G.R. No. L-19190 November 29, 1922

THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiff-appellee, vs. VENANCIO CONCEPCION, defendant-appellant.

Recaredo Ma. Calvo for appellant. Attorney-General Villa-Real for appellee.

MALCOLM, J.:

By telegrams and a letter of confirmation to the manager of the Aparri branch of the Philippine National Bank, Venancio Concepcion, President of the Philippine National Bank, between April 10, 1919, and May 7, 1919, authorized an extension of credit in favor of "Puno y Concepcion, S. en C." in the amount of P300,000. This special authorization was essential in view of the memorandum order of President Concepcion dated May 17, 1918, limiting the discretional power of the local manager at Aparri, Cagayan, to grant loans and discount negotiable documents to P5,000, which, in certain cases, could be increased to P10,000. Pursuant to this authorization, credit aggregating P300,000, was granted the firm of "Puno y Concepcion, S. en C.," the only security required consisting of six demand notes. The notes, together with the interest, were taken up and paid by July 17, 1919.

"Puno y Concepcion, S. en C." was a copartnership capitalized at P100,000. Anacleto Concepcion contributed P5,000; Clara Vda. de Concepcion, P5,000; Miguel S. Concepcion, P20,000; Clemente Puno, P20,000; and Rosario San Agustin, "casada con Gral. Venancio Concepcion," P50,000. Member Miguel S. Concepcion was the administrator of the company.

On the facts recounted, Venancio Concepcion, as President of the Philippine National Bank and as member of the board of directors of this bank, was charged in the Court of First Instance of Cagayan with a violation of section 35 of Act No. 2747. He was found guilty by the Honorable Enrique V. Filamor, Judge of First Instance, and was sentenced to imprisonment for one year and six months, to pay a fine of P3,000, with subsidiary imprisonment in case of insolvency, and the costs.

Section 35 of Act No. 2747, effective on February 20, 1918, just mentioned, to which reference must hereafter repeatedly be made, reads as follows: "The National Bank shall not, directly or indirectly, grant loans to any of the members of the board of directors of the bank nor to agents of the branch banks." Section 49 of the same Act provides: "Any person who shall violate any of the provisions of this Act shall be punished by a fine not to exceed ten thousand pesos, or by imprisonment not to exceed five years, or by both such fine and imprisonment." These two sections were in effect in 1919 when the alleged unlawful acts took place, but were repealed by Act No. 2938, approved on January 30, 1921.

Counsel for the defense assign ten errors as having been committed by the trial court. These errors they have argued adroitly and exhaustively in their printed brief, and again in oral argument. Attorney-General Villa-Real, in an exceptionally accurate and comprehensive brief, answers the proposition of appellant one by one.

The question presented are reduced to their simplest elements in the opinion which follows:

I. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." by Venancio Concepcion, President of the Philippine National Bank, a "loan" within the meaning of section 35 of Act No. 2747?

Counsel argue that the documents of record do not prove that authority to make a loan was given, but only show the concession of a credit. In this statement of fact, counsel is correct, for the exhibits in question speak of a "credito" (credit) and not of a " prestamo" (loan).

The "credit" of an individual means his ability to borrow money by virtue of the confidence or trust reposed by a lender that he will pay what he may promise. (Donnell vs. Jones [1848], 13 Ala., 490; Bouvier's Law Dictionary.) A "loan" means the delivery by one party and the receipt by the other party of a given sum of money, upon an agreement, express or implied, to repay the sum loaned, with or without interest. (Payne vs. Gardiner [1864], 29 N. Y., 146, 167.) The concession of a "credit" necessarily involves the granting of "loans" up to the limit of the amount fixed in the "credit,"

II. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C.," by Venancio Concepcion, President of the Philippine National Bank, a "loan" or a "discount"?

Counsel argue that while section 35 of Act No. 2747 prohibits the granting of a "loan," it does not prohibit what is commonly known as a "discount."

In a letter dated August 7, 1916, H. Parker Willis, then President of the National Bank, inquired of the Insular Auditor whether section 37 of Act No. 2612 was intended to apply to discounts as well as to loans. The ruling of the Acting Insular Auditor, dated August 11, 1916, was to the effect that said section referred to loans alone, and placed no restriction upon discount transactions. It becomes material, therefore, to discover the distinction between a "loan" and a "discount," and to ascertain if the instant transaction comes under the first or the latter denomination.

Discounts are favored by bankers because of their liquid nature, growing, as they do, out of an actual, live, transaction. But in its last analysis, to discount a paper is only a mode of loaning money, with, however, these distinctions: (1) In a discount, interest is deducted in advance, while in a loan, interest is taken at the expiration of a credit; (2) a discount is always on double-name paper; a loan is generally on single-name paper.

Conceding, without deciding, that, as ruled by the Insular Auditor, the law covers loans and not discounts, yet the conclusion is inevitable that the demand notes signed by the firm "Puno y Concepcion, S. en C." were not discount paper but were mere evidences of indebtedness, because (1) interest was not deducted from the face of the notes, but was paid when the notes fell due; and (2) they were single-name and not double-name paper.

The facts of the instant case having relation to this phase of the argument are not essentially different from the facts in the Binalbagan Estate case. Just as there it was declared that the operations constituted a loan and not a discount, so should we here lay down the same ruling.

III. Was the granting of a credit of P300,000 to the copartnership, "Puno y Concepcion, S. en C." by Venancio Concepcion, President of the Philippine National Bank, an "indirect loan" within the meaning of section 35 of Act No. 2747?

Counsel argue that a loan to the partnership "Puno y Concepcion, S. en C." was not an "indirect loan." In this connection, it should be recalled that the wife of the defendant held one-half of the capital of this partnership.

In the interpretation and construction of statutes, the primary rule is to ascertain and give effect to the intention of the Legislature. In this instance, the purpose of the Legislature is plainly to erect a wall of safety against temptation for a director of the bank. The prohibition against indirect loans is a recognition of the familiar maxim that no man may serve two masters — that where personal interest clashes with fidelity to duty the latter almost always suffers. If, therefore, it is shown that the husband is financially interested in the success or failure of his wife's business venture, a loan to partnership of which the wife of a director is a member, falls within the prohibition.

Various provisions of the Civil serve to establish the familiar relationship called a conjugal partnership. (Articles 1315, 1393, 1401, 1407, 1408, and 1412 can be specially noted.) A loan, therefore, to a partnership of which the wife of a director of a bank is a member, is an indirect loan to such director.

That it was the intention of the Legislature to prohibit exactly such an occurrence is shown by the acknowledged fact that in this instance the defendant was tempted to mingle his personal and family affairs with his official duties, and to permit the loan P300,000 to a partnership of no established reputation and without asking for collateral security.

In the case of Lester and Wife vs. Howard Bank ([1870], 33 Md., 558; 3 Am. Rep., 211), the Supreme Court of Maryland said:

What then was the purpose of the law when it declared that no director or officer should borrow of the bank, and "if any director," etc., "shall be convicted," etc., "of directly or indirectly violating this section he shall be punished by fine and imprisonment?" We say to protect the stockholders, depositors and creditors of the bank, against the temptation to which the directors and officers might be exposed, and the power which as such they must necessarily possess in the control and management of the bank, and the legislature unwilling to rely upon the implied understanding that in assuming this relation they would not acquire any interest hostile or adverse to the most exact and faithful discharge of duty, declared in express terms that they should not borrow, etc., of the bank.

In the case of People vs. Knapp ([1912], 206 N. Y., 373), relied upon in the Binalbagan Estate decision, it was said:

We are of opinion the statute forbade the loan to his copartnership firm as well as to himself directly. The loan was made indirectly to him through his firm.

IV. Could Venancio Concepcion, President of the Philippine National Bank, be convicted of a violation of section 35 of Act No. 2747 in relation with section 49 of the same Act, when these portions of Act No. 2747 were repealed by Act No. 2938, prior to the finding of the information and the rendition of the judgment?

As noted along toward the beginning of this opinion, section 49 of Act No. 2747, in relation to section 35 of the same Act, provides a punishment for any person who shall violate any of the provisions of the Act. It is contended, however, by the appellant, that the repeal of these sections of Act No. 2747 by Act No. 2938 has served to take away the basis for criminal prosecution.

This same question has been previously submitted and has received an answer adverse to such contention in the cases of United Stated vs. Cuna ([1908], 12 Phil., 241); People vs. Concepcion ([1922], 43 Phil., 653); and Ong Chang Wing and Kwong Fok vs. United States ([1910], 218 U. S., 272; 40 Phil., 1046). In other words, it has been the holding, and it must again be the holding, that where an Act of the Legislature which penalizes an offense, such repeals a former Act

which penalized the same offense, such repeal does not have the effect of thereafter depriving the courts of jurisdiction to try, convict, and sentenced offenders charged with violations of the old law.

V. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." by Venancio Concepcion, President of the Philippine National Bank, in violation of section 35 of Act No. 2747, penalized by this law?

Counsel argue that since the prohibition contained in section 35 of Act No. 2747 is on the bank, and since section 49 of said Act provides a punishment not on the bank when it violates any provisions of the law, but on aperson violating any provisions of the same, and imposing imprisonment as a part of the penalty, the prohibition contained in said section 35 is without penal sanction.lawph!l.net

The answer is that when the corporation itself is forbidden to do an act, the prohibition extends to the board of directors, and to each director separately and individually. (People vs. Concepcion, supra.)

VI. Does the alleged good faith of Venancio Concepcion, President of the Philippine National Bank, in extending the credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." constitute a legal defense?

Counsel argue that if defendant committed the acts of which he was convicted, it was because he was misled by rulings coming from the Insular Auditor. It is furthermore stated that since the loans made to the copartnership "Puno y Concepcion, S. en C." have been paid, no loss has been suffered by the Philippine National Bank.

Neither argument, even if conceded to be true, is conclusive. Under the statute which the defendant has violated, criminal intent is not necessarily material. The doing of the inhibited act, inhibited on account of public policy and public interest, constitutes the crime. And, in this instance, as previously demonstrated, the acts of the President of the Philippine National Bank do not fall within the purview of the rulings of the Insular Auditor, even conceding that such rulings have controlling effect.

Morse, in his work, Banks and Banking, section 125, says:

It is fraud for directors to secure by means of their trust, and advantage not common to the other stockholders. The law will not allow private profit from a trust, and will not listen to any proof of honest intent.

JUDGMENT

On a review of the evidence of record, with reference to the decision of the trial court, and the errors assigned by the appellant, and with reference to previous decisions of this court on the same subject, we are irresistibly led to the conclusion that no reversible error was committed in the trial of this case, and that the defendant has been proved guilty beyond a reasonable doubt of the crime charged in the information. The penalty imposed by the trial judge falls within the limits of the punitive provisions of the law.

Judgment is affirmed, with the costs of this instance against the appellant. So ordered.

Araullo, C. J., Johnson, Street, Avanceña, Villamor, Ostrand, Johns, and Romualdez, JJ., concur.

G.R. No. L-24968 April 27, 1972

SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee, vs. DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.

Mabanag, Eliger and Associates and Saura, Magno and Associates for plaintiff-appellee.

Jesus A. Avanceña and Hilario G. Orsolino for defendant-appellant.

MAKALINTAL, J.:p

In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was rendered on June 28, 1965 sentencing defendant Development Bank of the Philippines (DBP) to pay actual and consequential damages to plaintiff Saura Import and Export Co., Inc. in the amount of P383,343.68, plus interest at the legal rate from the date the complaint was filed and attorney's fees in the amount of P5,000.00. The present appeal is from that judgment.

In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the Rehabilitation Finance Corporation (RFC), before its conversion into DBP, for an industrial loan of P500,000.00, to be used as follows: P250,000.00 for the construction of a factory building (for the manufacture of jute sacks); P240,900.00 to pay the balance of the purchase price of the jute mill machinery and equipment; and P9,100.00 as additional working capital.

Parenthetically, it may be mentioned that the jute mill machinery had already been purchased by Saura on the strength of a letter of credit extended by the Prudential Bank and Trust Co., and arrived in Davao City in July 1953; and that to secure its release without first paying the draft, Saura, Inc. executed a trust receipt in favor of the said bank.

On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for P500,000.00, to be secured by a first mortgage on the factory building to be constructed, the land site thereof, and the machinery and equipment to be installed. Among the other terms spelled out in the resolution were the following:

1. That the proceeds of the loan shall be utilized exclusively for the following purposes:

For construction of factory building P250,000.00

For payment of the balance of purchase

price of machinery and equipment 240,900.00

For working capital 9,100.00

T O T A L P500,000.00

4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and Gregoria Estabillo and China Engineers, Ltd. shall sign the promissory notes jointly with the borrower-corporation;

5. That release shall be made at the discretion of the Rehabilitation Finance Corporation, subject to availability of funds, and as the construction of the factory buildings progresses, to be certified to by an appraiser of this Corporation;"

Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before, however, evidently having otherwise been informed of its approval, Saura, Inc. wrote a letter to RFC, requesting a modification of the terms laid down by it, namely: that in lieu of having China Engineers, Ltd. (which was willing to assume liability only to the extent of its stock subscription with Saura, Inc.) sign as co-maker on the corresponding promissory notes, Saura, Inc. would put up a bond for P123,500.00, an amount equivalent to such subscription; and that Maria S. Roca would be substituted for Inocencia Arellano as one of the other co-makers, having acquired the latter's shares in Saura, Inc.

In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating of the members of its Board of Governors, for certain reasons stated in the resolution, "to reexamine all the aspects of this approved loan ... with special reference as to the advisability of financing this particular project based on present conditions obtaining in the operations of jute mills, and to submit his findings thereon at the next meeting of the Board."

On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act as co-signer for the loan, and asked that the necessary documents be prepared in accordance with the terms and conditions specified in Resolution No. 145. In connection with the reexamination of the project to be financed with the loan applied for, as stated in Resolution No. 736, the parties named their respective committees of engineers and technical men to meet with each other and undertake the necessary studies, although in appointing its own committee Saura, Inc. made the observation that the same "should not be taken as an acquiescence on (its) part to novate, or accept new conditions to, the agreement already) entered into," referring to its acceptance of the terms and conditions mentioned in Resolution No. 145.

On April 13, 1954 the loan documents were executed: the promissory note, with F.R. Halling, representing China Engineers, Ltd., as one of the co-signers; and the corresponding deed of mortgage, which was duly registered on the following April 17.

It appears, however, that despite the formal execution of the loan agreement the reexamination contemplated in Resolution No. 736 proceeded. In a meeting of the RFC Board of Governors on June 10, 1954, at which Ramon Saura, President of Saura, Inc., was present, it was decided to reduce the loan from P500,000.00 to P300,000.00. Resolution No. 3989 was approved as follows:

RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc. under Resolution No. 145, C.S., from P500,000.00 to P300,000.00. Pursuant to Bd. Res. No. 736, c.s., authorizing the re-examination of all the various aspects of the loan granted the Saura Import & Export Co. under Resolution No. 145, c.s., for the purpose of financing the manufacture of jute sacks in Davao, with special reference as to the advisability of financing this particular project based on present conditions obtaining in the operation of jute mills, and after having heard Ramon E. Saura and after extensive discussion on the subject the Board, upon recommendation of the Chairman, RESOLVED that the loan granted the Saura Import & Export Co. be REDUCED from P500,000 to P300,000 and that releases up to P100,000 may be authorized as may be necessary from time to time to place the factory in actual operation: PROVIDED that all terms and conditions of Resolution No. 145, c.s., not inconsistent herewith, shall remain in full force and effect."

On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory note for China Engineers Ltd. jointly and severally with the other RFC that his company no longer to of the

loan and therefore considered the same as cancelled as far as it was concerned. A follow-up letter dated July 2 requested RFC that the registration of the mortgage be withdrawn.

In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be granted. The request was denied by RFC, which added in its letter-reply that it was "constrained to consider as cancelled the loan of P300,000.00 ... in view of a notification ... from the China Engineers Ltd., expressing their desire to consider the loan insofar as they are concerned."

On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC that China Engineers, Ltd. "will at any time reinstate their signature as co-signer of the note if RFC releases to us the P500,000.00 originally approved by you.".

On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original amount of P500,000.00, "it appearing that China Engineers, Ltd. is now willing to sign the promissory notes jointly with the borrower-corporation," but with the following proviso:

That in view of observations made of the shortage and high cost of imported raw materials, the Department of Agriculture and Natural Resources shall certify to the following:

1. That the raw materials needed by the borrower-corporation to carry out its operation are available in the immediate vicinity; and

2. That there is prospect of increased production thereof to provide adequately for the requirements of the factory."

The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December 22, 1954, wherein it was explained that the certification by the Department of Agriculture and Natural Resources was required "as the intention of the original approval (of the loan) is to develop the manufacture of sacks on the basis of locally available raw materials." This point is important, and sheds light on the subsequent actuations of the parties. Saura, Inc. does not deny that the factory he was building in Davao was for the manufacture of bags from local raw materials. The cover page of its brochure (Exh. M) describes the project as a "Joint venture by and between the Mindanao Industry Corporation and the Saura Import and Export Co., Inc. to finance, manage and operate a Kenafmill plant, to manufacture copra and corn bags, runners, floor mattings, carpets, draperies; out of 100% local raw materials, principal kenaf." The explanatory note on page 1 of the same brochure states that, the venture "is the first serious attempt in this country to use 100% locally grown raw materials notably kenaf which is presently grown commercially in theIsland of Mindanao where the proposed jutemill is located ..."

This fact, according to defendant DBP, is what moved RFC to approve the loan application in the first place, and to require, in its Resolution No. 9083, a certification from the Department of Agriculture and Natural Resources as to the availability of local raw materials to provide adequately for the requirements of the factory. Saura, Inc. itself confirmed the defendant's stand impliedly in its letter of January 21, 1955: (1) stating that according to a special study made by the Bureau of Forestry "kenaf will not be available in sufficient quantity this year or probably even next year;" (2) requesting "assurances (from RFC) that my company and associates will be able to bring in sufficient jute materials as may be necessary for the full operation of the jute mill;" and (3) asking that releases of the loan be made as follows:

a) For the payment of the receipt for jute mill machineries with the Prudential Bank &

Trust Company P250,000.00

(For immediate release)

b) For the purchase of materials and equip- ment per attached list to enable the jute mill to operate 182,413.91

c) For raw materials and labor 67,586.09

1) P25,000.00 to be released on the open- ing of the letter of credit for raw jute for $25,000.00.

2) P25,000.00 to be released upon arrival of raw jute.

3) P17,586.09 to be released as soon as the mill is ready to operate.

On January 25, 1955 RFC sent to Saura, Inc. the following reply:

Dear Sirs:

This is with reference to your letter of January 21, 1955, regarding the release of your loan under consideration of P500,000. As stated in our letter of December 22, 1954, the releases of the loan, if revived, are proposed to be made from time to time, subject to availability of funds towards the end that the sack factory shall be placed in actual operating status. We shall be able to act on your request for revised purpose and manner of releases upon re-appraisal of the securities offered for the loan.

With respect to our requirement that the Department of Agriculture and Natural Resources certify that the raw materials needed are available in the immediate vicinity and that there is prospect of increased production thereof to provide adequately the requirements of the factory, we wish to reiterate that the basis of the original approval is to develop the manufacture of sacks on the basis of the locally available raw materials. Your statement that you will have to rely on the importation of jute and your request that we give you assurance that your company will be able to bring in sufficient jute materials as may be necessary for the operation of your factory, would not be in line with our principle in approving the loan.

With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the matter further. Instead, it requested RFC to cancel the mortgage, and so, on June 17, 1955 RFC executed the corresponding deed of cancellation and delivered it to Ramon F. Saura himself as president of Saura, Inc.

It appears that the cancellation was requested to make way for the registration of a mortgage contract, executed on August 6, 1954, over the same property in favor of the Prudential Bank and Trust Co., under which contract Saura, Inc. had up to December 31 of the same year within which to pay its obligation on the trust receipt heretofore mentioned. It appears further that for failure to pay the said obligation the Prudential Bank and Trust Co. sued Saura, Inc. on May 15, 1955.

On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was cancelled at the request of Saura, Inc., the latter commenced the present suit for damages, alleging failure of RFC (as predecessor of the defendant DBP) to comply with its obligation to release the proceeds of the loan applied for and approved, thereby preventing the plaintiff from completing or paying contractual commitments it had entered into, in connection with its jute mill project.

The trial court rendered judgment for the plaintiff, ruling that there was a perfected contract between the parties and that the defendant was guilty of breach thereof. The defendant pleaded below, and reiterates in this appeal: (1) that the plaintiff's cause of action had prescribed, or that its claim had been waived or abandoned; (2) that there was no perfected contract; and (3) that assuming there was, the plaintiff itself did not comply with the terms thereof.

