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CREDIT TRANSACTIONS 2 SANCHEZ ROMAN- ATTY. JAZZIE SARONA-LOZARE

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November 13, 2015 (Tongo)

PART I: CONCEPT OF CREDIT TRANSACTIONS

We will discuss transactions such as transactions involving purchase or loan of goods or money or even services wherein the loan or purchase is at present with a promise to repay or deliver in the future.

With

the

concept

of

this

credit

transactions

We also have the bailee, the recipient of the property. He receives the custody or possession of the thing delivered. Essentially in a contract of bailment there is the obligation to restore or return the subject of the bailment whether if the same or other form has been delivered.

Kinds of bailment

1. Sole benefit of the bailor- it is gratuitous deposit

such as mandatum?

exchanges

is

possible

in

the

xx

commerce

because

instead

of

waiting

that

you

2. Sole benefit of the bailee- commodatum.

have money to be able to purchase goods you get

Gratituous, simple loan or mutuum.

to

deliver it in the future.

enjoy at present then

pay it later.

Or pay

or

Contract of bailments, usury, suretyship, guaranty, mortgage, antichresis, terms and preference of credits these are essentially contracts that we would be discussing. So we have here contracts of security.

There are two kinds of security contracts

1. Secured transactions- when you have properties whether personal or real which serve as a collateral or property is encumbered such as that of a mortgaged, pledge, antichresis or charged as lien thereon.

2. Unsecured transactions- also known as personal security. There is no property involved but rather what serve as a security is a promise to pay the person, the personal guaranty or commitment of the guarantor or surety.

Now contracts of security, with this type of contract something is given, deposited or serve as a means to ensure the fulfillment or the enforcement of an obligation or protecting some interest in the property. We will be discussing contracts of bailments ito yung contracts of loan, deposit.

What happens in bailment? Bailment means may delivery of something, delivery of a property from one person to another in trust for a specific purpose with a contract express or implied. That the trust should be faithfully executed and the property returned or duly accounted for when the special purpose is accomplished or kept until the bailor retains it. Again this is a contract.

We have two parties, the bailor and the bailee. The bailor is referred to as the commodatario, he is the one who delivers possession or custody of the thing bailed. He need not be the owner of the thing but what is important is that he has possessory interest of the said property. In other words he has the right to deliver it to another person.

A lessee can be a bailor, a usurfructuary can be a bailor even if he was not the owner of the property subject of the bailment.

3. For the benefit of boh the bailor or the bailee

such a deposit with compensation, involuntary deposit, pledge and xx for hire.

The first two kinds of bailment for the sole benefits

of the bailor, bailee

where there is no consideration but parties have

their respective obligations.

these are gratuitous bailments

For mutual benefit bailments, here the bailment involved are transactions such as deposit or compensation.

What about bailments for hire? this is also a bailment for the benefit of both parties since compensation is involved. It can be for the hire of things which will now be considered as a contract of lease, hire of service which is a contract of piece of work under 1467, hire for carriage of goodscommon carrier and hire of custody for storage and those covered under warehouse receipts law.

PART II: LOAN

I. CONCEPT

II. COMMODATUM

The first kind of credit transaction we have to

discuss is a contract of loan and we have article

1933

1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower.

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

CREDIT TRANSACTIONS 2 SANCHEZ ROMAN- ATTY. JAZZIE SARONA-LOZARE

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1953 discusses what a contract of loan is… to deliver something to another person consumable or not so that the latter may use the same for a certain time and return it.

Under 1933 we have two kinds of loan. We have commodatum or simple loan or mutuum.

Now if we say mutuum or loan the first that comes to your mind is money, mag-utang. Actually that is only one type of loan. That refers to a simple loan or mutuum. Because loan or contract of loan is also involved for example, if we borrow somebody else’s book that is commodatum, that is a contract of loan.

Now these contracts of loan whether commodatum or mutuum are real contracts as they are perfected by delivery. They are also considered as unilateral contract because once the subject matter has been delivered, it creates obligation to the part of the borrower. But again as you will see in the succeeding discussions, the bailor has still obligations to comply with.

Now do not confuse loan from other terms such as credit and discounting. Again when we talk about loan the first thing comes to our mind is loan of money, mutuum or simple loan, wherein there is delivery by other party and the recieve by other party who becomes the owner of the sum of money that has been delivered or some other consumable thing upon the agreement express or implied with the obligation to repay the same amount of the same kind and quality with or without interest.

