G.R. No. L-59519 July 20, 1982

ADELA FRANCISCO, petitioner, vs.HON. ALFREDO M. GORGONIO, as Presiding Judge of the Court of First Instance of Rizal, Branch XXXV, Caloocan City, Deputy Sheriff Danilo P. Norberto, and Spouses Ching Siao and Lim O. Chu, respondents.

BARREDO, J.:

Petition for certiorari seeking the setting aside of the orders of respondent court of August 15, 1980, November 7, 1980, March 2, 1981, October 27, 1981 and December 16, 1981, particularly insofar as said orders require petitioner to pay interest at the rates stated therein in addition to the amount of P150,000.00 which has already been paid to private respondents.

The case below stemmed from a contract of lease entered into on July 5, 1977 between Zenaida F. Boiser "representing her parents, spouses Luis F. Francisco and Adela Blas Francisco" (p. 26, Record) 1 of a piece of land one hundred thirty-five square meters, more or less, situated at No. 691 (Old) Rizal Avenue Extension, Caloocan City, with the following pertinent provisions:

1. That the amount of ONE HUNDRED FIFTY THOUSAND PESOS (Pl50,000.00), Philippine Currency, shall be deposited by the Lessee in favor of the Lessor upon signing of this agreement;

2. That out of the deposit of P150,000.00, the amount of P30,000.00 equivalent to twenty per cent (20%) of said deposit shall represent the goodwill of the store space;

3. That the monthly rental shall be THREE THOUSAND SEVEN HUNDRED FIFTY PESOS (P3,750.00), Philippine Currency, and the amount of P2,500.00 shall be deducted against the aforesaid deposit and the amount of P1,250.00 shall be in postdated monthly checks for 12 months. It is understood and agreed that the monthly rental aforesaid shall begin upon final occupancy of said store space by the Lessee;

4. That the proposed building shall be constructed and to be finished by the Lessor within 6 months from execution of this agreement:

5. That the terms of the lease contract shall be ten (10) years from execution hereof, to be renewed for a 5-year period upon agreement of both parties, subject however for a reasonable increase of monthly rental after five (5) years from execution hereof;

6. That in case the parties hereof will not agree as to the conditions and terms to be set up in the final contract of lease, then the Lessor agrees to return and refund the amount of P150,000.00 as deposit in full with legal interest to the Lessee and this agreement shall be considered null and void and without force and effect, if however, it is the Lessee who will back out from this agreement, then the amount of P30,000.00 shall be forfeited.

On May 30, 1978, private respondents filed a complaint, Civil Case No. C-6935, precisely the case below, against Zenaida F. Boiser, as attorney-in-fact of the spouses Luis F. Francisco and Adela Francisco, alleging that in spite of their having paid the P120,000.00 advanced rentals and P30,000.00 goodwill stipulated in the agreement, and the promise of said defendant to deliver to them the leased premises within six months from the signing of the contract, she failed to do so without any legal justification, and instead was about to turn over possession thereof to Ginza Telamart, and, therefore, prayed thus:

WHEREFORE, in view of all the foregoing it is most respectfully prayed as a preliminary matter that a writ 6f preliminary prohibitory injunction be issued by this court pending the final termination of this case ordering defendant to desist from awarding the leased premises to another and that after due hearing judgment be rendered:

1. Making preliminary prohibitory injunction final and permanent;

2. That plaintiff be entitled to the described leased portion of the building and ordering defendant to deliver the same;

3. Ordering defendant to pay an amount reasonably assessed by the Honorable Court for moral damages;

4. Ordering the defendant to pay actual damage as may be proven, plus legal interest;

5. And further ordering defendant to pay the sum of P15,000.00 as and for attorney's fees.

Plaintiffs herein further pray for such other reliefs and remedies just and equitable in the premises. (Pp. 24-25, Record)

After being summoned, on June 29, 1978, defendant Boiser (who was the only one served with summons) filed her answer alleging and praying:

10. That the agreement to lease was subject to the following conditions:

(a) the resolutory condition contained in paragraph 6 thereof quoted in paragraph 2 of this answer;

(b) the specific area of the building to be constructed was still to be agreed upon and it was not provided in the agreement what specific area of the building was to be leased by plaintiff;

11. That plaintiff and defendant could not agree on the specific area of the new building to be leased, the choice of which was made difficult by the fact that the frontage as required by the city government; consequently, defendant opted to consider the agreement null and void and of no force and effect; that defendant tendered payment to plaintiff before the complaint was filed of the sum of P150,000.00 with interest at the legal rate as provided in paragraph 6 of the agreement, which tender of payment was refused by the plaintiff;

12. That defendant is ready, willing and able to refund or reimburse the amount of P150,000.00 with interest at the legal rate as provided in paragraph 6 of the agreement;

And as counterclaim, defendant respectfully alleges:

13. That defendant reiterates the foregoing allegations to form integral part of this counterclaim;

14. That defendant is lawfully entitled to consider the agreement null and void and of no force and effect and to make a consignation of the amount of P150,000.00 with interest at the legal rate under paragraph 6 of the agreement and to be released from any further liability thereon;

15. That due to the unfounded suit filed by plaintiff, defendant has been compelled to litigate to protect her interest and avail of the services of counsel at an agreed fee of P5,000.00.

WHEREFORE, it is respectfully prayed:

1. That the prayer for a writ of preliminary injunction contained in the complaint be denied and the temporary restraining order be set aside;

2. After trial, that judgment be rendered dismissing the complaint for lack of merit;

3. On the counterclaim, that the Agreement dated July 5, 1977 between plaintiff and defendant be declared null and void and of no force and effect pursuant to paragraph 6 thereof, that the consignation of the amount of P150,000.00 with interest at the legal rate from July 5, 1977 until its deposit in court be accepted by the court; and that defendant be declared released from any further liability or obligation under the said Agreement;

4. Likewise on the counterclaim, that plaintiff be ordered to pay defendant attorney's fees in the amount of P5,000.00, such expenses of litigation as may be proven, and to pay the costs, if any.

Defendant respectfully prays for such other relief as the court may deem just and proper in the premises. (Pp. 29-31, Record)

Evidently, the court a quo must have issued the restraining order prayed for in private respondent's complaint, for on July 24, 1978, defendant Boiser filed a motion praying:

1. That the restraining order contained in the order of June 26, 1978 be lifted and set aside; and

2. That plaintiff be allowed to deposit with the clerk of court, or with such other depository as the court may determine, the sum of Pl50,000.00 subject to the disposition of the court in its judgment. (Page 33, Record.)

Acting on the foregoing motion, on August 10, 1978 Judge Alberto Q. Ubay, who was then still the judge in charge of the case, issued the following order:

O R D E R

The "Omnibus Motion" filed by defendant, thru counsel, on July 25, 1978, is hereby GRANTED, it appearing from the records of this case and from the testimony of plaintiff Ching Siao that when on June 26, 1978 the Court issued a restraining order requiting defendant "to desist and refrain from awarding the leased premises to Ginza Telamart", the premises in question had already been leased to the said Ginza Telamart and has been actually occupied by it, contrary to the allegation and contention of the herein plaintiffs. Hence, the continuance of said restraining order is no longer justified.

As regards the consignment of the sum of P150,000.00, the Court believes that no valid reason has been advanced by plaintiffs why the same should not be accepted or granted, subject to the outcome of this case on the merits and subject to the orders of this Court.

WHEREFORE, the restraining order issued by the Court dated June 26, 1978, is hereby lifted and set aside; and the defendant Zenaida F. Boiser is hereby authorized to deposit with the Clerk of Court the sum of P150,000.00 subject to the disposition of the Court, as may be provided in the decision to be rendered in this case.

SO ORDERED. (Page, 35, Record.)

However, on August 22, 1978, the following motion appears to have been filed by defendant:

NOW COMES defendant, by undersigned counsel, and to the Court respectfully moves for a partial reconsideration of the Order of August 10, 1978 insofar as said Order states that:

... the defendant Zenaida F. Boiser is hereby authorized to deposit with the Clerk of Court the sum of P150,000.00 subject to the disposition of the court, as may be provided in the decision to be rendered in this case.

on the following grounds:

1. That as early as July 18, 1978, Adela B. Francisco, one of defendant's principals (who is also defendant's mother) had deposited with the Associated Citizen's Bank, Sangandaan Branch, the amount of P150,000.00 intended to be refunded to plaintiffs, as provided in paragraph 6 of the Agreement of July 5, 1977 (Annex "A" of the Complaint);

2. That the said deposit earns interest of l4% per annum;

3. That the said Adela Blas Francisco, as signified by her conformity to this motion, is willing to keep the said deposit and make it subject to the disposition of this court, as may be provided in the decision to be rendered in this case:

4. That no prejudice would be caused to plaintiffs under the foregoing arrangement; on the other hand, it will earn for the parties interest at 14% per annum until disposed of under the judgment of this court;

5. That as evidence of the deposit alleged in paragraph 1 hereof, there is attached to this motion a xerox copy of a certificate of time deposit issued by the Associated Citizens Bank, Sangandaan Branch, as Annex "A" hereof.

WHEREFORE, it is respectfully prayed that the portion of the Order dated August 10, 1978 quoted in the opening paragraph of this motion be amended to read as follows:

... that the defendant Zenaida F. Boiser is hereby authorized to deposit in the name of Adela B. Francisco, one of the principals in entering into contract with plaintiffs, the sum of P150,000.00 with the Associated Citizens Bank, Sangandaan Branch, subject to the disposition of the court, as may be provided in the decision to be rendered in this case.

Quezon City for Caloocan City, August 22, 1978.

(SGD.) ANACLETO S. MAGNO Attorney for the Defendant 113 Mendez, Baesa Quezon City

WITH MY CONFORMITY: ADELA B. FRANCISCO (Pp. 38-39, Record.)

Consequently, Judge Ubay ordered on September 13, 1978 that:

O R D E R

Acting on the "Motion for Reconsideration", dated August 22, 1978 and filed by counsel for defendants, the Court, after a careful consideration of the grounds stated therein, as well as the arguments advanced by counsel for plaintiff, is of the opinion that the said motion should be, as it is hereby, GRANTED.

WHEREFORE, the Order of this Court dated August 10, 1978 is hereby amended to read as follows:

that the defendant Zenaida F. Boiser is hereby authorized to deposit in the name of Adela S. Francisco, one of her principals, in entering into contract with the Associated Citizens Bank, Sangandaan Branch, subject to the disposition of the Court, as may be provided in the decision to be rendered in this case, amount shall be made without an order from the Court. (sic)

SO ORDERED. (Page 41, Record.)

Apparently, as a counter-move, respondents filed on June 10, 1980, a Motion to Withdraw Deposit, asking the court that:

WHEREFORE, premises considered, it is respectfully so prayed that Lim O. Chu be snowed to withdraw the P150,000.00 previously deposited in bank upon order of this Honorable Court, plus legal rate of interest (14% per anum) from July 5, 1977, the date of the contract, Annex "A" of complaint. (Page 43, Record.)

Acting on this motion, on August 15, 1980, the now respondent judge who had replaced Judge Ubay, after the latter retired, issued an order pertinently ordering that:

Considering the foregoing antecedents and subsequent developments in this case and in the broad interest of justice and equity, this Court hereby grants said motion of the plaintiffs to withdraw from the Associated Citizens Bank, Caloocan City Branch, the amount of P150,000.00 plus the legal interests accruing thereon deposited in the name of the defendant Adela B. Francisco by way of refund to plaintiffs spouses Ching Siao and Lim O. Chu and hereby orders the said bank and defendant Zenaida Boiser and/or Adela B. Francisco in whose name said amount had been deposited to comply with this Order, directing Zenaida Boiser and/or Adela Francisco to withdraw from said bank the amount of P150,000.00, together with all the interests due thereon, and further to turn over said amount to the plaintiffs spouses within five (5) days from receipt of this Order.

Meanwhile and brushing aside legal technicalities raised by the parties, this Court will hold in abeyance resolution on other matters raised in the pleadings of the parties (Motion to Withdraw Deposit and Opposition to Withdrawal of Rentals) until such further steps that may be henceforth be taken by the parties-litigants in this case in the prosecution of their respective side of this case. (Pp. 45-46, Record.)

This order was followed by another dated November 7, 1980, portions of which read:

The delivery of the principal amount of P150,000.00 to the plaintiffs now being a fait accompli what remains now to be resolved by this Court is the amount of the interest to be paid the plaintiffs. The defendants maintain that it should be the legal rate of six (6%) percent per annum while the plaintiffs claim their legal rate of interest should be twelve percent (12 %) per annum.

Before resolving this issue, this Court finds it illuminating that the subject amount of P150,000.00 as admitted by the Associated Citizens Bank through their counsel, Atty. Teresita L. Nuguid in her Manifestation filed with this Court on September 3, 1980, was deposited by defendant Adela B. Francisco thru her attorney-in-fact, Zenaida F. Boiser in the form of time deposit (Account No. 7270, ACB). Hence, this Court can take judicial notice of the fact that as time deposit said amount of P150,000.00 earned aggregate interest far above the legal rates of 12% and 14% per annum allowed by law. Furthermore, as can be seen from Annex "A" of said Manifestation of the Associated Citizens Bank, defendant Adela B. Francisco made an assignment of said time deposit in favor of Engr. Laureano R. Arcadio and no doubt the said ban profited from the interest by reason of the time deposit far and above said legal rates.

Said interest derived by the defendants by virtue of said time deposit is of no moment in this case and what is controlling as heretofore stated is the agreement not contrary to law, morals and public policy between the parties which in this case is and should be the legal rate of interest which is twelve percent (12%) per annum computed from the date of the aforesaid Agreement executed on July 5, 1977 and to deny the plaintiffs that the rate of interest due them (12%) would amount to

allowing a party to enrich himself at the expense of the other. It cannot also be said that defendants- depositor suffered losses by reason of making such time deposit because the difference between the legal rates of interest and the aggregate interests in time deposits is substantial.

WHEREFORE, premises considered, the defendants Adela B. Francisco and/or Zenaida F. Boiser, is hereby ordered:

1. to pay the plaintiffs the legal rate of interest of twelve percent (12%) per annum on the deposit of P150,000.00 computed from July 5, 1977 (date when Agreement was executed) up to September 13, 1978 when the money was deposited with the Associated Citizens Bank on Time Deposit pursuant to the Order of then Presiding Judge, the Hon. Alberto Q. Ubay; and

2. to pay the plaintiffs the legal rate of interest of twelve percent (12%) per annum on the deposit of P150,000.00 from September 13, 1978 (date when money was deposited with the Bank) up to August 29, 1980, when the said deposited money was refunded to the plaintiffs. (Pp. 48-50, Record.)

And on March 2, 1981, again respondent judge ordered:

Before this Court is plaintiffs' Motion for Execution of the Order dated November 7, 1980, to which the defendants file their opposition with Motion for Reconsideration on January 29, 1981, and as a rejoinder the plaintiffs filed their Opposition to Defendants' Motion for Reconsideration on February 13, 1981.

Brushing aside all legal technicalities and niceties of the law raised by the respective counsels in their respective pleadings, this Court has to resolve the issue as to the proper rate of legal interest due to the plaintiffs and to reckon the period from which said interest should run in consonance with the antecedent facts and circumstances of this case in the broad interest of justice and equity.

This Court observes that the parties in the prosecution of their respective claims are motivated with a desire to get the maximum of what is due him on the one hand and the desire of the other to give the least or minimum of what he is bound to pay. At first blush considering that the bone of contention revolves in the determination of the proper rate of interest and the period to be covered, the issue seems inconsequential but considering the amount involved which is to the tune of P150,000.00 the respective positions taken by the parties in the instant case is quite understandable. Hence, this Court will resolve the issue on the basis of the time-honored legal dictum that "no one shall enrich himself at the expense of another" in conjunction with the facts and circumstances of this case in the broad interest of justice and equity.

Premises considered, this Court hereby reconsiders its Order dated November 7, 1980 and hereby orders the defendants Adela B. Francisco and/or Zenaida F. Boiser:

1. To pay the plaintiffs the legal rate of interest of nine (9%) percent per annum on the deposit of P 150,000.00 computed from July 5, 1977 (date of execution of Agreement) up to September 13, 1978 when the money was deposited with the Associated Citizens Bank on Time Deposit pursuant to the Order of then Presiding Judge of this Court, Hon. Alberto Q. Ubay; and

2. To pay the plaintiffs the legal rate of interest of twelve (12%) percent per annum on the deposit of P150,000.00 from September 13, 1978 (date when money was deposited with the Bank) up to August 29, 1980 (date of refund of the money to the plaintiffs). (Pp. 51-53, Record)

On July 31, 1981, petitioner filed a motion to quash the writ of execution issued pursuant to the above order, contending that she was not properly made a party to the case, since the defendant was her daughter Zenaida F. Boiser. On October 27, 1981, respondent judge denied said motion holding that said movant had by certain actuations related to the case vitually submitted her person to its jurisdiction although she was not properly made a party thereto. On October 16, 1981, respondent denied petitioner's motion for reconsideration, hence the instant petition before Us.

From a reading of the pleadings of both parties and looking at the case as a whole, We feel that somehow both counsel have centered, even with vehemence, on two points, which could be off-tangent, namely: (1) petitioner insists that the lower court had not acquired jurisdiction over her person and (2) respondents, for their part, maintain that they should be paid interest.

As far as petitioner is concerned, she evidently overlooks the fact that the record reveals that she gave her express conformity to the motion of defendant Boiser dated August 22, 1978, We have quoted earlier. Although technically, her contention is correct that she is not a party to the case below, she voluntarily formally manifested to the court "her conformity to this motion (of defendant Boiser) (and) is willing to keep the said deposit (made by her on July 18, 1978 in her own name in the Associated Citizens Bank, Sangandaan Branch) and make it subject to the disposition of this court, as may be provided in the decision to be rendered in this case." Under this circumstance, her being a party or not in the case has become immaterial. The fact is that she bound herself to an obligation with the court and the respondents, albeit, in this connection, it is very clear that her

obligation is premised on the "decision to be rendered in this case" exclusively. And that decision has not materialized, hence she has nothing to answer for.

On the other hand, the insistence of respondents to recover interests on the P150,000.00, can hardly have any legal basis, as things developed when they first demanded from defendant Boiser compliance with the agreement. According to the answer filed by said defendant, it is alleged therein, and this allegation has not been denied by respondents, "that defendant tendered payment to the plaintiff before the complaint was filed (on May 30, 1978) of the sum of P150,000.00 with interest at the legal rate as provided in paragraph 6 of the agreement, which tender of payment was refused by the plaintiffs." On this score, We hold to be well taken the following posture of defendant Boiser, which, of course, benefits equally her mother:

DAMAGES CANNOT BE AWARDED WITHOUT PRIOR DETERMINATION OF THE MERITS OF THE CASE. IN ANY EVENT, DEFENDANT BOISER HAVING TENDERED THE AMOUNT, DAMAGES CANNOT BE ADJUDGED AGAINST HER

The award for interests in an action for the recovery of a sum of money partakes of a nature of an award for damages. Thus, Article 2209 of the Civil Code provides:

Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six percent per annum.

Clearly, the indemnity for interest on a monetary obligation attaches only when the obligor incurs delay, that is, when he is in default, it being a fundamental principle of law that:

Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation. (Art. 1169, Civil Code.)

In the case at bar, it is not disputed that no demands, judicial or extrajudicial, were made by private respondents on defendant Boiser for the return of the amount of P150,000.00. There could not have been any because of the nature of the action filed by private respondents, which is for specific performance. Hence, there is no delay of the latter's obligation, assuming that she be eventually required in the decision of the Court to return the same. Upon the contrary, it was private respondents who were in mora accipiende from the time defendant Boiser tendered and consigned the amount in Court.

Art. 1256. If the creditor to whom tender of payment has been made refuses without just cause to accept, the debtor shall be released from the responsibility by the consignation of the thing or sum done.(Art. 1256, Civil Code).

Tender and consignation having been properly made by defendant Boiser, she should therefore be released from paying the interests on the sum so deposited.

In Gregorio Araneta, Inc. vs. Tuazon de Paterno, et al., 91 Phil. 786, it was held that tender of payment alone suspends the running of the interest on the obligation. Thus—

The matter of the suspension of the running of interest on the loan is governed by principles which regard reality rather than technicality, substance rather than form. Good faith of the offeror or ability to make good the offer should in simple justice excuse the debtor from paying interest after the offer was rejected. A debtor cannot be consider delinquent who offered checks backed by sufficient deposit or ready to pay cash it the creditor chose that means of payment. Technical defects of the offer cannot be adduced to destroy its effects when the objection to accept the payment was based on entirely different grounds. Thus, although the defective consignation made by the debtor did not discharge the mortgage debt, the running of interest on the loan is suspended by the offer and tender of payment. (Pp. 17-18, Record.)

IN VIEW OF ALL THE FOREGOING, judgment is hereby rendered in favor of petitioner absolving her from the payment of the interests claimed by respondents beyond the date when defendant Boiser made her tender, not-only because the decision on the merits contemplated in her obligation aforementioned and on which her conformity to defendant Boiser's motion of August 22, 1978 was based has not materialized because respondents opted to get their money back instead of insisting on being given possession of the premises; which was the original nature of their action, 2 but also because, in consequence of Boiser's tender to return the P150,000.00 prior to the filing of the respondents' complaint, and the refusal of the latter to accept the same, no obligation to pay any interest could attach after the tender was made. In other words, defendant Boiser and/or petitioner should pay 12% interest only from January 5, 1978, that is, six months after the signing of the contract 3 up to, at the latest, May 30, 1978, when the respondents' complaint was filed, roughly a little less than four months.

No costs.

G.R. No. 90676 June 19, 1991

STATE INVESTMENT HOUSE, INC., petitioner, vs.THE HONORABLE COURT OF APPEALS, HON. JUDGE PERLITA J. TRIA TIRONA, Presiding Judge of the Regional Trial Court of Quezon City, Branch CII and SPS. RAFAEL and REFUGIO AQUINO, respondents.

FELICIANO, J.:p

On 5 April 1982, respondent spouses Rafael and Refugio Aquino pledged certain shares of stock to petitioner State Investment House, Inc. ("State") in order to secure a loan of P120,000.00 designated as Account No. IF-82-0631-AA. Prior to the execution of the pledge, respondent-spouses, as an accommodation to and together with the spouses Jose and Marcelina Aquino, signed an agreement (Account No. IF-82-1379-AA) with petitioner State for the latter's purchase of receivables amounting to P375,000.00. When Account No. IF-82-0631-AA fell due, respondent spouses paid the same partly with their own funds and partly from the proceeds of another loan which they obtained also from petitioner State designated as Account No. IF-82-0904-AA. This new loan was secured by the same pledge agreement executed in relation to Account No. IF-820631-AA. When the new loan matured, State demanded payment. Respondents expressed willingness to pay, requesting that upon payment, the shares of stock pledged be released. Petitioner State denied the request on the ground that the loan which it had extended to the spouses Jose and Marcelina Aquino (Account No. IF-82-1379- AA) had remained unpaid.

On 29 June 1984, Atty. Rolando Salonga sent to respondent spouses a Notice of Notarial Sale stating that upon request of State and by virtue of the pledge agreement, he would sell at public auction the shares of stock pledged to State. This prompted respondents to file a case before the Regional Trial Court of Quezon City alleging that the intended foreclosure sale was illegal because from the time the obligation under Account No. IF-82-0904-AA became due, they had been able and willing to pay the same, but petitioner had insisted that respondents pay even the loan account of Jose and Marcelina Aquino which had not been secured by the pledge. It was further alleged that their failure to pay their loan (Account No. IF-82-0904-AA) was excused because the petitioner State itself had prevented the satisfaction of the obligation.

The trial court, in a decision dated 14 December 1984 rendered by Judge Willelmo Fortun, initially dismissed the complaint. Respondent spouses filed a motion for reconsideration praying for a new decision ordering petitioner State to release the shares upon payment of respondents' loan "without interest," as the latter had not been in delay in the performance of their obligation. State countered that the pledge executed by respondent spouses also covered the loan extended to Jose and Marcelina Aquino, which too should be paid before the shares may be released.

Acting on the motion for reconsideration, Judge Fortun set aside his original decision and rendered a new judgment dated 29 January 1985, ordering State to immediately release the pledge and to deliver to respondents the share of stock "upon payment of the loan under Code No. 82-0904-AA."

On appeal, the Court of Appeals affirmed in toto the new decision of the trial court, holding that the loan extended to Jose and Marcelina Aquino, having been executed prior to the pledge was not covered by the pledge which secured only loans executed subsequently. Thus, upon payment of the loan under Code No. IF-0904-AA, the shares of stock should be released. The decisions of the Court of Appeals and of Judge Fortun became final and executory.

Upon remand of the records of the case to the trial court for execution, there developed disagreement over the amount which respondent spouses Rafael and Refugio Aquino should pay to secure the release of the shares of stock — petitioner State contending that respondents should also pay interest and respondents arguing they should not. Respondent spouses then filed a motion with the trial court to clarify the Fortun decision praying that an order issue clarifying the phrase "upon payment of plaintiffs' loan" to mean upon payment of plaintiff' loan in the principal amount of P110,000.00 alone, "without interest, penalties and other charges."

On 17 February 1989, the trial court, speaking this time through Judge Perlita Tria Tirona, rendered a decision purporting to clarify the decision of Judge Fortun and ruling that petitioner State shall release respondents' shares of stock upon payment by respondents of the principal of the loan as set forth in PN No. 82-0904-AA in the amount of P110,000.00, without interest, penalties and other charges.