We hold that there was indeed a perfected consensual contract, as recognized in Article 1934 of the Civil Code, which provides:

ART. 1954. An accepted promise to deliver something, by way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be perferted until the delivery of the object of the contract.

There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan of P500,000.00 was approved by resolution of the defendant, and the corresponding mortgage was executed and registered. But this fact alone falls short of resolving the basic claim that the defendant failed to fulfill its obligation and the plaintiff is therefore entitled to recover damages.

It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption that the factory to be constructed would utilize locally grown raw materials, principally kenaf. There is no serious dispute about this. It was in line with such assumption that when RFC, by Resolution No. 9083 approved on December 17, 1954, restored the loan to the original amount of P500,000.00. it imposed two conditions, to wit: "(1) that the raw materials needed by the borrower-corporation to carry out its operation are available in the immediate vicinity; and (2) that there is prospect of increased production thereof to provide adequately for the requirements of the factory." The imposition of those conditions was by no means a deviation from the terms of the agreement, but rather a step in its implementation. There was nothing in said conditions that contradicted the terms laid down in RFC Resolution No. 145, passed on January 7, 1954, namely — "that the proceeds of the loan shall be utilizedexclusively for the following purposes: for construction of factory building — P250,000.00; for payment of the balance of purchase price of machinery and equipment — P240,900.00; for working capital — P9,100.00." Evidently Saura, Inc. realized that it could not meet the conditions required by RFC, and so wrote its letter of January 21, 1955, stating that local jute "will not be able in sufficient quantity this year or probably next year," and asking that out of the loan agreed upon the sum of P67,586.09 be released "for raw materials and labor." This was a deviation from the terms laid down in Resolution No. 145 and embodied in the mortgage contract, implying as it did a diversion of part of the proceeds of the loan to purposes other than those agreed upon.

When RFC turned down the request in its letter of January 25, 1955 the negotiations which had been going on for the implementation of the agreement reached an impasse. Saura, Inc. obviously was in no position to comply with RFC's conditions. So instead of doing so and insisting that the loan

be released as agreed upon, Saura, Inc. asked that the mortgage be cancelled, which was done on June 15, 1955. The action thus taken by both parties was in the nature cf mutual desistance — what Manresa terms "mutuo disenso" 1 — which is a mode of extinguishing obligations. It is a concept that derives from the principle that since mutual agreement can create a contract, mutual disagreement by the parties can cause its extinguishment. 2

The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against any alleged breach of contract by RFC, or even point out that the latter's stand was legally unjustified. Its request for cancellation of the mortgage carried no reservation of whatever rights it believed it might have against RFC for the latter's non-compliance. In 1962 it even applied with DBP for another loan to finance a rice and corn project, which application was disapproved. It was only in 1964, nine years after the loan agreement had been cancelled at its own request, that Saura, Inc. brought this action for damages.All these circumstances demonstrate beyond doubt that the said agreement had been extinguished by mutual desistance — and that on the initiative of the plaintiff-appellee itself.

With this view we take of the case, we find it unnecessary to consider and resolve the other issues raised in the respective briefs of the parties.

WHEREFORE, the judgment appealed from is reversed and the complaint dismissed, with costs against the plaintiff-appellee.

Reyes, J.B.L., Actg. C.J., Zaldivar, Castro, Fernando, Teehankee, Barredo and Antonio, JJ., concur.

Makasiar, J., took no part.

G.R. No. L-17474 October 25, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs. JOSE V. BAGTAS, defendant, FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by the late Jose V. Bagtas, petitioner-appellant.

D. T. Reyes, Liaison and Associates for petitioner-appellant. Office of the Solicitor General for plaintiff-appellee.

PADILLA, J.:

The Court of Appeals certified this case to this Court because only questions of law are raised.

On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau of Animal Industry three bulls: a Red Sindhi with a book value of P1,176.46, a Bhagnari, of P1,320.56 and a Sahiniwal, of P744.46, for a period of one year from 8 May 1948 to 7 May 1949 for breeding purposes subject to a government charge of breeding fee of 10% of the book value of the bulls. Upon the expiration on 7 May 1949 of the contract, the borrower asked for a renewal for another period of one year. However, the Secretary of Agriculture and Natural Resources approved a renewal thereof of only one bull for another year from 8 May 1949 to 7 May 1950 and requested the return of the other two. On 25 March 1950 Jose V. Bagtas wrote to the Director of Animal Industry that he would pay the value of the three bulls. On 17 October 1950 he reiterated his desire to buy them at a value with a deduction of yearly depreciation to be approved by the Auditor General. On 19 October 1950 the Director of Animal Industry advised him that the book value of the three bulls could not be reduced and that they either be returned or their book value paid not later than 31 October 1950. Jose V. Bagtas failed to pay the book value of the three bulls or to return them. So, on 20 December 1950 in the Court of First Instance of Manila the Republic of the Philippines commenced an action against him praying that he be ordered to return the three bulls loaned to him or to pay their book value in the total sum of P3,241.45 and the unpaid breeding fee in the sum of P199.62, both with interests, and costs; and that other just and equitable relief be granted in (civil No. 12818).

On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that because of the bad peace and order situation in Cagayan Valley, particularly in the barrio of Baggao, and of the pending appeal he had taken to the Secretary of Agriculture and Natural Resources and the President of the Philippines from the refusal by the Director of Animal Industry to deduct from the book value of the bulls corresponding yearly depreciation of 8% from the date of acquisition, to which depreciation the Auditor General did not object, he could not return the animals nor pay their value and prayed for the dismissal of the complaint.

After hearing, on 30 July 1956 the trial court render judgment —

. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value of the three bulls plus the breeding fees in the amount of P626.17 with interest on both sums of (at) the legal rate from the filing of this complaint and costs.

On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court granted on 18 October and issued on 11 November 1958. On 2 December 1958 granted an ex-parte motion filed by the plaintiff on November 1958 for the appointment of a special sheriff to serve the writ outside Manila. Of this order appointing a special sheriff, on 6 December 1958, Felicidad M. Bagtas, the

surviving spouse of the defendant Jose Bagtas who died on 23 October 1951 and as administratrix of his estate, was notified. On 7 January 1959 she file a motion alleging that on 26 June 1952 the two bull Sindhi and Bhagnari were returned to the Bureau Animal of Industry and that sometime in November 1958 the third bull, the Sahiniwal, died from gunshot wound inflicted during a Huk raid on Hacienda Felicidad Intal, and praying that the writ of execution be quashed and that a writ of preliminary injunction be issued. On 31 January 1959 the plaintiff objected to her motion. On 6 February 1959 she filed a reply thereto. On the same day, 6 February, the Court denied her motion. Hence, this appeal certified by the Court of Appeals to this Court as stated at the beginning of this opinion.

It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late defendant, returned the Sindhi and Bhagnari bulls to Roman Remorin, Superintendent of the NVB Station, Bureau of Animal Industry, Bayombong, Nueva Vizcaya, as evidenced by a memorandum receipt signed by the latter (Exhibit 2). That is why in its objection of 31 January 1959 to the appellant's motion to quash the writ of execution the appellee prays "that another writ of execution in the sum of P859.53 be issued against the estate of defendant deceased Jose V. Bagtas." She cannot be held liable for the two bulls which already had been returned to and received by the appellee.

The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huk in November 1953 upon the surrounding barrios of Hacienda Felicidad Intal, Baggao, Cagayan, where the animal was kept, and that as such death was due to force majeure she is relieved from the duty of returning the bull or paying its value to the appellee. The contention is without merit. The loan by the appellee to the late defendant Jose V. Bagtas of the three bulls for breeding purposes for a period of one year from 8 May 1948 to 7 May 1949, later on renewed for another year as regards one bull, was subject to the payment by the borrower of breeding fee of 10% of the book value of the bulls. The appellant contends that the contract was commodatum and that, for that reason, as the appellee retained ownership or title to the bull it should suffer its loss due to force majeure. A contract ofcommodatum is essentially gratuitous.1 If the breeding fee be considered a compensation, then the contract would be a lease of the bull. Under article 1671 of the Civil Code the lessee would be subject to the responsibilities of a possessor in bad faith, because she had continued possession of the bull after the expiry of the contract. And even if the contract be commodatum, still the appellant is liable, because article 1942 of the Civil Code provides that a bailee in a contract of commodatum —

. . . is liable for loss of the things, even if it should be through a fortuitous event:

(2) If he keeps it longer than the period stipulated . . .

(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event;

The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was renewed for another period of one year to end on 8 May 1950. But the appellant kept and used the bull until November 1953 when during a Huk raid it was killed by stray bullets. Furthermore, when lent and delivered to the deceased husband of the appellant the bulls had each an appraised book value, to with: the Sindhi, at P1,176.46, the Bhagnari at P1,320.56 and the Sahiniwal at P744.46. It was not stipulated that in case of loss of the bull due to fortuitous event the late husband of the appellant would be exempt from liability.

The appellant's contention that the demand or prayer by the appellee for the return of the bull or the payment of its value being a money claim should be presented or filed in the intestate proceedings of the defendant who died on 23 October 1951, is not altogether without merit. However, the claim

that his civil personality having ceased to exist the trial court lost jurisdiction over the case against him, is untenable, because section 17 of Rule 3 of the Rules of Court provides that —

After a party dies and the claim is not thereby extinguished, the court shall order, upon proper notice, the legal representative of the deceased to appear and to be substituted for the deceased, within a period of thirty (30) days, or within such time as may be granted. . . .

and after the defendant's death on 23 October 1951 his counsel failed to comply with section 16 of Rule 3 which provides that —

Whenever a party to a pending case dies . . . it shall be the duty of his attorney to inform the court promptly of such death . . . and to give the name and residence of the executory administrator, guardian, or other legal representative of the deceased . . . .

The notice by the probate court and its publication in the Voz de Manila that Felicidad M. Bagtas had been issue letters of administration of the estate of the late Jose Bagtas and that "all persons having claims for monopoly against the deceased Jose V. Bagtas, arising from contract express or implied, whether the same be due, not due, or contingent, for funeral expenses and expenses of the last sickness of the said decedent, and judgment for monopoly against him, to file said claims with the Clerk of this Court at the City Hall Bldg., Highway 54, Quezon City, within six (6) months from the date of the first publication of this order, serving a copy thereof upon the aforementioned Felicidad M. Bagtas, the appointed administratrix of the estate of the said deceased," is not a notice to the court and the appellee who were to be notified of the defendant's death in accordance with the above-quoted rule, and there was no reason for such failure to notify, because the attorney who appeared for the defendant was the same who represented the administratrix in the special proceedings instituted for the administration and settlement of his estate. The appellee or its attorney or representative could not be expected to know of the death of the defendant or of the administration proceedings of his estate instituted in another court that if the attorney for the deceased defendant did not notify the plaintiff or its attorney of such death as required by the rule.

As the appellant already had returned the two bulls to the appellee, the estate of the late defendant is only liable for the sum of P859.63, the value of the bull which has not been returned to the appellee, because it was killed while in the custody of the administratrix of his estate. This is the amount prayed for by the appellee in its objection on 31 January 1959 to the motion filed on 7 January 1959 by the appellant for the quashing of the writ of execution.

Special proceedings for the administration and settlement of the estate of the deceased Jose V. Bagtas having been instituted in the Court of First Instance of Rizal (Q-200), the money judgment rendered in favor of the appellee cannot be enforced by means of a writ of execution but must be presented to the probate court for payment by the appellant, the administratrix appointed by the court.

ACCORDINGLY, the writ of execution appealed from is set aside, without pronouncement as to costs.

Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala and Makalintal, JJ., concur. Barrera, J., concurs in the result.

G.R. No. L-46240 November 3, 1939

MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants, vs. BECK, defendant-appellee.

Mauricio Carlos for appellants. Felipe Buencamino, Jr. for appellee.

IMPERIAL, J.:

The plaintiff brought this action to compel the defendant to return her certain furniture which she lent him for his use. She appealed from the judgment of the Court of First Instance of Manila which ordered that the defendant return to her the three has heaters and the four electric lamps found in the possession of the Sheriff of said city, that she call for the other furniture from the said sheriff of Manila at her own expense, and that the fees which the Sheriff may charge for the deposit of the furniture be paid pro rata by both parties, without pronouncement as to the costs.

The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H. del Pilar street, No. 1175. On January 14, 1936, upon the novation of the contract of lease between the plaintiff and the defendant, the former gratuitously granted to the latter the use of the furniture described in the third paragraph of the stipulation of facts, subject to the condition that the defendant would return them to the plaintiff upon the latter's demand. The plaintiff sold the property to Maria Lopez and Rosario Lopez and on September 14, 1936, these three notified the defendant of the conveyance, giving him sixty days to vacate the premises under one of the clauses of the contract of lease. There after the plaintiff required the defendant to return all the furniture transferred to him for them in the house where they were found. On November 5, 1936, the defendant, through another person, wrote to the plaintiff reiterating that she may call for the furniture in the ground floor of the house. On the 7th of the same month, the defendant wrote another letter to the plaintiff informing her that he could not give up the three gas heaters and the four electric lamps because he would use them until the 15th of the same month when the lease in due to expire. The plaintiff refused to get the furniture in view of the fact that the defendant had declined to make delivery of all of them. On November 15th, before vacating the house, the defendant deposited with the Sheriff all the furniture belonging to the plaintiff and they are now on deposit in the warehouse situated at No. 1521, Rizal Avenue, in the custody of the said sheriff.

In their seven assigned errors the plaintiffs contend that the trial court incorrectly applied the law: in holding that they violated the contract by not calling for all the furniture on November 5, 1936, when the defendant placed them at their disposal; in not ordering the defendant to pay them the value of the furniture in case they are not delivered; in holding that they should get all the furniture from the Sheriff at their expenses; in ordering them to pay-half of the expenses claimed by the Sheriff for the deposit of the furniture; in ruling that both parties should pay their respective legal expenses or the costs; and in denying pay their respective legal expenses or the costs; and in denying the motions for reconsideration and new trial. To dispose of the case, it is only necessary to decide whether the defendant complied with his obligation to return the furniture upon the plaintiff's demand; whether the latter is bound to bear the deposit fees thereof, and whether she is entitled to the costs of litigation.lawphi1.net

The contract entered into between the parties is one of commadatum, because under it the plaintiff gratuitously granted the use of the furniture to the defendant, reserving for herself the

ownership thereof; by this contract the defendant bound himself to return the furniture to the plaintiff, upon the latters demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph 1, and 1741 of the Civil Code). The obligation voluntarily assumed by the defendant to return the furniture upon the plaintiff's demand, means that he should return all of them to the plaintiff at the latter's residence or house. The defendant did not comply with this obligation when he merely placed them at the disposal of the plaintiff, retaining for his benefit the three gas heaters and the four eletric lamps. The provisions of article 1169 of the Civil Code cited by counsel for the parties are not squarely applicable. The trial court, therefore, erred when it came to the legal conclusion that the plaintiff failed to comply with her obligation to get the furniture when they were offered to her.

As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the latter's demand, the Court could not legally compel her to bear the expenses occasioned by the deposit of the furniture at the defendant's behest. The latter, as bailee, was not entitled to place the furniture on deposit; nor was the plaintiff under a duty to accept the offer to return the furniture, because the defendant wanted to retain the three gas heaters and the four electric lamps.

As to the value of the furniture, we do not believe that the plaintiff is entitled to the payment thereof by the defendant in case of his inability to return some of the furniture because under paragraph 6 of the stipulation of facts, the defendant has neither agreed to nor admitted the correctness of the said value. Should the defendant fail to deliver some of the furniture, the value thereof should be latter determined by the trial Court through evidence which the parties may desire to present.

The costs in both instances should be borne by the defendant because the plaintiff is the prevailing party (section 487 of the Code of Civil Procedure). The defendant was the one who breached the contract ofcommodatum, and without any reason he refused to return and deliver all the furniture upon the plaintiff's demand. In these circumstances, it is just and equitable that he pay the legal expenses and other judicial costs which the plaintiff would not have otherwise defrayed.

The appealed judgment is modified and the defendant is ordered to return and deliver to the plaintiff, in the residence to return and deliver to the plaintiff, in the residence or house of the latter, all the furniture described in paragraph 3 of the stipulation of facts Exhibit A. The expenses which may be occasioned by the delivery to and deposit of the furniture with the Sheriff shall be for the account of the defendant. the defendant shall pay the costs in both instances. So ordered.

Avanceña, C.J., Villa-Real, Laurel, Concepcion and Moran, JJ., concur.

G.R. No. L-20240 December 31, 1965

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs. JOSE GRIJALDO, defendant-appellant.

Office of the Solicitor General for plaintiff-appellee. Isabelo P. Samson for defendant-appellant.

ZALDIVAR, J.:

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

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

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

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

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

The appellant appealed directly to this Court. During the pendency of this appeal the appellant Jose Grijaldo died. Upon motion by the Solicitor General this Court, in a resolution of May 13, 1963, required Manuel Lagtapon, Jacinto Lagtapon, Ruben Lagtapon and Anita L. Aguilar, who are the

legal heirs of Jose Grijaldo to appear and be substituted as appellants in accordance with Section 17 of Rule 3 of the Rules of Court.

In the present appeal the appellant contends: (1) that the appellee has no cause of action against the appellant; (2) that if the appellee has a cause of action at all, that action had prescribed; and (3) that the lower court erred in ordering the appellant to pay the amount of P2,377.23.

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

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

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

The appellant likewise maintains, in support of his contention that the appellee has no cause of action, that because the loans were secured by a chattel mortgage on the standing crops on a land owned by him and these crops were lost or destroyed through enemy action his obligation to pay the loans was thereby extinguished. This argument is untenable. The terms of the promissory notes and the chattel mortgage that the appellant executed in favor of the Bank of Taiwan, Ltd. do not support the claim of appellant. The obligation of the appellant under the five promissory notes was not to deliver a determinate thing namely, the crops to be harvested from his land, or the value of the crops that would be harvested from his land. Rather, his obligation was to pay a generic thing — the amount of money representing the total sum of the five loans, with interest. The transaction between the appellant and the Bank of Taiwan, Ltd. was a series of five contracts of simple loan of sums of money. "By a contract of (simple) loan, one of the parties delivers to another ... money or other consumable thing upon the condition that the same amount of the same kind and quality shall be

paid." (Article 1933, Civil Code) The obligation of the appellant under the five promissory notes evidencing the loans in questions is to pay the value thereof; that is, to deliver a sum of money — a clear case of an obligation to deliver, a generic thing. Article 1263 of the Civil Code provides:

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

The chattel mortgage on the crops growing on appellant's land simply stood as a security for the fulfillment of appellant's obligation covered by the five promissory notes, and the loss of the crops did not extinguish his obligation to pay, because the account could still be paid from other sources aside from the mortgaged crops.

In his second point of contention, the appellant maintains that the action of the appellee had prescribed. The appellant points out that the loans became due on June 1, 1944; and when the complaint was filed on January 17,1961 a period of more than 16 years had already elapsed — far beyond the period of ten years when an action based on a written contract should be brought to court.

This contention of the appellant has no merit. Firstly, it should be considered that the complaint in the present case was brought by the Republic of the Philippines not as a nominal party but in the exercise of its sovereign functions, to protect the interests of the State over a public property. Under paragraph 4 of Article 1108 of the Civil Code prescription, both acquisitive and extinctive, does not run against the State. This Court has held that the statute of limitations does not run against the right of action of the Government of the Philippines (Government of the Philippine Islands vs. Monte de Piedad, etc., 35 Phil. 738-751).Secondly, the running of the period of prescription of the action to collect the loan from the appellant was interrupted by the moratorium laws (Executive Orders No. 25, dated November 18, 1944; Executive Order No. 32. dated March 10, 1945; and Republic Act No. 342, approved on July 26, 1948). The loan in question, as evidenced by the five promissory notes, were incurred in the year 1943, or during the period of Japanese occupation of the Philippines. This case is squarely covered by Executive Order No. 25, which became effective on November 18, 1944, providing for the suspension of payments of debts incurred after December 31, 1941. The period of prescription was, therefore, suspended beginning November 18, 1944. This Court, in the case of Rutter vs. Esteban (L-3708, May 18, 1953, 93 Phil. 68), declared on May 18, 1953 that the Moratorium Laws, R.A. No. 342 and Executive Orders Nos. 25 and 32, are unconstitutional; but in that case this Court ruled that the moratorium laws had suspended the prescriptive period until May 18, 1953. This ruling was categorically reiterated in the decision in the case of Manila Motors vs. Flores, L-9396, August 16, 1956. It follows, therefore, that the prescriptive period in the case now before US was suspended from November 18,1944, when Executive Orders Nos. 25 and 32 were declared unconstitutional by this Court. Computed accordingly, the prescriptive period was suspended for 8 years and 6 months. By the appellant's own admission, the cause of action on the five promissory notes in question arose on June 1, 1944. The complaint in the present case was filed on January 17, 1961, or after a period of 16 years, 6 months and 16 days when the cause of action arose. If the prescriptive period was not interrupted by the moratorium laws, the action would have prescribed already; but, as We have stated, the prescriptive period was suspended by the moratorium laws for a period of 8 years and 6 months. If we deduct the period of suspension (8 years and 6 months) from the period that elapsed from the time the cause of action arose to the time when the complaint was filed (16 years, 6 months and 16 days) there remains a period of 8 years and 16 days. In other words, the prescriptive period ran for only 8 years and 16 days. There still remained a period of one year, 11 months and 14 days of the prescriptive period when the complaint was filed.