Credit on the other hand is your ability to borrow money or things by virtue of the confidence or trust reposed by a lender that he will pay what was promised within a specified period.

means the sum that is

credited on the books of the company purse to a person who appears to be entitled to it.

On accounting its credit

Discounting is different from loan. What happens when you discount checks? Discounting usually happens pag post dated yung check or malayo pa yung bangko for sa encashment or walay account ang payee sa cheke so instead of waiting for the maturity or due date of the check you will find another person, ‘puwede pa discount?’ so what would happen? If the amount of check is 20000 what would happen when it is discounted the amount that will be received by the payee or the holder will be lesser, bawas na yung interest. Now there is no contract of loan, what you have there is merely discounting, interest deducted in advance unlike contract of loan or the general concept of a contract of loan it is only considered as a single paper or only the signature of the maker appears therein.

However if you have discounting you have two signatures appearing therein both parties who are

liable for payment that would be considered as double paper.

Two kinds of loan

 

Commodatum

Simple loan

 

Object

Ordinary

the

Subject matter

object that is something that is not consumable

is

money

or

consumable

thing

 

ownership

No transfer of ownership as ownership is retained by the payor or lender

There

is

a

transfer

of

ownership

or

payee

 

Cause

Essentially gratuitous, under article 1933 it is very clear.

Maybe gratuitous or onerous. For example loan there is interest

Obligation

The bailee has the obligation to return the exact same thing to the bailor

To

pay the

involve

same

amount

of

the

same

kind

and

quality, not the exact thing that was loaned

property

Real or personal property

Personal

 

property

only.

 

Money,

consumable

 

purpose

Use

or

Consumption

temporary

possession

Demand the return of the subject matter

you can demand the return of the thing before the expiration of the term agreed upon if there is an urgent need.

You

cannot

demand

 

the

return before the lapse of the period agreed upon.

Who

suffers

The bailor. Why? Res peruit domino, owner bears the loss

Since

 

in

loss

mutuum

there

is

transfer

of

ownership then

 

the

bailee

suffers

 

the

loss.

 

As

being

Personal

in

Not personal

personal

nature

Two different kinds of commodatum

1. ordinary commodatum

2. precarium

Do not confuse loan as well from contract of lease, deposit, usufruct and barter.

In lease one of the parties binds himself to give to another the enjoyment or use of that property for a price certain,

In deposit there is delivery but the purpose is not the use thereof but for safekeeping

In usufruct the enjoyment of the fruits is the main cause.

Barteronerous because you exchange something for another thing.

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

CREDIT TRANSACTIONS 2 SANCHEZ ROMAN- ATTY. JAZZIE SARONA-LOZARE

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Let’s have specific provision

Art 1935. The bailee in commodatum acquires the use of the thing loaned but not its fruits; if any compensation is to be paid by him who acquires the use, the contract ceases to be a commodatum.

Two things are emphasized here

1. purpose is use of the thing loan as a general rule hindi kasama ang fruits.

2.

considered as a commoadtum anymore. Why?

Refer

gratuitous.

is compensation it could not be

if

there

to

1933, commodatum is essentially

Pajuyo vs CA

Pajuyo vs. CA(430 SCRA 492, G.R. No. 146364, June 3, 2004)

COLITO T. PAJUYO, petitioner, vs. COURT OF APPEALS and EDDIE GUEVARRA, respondents.

FACTS:

Petitioner Pajuyo paid P400 to a certain Pedro Perez for the rights over a lot, where Pajuyo subsequently built a house. In 1985, Pajuyo and private respondent Guevarra executed a Kasunduan wherein Pajuyo allowed Guevarra to live in the house for free, on the condition that Guevarra would maintain the cleanliness and orderliness of the house. Guevarra promised that he would vacate the premises upon Pajuyo’s demand.

In 1994, Pajuyo informed Guevarra of his need of the house and demanded that the latter vacate the house. Guevarra refused. Pajuyo filed an ejectment case against Guevarra before the MTC.

Guevarra claimed that Pajuyo had no valid title over the lot since it is within the area set aside for socialized housing. MTC rendered its decision in favor of Pajuyo, which was affirmed by RTC. (MTC and RTC basically ruled that the Kasunduan created a legal tie akin to that of a landlord and tenant relationship).