Petitioner State appealed Judge Tirona's decision to the Court of Appeals; the appeal was dismissed. The Court of Appeals agreed with Judge Tirona that no interest need be paid and added that the clarificatory (Tirona) decision of the trial court merely restated what had been provided for in the earlier (Fortun) decision; that the Tirona decision did not go beyond what had been adjudged in the earlier decision. The motion for reconsideration filed by petitioner was accordingly denied.

Hence, this Petition for Review contending that no manifest ambiguity existed in the decision penned by Judge Fortun; that the trial court through Judge Tirona, erred in clarifying the decision of Judge Fortun; and that the amendment sought to be introduced in the Fortun decision by respondents may not be made as the same was substantial in nature and the Fortun decision had become final.

We begin by noting that the trial court has asserted authority to issue the clarificatory order in respect of the decision of Judge Fortun, even though that judgment had become final and executory. In Reinsurance Company of the Orient, Inc. v. Court of Appeals, 1 this Court had occasion to deal with the applicable doctrine to some extent:

- - - [E]ven a judgment which has become final and executory may be clarified under certain circumstances. The dispositive portion of the judgment may, for instance, contain an error clearly clerical in nature (perhaps best illustrated by an error in arithmetical computation) or an ambiguity arising from inadvertent omission, which error may be rectified or ambiguity clarified and the omission supplied by reference primarily to the body of the decision itself Supplementary reference to the pleadings previously filed in the case may also be resorted to by way of corroboration of the existence of the error or of the ambiguity in the dispositive part of the judgment. In Locsin, et al. v. Parades, et al., this Court allowed a judgment which had become final and executory to be clarified by supplying a word which had been inadvertently omitted and which, when supplied, in effect changed the literal import of the original phraseology:

. . . it clearly appears from the allegations of the complaint, the promissory note reproduced therein and made a part thereof, the prayer and the conclusions of fact and of law contained in the decision of the respondent judge, that the obligation contracted by the petitioners is joint and several and that the parties as well as the trial judge so understood it. Under the juridical rule that the judgment should be in accordance with the allegations, the evidence and the conclusions of fact and law, the dispositive part of the judgment under consideration should have ordered that the debt be paid 'severally' and in omitting the word or adverb 'severally' inadvertently, said judgment became ambiguous. This ambiguity may be clarified at any time after the decision is rendered and even after it had become final (34 Corpus Juris, 235, 326). This respondent judge did not, therefore, exceed his jurisdiction in clarifying the dispositive part of the judgment by supplying the omission. (Emphasis supplied)

In Filipino Legion Corporation vs. Court of Appeals, et al., the applicable principle was set out in the following terms:

[W]here there is ambiguity caused by an omission or mistake in the dispositive portion of a decision, the court may clarify such ambiguity by an amendment even after the judgment had become final, and for this purpose it may resort to the pleadings filed by the parties, the court's findings of facts and conclusions of law as expressed in the body of the decision. (Emphasis supplied)

In Republic Surety and Insurance Company, Inc. v. Intermediate Appellate Court, the Court, in applying the above doctrine, said:

. . . We clarify, in other words, what we did affirm. That is involved here is not what is ordinarily regarded as a clerical error in the dispositive part of the decision of the Court of First Instance, . . . At the same time, what is involved here is not a correction of an erroneous judgment or dispositive portion of a judgment. What we believe is involved here is in the nature of an inadvertent omission on the part of the Court of First Instance (which should have been noticed by private respondents' counsel who had prepared the complaint), of what might be described as a logical follow-through of something set forth both in the body of the decision and in the dispositive portion thereof; the inevitable follow-through, or translation into, operational or behavioral terms, of the annulment of the Deed of Sale with Assumption of Mortgage, from which petitioners' title or claim of title embodied in TCT 133153 flows. (Emphasis supplied) 2 (Underscoring in the original; citations omitted)

The question we must resolve is thus whether or not there is an ambiguity or clerical error or inadvertent omission in the dispositive portion of the decision of Judge Fortun which may be legitimately clarified by referring to the body of the decision and perhaps even the pleadings filed before him. The decision of Judge Fortun disposing of the motion for reconsideration filed by respondent spouses Rafael and Refugio Aquino consisted basically of quoting practically the whole motion for reconsideration. In its dispositive portion, Judge Fortun's decision stated:

WHEREFORE, plaintiffs "Motion for Reconsideration" dated January 3, 1985, is granted and the decision of this Court dated December 14, 1984 is hereby revoked and set aside and another judgment is hereby rendered in favor of plaintiffs as follows:

(1) Ordering defendants to immediately release the pledge on, and to deliver to plaintiffs, the shares of stocks enumerated and described in paragraph 4 of plaintiffs' complaint dated July 17, 1984, upon payment of plaintiffs loan under Code No. 82-0904-AA to defendants;

(2) Ordering defendant State Investment House, Inc. to pay to plaintiffs P10,000.00 as moral damages, P5,000.00 as exemplary damages, P6,000.00 as attorney's fees, plus costs;

(3) Dismissing defendants' counterclaim, for lack of merit and making the preliminary injunction permanent.

SO ORDERED. 3

Judge Fortun evidently meant to act favorably on the motion for reconsideration of the respondent Aquino spouses and in effect accepted respondent spouses' argument that they had not incurred mora considering that their failure to pay PN No. IF82-0904-AA on time had been due to petitioner State's unjustified refusal to release the shares pledged to it. It is not, however, clear to what precise extent Judge Fortun meant to grant the motion for reconsideration. The promissory note in Account No. IF-82-0904-AA had three (3) components: (a) principal of the loan in the amount of P110,000.00; (b) regular interest in the amount of seventeen percent (17%) per annum; and (c) additional or penalty interest in case of non-payment at maturity, at the rate of two percent (2%) per month or twenty-four percent (24%) per annum. In the dispositive part of his

resolution, Judge Fortun did not specify which of these components of the loan he was ordering respondent spouses to pay and which component or components he was in effect deleting. We cannot assume that Judge Fortun meant to grant the relief prayed for by respondent spouses in all its parts. For one thing, respondent spouses in their motion for reconsideration asked for "at least P50,000.00" for moral damages and "at least P50,000.00" for exemplary damages, as well as P20,000.00 by way of attorney's fees and litigation expenses. Judge Fortun granted respondent spouses only P10,000.00 as moral damages and P5,000.00 as exemplary damages, plus P6,000.00 as attorney's fees and costs. For another, respondent spouses asked Judge Fortun to order the release of the shares pledged "upon payment of [respondent spouses'] loan under Code No. 82-0904-AA without interest, as plaintiffs were not in delay in accordance with Article 69 of the New Civil Code –– " (Emphasis supplied). In other words, respondent spouses did not themselves become very clear what they were asking Judge Fortun to grant them; they did not apparently distinguish between regular interest or "monetary interest" in the amount of seventeen percent (17%) per annum and penalty charges or "compensatory interest" in the amount of two percent (2%) per month or twenty-four percent (24%) per annum.

It thus appears that the Fortun decision was ambiguous in the sense that it was cryptic. We believe that in these circumstances, we must assume that Judge Fortun meant to decide in accordance with law, that we cannot fairly assume that Judge Fortun was grossly ignorant of the law, or that he intended to grant the respondent spouses relief to which they were not entitled under law. Thus, the ultimate question which arises is: if respondent Aquino spouses were not in delay, what should they have been held liable for in accordance with law?

We believe and so hold that since respondent Aquino spouses were held not to have been in delay, they were properly liable only for: (a) the principal of the loan or P110,000.00; and (b) regular or monetary interest in the amount of seventeen percent (17%) per annum. They were not liable for penalty or compensatory interest, fixed by the promissory note in Account No. IF-82-0904-AA at two percent (2%) per month or twenty-four (24%) per annum. It must be stressed in this connection that under Article 2209 of the Civil Code which provides that

. . . [i]f the obligation consists in the payment of a sum of money, and the debtor incurs in delay. the indemnity for damages, there being no stimulation to the contrary. shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum.

the appropriate measure for damages in case of delay in discharging an obligation consisting of the payment of a sum or money, is the payment of penalty interest at the rate agreed upon; and in the absence of a stipulation of a particular rate of penalty interest, then the payment of additional interest at a rate equal to the regular monetary interest; and if no regular interest had been agreed upon, then payment of legal interest or six percent (6%) per annum. 4

The fact that the respondent Aquino spouses were not in default did not mean that they, as a matter of law, were relieved from the payment not only of penalty or compensatory interest at the rate of twenty-four percent (24%) per annum but also of regular or monetary interest of seventeen percent (17%) per annum. The regular or monetary interest continued to accrue under the terms of the relevant promissory note until actual payment is effected. The payment of regular interest constitutes the price or cost of the use of money and thus, until the principal sum due is returned to the creditor, regular interest continues to accrue since the debtor continues to use such principal amount. The relevant rule is set out in Article 1256 of the Civil Code which provides as follows:

Art. 1256. If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due.

Consignation alone shall produce the same effect in the following cases:

(1) When the creditor is absent or unknown, or does not appear at the place of payment;

(2) When he is incapacitated to receive the payment at the time it is due;

(3) When, without just cause, he refuses to give a receipt;

(4) When two or more persons claim the same right to collect;

(5) When the title of the obligation has been lost. (Emphasis supplied)

Where the creditor unjustly refuses to accept payment, the debtor desirous of being released from his obligation must comply with two (2) conditions: (a) tender of payment; and (b) consignation of the sum due. Tender of payment must be accompanied or followed by consignation in order that the effects of payment may be produced. Thus, in Llamas v. Abaya, 5 the Supreme Court stressed that a written tender of payment alone, without consignation in court of the sum due, does not suspend the accruing of regular or monetary interest.

In the instant case, respondent spouses Aquino, while they are properly regarded as having made a written tender of payment to petitioner State, failed to consign in court the amount due at the time of the maturity of Account No. IF-820904-AA. It follows that their obligation to pay principal-cum-regular or monetary interest under the terms and conditions of Account No. IF-82-0904-AA was not extinguished by such tender of payment alone.

For the respondent spouses to continue in possession of the principal of the loan amounting to P110,000.00 and to continue to use the same after maturity of the loan without payment of regular or monetary interest, would constitute unjust enrichment on the part of the respondent spouses at the expense of petitioner State even though the spouses had not been guilty of mora. It is precisely this unjust enrichment which Article 1256 of the Civil Code prevents by requiring, in addition to tender of payment, the consignation of the amount due in court which amount would thereafter be deposited by the Clerk of Court in a bank and earn interest to which the creditor would be entitled.

WHEREFORE, the Petition for Review is hereby GRANTED DUE COURSE. The Decision of the Court of Appeals dated 30 August 1989 in C.A.-G.R. No. 17954 and the Decision of the Regional Trial Court dated 17 February 1989 in Civil Case No. Q-42188 are hereby REVERSED and SET ASIDE. The dispositive portion of the decision of Judge Fortun is hereby clarified so as to read as follows:

(1) Ordering defendants to immediately release the pledge and to deliver to the plaintiff spouses Rafael and Refugio Aquino the shares of stock enumerated and described in paragraph 4 of said spouses' complaint dated 17 July 1984, upon full payment of the amount of P110,000.00 plus seventeen percent (17%) per annum regular interest computed from the time of maturity of the plaintiffs' loan (Account No. IF-82-0904-AA) and until full payment of such principal and interest to defendants;

(2) Ordering defendant State Investment House, Inc. to pay to the plaintiff spouses Rafael and Refugio Aquino P10,000.00 as moral damages, P5,000.00 as exemplary damages, P6,000.00 as attorney's fees, plus costs; and

(3) Dismissing defendants' counterclaim for lack of merit and making the preliminary injunction permanent."

No pronouncement as to costs.

SO ORDERED.

G.R. No. 76101-02 September 30, 1991

TIO KHE CHIO, petitioner, vs.THE HONORABLE COURT OF APPEALS and EASTERN ASSURANCE AND SURETY CORPORATION, respondents.

FERNAN, C.J.:p

The issue in this petition for certiorari and prohibition is the legal rate of interest to be imposed in actions for damages arising from unpaid insurance claims. Petitioner Tio Khe Chio claims that it should be twelve (12%) per cent pursuant to Articles 243 and 244 of the Insurance Code while private respondent Eastern Assurance and Surety Corporation (EASCO) claims that it should be six (6%) per cent under Article 2209 of the Civil Code.

The facts are as follows: On December 18, 1978, petitioner Tio Khe Chio imported one thousand (1,000) bags of fishmeal valued at $36,000.30 from Agro Impex, U.S.A. Dallas, Texas, U.S.A. The goods were insured with respondent EASCO and shipped on board the M/V Peskov, a vessel owned by Far Eastern Shipping Company. When the goods reached Manila on January 28, 1979, they were found to have been damaged by sea water which rendered the fishmeal useless. Petitioner filed a claim with EASCO and Far Eastern Shipping. Both refused to pay. Whereupon, petitioner sued them before the then Court of First Instance of Cebu, Branch II for damages. EASCO, as the insurer, filed a counterclaim against the petitioner for the recovery of P18,387.86 representing the unpaid insurance premiums.

On June 30, 1982, the trial court rendered judgment ordering EASCO and Far Eastern Shipping to pay petitioner solidarily the sum of P105,986.68 less the amount of P18,387.86 for unpaid premiums with interest at the legal rate from the filing of the complaint, the sum of P15,000.00 as attorney's fees and the costs. 1

The judgment became final as to EASCO but the shipping company appealed to the Court of Appeals and was absolved from liability by the said court in AC-G.R. No. 00161, entitled "Tio Khe Chio vs. Eastern Assurance and Surety Corporation."

The trial court, upon motion by petitioner, issued a writ of execution against EASCO. The sheriff enforcing the writ reportedly fixed the legal rate of interest at twelve (12%). Respondent EASCO moved to quash the writ alleging that the legal interest to be computed should be six (6%) per cent per annum in accordance with Article 2209 of the Civil Code and not twelve (12%) per cent as insisted upon by petitioner's counsel. In its order of July 30, 1986, the trial court denied EASCO's motion. EASCO then filed a petition for certiorari and prohibition before the Court of Appeals.

On July 30, 1986, the Appellate Court rendered the assailed judgment, the dispositive part of which states:

WHEREFORE, the order dated July 30, 1986 is hereby SET ASIDE in so far as it fixes the interest at 12% on the principal amount of P87,598.82 from the date of filing of the complaint until the full payment of the amount, and the interest that the private respondent is entitled to collect from the petitioner is hereby reduced to 6% per annum.

No pronouncement as to costs. 2

In disputing the aforesaid decision of the Court of Appeals, petitioner maintains that not only is it unjust and unfair but it is also contrary to the correct interpretation of the fixing of interest rates under Sections 243 and 244 of the Insurance Code. And since petitioner's claims is based on an insurance contract, then it is the Insurance Code which must govern and not the Civil Code.

We rule for respondent EASCO. The legal rate of interest in the case at bar is six (6%) per annum as correctly held by the Appellate Court.

Section 243 of the Insurance Code provides:

The amount of any loss or damage for which an insurer may be liable, under any policy other than life insurance policy, shall be paid within thirty days after proof of loss is received by the insurer and ascertainment of the loss or damage is made either by agreement between the insured and the insurer or by arbitration; but if such ascertainment is not had or made within sixty days after such receipt by the insurer of the proof of loss, then the loss or damage shall be paid within ninety days after such receipt. Refusal or failure to pay the loss or damage within the time prescribed herein will entitle the assured to collect interest on the proceeds of the policy for the duration of the delay at the rate of twice the ceiling prescribed by the Monetary Board, unless such failure or refusal to pay is based on the ground that the claim is fraudulent.

Section 244 of the aforementioned Code also provides:

In case of any litigation for the enforcement of any policy or contract of insurance, it shall be the duty of the Commissioner or the Court, as the case may be, to make a finding as to whether the payment of the claim of the insured has been unreasonably denied or withheld; and in the affirmative case, the insurance company shall be adjudged to pay damages which shall consist of

attorney's fees and other expenses incurred by the insured person by reason of such undeniable denial or withholding of payment plus interest of twice the ceiling prescribed by the Monetary Board of the amount of the claim due the insured, from the date following the time prescribed in section two hundred forty-two or in section two hundred forty-three, as the case may be, until the claim is fully satisfied; Provided, That the failure to pay any such claim within the time prescribed in said sections shall be considered prima facie evidence of unreasonable delay in payment.

In the case at bar, the Court of Appeals made no finding that there was an unjustified refusal or withholding of payment on petitioner's claim. In fact, respondent court had this to say on EASCO's refusal to settle the claim of petitioner:

... EASCO's refusal to settle the claim to Tio Khe Chio was based on some ground which, while not sufficient to free it from liability under its policy, nevertheless is sufficient to negate any assertion that in refusing to pay, it acted unjustifiably.

xxx xxx xxx

The case posed some genuine issues of interpretation of the terms of the policy as to which persons may honestly differ. This is the reason the trial court did not say EASCO's refusal was unjustified. 3

Simply put, the aforecited sections of the Insurance Code are not pertinent to the instant case. They apply only when the court finds an unreasonable delay or refusal in the payment of the claims.

Neither does Circular No. 416 of the Central Bank which took effect on July 29, 1974 pursuant to Presidential Decree No. 116 (Usury Law) which raised the legal rate of interest from six (6%) to twelve (12%) per cent apply to the case at bar as by the petitioner. The adjusted rate mentioned in the circular refers only to loans or forbearances of money, goods or credits and court judgments thereon but not to court judgments for damages arising from injury to persons and loss of property which does not involve a loan. 4

In the case of Philippine Rabbit Bus Lines, Inc. vs. Cruz, G.R. No. 71017, July 28, 1986, 143 SCRA 158, the Court declared that the legal rate of interest is six (6%) per cent per annum, and not twelve (12%) per cent, where a judgment award is based on an action for damages for personal injury, not use or forbearance of money, goods or credit. In the same vein, the Court held in GSIS vs. Court of Appeals, G.R. No. 52478, October 30, 1986, 145 SCRA 311, that the rates under the Usury Law (amended by P.D. 116) are applicable only to interest by way of compensation for the use or forbearance of money, interest by way of damages is governed by Article 2209 of the Civil Code.

Clearly, the applicable law is Article 2209 of the Civil Code which reads:

If the obligation consists in the payment of a sum of money and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of interest agreed upon, and in the absence of stipulation, the legal interest which is six per cent per annum.

And in the light of the fact that the contending parties did not allege the rate of interest stipulated in the insurance contract, the legal interest was properly pegged by the Appellate Court at six (6%) per cent.

WHEREFORE, in view of the foregoing, the petition is DENIED for lack of merit.

SO ORDERED.

G.R. No. 97412 July 12, 1994

EASTERN SHIPPING LINES, INC., petitioner, vs.HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents.

VITUG, J.:

The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a shipment of goods can be a solidary, or joint and several, liability of the common carrier, the arrastre operator and the customs broker; (b) whether the payment of legal interest on an award for loss or damage is to be computed from the time the complaint is filed or from the date the decision appealed from is rendered; and (c) whether the applicable rate of interest, referred to above, is twelve percent (12%) or six percent (6%).

The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed facts that have led to the controversy are hereunder reproduced:

This is an action against defendants shipping company, arrastre operator and broker-forwarder for damages sustained by a shipment while in defendants' custody, filed by the insurer-subrogee who paid the consignee the value of such losses/damages.

On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for delivery vessel "SS EASTERN COMET" owned by defendant Eastern Shipping Lines under Bill of Lading No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance Policy No. 81/01177 for P36,382,466.38.

Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the custody of defendant Metro Port Service, Inc. The latter excepted to one drum, said to be in bad order, which damage was unknown to plaintiff.

On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from defendant Metro Port Service, Inc., one drum opened and without seal (per "Request for Bad Order Survey." Exh. D).

On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of the shipment to the consignee's warehouse. The latter excepted to one drum which contained spillages, while the rest of the contents was adulterated/fake (per "Bad Order Waybill" No. 10649, Exh. E).

Plaintiff contended that due to the losses/damage sustained by said drum, the consignee suffered losses totaling P19,032.95, due to the fault and negligence of defendants. Claims were presented against defendants who failed and refused to pay the same (Exhs. H, I, J, K, L).

As a consequence of the losses sustained, plaintiff was compelled to pay the consignee P19,032.95 under the aforestated marine insurance policy, so that it became subrogated to all the rights of action of said consignee against defendants (per "Form of Subrogation", "Release" and Philbanking check, Exhs. M, N, and O). (pp. 85-86, Rollo.)

There were, to be sure, other factual issues that confronted both courts. Here, the appellate court said:

Defendants filed their respective answers, traversing the material allegations of the complaint contending that: As for defendant Eastern Shipping it alleged that the shipment was discharged in good order from the vessel unto the custody of Metro Port Service so that any damage/losses incurred after the shipment was incurred after the shipment was turned over to the latter, is no longer its liability (p. 17, Record); Metroport averred that although subject shipment was discharged unto its custody, portion of the same was already in bad order (p. 11, Record); Allied Brokerage alleged that plaintiff has no cause of action against it, not having negligent or at fault for the shipment was already in damage and bad order condition when received by it, but nonetheless, it still exercised extra ordinary care and diligence in the handling/delivery of the cargo to consignee in the same condition shipment was received by it.

From the evidence the court found the following:

The issues are:

1. Whether or not the shipment sustained losses/damages;

2. Whether or not these losses/damages were sustained while in the custody of defendants (in whose respective custody, if determinable);

3. Whether or not defendant(s) should be held liable for the losses/damages (see plaintiff's pre-Trial Brief, Records, p. 34; Allied's pre-Trial Brief, adopting plaintiff's Records, p. 38).

As to the first issue, there can be no doubt that the shipment sustained losses/damages. The two drums were shipped in good order and condition, as clearly shown by the Bill of Lading and Commercial Invoice which do not indicate any damages drum that was shipped (Exhs. B and C). But when on December 12, 1981 the shipment was delivered to defendant Metro Port Service, Inc., it excepted to one drum in bad order.

Correspondingly, as to the second issue, it follows that the losses/damages were sustained while in the respective and/or successive custody and possession of defendants carrier (Eastern), arrastre operator (Metro Port) and broker (Allied Brokerage). This becomes evident when the Marine Cargo Survey Report (Exh. G), with its "Additional Survey Notes", are considered. In the latter notes, it is stated that when the shipment was "landed on vessel" to dock of Pier # 15, South Harbor, Manila on December 12, 1981, it was observed that "one (1) fiber drum (was) in damaged condition, covered by the vessel's Agent's Bad Order Tally Sheet No. 86427." The report further states that when defendant Allied Brokerage withdrew the shipment from defendant arrastre operator's custody on January 7, 1982, one drum was found opened without seal, cello bag partly torn but contents intact. Net unrecovered spillages was 15 kgs. The report went on to state that when the drums reached the consignee, one drum was found with adulterated/faked contents. It is obvious, therefore, that these losses/damages occurred before the shipment reached the consignee while under the successive custodies of defendants. Under Art. 1737 of the New Civil Code, the common carrier's duty to observe extraordinary diligence in the vigilance of goods remains in full force and effect even if the goods are temporarily unloaded and stored in transit in the warehouse of the carrier at the place of destination, until the consignee has been advised and has had reasonable opportunity to remove or dispose of the goods (Art. 1738, NCC). Defendant Eastern Shipping's own exhibit, the "Turn-Over Survey of Bad Order Cargoes" (Exhs. 3-Eastern) states that on December 12, 1981 one drum was found "open".

and thus held:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:

A. Ordering defendants to pay plaintiff, jointly and severally:

1. The amount of P19,032.95, with the present legal interest of 12% per annum from October 1, 1982, the date of filing of this complaints, until fully paid (the liability of defendant Eastern Shipping, Inc. shall not exceed US$500 per case or the CIF value of the loss, whichever is lesser, while the liability of defendant Metro Port Service, Inc. shall be to the extent of the actual invoice value of each package, crate box or container in no case to exceed P5,000.00 each, pursuant to Section 6.01 of the Management Contract);

2. P3,000.00 as attorney's fees, and

3. Costs.

B. Dismissing the counterclaims and crossclaim of defendant/cross-claimant Allied Brokerage Corporation.

SO ORDERED. (p. 207, Record).

Dissatisfied, defendant's recourse to US.

The appeal is devoid of merit.

After a careful scrutiny of the evidence on record. We find that the conclusion drawn therefrom is correct. As there is sufficient evidence that the shipment sustained damage while in the successive possession of appellants, and therefore they are liable to the appellee, as subrogee for the amount it paid to the consignee. (pp. 87-89, Rollo.)

The Court of Appeals thus affirmed in toto the judgment of the court a quo.

In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse of discretion on the part of the appellate court when —

I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF PRIVATE RESPONDENT AS GRANTED IN THE QUESTIONED DECISION;

II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE RESPONDENT SHOULD COMMENCE FROM THE DATE OF THE FILING OF THE COMPLAINT AT THE RATE OF TWELVE PERCENT PER ANNUM INSTEAD OF FROM THE DATE OF THE DECISION OF THE TRIAL COURT AND ONLY AT THE RATE OF SIX PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING INDISPUTABLY UNLIQUIDATED.

The petition is, in part, granted.

In this decision, we have begun by saying that the questions raised by petitioner carrier are not all that novel. Indeed, we do have a fairly good number of previous decisions this Court can merely tack to.