In his third point of contention the appellant maintains that the lower court erred in ordering him to pay the amount of P2,377.23. It is claimed by the appellant that it was error on the part of the lower court to apply the Ballantyne Scale of values in evaluating the Japanese war notes as of June 1943 when the loans were incurred, because what should be done is to evaluate the loans on the basis of the Ballantyne Scale as of the time the loans became due, and that was in June 1944. This contention of the appellant is also without merit.

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

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

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

IN VIEW OF THE FOREGOING, the decision appealed from is affirmed, with costs against the appellant. Inasmuch as the appellant Jose Grijaldo died during the pendency of this appeal, his estate must answer in the execution of the judgment in the present case.

Bengzon, C.J., Concepcion, Barrera, Regala, Bautista Angelo, Reyes, J.B.L., Makalintal and Bengzon, J.P., JJ.,concur.

[1991V329] PHILIPPINE NATIONAL BANK, petitioner, vs. THE HON. COURT OF APPEALS and AMBROSIO

PADILLA, respondents.

The Chief Legal Counsel for petitioner.

Ambrosio Padilla, Mempin & Reyes Law Offices for private respondent.

1991 Apr 301st Division

G.R. No. 88880 D E C I S I O N

GRIÑO-AQUINO, J.:

The Philippine National Bank (PNB) has appealed by certiorari from the decision promulgated on June

27, 1989 by the Court of Appeals in CA-G.R. CV No. 09791 entitled, "AMBROSIO PADILLA, plaintiff-

appellant versus PHILIPPINE NATIONAL BANK, defendant-appellee," reversing the decision of the trial

court which had dismissed the private respondent's complaint "to annul interest increases." (p. 32,

Rollo.) The Court of Appeals rendered judgment:

". . . declaring the questioned increases of interest as unreasonable, excessive and arbitrary and

ordering the defendant-appellee [PNB] to refund to the plaintiff-appellant the amount of interest

collected from July, 1984 in excess of twenty-four percent (24%) per annum. Costs against the

defendant-appellee." (pp 14-15, Rollo.)

In July 1982, the private respondent applied for, and was granted by petitioner PNB, a credit line of

321.8 million, secured by a real estate mortgage, for a term of two (2) years, with 18% interest per

annum. Private respondent executed in favor of the PNB a Credit Agreement, two (2) promissory notes

in the amount of P900,000.00 each, and a Real Estate Mortgage Contract.

The Credit Agreement provided that

"9.06 Other Conditions. The Borrowers hereby agree to be bound by the rules and regulations of the

Central Bank and the current and general policies of the Bank and those which the Bank may adopt in

the future, which may have relation to or in any way affect the Line, which rules, regulations and policies

are incorporated herein by reference as if set forth herein in full. Promptly upon receipt of a written

request from the Bank, the Borrowers shall execute and deliver such documents and instruments, in

form and substance satisfactory to the Bank, in order to effectuate or otherwise comply with such rules,

regulations and policies." (p. 85, Rollo.)

The Promissory Notes, in turn, uniformly authorized the PNB to increase the stipulated 18% interest per

annum "within the limits allowed by law at any time depending on whatever policy it [PNB] may adopt

in the future; Provided, that, the interest rate on this note shall be correspondingly decreased in the

event that the applicable maximum interest rate is reduced by law or by the Monetary Board." (pp. 85-

86, Rollo; emphasis ours.)

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 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." (p. 86, Rollo; mphasis supplied.)

Four (4) months advance interest and incidental expenses/charges were deducted from the loan, the

net proceeds of which were released to the private respondent by crediting or transferring the amount

to his current account with the bank.

On June 20, 1984, PNB informed the private respondent that (1) his credit line of P1.8 million "will

expire on July 4, 1984,"(2) "[i]f renewal of the line for another year is intended, please submit soonest

possible your request," and (3) the "present policy of the Bank requires at least 30% reduction of

principal before your line can be renewed." (pp. 86-87, Rollo.) Complying, private respondent on June

25, 1984, paid PNB P540,000 00 (30% of P1.8 million)

and requested that "the balance of P1,260,000.00 be renewed for another period of two (2) years under

the same arrangement" and that "the increase of the interest rate of my mortgage loan be from 18% to

21%" (p. 87, Rollo.).

On July 4, 1984, private respondent paid PNB P360,000.00.

On July 18, 1984, private respondent reiterated in writing his request that "the increase in the rate of

interest from 18% be fixed at 21% of 24%. (p. 87, Rollo.)

On July 26, 1984, private respondent made an additional payment of P100,000.

On August 10, 1984, PNB informed private respondent that "we can not give due course to your request

for preferential interest rate in view of the following reasons: Existing Loan Policies of the bank requires

32% for loan of more than one year; our present cost of funds has substantially increased." (pp. 8788,

Rollo.)

On August 17, 1984, private respondent further paid PNB P150,000.00.

In a letter dated August 24, 1984 to PNB, private respondent announced that he would "continue

making further payments, and instead of a 'loan of more than one year,' I shall pay the said loan before

the lapse of one year or before July 4, 1985. . . . I reiterate my request that the increase of my rate of

interest from 18% 'be fixed at 21% or 24%.'" (p. 88, Rollo.)

On September 12, 1984, private respondent paid PNB P160,000.00.

In letters dated September 12, 1984 and September 13, 1984, PNB informed private respondent that

"the interest rate on your outstanding line/loan is hereby adjusted from 32% p.a. to 41% p.a. (35%

prime rate + 6%) effective September 6, 1984;" and further explained "why we can not grant your

request for a lower rate of 21% or 24%." (pp. 88-89, Rollo.)

In a letter dated September 24, 1984 to PNB, private respondent registered his protest against the

increase of interest rate from 18% to 32% on July 4,

1984 and from 32% to 41% on September 6, 1984.

On October 15, 1984, private respondent reiterated his request that the interest rate should not be

increased from 18% to 32% and from 32% to 41%. He also attached (as payment) a check for

P140,000.00.

Like rubbing salt on the private respondent's wound, the petitioner informed private respondent on

October 29, 1984, that "the interest rate on your outstanding line/loan is hereby adjusted from 41% p.a.

to 48% p.a. (42% prime rate plus 6% spread) effective 25 October 1984." (p. 89, Rollo.)

In November 1984, private respondent paid PNB P50,000.00 thus reducing his principal loan obligation

to P300,000.00.

On December 18, 1984, private respondent filed in the Regional Trial Court of Manila a complaint

against PNB entitled, "AMBROSIO PADILLA vs. PHILIPPINE NATIONAL BANK" (Civil Case No. 84-28391),

praying that judgment be rendered:

"a. Declaring that the unilateral increase of interest rates from 18% to 32%, then to 41% and again to

48% are illegal, not valid nor binding on plaintiff, and that an adjustment of his interest rate from 18% to

24% is reasonable, fair and just;

"b. The interest rate on the P900,000.00 released on September 27, 1982 be counted from said date

and not from July 4, 1984;

"c. The excess of interest payment collected by defendant bank by debiting plaintiffs current account

be refunded to plaintiff or credited to his current account;

"d. Pending the determination of the merits of this case, a restraining order and or a writ of preliminary

injunction be issued (1) to restrain and or enjoin defendant bank for [sic] collecting from plaintiff and/or

debiting his current account with illegal and excessive increases of interest rates; and (2) to prevent

defendant bank from declaring plaintiff in default for non-payment and from instituting any foreclosure

proceeding, extrajudicial or judicial, of the valuable commercial property of plaintiff." (pp. 89-90, Rollo.)

In its answer to the complaint, PNB denied that the increases in interest rates were illegal, unilateral

excessive and arbitrary and recited the reasons justifying said increases.

On March 31, 1985, the private respondent paid the P300,000 balance of his obligation to PNBN (Exh. 5).

The trial court rendered judgment on April 14, 1986, dismissing the complaint because the increases of

interest were properly made.

The private respondent appealed to the Court of Appeals. On June 27, 1989, the Court of Appeals

reversed the trial court, hence, NB's recourse to this Court by a petition for review under Rule 45 of the

Rules of Court.

The assignments of error raised in PNB's petition for review can be resolved into a single legal issue of

whether the bank, within the term of the loan which it granted to the private respondent, may

unilaterally change or increase the interest rate stipulated therein at will and as often as it pleased.

The answer to that question is no.

In the first place, although Section 2, PD. No. 116 of January 29, 1973, authorizes the Monetary Board to

prescribe the maximum rate or rates of interest for loans or renewal thereof and to change such rate or

rates whenever warranted by prevailing economic and social conditions, it expressly provides that "such

changes shall not be made oftener than once every twelve months."

In this case, PNB, over the objection of the private respondent, and without authority from the

Monetary Board, within a period of only four (4) months, increased the 18% interest rate on the private

respondent's loan obligation three (3) times: (a) to 32% in July 1984; (b) to 41% in October 1984; and (c)

to 48% in November 1984. Those increases were null and void, for if the Monetary Board itself was not

authorized to make such changes oftener than once a year, even less so may a bank which is

subordinate to the Board.

Secondly, as pointed out by the Court of Appeals, while the private respondent-debtor did agree in the

Deed of Real Estate Mortgage (Exh. 5) that the interest rate may be increased during the life of the

contract "to such increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE

may prescribe" (Exh. 5-e-1) or "within the limits allowed by law" (Promissory Notes, Ex's. 2, 3, and 4), no

law was ever passed in July to November 1984 increasing the interest rates on loans or renewals thereof

to 32%, 41% and 48% (per annum), and no documents were executed and delivered by the debtor to

effectuate the increases. The Court of Appeals observed.

". . . We focus Our attention first of all on the agreement between the parties as embodied in the

following instruments, to wit: (1) Exhibit '1' Credit Agreement dated July 1, 1982; (2) Exhibit '2'

Promissory Note dated July 5, 1982; (3) Exhibit '(3)' Promissory Note dated January 3, 1983; (4) Exhibit

'4' Promissory Note, dated December 13, 1983; and (5) Exhibit '5' Real Estate Mortgage contract dated

July 1, 1982.

"Exhibit '1' states in its portion marked Exhibit '1-g-1':

'9 .06 Other Conditions. The Borrowers hereby agree to be bound by the rules and regulations of the

Central Bank and the current and general policies of the Bank and those which the Bank may adopt in

the future, which may have relation to or in any way affect the Line, which rules, regulations and policies

are incorporated herein by reference as if set forth herein in full. Promptly upon receipt of a written

request from the Bank, the Borrowers shall execute and deliver such documents and instruments, in

form and substance satisfactory to the Bank, in order to effectuate or otherwise comply with such rules,

regulations and policies.'

"Exhibits '2,' '3,' and '4' in their portions respectively marked Exhibits '2-B,' '3-B,' and '4-B' uniformly

authorize the defendant bank to increase the stipulated interest rate of 18% per annum 'within the

limits allowed by law at any time depending on whatever policy it may adopt in the future: Provided,

that, the interest rate on this note shall be correspondingly decreased in the event that the applicable

maximum interest rate is reduced by law or by the Monetary Board.'

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

'(k) INCREASE OF INTEREST RATE

'The rate of interest charged on the obligation secured by this mortgage as well as the interest on the

amount which may have been advanced by the MORTGAGEE, in accordance with the provisions hereof,

shall be subject during the life of this contract to such an increase within the rate allowed by law, as the

Board of Directors of the MORTGAGEE may prescribe for its debtors.'

"Clearly, then, the agreement between the parties authorized the defendant bank to increase the

interest rate beyond the original rate of 18% per annum but 'within the limits allowed by law' or 'within

the rate allowed by law,' it being declared the obligation of the plaintiff as borrower to execute and

deliver the corresponding documents and instruments to effectuate the increase." (pp. 11-12, Rollo.)

In Banco Filipino Savings and Mortgage Bank vs. Navarro, 15 SCRA 346 (1987), this Court disauthorized

the bank from raising the interest rate on the borrowers' loan from 12% to 17% despite an escalation

clause in the loan agreement signed by the debtors authorizing 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."

In the Banco Filipino case, the bank relied on Section 3 of CB Circular No. 494 dated July 1, 1976 (72 O.G.

No. 3, p. 676-J) which provided that "the maximum rate of interest, including commissions premiums,

fees and other charges on loans with a maturity of more than 730 days by banking institution . . . shall

be 19%."

This Court disallowed the increase for the simple reason that said "Circular No. 494, although it has the

effect of law is not a law." Speaking through Mme. Justice Ameurfina M. Herrera, this Court held:

"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.'" p.

111, Rollo.).

In the present case, the PNB relied on its own Board Resolution No. 681 (Exh. 10), PNB Circular No. 40-

79-84 (Exh. 13), and PNB Circular No. 40-129-84 (Exh. 15), but those resolution and circulars are neither

laws nor resolutions of the Monetary Board.

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 PD. 116

which limits such changes to "once every twelve months."

Besides violating PD. 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. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left

to the will of one of them."

In order that obligations arising from contracts may have the force of law between the parties, there

must be mutuality between the parties based on their essential equality. A contract containing a

condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the

contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555).

Hence, even assuming that the P1.8 million loan agreement between the PNB and the private

respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will

during the term of the loan, that license would have been null and void for being violative of the

principle of mutuality essential in contracts. It would have invested the loan agreement with the

character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker

party's (the debtor) participation being reduced to the alternative "to take it or leave it" (Qua vs. Law

Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom

the courts of justice must protect against abuse and imposition.

PNB'S successive increases of the interest rate on the private respondent's loan, over the latter's

protest, were arbitrary as they violated an express provision of the Credit Agreement (Exh. 1) Section

9.01 that its terms "may be amended only by an instrument in writing signed by the party to be bound

as burdened by such amendment." The increases imposed by PNB also contravene Art. 1956 of the Civil

Code which provides that "no interest shall be due unless it has been expressly stipulated in writing."

The debtor herein never agreed in writing to pay the interest increases fixed by the PNB beyond 24% per

annum, hence, he is not bound to pay a higher rate than that.

That an increase in the interest rate from 18% to 48% within a period of four (4) months is excessive, as

found by the Court of Appeals, is indisputable.

WHEREFORE, finding no reversible error in the decision of the Court of Appeals in CA-G.R. CV No. 09791,

the Court resolved to deny the petition for review for lack of merit, with costs against the petitioner.

SO ORDERED.

Narvasa (Chairman), Cruz, Gancayco and Medialdea, JJ., concur.

G.R. No. L-26058 October 28, 1977

AMPARO JOVEN DE CORTES & NOEL J. CORTES (Jesus Noel plaintiff-appellees, vs. MARY E. VENTURANZA, ETC., JOSE OLEDAN & ERLINDA M. OLEDAN, defendants-appellants.

Delia L. Hermoso for appellants the Venturanzas.

Ang. Atienza, Tabora & Del Rosario for appellants the Oledans, Bernardo Guerrero & Associates for appellees.

MAKASIAR, J.:t êñ.£îhqwâ£

Direct appeal by the defendants-appellants from the decision of the Court of First Instance of Bulacan against them in its Civil Case No. 2693, entitled "Felix Cortes y Ochoa, and Noel J. Cortes (Jesus Noel plaintiffs, versus Gregorio Venturanza, Mary E. Venturanza, Jose Oledan and Erlinda M. Oledan, defendants."

The original plaintiffs in this case were Felix Cortes y Ochoa and Noel J. Cortes, and the original defendants were Gregorio Venturanza, Mary E. Venturanza, Jose Oledan and Erlinda M. Oledan. On December 11, 1967, defendant Gregorio Venturanza died. Accordingly, as prayed for by appellees, Mary E. Venturanza, Edna Lucille, Greymar, Sylvia, Edward and Mary Grace, all surnamed Venturanza, surviving spouse and children of the deceased Gregorio Venturanza, were substituted as appellants, in place of the deceased, by resolution of this Court dated February 28, 1968. On September 12, 1968, Felix Cortes y Ochoa died. Appellees, through counsel, thereupon filed a petition praying that the title of this case be changed to read: "Amparo Joven de Cortes and Noel J. Cortes (Jesus Noel plaintiffs-appellant, versus Mary E. Venturanza, etc., Jose Oledan and Erlinda M. Oledan, defendants-appellants," which petition was granted by this Court in its resolution dated April 11, 1969.

The background facts may be gleaned from the pertinent portions of the decision of the court a quo, as follows:ñé+.£ªwph!1

Plaintiff Felix Cortes y Ochoa and Noel J. Cortes filed the instant action for foreclosure of real estate against the defendants Gregorio Venturanza, Mary E. Venturanza, Jose Oledan and Erlinda M. Oledan. The complaint alleges that plaintiff Felix Cortez y Ochoa was the original owner of nine (9) parcels of land covered by Transfer Certificates of Title Nos. 21334 to 21342, inclusive, while plaintiff Noel J. Cortes was likewise the original owner of twenty-four (24) parcels of land covered by Transfer Certificates off Title Nos. 21343, 21345, 21347 to 21367, inclusive, all of the land records of Bulacan; that on October 24, 1958 said plaintiffs sold and delivered to the defendants all the above-mentioned thirty-three (33) parcels of land with all the improvements thereon for the total sum of P716,573.90 of which defendants agreed to pay jointly and severally the plaintiffs the sum of P100,000.00 upon the signing and execution of a deed of sale and P40,000.00 on January 1, 1959 thereby leaving a balance of P576,573.90 which the defendants agreed and bound themselves to pay plaintiffs jointly and severally within three (3) years from January 1, 1959 with interest thereon at the rate of 6% per annum; that defendants further agreed and bound themselves to secure the payment of the said balance of P576,573.90 with a first mortgage upon the said 33 parcels of land with improvements; that the

defendants have already paid the plaintiffs the total sum of P140,000.00; that of the unpaid balance owing to plaintiffs, P169,484.24 pertaining to plaintiff Felix Cortes and P407,089.66 pertains to plaintiff Noel J. Cortes; that upon the registration of the deed of sale and mortgage with the office of the register of deeds of Bulacan new certificates of title for the 33 parcels of land were issued in the names of the defendants and the mortgage obligation was noted thereon; that the mortgage obligation fell due on January 1, 1962, but despite repeated demands for payment, defendants failed and refused to pay the said balance of P576,573.90 to plaintiffs; that from the time the mortgage obligation fell due and demandable up to December 1, 1962 the total interest due from the defendants on the balance of their obligation is P103,783.32 computer led at the stipulated interest of 6% per annum; that it is stipulated in the deed of sale with purchase money mortgage that in the event or default by defendants to pay the obligation secured by the mortgage and a suit is brought for the foreclosure of the mortgage or any other legal proceedings is instituted for the enforcement of plaintiffs' right, defendants would be obligated and hound to pay the plaintiffs reasonable compensation for attorney's fees which plaintiffs fixed at P50,000.00.

Defendants Spouses Venturanza admit the allegations of the complaint regarding plaintiffs's former ownership of the lands in question as well as their execution of the mortgage in favor of plaintiffs but allege that they are at present the registered owners of the same parcels of land by virtue of the sale thereof made to them; they likewise admit the allotment of payment to plaintiffs of the balance of their obligation but allege that the said balance has not yet become due and demandable so that they have not incurred in default. As special affirmative defense defendants Venturanza allege that the document designated as deed of sale with purchase money mortgage does not express the true intent and agreement of the parties with respect to the manner of payment of the balance of the purchase price, the truth being that defendants will pay the balance of the purchase price in,the amount of P576,573.90 to the plaintiffs, and the latter agreed, as soon as defendants will have received from the Land Tenure Administration the purchase price of their (defendants') hacienda in Bugo, Cagayan de Oro in the amount of P360,000.00 which hacienda is the object of exporpiration proceedings before the Court of First Instance of said City; that it was agreed moreover that defendants will complete payment of the balance of the purchase price upon the consummation of the sale of their other hacienda at Buhi, Camarines Sur to one Mr. De Castro for P837, 00.00 more or less; that this negotiation was known to plaintiffs who agreed to wait for the sale of the same properties by defendants; that the property in question was bought by defendant for speculative purposes. As second special and affirmative defenses defendants allege that the deed of sale with purchase money mortgage had been novated by a subsequent agreement regarding the manner and period of payment to be made by defendants and that, therefore, the cause of action has not yet accrued.