CA reversed the RTC decision, stating that the ejectment case is without legal basis since both Pajuyo and Guevarra illegally occupied the said lot. CA further stated that both parties are in pari delicto; thus, the court will leave them where they are. CA ruled that the Kasunduan is not a lease contract, but a commodatum because the agreement is not for a price certain.

ISSUE: WON the contractual relationship between Pajuyo and Guevarra was that of a commodatum NO

HELD:

In a contract of commodatum, one of the parties delivers to another something not consumable

so that the latter may use the same for a certain

commodatum is that it is gratuitous. Another feature of commodatum is that the use of the thing belonging to another is for a certain period. Thus, the bailor cannot demand the return of the thing

loaned until after expiration of the period stipulated,

or after accomplishment of the use for which the

commodatum is constituted. If the bailor should have urgent need of the thing, he may demand its return for temporary use. If the use of the thing is merely tolerated by the bailor, he can demand the return of the thing at will, in which case the contractual relation is called a precarium. Under the Civil Code, precarium is a kind of commodatum.

The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated him to maintain the property in good condition. The imposition of this obligation makes the Kasunduan a contract different from a commodatum. The effects of the Kasunduan are also different from that of a commodatum. Case law on ejectment has treated relationship based on tolerance as one that is akin to a landlord-tenant relationship where the withdrawal of permission would result in the termination of the lease. The tenant’s withholding of the property would then be unlawful.

Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum, Guevarra as bailee would still have the duty to turn over possession of the property to Pajuyo, the bailor. The obligation to deliver or to return the thing received attaches to contracts for safekeeping, or contracts of commission, administration and commodatum.70 These

contracts certainly involve the obligation to deliver

or return the thing received.

Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo

is also a squatter. Guevarra should know that there

must be honor even between squatters. Guevarra freely entered into the Kasunduan. Guevarra cannot now impugn the Kasunduan after he had benefited from it. The Kasunduan binds Guevarra.

The Kasunduan is not void for purposes of

determining who between Pajuyo and Guevarra has

a right to physical possession of the contested

property. The Kasunduan is the undeniable evidence of Guevarra’s recognition of Pajuyo’s better right of physical possession. Guevarra is clearly a possessor in bad faith. The absence of a contract would not yield a different result, as there would still be an implied promise to vacate.

time

and

return

it.

An

essential

feature

of

What kind of contract is involved here?

This is an innominate contract. I give that you may do. Do ut facias.

Assuming that it is a contract of commodatum what is the liability on the part of the bailee?

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

CREDIT TRANSACTIONS 2 SANCHEZ ROMAN- ATTY. JAZZIE SARONA-LOZARE

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Guevarra as bailee has the obligation to return the house upon demand of pajuyo

Why is it important to determine whether there is a commodatum or not, again because the case involved ejectment, unlawful detainer, who has the better right to possess the property. Now take note here the contention that pajuyo had no valid title is not relevant. Why? Because whether it is commodatum, lease as we have mentioned an innominate contract, ownership is not required. In the first place there was already an agreement between the parties that pajuyo would allow guevarra to make use of the poperty.

When you will have provrem, important thing to determine is solely who has the better right to possess. The one who questions or the one who demands possession of the property need not be the owner thereof.

Again here this emphasizes the nature of a commodatum which is essentially gratuitous and what we have in pajuyo is an innominate contract, I give that you may do.

Also take note that there is a similarity between donation and commodatum.

Both are gratuitious in nature, the benefit is to the recipient of the contracts.

Now with regard to commodatum, there is a presumption that the bailor has no use of the thing that he has loaned to another person. However the difference to donation is that donation has a transfer of ownership but not in commodatum

1935

commodatum

also

emphasizes

the

main

purpose of

a

2. use to the thing that was loaned. Take note fruits are excluded as a general rule. Why? Because it would be the bailor or the owner who would be naturally entitled to the enjoyment of the fruits.

Fruits may be subject of the commodatum by stipulation of the parties.

of

commodatum, it is for the temporary use of the thing loaned and also for a certain time.

Remember

the

purpose

of

a

contract

Producers bank vs CA

Producers Bank vs CA (397 SCRA 651, G.R. No. 115324, February 19,

2003)

PRODUCERS BANK OF THE PHILIPPINES (now FIRST INTERNATIONAL BANK), petitioner, vs. HON. COURT OF APPEALS AND FRANKLIN VIVES, respondents.