The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the time the articles are surrendered to or unconditionally placed in the possession of, and received by, the carrier for transportation until delivered to, or until the lapse of a reasonable time for their acceptance by, the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods shipped either are lost or arrive in damaged condition, a presumption arises against the carrier of its failure to observe that diligence, and there need not be an express finding of negligence to hold it liable (Art. 1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139 SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA 365). There are, of course, exceptional cases when such presumption of fault is not observed but these cases, enumerated in Article 1734 1 of the Civil Code, are exclusive, not one of which can be applied to this case.

The question of charging both the carrier and the arrastre operator with the obligation of properly delivering the goods to the consignee has, too, been passed upon by the Court. In Fireman's Fund Insurance vs. Metro Port Services (182 SCRA 455), we have explained, in holding the carrier and the arrastre operator liable in solidum, thus:

The legal relationship between the consignee and the arrastre operator is akin to that of a depositor and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5 [1967]. The relationship between the consignee and the common carrier is similar to that of the consignee and the arrastre operator (Northern Motors, Inc. v. Prince Line, et al., 107 Phil. 253 [1960]). Since it is the duty of the ARRASTRE to take good care of the goods that are in its custody and to deliver them in good condition to the consignee, such responsibility also devolves upon the CARRIER. Both the ARRASTRE and the CARRIER are therefore charged with the obligation to deliver the goods in good condition to the consignee.

We do not, of course, imply by the above pronouncement that the arrastre operator and the customs broker are themselves always and necessarily liable solidarily with the carrier, or vice-versa, nor that attendant facts in a given case may not vary the rule. The instant petition has been brought solely by Eastern Shipping Lines, which, being the carrier and not having been able to rebut the presumption of fault, is, in any event, to be held liable in this particular case. A factual finding of both the court a quo and the appellate court, we take note, is that "there is sufficient evidence that the shipment sustained damage while in the successive possession of appellants" (the herein petitioner among them). Accordingly, the liability imposed on Eastern Shipping Lines, Inc., the sole petitioner in this case, is inevitable regardless of whether there are others solidarily liable with it.

It is over the issue of legal interest adjudged by the appellate court that deserves more than just a passing remark.

Let us first see a chronological recitation of the major rulings of this Court:

The early case of Malayan Insurance Co., Inc., vs. Manila Port Service, 2 decided 3 on 15 May 1969, involved a suit for recovery of money arising out of short deliveries and pilferage of goods. In this case, appellee Malayan Insurance (the plaintiff in the lower court) averred in its complaint that the total amount of its claim for the value of the undelivered goods amounted to P3,947.20. This demand, however, was neither established in its totality nor definitely ascertained. In the stipulation of facts later entered into by the parties, in lieu of proof, the amount of P1,447.51 was agreed upon. The trial court rendered judgment ordering the appellants (defendants) Manila Port Service and Manila Railroad Company to pay appellee Malayan Insurance the sum of P1,447.51 with legal interest thereon from the date the complaint was filed on 28 December 1962 until full payment thereof. The appellants then assailed, inter alia, the award of legal interest. In sustaining the appellants, this Court ruled:

Interest upon an obligation which calls for the payment of money, absent a stipulation, is the legal rate. Such interest normally is allowable from the date of demand, judicial or extrajudicial. The trial court opted for judicial demand as the starting point.

But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be recovered upon unliquidated claims or damages, except when the demand can be established with reasonable certainty." And as was held by this Court in Rivera vs. Perez, 4 L-6998, February 29, 1956, if the suit were for damages, "unliquidated and not known until definitely ascertained, assessed and determined by the courts after proof (Montilla c. Corporacion de P.P. Agustinos, 25 Phil. 447; Lichauco v. Guzman, 38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis supplied)

The case of Reformina vs. Tomol, 5 rendered on 11 October 1985, was for "Recovery of Damages for Injury to Person and Loss of Property." After trial, the lower court decreed:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party defendants and against the defendants and third party plaintiffs as follows:

Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay jointly and severally the following persons:

xxx xxx xxx

(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00 which is the value of the boat F B Pacita III together with its accessories, fishing gear and equipment minus P80,000.00 which is the value of the insurance recovered and the amount of P10,000.00 a month as the estimated monthly loss suffered by them as a result of the fire of May 6, 1969 up to the time they are actually paid or already the total sum of P370,000.00 as of June 4, 1972 with legal interest from the filing of the complaint until paid and to pay attorney's fees of P5,000.00 with costs against defendants and third party plaintiffs. (Emphasis supplied.)

On appeal to the Court of Appeals, the latter modified the amount of damages awarded but sustained the trial court in adjudging legal interest from the filing of the complaint until fully paid. When the appellate court's decision became final, the case was remanded to the lower court for execution, and this was when the trial court issued its assailed resolution which applied the 6% interest per annum prescribed in Article 2209 of the Civil Code. In their petition for review on certiorari, the petitioners contended that Central Bank Circular No. 416, providing thus —

By virtue of the authority granted to it under Section 1 of Act 2655, as amended, Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest for the loan, or forbearance of any money, goods, or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall be twelve (12%) percent per annum. This Circular shall take effect immediately. (Emphasis found in the text) —

should have, instead, been applied. This Court 6 ruled:

The judgments spoken of and referred to are judgments in litigations involving loans or forbearance of any money, goods or credits. Any other kind of monetary judgment which has nothing to do with, nor involving loans or forbearance of any money, goods or credits does not fall within the coverage of the said law for it is not within the ambit of the authority granted to the Central Bank.

xxx xxx xxx

Coming to the case at bar, the decision herein sought to be executed is one rendered in an Action for Damages for injury to persons and loss of property and does not involve any loan, much less forbearances of any money, goods or credits. As correctly argued by the private respondents, the law applicable to the said case is Article 2209 of the New Civil Code which reads —

Art. 2209. — If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of interest agreed upon, and in the absence of stipulation, the legal interest which is six percent per annum.

The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz, 7 promulgated on 28 July 1986. The case was for damages occasioned by an injury to person and loss of property. The trial court awarded private respondent Pedro Manabat actual and compensatory damages in the amount of P72,500.00 with legal interest thereon from the filing of the complaint until fully paid. Relying on the Reformina v. Tomol case, this Court

8 modified the interest award from 12% to 6% interest per annum but sustained the time computation thereof, i.e., from the filing of the complaint until fully paid.

In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an action for the recovery of damages arising from the collapse of a building, ordered, inter alia, the "defendant United Construction Co., Inc. (one of the petitioners) . . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from November 29, 1968, the date of the filing of the complaint until full payment . . . ." Save from the modification of the amount granted by the lower court, the Court of Appeals sustained the trial court's decision. When taken to this Court for review, the case, on 03 October 1986, was decided, thus:

WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and environmental circumstances of this case, we deem it reasonable to render a decision imposing, as We do hereby impose, upon the defendant and the third-party defendants (with the exception of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra. p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to cover all damages (with the exception to

attorney's fees) occasioned by the loss of the building (including interest charges and lost rentals) and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for attorney's fees, the total sum being payable upon the finality of this decision. Upon failure to pay on such finality, twelve (12%) per cent interest per annum shall be imposed upon aforementioned amounts from finality until paid. Solidary costs against the defendant and third-party defendants (Except Roman Ozaeta). (Emphasis supplied)

A motion for reconsideration was filed by United Construction, contending that "the interest of twelve (12%) per cent per annum imposed on the total amount of the monetary award was in contravention of law." The Court 10 ruled out the applicability of the Reformina and Philippine Rabbit Bus Lines cases and, in its resolution of 15 April 1988, it explained:

There should be no dispute that the imposition of 12% interest pursuant to Central Bank Circular No. 416 . . . is applicable only in the following: (1) loans; (2) forbearance of any money, goods or credit; and (3) rate allowed in judgments (judgments spoken of refer to judgments involving loans or forbearance of any money, goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143 SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260 [1985]). It is true that in the instant case, there is neither a loan or a forbearance, but then no interest is actually imposed provided the sums referred to in the judgment are paid upon the finality of the judgment. It is delay in the payment of such final judgment, that will cause the imposition of the interest.

It will be noted that in the cases already adverted to, the rate of interest is imposed on the total sum, from the filing of the complaint until paid; in other words, as part of the judgment for damages. Clearly, they are not applicable to the instant case. (Emphasis supplied.)

The subsequent case of American Express International, Inc., vs. Intermediate Appellate Court 11 was a petition for review on certiorari from the decision, dated 27 February 1985, of the then Intermediate Appellate Court reducing the amount of moral and exemplary damages awarded by the trial court, to P240,000.00 and P100,000.00, respectively, and its resolution, dated 29 April 1985, restoring the amount of damages awarded by the trial court, i.e., P2,000,000.00 as moral damages and P400,000.00 as exemplary damages with interest thereon at 12% per annum from notice of judgment, plus costs of suit. In a decision of 09 November 1988, this Court, while recognizing the right of the private respondent to recover damages, held the award, however, for moral damages by the trial court, later sustained by the IAC, to be inconceivably large. The Court 12 thus set aside the decision of the appellate court and rendered a new one, "ordering the petitioner to pay private respondent the sum of One Hundred Thousand (P100,000.00) Pesos as moral damages, with six (6%) percent interest thereon computed from the finality of this decision until paid. (Emphasis supplied)

Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz 13 which arose from a breach of employment contract. For having been illegally dismissed, the petitioner was awarded by the trial court moral and exemplary damages without, however, providing any legal interest thereon. When the decision was appealed to the Court of Appeals, the latter held:

WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental dated October 31, 1972 is affirmed in all respects, with the modification that defendants-appellants, except defendant-appellant Merton Munn, are ordered to pay, jointly and severally, the amounts stated in the dispositive portion of the decision, including the sum of P1,400.00 in concept of compensatory damages, with interest at the legal rate from the date of the filing of the complaint until fully paid (Emphasis supplied.)

The petition for review to this Court was denied. The records were thereupon transmitted to the trial court, and an entry of judgment was made. The writ of execution issued by the trial court directed that only compensatory damages should earn interest at 6% per annum from the date of the filing of the complaint. Ascribing grave abuse of discretion on the part of the trial judge, a petition for certiorari assailed the said order. This Court said:

. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the legal rate" from the time of the filing of the complaint. . . Said circular [Central Bank Circular No. 416] does not apply to actions based on a breach of employment contract like the case at bar. (Emphasis supplied)

The Court reiterated that the 6% interest per annum on the damages should be computed from the time the complaint was filed until the amount is fully paid.

Quite recently, the Court had another occasion to rule on the matter. National Power Corporation vs. Angas, 14 decided on 08 May 1992, involved the expropriation of certain parcels of land. After conducting a hearing on the complaints for eminent domain, the trial court ordered the petitioner to pay the private respondents certain sums of money as just compensation for their lands so expropriated "with legal interest thereon . . . until fully paid." Again, in applying the 6% legal interest per annum under the Civil Code, the Court 15 declared:

. . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods or credits but expropriation of certain parcels of land for a public purpose, the payment of which is without stipulation regarding interest, and the interest adjudged by the trial court is in the nature of indemnity for damages. The legal interest required to be paid on the amount of just compensation for the properties expropriated is manifestly in the form of indemnity for damages for the delay in the payment thereof. Therefore, since the kind of interest involved in the joint judgment of the lower court sought to be enforced in this case is interest by way of damages, and not by way of earnings from loans, etc. Art. 2209 of the Civil Code shall apply.

Concededly, there have been seeming variances in the above holdings. The cases can perhaps be classified into two groups according to the similarity of the issues involved and the corresponding rulings rendered by the court. The "first group" would consist of the cases of Reformina v. Tomol (1985), Philippine Rabbit Bus Lines v. Cruz (1986), Florendo v. Ruiz (1989)

and National Power Corporation v. Angas (1992). In the "second group" would be Malayan Insurance Company v. Manila Port Service (1969), Nakpil and Sons v. Court of Appeals (1988), and American Express International v. Intermediate Appellate Court (1988).

In the "first group", the basic issue focuses on the application of either the 6% (under the Civil Code) or 12% (under the Central Bank Circular) interest per annum. It is easily discernible in these cases that there has been a consistent holding that the Central Bank Circular imposing the 12% interest per annum applies only to loans or forbearance 16 of money, goods or credits, as well as to judgments involving such loan or forbearance of money, goods or credits, and that the 6% interest under the Civil Code governs when the transaction involves the payment of indemnities in the concept of damage arising from the breach or a delay in the performance of obligations in general. Observe, too, that in these cases, a common time frame in the computation of the 6% interest per annum has been applied, i.e., from the time the complaint is filed until the adjudged amount is fully paid.

The "second group", did not alter the pronounced rule on the application of the 6% or 12% interest per annum, 17 depending on whether or not the amount involved is a loan or forbearance, on the one hand, or one of indemnity for damage, on the other hand. Unlike, however, the "first group" which remained consistent in holding that the running of the legal interest should be from the time of the filing of the complaint until fully paid, the "second group" varied on the commencement of the running of the legal interest.

Malayan held that the amount awarded should bear legal interest from the date of the decision of the court a quo, explaining that "if the suit were for damages, 'unliquidated and not known until definitely ascertained, assessed and determined by the courts after proof,' then, interest 'should be from the date of the decision.'" American Express International v. IAC, introduced a different time frame for reckoning the 6% interest by ordering it to be "computed from the finality of (the) decision until paid." The Nakpil and Sons case ruled that 12% interest per annum should be imposed from the finality of the decision until the judgment amount is paid.

The ostensible discord is not difficult to explain. The factual circumstances may have called for different applications, guided by the rule that the courts are vested with discretion, depending on the equities of each case, on the award of interest. Nonetheless, it may not be unwise, by way of clarification and reconciliation, to suggest the following rules of thumb for future guidance.

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts 18 is breached, the contravenor can be held liable for damages. 19 The provisions under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages. 20

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. 21 Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. 22 In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 23 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court 24 at the rate of 6% per annum. 25 No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. 26 Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due computed from the decision, dated 03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT (6%), shall be imposed on such amount upon finality of this decision until the payment thereof.

SO ORDERED.

G.R. No. 103590 January 29, 1993

GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner, vs.HON. COURT OF APPEALS, THE PROVINCIAL SHERIFF OF CAVITE and VICTOR G. VALENCIA, respondents.

DAVIDE, JR., J.:

In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner would have Us annul and set aside, for being inconsistent with law and jurisprudence, the Resolution 1 of the Court of Appeals (Special Eleventh Division) of 15 January 1992 in CA-G.R. SP No. 24021 which reversed its previous Decision 2 of 28 June 1991. This decision set aside the 7 June 1990, 10 September 1990 and 5 December 1990 Orders of Branch 19 of the Regional Trial Court (RTC) of the Fourth Judicial Region, sitting at Bacoor, Cavite, in Civil Case No. BCV 78-33 entitled "Victor G. Valencia versus Queen's Row Subdivision, Inc. and the Government Service Insurance System."

As disclosed by the pleadings, the salient facts surrounding the instant controversy are as follows:

Several years back, the Queen's Row Subdivision, Inc. (QRSI) entered into a construction project agreement with the Government Service Insurance System (GSIS) by virtue of which the latter agreed to extend a financing loan to the former for the construction and development of a residential subdivision, comprising some four thousand four hundred ninety-three (4,493) housing units, situated at Molino, Bacoor, Cavite; these units were to be sold to GSIS members in accordance with the System's housing program.

Pursuant to said project agreement, QRSI entered into a construction contract with private respondent Valencia involving various phases of land development in the said subdivision. Upon accomplishing and completing his undertaking under the contract, Valencia demanded payment from QRSI. Despite repeated demands, however, QRSI refused to pay. Valencia then filed the complaint in the aforementioned Civil Case No. BCV-78-33, an action for a sum of money with prayer for the issuance of a writ of preliminary attachment. During the trial of the case, Valencia, after manifesting that he was not seeking any relief against the personal funds of petitioner GSIS, proceeded to present his evidence. No evidence was offered by both the petitioner and QRSI.

On 2 March 1982, the trial court rendered its decision, the dispositive portion of which reads:

WHEREFORE, premises considered, the Court hereby renders judgment in favor of the plaintiff and against the defendants, as follows:

1. Ordering defendant Queen's Row to pay plaintiff the sum of FOUR HUNDRED FORTY EIGHT THOUSAND THREE HUNDRED SEVENTY FOUR and 01/100 Pesos (P448,374.01), for the first cause of action; the sum of TWO HUNDRED FOUR THOUSAND EIGHT HUNDRED TWENTY ONE and 32/100 Pesos (P204,821.32), for the second cause of action; the sum of ONE HUNDRED TWO THOUSAND EIGHT HUNDRED SIXTY SIX and 37/100 (P102,866.37) Pesos under the third cause of action and ordering the said defendant to return to plaintiff the amount of TEN THOUSAND PESOS (P10,000.00) posted as performance bond, the same amounts to be recovered by plaintiff shall bear legal rate of interest from the date of demands on February 10, 1974, September 13, 1976 and February 3, 1977, for the first, second and third causes of action, respectively;

2. Sentencing defendant Queen's Row to pay attorney's fees in favor of the plaintiff in the sum equal to twenty (20%) percent of the said amounts ordered recovered and payable to said plaintiff;

3. Requiring the defendant GSIS to hold whatever amounts it has granted to, retained and obtained for defendant Queen's Row, and to deliver the same to plaintiff by way of payment to the aforecited amount ordered recovered by plaintiff, the same to be credited as payment made by defendant Queen's Row. It is distinctly made clear that defendant GSIS shall not be personally liable for the said obligation of co-defendant Queen's Row, except as herein above-ordered; however, pending payment of the said claim of plaintiff, defendants are ordered to respect and satisfy the contractor's lien in favor of the plaintiff as provided for by law.

4. Defendant Queen's Row is hereby ordered to pay the costs.

5. All other claims and counterclaims are hereby ordered dismissed.

SO ORDERED. 3

On 25 March 1982, Valencia filed a motion for execution pending appeal. Actually, no motion for reconsideration or notice of appeal was filed by both QRSI and the petitioner. Although the motion was granted by the trial court, the writs issued as a consequence thereof was returned unsatisfied. Thereupon private respondent Valencia filed a Motion for Examination of Debtors of the Judgment Debtor. With the permission of the trial judge, a certain Mr. Valeriano M. Espiritu, a plaintiff in a separate collection suit against both the petitioner and QRSI, 4 was joined as movant

with Valencia. Acting on said motion, the trial court ordered Mr. Armando Diaz, Assistant General Manager for Loans and Investments of the GSIS, to appear and testify in accordance with Sections 38 to 40, Rule 39 of the Rules of Court.

On 10 November 1982, respondent Valencia filed a petition to cite petitioner in contempt of court for the latter's failure to comply with the writ of execution. On 15 November 1982, the trial court issued an order directing the petitioner to comply with the writ of execution and instructing Mr. Diaz to appear on 26 November 1982 under pain of contempt should he fail to do so. On 23 November 1982, petitioner filed an Urgent Motion for Reconsideration of the 15 November 1982 Order. Pending resolution of this motion, petitioner partially paid respondent Valencia on 26 November 1982 the amount of ONE HUNDRED FIFTY FOUR THOUSAND FOUR HUNDRED SEVENTY SIX and 14/100 PESOS (P154,476.14) out of the retained funds held for the account of QRSI.

Thereafter, on 20 October 1983, another alias writ of execution was issued by the trial court.

On 5 December 1983, respondent Sheriff served upon the petitioner a notice of garnishment upon all monies and credits belonging to QRSI which were under the control and possession of the petitioner. An answer to the Sheriff's notice was submitted by the latter stating that the GSIS is not a debtor of QRSI; that it has no credits, monies or interests belonging to QRSI in its possession or control; and that it is in fact the biggest creditor of QRSI whose outstanding account as of 9 December 1983 stood at FIFTY EIGHT MILLION TWO HUNDRED SIXTY ONE THOUSAND SEVEN HUNDRED SEVENTY THREE and 19/100 PESOS (P58,261,773.19).

In its 5 July 1985 Order, the trial court ruled that the petitioner was holding funds for QRSI; it thus directed the petitioner to pay both Valencia and Valeriano Espiritu the amount adjudged and covered by the writs of execution after deducting the payments previously made. The dispositive portion of the Order reads:

. . . WHEREFORE, premises considered, this Court holds that defendant GSIS holding funds for defendant QRSI has more than sufficient funds to pay the obligation of said Queen's Row Subdivision, Inc. with the plaintiffs. Consequently, the defendant GSIS is ordered to pay to plaintiffs the judgment rendered and covered by writs of execution after deducting the payments previously made . . . . 5

Petitioner's motion for reconsideration of the said order was denied by the trial court in its Order of 22 May 1986 on the ground that, inter alia, the claim that QRSI is obligated to the GSIS was not established by evidence during the trial of the case. The Order reads in part:

. . . Considering that the facts cited are not properly shown in the record, the court cannot see any plausible reason to reverse or otherwise sustain the motion of defendant GSIS.

WHEREFORE, finding no merit in the motion for reconsideration filed by defendant GSIS, the same is hereby denied. 6

On 9 June 1986, the trial court again issued an alias writ of execution. Consequently, notices of garnishment were served by the Sheriff upon the petitioner and the Philippine National Bank (PNB).

On 13 June 1986, petitioner filed a motion for the reconsideration of the 22 May 1986 Order and on 16 June 1986, it filed a Notice of Appeal Ad Cautelam from the Orders of 5 July 1985 and 22 May 1986. It thereafter filed its motion to quash the alias writ of execution.

In its Order of 10 July 1986, the trial court denied the aforesaid motion for reconsideration.

The petitioner thus filed on 18 September 1986 with the Court of Appeals a petition for certiorari and prohibition to set aside the aforesaid Orders of 5 July 1985, 22 May 1986 and 10 July 1986, as well as the alias writ of execution of 9 June 1986 and the Notice of Garnishment of 10 June 1986. The case was docketed as CA-G.R. SP No. 09956.

In its Decision promulgated on 17 April 1986, the Court of Appeals dismissed the aforesaid petition principally on the ground that the trial court's Decision of 2 March 1982 "has long become final" as neither QRSI nor the herein petitioner had moved for its reconsideration or appealed therefromwithin the reglementary period. It considered as "inexcusable" petitioner's contention — that it did not need to appeal the decision because according to the trial court, "defendant GSIS shall not be personally liable for the obligation of QRSI" — because the following portion of the trial court's decision:

3. Requiring defendant GSIS to hold whatever amounts it has granted to, retained and obtained for defendant Queen's Row, and to deliver same to plaintiff by way of payment of the aforecited amount ordered recovered by plaintiff, the same to be credited as payment made by the defendant Queen's Row. It is distinctly made clear that defendant GSIS shall not be personally liable for the said obligation of co-defendant Queen's Row, except, as herein above-ordered; however, pending payment of the said claim of plaintiff, defendants are ordered to respect and satisfy the contractor's lien in favor of the plaintiff as provided for by law. 7

constitutes:

. . . a final or definitive judgment on the merits from which the party adversely affected can make an appeal. Said decision imposes an obligation on GSIS which GSIS has acquiesced to do by its failure to appeal therefrom. 8

and that:

Consequently, when GSIS conformed to the decision and allowed it to attain finality, it in effect admitted that indeed it has in its possession or control credits, monies, and interests belonging to QRSI and therefore it obliged itself to pay the latter's obligation to Valencia as in fact, it did make a partial payment thereto in the amount of P154,476.14 (Annexes "A" and "B", p. 141, Ibid) on November 26, 1982.

And as pointed out by the private respondent in its Comment to the petition, the challenged decision has not only become final and executory but has in fact been partially executed by virtue of the payment on November 26, 1982 by GSIS pursuant to a writ of execution issued against it out of its retentions. The fact of payment meanwhile also constitutes as (sic) a waiver of the legal compensation being invoked by petitionerGSIS. 9

Unsatisfied with the said decision, petitioner came to this Court by way of a petition for review under Rule 45 of the Rules of Court; the case was docketed as G.R. No. 87980. In the Resolution of 27 November 1989, this Court denied the petition because o the petitioner's failure to show that the appellate court's decision is not supported by substantial evidence and that the conclusions therein are contrary to law and jurisprudence. This Court stated:

A careful review of the petition shows that it has no merit. The decision of the respondent Regional Trial Court had long become final before the appeal to the Court of Appeals was made.

The Argument that Queen's Row owes GSIS certain sums of money was rejected by the two courts below because it was never raised during the trial and no evidence was presented on the matter. The respondent court correctly applied PD 1594 on government infrastructure contracts regarding progress payments and the withholding of retention money everytime a certain percentage of the work is completed. The housing units were constructed by the respondent and they have been sold by the GSIS to its members.

The argument of the petitioner that a separate action should be filed by the private respondent against GSIS was correctly rejected because the GSIS was a party to the case from the very start. As pointed out by the respondent, the legal compensation invoked by the GSIS whereby there would be compensation as between GSIS and Queen's Row was waived by the fact that GSIS made partial payments to Valencia. 10

The motion to reconsider this Resolution was denied with finality in the Resolution of 15 January 1990.