Defendants Jose Oledan and Erlinda M. Oledan deny the material allegations of the complaint with respect to the mortgage obligation alleging that plaintiffs cause of action against them has been extinguished and, therefore did not become due against them on January 1, 1962; that even as regards their co-defendants Venturanzas the mortgage obligation did not become due on January 1, 1962 there hating been a novation of the original agreement which affected material changes in the manner and condition of time of payment of the balance of the mortgage obligation. By way of affirmative defenses defendants Oledans alleged that the deed of sale with purchase money mortgage fails to express the true intent and agreement of the parties thereto insofar as the nature of the liability of the defendants is

concerned, the true intention being to hold them (defendants Oledan) obligated unto plaintiffs only to the extent of the proportion of their share, ownership and interests in the property conveyed; that their obligation to plaintiffs has been extinguished by novation; that their obligation to plaintiffs has been extinguished by the assumption of the obligation by defendants Venturanza as provided for in the agreement among defendants dated December 28, 1959, such assumption of the obligation being inside' with full knowledge (of) and consent of plaintiffs which partakes of the character of a novation of the original agreement and that by their failure to seasonably interrupt any opposition to the assumption of any obligation by defendants Venturanza and to take appropriate action thereon, plaintiffs have waived their right to proceed against them.

By way of cross-claim against their co-defendants Venturanza, defendants Oledan allege that on December 28, 1958 they and their co-defendants executed and entered into an agreement whereby they sold, transferred unto their co-defendants all their shares, ownership and interest in the property subject of a deed of sale with purchase money mortgage for and in consideration of the sum of P44,571.66 payable at the time and in the manner specified in the written agreement; that of the aforementioned consideration cross-defendants have paid to them the sum of P22,285.83 thereby leaving a balance still due and unpaid in the amount of P22,285.83 which cross-defendants have failed to pay within the period stipulated in their agreement; that it is further stipulated in their agreement with cross-defendants that in the event of failure by the latter to pay the said balance within the period agreed upon they (cross-defendants) shall pay to them the sum of P6,367.30 for the period August 8, 1960 to August 28, 1961; another amount of P6,367.30 for the period August 28,1961 to August 28, 1962 and still another amount of P6,367.30 for the period August 28, 1963 by way of penalty, which despite repeated demands cross-defendants have failed to pay; that it is further stipulated in their agreement that in the event of default on the part of cross-defendants, interest in the legal rate of 6% per annum shall be borne by the unpaid balance in the amount of P22,285.83 plus the penalties aforementioned.

By way of counter-claim, defendants-cross-plaintiffs allege that at the time defendants executed the agreement dated December 28, 1958 plaintiffs had full knowledge of and gave their consent to the transfer of their shares, ownership and interest in favor of their co-defendants, as well as the assumption by the latter of the mortgage obligation; that despite such knowledge and consent, plaintiffs induced cross-defendants not to register the agreement and effect the issuance of new transfer certificate of title in the name solely of defendants Venturanza, evidently for the purpose of preversing cause of action against them under the deed of sale with purchase money mortgage; that as a consequence of plaintiffs' injurious and malicious suit against them they suffered mental anguish, serious anxiety, besmirched reputation and moral shock on the basis of which plaintiffs should he held answerable to them in moral damages in the amount of P100,000.00 aside from exemplary damages; and that a, a consequence of plaintiffs' having filed the instant action against them they were compelled to engage the services of counsel and incurred expenses of litigation in the total amount of P20,000.00 for which plaintiffs should be held liable to them (pp. 93-100, Corrected Rec. on Appeal, pp. 320-323, rec ).

After due trial, the court a quo rendered its judgment with the following rationale and dispositive portion:ñé+.£ªw ph!1

There is no question that defendants are indebted to plaintiffs on the mortgage executed by them contained in the document denominated as 'Deed of Sale with Purchase Money Mortgage' (Exhibit 'A') to the tune of P576,573.90 with interest thereon at the stipulate rate of 6% per annum. The pertinent portion of the document in question is quoted, as follows:ñé+.£ªwph!1

'(c) The remaining balance of the purchase price, after deducting the sums of P100,000.00 and P40,000.00, mentioned in Paragraphs (a) and (b) of this Article II, aggregating the sum of Five Hundred Seventy Six Thousand Five Hundred Seventy Three Pesos and Ninety Centavos (P576,573.90) shall be paid jointly and severally, by the vendees to the vendors within three (3) Nears from January 1, 1959, with interest thereon at the rate of six per annum, until fully paid, of which the sum of P169,484.24, plus the corresponding interest thereon, shall be paid by the vendees to the vendor, Felix Cortes y Ochoa, and the balance of P407,089.66, plus the corresponding interest thereon, shall be paid by the Vendees to the Vendor, Noel J. Cortes.'

Defendants do not deny their failure to make good their obligation to pay plaintiffs the balance of the purchase price within the three-year period agreed upon in their document. However, defendants Venturanzas explained their failure as being due to their inability to collect the payment of the sale of their own property located in Buhi, Camarines Sur, and Bugo, Cagayan de Oro. in this connection, we are again quoting a specific provision of the agreement between the parties as regards the payment of the obligation, thus:ñé+.£ªw ph!1

C. In the event that the vendees shall fail to pay to the vendors, in the form and manner provided in Paragraphs (b) and (c) of Article II hereof, the said sums of P40,000.00 and P576,573.90, and the interest thereon, or should the vendees make default in the performance of any one or more of the conditions stipulated herein, the Vendors shall have the right, at their election, to foreclos(ur)e this mortgage, and to that end the vendors are hereby appointed the attorneys-in-fact for the Vendees with full power of substitution, to enter upon and take possession of the mortgaged properties, without the order of any court or any other authority other than herein granted, and to sell and dispose of the same to the highest bidder at public auction, ... .'

Defendants claim that there had been a novation of the contract between them and plaintiffs on account of the transfer made by defendants Oledans of their interest in the property in favor of their defendants Venturanzas, with the knowledge and consent of the plaintiffs As regards this claim of defendants, we have another pertinenent provision of their contract which reads as follows:ñé+.£ªw ph!1

'B. The vendees may, during the existence of this mortgage, sell the property hereby mortgaged, or any part thereof, or encumber the same with a second mortgage, with the previous written consent of the vendors. ... .'

In view of the foregoing stipulations in the contract between the parties, while plaintiffs may have knowledge of the transfer made by defendants Oledans of their interest in the property in question in favor of their co-defendants, yet insofar as the original contract between plaintiffs and defendants are concerned, 'the provisions thereof shall govern. For plaintiffs' written consent to any transfer is required by the provisions of their contract. Since defendants were of the said provision, they should have taken steps to obtain plaintiffs' written consent if only to effect a novation. To the mind of the court, it must have been due to a premonition on the part of plaintiffs that there might be a substitution of debtor that gave rise to the incIusion of the aforequoted provision in their original contract.

It having been satisfactorily established that defendants are indeed indebted to plaintiffs on the mortgage constituted by them over the parcels of land in question, the period of payment of the obligations having become due, plaintiffs are, therefore, entitled to a foreclosure of the said mortgage.

The next question that crops up for determination is whether or not defendants Oledans have a right against their co-defendants Venturanzas in this case. Exhibit 1-Oledan which is an Agreement and Deed of Sale of Undivided Share in Real Estate entered into by and between the Venturanzas and the Oledans clearly shows that by virtue of said document, the Venturanzas assumed the whole obligation to plaintiffs for and in consideration of the sum of P44,571.66, one-half of which amount was paid to the Oledans upon the execution and signing thereof and the balance payable within 8 months therefrom. The Venturanzas do not assail the veracity of the document However, they seem to deny having agreed to the divisions of the penalty clause claiming that the Oledans assured them that the same was just incorporated therein as a matter of form but that it would not be enforced. The Venturanzas having agreed to time, as in fact, they have assumed the whole obligation to the plaintiffs, they should, therefore, be held liable to the Oledans for ,Alexander the latter shall be bound to pay to plaintiffs under the original contract known as Deed of Sale with Purchase Money Mortgage.

WHEREFORE, judgment is hereby rendered in favor of pIaintiffs and against the defendants, ordering the latter jointly and severally to pay to the former or to deposit with the clerk of court the sum of P576,573.90 with interest thereon at the stipulated rate of 6% per annum until fully paid, within 90 days from notice hereof. In default of such payment the mortgaged property will be sold at public auction to realize the mortgage indebtedness and costs. in accordance with law.

On the cross-claim filed by defendants-cross-claimants Oledans, cross-defendants Venturanzas are ordered to reimburse to the former the amount which cross-claimants are to pay to plaintiffs under the above judgment.

The parties will bear their own costs and expensive of litigation" (pp. 107-113, Corrected Record on Appeal, pp. 327-330, rec.).

Not satisfied with the foregoing decision of the court a quo, particularly with respect to its dispositive portion, plaintiffs filed a motion for reconsideration and/or new trial, dated October 19, 1965, and an urgent supplemental ration for reconsideration, dated November 2, 1965. The defendants Oledans likewise filed their motion for reconsideration dated November 2, 1965, and the defendants Venturanzas also filed a motion for reconsideration dated November 10, 1965.

Resolving the aforesaid motions of the parties litigants, the trial court amended the dispositive portion of its in question in its order dated November 22, 1965, which reads as follows:ñé+.£ªw ph!1

This case is again before the Court upon a motion for reconsideration and/or new trial filed by plaintiffs dated October 19, 1965, an urgent supplemental motion for reconsideration dated November 2, 1965 filed by the same plaintiffs, a motion for reconsideration dated November 2, 1965 filed by defendants Oledans, and a motion for reconsideration dated November 10, 1965 filed by defendants Venturanzas.

After a careful deliberation of the different motions for filed by the parties, the Court believes a further modification of the decision of September 30, 1965, as amended by the order of October l, 1965, is in order. This, in accordance with the agreement entered into by the parties embodied in the document designated as Deed of Sale with Purchase Money Mortgage.

WHEREFORE, the dispositive part of the decision of September 30, 1965 is hereby re-amended so as to read as follows:ñé+.£ªw ph!1

'WHEREFORE, judgment is hereby rendered in favor of plaintiff.s, and against the defendants ordering the latter, jointly and severally, to pay the former or to deposit with the clerk of court the sum of P576,573.90 with interest thereon at the stipulated rate of 6% per annum from January 1, 1959 until fully paid, within 90 days from notice hereof. In default of such payment the mortgaged property will be sold at public auction to realize the mortgage indebtedness and costs, in accordance with law.'

'On the cross-claim by the defendants-cross-claimants Venturanzas are ordered to reimburse to the former the amount which cross-claimants are to pay to plaintiff under the judgment.

'The parties will bear their own costs and expenses of litigation.'

With the foregoing resolution the motion for reconsideration filed by defendants Venturanzas and Oledans are, therefore, DENIED (pp. 151-152, Corrected Record on Appeal, pp. 349-350, rec.).

From the foregoing judgment, as amended, the defendants Venturanzas and Oledans now appeal directly before this Court. The Venturanzas assigned four (4) errors while the Oledans assinged five (5) errors allegedly committed by the trial court. WE believe these errors taken together all boil down to the following issues:

a. Whether, upon the filing by plaintiffs of their complaint against the defendants on December 12, 1962, the obligation of the defendants had not yet become due and demandable and, hence, the complaint was filed prematurely.

b. Whether the payment of P576,573.90 with interest thereon at the stipulated rate of 6% per annum was to be made dependent upon the consummation of the sale of the two haciendas of defendants Venturanzas and, hence, there was a novation of the contract of sale with purchase money mortgage, Exhibit B, as a result of a change in the manner of payment.

c. Whether the sale on December 28, 1959 by the defendants Oledans to their co-defendants Venturanzas, of all their rights and interests in the property, subject-matter of the deed of sale with purchase money mortgage, Exhibit B, likewise constituted a novation thereof and, therefore, had the effect of discharging the defendants Oledans from their original obligation to the plaintiffs.

1. The first and second issues involve an interpretation of paragraph II (c) of the Deed of Sale with Purchase Money Mortgage, Exhibit B, which provides as follows: ñé+.£ªwph!1

(c) The remaining balance of the purchase price, after deducting the sums of P100,000.00 and P40,000.00, mentioned in Paragraphs (a) and (b) of this Article II, aggregating the sum of FIVE HUNDRED SEVENTY-SIX THOUSAND FIVE HUNDRED SEVENTY-THREE PESOS AND NINETY CENTAVOS (P576,573.90) shall be paid, jointly and severally, by the VENDEES to the VENDORS WITHIN THREE (3) years from January 1, 1959, with interest at the rate of Six Per Centrum (6%) per annum, until fully paid of which the sum of P169,484.24, plus the corresponding interest thereon, shall be paid by the VENDEES to the VENDOR, FELIX CORTES y OCHOA, and the balance of P407,089.66, plus the corresponding interest thereon, shall be paid by the VENDEES to the VENDOR, NOEL J. CORTES. ...

With respect to the first issue — whether the complaint was filed prematurely — there is no dispute that plaintiffs filed their complaint on December 12, 1962; that under the term of the contract, the pertinent portion of which is quoted above, the defendants were given until January 1, 1962 within which to pay their obligation; and that January 1, 1962 had passed without the defendants having paid to the plaintiffs the sum of P576,573.90 and the corresponding interest thereon notwithstanding repeated demands for payment made upon and duly received by them (Exhs. D, D-3 E, E-3, pp. 72, 73, 73-A, 74- 75, Folder of Exhibits). Therefore, when plaintiffs filed the complaint on December 12, 1962, the effects of default as against the defendants had already arisen. Besides, no less than the defendants Venturanzas themselves admitted in their brief that they were delayed in the payment of the balance of their obligation to the plaintiffs. Let us turn to page 25 of their brief.ñé+.£ªw ph!1

The delay in the payment of the balance of the purchase price due to the plaintiffs-appellees was caused by the delay in the receipt of the payment of the purchase price of the two haciendas of the herein defendants-appellants Venturanza spouses. The non-compliance of herein defendants-appellants with their obligations to pIaintiffs-appellees was due to circumstances not within their control ... .

One cannot admit being delayed in the payment of his obligation unless he believes that his obligation is already due and demandable. Stated otherwise, there is no delay if the obligation is not yet due.

The alleged cause of their default in paying the balance of the price, is not force majeure nor an act of God. Hence, their failure to pay is not justified.

2. With respect to the second issue, defendants Venturanzas contend that the three-year period provided for in the Deed of Sale with Purchase Money Mortgage, Exhibit B, was dependent on the date when they would be able to collect the purchase price of the two properties they were trying to sell. For this purpose, they claim that Dr. Cortes, one of the plaintiffs, granted them an extension of time within which to pay and this act of Dr. Cortes constituted a novation of the contract.

This claim of defendants Venturanzas is equally devoid of merit. A careful reading of the Deed of Sale with Purchase Money Mortgage, Exhibit B, reveals the conspicuous absence of any provision

making the consummation of the said contract dependent on the ability of defendants Venturanzas to collect the purchase price of their two haciendas. If this were the intention of the parties, they should have clearly stated it in the contract. It is true the defendants wrote two letters to Dr. Cortes and/or his lawyer (Exhibits H and I-Venturanza, p. 90, Folder of Exhibits), wherein the defendants Venturanzas requested an extension of time within which to pay and Dr. Cortes admitted having been informed of the alleged projected sale of defendants Venturanzas' properties. Dr. Cortes, however, vehemently denied having given said defendants any extension of time.

The deed of sale with purchase money mortgage clearly indicates that the balance of P576,573.90 shall be paid by the defendants, jointly and severally, within three (3) years from January 1, 1959, with interest at the rate of 6%per annum, until fully paid. On January 1, 1962, the defendants failed and refused to pay their obligation. This is a clear case of an obligation with a definite period ex die, which period was incidentally established for the benefit of the defendants. The evidence presented by the plaintiffs to substantiate these facts approaches moral certainty, not merely preponderance of evidence. Hence, defendants' defense of novation as to the period for payment, fails.

Furthermore, according to Article 1159 of the New Civil Code, obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. The deed, Exhibit B, does not show on its face that any of the limitation of the freedom of contract under Article 1306 of the same Code, such as law, morals, good customs, public order, or public policy, exists, On the contrary, the terms of said exhibit are so clear and leave no doubt with respect to the intention of the contracting parties. Hence, the literal meaning of its stipulations shall control (Art. 1370, New Civil Code). This is so because the intention of the parties is clearly manifested and they are presumed to intend the consequences of their voluntary acts ft. 5, par. [c], Rule 131, Revised Rules of Court). There being nothing in the deed, Exhibit B, which would argue against its enforcement, it follows that there is no ground or reason why it should not be given effect.

WE therefore, see no reason to overturn the finding of the court a quo that the defendants are indebted to the plaintiffs on the mortgage constituted by them over the 33 parcels of land in question since the period for payment of the obligation had become due and, therefore, plaintiffs are entitled to a foreclosure of the said mortgage

3. The third and last issue pertains to the principal defense of the defendants Oledans. These defendants claim that because they transferred their interest and participation in the property subject of the Deed of Sale with Purchase Money Mortgage, Exhibit B, to the defendants Venturanzas allegedly with the knowledge of the plaintiffs, novation by substitution of the person of the debtor took place and, therefore, their obligation to the plaintiffs had been extinguished.

In resolving this issue, it is important to state some principles and jurisprudence underlying the concept and nature of novation as a mode of extinguishing obligations.

According to Manresa, novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first, either by changing the object or Principal conditions, or by substituting the person of the debtor, or by subrogating a third person to the rights of the creditor (8 Manresa 428, cited in IV Civil Code of the Philippines by Tolentino 1962 ed., p. 352). Unlike other modes of extinction of obligations, novation is a juridical act with a dual function — it extinguishes an obligation and creates a new one in lieu of the old.

Article 1293 of the New Civil Code provides:ñé+.£ªwph!1

Novation which consists in substituting a new debtor ,in the place of the original one, may be made even without the knowledge or -i , it the will of the latter, but not without the without of the creditor (Emphasis supplied).

Under this provision, there are two forms of novation by substituting the person of the debtor, and they are: (1)expromision and (2) delegacion. In the former,the initiative for the change does not come from the debtor and may even be made without his knowledge, since it consists in a third person assuming the obligation. As such, it logically requires the consent of the third person and the creditor. In the latter, the debtor offers and the creditor accepts a third person who consents to the substitution and assumes the obligation, so that the intervention and the consent of these three persons are necessary (8 Manresa 436-437, cited in IV Civil Code of the Philippines by Tolentino, 1962 ed., p. 360). In these two modes of substitution, the consent of the creditor is an indispensable requirement (Garcia vs. Khu Yek Chiong, 65 Phil. 466, 468)

Defendants Oledans' theory is that the Agreement and Deed of Sale of Undivided Share in Real Estate (Exhibit 1-Oledan, p. 91, Folder of Exhibits), executed and entered into by and between them and their co-defendants Venturanzas, and which in effect transferred all their interest and participation in the property subject of the deed of mortgage (Exhibit B) to their co-defendants Venturanzas, extinguished their obligation to the plaintiffs. In support of their theory, they cited Article 1293 of the New Civil Code, quoted above, and then concluded that the creditor's consent to the novation which consists one "is entirely unnecessary and senseless." They also cited the cases of Rio Grande Oil Co. vs. Coleman (39 O.G. No. 38, 986) and Santisimo Rosario de Molo vs. Gemperle (39 O.G. No. 59, 1410), both decided by the Court of Appeals, through the learned Mr. Justice Sabino Padilla, who later became an active and respected member of this Court.

A perusal of the aforecited cases shows the following:ñé+.£ªw ph!1

From the Coleman case:

... A personal novation by substitution of another in place of the debtor may be effected with or without the knowledge of the debtor but not without the consent of the creditor (Art. 1205, Civil Code [now Art 1293, New Civil code]). this is the legal provision applicable to the case at bar. the reason for the requirement that the creditor give his consent to the substitution is obvious. the substitution of another in place of the debtor may prevent or delay the fulfillment or performance of the obligation by reason of the inability or insolvency of the new debtor; hence, the consent of the creditor is necessary. This kind of substitution may take place without the knowledge of the debtor when a third party assumes the obligation of the debtor with the consent of the creditor. The novation effected in this way is called delegacion. (Art. 1206, Civil Code [now Art. 1295, New Civil Code]). In these two modes of substitution, the consent of the creditor is always required.... (emphasis supplied).

