
lessor (plaintiff) eight (8) years in advance rentals based on P2,930.20 per month discounted at 12%
interest per annum. Thus, the total rental for one-year period is P35,162.40 (P2,930.20 multiplied by 12
months) and that the interest therefrom is P4,219.4880 (P35,162.40 multiplied by 12%). So, therefore,
the total interest for the first eight (8) years should be only P33,755.90 (P4,129.4880 multiplied by eight
(8) years and not P98,828.03 as the defendant claimed it to be.

The afore-quoted manner of computation made by plaintiff is patently erroneous. It is most seriously
misleading. He just computed the annual discount to be at P4,129.4880 and then simply multiplied it by
eight (8) years. He did not take into consideration the naked fact that the rentals due on the eight year
were paid in advance by seven (7) years, the rentals due on the seventh year were paid in advance by six
(6) years, those due on the sixth year by five (5) years, those due on the fifth year by four (4) years,
those due on the fourth year by three (3) years, those due on the third year by two (2) years, and those
due on the second year by one (1) year, so much so that the total number of years by which the annual
rental of P4,129.4880 was paid in advance is twenty-eight (28), resulting in a total amount of
P118,145.44 (P4,129.48 multiplied by 28 years) as the discount. However, defendant was most fair to
plaintiff. It did not simply multiply the annual rental discount by 28 years. It computed the total discount
with the principal diminishing month to month as shown by Annex 'A' of its memorandum. This is why
the total discount amount to only P 8,828.03.

The allegation of plaintiff that defendant made the computation in a compounded manner is erroneous.
Also after making its own computations and after examining closely defendant's Annex 'A' of its
memorandum, the court finds that defendant did not charge 12% discount on the rentals due for the
first year so much so that the computation conforms with the provision of the Lease Agreement to the
effect that the rentals shall be 'payable yearly in advance within the 1st 20 days of each year. '

We do not agree. The above computation appears to be too much technical mumbo-jumbo and could
not have been the intention of the parties to the transaction. Had it been so, then it should have been
clearly stipulated in the contract. Contracts should be interpreted according to their literal meaning and
should not be interpreted beyond their obvious intendment. 13

The plaintfff-appellant simply understood that for every year of advance payment there would be a
deduction of 12% and this amount would be the same for each of the eight years. There is no showing
that the intricate computation applied by the trial court was explained to him by the defendant-appellee
or that he knowingly accepted it.

The lower court, following the defendant-appellee's formula, declared that the plaintiff-appellant had
actually agreed to a 12% reduction for advance rentals for all of twenty eight years. That is absurd. It is
not normal for a person to agree to a reduction corresponding to twenty eight years advance rentals
when all he is receiving in advance rentals is for only eight years.

The deduction shall be for only eight years because that was plainly what the parties intended at the
time they signed the lease agreement. "Simplistic" it may be, as the Solicitor General describes it, but
that is how the lessor understood the arrangement. In fact, the Court will reject his subsequent
modification that the interest should be limited to only seven years because the first year rental was not
being paid in advance. The agreement was for a uniform deduction for the advance rentals for each of
the eight years, and neither of the parties can deviate from it now.

On the annual rental of P35,168.40, the deducted 12% discount was P4,220.21; and for eight years, the
total rental was P281,347.20 from which was deducted the total discount of P33,761.68, leaving a
difference of P247,585.52. Subtracting from this amount, the sum of P182,471.17 already paid will leave
a balance of P65,114.35 still due the plaintiff-appellant.
The above computation is based on the more reasonable interpretation of the contract as a whole
rather on the single stipulation invoked by the respondent for the flat reduction of P130,288.47.

WHEREFORE, the decision of the trial court is hereby modified, and the defendant-appellee Petrophil
Corporation is ordered to pay plaintiff-appellant the amount of Sixty Five Thousand One Hundred
Fourteen pesos and Thirty-Five Centavos (P65,114.35), with interest at the legal rate until fully paid, plus
Ten Thousand Pesos (P10,000.00) as attorney's fees. Costs against the defendant-appellee.

SO ORDERED.

Yap (Chairman), Narvasa, Melencio-Herrera and Feliciano, JJ., concur.

DIGESTED

VIII FRANCISCO HERRERA, plaintiff-appellant, vs. PETROPHIL CORPORATION, defendant-appellee.