Thereafter, respondent Valencia moved for the issuance of an alias writ of execution for the amount of FIVE MILLION SEVEN HUNDRED FIFTY NINE THOUSAND SIX HUNDRED SEVENTY SEVEN and 97/100 PESOS (P5,759,677.97). An opposition thereto was filed by the petitioner contesting only the amount due and payable, particularly the interests imposed therein. On 7 June 1990, the trial court issued an order the dispositive portion of which reads:

WHEREFORE, premises considered, this court hereby orders GSIS to deposit in court or pay plaintiff the amounts of the principal at twelve (12%) per cent simple interest per annum and attorney's fees less payment already made within five (5) days from receipt hereof, otherwise, the Clerk of Court is directed to issue the corresponding alias writ of execution for the said amounts. GSIS is ordered, therefore, to pay the following amounts:

a) P448,374.01 with simple interest from February 10, 1974 or 195.166 months up to May 15, 1990. At one percent (15) (sic) a month, the interest would be:

P448,374.01 x .01 x 195.166 months = P 875,073.

b) P204,821.32 with simple interest from September 13, 1976 or 164.066 months up to May 15 1990. At one percent (1%) a month, the interest would be:

P204,821.32 x .01 x 164.066 mos. = P336,041.62 (sic).

c) P102,866.33 with simple interest from Feb. 3, 1977 or 159.4 months up to May 15, 1990. At one percent (1%) a month, the interest would be:

P102,866.33 x .01 x 159.4 mos. = P163,968.40 (sic).

S U M M A R Y

Principal Interest Total

P448,374.01 P875,073.60P204,821.32 P336,041.62 (sic)P102,866.37 P163,968.40 (sic)————— —————P756,061.70 P1,375,083.62 =P2,131,145.32Attorney's fees (20%) 426,229.06Performance Bond 10,000.00—————TOTAL P2,567,374.06

This Order shall be without prejudice to whatever resolution that may be rendered by this Court on the issue of proper rate of interest.

SO ORDERED. 11

The rate of interest was later fixed in the Supplemental Order of 10 September 1990 which directed the petitioner to pay the total amount of P11,363,304.27 — arrived at by compounding interests ranging from twelve percent (12%) to twenty-one percent (21%) per annum allegedly in accordance with Central Bank Circulars Nos. 416, 494, 586 and 705 which fixed the maximum legal rate of interest at twelve percent (12%), seventeen percent (17%), nineteen percent (19%) and twenty-one percent (21%) per annum, respectively — less the sum of P2,567,374.06. 12

Its motion for reconsideration of the said supplemental order having been denied by the trial court in the Order of 5 December 1990, petitioner commenced before the respondent Court of Appeals a petition or certiorari and prohibition to seek the nullification of the Orders of 7 June 1990, 10 September 1990 and 5 December 1990. The petition was docketed as CA-G.R. SP No. 24021. On 28 June 1991, respondent Court promulgated its decision 13 therein in favor of the petitioner:

The Court, therefore, finds grave abuse of discretion n the trial court's orders requiring the petitioner to the payment (sic) of millions of pesos, in favor of the private respondent, Victor G. Valencia, without regard to the amount or amounts that it actually holds, if any, in favor of Queen's Row Subdivision, Inc. To do otherwise would violate the very judgment sought to be executed.

WHEREFORE, the orders of June 7, 1990, September 10, 1990 and December 5, 1990 are hereby SET ASIDE. The case is remanded for proceedings appropriate to determining how much funds the petitioner holds in favor of Queen's Row Subdivision, Inc., under paragraph 3 of the decision of March 3, [should be 2] 1982, beyond which amount, the petitioner cannot be held liable. 14

The above decision is anchored on the following disquisitions:

The merit in this petition flows from the language of the nowlong-final decision of March 3, [should be 2] 1982. The orders above-cited and complained of have evidently disregarded, ignored, and held inexistent, he clear language of the decision sought to be executed. The said judgment contains the following significant restricting and limiting clauses, namely:

(1) That the judgment for money resulting from the violated contract between respondent Victor G. Valencia and Queen's Row Subdivision, Inc. ordered the latter to pay the former specific amounts stated in the judgment with "legal rate of interest from the date of demands on February 10, 1974, September 13, 1976 and February 3, 1977 . . . ."

(2) The Government Service Insurance System is requiring to "hold whatever amounts it has granted to, retained and obtained for defendant Queen's Row Subdivision, Inc. and deliver same to plaintiff by way of payment to the aforecited amount ordered recovered by the plaintiff, the same to be credited as payment made by defendant Queen's Row. It is distinctly made clear that defendant GSIS shall not be personally liable for the said obligation of co-defendant Queen's Row, except as herein above ordered; . . . . . . .

It does not appear anywhere that the petitioner is in any manner contractually related to the private respondent, Victor G. Valencia. The petitioner, under the decision, is ordered to pay, not because it is principally and directly liable to the private respondent under the contracts between Queen's Row Subdivision, Inc. and respondent Victor G. Valencia, but because it had granted, retained and obtained funds for Queen's Row Subdivision, Inc. It is ordered to pay such funds and to deliver the same to respondent Victor G. Valencia which shall be credited as payment for the amounts recovered by the said private respondent. Strictly speaking, the petitioner has no standing questioning (sic) the rate of interest to be applied on the principals because only Queen's Row Subdivision may, since it is the latter's obligation that is being liquidated and paid for in this manner. The petitioner is not a debtor of Queen's Row Subdivision, Inc. and the decision sought to be executed does not say so. It is simply being ordered to pay the funds it holds for Queen's Row Subdivision, Inc. in order that the latter's indebtedness in favor of Victor G. Valencia may be paid fully, or partially.

But while the petitioner is ordered to pay whatever amount Queen's Row is adjudged to pay, the judgment protects the petitioner by saying that it shall not be personally liable for the payment of the obligation of Queen's Row Subdivision, Inc., beyond whatever funds it holds for Queen's Row Subdivision, Inc. The judgment specifically limits the petitioner's liability to the extent of the amounts 'it has granted to be retained and obtained for defendant Queen's Row . . . . . . Therefore, there should be a preliminary inquiry into how much the petitioner holds for Queen's Row Subdivision, Inc.

The orders brought up for review simply order the petitioner to pay the principal amounts plus the computed interest without regard to the amount that the petitioner holds, retains or is granted in favor of Queen's Row Subdivision, Inc. Beyond this amount, the trial court would be ordering the payment of the petitioner's "personal" money, money that belongs to its thousands of members, thousands of small-salaried government employees. Their interests need protection also. The petitioner can, theretofore, be ordered to pay the obligations of Queen's Row Subdivision, Inc. to the limit of what it holds, retains or has granted, in favor of Queen's Row Subdivision. Beyond this, it cannot be made to pay because that would be violative of the very judgment sought to be executed. There is ni basis, therefore, for orders that would compel it to pay without regard to the amounts that it holds in favor of Queen's Row Subdivision, Inc., under paragraph 3 of the decision of March 3, [should be 2] 1982. There must be a previous inquiry into how much these funds amount to. This has not been made. 15

On 12 July 1991, respondent Valencia sought the reconsideration of the above-quoted decision claiming that the petition filed before the appellate court (CA-G.R. SP No. 24021) is barred by a prior judgment and estoppel. The prior judgment alluded to is the decision of the Court of Appeals in CA-G.R. SP No. 09956 and the resolution of this Court in G.R. No. 87980, while the estoppel is based on the partial payment made by the petitioner.

On 15 January 1992, the respondent Court promulgated the questioned resolution 16 reconsidering its 28 June 1991 Decision and dismissing the Petition for Certiorari and Prohibition, thus:

WHEREFORE, the motion for reconsideration is hereby granted, the decision reconsidered, and the petition for certiorari and prohibition dismissed for lack of merit.

SO ORDERED. 17

The Court of Appeals agreed with the private respondent's claim of res judicata or bar by prior judgment. It further observed that after making a partial payment in compliance with the trial court's Order of 7 June 1990 which set the interest at twelve percent (12%) per annum, petitioner can no longer assert that the interest should be at six percent (6%) per annum.

Dissatisfied with the respondent Court's findings, petitioner took this present recourse and assigns the following errors:

1. THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT THE PRESENT PETITION IS BARRED BY PRIOR JUDGMENT AND ESTOPPEL.

2. THE RESPONDENT COURT OF APPEALS ERRED IN REVERSING ITS OWN DECISION PROMULGATED ON JUNE 28, 1991.

3. THE RESPONDENT COURT OF APPEALS ERRED WHEN IT FAILED TO RULE THAT PETITIONER CAN ONLY BE HELD TO PAY THE OBLIGATIONS OF QUEEN'S ROW SUBDIVISION, INC. TO RESPONDENT VALENCIA OUT OF RETENTIONS AND ONLY AT A SIX PERCENT (6%) SIMPLE INTEREST RATE PER ANNUM.

4. THE RESPONDENT COURT OF APPEALS MANIFESTLY OVERLOOKED CERTAIN RELEVANT FACTS NOT DISPUTED BY THE PARTIES AND, WHICH IF PROPERLY CONSIDERED, WOULD JUSTIFY A DIFFERENT CONCLUSION. 18

Petitioner claims that res judicata does not apply in this case as the reliefs sought in CA-G.R. SP No. 24021 are distinct from those prayed for in G.R. No. 87980. It avers that while the former questions the rate of interest imposed, the latter involves the issue of whether the petitioner is a creditor or a debtor of QRSI and the question of the sufficiency of the retained money in its possession. In CA-G.R. SP No. 24021, petitioner assailed the trial

court's Orders of 7 June 1990, 10 September 1990 and 5 December 1990 because they vary the terms of the very decision sought to be enforced, particularly with respect to the rate of interest to be applied.

Petitioner argues further that the partial payment of the sum of P2,567,374.06 in favor of respondent Valencia does not ipso facto estop it from asserting that it can only be held liable for the aggregate amount of P3,373,391.77, the total amount retained by it in favor of QRSI.

On 25 May 1992, after the private respondent had filed his Comment 19 and the petitioner had submitted its Reply, 20 We resolved to give due course to the instant petition and required the parties to submit their respective Memoranda 21 which they subsequently complied with.

The main issue in this petition is whether or not respondent Court of Appeals committed reversible error when it made a sudden volte-face by reversing its own Decision of 28 June 1991 on the grounds of res judicata and estoppel. This in turn brings Us to the issue of whether or not the trial court acted without or in excess of jurisdiction, or with grave abuse of discretion when it ordered the petitioner to pay interests at various rates ranging from twelve percent (12%) to twenty-one percent (21%), pursuant to various circulars of the Central Bank, and attorney's fees.

We find merit in this petition. We rule for the petitioner.

Respondent Court erred in declaring, in the challenged resolution, that the judgments in CA-G.R. SP No. 09956 and G.R. No. 87980 bar, because of res judicata, CA-G.R. SP No. 24021, as these three (3) cases involve the same parties. In its own language, it avers:

The petitioner's comment on the motion for reconsideration does not deny the grounds stated in the motion for reconsideration. It is, therefore, clear that the Court cannot tread over grounds that had already been covered in a previous litigation between the same parties, especially where the Highest Court of the land has made a final, binding and lasting ruling. . . . 22

After taking pains to read the records of G.R. No. 87980 and the decision of the Court of Appeals in CA-G.R. SP No. 09956 challenged therein, We agree with the petitioner that these rulings do not bar CA-G.R. SP No. 24021 because said prior judgments did not involve and did not rule on the rates of interest chargeable against the petitioner for the purpose of executing judgment. All that was ruled upon therein was that the trial court's judgment of 2 March 1982 is already final and executory since no motion for reconsideration or appeal was interposed within the reglementary period, that petitioner is holding more than enough funds for QRSI to pay for the latter's obligation to Valencia and Espiritu and that the petitioner's defense of legal compensation was deemed waived by the partial payment made on 26 November 1982. These matters are not sought to be relitigated in CA-G.R. SP No. 24021. As We see it, the latter merely seeks for a correct and proper executor of the Decision of 2 March 1982. Petitioner no longer questions the finality of the decision for as a matter of fact, it had already partially satisfied the portion thereof directed against it. The application then of the doctrine of res judicata is not called for. It is entirely irrelevant. Besides, the identity of parties which the respondent Court relied upon to justify the application of the doctrine is only one of three (3) identities prescribed by the fourth requisite of res judicata. These four (4) requisites are (1) the presence of a final former judgment, (2) the former judgment is by a court having jurisdiction over the subject matter and the parties, (3) the former judgment is a judgment on the merits and (4) there is, between the first and the second actions identity of parties, of subject matter and of causes of action. 23 Since a cause of action gives rise to issues, it logically follows that there must be identical issues. As heretofore stated, the issue raised in CA-G.R. SP No. 24021 is not identical with any of the issues posed and resolved in CA-G.R. SP No. 09956 and G.R. No. 87980.

The general rule is that an order of execution of a final judgment is not appealable. It is, however, recognized that this rule is subject to two (2) exceptions, viz., (1) when the order of execution varies or tends to vary the tenor of the judgment, and (2) when the terms of the judgment are not clear enough that there remains room for their interpretation by the trial court. In such instances, the aggrieved party may appeal from the order of execution thus issued 24 or avail of any other proceeding appropriate and allowed under the Rules of Court — such as the special civil action of certiorari under Rule 65 of the Rules of Court. 25 In the instant case, petitioner is of the honest opinion that the Orders of the trial court dated 7 June 1990 and 10 September 1990 upon which shall be based the subsequent alias writ of execution, fixing the rates of interest on the judgment amounts from twelve percent (12%) to twenty-one percent (21%) on the basis of various circulars of the Central Bank, vary the tenor of the judgment. Hence, it could seek remedy therefrom either by ordinary appeal, or by certiorari under Rule 65 of the Rules of Court; it chose the latter, the propriety of which is not challenged by the adverse party. The circumstances surrounding the issuance of the orders justify such choice. We agree with the petitioner that indeed, the said orders vary the tenor of the dispositive portion of the 2 March 1982 Decision with respect to the petitioner's specific liability thereunder, the rate of interest and, it may be added, attorney's fees. As against the petitioner, the dispositive portion merely provides:

3. Requiring defendant GSIS to hold whatever amounts it has granted to, retained and obtained for defendant Queen's Row, and to deliver same to plaintiff by way of payment to the aforecited amount ordered recovered by plaintiff, the same to be credited as payment made by defendant Queen's Row. It is distinctly made clear that defendant GSIS shall not be personally liable for the said obligation of co-defendant Queen's Row, except, as herein above-ordered; however, pending payment of the said claim of plaintiff, defendants are ordered to respect and satisfy the contractor's lien in favor of the plaintiff as provided for by law. 26

It is clear from this disposition that the petitioner's liability is limited to the holding of whatever amount it "has granted to, retained and obtained for defendant Queen's Row" and the "delivery" thereof to Valencia "by way of payment to the aforecited amount ordered recovered by" Valencia.

Beyond such amount, 27 petitioner is no longer liable. It is precisely for this reason that the trial court explicitly incorporated a proviso that petitioner "shall not be personally liable for the said obligation of co-defendant Queen's Row, except, as herein above-ordered." Petitioner was not ordered to pay interest on the amount it was to hold and deliver to Valencia or to pay attorney's fees. The trial court cannot, therefore, without committing grave abuse of discretion, direct the petitioner to pay interest and attorney's fees. To do so would be to vary the tenor of the judgment against the latter and increase its liability, thereby rendering nugatory the above proviso. Such imposition would mean, as in this case, the delivery of money to Valencia in excess of that belonging to QRSI which the petitioner has been retaining. It is a settled general principle that a writ of execution must conform substantially to every essential particular of the judgment promulgated. Execution not in harmony with the judgment is bereft of validity. It must conform, more particularly, to that ordained or decreed in the dispositive portion of the decision. 28

And even if We are to assume, for the sake of argument, that the amount held or retained by the petitioner for delivery to Valencia is more than enough to cover the sums adjudged against QRSI, the imposition of interest ranging from twelve percent (12%) to twenty-one percent (21%) per annum on said sum pursuant to the quoted Central Bank circulars, is not justified and warranted.

While it is true that with respect to the amounts adjudged against QRSI, enumerated in the first paragraph of the dispositive portion of the Decision of 2 March 1982, the trial court imposed thereon the "legal rate of interest from the date of demands on February 10, 1974, September 13, 1976 and February 3, 1977, for the first, second and third causes of action, respectively," We agree with the petitioner that such legal rate refers to the legal rate provided for in Article 2209 of the Civil Code, which is six percent (6%) per annum.

Central Bank Circular No. 416, which prescribes interest at twelve percent (12%) per annum, does not apply in this case. We have held in a number of cases 29 that the said circular applies only to interest for loans or forbearances of any money, goods or credits or judgments in cases involving loans or forbearances of any money, goods or credits. Any other monetary judgment which does not involve or which has nothing to do with loans or forbearances of any money, goods or credit does not fall within its coverage for such imposition is not within the ambit of the authority granted to the Central Bank. The instant case does not involve loans or forbearances of money, goods or credits.

Neither are Central Bank Circulars Nos. 494, 586, 705 and 783 applicable. The first prescribed ceilings on the rates of interest on loans and yields on purchases of instruments by banks and non-bank financial intermediaries. The second superseded the first while the third amended the latter by increasing the ceiling to a maximum of twenty-one percent (21%) per annum; the fourth fixed the effective rate of interest, including commissions, premiums, fees and other charges on loans or forbearances of money, goods or credit with a maturity of 730 days or less not exceeding sixteen percent (16%) per annum, for secured loans, and not exceeding eighteen percent (18%) per annum for unsecured loans. Beyond 730 days, the interest rate is not subject to any ceiling.

Accordingly, the respondent Court's Decision of 28 June 1991, the dispositive portion of which provides that:

WHEREFORE, the orders of June 7, 1990, September 10, 1990 and December 5, 1990 are hereby SET ASIDE. The case is remanded for proceedings appropriate to determining how much funds the petitioner holds in favor of Queen's Row Subdivision, Inc., under paragraph 3 of the decision of March 3, [should be 2] 1982, beyond which amount, the petitioner cannot be held liable.

is in accord with the law and jurisprudence. Thus, the respondent Court erred in reversing itself via its challenged Resolution of 15 January 1992.

The private respondent's claim that the petitioner is estopped from questioning the twelve percent (12%) interest because it had made some payments is untenable. The petitioner is an instrumentality of the Government which functions as an administrative body. Its officials are public officials. The general rule is that the Government is not estopped by errors, mistakes or omissions of its officials or agents. 30 This is especially true in the case of the petitioner because of the fiduciary character of its management which is "rendered more strict by the fact that the funds under its administration are partly contributed by the thousands upon thousands of employees and workers in all the branches and instrumentalities of the government." 31

WHEREFORE, the instant petition is GRANTED. The Resolution of respondent Court of 15 January 1992 in CA-G.R. SP No. 24021 is SET ASIDE and its Decision therein of 28 June 1991 is hereby REINSTATED and AFFIRMED.

This decision shall be immediately executory.

Costs against the private respondent.

SO ORDERED.

G.R. No. 107569 November 8, 1994

PHILIPPINE NATIONAL BANK, petitioner, vs.COURT OF APPEALS, REMEDIOS JAYME-FERNANDEZ and AMADO FERNANDEZ, respondents.

PUNO, J.:

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:

WHEREFORE, the judgment appealed from is hereby SET ASIDE and a new one is entered ordering defendant-appellee PNB to re-apply the interest rate of 12% per annum to plaintiffs-appellants' (referring to herein private respondents) indebtedness and to accordingly take the appropriate charges from plaintiffs-appellants' (private 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.

SO ORDERED.

The parties do not dispute the facts as laid down by respondent court in its impugned decision, viz.:

On April 7, 1982, (private respondents) as owners of a NACIDA-registered enterprise, obtained a loan under the Cottage Industry Guaranty Loan Fund (CIGLF) from the Philippine National Bank (PNB) in the amount of Fifty Thousand (P50,000.00) Pesos, as evidenced by a Credit Agreement. Under the Promissory Note covering the loan, the loan was to be amortized over a period of three (3) years to end on March 29, 1985, at twelve (12%) percent interest annually.

To secure the loan, (private respondents) executed a Real Estate Mortgage over a 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 by the Bank. In addition, (private respondents) executed a Chattel Mortgage over a thermo plastic-forming machine, which had an appraisal value of P8,800 and a loan value of P4,400.00.

The Credit Agreement provided inter alia, that —

(a) 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; Provided, that the interest rate on this accommodation shall be correspondingly decreased in the event that the applicable maximum interest is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease in the maximum interest rate.

The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time without notice, beyond the stipulated rate of 12% but only "within the limits allowed by law."

The Real Estate Mortgage contract likewise provided that —

(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 MORTGAGE, in accordance with the provision 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.

On February 17, 1983, (private respondents) were granted an additional NACIDA loan of Fifty Thousand (P50,000.00) Pesos by the PNB, for which (private respondents) executed another Promissory Note, which was to mature on April 1, 1985. Other than the date of maturity, the second promissory note contained the same terms and stipulations as the previous note. The parties likewise executed a new Credit 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.

As additional security for the loan, (private respondents) constituted another real estate mortgage over 2 parcels of registered land, with a combined area of 311 square 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 P28,000.00.

In a letter dated August 1, 1984, the PNB informed (private respondents) "that the interest rate of your CIGLF loan account with us is now 25% per annum plus a penalty of 6% per annum on past dues." The PNB further increased this interest rate to 30% on October 15, 1984; and to 42% on October 25, 1984.

The records show that as of December 1985, (private respondents) had an outstanding principal account of P81,000.00 of which P18,523.14 was credited to the principal, P57,488.89 to the interest, and the rest to penalty and other charges. Thus, as of said date, the unpaid principal obligation of (private respondent) amounted to P62,830.32.

Thereafter, (private respondents) exerted efforts to get the PNB to re-adopt the 12% interest and to condone the present interest and penalties due; but to no avail. 2 (Citations omitted.)

On December 15, 1987, private respondents filed a suit for specific performance against 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 prayed the trial court to order:

1. The PNB and NACIDA to issue in (private respondents') favor, a release of mortgage;

2. The PNB to pay pecuniary consequential damages for the destruction of (private respondents') enterprise;

3. The PNB to pay moral and exemplary damages as well as the costs of suit; and

4. Granting (private respondents') such other relief as may be found just and equitable in the premises. 4

On February 26, 1990, the trial court dismissed private respondents' complaint in Civil 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 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 Agreement and the Promissory Notes are not the law between the parties; (3) that CB Circular No. 773 and CB Circular No. 905 are not applicable; and (4) that private respondents are not estopped from questioning the increase of rate interest made by petitioner." 5

The petition is bereft of merit.

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 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 and provided, that, the interest rate on this accommodation shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease in maximum interest rate.

This clause is authorized by Section 2 of Presidential Decree (P.D.) No. 1684 which further amended Act No. 2655 ("The Usury Law"), as amended, thus:

Section 2. The same Act is hereby amended by adding a new section after Section 7, to read as follows:

Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods 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 Monetary Board; Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board; Provided further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest.

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 such authority, the Monetary Board issued Central Bank (C.B.) Circular No. 905, series of 1982, Section 5 of which provides:

Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial Intermediaries) is hereby amended to read as follows:

Sec. 1303. Interest and Other Charges. — The rate of interest, including commissions, premiums, fees and other charges, on any loan, or forbearance of any money, goods or credits, regardless of maturity and whether secured or unsecured, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as amended.

P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to adjust, upward or downward, the interest previously stipulated. However, contrary to the stubborn insistence of petitioner bank, the said law and circular did not authorize either party to unilaterally raise the interest rate without the other's consent.

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 one who contracts, his act has no more efficacy than if it had been done under duress or by a person of unsound mind. 6

Similarly, contract changes must be made with the consent of the contracting parties. The 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 gainsaid that the rate of interest is always a vital component, for it can make or break a capital venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of any binding effect.

We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it unbridled right to unilaterally upwardly adjust the interest on private respondents' loan. That would completely take away from private respondents the right to assent to an important modification in their agreement, and would negate the element of mutuality in contracts. In Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held —

. . . The unilateral action of the PNB in increasing the interest rate on the private respondent's loan violated the mutuality of contracts ordained in Article 1308 of the Civil Code:

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 or 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 . . . . Hence, even assuming that the . . . 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" . . . . 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. 84884 : December 3, 1990.]

EULALIO M. RUIZ and ILUMINADA RUIZ, Petitioners, vs. HON. DOROTEO N. CANEBA, THE CITY SHERIFF OF MANILA AND/OR HIS DEPUTIES, ZENAIDA SANGALANG and ADOLFO CRUZ, Respondents.

D E C I S I O N

PARAS, J.:

This is a petition for Certiorari and prohibition with preliminary injunction and/or restraining order of the Order of the respondent judge 1 dated July 27, 1988 in Civil Case No. 84-24032 entitled "Eulalio M. Ruiz and Iluminada M. Ruiz vs. Zenaida S. Sangalang and Adolfo Cruz" amending the May 15, 1986 decision of Judge Antonio M. Martinez (now Justice of the Court of Appeals). The facts of the case are as follows:

Private respondents Zenaida Sangalang and Adolfo Cruz are common-law spouses and owners in common of a 2-storey house and lots described in Transfer Certificate of Title (TCT) No. 56053 of the Registry of Deeds of Caloocan City but registered only in the name of Zenaida Sangalang.