From the Gemperle case:ñé+.£ªw ph!1

A personal novation by substitution of another in place of the debtor may take place with or without the knowledge of the debtor but not without the consent of the creditor (Article 1205, Civil code the creditor's consent to such substitution is obvious. Substitution of one debtor, for another may delay or prevent the fulfillment or performance of the obligation by reason of the temporary inability or insolvency of the new debtor. In a novation that takes place when the debtor offers and the creditor accepts a third party in place of the former debtor, the consent of the creditor is also necessary (art. 1206, Civil Code [now Art. 1295, New civil Code]). ...

After going over carefully the aforecited portions of the decisions of the Court of Appeal cited by the defendants Oledans, WE find that they do not help any the cause of said defendants; on the contrary, they both militate against their theory. Be that as it may, suffice it to state that while the Agreement and Deed of Sale of Undivided Share in Real Estate, Exhibit 1-Oledan, might have created a juridical relation as between defendants Venturanzas and Oledans, it cannot however affect the relation between them on one hand, and the plaintiffs, on the other, since the latter are not privies to the said agreement, and this kind of novation cannot be made without the consent of the plaintiffs (Garcia vs. Khu Yek Chiong, et al., supra). One reason for the requirement of the creditor's consent to such substitution is obvious. Substitution of one debtor for another may delay or prevent the fulfillment of the obligation by reason of the financial inability or insolvency of the new debtor; hence, the creditor should agree to accept the substitution in order that it may be binding on him.

Incidentally, this case is, in practically all respects, similar to, if not Identical with, the case of McCullough & Co. vs. Veloso and Serna (46 Phil. 1). In that case, plaintiff sold to defendant Veloso its property known as "McCullough Building" consisting of a land with the building thereon, for the price of P700,000.00. Veloso paid a down payment of P50,000.00 cash on account at the execution of the contract, and the balance of P650,000.00 to be paid on installment basis. To secure the payment of the balance, Veloso mortgaged the property purchased in favor of McCullough. It was stipulated that in case of failure on the part of Veloso to comply with any of the stipulations contained in the mortgage deed, all the installments with the interest thereon at the rate of 7% per annum shall become due, and the creditor shall then have the right to bring the proper action in court.

Subsequently, Veloso sold the property with the improvements thereon for P100,000.00 to Serna, who agreed to respect the mortgage on the property in favor of McCullough and to assume Veloso's obligation to pay the plaintiff the balance. Veloso paid P50,000.00 on account of the P650,000.00 and Serna made several payments up to the total sum of P250.000.00 Subsequently, however, neither Veloso nor Serna made any payment upon the last installments, by virtue of which delay, the whole obligation became due McCullough went to court.

After due trial, the court sentenced defendant Veloso to pay the plaintiff the sum of P510,047.34, with interest thereon at 7% per annum, within three months; otherwise, the property mortgaged shall be sold at public auction to the highest bidder and in the manner provided by law, the proceeds of the sale to be applied to the payment of the judgment, after deducting the fees of the court's officer.

On appeal, defendant Veloso contended that having sold the property to Serna and the otter having assumed the obligation to pay the plaintiff"the unpaid balance of the price secured by the he was relieved from the obligation to pay the plaintiff. This means contract between the appellant and Serna, contract between him and the plaintiff was novated by the substitution of Serna as a new debtor.

The Supreme Court ruled —ñé+.£ªwph!1

In order that this novation may take place, the law requires the consent of the creditor (Art. 1205 of the Old Civil code; now Art. 1293 of the New Civil Code). The plaintiff did not intervene in the contract between Veloso and Serna and did not expressly give his consent to this substitution. Novation must be express, and cannot be presumed.

In the case at bar, the agreement, Exhibit 1-Oledan relied upon by the defendants Oledans, does not show on its face that the plaintiffs intervened in, much less gave their consent to, the substitution; as a matter of fact, plaintiff Cortes vehemently denied having consented to the transfer of rights from

the Oledans to the Venturanzas alone. Res inter alios acta alteri nocere non debet , no less than defendant lose Oledan himself testified that he did not personally see Dr. Cortes about the transfer of rights in Exhibit 1-Oledan, despite his commitment with his co-defendants in said agreement 'to inform Messrs. Felix Cortes and Noel J. Cortes (Jesus Noel) of the execution of the said agreement" (p. 15, t.s.n. hearing of January 19, 1965). There is thus a complete absence of animus novandi, whether express or implied, on the part of the creditors — the Corteses.

With respect to the claim of plaintiffs for reasonable attorney's fees, paragraph III (G) of the Deed of Sale with Purchase Money Mortgage, Exhibit B, provides:ñé+.£ªwph!1

G In the event of default on the part of the VENDEES and by reason thereof a suit is brought for the foreclosure of this mortgage or any other legal proceedings is instituted for the enforcement of any of the rights of the VENDORS hereunder, a reasonable compensation shall be paid, jointly and severally, by the VENDEES to the VENDORS for attorney's fees, in addition to the fees and costs allowed by the Rules of Court.

The validity of the above agreement for reasonable attorney's fees was questioned in the pleadings of the defendants before the trial court. Before this Court, the plaintiffs in their brief (pp. 121-123, 126), called OUR attention to the oversight in respect thereto committed by the court a quo.

With respect, however, to the interest due to the plaintiffs on the indebtedness of the defendants, WE are reminded of the mandate of Article 2212 of the New Civil Code, which provides: ñé+.£ªwph!1

Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.

Per stipulation, plaintiffs are entitled to collect from defendants interest at the rate of six per centum (6%) per annum on the remaining balance of P576,573.90 from January 1, 1959. Hence, for the period from January 1, 1959 to December 12, 1962, the date of the riling of the complaint, plaintiffs are entitled to collect from the defendants, by way of interest at six percent per annum, the sum of P136,482.13. Applying the aforequoted legal provision, this amount of P136,482.13 should be added to the principal of P576,573.90, making a total of P713,056.03, which shall earn legal interest stipulated at six percent per annum from December 13, 1962 until fully paid. Such interest is not due to stipulation; rather it is due to the mandate of the law hereinbefore quoted.

Now, considering that the total amount recoverable in this case approximates 1.4 million pesos as of October 31, 1977 (consisting of principal of P576,573.90, plus P136,482.13 interest from January 1, 1959 to December 12, 1962, plus P636,827.37 interest from December 13, 1962 to October 31, 1977), and that every step in the foreclosure proceedings had been tenaciously contested, not to mention the work it will still require counsel for the plaintiffs to collect the same by judicial proceedings, WE find that P50,000.00 is a reasonable amount to which the plaintiffs are entitled as and for attorney's fees.

Anent the cross-claim of defendants Oledans against their co-defendants Venturanzas to the effect "that the defendants Venturanzas are liable to them for the balance of P22,285.83 in addition to the penalties stipulated in the agreement and deed of sale, Exhibit 1-Oledan, and the interests provided therein, WE find the claim for the balance of P22,285.83 meritorious.

On their claim for penalties and interests as provided for in the same agreement, cross-claimants and defendants Oledans rely on the pertinent portions of the agreement, which read:ñé+.£ªwph!1

xxx xxx xxx

2. That upon the execution and signing of this Agreement, the PARTIES/OF THE FIRST PART (the Venturanzas will pay to the PARTIES OF THE SECOND PART (the Oledans and the latter hereby, acknowledge receipt thereof, of the sum of TWENTY TWO THOUSAND (TWO HUNDRED) AND EIGHTY FIVE PESOS AND EIGHTY THREE CENTAVOS (P22,285-83), Philippine Currency (Prudential Bank Check No. 965159) and the balance of Twenty Two Thousand Two Hundred and Eighty Five Pesos and Eighty Three centavos (P22,285.83), Philippine Currency, shall be paid by the PARTIES OF THE FIRST PART to the PARTIES OF THE SECOND PART within eight (8) months from the date and execution of this Agreement and Deed of Sale;

xxx xxx xxx

4. That in the event of failure on the part of the PARTIES OF THE FIRST PART to pay the said balance of Twenty Two Thousand Two Hundred and Eighty Five Pesos and Eighty Centavos (P22,285.80) within the said period of eight (8) months stipulated above, the said PARTIES OF THE FIRST PART will pay to the PARTIES OF THE SECOND PART a penalty of Six Thousand Three Hundred Sixty Seven Pesos and Thirty Centavos (P6,367.30) for the period from August 28, 1960 to August 28, 1961; another penalty of P6,367.30 for the period from August 28, 1961 to August 28, 1962; and another penalty of P6,367.30 for the period from August 28, 1962 to August 28, 1963. It is agreed that any part payment on the said balance of P22,285.80 has no effect on the payment of the penalty provided for herein, and in case of non-payment of the full amount of the balance of P22,285.80 within the said period of three years aforementioned or up to August 28, 1963, then the said balance left unpaid plus the penalties due, as provided for herein, shall bear an interest at the legal rate. It is of course understood, that the penalties and interest provided for herein shall not apply if the PARTIES OF THE FIRST PART shall pay the said balance of Twenty Two Thousand Two Hundred and Eighty Five Pesos and Eighty Centavos (P22,285.80) within the eight (8) months stipulated in paragraph 2 above, or on or before August 28, 1960;

xxx xxx xxx

(Brief for defendants Oledans, pp. 32-34, Folder of Exhibits, pp. 92- 93).

A meticulous analysis of the aforequoted portions of Exhibit 1-Oledan shows:

1. That the Venturanzas were given a period of eight (8) months from and after December 28, 1959 - the date of the execution of the agreement - within which to pay the balance of P22,285.80;

2. That in the event of failure on the part of the Venturanzas to pay the said balance of P22,285.80 within the said period of eight (8) months, the Venturanzas would pay to the Oledans a penalty of P6,367.30 annually, beginning August 28, 1960, for a period of three (3) years lip to August 28, 1963, regardless of any partial payment which the Venturanzas might make on the balance of P22,285.80; and

3. That in case of non-payment of the whole obligation of P22,285.80 within the stipulated period of three (3) years from August 28, 1960 to August 28, 1963, such obligation or any balance thereof

remaining unpaid, plus the penalties due at the rate of P6,367.30 annually for three (3) years, shall earn interest at the legal rate.

Going over the entire agreement, Exhibit 1-Oledan, WE have noted the following:

1. That in connection with the deed of sale with mortgage, Exhibit B, the Venturanzas were the ones who paid out of their own personal funds the One Hundred Thousand Pesos (P100,000.00) to the plaintiffs, representing the down payment on the purchase price of the property, with the understanding that the Oledans would reimburse the Venturanzas their one-half (1/2) share of P50,000.00;

2. That subsequently, the Oledans decided not to continue with the payment or reimbursement to the Venturanzas of their one-half (1/2) share of P50,000.00 as above indicated, but they agreed to share in the amount of their investment of only P20,000.00;

3. That the Venturanzas were again the ones who paid out of their own personal funds the succeeding P40,000.00, which fell due on January 1, 1959, to the plaintiffs;

4. That it was only on January 16, 1959 that the Oledans were able to reimburse to the Venturanzas their one-half (1/2) share of the P40,000.00; and

5. That the sum of P20,000.00 was the only amount paid by the Oledans to and/or invested with the Venturanzas in their joint venture envisioned in the deed of sale with mortgage, Exhibit B.

In support of their claim for penalties and interests, the cross-claimants and defendants Oledans contend that "this is a normal stipulation in contracts of this character." WE do not agree and hereby reject such claim for penalties as well as for interests.

Settled is the rule that the contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy (Art. 1306, New Civil Code). The onwards show that cross-claimants and defendants Oledans more than broke even on their investment of P20,000.00 when they received from their co-defendants Venturanzas the sum of P22,285.F3 on December 28, 1959. From all indications, it would seem that defendants Venturanzas threw caution to the four winds, so to say, and bound themselves to pay to their co-defendants Oledans the stipulated penalty of P6,367.30 annually for three (3) years, beginning August 28, 1960, in their belief that within the said period of time they would have more than enough money with which to pay their obligation to the plaintiffs. Unfortunately, however, to their great disappointment, the unexpected happened as they ended up with no money with which to pay not only the balance of their obligation to the plaintiffs in the sum of P576,573.90, but also the balance of their obligation to their co-defendants Oledans in the sum of P22,285.30. Be that as it may justice and morality cannot consent to and sanction a clearly iniquitous deprivation of property, repulsive to the common sense of man. This is what this Court said some sixty (60) years ago in the case of Ibarra vs. Aveyro and Pre (37 Phil 273, 282), which WE cannot help but quote hereunder:ñé+.£ªw ph!1

Notwithstanding the imprudence and temerity shown by the defendants by their execution of a ruinous engagement, assumed, as it appears, knowingly and voluntarily, morality and justice cannot consent to and sanction a repugnant spoliation and iniquitous deprivation of property, repulsive to the common sense of man; and therefore, as all acts performed against the provisions of law are null and void, and as the penal clause referred to, notwithstanding its being an ostensible violation of morals, was inserted in said promissory note, and as there is no law that

expressly authorizes it, we must conclude that the contracting party favored by said penal clause totally lacks all right of action to enforce its fulfillment (emphasis supplied).

WHEREFORE, THE APPEALED JUDGMENT IS MODIFIED AND ANOTHER ONE IS RENDERED, DIRECTING:

I. ALL THE DEFENDANTS APPELLANTS VENTURANZAS AND OLEDANS TO PAY JOINTLY AND SEVERALLY THE PLAINTIFFS-APPELLEES: ñé+.£ªw ph!1

A. THE SUM OF FIVE HUNDRED SEVENTY SIX THOUSAND FIVE HUNDRED SEVENTY THREE PESOS AND NINETY CENTAVOS (P576,573.90), PLUS ONE HUNDRED THIRTY SIX THOUSAND FOUR HUNDRED EIGHTY TWO PESOS AND THIRTEEN CENTAVOS (P136,482.13) INTEREST AT THE RATE OF SIX PER CENTUM (6%) PER ANNUM FROM JANUARY 1, 1959 TO DECEMBER 12, 1962, PLUS INTEREST AT THE SAME RATE ON THE PRINCIPAL AMOUNT OF P576, 573.90 ADDED TO THE ACCRUED INTEREST FOR THE PERIOD FROM DECEMBER 13,1962 UNTIL THE WHOLE OBLIGATION IS FULLY PAID, WITHIN NINETY (90) DAYS FROM NOTICE HEREOF. IN DEFAULT OF SUCH PAYMENT, THE MORTGAGED PROPERTIES SHALL BE SOLD AT PUBLIC AUCTION TO REALIZE THE MORTGAGE INDEBTEDNESS AND COSTS IN ACCORDANCE WITH LAW; AND

B. THE SUM OF FIFTY THOUSAND PESOS (P50,000.00) AS ATTORNEY'S FEES:

II. THE CROSS-DEFENDANT'S VENTURANZAS TO PAY AND/OR REIMBURSE THE CROSS-CLAIMANTS OLEDANS: ñé+.£ªw ph!1

A. THE SUM OF TWENTY TWO THOUSAND TWO HUNDRED AND EIGHTY FIVE PESOS AND EIGHTY THREE CENTAVOS (P22,285.83), PLUS INTEREST AT THE RATE OF SIX PERCENT (6%) PER ANNUM COUNTED FROM THE FINALITY OF THIS DECISION, UNTIL THE SAW IS FULLY PAID;

B. THE AMOUNT WHICH SAID CROSS-CLAIMANT'S MAY PAY TO PLAINTIFFS-APPELLEES UNDER THIS JUDGMENT;AND

III. THE DEFENDANTS-APPELLANTS VENTURANZAS TO PAY TREBLE COSTS.

Teehankee (Chairman), Muñ;oz Palma, Martin, Fernandez and Guerrero, JJ., concur.1äwphï1.ñët

G.R. No. 128833 April 20, 1998

RIZAL COMMERCIAL BANKING CORPORATION, UY CHUN BING AND ELI D. LAO, petitioners, vs. COURT OF APPEALS and GOYU & SONS, INC., respondents.

G.R. No. 128834 April 20, 1998

RIZAL COMMERCIAL BANKING CORPORATION, petitioners, vs. COURT OF APPEALS, ALFREDO C. SEBASTIAN, GOYU & SONS, INC., GO SONG HIAP, SPOUSES GO TENG KOK and BETTY CHIU SUK YING alias BETTY GO, respondents.

G.R. No. 128866 April 20, 1998

MALAYAN INSURANCE INC., petitioners, vs. GOYU & SONS, INC. respondent.

MELO, J.:

The issue relevant to the herein three consolidated petitions revolve around the fire loss claims of respondent Goyu & Sons, Inc. (GOYU) with petitioner Malayan Insurance Company, Inc. (MICO) in connection with the mortgage contracts entered into by and between Rizal Commercial Banking Corporation (RCBC) and GOYU.

The Court of Appeals ordered MICO to pay GOYU its claims in the total amount of P74,040,518.58, plus 37% interest per annum commending July 27, 1992. RCBC was ordered to pay actual and compensatory damages in the amount of P5,000,000.00. MICO and RCBC were held solidarily liable to pay GOYU P1,500,000.00 as exemplary damages and P1,500,000.00 for attorney's fees. GOYU's obligation to RCBC was fixed at P68,785,069.04 as of April 1992, without any interest, surcharges, and penalties. RCBC and MICO appealed separately but, in view of the common facts and issues involved, their individual petitions were consolidated.

The undisputed facts may be summarized as follows:

GOYU applied for credit facilities and accommodations with RCBC at its Binondo Branch. After due evaluation, RCBC Binondo Branch, through its key officers, petitioners Uy Chun Bing and Eli D. Lao, recommended GOYU's application for approval by RCBC's executive committee. A credit facility in the amount of P30 million was initially granted. Upon GOYU's application and Uy's and Lao's recommendation, RCBC's executive committee increased GOYU's credit facility to P50 million, then to P90 million, and finally to P117 million.

As security for its credit facilities with RCBC, GOYU executed two real estate mortgages and two chattel mortgages in favor of RCBC, which were registered with the Registry of Deeds at Valenzuela, Metro Manila. Under each of these four mortgage contracts, GOYU committed itself to insure the mortgaged property with an insurance company approved by RCBC, and subsequently, to endorse and deliver the insurance polices to RCBC.

GOYU obtained in its name a total of ten insurance policies from MICO. In February 1992, Alchester Insurance Agency, Inc., the insurance agent where GOYU obtained the Malayan insurance policies,

issued nine endorsements in favor of RCBC seemingly upon instructions of GOYU (Exhibits "1-Malayan" to "9-Malayan").

On April 27, 1992, one of GOYU's factory buildings in Valenzuela was gutted by fire. Consequently, GOYU submitted its claim for indemnity on account of the loss insured against. MICO denied the claim on the ground that the insurance policies were either attached pursuant to writs of attachments/garnishments issued by various courts or that the insurance proceeds were also claimed by other creditors of GOYU alleging better rights to the proceeds than the insured. GOYU filed a complaint for specific performance and damages which was docketed at the Regional Trial Court of the National Capital Judicial Region (Manila, Branch 3) as Civil Case No. 93-65442, now subject of the present G.R. No. 128833 and 128866.

RCBC, one of GOYU's creditors, also filed with MICO its formal claim over the proceeds of the insurance policies, but said claims were also denied for the same reasons that MICO denied GOYU's claims.

In an interlocutory order dated October 12, 1993 (Record, pp. 311-312), the Regional Trial Court of Manila (Branch 3), confirmed that GOYU's other creditors, namely, Urban Bank, Alfredo Sebastian, and Philippine Trust Company obtained their respective writs of attachments from various courts, covering an aggregate amount of P14,938,080.23, and ordered that the proceeds of the ten insurance policies be deposited with the said court minus the aforementioned P14,938,080.23. Accordingly, on January 7, 1994, MICO deposited the amount of P50,505,594.60 with Branch 3 of the Manila RTC.

In the meantime, another notice of garnishment was handed down by another Manila RTC sala (Branch 28) for the amount of P8,696,838.75 (Exhibit "22-Malayan").

After trial, Branch 3 of the Manila RTC rendered judgment in favor of GOYU, disposing:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant, Malayan Insurance Company, Inc. and Rizal Commercial Banking Corporation, ordering the latter as follows:

1. For defendant Malayan Insurance Co., Inc.:

a. To pay the plaintiff its fire loss claims in the total amount of P74,040,518.58 less the amount of P50,000,000.00 which is deposited with this Court;

b. To pay the plaintiff damages by was of interest for the duration of the delay since July 27, 1992 (ninety days after defendant insurer's receipt of the required proof of loss and notice of loss) at the rate of twice the ceiling prescribed by the Monetary Board, on the following amounts:

1) P50,000,000.00 — from July 27, 1992 up to the time said amount was deposited with this Court on January 7, 1994;

2) P24,040,518.58 — from July 27, 1992 up to the time when the writs of attachments were received by defendant Malayan;

2. For defendant Rizal Commercial Banking Corporation:

a. To pay the plaintiff actual and compensatory damages in the amount of P2,000,000.00;

3. For both defendants Malayan and RCBC:

a. To pay the plaintiff, jointly and severally, the following amounts:

1) P1,000,000.00 as exemplary damages;

2) P1,000,000.00 as, and for, attorney's fees;

3) Costs of suit.

and on the Counterclaim of defendant RCBC, ordering the plaintiff to pay its loan obligations with defendant RCBC in the amount of P68,785,069.04, as of April 27, 1992, with interest thereon at the rate stipulated in the respective promissory notes (without surcharges and penalties) per computation, pp. 14-A, 14-B & 14-C.