G.R. No. L-48349 | 1986-12-29
DOCTRINE:
The elements of usury are (1) a loan, express or implied; (2) an understanding between the parties that
the money lent shall or may be returned; that for such loan a greater rate or interest that is allowed by
law shall be paid, or agreed to be paid, as the case may be; and (4) a corrupt intent to take more than
the legal rate for the use of money loaned. Unless these four things concur in every transaction, it is safe
to affirm that no case of usury can be declared.
FACTS:
On December 5, 1969, the plaintiff-appellant and ESSO Standard Eastern. Inc., (Petrophil Corporation)
entered into a "Lease Agreement" whereby the former leased to the latter a portion of his property for a
period of twenty (20) years from said date. On December 31, 1969, pursuant to the said contract, the
PETROPHIL CORPORATION
paid to the
HERRERA
advance rentals for the first eight years, subtracting therefrom the amount of P101,010.73, the amount
it computed as constituting the interest or discount for the first eight years, in the total sum
P180,288.47. On August 20, 1970, the defendant-appellee, explaining that there had been a mistake in
computation, paid to the appellant the additional sum of P2,182.70, thereby reducing the deducted
amount to only P98,828.03. On October 14, 1974, the plaintiff-appellant sued the defendant-appellee
for the sum of P98,828.03, with interest, claiming this had been illegally deducted from him in violation
of the Usury Law. Plaintiff-appellant now prays for a reversal of that judgment, insisting that the lower
court erred in the computation of the interest collected out of the rentals paid for the first eight years;
that such interest was excessive and violative of the Usury Law; and that he had neither agreed to nor
accepted the defendant-appellant's computation of the total amount to be deducted for the eight years
advance rentals. The defendant maintains that the correct amount of the discount is P98,828.03 and
that the same is not excessive and above that allowed by law.
ISSUE:
Whether or not the contract is a loan
HELD:
No As its title plainly indicates, the contract between the parties is one of lease and not of loan. It is
clearly denominated a "LEASE AGREEMENT." Nowhere in the contract is there any showing that the
parties intended a loan rather than a lease. The provision for the payment of rentals in advance cannot
be construed as a repayment of a loan because there was no grant or forbearance of money as to
constitute an indebtedness on the part of the lessor. On the contrary, the defendant-appellee was
discharging its obligation in advance by paying the eight years rentals, and it was for this advance
payment that it was getting a rebate or discount.
There is no usury in this case because no money was given by the defendant-appellee to the plaintiff-
appellant, nor did it allow him to use its money already in his possession.
9
There was neither loan nor forbearance but a mere discount which the plaintiff-appellant allowed the
defendant-appellee to deduct from the total payments because they were being made in advance for
eight years. The discount was in effect a reduction of the rentals which the lessor had the right to
determine, and any reduction thereof, by any amount, would not contravene the Usury Law.
G.R. No. 82082 March 25, 1988

INSULAR BANK OF ASIA AND AMERICA,plaintiff-appellant,

vs.
SPOUSES EPIFANIA SALAZAR and RICARDO SALAZAR, defendants-appellees.

GUTIERREZ, JR., J.:

This is an appeal by the Insular Bank of Asia and America (IBAA) from the judgment of the Regional Trial
Court of Leyte in Civil Case No. 6932 for collection of a sum of money with preliminary attachment. The
appeal was originally brought to the Court of Appeals but was certified to us by that tribunal because it
raises only a question of law.

The facts are not disputed.

On November 22, 1978, defendants-appellees Epifania Salazar and Ricardo Salazar obtained a loan from
the plaintiff-appellant in the amount of Forty Two Thousand and Fifty Pesos ( P42,050.00 ) payable on or
before December 12, 1980. This loan transaction was evidenced by a promissory note where the
defendants-appellees bound themselves jointly and severally to pay the amount with interest at 19%
per annum and with the express authority to increase without notice the rate of interest up to the
maximum allowed by law and subject further to penalty charges or liquidated damages upon default
equivalent to 2% per month on any amount due and unpaid. In the event the account was referred to an
attorney for collection, the defendants-appellees were also bound to pay 25% of any amount due as
attorney's fees plus expenses of litigation and costs.

In accordance with the agreement, the plaintiff-appellant increased the rate of interest to 21% pursuant
to Central Bank Circular No. 705 dated December 1, 1979.

The promissory note matured but the defendants-appellees failed to pay their account. It was only after
several demands that the defendants-appellees were able to make partial payment. As of November 25,
1983, they were able to pay a total of P68,676.75 which payments were applied to partially satisfy the
penalty and interest charges.

On September 12, 1984, the plaintiff-appellant filed a complaint with the Regional Trial Court alleging
that the defendants-appellees were indebted to IBAA in the amount of P87,647.19 as of September 15,
1984. including interest at 21% per annum penalty charges, and attorney's fees.