Petitioners, the spouses Eulalio M. Ruiz and Iluminada M. Ruiz are the lessees of Door No. 1 of the aforesaid two storey house divided into 2 doors, for a monthly rental of P650.00.:- nad

Sometime on November 19, 1982, Eulalio Ruiz and Zenaida Sangalang executed an agreement where it was provided that Ruiz will buy the house and lot for the sum of P175,000.00 under the following terms and conditions:

"That I, EULALIO M. RUIZ, of legal age, Filipino, married to Iluminada M. Ruiz, with residence and postal address at 399 Gen. Luna, Caloocan City, Metro Manila, Philippines, am a tenant of MISS ZENAIDA S. SANGALANG and I agree to purchase the above mentioned parcel of land from MISS ZENAIDA S. SANGALANG for the total amount of ONE HUNDRED AND SEVENTY FIVE THOUSAND PESOS (175,000.00), Philippine Currency, to be paid as follows: SIXTY FIVE THOUSAND PESOS (P65,000.00) down payment and will assume the amount of balance of THIRTY ONE THOUSAND FIVE HUNDRED PESOS (P31,500.00) with the BANK OF THE PHILIPPINE ISLAND, Marulas Branch, Metro Manila; that after payment of said balance mortgage, a balance of seventy eight thousand five hundred pesos (P78,500.00) will be payable on or before December 31, 1983; my failure to comply with the above conditions of payment, the said property above described will be open for sale and all partial payments will be refunded by Miss Zenaida S. Sangalang". (Rollo, p. 45)

It was also stipulated that the Ruiz spouses will continue paying the monthly rental of P650.00 until the amount of P175,000.00 shall have been fully satisfied.

There is no dispute that the following payments were made by Ruiz: P65,000.00 to Sangalang as down payment and P21,119.62 to the Bank on the assumed mortgage. There is disagreement however as to the amount paid to Sangalang on the balance of P78,500.00. Sangalang maintains that she received only P33,793.00 while Ruiz insists that they paid P53,073.00.

Thus, the Ruiz spouses filed a complaint on April 24, 1984 for specific performance with damages against Zenaida Sangalang and Adolfo Cruz. (Ibid, p. 14)

In any event, the trial court found that the Ruiz spouses failed to pay in full the balance of P78,500.00 on or before December 31, 1983 as stipulated and even on the extended period of March 22, 1984. Hence, the Ruiz spouses are not entitled to their prayer for specific performance with damages. In the same breath, the trial court decided that it is only fair that Zenaida Sangalang return/refund to the Ruiz spouses the payment made by the latter. Further, it ruled that the Ruiz spouses shall continue to pay the agreed amount of rental in the amount of P650.00 until the property is surrendered to Sangalang (RTC decision, May 15, 1986, p. 7; Rollo, p. 48).: nad

More specifically, the dispositive portion of the decision reads:

"Wherefore, in view of all the foregoing, we hereby rule as follows:

"1. Ordering the plaintiffs to pay defendant Zenaida Sangalang the amount of P20,000.00 moral damages;

"2. Ordering plaintiffs to pay defendant Sangalang, attorney's fees in the amount of P15,000.00; and to pay the costs of suit; and

"3. Defendant Zenaida Sangalang is hereby ordered to return the payments made by the plaintiffs pursuant to the Agreement.

SO ORDERED". (Rollo, p. 48)

The Ruiz spouses appealed the decision to the Court of Appeals but the same was dismissed for failure to pay the docket fee. (Rollo, p. 162) On May 29, 1987, an entry of judgment was made by the Court of Appeals.

On motion of the private respondents, respondent Judge issued an order for the issuance of a writ of execution. (Ibid., p. 59)

The Clerk of Court, in his capacity as ex-oficio city sheriff, caused the execution of the 1st and 2nd paragraphs of the dispositive portion of the May 15, 1986 decision without including in the writ, the execution of the 3rd par. thereof in favor of the Ruizes. A notice of levy as well as a notice of garnishment were both issued to the petitioners. (Rollo, p. 51)

On September 2, 1987, the Ruiz spouses filed an "Ex-parte Motion for Execution of Decision Now Partly Executed," praying that a writ of execution be issued for par. 3 of the said dispositive portion and that the sheriff be ordered to make full execution of the decision by "off-setting" and/or setting-off par. 3 as against pars. 1 and 2 thereof. (Ibid, p. 92)

An order was issued by the respondent judge on September 8, 1987 the dispositive portion of which reads as follows:: nad

"WHEREFORE, in view of the fact that a writ of execution has already been issued and the same was enforced only with respect to paragraphs 1 and 2 of the dispositive portion of the decision dated May 15, 1986, let a writ of execution be issued with respect to paragraph 3 of the said dispositive portion of the decision.

"SO ORDERED" (Rollo, p. 59)

The aforequoted order was reiterated by the respondent judge in his order dated December 11, 1987 (Ibid., p. 60) after an omnibus motion was filed by the petitioners on September 8, 1987. (Ibid., p. 53)

As expected, the parties could not agree on the execution of the decision, as regards par. 3 thereof; that is the amount to be returned by Sangalang to the Ruiz spouses. Sangalang and Adolfo Cruz on May 7, 1988 moved to amend said decision of May 15, 1986 which they alleged to have clear disparities and evident ambiguities between the body of said decision and the dispositive portion.

Thus, while the trial court is fully aware that a decision once final and executory can no longer be amended or corrected, it opted, for the purpose of finally settling the claims of the parties and thereby avoid multiplicity of suits, to amend the decision in question, on July 27, 1988, the dispositive portion of which reads:

"WHEREFORE, Order is hereby issued directing:

"1. the cancellation of lis pendens annotated at the back of the title of the subject property by the Register of Deeds of Caloocan City;

"2. the plaintiffs to pay the defendant the sum of P1,500.00 monthly from May 15, 1986, the effective date of the decision up to the date they vacate door No. 2;

"3. the return of payments made by the plaintiffs to defendant Zenaida Sangalang which shall be without prejudice to off-setting of rental payments from November 1982; and

"4. the writ of possession be issued on the property, subject matter of the rescission of the contract.

"SO ORDERED" (Rollo, p. 64)

Sangalang and Cruz filed a Motion for Execution on the above-quoted order on September 1, 1988 (Ibid., p. 65) but before the day of the hearing of said motion, the Ruiz spouses filed an "Urgent Motion to Cancel Hearing of Motion." (Ibid., p. 127)

On September 15, 1988, the Ruizes filed the present petition.

In the resolution of the 2nd Division of this Court dated January 10, 1990, the petition was given due course (Rollo, p. 152-A). Petitioners' memorandum was filed on April 11, 1990 (Ibid., p. 192) while respondents' memorandum was filed on March 30, 1990 (Ibid., p. 171).

The petition is impressed with merit.

The principal issue to be resolved in the instant petition is: whether or not there is an ambiguity in the dispositive portion of the May 15, 1986 decision sufficient to warrant the questioned order of the respondent court amending subject final and executory judgment.:-cralaw

There is no question that the Ruizes failed to comply with the agreement and rescission of the contract is in order. The parties are also agreed that the Ruizes must return the physical possession of the property to Sangalang while the latter is obliged to return all partial payments made on the property to the Ruizes in accordance with the agreement. But the bone of contention in this case is the exact amount to be returned by Sangalang to the Ruiz spouses which was not spelled out by the trial court. The Ruizes claim that they are entitled to a refund of P124,192.62 plus 24% interest compounded annually, the alleged legal rate under Central Bank Circular, or a total amount of P169,414.95.

Sangalang, on the other hand, countered that she received only the amount of P120,092.62 or a difference of P4,100.00 from that claimed by the Ruizes, let alone the computation of interest. Furthermore, Sangalang insists that she is entitled to a P1,500.00 a month rental for Door No. 2 of said house which the Ruizes occupied after the execution of the agreement (Rollo, p. 166) instead of confining themselves to Door No. 1 which they used to occupy and for which they have originally been paying rentals.: nad

A careful study of the decision of the trial court of May 15, 1986 shows that aside from the fact that the refund ordered to be made by Sangalang was not specified in exact numbers, there appears to be no ambiguity in the decision to such an extent as to warrant an amendment of the dispositive portion.

From the total amount of P139,192.62 claimed by the Ruiz spouses to have been actually paid to Sangalang, only the amount of P15,000.00 in the form of dishonored checks have been discounted by the trial court leaving a balance of P124,192.62; more specifically shown as follows:

Downpayment on Nov. 19, 1982 P 65,000.00Payment to the Bank of P.I. P 21,119.62Payment made to Zenaida Sangalang P53,073.00 less P15,000.00 total sum of two (2) dishonored checks P 38,073.00 —————Total Payments Made P124,192.62Decision, p. 2 & 3.

Hence, it is evident that this is the amount that Sangalang was ordered to return to the Ruizes pursuant to par. 3 of the said dispositive portion.

The only set-off specified by the trial court in the assailed May 15, 1986 decision were the lost profits suffered by Sangalang because of the annotation of the notice of lis pendens on her title by the Ruiz spouses which were considered compensated by the increase in value of the property due to the repair made by the latter. Moreover, it appearing that there was in fact a part execution of pars. 1 and 2 of the dispositive portion of the 1986 decision against the Ruizes, it is but proper that the amount to be paid by Sangalang is the total payments made by the petitioners in the amount of P124,192.62.

Anent the Ruizes' claim of interest as aforementioned, it has been held in the case of Santulan v. Fule, 133 SCRA 762 (1984) that where the court judgment which did not provide for interest is already final, there is no reason to add interest in the judgment. Interest was not demanded by the Ruizes when the case was pending before the lower court, hence, there is no reason for this Court to grant such claim. As ruled by this Court, such claim is groundless since the decision and orders sought to be enforced do not direct the payment of interest and have long become final (Canonizado v. Ordoñez-Benitez, 149 SCRA 555 [1987]).

Finally, as to Sangalang's claim for P1,500.00 as monthly rental for Door No. 2, the records show that such claim was never raised in the trial court. The issue of additional rentals was brought up by Sangalang only when the motion for execution of par. 3 of the dispositive portion of the decision was filed by the Ruiz spouses (Rollo, p. 189). It is a basic rule that an issue which was not raised in the court below cannot be raised for the first time on appeal as it would be offensive to the basic rules of fair play, justice and due process (Matienzo v. Servidad, 107 SCRA 276 [1981]; De la Santa v. CA, 140 SCRA 44, [1985]; Dihiansan v. CA, 157 SCRA 434 [1987]; Auchuelo v. CA, 147 SCRA 434 [1987]; Dulos Realty and Dev't. Corp. v. CA, 157 SCRA 425 [1988]; Ramos v. IAC, GR No. 78282, July 5, 1989; Filipino Merchants vs. CA GR No. 85141, Nov. 28, 1989). Consequently, Sangalang's claim cannot be granted.

Hence, since the May 15, 1986 decision has long become final and executory and in fact has been partly executed, the respondent judge had lost its jurisdiction thereon (Marcopper Mining Corp. vs. Briones, G.R. 77210, Sept. 19, 1988; Baclayon et al. v. CA, G.R. No. 89132, Feb. 26, 1990). He has exceeded his authority, considering that the trial court has no authority to modify or vary the terms and conditions of a final and executory judgment (Vda. de Nabong v. Sadang, 167 SCRA 232 [1988]; Commercial Credit Corporation vs. CA, 169 SCRA 1 [1989]; Christian Literature Crusade v. NLRC, 171 SCRA 712 [1989]). What remains in his authority in relation thereto is purely the ministerial enforcement or execution of the judgment. (Christian Lit. Crusade, supra; Baclayan vs. CA, supra.) Therefore, for having substantially affected the final and executory judgment such Order of the respondent judge dated July 27, 1988 is null and void for lack of jurisdiction, including the entire proceedings held for the purpose (Marcopper Mining vs. Briones, supra).

PREMISES CONSIDERED, (a) the instant petition for Certiorari and prohibition is hereby GRANTED; (b) the Order of the respondent judge dated July 27, 1988 is hereby DECLARED null and void ab initio; (c) respondent Sangalang is hereby required to PAY petitioners-spouses Ruizes the amount of P124,192.62; (d) petitioners Ruizes are hereby required to VACATE the property in question and PAY P650.00 monthly as rental as agreed upon and as required by the May 15, 1986 decision until they vacate the premises and (e) the Register of Deeds of Caloocan City is hereby required to CANCEL the lis pendens annotated on the title of subject property.

SO ORDERED.

G.R. No. 79552 November 29, 1988

EVELYN J. SANGRADOR, joined by her husband RODRIGO SANGRADOR, SR., petitioners, vs.SPOUSES FRANCISCO VALDERRAMA and TERESITA M. VALDERRAMA, respondents.

PADILLA, J.:

This is a petition for review on certiorari of the decision 1 of the Court of Appeals in CA-G.R. CV No. 08813, dated 13 August 1987, which modified the decision 2 of the Regional Trial Court of Iloilo City, Branch XXIII, in Civil Case No. 16210, entitled "Evelyn J. Sangrador, joined by her husband, Rodrigo Sangrador, Plaintiffs, versus Spouses Francisco Valderrama and Teresita Valderrama, Defendants."

The factual background of the case is narrated in the decision of the Court of Appeals as follows:

On April 11, 1983 the defendants-spouses Francisco and Teresita Valderrama obtained a P500,000 loan from Manuel Asencio payable on or before April 12, 1984, and secured by a real estate mortgage on their house and lot (actually 3 lots) in front of the Jaro Plaza in Iloilo City (Exh. 9).

Foreseeing that they would not be able to pay the loan and redeem their property upon maturity of the loan, the defendants scouted around for money-lenders who would be willing to lend them money with which to pay off their mortgage to Asencio.

Through the help of a loan broker, Wilson Jesena, they were able to obtain on April 6, 1984 a P1,000,000 loan from the plaintiff Teresita Sangrador, who is an aunt of Jesena, on the security of the same property which they redeemed from Asencio. The loan is evidenced by the following promissory note (Exh. B) dated April 6, 1 984 providing for the payment of P1,400,000 to the creditor eight months after date'.

FOR VALUE RECEIVED, we jointly and severally promise to pay EVELYN J. SANGRADOR, or order, at her address at No. 2 Locsin Street, Molo, Iloilo City, Philippines, the sum of ONE MILLION FOUR HUNDRED THOUSAND PESOS (P1,400,000.00) Philippine Currency, EIGHT (8) MONTHS after date without need of demand.

Should we default in the payment of the obligation or in the manner of performance thereof and it shall become necessary to enforce and collect on this note by or through an attorney, the makers shall jointly and severally pay TWENTY (20) PER CENTUM of the amount due, principal and interest and charges then unpaid, which in no case shall be less than P1,000.00.

The makers hereby submit to the jurisdiction of the Municipal Trial Court of Iloilo or the Regional Trial Court of Iloilo, Sixth Judicial Region, Iloilo City, as the case may be, in the event of litigation arising from this note.

The makers of this note, jointly and severally undertake that in the event that an extraordinary inflation of the Philippine Peso should supervene between now and eight (8) months after date, then the value of the Philippine Peso at the time of the establishment of this obligation, shall be the basis of payment pursuant to Art. 1250 of the Civil Code of the Philippines, and for this purpose, we hereby acknowledge the official exchange rate of the Philippine Peso to the US Dollar at P14.002 to $1. The corresponding adjustment in the value of the Philippine Peso shall be made in the event that at the time of the maturity of this obligation, the rate of exchange will have changed as a result of the supervening inflation. We further agree that the official rate of exchange as set by the Central Bank of the Philippines for private transactions, shall be the basis of this adjustment.

This note is secured by a Real Estate Mortgage over three (3) parcels of residential land, Lots 700, 701 and 750, of the Cadastral Survey of Jaro, covered by TCT Nos. T-41719, T41721 and T-41720, respectively, of the Registry of Deeds for the City of Iloilo, together with the improvements thereon.

In case of judicial execution of this obligation or any part thereof, the debtors waive all their rights under the provisions of Rule 39, Sec. 12, of the Rules of Court.

EXECUTED in the City of Iloilo, Philippines, on this 6th day of April 1984.

(SGD) TERESITA MONTINOLA-VALDERRAMAMaker

(SGD) FRANCISCO VALDERRAMAMaker

Signed in the presence of.

(illegible) (illegible)(Exh. B)

The debtors allege that the amount actually received by them was only P1,000,000 the disposition of which was itemized by the broker, Wilson Jesena a, on a memo pad of "Jesena Realty" as follows:

From the desk of:

REALTOR WILSON G. Jesena, Jr.President & Gen. Manager

EXPENSES

P625,000.00—Manuel Asencio50,000.00—Commission Boy4,000.00—Atty. Arguelles13,398.69—Transfer fees—Register of Deeds and B.I.R.

P692,398.69P1,000,000.00— 692,398.69P307,601.40 — Balance (Exh. 1)

Accordingly, a Prudential Bank Cashier's check for P625,000 was issued by Sangrador to Asencio to redeem the defendants' property from him. A receipt for that check was issued by the Valderramas to the plaintiff as follows:

R E C E I P T

Date April 6, 1984

Received from EVELYN JESENA SANGRADOR the amount of SIX HUNDRED TWENTY FIVE THOUSAND PESOS (625,000.00) Bank Prudential Bank Cashier's Check No. 14937. The balance of THREE HUNDRED SEVENTY FIVE THOUSAND PESOS (P375,000.00) is to be paid to the undersigned after deducting all expenses incurred in payment of real estate taxes, attorney's fees, commission, Bureau of Internal Revenue fees and Register of Deeds fees. All expenses are to be supported by receipts.

(SGD) FRANCISCO (SGD) TERESITA MONTINOLA- VALDERRAMA VALDERRAMA

(Exh. 2)

Plaintiff Evelyn Sangrador made a list of the expenses chargeable to the debtors (Exh. 5) and submitted it to them (22 t.s.n., May 7, 1985). Payment of Atty. Arguelles' attorney's fees was duly acknowledged by him (Exh. 8). Jesena issued the following receipt to the defendants for his 5% commission in procuring the loan for them;

R E C E I P T

Received from Spouses Francisco Valderrama and Teresita Montinola Valderrama the amount of FIFTY THOUSAND PESOS (P50,000.00) representing commission for my efforts and expertise in effecting the procurement of a loan from a financier for the amount of ONE MILLION PESOS (P1,000,000.00).

(SGD) REALTOR WILSON JESENA, JR.REB License No. 3441-R

(Exh. 3)

The balance of P307,601.40 was paid to the defendants by means of another Prudential Bank check for which the corresponding receipt (Exh. 4) was also signed by the mortgagors:

R E C E I P T

April 7, 1984

Received from EVELYN J. SANGRADOR the amount of THREE HUNDRED SEVEN THOUSAND SIX HUNDRED ONE PESOS AND FORTY CENTAVOS (P307,601.40) representing full payment per Promissory Note dated April 6,1984.

(SGD) FRANCISCO (SGD) TERESITA MONTINOLA- VALDERRAMA VALDERRAMA

Paid by—Prudential Bank Chk.#144358-2—April 7, 1984 P307,601.40c/o #0033-00022-0 paid by—Evelyn J. Sangrador

(Exh. 4)

Evelyn Sangrador admitted that the receipts (Exhs. 2 and 4) were issued to her by the defendants (14, 21 t.s.n., May 7, 1985).

When the defendants failed to pay the sum of P1,400,000 stated in the promissory note on December 6, 1984 despite the plaintiffs' written demands (Exhs. C and D) a complaint for judicial foreclosure of the real estate mortgage was filed against them on December 21, 1984.

(Exh. G).

The defendants in their answer denied that the loan was P1,400,000. They alleged that it was only P1,000,000.00 and that the additional P400,000 represented usurious interest.

At the trial, the plaintiff testified that the sum of P1,400,000 was received by the defendants. She alleged that besides the expenses of P67,398.69 itemized in Jesena's and her lists (Exhs. 1 and 5), the check of P625,000 for Asencio and the check of P307,601.40 which she issued to the defendants for the balance of the loan, she gave to the defendants the amount of P400,000 in cash for which no receipt was issued by them.

On the other hand Francisco Valderrama testified that he thought all along that the promissory note (Exh. B) and deed of real estate mortgage (Exh. A) provided for a loan of only P1 million since that was the amount which they borrowed and received from the plaintiffs. He allegedly did not notice that both documents provided for a loan of P1,400,000.

After the trial, the court rendered judgment on November 7, 1985 binding the debtors to the terms of the promissory note and mortgage deed. 3

The dispositive part of the trial court's judgment reads as follows:

WHEREFORE, in the light of the foregoing, considerations and findings of this Court, judgment is hereby rendered:

1) Directing the foreclosure of the Deeds of Real Estate Mortgage (Exh. 'A');

2) Ordering the defendants to pay the mortgage obligation in the amount of P1,400,000.00 plus the sum of P569,718.61 pursuant to the escalation clause contained in paragraph 14 of the Deed of Real Estate Mortgage; to pay attorney's fees equivalent to twenty (20%) percentum of the total indebtedness including costs, plus 12% interest per annum from December 18,1984 until fully paid, all of which shall be paid into Court within 90 days from date of the service of the order;

3) In default of such payment, ordering the mortgaged properties to be sold at public auction to realize the mortgage debt and costs.

SO ORDERED. 4

Private respondents, defendants in the trial court, appealed to the Court of Appeals, where the appeal was docketed as CA G.R. CV No. 08813. On 12 August 1987, respondent Court of Appeals promulgated its decision 5 modifying the decision of the trial court, the dispositive part of which reads, as follows:

WHEREFORE, the appealed decision is hereby modified by ordering the defendants, within (90) days from date of service of this decision, to pay to the plaintiffs the principal loan of P1,000,000 with 12% interest per annum from April 6,1984 until fully paid, P50,000 as attorney's fees, and the costs of this suit. In default of such payment, the mortgaged property shall be sold at public auction to realize the sums due to plaintiffs under this judgment.

SO ORDERED. 6

Hence, the present petition for review on certiorari of the decision of the Court of Appeals. Petitioners present the following—

ASSIGNMENT OF ERRORS

1. FIRST ASSIGNED ERROR:

THE HONORABLE COURT OF APPEALS ERRED IN NULLIFYING THE ESCALATION CLAUSE AS FOUND BY THE TRIAL COURT ORDERING THE PAYMENT BY RESPONDENTS OF THE SUM OF P569,718.61.

2. SECOND ASSIGNED ERROR:

THE HONORABLE COURT OF APPEALS ERRED IN FINDING THE PRINCIPAL LOAN TO BE IN THE SUM OF P1,000,000.00 INSTEAD OF P1,400,000.00 AS FOUND BY THE LOWER COURT.

3. THIRD ASSIGNED ERROR:

THE HONORABLE COURT OF APPEALS ERRED IN REDUCING PETITIONER'S AWARD OF ATTORNEY'S FEES TO P50,000.00 INSTEAD OF 20% OF THE TOTAL INDEBTEDNESS AS FOUND BY THE TRIAL COURT. 7

The pivotal issue to be resolved in this case is whether or not the loan obtained by private respondents from petitioners was in the amount of P1,400,000.00 or P1,000,000.00 only.

In resolving this issue, the Court of Appeals in its decision under review, held:

After carefully reviewing the evidence, We are convinced that the trial court erred in finding that the loan was P1,400,000 as stated in the promissory note (Exh. B) and deed of mortgage. Like the trial court, We do not believe defendant Valderrama's allegation that he did not notice that the amount stated in the promissory note was P1,400,000, instead of only P1,000,000, until demands for payment were sent to him by the plaintiffs' counsel. But neither do We believe the plaintiff Evelyn Sangrador's allegation that besides the sum of P1,000,000 admittedly received by the defendants and evidenced by checks and receipts, she also gave them P400,000.00 in cash without receipt. This is a case, therefore, where both parties prevaricated.

The documentary evidence preponderantly proves that the loan was only P1,000,000, not P1,400,000. The checks and receipts and the broker's computations found in Exhibit 'l' show clearly that the loan was only P1,000,000. Even the broker's P50,000 commission was computed on the basis of 5% of P1 million. The circumstance that the alleged payment of P400,000 in cash to the debtors is not evidenced by a receipt, is conclusive proof that it was not a part of the loan. The loan was only P1 million.

Obviously, the P400,000 that was added to the principal represents a hidden interest charge for the promissory note contains no express provision fixing the rate of interest on the loan. 8

Petitioners assail the foregoing findings and conclusions of the Court of Appeals, contending that the amount of the loan as clearly and expressly stated in the Deed of Real Estate Mortgage 9 and the Promissory Note, 10 is P1,400,000.00 and not P1,000,000.00 only.

Because the findings of the trial court and the Court of Appeals differ on this crucial factual issue, we have carefully reviewed and examined the evidence. The finding of the Court of Appeals that the loan is in the amount of P1,000,000.00 only is supported by substantial evidence.

The Promissory Note (Exh- B) and the Deed of Real Estate Mortgage (Exh. A) executed by the respondents in favor of the petitioners indeed state that the loan is in the amount of P1,400,000.00. However, the other documents executed by the parties contemporaneously with said Promissory Note and Deed of Real Estate Mortgage clearly show that the actual loan, i.e. the amount received by respondents, was only P1,000,000.00. Thus, for the payment made by the petitioners for the account of the respondents to Manuel Asencio, thereby releasing the mortgage on the property, so that it could in turn be mortgaged to the petitioners, the respondents signed a receipt in favor of the petitioners in the amount of P625,000.00 (Exh. 2). The respondents executed another receipt in favor of the petitioners for the amount of P307,601.40," representing full payment per promissory note dated 6 April 1984" (Exh. 4). The broker who arranged for the loan signed a receipt in favor of the respondents for the amount of P50,000.00 representing his commission in effecting the loan "for the amount of P1,000,000.00" (Exh. 3).<äre||anº•1àw> The attorney who assisted in the transaction was paid attorney's fees in the amount of P4,000.00 (Exh. 8). The petitioners submitted a list of expenses chargeable to the respondents, totalling P13,398.69 covering transfer fees, expenses in the Register of Deeds and payments to the BIR (Exh. 5). All told, the loan of P1,000,000.00 obtained by the respondents from the petitioners was applied or used in the following manner at the time the loan was obtained:

P625,00.00 — to pay Manuel Asencio (first creditor)50,000.00 — to pay Wilson Jesena (for broker's commission)4,000.00 — to pay Atty. Enrique Arguelles (for attorney's fees)13,398.69 — to pay transfer fees and other expenses in Register of Deeds and BIR

307,601.40 — to pay respondents as balance of the loanP1,000,000.09 TOTAL

The above itemization tallies with the breakdown of the proceeds of the loan, made by the loan broker Wilson Jesena (Exh. 1).