FURTHER, the Clerk of Court of the Regional Trial Court of Manila is hereby ordered to release immediately to the plaintiff the amount of P50,000,000.00 deposited with the Court by defendant Malayan, together with all the interest earned thereon.

(Record, pp. 478-479.)

From this judgment, all parties interposed their respective appeals. GOYU was unsatisfied with the amount awarded in its favor. MICO and RCBC disputed the trial court's findings of liability on their part. The Court of Appeals party granted GOYU's appeal, but sustained the findings of the trial court with respect to MICO and RCBC's liabilities, thusly:

WHEREFORE, the decision of the lower court dated June 29, 1994 is hereby modified as follows:

1. FOR DEFENDANT MALAYAN INSURANCE CO., INC:

a) To pay the plaintiff its fire loss claim in the total amount of P74,040,518.58 less the amount of P50,505,594.60 (per O.R. No. 3649285) plus deposited in court and damages by way of interest commencing July 27, 1992 until the time Goyu receives the said amount at the rate of thirty-seven

(37%) percent per annum which is twice the ceiling prescribed by the Monetary Board.

2. FOR DEFENDANT RIZAL COMMERCIAL BANKING CORPORATION;

a) To pay the plaintiff actual and compensatory damages in the amount of P5,000,000.00.

3. FOR DEFENDANTS MALAYAN INSURANCE CO., INC., RIZAL COMMERCIAL BANKING CORPORATION, UY CHUN BING AND ELI D. LAO:

a) To pay the plaintiff jointly and severally the following amounts:

1. P1,500,000.00 as exemplary damages;

2. P1,500,000.00 as and for attorney's fees.

4. And on RCBC's Counterclaim, ordering the plaintiff Goyu & Sons, Inc. to pay its loan obligation with RCBC in the amount of P68,785,069.04 as of April 27, 1992 without any interest, surcharges and penalties.

The Clerk of the Court of the Regional Trial Court of Manila is hereby ordered to immediately release to Goyu & Sons, Inc. the amount of P50,505,594.60 (per O.R. No. 3649285) deposited with it by Malayan Insurance Co., Inc., together with all the interests thereon.

(Rollo, p. 200.)

RCBC and MICO are now before us in G.R. No. 128833 and 128866, respectively, seeking review and consequent reversal of the above dispositions of the Court of Appeals.

In G.R. No. 128834, RCBC likewise appeals from the decision in C.A. G.R. No. CV-48376, which case, by virtue of the Court of Appeals' resolution dated August 7, 1996, was consolidated with C.A. G.R. No. CV-46162 (subject of herein G.R. No. 128833). At issue in said petition is RCBC's right to intervene in the action between Alfredo C. Sebastian (the creditor) and GOYU (the debtor), where the subject insurance policies were attached in favor of Sebastian.

After a careful reviews of the material facts as found by the two courts below in relation to the pertinent and applicable laws, we find merit in the submission of RCBC and MICO.

The several causes of action pursued below by GOYU gave rise to several related issues which are now submitted in the petitions before us. This Court, however, discerns one primary and central issue, and this is, whether or not RCBC, as mortgagee, has any right over the insurance policies taken by GOYU, the mortgagor, in case of the occurrence of loss.

As earlier mentioned, accordant with the credit facilities extended by RCBC to GOYU, the latter executed several mortgage contracts in favor of RCBC. It was expressly stipulated in these

mortgage contracts that GOYU shall insure the mortgaged property with any of the insurance companies acceptable to RCBC. GOYU indeed insured the mortgaged property with MICO, an insurance company acceptable to RCBC. Bases on their stipulations in the mortgage contracts, GOYU was supposed to endorse these insurance policies in favor of, and deliver them, to RCBC. Alchester Insurance Agency, Inc., MICO's underwriter from whom GOYU obtained the subject insurance policies, prepared the nine endorsements (see Exh. "1-Malayan" to "9-Malayan"; also Exh. "51-RCBC" to "59-RCBC"), copies of which were delivered to GOYU, RCBC, and MICO. However, because these endorsements do not bear the signature of any officer of GOYU, the trial court, as well as the Court of Appeals, concluded that the endorsements are defective.

We do not quite agree.

It is settled that a mortgagor and a mortgagee have separated and distinct insurable interests in the same mortgaged property, such that each one of them may insure the same property for his own sole benefit. There is no question that GOYU could insure the mortgaged property for its own exclusive benefit. In the present case, although it appears that GOYU obtained the subject insurance policies naming itself as the sole payee, the intentions of the parties as shown by their contemporaneous acts, must be given due consideration in order to better serve the interest of justice and equity.

It is to be noted that nine endorsement documents were prepared by Alchester in favor of RCBC. The Court is in a quandary how Alchester could arrive at the idea of endorsing any specific insurance policy in favor of any particular beneficiary or payee other than the insured had not such named payee or beneficiary been specifically disclosed by the insured itself. It is also significant that GOYU voluntarily and purposely took the insurance policies from MICO, a sister company of RCBC, and not just from any other insurance company. Alchester would not have found out that the subject pieces of property were mortgaged to RCBC had not such information been voluntarily disclosed by GOYU itself. Had it not been for GOYU, Alchester would not have known of GOYU's intention of obtaining insurance coverage in compliance with its undertaking in the mortgage contracts with RCBC, and verily, Alchester would not have endorsed the policies to RCBC had it not been so directed by GOYU.

On equitable principles, particularly on the ground of estoppel, the Court is constrained to rule in favor of mortgagor RCBC. The basis and purpose of the doctrine was explained in Philippine National Bank vs. Court of Appeals (94 SCRA 357 [1979]), to wit:

The doctrine of estoppel is based upon the grounds of public, policy, fair dealing, good faith and justice, and its purpose is to forbid one to speak against his own act, representations, or commitments to the injury of one to whom they were directed and who reasonably relied thereon. The doctrine of estoppel springs from equitable principles and the equities in the case. It is designed to aid the law in the administration of justice where without its aid injustice might result. It has been applied by this Court wherever and whenever special circumstances of a case so demand.

(p. 368.)

Evelyn Lozada of Alchester testified that upon instructions of Mr. Go, through a certain Mr. Yam, she prepared in quadruplicate on February 11, 1992 the nine endorsement documents for GOYU's nine insurance policies in favor of RCBC. The original copies of each of these nine endorsement documents were sent to GOYU, and the others were sent to RCBC and MICO, while the fourth

copies were detained for Alchester's file (tsn, February 23, pp. 7-8). GOYU has not denied having received from Alchester the originals of these documents.

RCBC, in good faith, relied upon the endorsement documents sent to it as this was only pursuant to the stipulation in the mortgage contracts. We find such reliance to be justified under the circumstances of the case. GOYU failed to seasonably repudiate the authority of the person or persons who prepared such endorsements. Over and above this, GOYU continued, in the meantime, to enjoy the benefits of the credit facilities extended to it by RCBC. After the occurrence of the loss insure against, it was too late for GOYU to disown the endorsements for any imagined or contrived lack of authority of Alchester to prepare and issue said endorsements. If there had not been actually an implied ratification of said endorsements by virtue of GOYU's inaction in this case, GOYU is at the very least estopped from assailing their operative effects. To permit GOYU to capitalize on its non-confirmation of these endorsements while it continued to enjoy the benefits of the credit facilities of RCBC which believed in good faith that there was due endorsement pursuant to their mortgage contracts, is to countenance grave contravention of public policy, fair dealing, good faith, and justice. Such an unjust situation, the Court cannot sanction. Under the peculiar circumstances obtaining in this case, the Court is bound to recognize RCBC's right to the proceeds of the insurance polices if not for the actual endorsement of the policies, at least on the basis of the equitable principle of estoppel.

GOYU cannot seek relief under Section 53 of the Insurance Code which provides that the proceeds of insurance shall exclusively apply to the interest of the person in whose name or for whose benefit it is made. The peculiarity of the circumstances obtaining in the instant case presents a justification to take exception to the strict application of said provision, it having been sufficiently established that it was the intention of the parties to designate RCBC as the party for whose benefit the insurance policies were taken out. Consider thus the following:

1. It is undisputed that the insured pieces of property were the subject of mortgage contracts entered into between RCBC and GOYU in consideration of and for securing GOYU's credit facilities from RCBC. The mortgage contracts contained common provisions whereby GOYU, as mortgagor, undertook to have the mortgaged property properly covered against any loss by an insurance company acceptable to RCBC.

2. GOYU voluntarily procured insurance policies to cover the mortgaged property from MICO, no less than a sister company of RCBC and definitely an acceptable insurance company to RCBC.

3. Endorsement documents were prepared by MICO's underwriter, Alchester Insurance Agency, Inc., and copies thereof were sent to GOYU, MICO, and RCBC. GOYU did not assail, until of late, the validity of said endorsements.

4. GOYU continued until the occurrence of the fire, to enjoy the benefits of the credit facilities extended by RCBC which was conditioned upon the endorsement of the insurance policies to be taken by GOYU to cover the mortgaged properties.

This Court can not over stress the fact that upon receiving its copies of the endorsement documents prepared by Alchester, GOYU, despite the absence of its written conformity thereto, obviously considered said endorsement to be sufficient compliance with its obligation under the mortgage contracts since RCBC accordingly continued to extend the benefits of its credits facilities and GOYU continued to benefit therefrom. Just as plain too is the intention of the parties to constitute RCBC as the beneficiary of the various insurance policies obtained by GOYU. The intention of the parties will have to be given full force and effect particular case. The insurance proceeds may, therefore, be

exclusively applied to RCBC, which under the factual circumstances of the case, is truly the person or entity for whose benefit the polices were clearly intended.

Moreover, the law's evident intention to protect the interests of the mortgage upon the mortgaged property is expressed in Article 2127 of the Civil Code which states:

Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or income not yet received when the obligation becomes due, and to the amount of the indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue of expropriation for public use, with the declarations, amplifications and limitations established by law, whether the estate remains in the possession of the mortgagor, or it passes into the hands of a third person.

Significantly, the Court notes that out of the 10 insurance policies subject of this case, only 8 of them appear to have been subject of the endorsements prepared and delivered by Alchester for and upon instructions of GOYU as shown below:

INSURANCE POLICY PARTICULARS ENDORSEMENT

a. Policy Number F-114-07795 None Issue Date March 18, 1992 Expiry Date April 5, 1993 Amount P9,646,224.92

b. Policy Number ACIA/F-174-07660 Exhibit "1-Malayan" Issue Date January 18, 1992 Expiry Date February 9, 1993 Amount P4,307,217.54

c. Policy Number ACIA/F-114-07661 Exhibit "2-Malayan" Issue Date January 18, 1992 Expiry Date February 15, 1993 Amount P6,603,586.43

d. Policy Number ACIA/F-114-07662 Exhibit "3-Malayan" Issue Date January 18, 1992 Expiry Date (not legible) Amount P6,603,586.43

e. Policy Number ACIA/F-114-07663 Exhibit "4-Malayan" Issue Date January 18, 1992 Expiry Date February 9, 1993 Amount P9,457,972.76

f. Policy Number ACIA/F-114-07623 Exhibit "7-Malayan" Issue Date January 13, 1992 Expiry Date January 13, 1993 Amount P24,750,000.00

g. Policy Number ACIA/F-174-07223 Exhibit "6-Malayan" Issue Date May 29, 1991

Expiry Date June 27, 1992 Amount P6,000,000.00

h. Policy Number CI/F-128-03341 None Issue Date May 3, 1991 Expiry Date May 3, 1992 Amount P10,000,000.00

i. Policy Number F-114-07402 Exhibit "8-Malayan" Issue Date September 16, 1991 Expiry Date October 19, 1992 Amount P32,252,125.20

j. Policy Number F-114-07525 Exhibit "9-Malayan" Issue Date November 20, 1991 Expiry Date December 5, 1992 Amount P6,603,586.43

(pp. 456-457, Record; Folder of Exhibits for MICO.)

Policy Number F-114-07795 [(a) above] has not been endorsed. This fact was admitted by MICO's witness, Atty. Farolan (tsn, February 16, 1994, p. 25). Likewise, the record shows no endorsement for Policy Number CI/F-128-03341 [(h) above]. Also, one of the endorsement documents, Exhibit "5-Malayan", refers to a certain insurance policy number ACIA-F-07066, which is not among the insurance policies involved in the complaint.

The proceeds of the 8 insurance policies endorsed to RCBC aggregate to P89,974,488.36. Being excessively payable to RCBC by reason of the endorsement by Alchester to RCBC, which we already ruled to have the force and effect of an endorsement by GOYU itself, these 8 policies can not be attached by GOYU's other creditors up to the extent of the GOYU's outstanding obligation in RCBC's favor. Section 53 of the Insurance Code ordains that the insurance proceeds of the endorsed policies shall be applied exclusively to the proper interest of the person for whose benefit it was made. In this case, to the extent of GOYU's obligation with RCBC, the interest of GOYU in the subject policies had been transferred to RCBC effective as of the time of the endorsement. These policies may no longer be attached by the other creditors of GOYU, like Alfredo Sebastian in the present G.R. No. 128834, which may nonetheless forthwith be dismissed for being moot and academic in view of the results reached herein. Only the two other policies amounting to P19,646,224.92 may be validly attached, garnished, and levied upon by GOYU's other creditors. To the extent of GOYU's outstanding obligation with RCBC, all the rest of the other insurance policies above-listed which were endorsed to RCBC, are, therefore, to be released from attachment, garnishment, and levy by the other creditors of GOYU.

This brings us to the next issue to be resolved, which is, the extent of GOYU's outstanding obligation with RCBC which the proceeds of the 8 insurance policies will discharge and liquidate, or put differently, the actual amount of GOYU's liability to RCBC.

The Court of Appeals simply echoed the declaration of the trial court finding that GOYU's total obligation to RCBC was only P68,785,060.04 as of April 27, 1992, thus sanctioning the trial court's exclusion of Promissory Note No. 421-92 (renewal of Promissory Note No. 908-91) and Promissory Note No. 420-92 (renewal of Promissory Note No. 952-91) on the ground that their execution is highly questionable for not only are these dated after the fire, but also because the signatures of

either GOYU or any its representative are conspicuously absent. Accordingly, the Court of Appeals speculated thusly:

. . . Hence, this Court is inclined to conclude that said promissory notes were pre-signed by plaintiff in bank terms, as averred by plaintiff, in contemplation of the speedy grant of future loans, for the same practice of procedure has always been adopted in its previous dealings with the bank.

(Rollo, pp. 181-182.)

The fact that the promissory notes bear dates posterior to the fire does not necessarily mean that the documents are spurious, for it is presumed that the ordinary course of business had been followed (Metropolitan Bank and Trust Company vs. Quilts and All, Inc., 22 SCRA 486 [1993]). The obligor and not the holder of the negotiable instrument has the burden of proof of showing that he no longer owes the obligee any amount (Travel-On, Inc. vs. Court of Appeals, 210 SCRA 351 [1992]).

Even casting aside the presumption of regularity of private transactions, receipt of the loan amounting to P121,966,058.67 (Exhibits 1-29, RCBC) was admitted by GOYU as indicated in the testimony of Go Song Hiap when he answered the queries of the trial court.

ATTY. NATIVIDAD

Q: But insofar as the amount stated in Exhibits 1 to 29-RCBC, you received all the amounts stated therein?

A: Yes, sir, I received the amount.

COURT

He is asking if he received all the amounts stated in Exhibits 1 to 29-RCBC?

WITNESS:

Yes, Your Honor, I received all the amounts.

COURT

Indicated in the Promissory Notes?

WITNESS

A. The promissory Notes they did not give to me but the amount I asked which is correct, Your Honor.

COURT

Q Your mean to say the amounts indicated in Exhibits 1 to 29-RCBC is correct?

A Yes, Your Honor.

(tsn, Jan. 14, 1994, p. 26.)

Furthermore, aside from its judicial admission of having received all the proceeds of the 29 promissory notes as hereinabove quotes, GOYU also offered and admitted to RCBC that is obligation be fixed at P116,301,992.60 as shown in its letter date March 9, 1993, which pertinently reads:

We wish to inform you, therefore that we are ready and willing to pay the current past due account of this company in the amount of P116,301,992.60 as of 21 January 1993, specified in pars. 15, p. 10, and 18, p. 13 of your affidavits of Third Party Claims in the Urban case at Makati, Metro Manila and in the Zamboanga case at Zamboanga city, respectively, less the total of P8,851,519.71 paid from the Seaboard and Equitable insurance companies and other legitimate deductions. We accept and confirm this amount of P116,301,992.60 as stated as true and correct.

(Exhibit BB.)

The Court of Appeals erred in placing much significance on the fact that the excluded promissory notes are dated after the fire. It failed to consider that said notes had for their origin transactions consummated prior to the fire. Thus, careful attention must be paid to the fact that Promissory Notes No. 420-92 and 421-92 are mere renewalsof Promissory Notes No. 908-91 and 952-91, loans already availed of by GOYU.

The two courts below erred in failing to see that the promissory notes which they ruled should be excluded for bearing dates which are after that of the fire, are mere renewals of previous ones. The proceeds of the loan represented by these promissory notes were admittedly received by GOYU. There is ample factual and legal basis for giving GOYU's judicial admission of liability in the amount of P116,301,992.60 full force and effect.

It should, however, be quickly added that whatever amount RCBC may have recovered from the other insurers of the mortgage property will, nonetheless, have to be applied as payment against GOYU's obligation. But, contrary to the lower courts' findings, payments effected by GOYU prior to January 21, 1993 should no longer be deducted. Such payments had obviously been duly considered by GOYU, in its aforequoted letter date March 9, 1993, wherein it admitted that its past due account totaled P116,301,992.60 as of January 21, 1993.

The net obligation of GOYU, after deductions, is thus reduced to P107,246,887.90 as of January 21, 1993, to wit:

Total Obligation as admitted by GOYU as of January 21, 1993: P116,301,992.60

Broken down as follows:

Principal 1 Interest

Regular 80,535,946.32 FDU 27,548,025.17

____________ Total 108,083,971.49 8,218,021.11 2

LESS:

1) Proceeds from Seaboard Eastern Insurance Company 6,095,145.81

2) Proceeds from Equitable Insurance Company 2,756,373.00

3) Payment from foreign department negotiation: 203,584.89 ___________

9,055,104.70 3 ================ NET AMOUNT as of January 21, 1993 P107,246,887.90

The need for the payment of interest due the principal amount of the obligation, which is the cost of money to RCBC, the primary end and the ultimate reason for RCBC's existence and being, was duly recognized by the trial court when it ruled favorably on RCBC's counterclaim, ordering GOYU "to pay its loan obligation with RCBC in the amount of P68,785,069.04, as of April 27, 1992, with interest thereon at the rate stipulated in the respective promissory notes (without surcharges and penalties) per computation, pp. 14-A, 14-B 14-C" (Record, p. 479). Inexplicably, the Court of Appeals, without even laying down the factual or legal justification for its ruling, modified the trial court's ruling and ordered GOYU "to pay the principal amount of P68,785,069.04 without any interest, surcharges and penalties" (Rollo, p. 200).

It is to be noted in this regard that even the trial court hedgingly and with much uncertainty deleted the payment ofadditional interest, penalties, and charges, in this manner:

Regarding defendant RCBC's commitment not to charge additional interest, penalties and surcharges, the same does not require that it be embodied in a document or some form of writing to be binding and enforceable. The principle is well known that generally a verbal agreement or contract is no less binding and effective than a written one. And the existence of such a verbal agreement has been amply established by the evidence in this case. In any event, regardless of the existence of such verbal agreement, it would still be unjust and inequitable for defendant RCBC to charge the plaintiff with surcharges and penalties considering the latter's pitiful situation. (Emphasis supplied).

(Record, p. 476)

The essence or rationale for the payment of interest or cost of money is separate and distinct from that of surcharges and penalties. What may justify a court in not allowing the creditor to charge surcharges and penalties despite express stipulation therefor in a valid agreement, may not equally justify non-payment of interest. The charging of interest for loans forms a very essential and fundamental element of the banking business, which may truly be considered to be at the very core

of its existence or being. It is inconceivable for a bank to grant loans for which it will not charge any interest at all. We fail to find justification for the Court of Appeal's outright deletion of the payment of interest as agreed upon in the respective promissory notes. This constitutes gross error.