At the pre-trial on October 31, 1984, the parties and their counsels appeared. The defendant-spouses
admitted the execution of the promissory note in consideration of P48,050.00. The trial court then
rendered a summary judgment the dispositive portion of which reads:

WHEREFORE, judgment is hereby ordered in favor of the plaintiff ordering the defendant spouses
Ricardo Salazar and Epifania Salazar to pay Insular Bank of Asia and America (IBAA) the sum of Eleven
Thousand Two Hundred Fifty Three Pesos and Twenty Five Centavos ( P11,253.25 ), with interest
thereon at the rate of 19% per annum from the filing of the complaint on September 12, 1984 until fully
paid. The defendants are further ordered to pay the plaintiff-attorney's fees in the amount of one
Thousand Pesos ( P1,000.00 ) and to pay the costs. (p. 4, Plaintiff- Appellant's Brief).

Plaintiff-appellant now raises the following assigned errors:

I THE LOWER COURT ERRED IN NOT AWARDING TO PLAINTIFF-APPELLANT PENALTY CHARGES OR
LIQUIDATED DAMAGES IN THE AMOUNT OF 2% PER MONTH ON ALL AMOUNTS DUE AND UNPAID;

II THE LOWER COURT ERRED IN NOT AWARDING INTEREST ON THE LOAN AT 21 % PER ANNUM.

III THE LOWER COURT ERRED IN THE COMPUTATION OF THE AMOUNT OF OBLIGATION DUE FROM
DEFENDANTS-APPELLEES APPELLEES IN FAVOR OF PLAINTIFF-APPELLANT

III THE LOWER COURT ERRED IN NOT AWARDING PLAINTIFF- APPELLANT ATTORNEY'S FEES
EQUIVALENT TO 25% OF THE AMOUNT DUE AND EXPENSES OF LITIGATION; and

IV THE LOWER COURT ERRED IN NOT ORDERING DEFENDANTS-APELLEES TO JOINTLY AND

SEVERALLY PAY THE OBLIGATION. (pp. 4-5, Plaintiff-Appellant's Brief)

The Escalation Clause provided in the promissory note reads:

The interest herein charged shall be subject to in , without notice, depending on whatever policy IBAA
may in the future adopt conformable to law, especially to compensate for any in Central Bank interests
or rediscounting rates.

Finding strength in the argument that the promissory note is the contract between the parties and,
under the law, obligations arising from contracts have the force of law between the parties, the plaintiff-
appellant increased the interest rate to 21% per annum effective December 1, 1979 pursuant to Central
Bank Circular No. 705.

In line with the Court's ruling in the case of Banco Filipino v. Navarro (G.R. No. L-46591, July 28,1987),
the interest rate may not be increased by the plaintiff-appellant in the instant case. It is the nile that
escalation clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain
the value of money in long term contracts. However, the enforceability of such stipulations are subject
to certain conditions.

In the Banco Filipino case, the borrower questioned the additional interest charges on the loan of
P41,300.00 she obtained when the interest rates were increased from 12% to 17% per Central Bank
Circular No. 494, issued on January 2, 1976. In a letter written by the Central Bank to the borrower,
some clarifications were made. Pertinent portions of the letter read:

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 by banks and non-banks
performing quasi- banking functions on loans already existing as of January 3, 1976, in the light of
Central Rank Circulars Nos. 492-498:

1 Only banks and non-bank financial intermediaries performing quasi-banking functions may
interest rates on I already existing as 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.
(Emphasis supplied)

Moreover, in its comment and supplemental comment submit, ted upon orders of this Court, the
Central Bank took the position that the issuance of its circulars is a valid exercise of its authority to
prescribe maximum rates of interest and based on the general principles of contract, the Escalation
Clause is a valid provision in the loan agreement provided that- 41) the increased rate imposed or
charged by petitioner does not exceed the ceiling fixed by law or the Monetary Board; (2) the increase is
made effective not earlier than the effectivity of the law or regulation authorizing such an increase and
(3) the remaining maturities of the loans are more than 730 days as of the effectivity of the law or
regulation authorizing such an increase. (Emphasis supplied)

In the case at bar, the loan was obtained on November 21, 1978 and was payable on or before
November 12, 1980. Central Bank Circular No. 705, authorizing the increase from 19% to 21% was issued
on December 1, 1979. Obviously, as of this date, December 1, 1979, the remaining maturity of the loan
was less than 730 days. Hence, the plaintiff-appellant's second assignment of error is without merit.