Petitioners contend that over and above the P1,000,000.00, the amount of P400,000.00 was delivered by them to the respondents in cash and that this delivery was not evidenced by a receipt because, anyway, said amount (P400,000.00) is already included in the statement of the loan amount in the promissory note and the deed of real estate mortgage, which is P1,400,000.00. We find this contention to be quite incredible, to say the least. It is contrary to ordinary human experience. Normally, in delivering a hefty sum like P400,000.00 in cash, one would require some sort of receipt or acknowledgment from the recipient.

Moreover, if petitioners were careful enough to require from the respondents the separate receipts above-mentioned, there was no reason why they would not require another receipt from the respondents for said amount of P400,000.00. And if, as petitioners now allege, they did not anymore require a receipt for the P400,000.00 allegedly delivered by them in cash to the respondents because the loan amount stated in the promissory note and the real estate mortgage already included said amount of P400,000.00, then, by the same reasoning, there was no need for requiring the other separate receipts abovementioned—as the amounts they referred to were already a part of the loan amount stated in the promissory note and real estate mortgage—and yet, said separate receipts were required by petitioners of the respondents.

In short, we agree with the finding of the Court of Appeals that the disputed amount of P400,000.00 was a hidden interest that the petitioners had required the respondents to pay at the maturity of the loan, but said amount of P400,000.00 was not received by or delivered to the respondents. This conclusion is strengthened by the fact that the promissory note and the deed of real estate mortgage (Exhs. B and A), strangely enough, do not contain any express stipulation on interest, or rate of interest, when the loan involved therein is in the substantial amount of allegedly P1,400,000.00.

Petitioners may conceivably argue that, granting that the disputed amount of P400,000.00 is interest on the loan of P1,000,000.00, yet, in line with this Court's decision in Liam Law vs. Oriental Sawmill Co., et al., 11 there is no longer any ceiling on interest or interest rates on loans. This may be so in a situation where the parties openly and expressly agree on a specific rate of interest to accrue on the loan but, as the Court of Appeals in its decision under review correctly pointed out, in the case at bar, no interest rate is expressly stipulated in the promissory note and deed of real estate mortgage. Circular No. 905 of the Central Bank dated 10 December 1982 provides:

Section 1. The rate of interest, including commissions, premiums, fees and other charges on a loan or forbearance of any money, goods, or credits, regardless of maturity and whether secured or unsecured, that may be charged or collected by any person, whether natural or juridical, shall not be subject to any ceiling prescribed under or pursuant to the Usury law, as amended.

Section 2. The rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall continue to be twelve per cent (1 2%) per annum. (Emphasis supplied)

The rate of interest for loans or forbearance of money, in the absence of express contract as to such rate of interest, shall continue therefore to be twelve per cent (12%) per annum. 12

Accordingly, the loan of P1,000,000.00 in the instant case should earn a twelve per cent (12%) interest per annum computed from 6 April 1984 when the loan was obtained by the respondents from the petitioners until paid.

Petitioners also impugn the Court of Appeals in nullifying the escalation clause in the Deed of Real Estate Mortgage and Promissory Note. Under such escalation clause, sustained by the trial court, the amount of P569,718.61 was awarded to herein petitioners by way of adjustment of the loan of P1,400,000.00 after the eight (8) month period of the loan. 13

The Deed of Real Estate Mortgage provides, among others, as follows:

14. That in the event that an extra-ordinary inflation of the Philippine peso should supervene, it is hereby stipulated that the value of the currency at the time of the establishment of the obligation shall be the basis of payment pursuant to Art. 1250 of the New Civil Code of the Philippines. For this purpose, MORTGAGORS hereby recognize the official exchange rate of the Philippine Peso to the US dollar at 14.002 to one. The corresponding adjustment in the value of the Philippine Peso shall be made should at the time of the maturity of this obligation, the rate of exchange will have changed as a result of the supervening inflation. It is further agreed that the official rate of exchange as set by the Central Bank for private transactions shall be the basis of this adjustment. (Emphasis supplied).

A cursory reading of the aforequoted provision of the Deed of Real Estate Mortgage (similar stipulation is contained in the Promissory Note) shows that the escalation clause takes effect "in the event that an extraordinary inflation of the Philippine Peso should supervene," between the date the

loan was granted and the date of its maturity, in which case, the value of the (peso) currency at the time of the establishment of the obligation shall be the basis of payment. To give meaning to the "value of the currency at the time of the establishment of the obligation," the parties agreed that on 6 April 1984 (date of loan), the exchange rate of the peso to the US dollar was 14.002 to one.

Consequently, under the aforesaid escalation clause, "(t)he corresponding adjustment in the value of the Philippine Peso" at the maturity of the obligation crucially depends upon the supervening of an extraordinary inflation in the sense contemplated in Article 1250 of the Civil Code of the Philippines. 14

In Filipino Pipe and Foundry Corporation vs. National Waterworks and Sewerage Authority, 15 this Court held:

Extraordinary inflation exists when 'there is a decrease or increase in the purchasing power of the Philippine currency which is unusual or beyond the common fluctuation in the value of said currency, and such decrease or increase could not have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of the obligation. (Tolentino Commentaries and Jurisprudence on the Civil Code Vol. IV, p. 284.)

An example of extraordinary inflation is the following description of what happened to the deutschmark in 1920:

More recently, in the 1920's Germany experience a case of hyper-inflation. In early 1921, the value of the German mark was 4.2 to the U.S. dollar. By May of the same year, it had stumbled to 62 to the U.S. dollar. And as prices went up rapidly, so that by October 1923, it had reached 4.2 trillion to the U.S. dollar! (Bernardo M. Villegas & Victor R. Abola, Economics, An Introduction [Third Edition].

As reported, "prices were going up every week, then every day, then every hour. Women were paid several times a day so that they could rush out and exchange their money for something of value before what little purchasing power was left dissolved in their hands. Some workers tried to beat the constantly rising prices by throwing their money out of the windows to their waiting wives, who would rush to unload the nearly worthless paper. A postage stamp cost millions of marks and a loaf of bread, billions," (Sidney Rutberg, "The Money Baloon" New York; Simon and Schuster, 1975, p. 19, cited in Economics, An Introduction by Villegas & Abola, 3rd Ed.)

While appellant's voluminous records and statistics proved that there has been a decline in the purchasing power of the Philippine peso, this downward fall of the currency cannot be considered "extraordinary." It is simply a universal trend that has not spared our country. 16

Since petitioners failed to prove the supervening of extraordinary inflation between 6 April 1984 and 7 December 1984—no proofs were presented on how much, for instance, the price index of goods and services had risen during the intervening period—an extraordinary inflation cannot be assumed; consequently, there is no reason or basis, legal or factual, for adjusting the value of the Philippine Peso in the settlement of respondents' obligation.

Finally, the Court of Appeals did not commit any error in reducing the award of attorney's fees to P50,000.00. The contractual provision for attorney's fees may be modified by the courts in the exercise of their sound judicial discretion. 17

WHEREFORE, the petition is DENIED. The decision of the Court of Appeals dated 12 August 1987 is AFFIRMED. With costs against petitioners.

SO ORDERED.

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.

[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.

SYLLABUS

1. CIVIL LAW; CONTRACTS; SALE ON INSTALLMENT BASIS; ESCALATION CLAUSE BASED ON CIRCULAR NO. 494; CANNOT BE THE BASIS FOR AN INCREASE IN INTEREST RATE ON LOAN. — 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 opinion that it may not. It is clear from the stipulation between the parties that the interest rate may be increased "in the event a law should be enacted increasing the lawful rate of interest that may be charged on this particular kind of loan." The Escalation Clause was dependent on an increase of rate made by "law" alone. CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly issued is not strictly a statute or a law, it has, however, the force and effect of law." "An administrative regulation adopted pursuant to law has the force and effect of law." "That administrative rules and regulations have the force of law can no longer be questioned."

2. STATUTORY CONSTRUCTION; LAW DISTINGUISHED FROM ADMINISTRATIVE REGULATIONS. — The distinction between a law and an administrative regulation is recognized in the Monetary Board guidelines quoted in the letter to the BORROWER of Ms. Paderes of September 24, 1976. According to the guidelines, for a loan's interest to be subject 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 increasing the maximum interest rate for loans." The guidelines thus presuppose that a Central Bank regulation is not within the term "any law." The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding section 7-a to the Usury Law, providing that parties to an agreement pertaining to a loan could 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 Monetary Board."

3. CIVIL LAW; CONTRACTS; SALE ON INSTALLMENT BASIS; ESCALATION CLAUSE; REQUISITE FOR VALIDITY. — It is now clear that from March 17, 1980, escalation clauses to be valid should specifically 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 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."

4. ID.; ID.; ID.; ID.; CIRCULAR No. 494 LIMITED ONLY TO LOANS GUARANTEED BY SECURITIES OTHER THAN MORTGAGE UPON REGISTERED REALTY. — Apparent from Sections 3 and 4 of P.D. 116 is that the separate treatment for the two classes of loans was maintained. Yet, CIRCULAR No. 494 makes no distinction as to the types of loans that it is applicable 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 than 730 days to not exceeding 19% per annum (Circular No. 586) and not exceeding 21% per annum (Circular No. 705) "on both secured and unsecured loans as defined by the Usury Law, as amended." 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 No. 494 to loans guaranteed by securities other than mortgage upon registered realty.

D E C I S I O N

MELENCIO-HERRERA, J p:

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 secured by a real estate mortgage (the LOAN, for short) from petitioner BANCO FILIPINO 1 in the sum of Forty-one Thousand Three Hundred (P41,300.00) Pesos, payable and to be amortized within fifteen (15) years at twelve (12%) per cent interest annually. Hence, the LOAN still had more than 730 days to run by January 2, 1976, the date when CIRCULAR No. 494 was issued by the Central Bank.

Stamped on the promissory note evidencing the loan is an Escalation Clause, reading as follows:"I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan."

The Escalation Clause is based upon Central Bank CIRCULAR No. 494 issued on January 2, 1976, the pertinent portion of which reads:

"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 banking institutions, including thrift banks and rural banks, or by financial intermediaries authorized to engage in quasi-banking functions shall be nineteen per cent (19%) per annum."xxx xxx xxx

"7. Except as provided in this Circular and Circular No. 493, loans or renewals thereof shall continue to be governed by the Usury Law, as amended."

CIRCULAR No. 494 was issued pursuant to the authority granted to the Monetary Board by Presidential Decree No. 116 (Amending Further Certain Sections of the Usury Law) promulgated on January 29, 1973, the applicable section of which provides:

"Sec. 2. The same Act is hereby amended by adding the following section immediately after section one thereof, which reads as follows:"Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions: Provided, that such changes shall not be made oftener than once every twelve months."

The same grant of authority appears in P.D. No. 858, promulgated on December 31, 1975, except that the limitation on the frequency of changes was eliminated.

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 annum effective on March 1, 1976.

On September 24, 1976, Ms. Mercedes C. Paderes of the Central Bank wrote a letter to the BORROWER as follows:

"September 24, 1976Mr. Florante del Valle14 Palanca StreetB.F. Homes, ParañaqueRizal.

Dear Mr. del Valle:

This refers to your letter dated August 28, 1976 addressed to the Governor, Central Bank of the Philippines, seeking clarification and our official stand on Banco Filipino's recent decision to raise interest rates on lots bought on installment from 12% to 17% per annum.A verification made by our Examiner of the copy of your Promissory Note on file with Banco Filipino showed that the following escalation clause with your signature is stamped on the Promissory Note:

'I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest that may he charged on this particular kind of loan.'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 Bank Circulars Nos. 492498:

'1. Only banks and non-bank financial intermediaries performing quasi-banking functions may increase interest rates on loans 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.'

"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.

"We trust the above guidelines would help you resolve your problems regarding additional interest charges of Banco Filipino.

Very truly yours,

(Sgd.) MERCEDES C. PAREDESDirector"

Contending that CIRCULAR No. 494 is not the law contemplated in the Escalation Clause of the promissory note, the BORROWER filed suit against BANCO FILIPINO for "Declaratory Relief" with respondent Court, praying that the Escalation Clause be declared null and void and that BANCO FILIPINO be ordered to desist from enforcing the increased rate of interest on the BORROWER's real estate loan.

For its part, BANCO FILIPINO maintained that the Escalation Clause signed by the BORROWER authorized it to increase the interest rate once a law was passed increasing the rate of interest and that its authority to increase was provided for by CIRCULAR No. 494.

In its judgment, respondent Court nullified the Escalation Clause and ordered BANCO FILIPINO to desist from enforcing the increased rate of interest on the BORROWER's loan. It reasoned out that P.D. No. 116 does not expressly grant the Central Bank 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 in which the loan is to be paid other than the 12% per annum in force at the time of the execution of the loan.

It is from that Decision in favor of the BORROWER that BANCO FILIPINO has come to this instance on review by Certiorari. We gave due course to the Petition, the question being one of law.

On February 24, 1983, the parties represented by their respective counsel, not only moved to withdraw the appeal on the ground that it had become moot and academic "because of recent developments in the rules and regulations of the Central Bank," but also prayed that "the decision rendered in the Court of First Instance be therefore vacated and declared of no force and effect as if the case was never filed," since the parties "would like to end this matter once and for all."

However, "considering the subject matter of the controversy in which many persons similarly situated are interested and because of the need for a definite ruling on the question," the Court, in its Resolution of February 24, 1983, impleaded the Central Bank and required it to submit its Comment, and encouraged homeowners similarly situated as the BORROWER to intervene in the proceedings.

At the hearing on February 24, 1983, one Leopoldo Z. So, a mortgage homeowner at B.F. 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 resolution of the case. The Court allowed the intervention of Lolita Perono 2 and issued a temporary restraining order enjoining the Regional Trial Court (Pasay City Branch) in the case entitled "Banco Filipino Savings and Mortgage Bank vs. Lolita Perono" from issuing a writ of possession over her mortgaged property. Also allowed to intervene were Enrique Tabalon, Jose Llopis, et als., who had obtained loans with identical escalation clauses from Apex Mortgage and Loans Corporation, apparently an affiliate of BANCO FILIPINO. Upon motion of Jose Llopis, a Temporary Restraining Order was likewise issued enjoining the foreclosure of his real estate mortgage by BANCO FILIPINO.

The Court made it explicit, however, that intervention was allowed only for the purpose of "joining in the discussion of the legal issue involved in this proceedings, to wit, the validity of the so-called 'escalation clause,' or its applicability to existing contracts of loan."

The Central Bank has submitted its Comment and Supplemental Comment and like BANCO FILIPINO, has taken the position that the issuance of its Circulars is a valid exercise of its authority to prescribe maximum rates of interest and that, based on the general 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 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. However, with respect to loan agreements entered into on or after March 17, 1980, such agreement, in order to be valid, must also include a de-escalation clause as required by Presidential Decree No. 1684."

The substantial question in this case is not really whether the Escalation Clause is a valid or void stipulation. There should be no question that the clause is valid.

"Some contracts contain what is known as an 'escalator clause' which is defined as one in which the contract fixes a base price but contains a provision that in the event of specified cost increases, the seller or contractor may raise the price up to a fixed percentage of the base. Attacks on such a clause have usually been based on 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, 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 been unsuccessful."

"The Court further finds as a matter of law that the cost of living index adjustment, or escalator clause, is not substantively unconscionable."Cost of living index adjustment clauses are widely used in commercial contracts in an effort to maintain fiscal stability and to retain 'real dollar' value to the price terms of long term contracts. The provision is a common one, and has been universally upheld and enforced. Indeed, the Federal government has recognized the efficacy of escalator clauses in tying Social Security benefits to the cost of living index, 42 U.S.C.s 415(i). Pension benefits and labor contracts negotiated by most of the major labor unions are other examples. That inflation, expected or otherwise, will cause a particular bargain to be more costly in terms of total dollars than originally contemplated can be of little solace to the plaintiffs." 5 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 opinion that it may not.

The Escalation Clause reads as follows:

"I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event. A law increasing the lawful rates of interest that may be charged on this particular kind of loan" (Paragraphing and emphasis supplied)

It is clear from the stipulation between the parties that the interest rate may be increased "in the event a law should be enacted increasing the lawful rate of interest that may be charged on this particular kind of loan." The Escalation Clause was dependent on an increase of rate made by "law" alone.

CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly issued is not strictly a statute or a law, it has, however, the force and effect of law."

"An administrative regulation adopted pursuant to law has the force and effect of law." 7 "That administrative rules and regulations have the force of law can no longer be questioned."

The distinction between a law and an administrative regulation is recognized in the Monetary Board guidelines quoted in the letter to the BORROWER of Ms. Paderes of September 24, 1976 (supra). According to the guidelines, for a loan's interest to be subject 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 increasing the maximum interest rate for loans." The guidelines thus presuppose that a Central Bank regulation is not within the term "any law."The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding section 7-a to the Usury Law, providing that parties to an agreement pertaining to a loan could 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 Monetary Board." To quote:

"Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods 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 Monetary Board; Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board; Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest." (Paragraphing and emphasis supplied).

It is now clear that from March 17, 1980, escalation clauses to be valid should specifically 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 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. 586. The Usury Law, as amended by Acts Nos. 3291, 3998 and 4070, became effective on May 1, 1916. It provided for the maximum yearly interest of 12% for loans secured by a 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). Significant is the separate treatment of registered real estate loans and other loans not secured by mortgage upon registered real estate. It appears clear in the Usury Law that the policy is to make interest rates for loans guaranteed by registered real estate lower than those for loans guaranteed by properties other than registered realty.

On June 15, 1948, Congress approved Republic Act No. 265, creating the Central Bank, and establishing the Monetary Board. That law provides that "the Monetary Board may, within the limits prescribed in the Usury Law, 9 fix the maximum rates of interest which 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 operations of the banks shall apply only to future operations and not to those made prior to the date on which the modification becomes effective" (Section 109).

On January 29, 1973, P.D. No. 116 was promulgated amending the Usury Law. The Decree gave authority to the Monetary Board "to prescribe maximum rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions. In one section, 10 the Monetary Board could prescribe the maximum rate of interest for loans secured by mortgage upon registered real estate or by any document conveying such real estate or an interest therein and, in another separate section, 11 the Monetary Board was also granted authority to fix the maximum interest rate for loans secured by types of security other than registered real property. The two sections read: LLpr

"SEC. 3. Section two of the same Act is hereby amended to read as follows:

'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 interest or greater sum or value, including commissions, premiums, fines and penalties, for the loan or renewal thereof or forbearance of money, goods, or credits, where such loan or renewal or forbearance is secured in whole or in part by a mortgage upon real estate the title to which is duly registered or by any document conveying such real estate or an interest therein, than twelve per 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: Provided, That the rate of interest under this section or the maximum rate of interest that may be prescribed by the Monetary Board under this section may likewise apply to loans secured by other types of security as may be specified by the Monetary Board.'"

"SEC. 4. Section three of the same Act is hereby amended to read as follows:

'SEC. 3. No person or corporation shall directly or indirectly demand, take, receive, or agree to charge in money or other property, real or personal, a higher 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 two hereof, than fourteen per centum per annum or the maximum rate or rates prescribed by the Monetary Board and in force at the time the loan or forbearance is granted.'"

Apparent then is that the separate treatment for the two classes of loans was maintained. Yet, CIRCULAR No. 494 makes no distinction as to the types of loans that it is applicable 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 than 730 days to not exceeding 19% per annum (Circular No. 586) and not exceeding 21% per annum (Circular No. 705) "on both secured and unsecured loans as defined by the Usury Law, as amended."

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 No. 494 to loans guaranteed by securities other than mortgage upon registered realty. LLjurWHEREFORE, the Court rules that while an escalation clause like the one in question can 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 of the Monetary Board was not the "law" contemplated by the parties, nor should said Circular be held as applicable to loans secured by registered real estate in the absence of any such specific indication and in contravention of the policy behind the Usury Law. The judgment appealed from is, therefore, hereby affirmed in so far as it orders petitioner Banco Filipino to desist from enforcing the increased rate of interest on petitioner's loan.The Temporary Restraining Orders heretofore issued are hereby made permanent if the escalation clauses are identical to the one herein and the loans involved have applied the increased rate of interest authorized by Central Bank Circular No. 494.

SO ORDERED.

G.R. No. 75223 March 14, 1990

PHILIPPINE NATIONAL BANK, petitioner vs.The HON. INTERMEDIATE APPELLATE COURT and SPOUSES FERMIN MAGLASANG and ANTONIA SEDIGO, respondents.

PARAS, J.:

This is a petition to review on certiorari the decision of the Intermediate Appellate Court, * now Court of Appeals, rendered in AC-G.R. CV No. 07678 modifying the decision of the Regional Trial Court of Ormoc City.

The factual background of this case is as follows:

The petitioner, a government banking institution, extended financial assistance to the private respondents in the form of loans, the total amount of which is P82,682.39 as embodied in the promissory notes that the latter have executed on various dates from February 5, 1976 to May 18, 1979, the payment of which to come from the proceeds of sugar sales of the private respondents. The promissory notes bore 12% interest per annum plus 1% interest as penalty charge in case of default in the payments.

On January 16, 1969, the private respondents mortgaged several real estate properties in favor of the petitioner as security of their loans, which mortgage was amended on December 17, 1969, December 22, 1970 and February 12, 1975, as to the consideration thereof.

When the price of sugar went down in 1977, the private respondents incurred deficits in the payment of their loans.

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.

When the private respondents defaulted in the payments of their loans, the petitioner demanded not only the settlement of their outstanding obligation but also the payment of the new interest rate of 21% per annum beginning June 1, 1980 per the PNB board resolution.

For failure of the private respondents to settle their obligation, then in the amount of P84,743.34, the petitioner foreclosed the mortgage. Since the proceeds of the auction sale, P63,000.00 was not enough to satisfy private respondents' outstanding obligation, the petitioner filed an action for deficiency judgment with the Court of First Instance of Leyte against the private respondents.

After due trial, the trial court ** rendered its judgment on February 20, 1985, in favor of the petitioner and against the private respondents, the dispositive portion of which reads as follows:

WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of the plaintiff and against the defendants:

1. Ordering the defendants to pay the plaintiff the amount of P21,743.34; said amount shall earn interest at 21 % per annum and 3% penalty charge starting November 27, 1981, until the whole obligation is fully paid;

2. Ordering the defendants to pay the plaintiff attorney's fees in the amount equivalent to 10% of the total amount due as of November 28, 1981;

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.

SO ORDERED. (Records, p. 235).

The private respondents appealed to the Intermediate Appellate Court, docketed as AC-G.R. CV No. 07678.

On June 30, 1986, the appellate court affirmed the decision of the trial court with modification as follows:

WHEREFORE, in view of the foregoing consideration, the appealed decision is hereby AFFIRMED with modification as follows:

1. Ordering the defendants to pay the plaintiff the amount of P12,551.16 which shall earn interest at 12% per annum and 1% penalty charge starting November 27, 1981 until fully paid; and

2. No other pronouncement as to attorney's fees and costs of suit.

SO ORDERED. (Rollo, p. 28)

Hence, this petition.

In the resolution of September 14, 1987, the Court gave due course to the petition and required the parties to submit simultaneously their respective memoranda within thirty (30) days from notice (Rollo, p. 80).

The main issue in this case is whether or not the revised rate of interest imposed on the loans of the private respondents is legal.

The petitioner contends that in all the promissory notes executed by the private 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 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 Amendment to Real Estate Mortgage of February 12, 1979 that "this account is also subject to the upward revision of interest rate as may be imposed by the mortgagee PNB." By these explicit contractual clauses, the private respondents fully agreed to an upward 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 Estate Mortgage were executed by private respondent Fermin Maglasang, Presidential Decree No. 116 (amending further certain sections of Act No. 2655, as amended, 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.

Pursuant to Presidential Decree No. 116, the Monetary Board issued Central Bank Circular No. 705 on December 1, 1979, prescribing the maximum rate of interest on loan transactions with maturities of more than seven hundred thirty (730) days and shall not exceed twenty-one percent (21%) per annum. Hence, the upward revision of interest rate as stipulated in the Promissory Notes and Amendment of Real Estate Mortgage dated February 12, 1975, is in accordance with Presidential Decree No. 116 promulgated on January 29, 1973 and Central Bank Circular No. 705 issued on December 1, 1979, and the imposition of 21% rate of interest on the loan obligations of private respondents is within the limits prescribed by law.

On the other hand, the private respondents maintain that the collection of service charge and liquidated damages in excess of the maximum 12% interest originally agreed, are illegal and void for being contrary to or prohibited under Section 2 of Act No. 2655, as amended by Act No. 4070.

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.

The petition is without merit.

In Insular Bank of Asia and America v. Spouses Salazar, (159 SCRA 133 [1988]), the Court ruled that the Escalation Clause is a valid provision in the loan agreement provided that — (1) the increased rate imposed or charged 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.