FACTS:

Private respondent Vives was asked by his friend Sanchez to help Col. Arturo Doronilla in incorporating Doronilla’s business, the Sterela Marketing and Services (Sterela).

Specifically, Sanchez asked Vives to deposit in a bank a certain amount of money in the bank account of Sterela for purposes of its incorporation. She assured Vives that he could withdraw his money from said account within a month’s time.

Vives issued a check worth P 200,000 in favor of Sterela. Said money was used to open a savings account in the name of Sterela in petitioner Producers Bank (Bank).

However, when Vives and his wife later went to the bank to verify if their money in Sterela’s account was still intact, they were informed that part of the money in the savings account had been withdrawn by Doronilla and that only P 90,000 remained therein. They were also told that said remaining amount cannot be withdrawn because it had to answer for some postdated checks issued by Doronilla.

When Vives tried to get in touch with Doronilla through Sanchez, he was again reassured that his money was intact and would be returned to him.

Doronilla thereafter issued a postdated check for P212,000 in favor of Vives. However, this check was dishonored.

Vives instituted an action for recovery of sum of money in the RTC against Doronilla.

RTC ruled in favor of Vives, and held petitioner bank jointly and severally liable with Doronilla because the bank’s employee Mr. Atienza was found partly responsible for the loss of Vives’s money. CA affirmed in toto.

Petitioner bank’s contention: The transaction between Vives and Doronilla is a simple loan (mutuum) since all the elements of a mutuum are present: first, what was delivered by private respondent to Doronilla was money, a consumable thing; and second, the transaction was onerous as Doronilla was obliged to pay interest, as evidenced by the check issued by Doronilla in the amount of P212,000.00

ISSUE: WON the transaction between Doronilla and Vives was one of simple loan (mutuum)NO, it was a commodatum.

HELD:* Commodatum even if what is involved is a consumable thing The transaction between Vives and Doronilla was a commodatum and not a mutuum. A circumspect examination of the records reveals that the transaction between them was a commodatum. Article 1933 of the CC distinguishes between the two kinds of loans (see provision for reference). The said provision seems to imply that if the subject of the contract is a consumable thing, such as money, the contract would be a mutuum. However, there are some instances where a commodatum may have for its object a consumable thing. Article 1936 of the CC provides:

Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the object, as when it is merely for exhibition. Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of the parties is to lend consumable goods and to have the very same goods returned at the end of the period agreed upon, the loan is a commodatum and not a mutuum.

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

CREDIT TRANSACTIONS 2 SANCHEZ ROMAN- ATTY. JAZZIE SARONA-LOZARE

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The rule is that the intention of the parties thereto shall be accorded primordial consideration in determining the actual character of a contract. In case of doubt, the contemporaneous and subsequent acts of the parties shall be considered in such determination. In the case at bar, evidence shows that Vives agreed to deposit his money in the savings account of Sterela specifically for the purpose of making it appear "that said firm had sufficient

capitalization

for

incorporation,

with

the

promise

that

the

amount

shall

be

returned

within

thirty

(30)

days." Vives

merely

"accommodated" Doronilla by lending his money without consideration, as a favor to his good friend Sanchez. It was however clear to the parties to the transaction that the money would not be removed from Sterela’s savings account and would be returned to Vives after thirty (30) days. * The additional P 12,000 did not convert commodatum to mutuum Doronilla’s attempts to return to Vives the amount of P200,000 which the latter deposited in Sterela’s account together with an additional P12,000, allegedly representing interest on the mutuum, did not convert the transaction from a commodatum into a mutuum because such was NOT THE INTENT of the parties and because the additional P12,000 corresponds to the fruits of the lending of the P200,000. Article 1935 of the CC expressly states that "the bailee in commodatum acquires the use of the thing loaned but not its fruits." Hence, it was only proper for Doronilla to remit to Vives the interest accruing to the latter’s money deposited with petitioner bank.Petition denied. Take note SC said that whether it is a mutuum or a commodatum has no bearing on the question of bank’s liability for the return of Vives’s money because the factual circumstances of the case clearly show that petitioner bank, through its employee Mr. Atienza, was partly responsible for the loss of Vives’s money and is liable for its restitution.POLICY: You cannot automatically say that contract is mutuum if the subject matter is a consumable thing, such as money. Such contract may be commodatum if the purpose of the contract is not the consumption of the object, as when it is merely for exhibition. The INTENTION of the parties must always be ascertained.