With respect to the penalty clause, we have upheld the validity of such agreements in several cases. As
the Court stated in the case of Government Service Insurance System v. Court of appeals (145 SCRA 311,
321):

In the Bachrach case (supra) the Supreme Court ruled that the Civil Code permits the agreement upon a
penalty apart from the interest. Should there be such an agreement, the penalty does not include the
interest, and as such the two are different and distinct things which may be demanded separately.
Reiterating the same principle in the later case of Equitable Banking Corp. (supra), where this Court held
that the stipulation about payment of such additional rate partakes of the nature of a penalty clause,
winch is sanctioned by law.

In the case of Equitable Banking Corporation v. Liwanag (32 SCRA 293, 297), the Court explained:

xxx xxx xxx

... We have not overlooked the 14% interest that appellant has been sentenced to pay. This may appear
to be usurious, but it is not so. The rate stipulated was 9%, subject, however, to an additional rate of 5%,
in the event of default. The stipulation about payment of such additional rate partakes of the nature of a
penalty clause, which is sanctioned by law, (Art. 1226, Civil Code of the Philippines), although, the
penalty may also be reduced by the courts if it is iniquitous or unconscionable. (Art 1229, Civil Code of
the Philippines). ...

Admittedly, the defendants-appellees in the instant case failed to pay the loan on the due date.
However, with earnest efforts, they tried to pay the loan little by little so that as of November 25, 1983,
a total of P68,676.75 had been paid. The plaintiff-appellant, on the other hand, merely applied this
amount to satisfy the penalty and interest charges which it additionally imposed. We do not find any
evidence of bad faith on the part of the defendants-appellees in their failure to pay the loan on time.
Efforts were indeed made to make good their promise. We note the trial court's observation that the
plaintiff-appellant did not even state in the complaint that the defendants-appellees had made partial
payments, making it appear that the spouses Salazars refused to pay the loan. In their answer with
counterclaim, the defendants-appellees alleged that the bank neglected to credit said payments in the
defendant's account folio and subjected it as it did to the additional charges. Furthermore, we agree
with the trial court that the bank has already profited considerably from the loan. In a span of about six
(6) years, the bank was enriched by P 26,626.75 (p. 17, Records). The penalty charges of 2% a month are,
therefore, out of proportion to the damage incurred by the bank. In accordance with Article 1229 of the
Civil Code, the Court is constrained to reduce the penalty for being highly iniquitous

With respect to the attorney's fees, the court is likewise empowered to reduce the same if they are
unreasonable or unconscionable notwithstanding the express contract for attorney's fees. The award of
one thousand ( P1,000.00 ) pesos by the trial court appears to be enough.

The promissory note signed by the defendants-appellants states that the loan of P42,050.00 shall bear
interest at the rate of 19% per annum. This would yield interest of P7,989.50 per annum or a total of P
46,339.10 from November 22, 1978 to September 12, 1984, the date of filing the complaint. Penalty
interest of 1% a month or 12% per annum is reasonable so that from December 12, 1980 up to
September 12, 1984, penalty charges should be P19,202.83. Considering that the defendants-appellees
have paid the amount of P68,676.75, they, therefore, owed the bank the amount of P38,915.18 when
the complaint was filed. There is no indication in the records as to the fluctuation of actual interest rates
from 1984 and, therefore, we order interest at the legal rate of 12% per annum on the unpaid amount.

WHEREFORE, the decision of the lower court is MODIFIED. The defendants-appellants Ricardo Salazar
and Epifania Salazar are ordered to pay Insular Bank of Asia and America (IBAA) the sum of THIRTY-
EIGHT THOUSAND NINE HUNDRED PESOS and EIGHTEEN CENTAVOS (P38,915.18 ) with interest thereon
at the rate of Twelve Percent (12%) per annum from the filing of the complaint until fully paid.