For the computation of the interest due to be paid to RCBC, the following rules of thumb laid down by this Court inEastern Shipping Lines, Inc. vs. Court of Appeals (234 SCRA 78 [1994]), shall apply, to wit:

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

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

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

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date of 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.

(pp. 95-97).

There being written stipulations as to the rate of interest owing on each specific promissory note as summarized and tabulated by the trial court in its decision (pp. 470 and 471, Record) such agreed interest rates must be followed. This is very clear from paragraph II, sub-paragraph 1 quoted above.

On the issue of payment of surcharges and penalties, we partly agree that GOYU's pitiful situation must be taken into account. We do not agree, however, that payment of any amount as surcharges and penalties should altogether be deleted. Even assuming that RCBC, through its responsible officers, herein petitioners Eli Lao and Uy Chun Bing, may have relayed its assurance for assistance

to GOYU immediately after the occurrence of the fire, we cannot accept the lower courts' finding that RCBC had thereby ipso facto effectively waived collection of any additional interests, surcharges, and penalties from GOYU. Assurances of assistance are one thing, but waiver of additional interests, surcharges, and penalties is another.

Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature of liquidated damages, covered by Section 4, Chapter 3, Title XVIII of the Civil Code. Article 2227 thereof provides:

Art. 2227. Liquidated damages, whether intended as a indemnity or penalty, shall be equitably reduced if they are iniquitous and unconscionable.

In exercising this vested power to determine what is iniquitous and unconscionable, the Court must consider the circumstances of each case. It should be stressed that the Court will not make any sweeping ruling that surcharges and penalties imposed by banks for non-payment of the loans extended by them are generally iniquitous and unconscionable. What may be iniquitous and unconscionable in one case, may be totally just and equitable in another. This provision of law will have to be applied to the established facts of any given case. Given the circumstance under which GOYU found itself after the occurrence of the fire, the Court rules the surcharges rates ranging anywhere from 9% to 27%, plus the penalty charges of 36%, to be definitely iniquitous and unconscionable. The Court tempers these rates to 2% and 3%, respectively. Furthermore, in the light of GOYU's offer to pay the amount of P116,301,992.60 to RCBC as March 1993 (See: Exhibit "BB"), which RCBC refused, we find it more in keeping with justice and equity for RCBC not to charge additional interest, surcharges, and penalties from that time onward.

Given the factual milieu hereover, we rule that it was error to hold MICO liable in damages for denying or withholding the proceeds of the insurance claim to GOYU.

Firstly, by virtue of the mortgage contracts as well as the endorsements of the insurance policies, RCBC has the right to claim the insurance proceeds, in substitution of the property lost in the fire. Having assigned its rights, GOYU lost its standing as the beneficiary of the said insurance policies.

Secondly, for an insurance company to be held liable for unreasonably delaying and withholding payment of insurance proceeds, the delay must be wanton, oppressive, or malevolent (Zenith Insurance Corporation vs. CA. 185 SCRA 403 [1990]). It is generally agreed, however, that an insurer may in good faith and honesty entertain a difference of opinion as to its liability. Accordingly, the statutory penalty for vexatious refusal of an insurer to pay a claim should not be inflicted unless the evidence and circumstances show that such refusal was willful and without reasonable cause as the facts appear to a reasonable and prudent man (Bufallo Ins. Co. vs. Bommarito [CCA 8th] 42 F [2d] 53, 70 ALR 1211; Phoenix Ins. Co. vs. Clay, 101 Ga. 331, 28 SE 853, 65 Am St. Rep 307; Kusnetsky vs. Security Ins. Co., 313 Mo. 143, 281 SW 47, 45 ALR 189). The case at bar does not show that MICO wantonly and in bad faith delayed the release of the proceeds. The problem in the determination of who is the actual beneficiary of the insurance policies, aggravated by the claim of various creditors who wanted to partake of the insurance proceeds, not to mention the importance of the endorsement to RCBC, to our mind, and as now borne out by the outcome herein, justified MICO in withholding payment to GOYU.

In adjudging RCBC liable in damages to GOYU, the Court of Appeals said that RCBC cannot avail itself of two simultaneous remedies in enforcing the claim of an unpaid creditor, one for specific performance and the other for foreclosure. In doing so, said the appellate court, the second action is deemed barred, RCBC having split a single cause of action (Rollo, pp. 195-199). The Court of Appeals was too accommodating in giving due consideration to this argument of GOYU, for the

foreclosure suit is still pending appeal before the same Court of Appeals in CA G.R. CV No. 46247, the case having been elevated by RCBC.

In finding that the foreclosure suit cannot prosper, the Fifteenth Division of the Court of Appeals pre-empted the resolution of said foreclosure case which is not before it. This is plain reversible error if not grave abuse of discretion.

As held in Peña vs. Court of Appeals (245 SCRA 691 [1995]):

It should have been enough, nonetheless, for the appellate court to merely set aside the questioned ordered of the trial court for having been issued by the latter with grave abuse of discretion. In likewise enjoining permanently herein petitioner "from entering in and interfering with the use or occupation and enjoyment of petitioner's (now private respondent) residential house and compound," the appellate court in effect, precipitately resolved with finality the case for injunction that was yet to be heard on the merits by the lower court. Elevated to the appellate court, it might be stressed, were mere incidents of the principal case still pending with the trial court. In Municipality of Biñan, Laguna vs. Court of Appeals, 219 SCRA 69, we ruled that the Court of Appeals would have "no jurisdiction in a certiorari proceeding involving an incident in a case to rule on the merits of the main case itself which was not on appeal before it.

(pp. 701-702.)

Anent the right of RCBC to intervene in Civil Case No. 1073, before the Zamboanga Regional Trial Court, since it has been determined that RCBC has the right to the insurance proceeds, the subject matter of intervention is rendered moot and academic. Respondent Sebastian must, however, yield to the preferential right of RCBC over the MICO insurance policies. It is basic and fundamental that the first mortgagee has superior rights over junior mortgagees or attaching creditors (Alpha Insurance & Surety Co. vs. Reyes, 106 SCRA 274 [1981]; Sun Life Assurance Co. of Canada vs. Gonzales Diaz, 52 Phil. 271 [1928]).

WHEREFORE, the petitions are hereby GRANTED and the decision and resolution of December 16, 1996 and April 3, 1997 in CA-G.R. CV No. 46162 are hereby REVERSED and SET ASIDE, and a new one entered:

1. Dismissing the Complaint of private respondent GOYU in Civil Case No. 93-65442 before Branch 3 of the Manila Trial Court for lack of merit;

2. Ordering Malayan Insurance Company, Inc. to deliver to Rizal Commercial Banking Corporation the proceeds of the insurance policies in the amount of P51,862,390.94 (per report of adjuster Toplis & Harding (Far East), Inc., Exhibits "2" and "2-1"), less the amount of P50,505,594.60 (per O.R. No. 3649285);

3. Ordering the Clerk of Court to release the amount of P50,505,594.60 including the interests earned to Rizal Commercial Banking Corporation;

4. Ordering Goyu & Sons, Inc. to pay its loan obligation with Rizal Commercial Banking Corporation in the principal amount of P107,246,887.90, with interest at the respective rates stipulated in each promissory note from January 21, 1993 until finality of this judgment, and surcharges at 2% and penalties at 3% from January 21, 1993 to March 9, 1993, minus payments made by Malayan Insurance Company, Inc.

and the proceeds of the amount deposited with the trial court and its earned interest. The total amount due RCBC at the time of the finality of this judgment shall earn interest at the legal rate of 12% in lieu of all other stipulated interests and charges until fully paid.

The petition of Rizal Commercial Banking Corporation against the respondent Court in CA-GR CV 48376 is DISMISSED for being moot and academic in view of the results herein arrived at. Respondent Sebastian's right as attaching creditor must yield to the preferential rights of Rizal Commercial Banking Corporation over the Malayan insurance policies as first mortgagee.

SO ORDERED.

Regalado, Puno, Mendoza and Martinez, JJ., concur.

SECOND DIVISION

[G.R. No. 73198, September 02, 1992]

PRIVATE DEVELOPMENT CORPORATION OF THE PHILIPPINES, PETITIONER, VS. THE INTERMEDIATE APPELLATE COURT AND ERNESTO C. DEL ROSARIO, RESPONDENTS.

D E C I S I O N

NOCON, J.:

Before Us is an appeal from the decision[1] of the then Intermediate Appellate Court which overruled the

trial's court Decision[2] in Civil Case No. 82-8088.

The undisputed facts of the case are as follows:

On May 21, 1974, Davao Timber Corporation, DATICOR for brevity, and the Private Development

Corporation (PDCP) entered into a loan agreement[3] whereby PDCP extended to DATICOR a loan in foreign

currency equivalent to US$ 265,000.00 and another in the amount of P2,500,000.00 for the purpose of

establishing a kiln drying and woodworking plant in Mati, Davao Oriental.

It was stipulated in the loan agreement, that the foreign currency loan was to be paid with an interest rate

of eleven and three fourths (11-3/4%) per cent per annum on the disbursed amount of the foreign

currency; and the peso loan at the rate of twelve (12%) per cent per annum on the disbursed amount of the

peso loan outstanding, commencing on the several dates on which disbursements of the proceeds of the

loans were made.[4]

The loans were originally secured by a first mortgage[5] executed by Ernesto del Rosario, President of

DATICOR, in his personal capacity, and his sister, Lourdes C. Cuerva, as third party mortgagors on a parcel

of land which they owned in common. On December 28, 1976, the third party mortgagors, Del Rosario and

Cuerva partitioned this mortgaged property which they owned in common, such that said parcel was re-

surveyed and two certificates of titles were issued, each with an area of 3,854 square meters, one in the

name of Del Rosario and the other in the name of Cuerva.

Thereafter, PDCP executed a partial release of mortgage[6] on the parcel of land owned by Cuerva, on the

condition that in lieu thereof, DATICOR was to mortgage an additional five (5) parcels of land consisting of

prime industrial lands with buildings thereon. As a consequence, DATICOR executed an Addendum to

Mortgage[7] in favor of PDCP.

DATICOR likewise executed a Deed of Chattel Mortgage[8] on the machineries and equipments attached to

the land in Davao Oriental as added security for said loans.

The approved value of the parcel of land of Del Rosario, including the building thereon, was P12,000,000.00

while the appraised value of the DATICOR properties consisting of the five parcels of land in Davao Oriental,

including the buildings and structure thereon and the machineries and equipments, is at least

P15,000,000.00 or a total of P27,000,000.00 for the loan of about P4.4 million pesos.

PDCP asked DATICOR to pay a service fee of one (1%) per cent per annum on the outstanding balance of

the peso loan to cover the cost of administering DATICOR's account and supervision of the project.[9] This

service fee was subsequently increased to six (6%) per cent per annum in addition to the twelve (12%) per

cent per annum interest on the peso loan.[10] Furthermore, DATICOR was asked to pay penalty charges at

the rate of two (2%) per cent per month.[11]

A total of P3,000,000.00 was already paid by Del Rosario to PDCP and which the latter applied to interests,

service fees and penalty charges; such that according to PDCP, DATICOR still has an outstanding balance on

the principal loan of P10,887,856.99 as of May 15, 1983.

By virtue of which, PDCP initiated extra-judicial foreclosure proceedings[12] against the parcel of land owned

by Del Rosario in Manila and the five (5) parcels of land owned by DATICOR in Davao Oriental.

Del Rosario and Cuerva then filed a complaint[13] on March 31, 1982 against the PDCP in the Court of First

Instance of Manila in Civil Case No. 82-8088 for violation of the Usury Law, annulment of contract and

damages with prayer for the issuance of a writ of preliminary injunction. On April 13, 1982, a restraining

order[14] was issued by the Court of First Instance of Manila.

DATICOR filed another case on April 1, 1982 in the Court of First Instance of Davao Oriental seeking a writ

of injunction to prevent PDCP from foreclosing its properties in Davao, and likewise praying for the

annulment of the loan contract as it is in violation of the Usury Law and damages.[15]

On January 25, 1983, the Court of First Instance of Manila rendered a decision[16]dismissing Del Rosario's

petition. A motion for reconsideration was filed and was still pending when the PDCP filed another petition

for extra-judicial foreclosure of the real properties of Del Rosario in Manila and anchored on the same

grounds, requesting the Sheriff to conduct the same. The Sheriff had thus posted and caused publication of

the public auction sale scheduled on July 27, 1983.

Del Rosario and Cuerva therefore sought a restraining order from another branch of the Regional Trial Court

in Manila as their right to appeal would be rendered meaningless if the foreclosure proceedings were

conducted in the meantime that their motion for reconsideration with Judge Ejercito in Civil Case No. 82-

8088 was still pending resolution.

On August 3, 1983, herein respondents received a copy of the order in Civil Case No. 82-8088 denying their

motion for reconsideration for lack of merit. On that same day, they appealed to the then Intermediate

Appellate Court seeking an injunction to issue against the sheriff of Manila from proceeding with the auction

sale and likewise appealing the dismissal of their complaint in Civil Case No. 82-8088 for violation of the

Usury Law, annulment of contract and damages.

The then Intermediate Appellate Court rendered its decision,[17] the dispositive portion of which reads:

"WHEREFORE, the decision appealed from is hereby set aside and another one is rendered declaring void

and of no effect the stipulations of interest in the loan agreement (Annex "A") between DATICOR and PDCP,

as if the loan agreement is without stipulation as to payment of interest."

Hence, this appeal.

We find no merit in the instant petition.

Inasmuch as the loan agreement herein was entered into on May 21, 1974, the prevailing law applicable is

Act No. 2655, otherwise known as the Usury Law, as amended by P.D. No. 116, which took effect on

January 29, 1974.

Section 2 of Act No. 2655 provides:

"No person or corporation shall directly or indirectly take or receive money or other property, real or

personal, or choses in action, a higher rate of interest or greater sum of value including commission

premiums, fines and penalties for the loan or renewal thereof or forbearance of money, goods or credit,

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 a document conveying such real estate at an interest, than twelve

percent per annum."

The usury law therefore, as amended by Presidential Decree 116 fixed all interest rates for all loans with

maturity of more than 360 days at twelve (12%) per cent per annum including premiums, fines and

penalties.

It is to be noted that PDCP was charging penalties at the rate of two (2%) per cent per month or an

effective rate of twenty four (24%) per cent per annum on the peso loan and one-half (1/2%) per cent per

month or an effective six (6%) per cent per annum on the foreign currency loan. It is therefore very clear

that PDCP has been charging and imposing interests in violation of the prevailing usury laws.

In the beginning, PDCP was charging a total of nineteen (19%) per cent interest per annum on the peso

loan and eighteen and three fourths (18-3/4%) per cent on the foreign currency loan. Since the penalty

charges was increased to two (2%) per cent per month with regard to the peso loan, PDCP began charging a

total of forty two (42%) per cent per annum on the peso loan, clearly in violation of the usury law.

DATICOR obtained a loan of P4.4 million pesos and has paid a total of about P3 million pesos, the remaining

balance on the principal debt left unpaid is about P1.4 million pesos, to which respondents must still pay the

petitioner.

The law should not be interpreted to mean forfeiture of the principal loan as that would be unjustly enriching

the borrower. The unpaid principal debt still stands and remains valid but the stipulation as to the usurious

interest is void, consequently, the debt is to be considered without stipulation as to the interest.

As, held in Angel Jose Warehousing Co., Inc. vs. Chelda Enterprises, et. al.:[18]

"In, simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt,

which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies only as to the

prestation to pay the stipulated interest; hence, being separable, the latter only should be deemed void,

since it is only one that is illegal."

x x x             x x x    x x x

"The foregoing interpretation is reached with the philosophy of usury legislation in mind; to discourage

stipulations on usurious interest, said stipulations are treated as wholly void, so that the loan becomes one

without stipulation as to the payment of interest. It should not, however, be interpreted to mean forfeiture

even of the principal, for this would unjustly enrich the borrower at the expense of the lender. Furthermore,

penal sanctions are available against a usurious lender, as a further deterrence to usury.

"The principal debt remaining without stipulation for payment of interest can thus be recovered by judicial

action."

Petitioner contends that petitioner Del Rosario is not a party-in-interest in the case.

We do not agree.

Del Rosario mortgaged his properties in his personal capacity to secure the debt of DATICOR. As, such, the

creditor, PDCP, may proceed against Del Rosario or DATICOR or both of them simultaneously for the

payment of the loan or for the performance of the obligation. In fact, PDCP filed for the foreclosure of the

real properties belonging to Del Rosario.

Petitioner further contends that the cause of action of Ernesto del Rosario in Civil Case No. 82-8088 is

barred by prescription and that that there is a pending case before the Court of First Instance of Mati, Davao

with the same cause of action.

With regard to the first contention, Article 1957 of the Civil Code provides:

“x x x contracts and stipulations, under any cloak or device whatever, intended to circumvent the law

against usury shall be void."

Furthermore, Article 1410 provides:

"The action or defense for the declaration of the inexistence of a contract does not prescribe."

The aforesaid articles therefore state that all usurious stipulations are void and as such, an action to annul

such usurious stipulations does not prescribe.

As to the issue of litis pendencia, such principle is not applicable to the case at bar. Records show and as

admitted by petitioner, the action filed in the Court of First Instance of Manila in Civil Case No. 82-8088 was

against Del Rosario while the case filed in the Court of First Instance of Mati, Davao Oriental in Civil Case

No. 998 was against DATICOR. The first case against a natural person, while the second, against a juridical

person. Clearly, there is no identity of parties, hence, litis pendencia cannot apply.

WHEREFORE, finding no reversible error in the decision appealed herefrom, the same is hereby

AFFIRMED in toto.

SO ORDERED.

Narvasa, C.J., (Chairman), Padilla, and Regalado, JJ., concur.

Melo, J., no part.

[G.R. No. 131622. November 27, 1998]

LETICIA Y. MEDEL DR. RAFAEL MEDEL and SERVANDO

FRANCO, petitioners, vs. COURT OF APPEALS, SPOUSES

VERONICA R. GONZALES and DANILO G. GONZALES, JR., doing

lending business under the trade name and style "GONZALES

CREDIT ENTERPRISES", respondents.

D E C I S I O N

PARDO, J.:

The case before the Court is a petition for review on certiorari, under Rule 45 of the

Revised Rules of Court, seeking to set aside the decision of the Court of Appeals,[1] and its

resolution denying reconsideration,[2]the dispositive portion of which decision reads as follows:

"WHEREFORE, the appealed judgment is hereby MODIFIED

such that defendants are hereby ordered to pay the plaintiff: the sum

of P500,000.00, plus 5.5% per month interest and 2% service charge

per annum effective July 23, 1986, plus 1% per month of the total

amount due and demandable as penalty charges effective August 23,

1986, until the entire amount is fully paid.

"The award to the plaintiff of P50,000.00 as attorney's fees is

affirmed. And so is the imposition of costs against the defendants.

SO ORDERED."[3]

The Court required the respondents to comment on the petition,[4] which was filed on April

3, 1998,[5] and the petitioners to reply thereto, which was filed on May 29, 1998.[6] We now

resolve to give due course to the petition and decide the case.

The facts of the case, as found by the Court of Appeals in its decision, which are considered

binding and conclusive on the parties herein, as the appeal is limited to questions of law, are as

follows:

On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia)

obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was engaged in the money

lending business under the name "Gonzales Credit Enterprises", in the amount of P50,000.00,

payable in two months. Veronica gave only the amount of P47,000.00, to the borrowers, as she

retained P3,000.00, as advance interest for one month at 6% per month. Servado and Leticia

executed a promissory note for P50,000.00, to evidence the loan, payable on January 7, 1986.

On November 19, 1985, Servando and Leticia obtained from Veronica another loan in the

amount of P90,000.00, payable in two months, at 6% interest per month. They executed a

promissory note to evidence the loan, maturing on January 19, 1986. They received

only P84,000.00, out of the proceeds of the loan.

On maturity of the two promissory notes, the borrowers failed to pay the indebtedness.

On June 11, 1986, Servando and Leticia secured from Veronica still another loan in the

amount of P300,000.00, maturing in one month, secured by a real estate mortgage over a

property belonging to Leticia Makalintal Yaptinchay, who issued a special power of attorney in

favor of Leticia Medel, authorizing her to execute the mortgage. Servando and Leticia executed

a promissory note in favor of Veronica to pay the sum ofP300,000.00, after a month, or on July

11, 1986. However, only the sum of P275,000.00, was given to them out of the proceeds of the

loan.

Like the previous loans, Servando and Medel failed to pay the third loan on maturity.