Likewise in Banco Filipino Savings and Mortgage Bank v. Navarro, (152 SCRA 346 [1987]), the Court said that for an Escalation Clause to be valid, it must include a de-escalation clause. There can be an increase in interest if increased by law or by the Monetary Board; and 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," as provided for in P.D. No. 1684, promulgated on March 17, 1980. There is no question that PNB board resolution dated May 26, 1980 contains such de-escalation clause, under paragraph 8 thereof, to wit:

(8) To enable us to adjust interest rates in accordance with CB Circular letter of March 19, 1980, the covering promissory note for all short/medium/long terms loans shall include the following conditions:

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 agreed upon shall be reduced in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board: Provided, further, that 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)

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 they are all payable on demand but the records do not show when payment was 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 at the public auction on November 27, 1981 (Certificate of Sheriff's Sale, Records of Exhibits, p. 84). Accordingly, as of December 1, 1979, the remaining maturity days of the loans were less than 730 days. Hence, the increased rate imposed or charged is not valid.

The claim of private respondents that the respondent appellate court committed mathematical error in computing the 12% interest due their deficiencies is a factual issue.

Absent the recognized exceptions, finding of facts of the Court of Appeals are conclusive on the parties and Supreme Court on the tenet that this Court decides appeals which only involve questions of law and that it is not the function of the Supreme Court to analyze and 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 (Philippine National Bank v. Court of Appeals, 159 SCRA 433 [1988]).

PREMISES CONSIDERED, the petition is hereby DENIED for lack of merit, and the assailed decision of the Court of Appeals is hereby AFFIRMED.

SO ORDERED.

G.R. No. 103592 February 4, 1993

IRENEO F. LLORIN, JR., petitioner, vs.COURT OF APPEALS and APEX MORTGAGE AND LOANS CORPORATION, respondents.

REGALADO, J.:

In this petition for review on certiorari, petitioner impugns the decision rendered by respondent Court of Appeals on January 17, 1992 1 which affirmed in toto the judgment of the Regional Trial Court of Manila, Branch 50, dated April 12, 1991, in Civil Case No. 88-45055 2 which is an action for collection of a sum of money.

The uncontested antecedent facts, as found by the trial court and adopted by respondent court, are as follows:

It is undisputed that on April 11, 1978, defendant Llorin obtained a loan from plaintiff corporation in the amount of Eighty Four Thousand Four Hundred Ten Pesos (P84,410.00). The loan, secured by a real estate mortgage, is payable in two hundred forty (240) installments at P1,142.08 monthly commencing May 11, 1978, with interest of 12% per annum, service charge of three percent (3%) p.a. and 1 1/2% monthly penalty for unpaid or delayed amortizations, as evidenced by a Promissory Note With Authority to Assign Credit.

The promissory note provides for an escalation clause which reads:

I/We hereby authorized (sic) APEX MORTGAGE AND LOAN CORPORATION to accordingly increase the rate of interest and/or service charges stipulated in this contract without notice to me/us in the event of a law or any applicable Presidential Decree and/or Central Bank regulation (which) should be enacted increasing the lawful rate of interest and/or service charges that may be charged on this particular kind of loan.

Pursuant to the said clause and on the basis of Central Bank Circular No. 721 (February 25, 1980) and No. 905 (Series of 1982), plaintiff increased the interest rate on the loan from 12% annually as follows:

Effective Date From To Monthly Amortization

February 25, 1980 12% 21% P 1,511.91 (Exhs. "8" & "G")

(4 years & 5

months or more)

August 1, 1984 21% 25% P 1,772.68 (Exh. "5")

(4 months)

December 1, 1984 25% 36% P 2,482.94 (Exh. "4")

(1 year & 2 months)

Despite the absence of a de-escalation clause, the interest rates were, however, later reduced corresponding to the reduction in the interest rates prescribed by the Central Bank as follows:

Effective Date From To Monthly Amortization

February 1, 1986 36% 28% P 1,957.00 (Exhs. "6")

(10 months)

December 1, 1986 28% 24% P 1,732.04 (Exh. "7")

(2 months)

February 1, 1987 24% 21% P 1,580.14 (Exh. "1")

(3 years-Feb. 1990)

On May 11, 1982 plaintiff demanded from defendant the payment of P123,720.32. On July 7, 1987 another written demand was sent to defendant for payment of P208,964.88 covering the period from September 1981 to June 1987. As of July 27, 1987,

defendant was able to pay the plaintiff the total sum of P79,462.27 which was applied to satisfy the penalty, interest charges and part of (the) principal loan.

On March 28, 1988, plaintiff wrote defendant for payment of P323,523.42 representing principal and interest as of March 21, 1988 computed (in) consonant (sic) with the foregoing CB Circulars. Defendant, in his reply, requested for recomputation of his account invoking the decisions of the Supreme Court in Banco Filipino Savings and Mortgage Bank vs. Hon. Miguel Navarro, and Florante Valle and Insular Bank of Asia and America vs. Spouses Salazar. . . . 3

On June 17, 1988, respondent Apex Mortgage and Loans Corporation (APEX) filed a complaint with the Regional Trial Court of Manila for the collection of the amount of P323,523.42, with interest at 21% per annum and 10% of the total claim as attorney's fees. Three pre-trial conferences were had before the court a quo. On February 12, 1990, the trial court issued a second pre-trial order stating, inter alia, that:

xxx xxx xxx

Both parties agreed that the material facts of the case are not disputed and that the main issue pertains to whether or not the escalation clause contained in the promissory note validly applies to this case in light of the Supreme Court decision in the case of Banco Filipino.

Final pre-trial for submission of additional stipulation of facts on last payment, principal balance, computations according to each other's theory, etc., is set on March 12, 1990 at 8:30 a.m. 4

In compliance with said order, the parties submitted their respective computations to the trial court which issued an order on March 12, 1990 directing the parties to submit their respective memoranda, after which the case would be considered submitted for decision on the basis of the pleadings, stipulations, affidavits and the three pre-trial orders, the issue being principally a question of law.

On April 12, 1991, the lower court rendered a decision ordering herein petitioner "to pay plaintiff Apex Mortgage and Loan Corporation the sum of P80,561.13 with interest of 21% and service charge of 3% per annum from September 12, 1981 until fully paid, plus P10,000.00 (as) attorney's fees and the costs of suit." 5

Petitioner initially went to this Court on a petition for review on certiorari, which was referred to the Court of Appeals for determination and disposition pursuant to our resolution dated September 18, 1991. As earlier stated, respondent court rendered judgment upholding the decision of the court below.

The same issue raised by petitioner before respondent Court of Appeals is now being presented before us for resolution, that is, whether the decision of this Court in the case of Banco Filipino Savings and Mortgage Bank vs. Hon Miguel Navarro, et al., 6 is applicable to the case at bar and, if so, whether the computation should be patterned after the formula used in Insular Bank of Asia and America vs. Sps. Salazar. 7

Petitioner asseverates that in the Banco Filipino case, we disallowed the imposition of the increased rates of interest and declared that the escalation clause should not be given effect because of (1) its one-sidedness in favor of the lender, and (2) the absence of a de-escalation clause. In the case at bar, petitioner claims that the escalation clause contained in the promissory note executed in favor of private respondent APEX is identical with the escalation clause subject of the Banco Filipino case. Hence, he argues, the same should likewise be declared null and void.

We find the petition to be barren of meritorious submissions or arguments.

The legality of the escalation clause, as in the case at bar, has been recognized in this jurisdiction. In the aforecited case of Banco Filipino Savings and Mortgage Bank vs. Hon. Miguel Navarro, et al., supra, we declared such clause to be valid and held that:

Some contracts, contain what is known as an "escalator clause," which is defined as one in which the contract fixes a base price but contains a provision that in the event of specified cost increases, the seller or contractor may increase the price up to a fixed percentage of the base. Attacks on such a clause have usually been based on 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, 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 been unsuccessful.

The Court further finds as a matter of law that the cost of living index adjustment, or escalator clause, is not substantively unconscionable.

Cost of living index adjustment clauses are widely used in commercial contracts in an effort to maintain fiscal stability and to retain "real dollar" value to the price terms of long term contracts. The provision is a common one, and has been universally upheld and enforced. . . .

However, it is pointed out that Section 2 of Presidential Decree No. 1684, which further amended the Usury Law, provides:

Sec. 2. The same Act is hereby amended by adding a new section after Section 7, to read as follows:

Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods 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 Monetary Board: Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board: Provided further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest.

Accordingly, for a stipulation on an escalation clause to be valid, it should specifically provide (1) that there can be an increase in interest if increased by law or by the Monetary Board, and (2) 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.

The purpose of the law in mandating the inclusion of a de-escalation clause is to prevent one-sidedness in favor of the lender which is considered repugnant to the principle of mutuality of contracts. As we held in Philippine National Bank vs. Court of Appeals, et al.: 8

. . . the unilateral action of the PNB in increasing the interest rate on the private respondent's loan, violated the mutuality of contracts ordained in Article 1308 of the Civil Code:

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 . . . . 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" . . . . Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition.

The inescapable conclusion is that a de-escalation clause is an indispensable requisite to the validity and enforceability of an escalation clause in the contract. In other words, in the absence of a corresponding de-escalation clause, the escalation clause shall be considered null and void.

We are fully persuaded, however, to take particular exception from said ruling insofar as the case at bar is concerned, considering the peculiar circumstances obtaining herein. There is no dispute that the escalation clause in the promissory note involved in this case does not contain a correlative de-escalation clause or a provision providing for the reduction of the stipulated interest in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board. Notwithstanding the absence of such stipulation, however, it is similarly not controverted but, as a matter of fact, specifically admitted by petitioner that respondent APEX unilaterally and actually decreased the interest charges it imposed on herein petitioner on three occasions.

Consequently, we hold that with this actuality, the escalation clause involved in this case remains valid and enforceable. The evil sought to be thwarted with the enactment and by the application of Presidential Decree No. 1684 is inexistent in the present case by reason of the actual grant of a concomitant decrease in the interest rates on petitioner's loan. We do not find here a situation where it can be said that the parties do not stand on equal footing, which is the evil proscribed by said decree. Ergo, cessante ratione legis cessat ipsa lex.

The insistence of petitioner that the ruling enunciated in the Banco Filipino case should be made to apply in this case has no leg to stand on. As correctly found by respondent court, the escalation clause subject of the aforementioned case is different from that stipulated between herein petitioner and private respondent. Thus:

The escalation clause found in the promissory note executed by petitioner Llorin in favor of private respondent Apex on April 11, 1978 reads:

I/We hereby authorized (sic) APEX MORTGAGE AND LOAN CORPORATION to correspondingly increase the rate of interest and/or service charges stipulated in this contract without notice to me/us in the event of a law or any applicable Presidential Decree and/or Central Bank regulation (which) should be enacted increasing the lawful rate of interest and/or service charges that may be charged on this particular kind of loan.

while the escalation clause subject of the Banco Filipino vs. Navarro case (152 SCRA 346) reads:

I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan.

There is a significant difference between the two escalation clauses; specifically that the escalation clause found in the Banco Filipino case refers only to a "law" increasing the lawful rates of interest that may be charged, whereas the escalation clause found in this case refers not only to a law but also "to any Presidential Decree or, Central Bank Regulation" which increases such rate of interest and/or service charges. Thus, the Supreme Court stated in the Banco Filipino case that while Central Bank Circular 494 had the force and effect of a law, it was not the law contemplated in the said escalation clause contained in the promissory note executed by the respondent del Valle in favor of petitioner Banco Filipino; the Escalation Clause was dependent on an increase of rate made by "law" alone.

Upon the other hand, the escalation clause in question by speaking of "a law or any applicable Presidential Decree and/or Central Bank Regulation" which would increase the lawful rate of interest and fees chargeable on loans of this nature necessarily included Central Bank Circular(s) Nos. 721 (February 25, 1980) and 905 (s. 1982) the legality of which, as correctly pointed out by the court a quo is not assailed by the defendant, and which are applicable to both secured and unsecured loans. There existed legal basis for the increases in the interest rate chargeable against petitioner's account made by the respondent Apex on February 25, 1980 (from 12% to 21% per annum), August 1, 1984 (from 21% to 25% per annum) and December 1, 1984 (from 25% to 36% per annum). Notably the Usury Law ceased to be in existence as of December 22, 1982 (see Central Bank Circular No. 905; Liam Law vs. Olympic Sawmill Co., 129 SCRA 439). 9

Another justification for the inapplicability of the Banco Filipino case, as correctly advanced by private respondent in its memorandum, 10 is that in said case this Court ruled that Central Bank Circular No. 494 does not make a distinction as to the type of loan to which it is applicable, hence, Banco Filipino erroneously relied thereon in imposing the increased rates in interest. On the other hand and with regard to the present case, both Circulars Nos. 721 and 905 expressly provide that the interest rates prescribed therein shall be applicable to both "secured and unsecured loans" such that both circulars can very well be made to apply to petitioner's loan.

On the foregoing premises and in light of the foregoing disquisitions, the matter of the controverted computation of petitioners total liability has been rendered moot and academic.

WHEREFORE, the judgment appealed from is hereby AFFIRMED in toto and the petition at bar is DENIED for lack of merit.

SO ORDERED.

G.R. No. 113412 April 17, 1996

Spouses PONCIANO ALMEDA and EUFEMIA P. ALMEDA, petitioner, vs.THE COURT OF APPEALS and PHILIPPINE NATIONAL BANK, respondents.

KAPUNAN, J.:p

On various dates in 1981, the Philippine National Bank granted to herein petitioners, the spouses Ponciano L. Almeda and Eufemia P. Almeda several loan/credit accommodations totaling P18.0 Million pesos payable in a period of six years at an interest rate of 21% per annum. To secure the loan, the spouses Almeda executed a Real Estate Mortgage Contract covering a 3,500 square meter parcel of land, together with the building erected thereon (the Marvin Plaza) located at Pasong Tamo, Makati, Metro Manila. A credit agreement embodying the terms and conditions of the loan was executed between the parties. Pertinent portions of the said agreement are quoted below:

SPECIAL CONDITIONS

xxx xxx xxx

The loan shall be subject to interest at the rate of twenty one per cent (21%) per annum, payable semi-annually in arrears, the first interest payment to become due and payable six (6) months from date of initial release of the loan. The loan shall likewise be subject to the appropriate service charge and a penalty charge of three per cent (30%) per annum to be imposed on any amount remaining unpaid or not rendered when due.

xxx xxx xxx

III. OTHER CONDITIONS

(c) Interest and Charges

(1) 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; provided, that the interest rate on this/these accommodations shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease of the maximum interest rate. 1

Between 1981 and 1984, petitioners made several partial payments on the loan totaling. P7,735,004.66, 2 a substantial portion of which was applied to accrued interest. 3 On March 31, 1984, respondent bank, over petitioners' protestations, raised the interest rate to 28%, allegedly pursuant to Section III-c (1) of its credit agreement. Said interest rate thereupon increased from an initial 21% to a high of 68% between March of 1984 to September, 1986. 4

Petitioner protested the increase in interest rates, to no avail. Before the loan was to mature in March, 1988, the spouses filed on February 6, 1988 a petition for declaratory relief with prayer for a writ of preliminary injunction and temporary restraining order with the Regional Trial Court of Makati, docketed as Civil Case No. 18872. In said petition, which was raffled to Branch 134 presided by Judge Ignacio Capulong, the spouses sought clarification as to whether or not the PNB could unilaterally raise interest rates on the loan, pursuant to the credit agreement's escalation clause, and in relation to Central Bank Circular No. 905. As a preliminary measure, the lower court, on March 3, 1988, issued a writ of preliminary injunction enjoining the Philippine National Bank from enforcing an interest rate above the 21% stipulated in the credit agreement. By this time the spouses were already in default of their loan obligations.

Invoking the Law on Mandatory Foreclosure (Act 3135, as amended and P.D. 385), the PNB countered by ordering the extrajudicial foreclosure of petitioner's mortgaged properties and scheduled an auction sale for March 14, 1989. Upon motion by petitioners, however, the lower court, on April 5, 1989, granted a supplemental writ of preliminary injunction, staying the public auction of the mortgaged property.

On January 15, 1990, upon the posting of a counterbond by the PNB, the trial court dissolved the supplemental writ of preliminary injunction. Petitioners filed a motion for reconsideration. In the interim, respondent bank once more set a new date for the foreclosure sale of Marvin Plaza which was March 12, 1990. Prior to the scheduled date, however, petitioners tendered to respondent bank the amount of P40,142,518.00, consisting of the principal (P18,000,000.00) and accrued interest calculated at the originally stipulated rate of 21%. The PNB refused to accept the payment. 5

As a result of PNB's refusal of the tender of payment, petitioners, on March 8, 1990, formally consigned the amount of P40,142,518.00 with the Regional Trial Court in Civil Case No. 90-663. They prayed therein for a writ of preliminary injunction with a temporary restraining order. The case was raffled to Branch 147, presided by Judge Teofilo Guadiz. On March 15, 1990, respondent bank sought the dismissal of the case.

On March 30, 1990 Judge Guadiz in Civil Case No. 90-663 issued an order granting the writ of preliminary injunction enjoining the foreclosure sale of "Marvin Plaza" scheduled on March 12, 1990. On April 17, 1990 respondent bank filed a motion for reconsideration of the said order.

On August 16, 1991, Civil Case No. 90-663 we transferred to Branch 66 presided by Judge Eriberto Rosario who issued an order consolidating said case with Civil Case 18871 presided by Judge Ignacio Capulong.

For Judge Ignacio's refusal to lift the writ of preliminary injunction issued March 30, 1990, respondent bank filed a petition for Certiorari, Prohibition and Mandamus with respondent Court of Appeals, assailing the following orders of the Regional Trial Court:

1. Order dated March 30, 1990 of Judge Guadiz granting the writ of preliminary injunction restraining the foreclosure sale of Mavin Plaza set on March 12, 1990;

2. Order of Judge Ignacio Capulong dated January 10, 1992 denying respondent bank's motion to lift the writ of injunction issued by Judge Guadiz as well as its motion to dismiss Civil Case No. 90-663;

3. Order of Judge Capulong dated July 3, 1992 denying respondent bank's subsequent motion to lift the writ of preliminary injunction; and

4. Order of Judge Capulong dated October 20, 1992 denying respondent bank's motion for reconsideration.

On August 27, 1993, respondent court rendered its decision setting aside the assailed orders and upholding respondent bank's right to foreclose the mortgaged property pursuant to Act 3135, as amended and P.D. 385. Petitioners' Motion for Reconsideration and Supplemental Motion for Reconsideration, dated September 15, 1993 and October 28, 1993, respectively, were denied by respondent court in its resolution dated January 10, 1994.

Hence the instant petition.

This appeal by certiorari from the respondent court's decision dated August 27, 1993 raises two principal issues namely: 1) Whether or not respondent bank was authorized to raise its interest rates from 21% to as high as 68% under the credit agreement; and 2) Whether or not respondent bank is granted the authority to foreclose the Marvin Plaza under the mandatory foreclosure provisions of P.D. 385.

In its comment dated April 19, 1994, respondent bank vigorously denied that the increases in the interest rates were illegal, unilateral, excessive and arbitrary, it argues that the escalated rates of interest it imposed was based on the agreement of the parties. Respondent bank further contends that it had a right to foreclose the mortgaged property pursuant to P.D. 385, after petitioners were unable to pay their loan obligations to the bank based on the increased rates upon maturity in 1984.

The instant petition is impressed with merit.

The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that any obligation arising from contract has the force of law between the parties; and (2) that there must be mutuality between the parties based on their essential equality. 6 Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties, is likewise, invalid.

It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank unilaterally altered the terms of its contract with petitioners by increasing the interest rates on the loan without the prior assent of the latter. In fact, the manner of agreement is itself explicitly stipulated by the Civil Code when it provides, in Article 1956 that "No interest shall be due unless it has been expressly stipulated in writing." What has been "stipulated in writing" from a perusal of interest rate provision of the credit agreement signed between the parties is that petitioners were bound merely to pay 21% interest, subject to a possible escalation or de-escalation, when 1) the circumstances warrant such escalation or de-escalation; 2) within the limits allowed by law; and 3) upon agreement.

Indeed, the interest rate which appears to have been agreed upon by the parties to the contract in this case was the 21% rate stipulated in the interest provision. Any doubt about this is in fact readily resolved by a careful reading of the credit agreement because the same plainly uses the phrase "interest rate agreed upon," in reference to the original 21% interest rate. The interest provision states:

(c) interest and Charges

(1) 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; provided, that the interest rate on this/these accommodations shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease of the maximum interest rate.

In Philippine National Bank v. Court of Appeals, 7 this Court disauthorized respondent bank from unilaterally raising the interest rate in the borrower's loan from 18% to 32%, 41% and 48% partly because the aforestated increases violated the principle of mutuality of contracts expressed in Article 1308 of the Civil Code. The Court held:

CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest rates —

. . . increases in interest rates are not subject to any ceiling prescribed by the Usury Law.

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 span of four (4) months, in violation of P.D. 116 which limits such changes to once every twelve months.

Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest rate on the private respondent's loan, violated the mutuality of contracts ordained in Article 1308 of the Civil Code:

Art. 308. 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 vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the debtor) participation being reduced to the alternative "to take it or lease it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition.

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.

Clearly, the galloping increases in interest rate imposed by respondent bank on petitioners' loan, over the latter's vehement protests, were arbitrary.

Moreover, respondent bank's reliance on C.B. Circular No. 905, Series of 1982 did not authorize the bank, or any lending institution for that matter, to progressively increase interest rates on borrowings to an extent which would have made it virtually impossible for debtors to comply with their own obligations. True, escalation clauses in credit agreements are perfectly valid and do not contravene public policy. Such clauses, however, (as are stipulations in other contracts) are nonetheless still subject to laws and provisions governing agreements between parties, which agreements — while they may be the law between the contracting parties — implicitly incorporate provisions of existing law. Consequently, while the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the said circular could possibly be read as granting respondent bank carte blanche authority to raise interest rates to levels which would either enslave its borrowers or lead to a hemorrhaging of their assets. Borrowing represents a transfusion of capital from lending institutions to industries and businesses in order to stimulate growth. This would not, obviously, be the effect of PNB's unilateral and lopsided policy regarding the interest rates of petitioners' borrowings in the instant case.

Apart from violating the principle of mutuality of contracts, there is authority for disallowing the interest rates imposed by respondent bank, for the credit agreement specifically requires that the increase be "within the limits allowed by law". In the case of PNB v. Court of Appeals, cited above, this Court clearly emphasized that C.B. Circular No. 905 could not be properly invoked to justify the escalation clauses of such contracts, not being a grant of specific authority.

Furthermore, the escalation clause of the credit agreement requires that the same be made "within the limits allowed by law," obviously referring specifically to legislative enactments not administrative circulars. Note that the phrase "limits imposed by law," refers only to the escalation clause. However, the same agreement allows reduction on the basis of law or the Monetary Board. Had the parties intended the word "law" to refer to both legislative enactments and administrative circulars and issuances, the agreement would not have gone as far as making a distinction between "law or the Monetary Board Circulars" in referring to mutually agreed upon reductions in interest rates. This distinction was the subject of the Court's disquisition in the case of Banco Filipino Savings and Mortgage Bank v. Navarro 8 where the Court held that:

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 opinion that it may not.

The Escalation Clause reads as follows:

I/We hereby authorize Banco Filipino to correspondingly increase.

the interest rate stipulated in this contract without advance notice to me/us in the event.

a law

increasing

the lawful rates of interest that may be charged

on this particular

kind of loan. (Paragraphing and emphasis supplied)

It is clear from the stipulation between the parties that the interest rate may be increased "in the event a law should be enacted increasing the lawful rate of interest that may be charged on this particular kind of loan." The Escalation Clause was dependent on an increase of rate made by "law" alone.

CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly issued is not strictly a statute or a law, it has, however, the force and effect of law." (Emphasis supplied). "An administrative regulation adopted pursuant to law has the force and effect of law." "That administrative rules and regulations have the force of law can no longer be questioned."

The distinction between a law and an administrative regulation is recognized in the Monetary Board guidelines quoted in the latter to the BORROWER of Ms. Paderes of September 24, 1976 (supra). According to the guidelines, for a loan's interest to be subject 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 increasing the maximum rate for loans." The guidelines thus presuppose that a Central Bank regulation is not within the term "any law."

The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding section 7-a to the Usury Law, providing that parties to an agreement pertaining to a loan could 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 Monetary Board." To quote:

Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods 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 Monetary Board:

Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board;

Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest.' (Paragraphing and emphasis supplied).

It is now clear that from March 17, 1980, escalation clauses to be valid should specifically 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 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."

Petitioners never agreed in writing to pay the increased interest rates demanded by respondent bank in contravention to the tenor of their credit agreement. That an increase in interest rates from 18% to as much as 68% is excessive and unconscionable is indisputable. Between 1981 and 1984, petitioners had paid an amount equivalent to virtually half of the entire principal (P7,735,004.66) which was applied to interest alone. By the time the spouses tendered the amount of P40,142,518.00 in settlement of their obligations; respondent bank was demanding P58,377,487.00 over and above those amounts already previously paid by the spouses.

Escalation clauses are not basically wrong or legally objectionable so long as they are not solely potestative but based on reasonable and valid grounds. 9 Here, as clearly demonstrated above, not only the increases of the interest rates on the basis of the escalation clause patently unreasonable and unconscionable, but also there are no valid and reasonable standards upon which the increases are anchored.

We go now to respondent bank's claim that the principal issue in the case at bench involves its right to foreclose petitioners' properties under P.D. 385. We find respondent's pretense untenable.