SO ORDERED.
DIGESTED
Producers Bank Of The Philippines (Now First International Bank), Petitioner, Vs. Hon. Court
Of Appeals And Franklin Vives, Respondents. G.R. No. 115324 | 2003-02-19
DOCTRINE:
Consumable goods may be the subject of commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for exhibition.
FACTS:
Sanchez asked Franklin Vives to deposit in a bank a certain amount of money in the bank account of
Sterela Marketing and Services for purposes of its incorporation, the corporation was owned by
Doronilla. Sanchez assured Vives that he could withdraw the money from the account of Sterela a
month’s time. Thereafter, relying on the assurances and representations of Sanchez and Doronilla, Vives
issued a check in favor of Sterela. The check was deposited to the newly opened savings account of
Sterela Marketing and Services in the Producers Bank of the Philippines (Producers). The passbook,
given to the wife of Vives, had an instruction that no withdrawals/deposits will be allowed unless the
passbook is presented. The authorized signatories of said account were Mrs. Vives and/or Sanchez.
Subsequently, Vives learned that Sterela was no longer holding office in the address previously given to
him. Alarmed, he and his wife went to the Producers to verify if their money was still intact. They were
informed that part of the money in account had been withdrawn by Doronilla and could not withdraw
said remaining amount because it had to answer for some postdated checks issued by Doronilla. Vives
tried to get in touch with Doronilla through Sanchez. He received a letter from Doronilla, assuring him
that his money was intact and would be returned to him. Doronilla issued a postdated check in favor
Vives. However, upon presentment thereof to the drawee bank, the check was dishonored. Vives filed
an action for recovery of sum of money in the RTC against Doronilla, Sanchez, Dumagpi and Producers.
RTC ruled in favor of Vives holding Doronila, Dumagpi and Producers jointly and severally liable and
ordered the payment thereof.
ISSUE:
Whether the transaction between Vives and Doronilla is a simple loan (mutuum)
HELD:
No
A circumspect examination of the records reveals that the transaction between them was a
commodatum. Article 1933 of the Civil Code distinguishes between the two kinds of loans in this wise:
“
By the contract of loan, one of the parties delivers to another, either something not consumable so that
the latter may use the same for a certain time and return it, in which case the contract is called a
commodatum; or money or other consumable thing, upon the condition that the same amount of the
same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum.

Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay
interest.In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan,
ownership passes to the borrower.”

The rule is that the intention of the parties thereto shall be accorded primordial consideration in
determining the actual character of a contract. In case of doubt, the contemporaneous and subsequent
acts of the parties shall be considered in such determination. As correctly pointed out by both the Court
of Appeals and the trial court, the evidence shows that private respondent agreed to deposit his money
in the savings account of Sterela specifically for the purpose of making it appear "that said firm had
sufficient capitalization for incorporation, with the promise that the amount shall be returned within 30
days. Vives merely "accommodated" Doronilla by lending his money without consideration, as a favor to
his good friend Sanchez. It was however clear to the parties to the transaction that the
money would not be removed from Sterela’s savings account and would be returned to private
respondent after thirty (30) days.

Doronilla’s attempts to return to private respondent the amount of P200,000.00 which the latter
deposited in Sterela’s account together with an

additional P12,000.00, allegedly representing interest on the mutuum, did not convert the

transaction from a commodatum into a mutuum because such was not the intent of the parties and
because the additional P12,000.00 corresponds to the fruits of the lending of the P200,000.00.

Article 1935 of the Civil Code expressly states that "[t]he bailee in commodatum acquires the use of the
thing loaned but not its fruits." Hence, it was only proper for Doronilla to remit to private respondent
the interest accruing to the latter’s money deposited with petitioner.
G.R. No. L-20240 December 31, 1965

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
JOSE GRIJALDO, defendant-appellant.

Office of the Solicitor General for plaintiff-appellee.

Isabelo P. Samson for defendant-appellant.

ZALDIVAR, J.:

In the year 1943 appellant Jose Grijaldo obtained five loans from the branch office of the Bank of
Taiwan, Ltd. in Bacolod City, in the total sum of P1,281.97 with interest at the rate of 6% per annum,
compounded quarterly. These loans are evidenced by five promissory notes executed by the appellant in
favor of the Bank of Taiwan, Ltd., as follows: On June 1, 1943, P600.00; on June 3, 1943, P159.11; on
June 18, 1943, P22.86; on August 9, 1943,P300.00; on August 13, 1943, P200.00, all notes without due
dates, but because the loans were due one year after they were incurred. To secure the payment of the
loans the appellant executed a chattel mortgage on the standing crops on his land, Lot No. 1494 known
as Hacienda Campugas in Hinigiran, Negros Occidental.

By virtue of Vesting Order No. P-4, dated January 21, 1946, and under the authority provided for in the
Trading with the Enemy Act, as amended, the assets in the Philippines of the Bank of Taiwan, Ltd. were
vested in the Government of the United States. Pursuant to the Philippine Property Act of 1946 of the
United States, these assets, including the loans in question, were subsequently transferred to the
Republic of the Philippines by the Government of the United States under Transfer Agreement dated
July 20, 1954. These assets were among the properties that were placed under the administration of the
Board of Liquidators created under Executive Order No. 372, dated November 24, 1950, and in
accordance with Republic Acts Nos. 8 and 477 and other pertinent laws.

On September 29, 1954 the appellee, Republic of the Philippines, represented by the Chairman of the
Board of Liquidators, made a written extrajudicial demand upon the appellant for the payment of the
account in question. The record shows that the appellant had actually received the written demand for
payment, but he failed to pay.