On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel,

consolidated all their previous unpaid loans totaling P440,000.00, and sought from Veronica

another loan in the amount ofP60,000.00, bringing their indebtedness to a total of P500,000.00,

payable on August 23, 1986. The executed a promissory note, reading as follows:

"Baliwag, Bulacan July 23, 1986

"Maturity Date August 23, 1986

"P500,000.00

"FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the

order of VERONICA R. GONZALES doing business in the business style of

GONZALES CREDIT ENTERPRISES, Filipino, of legal age, married to

Danilo G. Gonzales, Jr., of Baliwag Bulacan, the sum of PESOS ........ FIVE

HUNDRED THOUSAND ..... (P500,000.00) Philippine

Currency with interest thereon at the rate of 5.5 PERCENT per month plus 2%

service charge per annum from date hereof until fully paid according to the

amortization schedule contained herein. (Underscoring supplied)

"Payment will be made in full at the maturity date.

"Should I/WE fail to pay any amortization or portion hereof when due, all the

other installments together with all interest accrued shall immediately be due

and payable and I/WE hereby agree to pay

an additionalamount equivalent to one per cent (1%) per month of the amount

due and demandable as penalty charges in the form of liquidated damages unti

l fully paid; and the

further sum of TWENTY FIVE PER CENT(25%) thereon in full, without

deductions as Attorney's Fee whether actually incurred or not, of the total

amount due and demandable, exclusive of costs and judicial or extra judicial

expenses. (Underscoring supplied)

"I, WE further agree that in the event the present rate of interest on loan is

increased by law or the Central Bank of the Philippines, the holder shall have

the option to apply and collect the increased interest charges without notice

although the original interest have already been collected wholly or partially

unless the contrary is required by law.

"It is also a special condition of this contract that the parties herein agree that

the amount of peso-obligation under this agreement is based on the present

value of peso, and if there be any change in the value thereof, due to

extraordinary inflation or deflation, or any other cause or reason, then the

peso-obligation herein contracted shall be adjusted in accordance with the

value of the peso then prevailing at the time of the complete fulfillment of

obligation.

"Demand and notice of dishonor waived. Holder may accept partial payments

and grant renewals of this note or extension of payments, reserving rights

against each and all indorsers and all parties to this note.

"IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the

debtors waive all his/their rights under the provisions of Section 12, Rule 39,

of the Revised Rules of Court."

On maturity of the loan, the borrowers failed to pay the indebtedness of P500,000.00, plus

interests and penalties, evidenced by the above-quoted promissory note.

On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G. Gonzales,

filed with the Regional Trial Court of Bulacan, Branch 16, at Malolos, Bulacan, a complaint for

collection of the full amount of the loan including interests and other charges.

In his answer to the complaint filed with the trial court on April 5, 1990, defendant Servando

alleged that he did not obtain any loan from the plaintiffs; that it was defendants Leticia and Dr.

Rafael Medel who borrowed from the plaintiffs the sum of P500,000.00, and actually received

the amount and benefited therefrom; that the loan was secured by a real estate mortgage executed

in favor of the plaintiffs, and that he (Servando Franco) signed the promissory note only as a

witness.

In their separate answer filed on April 10,1990, defendants Leticia and Rafael Medel alleged

that the loan was the transaction of Leticia Yaptinchay, who executed a mortgage in favor of the

plaintiffs over a parcel of real estate situated in San Juan, Batangas; that the interest rate is

excessive at 5.5% per month with additional service charge of 2% per annum, and penalty charge

of 1% per month; that the stipulation for attorney's fees of 25% ofthe amount due is

unconscionable, illegal and excessive, and that substantial payments made were applied to

interest, penalties and other charges.

After due trial, the lower court declared that the due execution and genuineness of the four

promissory notes had been duly proved, and ruled that although the Usury Law had been

repealed, the interest charged by the plaintiffs on the loans was unconscionable and "revolting to

the conscience". Hence, the trial court applied "the provision of the New [Civil] Code" that the

"legal rate of interest for loan or forbearance of money, goods or credit is 12% per annum."[7]

Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive

portion of which reads as follows:

"WHEREFORE, premises considered, judgment is hereby rendered, as follows:

"1. Ordering the defendants Servando Franco and Leticia Medel, jointly and

severally, to pay plaintiffs the amount of P47,000.00 plus 12% interest per annum

from November 7, 1985 and 1% per month as penalty, until the entire amount is paid

in full.

"2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs,

jointly and severally the amount of P84,000.00 with 12% interest per annum and 1%

per cent per month as penalty from November 19,1985 until the whole amount is fully

paid;

"3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount

of P285,000.00 plus 12% interest per annum and 1% per month as penalty from July

11, 1986, until the whole amount is fully paid;

"4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount

of P50,000.00 as attorney's fees;

"5. All counterclaims are hereby dismissed.

"With costs against the defendants."[8]

In due time, both plaintiffs and defendants appealed to the Court of Appeals.

In their appeal, plaintiffs-appellants argued that the promissory note, which consolidated all

the unpaid loans of the defendants, is the law that governs the parties. They further argued that

Circular No. 416 of the Central Bank prescribing the rate of interest for loans or forbearance of

money, goods or credit at 12% per annum, applies only in the absence of a stipulation on interest

rate, but not when the parties agreed thereon.

The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the Usury

Law having become 'legally inexistent' with the promulgation by the Central Bank in 1982 of

Circular No. 905, the lender and borrower could agree on any interest that may be charged on the

loan".[9] The Court of Appeals further held that "the imposition of 'an additional amount

equivalent to 1% per month of the amount due and demandable as penalty charges in the form of

liquidated damages until fully paid' was allowed by law".[10]

Accordingly, on March 21, 1997, the Court of Appeals promulgated it decision reversing

that of the Regional Trial Court, disposing as follows:

"WHEREFORE, the appealed judgment is hereby MODIFIED

such that defendants are hereby ordered to pay the plaintiffs the sum

of P500,000.00, plus 5.5% per month interest and 2% service charge

per annum effective July 23, 1986, plus 1% per month of the total

amount due and demandable as penalty charges effective August 24,

1986, until the entire amount is fully paid.

"The award to the plaintiffs of P50,000.00 as attorney's fees is

affirmed. And so is the imposition of costs against the defendants.

"SO OREDERED."[11]

On April 15, 1997, defendants-appellants filed a motion for reconsideration of the said

decision. By resolution dated November 25, 1997, the Court of Appeals denied the motion.[12]

Hence, defendants interposed the present recourse via petition for review on certiorari.[13]

We find the petition meritorious.

Basically, the issue revolves on the validity of the interest rate stipulated upon. Thus, the

question presented is whether or not the stipulated rate of interest at 5.5% per month on the loan

in the sum of P500,000.00, that plaintiffs extended to the defendants is usurious. In other words,

is the Usury Law still effective, or has it been repealed by Central Bank Circular No. 905,

adopted on December 22, 1982, pursuant to its powers under P.D. No. 116, as amended by P.D.

No. 1684?

We agree with petitioners that the stipulated rate of interest at 5.5% per month on

the P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant.13 However, we can

not consider the rate "usurious" because this Court has consistently held that Circulr No. 905 of

the Central Bank, adopted on December 22, 1982, has expressly removed the interest ceilings

prescribed by the Usury Law[14] and that the Usury Law is now "legally inexistent".[15]

In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61[16] the

Court held that CB Circular No. 905 "did not repeal nor in anyway amend the Usury Law but

simply suspended the latter's effectivity." Indeed, we have held that "a Central Bank Circular

can not repeal a law. Only a law can repeal another law."[17] In the recent case of Florendo vs.

Court of Appeals[18], the Court reiterated the ruling that "by virtue of CB Circular 905, the Usury

Law has been rendered ineffective". "Usury has been legally non-existent in our

jurisdiction. Interest can now be charged as lender and borrower may agree upon."[19]

Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by

the parties in the promissory note iniquitous or unconscionable, and, hence, contrary to morals

("contra bonos mores"), if not against the law.[20] The stipulation is void.[21]

The courts shall

reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are

iniquitous or unconscionable.[22]

Consequently, the Court of Appeals erred in upholding the stipulation of the parties. Rather,

we agree with the trial court that, under the circumstances, interest at 12% per annum, and an

additional 1% a month penalty charge as liquidated damages may be more reasonable.

WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court

of Appeals promulgated on March 21, 1997, and its resolution dated November 25,

1997. Instead, we render judgment REVIVING and AFFIRMING the decision dated December

9, 1991, of the Regional Trial Court of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No.

134-M-90, involving the same parties.

No pronouncement as to costs in this instance

SO ORDERED.

Narvasa, C.J. (Chairman), Romero, Kapunan, and Purisima, JJ., concur.

[G.R. No. 133498. April 18, 2002]

C.F. SHARP & CO., INC., petitioner, vs. NORTHWEST AIRLINES,

INC., respondent.

D E C I S I O N

YNARES-SANTIAGO, J.:

This is a petition for review under Rule 45 of the Rules of Court assailing the February 17,

1997 Decision[1] and the April 2, 1998 Resolution[2] of the Court of Appeals[3] in CA-G.R. SP No.

40996.

The undisputed facts are as follows:

On May 9, 1974, respondent, through its Japan Branch, entered into an International

Passenger Sales Agency Agreement with petitioner, authorizing the latter to sell its air transport

tickets. Petitioner failed to remit the proceeds of the ticket sales, for which reason, respondent

filed a collection suit against petitioner before the Tokyo District Court which rendered judgment

on January 29, 1981, ordering petitioner to pay respondent the amount of “83,158,195 Yen and

damages for the delay at the rate of 6% per annum from August 28, 1980 up to and until payment

is completed.”[4] Unable to execute the decision in Japan, respondent filed a case to enforce said

foreign judgment with the Regional Trial Court of Manila, Branch 54.[5] However, the case was

dismissed on the ground of failure of the Japanese Court to acquire jurisdiction over the person

of the petitioner. Respondent appealed to the Court of Appeals, which affirmed the decision of

the trial court.

Respondent filed a petition for review with this Court, docketed as G.R. No. 112573. On

February 9, 1995, a decision was rendered, the dispositive portion of which reads:

WHEREFORE, the instant petition is partly GRANTED, and the challenged decision

is AFFIRMED insofar as it denied NORTHWEST’s claims for attorney’s fees,

litigation expenses, and exemplary damages but REVERSED insofar as it sustained

the trial court’s dismissal of NORTHWEST’s complaint in Civil Case No. 83-17637

of Branch 54 of the Regional Trial Court of Manila, and another in its stead is hereby

rendered ORDERING private respondent C.F. SHARP & COMPANY, INC. to pay to

NORTHWEST the amounts adjudged in the foreign judgment subject of said case,

with interest thereon at the legal rate from the filing of the complaint therein until the

said foreign judgment is fully satisfied.

Costs against the private respondent.

SO ORDERED.[6]

Accordingly, the Regional Trial Court of Manila, Branch 54, issued a writ of execution of

the foregoing decision.[7] On November 22, 1995, the trial court modified its order for the

execution of the decision, viz:

WHEREFORE, in view of the foregoing, this Court hereby issues another order, as

follows: the writ of execution is issued against defendant C.F. Sharp ordering said

defendant to pay the plaintiff the sum of 83,158,195 Yen at the exchange rate

prevailing on the date of the foreign judgment on January 29, 1981, plus 6% per

annum until May 19, 1983; and from said date until full payment, 12% per

annum (6% by way of damages and 6% interest) until the entire obligation is fully

satisfied.

SO ORDERED.[8]

On December 18, 1995, petitioner filed a petition for certiorari under Rule 65, docketed as

G.R. No. 122890, assailing the aforequoted order. On May 29, 1996, the case was referred to the

Court of Appeals. Petitioner contended that it had already made partial payments; hence, it was

liable only for the amount of 61,734,633 Yen. Moreover, it argued that it was not liable to pay

additional interest on top of the 6% interest imposed in the foreign judgment.

The Court of Appeals rendered the assailed decision on February 17, 1997. It sustained the

imposition of additional interest on the liability of petitioner as adjudged in the foreign

judgment. The appellate court likewise corrected the reckoning date of the imposition of the

interests in accordance with the February 9, 1995 decision to be executed, but lowered the

additional interest from 12% to 6% per annum. Further, it ruled that the basis of the conversion

of petitioner’s liability in its peso equivalent should be the prevailing rate at the time of payment

and not the rate on the date of the foreign judgment. The dispositive portion of the said decision

reads:

WHEREFORE, the petition is GRANTED. The assailed Orders dated October 13,

1995 and November 22, 1995 are annulled and set aside on the ground that they

varied the final judgment of the First Division of the Supreme Court in G.R. No.

112573, entitled, “NORTHWEST ORIENT AIRLINES, INC., Petitioner, versus,

COURT OF APPEALS and C. F. SHARP & COMPANY, INC., Respondents”.

Respondent court is enjoined to execute the said final judgment with an unpaid

principal balance of Y61,734,633 plus damages for delay at the rate of 6% per

annum from August 28, 1980, until fully paid, which may be paid in local currency

based on the conversion rate prevailing at the time of payment; plus 6% legal

interest per annum from August 28, 1980, the date of the filing of the complaint in the

foreign judgment.

No costs.

SO ORDERED.[9]

On April 2, 1998, the Court of Appeals denied both the motion for reconsideration and the

partial motion for reconsideration filed by petitioner and respondent, respectively.

In the present recourse, petitioner questions the applicable conversion rate of its liability,

and claims that a ruling thereon by the Court of Appeals effectively deprived it of due process of

law because said rate was not among the issues submitted for resolution.

The petition is without merit.

In ruling that the applicable conversion rate of petitioner’s liability is the rate at the time of

payment, the Court of Appeals cited the case of Zagala v. Jimenez,[10] interpreting the provisions

of Republic Act No. 529, as amended by R.A. No. 4100. Under this law, stipulations on the

satisfaction of obligations in foreign currency are void. Payments of monetary obligations,

subject to certain exceptions, shall be discharged in the currency which is the legal tender in the

Philippines. But since R.A. No. 529 does not provide for the rate of exchange for the payment of

foreign currency obligations incurred after its enactment, the Court held in a number of

cases[11] that the rate of exchange for the conversion in the peso equivalent should be the

prevailing rate at the time of payment.

Petitioner, however, contends that with the repeal of R.A. No. 529 by R.A. No. 8183,[12] the

jurisprudence relied upon by the Court of Appeals is no longer applicable.

Republic Act No. 529, as amended by R.A. No. 4100, provides:

SECTION 1. Every provision contained in, or made with respect to, any domestic

obligation to wit, any obligation contracted in the Philippines which provision

purports to give the obligee the right to require payment in gold or in a particular kind

of coin or currency other than Philippine currency or in an amount of money of the

Philippines measured thereby, be as it is hereby declared against public policy, and

null, void, and of no effect, and no such provision shall be contained in, or made with

respect to, any obligation hereafter incurred. The above prohibition shall not apply to

(a) transactions where the funds involved are the proceeds of loans or investments

made directly or indirectly, through bona fide intermediaries or agents, by foreign

governments, their agencies and instrumentalities, and international financial banking

institutions so long as the funds are identifiable, as having emanated from the sources

enumerated above; b) transactions affecting high-priority economic projects for

agricultural, industrial and power development as may be determined by the National

Economic Council which are financed by or through foreign funds; (c) forward

exchange transactions entered into between banks or between banks and individuals

or juridical persons; (d) import-export and other international banking, financial

investment and industrial transactions. With the exception of the cases enumerated in

items (a), (b), (c) and (d) in the foregoing provision, in which cases the terms of the

parties’ agreement shall apply, every other domestic obligation heretofore or hereafter

incurred, whether or not any such provision as to payment is contained therein or

made with respect thereto, shall be discharged upon payment in any coin or currency

which at the time of payment is legal tender for public and private debts: Provided,

That if the obligation was incurred prior to the enactment of this Act and required

payment in a particular kind of coin or currency other than Philippine currency, it

shall be discharged in Philippine currency, measured at the prevailing rates of

exchange at the time the obligation was incurred, except in case of a loan made in a

foreign currency stipulated to be payable in the same currency in which case the rate

of exchange prevailing at the time of the stipulated date of payment shall prevail. All

coin and currency, including Central Bank notes, heretofore or hereafter issued and

declared by the Government of the Philippines shall be legal tender for all debts,

public and private.

Pertinent portion of Republic Act No. 8183 states:

SECTION 1. All monetary obligations shall be settled in the Philippine currency

which is legal tender in the Philippines. However, the parties may agree that the

obligation or transaction shall be settled in any other currency at the time of payment.

SEC. 2. Republic Act Numbered Five Hundred and Twenty-Nine (R.A. No. 529), as

amended, entitled “An Act to Assure the Uniform Value of Philippine Coin and

Currency” is hereby repealed.

The repeal of R.A. No. 529 by R.A. No. 8183 has the effect of removing the prohibition on

the stipulation of currency other than Philippine currency, such that obligations or transactions

may now be paid in the currency agreed upon by the parties. Just like R.A. No. 529, however, the

new law does not provide for the applicable rate of exchange for the conversion of foreign

currency-incurred obligations in their peso equivalent. It follows, therefore, that the

jurisprudence established in R.A. No. 529 regarding the rate of conversion remains

applicable. Thus, in Asia World Recruitment, Inc. v. National Labor Relations

Commission,[13] the Court, applying R.A. No. 8183, sustained the ruling of the NLRC that

obligations in foreign currency may be discharged in Philippine currency based on the prevailing

rate at the time of payment. The wisdom on which the jurisprudence interpreting R.A. No. 529

is based equally holds true with R.A. No. 8183. Verily, it is just and fair to preserve the real

value of the foreign exchange- incurred obligation to the date of its payment.[14]

We find no denial of due process in the instant case. Contrary to the argument of petitioner,

the matter of the applicable conversion rate was one of the issues submitted for resolution before

the Court of Appeals. Moreover, opportunity to be heard, which is the very essence of due

process, was afforded petitioner when it filed a motion for reconsideration of the Court of

Appeals’ decision.

Petitioner’s contention that it is Article 1250[15] of the Civil Code that should be applied is

untenable. The rule that the value of the currency at the time of the establishment of the

obligation shall be the basis of payment finds application only when there is an official

pronouncement or declaration of the existence of an extraordinary inflation or deflation.[16]

For its part, respondent prays for the modification of the Court of Appeals’ award of

interest. While as a general rule, a party who has not appealed is not entitled to affirmative relief

other than what was granted in the decision of the court below, law and jurisprudence authorize a

tribunal to consider errors, although unassigned, if they involve (1) errors affecting the lower

court’s jurisdiction over the subject matter, (2) plain errors not specified, and (3) clerical

errors.[17]

In the case at bar, the Court of Appeal’s failure to apply the correct legal rate of interest, to

which respondent is lawfully entitled, amounts to a “plain error.” In Eastern Shipping Lines, Inc.

v. Court of Appeals,[18] it was held that absent any stipulation, the legal rate of interest in

obligations which consists in the payment of a sum of money, as in the present case, is 12% per

annum. As stated in the decision of the Court in G.R. No. 112573, which is final and executory,

petitioner is liable to pay respondent the amount adjudged in the foreign judgment, with “interest

thereon at the legal rate [12% per annum] from the filing of the complaint therein [on August 28,

1980] until the said foreign judgment is fully satisfied.” Since petitioner already made partial

payments, his obligation was reduced to 61,734,633 Yen. Thus, petitioner should pay

respondent the amount of 61,734,633 Yen plus “damages for the delay at the rate of 6% per

annum from August 28, 1980 up to and until payment is completed,” with interest thereon at the

rate of 12% per annum from the filing of the complaint on August 28, 1980, until fully satisfied.

The Court is clothed with ample authority to review matters, even if they are not assigned as

errors on appeal, if it finds that their consideration is necessary in arriving at a just decision of

the case. Rules of procedure are mere tools designed to facilitate the attainment of justice. Their

strict and rigid application, which would result in technicalities that tend to frustrate rather than

promote substantial justice, must be avoided. Hence, substantive rights, like the applicable legal

rate of interest on petitioner’s long due and demandable obligation, must not be prejudiced by a

rigid and technical application of the rules.[19]

WHEREFORE, in view of all the foregoing, the instant petition is DENIED. The February

17, 1997 decision and the April 2, 1998 resolution of the Court of Appeals in CA-G.R. SP No.

40996 are AFFIRMED with MODIFICATION. Petitioner is directed to pay respondent

61,734,633 Yen plus damages for the delay at the rate of 6% per annum from August 28, 1980

up to and until payment is completed, with interest at the rate of 12% per annum counted from

the date of filing of the complaint on August 28, 1980, until fully satisfied. Petitioner’s liability

may be paid in Philippine currency, computed at the exchange rate prevailing at the time of

payment.

SO ORDERED.

Puno, and Sandoval-Gutierrez, JJ., concur.

Davide, Jr., C.J., (Chairman), Kapunan, and Austria-Martinez, JJ., on official leave.