Presidential Decree No. 385 was issued principally to guarantee that government financial institutions would not be denied substantial cash inflows necessary to finance the government's development projects all over the country by large borrowers who resort to litigation to prevent or delay the government's collection of their debts or loans. 10 In facilitating collection of debts through its automatic foreclosure provisions, the government is however, not exempted from observing basic principles of law, and ordinary fairness and decency under the due process clause of the Constitution. 11

In the first place, because of the dispute regarding the interest rate increases, an issue which was never settled on merit in the courts below, the exact amount of petitioner's obligations could not be determined. Thus, the foreclosure provisions of P.D. 385 could be validly invoked by respondent only after settlement of the question involving the interest rate on the loan, and only after the spouses refused to meet their

obligations following such determination. In Filipinas Marble Corporation v. Intermediate Appellate Court, 12 involving P.D. 385's provisions on mandatory foreclosure, we held that:

We cannot, at this point, conclude that respondent DBP together with the Bancom people actually misappropriated and misspent the $5 million loan in whole or in part although the trial court found that there is "persuasive" evidence that such acts were committed by the respondent. This matter should rightfully be litigated below in the main action. Pending the outcome of such litigation, P.D. 385 cannot automatically be applied for if it is really proven that respondent DBP is responsible for the misappropriation of the loan, even if only in part, then the foreclosure of the petitioner's properties under the provisions of P.D. 385 to satisfy the whole amount of the loan would be a gross mistake. It would unduly prejudice the petitioner, its employees and their families.

Only after trial on the merits of the main case can the true amount of the loan which was applied wisely or not, for the benefit of the petitioner be determined. Consequently, the extent of the loan where there was no failure of consideration and which may be properly satisfied by foreclosure proceedings under P.D. 385 will have to await the presentation of evidence in a trial on the merits.

In Republic Planters Bank v. Court of Appeals 13 the Court reiterating the dictum in Filipinas Marble Corporation, held:

The enforcement of P.D. 385 will sweep under the rug' this iceberg of a scandal in the sugar industry during the Marcos Martial Law years. This we can not allow to happen. For the benefit of future generations, all the dirty linen in the PHILSUCUCOM/NASUTRA/RPB closets have to be exposed in public so that the same may NEVER be repeated.

It is of paramount national interest, that we allow the trial court to proceed with dispatch to allow the parties below to present their evidence.

Furthermore, petitioners made a valid consignation of what they, in good faith and in compliance with the letter of the Credit Agreement, honestly believed to be the real amount of their remaining obligations with the respondent bank. The latter could not therefore claim that there was no honest-to-goodness attempt on the part of the spouse to settle their obligations. Respondent's rush to inequitably invoke the foreclosure provisions of P.D. 385 through its legal machinations in the courts below, in spite of the unsettled differences in interpretation of the credit agreement was obviously made in bad faith, to gain the upper hand over petitioners.

In the face of the unequivocal interest rate provisions in the credit agreement and in the law requiring the parties to agree to changes in the interest rate in writing, we hold that the unilateral and progressive increases imposed by respondent PNB were null and void. Their effect was to increase the total obligation on an eighteen million peso loan to an amount way over three times that which was originally granted to the borrowers. That these increases, occasioned by crafty manipulations in the interest rates is unconscionable and neutralizes the salutary policies of extending loans to spur business cannot be disputed.

WHEREFORE, PREMISES CONSIDERED, the decision of the Court of Appeals dated August 27, 1993, as well as the resolution dated February 10, 1994 is hereby REVERSED AND SET ASIDE. The case is remanded to the Regional Trial Court of Makati for further proceedings.

SO ORDERED.

G.R. No. 109563 July 9, 1996

PHILIPPINE NATIONAL BANK, petitioner, vs.COURT OF APPEALS, MARIA AMOR BASCOS and MARCIANO BASCOS, respondents.

MENDOZA, J.:p

This is a petition seeking review of the decision dated August 10, 1992, 1 of the Eighth Division of the Court of Appeals and its resolution dated March 25, 1993, 2 both rendered in CA-G.R. CV No. 27653, which affirmed the decision of the Regional Trial Court (RTC) of San Jose City (Branch 38).

The facts are as follows:

On June 4, 1979, private respondent spouses Maria Amor and Marciano Bascos obtained a loan from the Philippine National Bank in the amount of P15,000.00 evidenced by a promissory note and secured by a real estate mortgage.

The promissory note contained the following stipulation: 3

For value received, I/we, [private respondents] jointly and severally promise to pay to the ORDER of the PHILIPPINE NATIONAL BANK, at its office in San Jose City, Philippines, the sum of FIFTEEN THOUSAND ONLY (P15,000.00), Philippine Currency, together with 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 I/we also agree to pay jointly and severally ____ % per annum penalty charge, by way of liquidated damages should this note be unpaid or is not renewed on due date.

Payment of this note shall be as follows:

* THREE HUNDRED SIXTY FIVE DAYS * AFTER DATE

On the reverse side of the note the following condition was stamped: 4

All short-term loans to be granted starting January 1, 1978 shall be made subject to the condition that any and/or all extensions hereof that will leave any portion of the amount still unpaid after 730 days shall automatically convert the outstanding balance into a medium or long-term obligation as the case may be and give the Bank the right to charge the interest rates prescribed under it policies from the date the account was originally granted.

To secure payment of the loan the parties executed a real estate mortgage contract which provided: 5

(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 provision 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.

On December 12, 1980, PNB extended the period of payment of the loan to June 5, 1981, thus converting the loan from a short-term to a medium-term loan, i.e., a loan which matured over two to five years. 6 PNB also increased the rate of interest per annum, first to 14%, effective December 1, 1979; 7 then to 22% effective February 21, 1983; 8 to 22.5% effective June 20, 1983; 9 to 23% from November 2, 1983; 10 to 25% effective March 2, 1984; 11 and finally to 28% from April 10, 1984. 12

Because private respondents defaulted in paying their obligation, the Provincial Sheriff of Nueva Ecija scheduled the extrajudicial foreclosure of the mortgage on June 15, 1984 to pay private respondents' indebtedness which, according to PNB, had increased from P15,000.00 to P35,125.84, plus 28% annual interest. 13

Private respondents brought suit against PNB, its Branch Manager Jetro Godoy, and the Provincial Sheriff of Nueva Ecija Numeriano Y. Galang (1) for a declaration of nullity of C.B. Monetary Board Resolution No. 2126 dated November 29, 1979 (embodied in C.B. Circular No. 705 dated December 1, 1979), which increased the ceiling on the interest rate of secured and unsecured loans to 16% per annum and 14% per annum, respectively, on the ground that it was contrary to the Usury Law, good morals, public policy, customs and traditions, social justice, due process and the equal protection clause of the Constitution; and (2) for a declaration that the interest rate increases on their loan were contrary to Art. 1959 of the Civil Code which provides that interest due and unpaid shall not earn interest. Pending final determination of the case, private respondents asked that the auction sale be enjoined.

PNB filed an answer with compulsory counterclaim. It alleged that private respondents had no cause of action because §1-a of the Usury Law, as amended by P.D. No. 1684, did not limit the number of times the interest could be increased and that private respondents were estopped from questioning the increases because they failed to object to the same. PNB asked that the complaint be dismissed and that private respondents be ordered to pay P35,125.84, plus interest from April 10, 1984, until the obligation was fully paid, attorney's fees and moral damages in such amount as may be determined by the court.

On June 13, 1984 private respondents deposited with the clerk of court P8,000.00 14 and on January 15, 1985 P2,000.00, 15 in partial payment of their loan.

On June 15, 1990, the RTC rendered a decision, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered as follows:

1. There having [sic] no evidence against the defendants Jetro Godoy, and the Provincial Sheriff of Nueva Ecija, Numeriano Galang, the case against them is dismissed;2. The increase in interest rates based on the escalation clauses in the Promissory Note and the Real Estate Mortgage, par. K, being contrary to Sec. 3, P.D. No. 116 are declared null and void, that henceforth, the defendant PNB is hereby directed to desist from enforcing the increased rate of interest more than TWELVE (12%) per cent on plaintiffs' loan;

3. The compulsory counterclaim of the defendants is also dismissed;4. On the other hand, the plaintiffs can settle their unpaid obligation with the defendant PNB at the interest rate of TWELVE (12%) per cent per annum computed from the inception of the loan until the same is fully paid; advances made by the PNB for insurance premiums and penalties added; and the P10,000.00 paid to and defendant bank to be credited as payment by the plaintiffs;5. Plaintiff's claim for damages is, likewise, dismissed; and6. The parties shall each bear out [sic] the expenses incurred by them.

SO ORDERED.

The RTC invalidated the stipulations in the promissory note and the real estate mortgage, which authorized PNB to increase the interest rate, on the ground that there was no corresponding stipulation that the interest rate would be reduced in the event the law reduced the applicable maximum rate as provided under P.D. No. 1684; that P.D. No. 116, which sets a ceiling of 12% interest on secured loans, is a "law," which should prevail over Circular No. 705, used by PNB to increase the interest; that collection of the increased interest sanctions unjust enrichment contrary to Art. 22 of the Civil Code; and that the promissory note and real estate mortgage were contracts of adhesion which should be interpreted in favor of private respondents.

PNB appealed. However, the Court of Appeals affirmed the trial court's decision. The appellate court held that the escalation clause in the promissory note could not be given effect because of the absence of a provision for a de-escalation in the event a reduction of interest was ordered by law. In addition it held that pursuant to the escalation clause any increase in interest must be within "the limits allowed by law" but C.B. circulars, on the basis of which PNB increased the interest, could not be considered "laws".

PNB moved for a reconsideration. As its motion was denied, it filed this petition. PNB's argument is that the Court of Appeals erred in applying §2 of P.D. No. 1684, which makes the validity of an escalation clause turn on the presence of a de-escalation clause, to the promissory note and real estate mortgage in this case. PNB contends that the two had been executed on June 4, 1979, before the effectivity of P.D. No. 1684 on March 17, 1980.

To begin with, PNB's argument rests on a misapprehension of the import of the appellate court's ruling. The Court of Appeals nullified the interest rate increases not because the promissory note did not comply with P.D. No. 1684 by providing for a de-escalation, but because the absence of such provision made the clause so one-sided as to make it unreasonable.

That ruling is correct. It is in line with our decision in Banco Filipino Savings & Mortgage Bank v. Navarro 16 that although P.D. No. 1684 is not to be retroactively applied to loans granted before its effectivity, there must nevertheless be a de-escalation clause to mitigate the one-sideness of the escalation clause. Indeed because of concern for the unequal status of borrowers vis-a-vis the banks, our cases after Banco Filipino have fashioned the rule that any increase in the rate of interest made pursuant to an escalation clause must be the result of agreement between the parties.

Thus in Philippine National Bank v. Court of Appeals, 17 two promissory notes authorized PNB to increase the stipulated interest per annum "within the limits allowed by law at any time depending on whatever policy [PNB] may adopt in the future; Provided, that the interest rate on this note shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board." The real estate mortgage likewise provided:

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.

Pursuant to these clauses, PNB successively increased the interest from 18% to 32%, then to 41% and then to 48%. This Court declared the increases unilaterally imposed by PNB to be in violation of the principle of mutuality as embodied in Art. 1308 of the Civil Code, which provides that "[t]he contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them." As the Court explained: 18

In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan agreement between the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the debtor) participation being reduced to the alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition.

A similar ruling was made in Philippine National Bank v. Court of Appeals. 19 The credit agreement in that case provided:

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: Provided, that the interest rate on this accommodation shall be correspondingly decreased in the event that the applicable maximum interest is reduced by law or by the Monetary Boar. . . .

As in the first case, PNB successively increased the stipulated interest so that what was originally 12% per annum became, after only two years, 42%. In declaring the increases invalid, we held: 20

We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it unbridled right to unilaterally upwardly adjust the interest on private respondents' loan. That would completely take away from private respondents the right to assent to an important modification in their agreement, and would negate the element of mutuality in contracts.

Only recently we invalidated another round of interest increases decreed by PNB pursuant to a similar agreement it had with other borrowers: 21

[W]hile the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the said circular could possibly be read as granting respondent bank carte blanche authority to raise interest rates to levels which would either enslave its borrowers or lead to a hemorrhaging of their assets.

In this case no attempt was made by PNB to secure the conformity of private respondents to the successive increases in the interest rate. Private respondents' assent to the increase can not be implied from their lack of response to the letters sent by PNB, informing them of the increases. For as stated in one case, 22 no one receiving a proposal to change a contract is obliged to answer the proposal.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED.

SO ORDERED.

G.R. No. 114061 August 3, 1994

KOREAN AIRLINES CO., LTD., petitioner, vs.COURT OF APPEALS and JUANITO C. LAPUZ, respondents.

G.R. No. 113842 August 3, 1994

JUANITO C. LAPUZ, petitioner, vs.COURT OF APPEALS and KOREAN AIRLINES CO., LTD., respondents.

CRUZ, J.:

Sometime in 1980, Juanito C. Lapuz, an automotive electrician, was contracted for employment in Jeddah, Saudi Arabia, for a period of one year through Pan Pacific Overseas Recruiting Services, Inc. Lapuz was supposed to leave on November 8, 1980, via Korean Airlines. Initially, he was "wait-listed," which meant that he could only be accommodated if any of the confirmed passengers failed to show up at the airport before departure. When two of such passengers did not appear, Lapuz and another person by the name of Perico were given the two unclaimed seats.

According to Lapuz, he was allowed to check in with one suitcase and one shoulder bag at the check-in counter of KAL. He passed through the customs and immigration sections for routine check-up and was cleared for departure as Passenger No. 157 of KAL Flight No. KE 903. Together with the other passengers, he rode in the shuttle bus and proceeded to the ramp of the KAL aircraft for boarding. However, when he was at the third or fourth rung of the stairs, a KAL officer pointed to him and shouted "Down! Down!" He was thus barred from taking the flight. When he later asked for another booking, his ticket was canceled by KAL. Consequently, he was unable to report for his work in Saudi Arabia within the stipulated 2-week period and so lost his employment.

KAL, on the other hand, alleged that on November 8, 1980, Pan Pacific Recruiting Services Inc. coordinated with KAL for the departure of 30 contract workers, of whom only 21 were confirmed and 9 were wait-listed passengers. The agent of Pan Pacific, Jimmie Joseph, after being informed that there was a possibility of having one or two seats becoming available, gave priority to Perico, who was one of the supervisors of the hiring company in Saudi Arabia. The other seat was won through lottery by Lapuz. However, only one seat became available and so, pursuant to the earlier agreement that Perico was to be given priority, he alone was allowed to board.

After trial, the Regional Trial Court of Manila, Branch 30, 1 adjudged KAL liable for damages, disposing as follows:

WHEREFORE, in view of the foregoing consideration, judgment is hereby rendered sentencing the defendant Korean Air Lines to pay plaintiff Juanito C. Lapuz the following:

1. The amount of TWO HUNDRED SEVENTY-TWO THOUSAND ONE HUNDRED SIXTY (P272,160.00) PESOS as actual/compensatory damages, with legal interest thereon from the date of the filing of the complaint until fully paid.

2. The sum of TWENTY-FIVE THOUSAND (P25,000.00) PESOS as and for attorney's fees; and

3. The costs of suit.

The case is hereby dismissed with respect to defendant Pan Pacific Overseas Recruiting Services, Inc.

The counterclaims and cross-claim of defendant Korean Air Lines Co., Ltd. are likewise dismissed.

On appeal, this decision was modified by the Court of Appeals 2 as follows:

WHEREFORE, in view of all the foregoing, the appealed judgment is hereby AFFIRMED with the following modifications: the amount of actual damages and compensatory damages is reduced to P60,000.00 and defendant-appellant is hereby ordered to pay plaintiff-appellant the sum of One Hundred Thousand Pesos (P100,000.00) by way of moral and exemplary damages, at 6% interest per annum from the date of the filing of the Complaint until fully paid.

KAL and Lapuz filed their respective motions for reconsideration, which were both denied for lack of merit. Hence, the present petitions for review which have been consolidated because of the identity of the parties and the similarity of the issues.

In G. R. No. 114061, KAL assails the decision of the appellate court on the following grounds:

1. That the Court of Appeals erred in concluding that petitioner committed a breach of contract of carriage notwithstanding lack of proper, competent and sufficient evidence of the existence of such contract.

2. That the Court of Appeals erred in not according the proper evidentiary weight to some evidence presented and the fact that private respondent did not have any boarding pass to prove that he was allowed to board and to prove that his airline ticket was confirmed.

3. That the Court of Appeals erred in concluding that the standby passenger status of private respondent Lapuz was changed to a confirmed status when his name was entered into the passenger manifest.

4. That the Court of Appeals abused its discretion in awarding moral and exemplary damages in the amount of P100,000.00 in favor of private respondent notwithstanding its lack of basis and private respondent did not state such amount in his complaint nor had private respondent proven the said damages.

5. That the Court of Appeals erred in dismissing the counterclaims.

6. That the Court of Appeals erred in dismissing the counterclaim of petitioner against Pan Pacific.

7. That the Court of Appeals erred in ruling that the 6% per annum legal interest on the judgment shall be computed from the filing of the complaint.

In G. R. No. 113842, Lapuz seeks: (a) the setting aside of the decision of the Court of Appeals insofar as it modifies the award of damages; b) actual and compensatory damages in the sum equivalent to 5 years' loss of earnings based on the petitioner's monthly salary of 1,600 Saudi rials at the current conversion rate plus the cost of baggage and personal belongings worth P2,000 and the service fee of P3,000 paid to the recruiting agency, all with legal interest from the filing of the complaint until fully paid; c) moral damages of not less than P1 million and exemplary damages of not less than P500,000.00, both with interest at 6% per annum from the filing of the complaint; and d) attorney's fees in the sum equivalent to 30% of the award of damages.

It is evident that the issues raised in these petitions relate mainly to the correctness of the factual findings of the Court of Appeals and the award of damages. The Court has consistently affirmed that the findings of fact of the Court of Appeals and the other lower courts are as a rule binding upon it, subject to certain exceptions. As nothing in the record indicates any of such exceptions, the factual conclusions of the appellate court must be affirmed.

The status of Lapuz as standby passenger was changed to that of a confirmed passenger when his name was entered in the passenger manifest of KAL for its Flight No. KE 903. His clearance through immigration and customs clearly shows that he had indeed been confirmed as a passenger of KAL in that flight. KAL thus committed a breach of the contract of carriage between them when it failed to bring Lapuz to his destination.

This Court has held that a contract to transport passengers is different in kind and degree from any other contractual relation. 3 The business of the carrier is mainly with the traveling public. It invites people to avail themselves of the comforts and advantages it offers. The contract of air carriage generates a relation attended with a public duty. Passengers have the right to be treated by the carrier's employees with kindness, respect, courtesy and due consideration. They are entitled to be protected against personal misconduct, injurious language, indignities and abuses from such employees. 4 So it is that any discourteous conduct on the part of these employees toward a passenger gives the latter an action for damages against the carrier.

The breach of contract was aggravated in this case when, instead of courteously informing Lapuz of his being a "wait-listed" passenger, a KAL officer rudely shouted "Down! Down!" while pointing at him, thus causing him embarrassment and public humiliation.

KAL argues that "the evidence of confirmation of a chance passenger status is not through the entry of the name of a chance passenger in the passenger manifest nor the clearance from the Commission on Immigration and Deportation, because they are merely means of facilitating the boarding of a chance passenger in case his status is confirmed." We are not persuaded.

The evidence presented by Lapuz shows that he had indeed checked in at the departure counter, passed through customs and immigration, boarded the shuttle bus and proceeded to the ramp of KAL's aircraft. In fact, his baggage had already been loaded in KAL's aircraft, to be flown with him to Jeddah. The contract of carriage between him and KAL had already been perfected when he was summarily and insolently prevented from boarding the aircraft.

KAL's allegation that the respondent court abused its discretion in awarding moral and exemplary damages is also not tenable.

The Court of Appeals granted moral and exemplary damages because:

The findings of the court a quo that the defendant-appellant has committed breach of contract of carriage in bad faith and in wanton, disregard of plaintiff-appellant's rights as passenger laid the basis and justification of an award for moral damages.

x x x x

In the instant case, we find that defendant-appellant Korean Air Lines acted in a wanton, fraudulent, reckless, oppressive or malevolent manner when it "bumped off" plaintiff-appellant on November 8, 1980, and in addition treated him rudely and arrogantly as a "patay gutom na contract worker fighting Korean Air Lines," which clearly shows malice and bad faith, thus entitling plaintiff-appellant to moral damages.

x x x x

Considering that the plaintiff-appellant's entitlement to moral damages has been fully established by oral and documentary evidence, exemplary damages may be awarded. In fact, exemplary damages may be awarded, even though not so expressly pleaded in the complaint (Kapoe vs. Masa, 134 SCRA 231). By the same token, to provide an example for the public good, an award of exemplary damages is also proper (Armovit vs. Court of Appeals, supra).

On the other hand, Lapuz's claim that the award of P100,000.00 as moral and exemplary damages is inadequate is not acceptable either. His prayer for moral damages of not less than P1 million and exemplary damages of not less than P500,000.00 is overblown.

The well-entrenched principle is that moral damages depend upon the discretion of the court based on the circumstances of each case. 5 This discretion is limited by the principle that the "amount awarded should not be palpably and scandalously excessive" as to indicate that it was the result of prejudice or corruption on the part of the trial court. 6 Damages are not intended to enrich the complainant at the expense of the defendant. They are awarded only to alleviate the moral suffering that the injured party had undergone by reason of the defendant's culpable action. 7 There is no hard-and-fast rule in the determination of what would be a fair amount of moral damages since each case must be governed by its own peculiar facts.

A review of the record of this case shows that the injury suffered by Lapuz is not so serious or extensive as to warrant an award of P1.5 million. The assessment of P100,000 as moral and exemplary damages in his favor is, in our view, reasonable and realistic.

Lapuz likewise claims that the respondent court could not rule upon the propriety of the award of actual damages because it had not been assigned as an error by KAL. Not so. The rule is that only errors specifically assigned and properly argued in the brief will be considered except errors affecting jurisdiction over the subject matter and plain as well as clerical errors. 8 But this is not without qualification for, as the Court held in Vda. de Javellana vs. Court of Appeals: 9

. . . [T]he Court is clothed with ample authority to review matters, even if they are not assigned as errors in their appeal, if it finds that their consideration is necessary in arriving at a just decision of the case.

A similar pronouncement was made in Baquiran vs. Court of Appeals 10 in this wise:

Issues, though not specifically raised in the pleading in the appellate court, may, in the interest of justice, be properly considered by said court in deciding a case, if they are questions raised in the trial court and are matters of record having some bearing on the issue submitted which the parties failed to raise or the lower court ignored.

The Court of Appeals was therefore justified in decreasing the award of actual damages even if the issue was not assigned as an error by KAL. Consideration of this question was necessary for the just and complete resolution of the present case. Furthermore, there was enough evidence to warrant the reduction of the original award, as the challenged decision correctly observed:

A perusal of the plaintiff-appellant's contract of employment shows that the effectivity of the contract is for only one year, renewable every year for five years. Although plaintiff-appellant intends to renew his contract, such renewal will still be subject to his foreign employer. Plaintiff-appellant had not yet started working with his foreign employer, hence, there can be no basis as to whether his contract will be renewed by his foreign employer or not. Thus, the damages representing the loss of earnings of plaintiff-appellant in the renewal of the contract of employment is at most speculative. Damages may not be awarded on the basis of speculation or conjecture (Gachalian vs. Delim, 203 SCRA 126). Hence, defendant-appellant's liability is limited to the one year contract only. Plaintiff-appellant is, therefore, entitled only to his lost earnings for one year, i.e., P60,000.00, which is 1/5 of P300,000.00, the total amount of actual damages, representing lost earnings for five years prayed for in the Complaint.

Plaintiff-appellant's contention that in computing his lost earnings, the current rate of the Saudi Rial to the Philippine Peso at the time of payment should be used, is untenable, considering that in his Complaint, plaintiff-appellant has quantified in Philippine Peso his lost earnings for five years.

We disagree with the respondent court, however, on the date when the legal interest should commence to run. The rule is that the legal interest of six percent (6%) on the amounts adjudged in favor of Lapuz should resume from the time of the rendition of the trial court's decision instead of November 28, 1980, the date of the filing of the complaint.

On this matter, the Court has held:

If suit were for payment of a definite sum of money, the contention might be tenable. However, if it is for damages, unliquidated and not known until definitely ascertained, assessed and determined by the courts after proof, interest should be from the date of the decision. 11

x x x x

The obligation to pay interest on a sum filed in a judgment exists from the date of the sentence, when so declared; for until the net amount of the debtor's liability has been determined, he cannot he considered delinquent in the fulfillment of his obligation to pay the debt with interest thereon. 12

Finally, we find that the respondent court did not err in sustaining the trial court's dismissal of KAL's counterclaim against Pan Pacific Overseas Recruiting Services Inc., whose responsibility ended with the confirmation by KAL of Lapuz as its passenger in its Flight No. 903.

This is still another case of the maltreatment of our overseas contract workers, this time by the airline supposed to bring the passenger to his foreign assignment. Our OCW's sacrifice much in seeking employment abroad, where they are deprived of the company of their loved ones, the direct protection of our laws, and the comfort of our own native culture and way of life. This Court shall exert every effort to vindicate their rights when they are abused and shall accord them the commensurate reparation of their injuries consistent with their dignity and worth as members of the working class.

WHEREFORE, the appealed judgment is AFFIRMED, but with the modification that the legal interest on the damages awarded to private respondent should commence from the date of the decision of the trial court on November 14, 1990. The parties shall bear their own costs.

SO ORDERED.