The aggregate amount due as principal of the five loans in question, computed under the Ballantyne
scale of values as of the time that the loans were incurred in 1943, was P889.64; and the interest due
thereon at the rate of 6% per annum compounded quarterly, computed as of December 31, 1959 was
P2,377.23.

On January 17, 1961 the appellee filed a complaint in the Justice of the Peace Court of Hinigaran, Negros
Occidental, to collect from the appellant the unpaid account in question. The Justice of the Peace Of
Hinigaran, after hearing, dismissed the case on the ground that the action had prescribed. The appellee
appealed to the Court of First Instance of Negros Occidental and on March 26, 1962 the court a quo
rendered a decision ordering the appellant to pay the appellee the sum of P2,377.23 as of December 31,
1959, plus interest at the rate of 6% per annum compounded quarterly from the date of the filing of the
complaint until full payment was made. The appellant was also ordered to pay the sum equivalent to
10% of the amount due as attorney's fees and costs.

The appellant appealed directly to this Court. During the pendency of this appeal the appellant Jose
Grijaldo died. Upon motion by the Solicitor General this Court, in a resolution of May 13, 1963, required
Manuel Lagtapon, Jacinto Lagtapon, Ruben Lagtapon and Anita L. Aguilar, who are the legal heirs of Jose
Grijaldo to appear and be substituted as appellants in accordance with Section 17 of Rule 3 of the Rules
of Court.

In the present appeal the appellant contends: (1) that the appellee has no cause of action 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 of P2,377.23.

In discussing the first point of contention, the appellant maintains that the appellee has no privity of
contract with the appellant. It is claimed that the transaction between the Taiwan Bank, Ltd. and the
appellant, so that the appellee, Republic of the Philippines, could not 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 the original creditor and the transaction between the
appellant and the Bank of Taiwan was a private contract of loan. However, pursuant to the Trading with
the Enemy Act, as amended, and Executive Order No. 9095 of the United States; and under Vesting
Order No. P-4, dated January 21, 1946, the properties of the Bank of Taiwan, Ltd., an entity which was
declared to be under the jurisdiction of the enemy country (Japan), were vested in the United States
Government and the Republic of the Philippines, the assets of the Bank of Taiwan, Ltd. were transferred
to and vested in the Republic of the Philippines. The successive transfer of the rights over the loans in
question from the Bank of Taiwan, Ltd. to the United States Government, and from the United States
Government to the government of the Republic of the Philippines, made the Republic of the Philippines
the successor of the rights, title and interest in said loans, thereby creating a privity of contract between
the appellee and the appellant. In defining the word "privy" this Court, in a case, said:

The word "privy" denotes the idea of succession ... hence an assignee of a credit, and one subrogated to
it, etc. will be privies; in short, he who by succession is placed in the position of one of those who
contracted the judicial relation and executed the private document and appears to be substituting him
in the personal rights and obligation is a privy (Alpurto vs. Perez, 38 Phil. 785, 790).

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 assets of the Bank of Taiwan,
Ltd. being an involuntary act of war, and sanctioned by international law, the United States succeeded
to the rights and interests of said Bank of Taiwan, Ltd. over the assets of said bank. As successor in
interest in, and transferee of, the property rights of the United States of America over the loans in
question, the Republic of the Philippines had thereby become a privy to the original contracts of loan
between the Bank of Taiwan, Ltd. and the appellant. It follows, therefore, that the Republic of the
Philippines has a legal right to bring the present action against the appellant Jose Grijaldo.

The appellant likewise maintains, in support of his contention that the appellee has no 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 enemy action his obligation to pay the loans was
thereby extinguished. This argument is untenable. The terms of the promissory notes and the chattel
mortgage that the appellant executed in favor of the Bank of Taiwan, Ltd. do not support the claim of
appellant. The obligation of the appellant under the five promissory notes was not to deliver a
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 thing — the amount of money
representing the total sum of the five loans, with interest. The transaction between the appellant and
the Bank of Taiwan, Ltd. was a series of five contracts of simple loan of sums of money. "By a contract of
(simple) loan, one of the parties delivers to another ... money or other consumable thing upon the
condition that the same amount of the same kind and quality shall be paid." (Article 1933, Civil Code)
The obligation of the appellant under the five promissory notes evidencing the loans in questions is to
pay the value thereof; that is, to deliver a sum of money — a clear case of an obligation to deliver, a
generic thing. Article 1263 of the Civil Code provides:

In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not
extinguish the obligation.

The chattel mortgage on the crops growing on appellant's land simply stood as a security 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 be paid from other sources aside
from the mortgaged crops.

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 should be done is to evaluate the loans on the basis of the
Ballantyne Scale as of the time the loans became due, and that was in June 1944. This contention of the
appellant is also without merit.