What are the subject matter in a commodatum?

Real and personal property

What is the subject matter here?

Money

 

Can

money

be

a

valid

subject

matter

of

a

commodatum?

 

Yes,

if

its

for

exhibition

purpose

and

not

for

consumption.

In this case do we have a commodatum?

Yes. The Court said that it is the intention of the parties should prevail and in this case the intention was merely for exhibition and not to use it.

Regarding 12,000 Php interest? Who is entitled to

12,000?

The one entitled with12,000 is the bailor citing1935

Take note of 1936

Article 1936. Consumable goods may be the subject of commodatum if the purpose of the contract is not consumption of the object, as when it is merely for exhibition.

So I have mentioned earlier one of the main

disctinction between commodatum and mutuum is that in commodatum ordinarily involved is something that is not consumable but in this case what we have here is money. Nevertheless the Supreme Court ruled that what was enetered into is commodatum and not mutuum. Again, to determine the nature of the contract we always go back to the intention of the parties.

The intention of the parties shall be afforded primordial consideration in determining the actual

xx of a contract, the contemporaneous and

subsequent act of the parties shall be considered in such determination. In this case it was shown that

the private respondent agreed to deposit his money

in the account of sterela, specifically for the purpose of making it appear that the said firm sufficient capitalization for the purpose of incorporation with the promise that the amount shall be returned within 30 days. In this case there was merely an accommodation. The money was not for

consumption but only to show that there was compliance with capitalization purposes.

How about the 12,000 pesos? It was alleged that

the 12,000 pesos converted the transaction into a

mutuum however that was not the intention of the parties. Nevertheless the bailor in this case is entitled with the 12000 as it is considered the fruit of the lendee of the 200000 pesos applying 1935.

However take note class that this is a unique type of commodatum, why? Because when you strictly speak of commodatum what is to be returned is the exact the same thing that was borrowed. In this case although the purpose is not for consumption but merely for exhibition… still considered as a commodatum, the money that was deposited in the account is not exactly the money you will return to

the bailor, not exact series number, denomination.

Take note it is very unique in that sense and do not

forget that essentially when we talk about commodatum, you return the exact same thing that

was

borrowed.

Also with regard to subject matter, the general rule is non consumable, it could be movable or immovable as provided by article 1937.

Art 1937. Movable or immovable property may be the object of commodatum.

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

CREDIT TRANSACTIONS 2 SANCHEZ ROMAN- ATTY. JAZZIE SARONA-LOZARE

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Another good example is a wine, inexhibit ang wine collection mo not for the purpose of drinking it but to exhibit it with the intention to return the exact wine to you then it would be considered commodatum.

Again take note when you talk of consumable things these are things which cannot be used without being consumed.

Mina vs Pascual

Mina vs Pascual (G.R. No. 8321, October 14, 1913) ALEJANDRA MINA, ET AL., plaintiffs-appellants, vs. RUPERTA PASCUAL, ET AL., defendants- appellees.

FACTS:

Francisco Fontanilla and Andres Fontanilla were brothers. Andres Fontanilla, with the consent of his brother Francisco, erected a warehouse on a part of Francisco’s lot. Francisco Fontanilla, the former owner of the lot, being dead, the herein plaintiffs, Alejandro Mina, et al., were recognized without discussion as his heirs. Andres Fontanilla, the former owner of the warehouse, also having died, the children of Ruperta Pascual were recognized likes without discussion. The fact is that the plaintiffs and the defendants are virtually, to all appearance, the owners of the warehouse; while the plaintiffs are undoubtedly, the owners of the part of the lot occupied by that building, as well as of the remainder thereof.

This was the state of affairs, when, on May 6, 1909, Ruperta Pascual, as the guardian of her minor children, the herein defendants, petitioned the Curt of First Instance of Ilocos Norte for authorization to sell "the six-sevenths of the one-half of the warehouse, of 14 by 11 meters, together with its lot." The plaintiffs that is Alejandra Mina, et al. opposed the petition of Ruperta Pascual for the reason that the latter had included therein the lot occupied by the warehouse, which they claimed was their exclusive property. All this action was taken in a special proceeding in re guardianship.