The decision of the court a quo ordered the appellant to pay the sum of P2,377.23 as of December 31,
1959, plus interest rate of 6% per annum compounded quarterly from the date of the filing of the
complaint. The sum total of the five loans obtained by the appellant from the Bank of Taiwan, Ltd. was
P1,281.97 in Japanese war notes. Computed under the Ballantyne Scale of values as of June 1943, this
sum of P1,281.97 in Japanese war notes in June 1943 is equivalent to P889.64 in genuine Philippine
currency which was considered the aggregate amount due as principal of the five loans, and the amount
of 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 incurred in 1943.

It is the stand of the appellee that the Ballantyne scale of values should be applied as of the time the
obligation was incurred, and that was in June 1943. This stand of the appellee was upheld by the lower
court; and the decision of the lower court is supported by the ruling of this Court in the case of Hilado
vs. De la Costa (G.R. No. L-150, April 30, 1949; 46 O.G. 5472), which states:

... Contracts stipulating for payments presumably in Japanese war notes may be enforced in our Courts
after the liberation to the extent of the just obligation of the contracting parties and, as said notes have
become worthless, in order that justice may be done and the party entitled to be paid can recover their
actual value in Philippine Currency, what the debtor or defendant bank should return or pay is the value
of the Japanese military notes in relation to the peso in Philippine Currency obtaining on the date when
and at the place where the obligation was incurred unless the parties had agreed otherwise. ... . (italics
supplied)

IN VIEW OF THE FOREGOING, the decision appealed from is affirmed, with costs 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 case.

DIGESTED

REPUBLIC v. JOSE GRUALDO, GR No. L-20240, 1965-12-31

Facts:

I... ursuant to the

Philippine Property Act of 1946 of the United States, these assets, including the loans in question, were
subsequently transferred to the Republic of the Philippines by the Government of the United States
under Transfer Agreement dated July 20, 1954. These assets were among the... properties that were
placed under the administration of the Board of Liquidators created under Executive Order No. 372,
dated November 24, 1950, and in accordance with Republic Act Nos. 8 and 477 and other pertinent
laws.

On September 29, 1954 the appellee, Republic of the Philippines, represented by the Chairman of the
Board of Liquidators, made a written extra-judicial demand upon the appellant for the payment of the
account in question. The record shows that the appellant had actually... received the written demand
for payment, but he failed to pay.
The appellant appealed directly to this Court. During pendency of this appeal the appellant Jose Grijaldo
died.

Upon motion by the Solicitor General this Court, in a resolution of May 13, 1963, required Manuel
Lagtapon, Jacinto Lagtapon, Ruben Lagtapon and Anita L. Aguilar,... who are the legal heirs of Jose
Grijaldo, to appear and be substituted as appellants in accordance with Section 17 of Rule 3 of the Rules
of Court.

In discussing Ms first point of contention, the appellant maintains that the appellee has no privity of
contract with the appellant. It is claimed that the transaction involved in this case was a private
transaction between the Taiwan Bank, Ltd. and the appellant, so that the... appellee, Republic of the
Philippines, could not legally bring action against the appellant for the enforcement of the obligation
involved in said transaction.

This contention has no merit.

Issues:

The record shows that the appellant had actually... received the written demand for payment, but he
failed to pay.

The appellant likewise maintains, in support of his contention that the appellee has no cause of action,
that because the loans were secured by a chattel mortgage on the standing crops on a land owned by
him and those crops were lost or destroyed through enemy action his... obligation to pay the loans was
thereby extinguished.

The chattel mortgage on the crops growing on appellant's land simply stood as a security 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 be... paid from other sources aside
from the mortgaged crops.

he decision of the court a quo ordered the appellant to pay the sum of P2,377.23 as of December 31,
1959 plus interest at the rate of 6% per annum compounded quarterly from the date of the filing of the
complaint. The sum total of the five loans obtained by the... appellant from the Bank of Taiwan, Ltd. was
P1,281.97 in Japanese war notes.

Ruling:

The decision of the court a quo ordered the appellant to pay the sum of P2,377.23 as of December 31,
1959 plus interest at the rate of 6% per annum compounded quarterly from the date of the filing of the
complaint. The sum total of the five loans obtained by the... appellant from the Bank of Taiwan, Ltd. was
P1,281.97 in Japanese war notes.

It is the stand of the appellee that the Ballantyne scale of value should be applied as of the time the
obligation was incurred, and that was in June 1943.

It is the stand of the appellee that the Ballantyne scale of value should be applied as of the time the
obligation was incurred, and that was in June 1943. This stand of the appellee was upheld by the lower
court; and the decision of the lower court is supported by the ruling... of this Court in the case of Hilado
vs. De la Costa (83 Phil 471; 46 Off. Gaz., 5472), which states:
In view of the foregoing, the decision appealed from is affirmed, with costs 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 case.
G.R. No. L-32116 April 2l, 1981
RURAL BANK OF CALOOCAN, INC. and JOSE O. DESIDERIO, JR.,
petitioners,vs.
THE COURT OF APPEALS and MAXIMA CASTRO,
respondents.

FACTS:
Maxima Castro, accompanied by Severino Valencia, went to the Rural Bank of Caloocan to apply for a
loan. Valencia arranged everything about the loan with the bank. He supplied to the latter the personal
data required for Castro's loan application. After the bank approved the loan for the amount of
P3,000.00, Castro, accompanied by the Valencia spouses, signed a promissory note corresponding to her
loan in favor of the bank. On the same day, the Valencia spouses obtained from the bank an equal
amount of loan for P3,000.00. They signed another promissory note (Exhibit "2") corresponding to their
loan in favor of the bank and had Castro affixed thereon her signature as co-maker.

Both loans were secured by a real-estate mortgage on Castro's house and lot. Later, the sheriff of Manila
sent a notice to Castro, saying that her property would be sold at public auction to satisfy the obligation
covering the two promissory notes plus interest and attorney's fees. Upon request by Castro and the
Valencias and with conformity of the bank, the auction sale was postponed, but was nevertheless
auctioned at a later date.

Castro claimed that she is a 70-year old widow who cannot read and write in English. According to her,
she has only finished second grade. She needed money in the amount of P3,000.00 to invest in the
business of the defendant spouses Valencia, who accompanied her to the bank to secure a loan of
P3,000.00. While at the bank, an employee handed to her several forms already prepared which she was
asked to sign, with no one explaining to her the nature and contents of the documents. She also alleged
that it was only when she received the letter from the sheriff that she learned that the mortgage
contract which was an encumbrance on her property was for P6.000.00 and not for P3,000.00 and that
she was made to sign as co-maker of the promissory note without her being informed.

Castro filed a suit against petitioners contending that thru mistake on her part or fraud on the part of
Valencias she was induced to sign as co-maker of a promissory note and to constitute a mortgage on her
house and lot to secure the questioned note. At the time of filing her complaint, respondent Castro
deposited the amount of P3,383.00 with the court a quo in full payment of her personal loan plus
interest.
Castro prayed for:
(1)
the annulment as far as she is concerned of the promissory note (Exhibit "2")and mortgage (Exhibit "6")
insofar as it exceeds P3,000.00; and
(2)
for the discharge of her personal obligation with the bank by reason of a deposit of P3,383.00 with the
court a quo upon the filing of her complaint.

ISSUE:
Whether or not respondent court correctly affirmed the lower court in declaring the promissory note
(Exhibit 2) invalid insofar as they affect respondent Castro vis-à-vis petitioner bank, and the mortgage
contract (Exhibit 6) valid up to the amount of P3,000.00 only.

HELD:
Yes.
RATIO:
While the Valencias defrauded Castro by making her sign the promissory note and the mortgage
contract, they also misrepresented to the bank Castro's personal qualifications in order to secure its
consent to the loan. Thus, as a result of thefraud upon Castro and the misrepresentation to the bank
inflicted by theValencias both Castro and the bank committed mistake in giving theirconsents to the
contracts. In other words, substantial mistake vitiated their consents given. For if Castro had been
aware of what she signed and the bank of the true qualifications of the loan applicants, it is evident that
they would not have given their consents to the contracts.

Article 1342 of the Civil Code which provides:

Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such
misrepresentation has created substantial mistake and the same is mutual.

We cannot declare the promissory note valid between the bank and Castro and the mortgage contract
binding on Castro beyond the amount of P3,000.00, for while the contracts may not be invalidated
insofar as they affect the bank and Castro on the ground of fraud because the bank was not a
participant thereto, such may however be invalidated on the ground of substantial mistake mutually
committed by them as a consequence of the fraud and misrepresentation inflicted by the Valencias.

Thus, in the case of Hill vs. Veloso, this Court declared that a contract may be annulled on the ground of
vitiated consent if deceit by a third person, even without connivance or complicity with one of the
contracting parties, resulted in mutual error on the part of the parties to the contract. The fraud
particularly averred in the complaint, having been proven, is deemed sufficient basis for the declaration
of the promissory note invalid insofar as it affects Castro vis-a-vis the bank, and the mortgage contract
valid only up to the amount of P3,000.00.