The plaintiffs did more than oppose Pascual's petition; they requested the court, through motion, to decide the question of the ownership of the lot before it pass upon the petition for the sale of the warehouse. But the court before determining the matter of the ownership of the lot occupied by the warehouse, ordered the sale of the warehouse together with the lot at a public auction to Cu Joco. There was an agreement: the ninth paragraph of which is as follows:

9. That the herein plaintiffs excepted to the judgment and appealed therefrom to the Supreme Court which found for them by holding that they are the owners of the lot in question, although there existed and still exists a commodatum by virtue of which the guardianship (meaning the defendants) had and has the use, and the plaintiffs the ownership, of the property, with no finding concerning the decree of the lower court that ordered the sale.

ISSUES:

1. WON the contract of sale to Cu Joco is valid. NO

2. WON there is commodatum. NO

HELD:

As respects this action for recovery, this Supreme Court finds:

1. That it is a fact admitted by the litigating

parties, both in this and in the previous suit, that Andres Fontanilla, the defendants' predecessor in interest, erected the warehouse on the lot, some thirty years ago, with the explicit consent of his brother Francisco Fontanilla, the plaintiff's predecessor in interest.

2. That it also appears to be an admitted

fact that the plaintiffs and the defendants are the

coowners of the warehouse.

3. That it is a fact explicitly admitted in the

agreement, that neither Andres Fontanilla nor his successors paid any consideration or price whatever for the use of the lot occupied by the said building; whence it is, perhaps, that both parties have denominated that use a commodatum.

pon the premise of these facts, or even merely upon that of the first of them, the sentencing of the defendants to deliver the lot to the plaintiffs does not follow as a necessary corollary of the judicial declaration of ownership made in the previous suit, nor of that of the nullity of the sale of the lot, made in the present case.

The defendants do not hold lawful possession of the lot in question. But, although both litigating parties may have agreed in their idea of the commodatum, on account of its not being, as indeed it is not, a question of fact but of law, yet that denomination given by them to the use of the lot granted by Francisco Fontanilla to his brother, Andres Fontanilla, is not acceptable. Contracts are not to be interpreted in conformity with the name that the parties thereto agree to give them, but must be construed, duly considering their constitutive elements, as they are defined and denominated by law.

By the contract of loan, one of the parties delivers to the other, either anything not perishable, in order that the latter may use it during the certain period and return it to the former, in which case it is called commodatum . (art. 1740, Civil Code).

It is, therefore, an essential feature of the commodatum that the use of the thing belonging to another shall for a certain period. Francisco Fontanilla did not fix any definite period or time during which Andres Fontanilla could have the use of the lot whereon the latter was to erect a stone warehouse of considerable value, and so it is that for the past thirty years of the lot has been used by both Andres and his successors in interest. The present contention of the plaintiffs that Cu Joco, now in possession of the lot, should

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

CREDIT TRANSACTIONS 2 SANCHEZ ROMAN- ATTY. JAZZIE SARONA-LOZARE

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pay rent for it at the rate of P5 a month, would destroy the theory of the commodatum sustained by them, since, according to the second paragraph of the aforecited article 1740, "commodatum is essentially gratuitous," and, if what the plaintiffs themselves aver on page 7 of their brief is to be believed, it never entered Francisco's mind to limit the period during which his brother Andres was to have the use of the lot, because he expected that the warehouse would eventually fall into the hands of his son, Fructuoso Fontanilla, called the adopted son of Andres, which did not come to pass for the reason that Fructuoso died before his uncle Andres.

With that expectation in view, it appears more likely that Francisco intended to allow his brother Andres

a surface right; but this right supposes the payment of an annual rent, and Andres had the gratuitous use of the lot.

Hence, as the facts aforestated only show that a building was erected on another's ground, the question should be decided in accordance with the statutes that, thirty years ago, governed accessions to real estate, and which were Laws 41 and 42, title 28, of the third Partida, nearly identical with the provisions of articles 361 and 362 of the Civil Code.

So, then, pursuant to article 361, the owner of the land on which a building is erected in good faith has

a right to appropriate such edifice to himself, after

payment of the indemnity prescribed in articles 453 and 454, or to oblige the builder to pay him the value of the land. Such, and no other, is the right to which the plaintiff are entitled.

For the foregoing reasons, it is only necessary to annul the sale of the said lot which was made by Ruperta Pascual, in representation of her minor children, to Cu Joco, and to maintain the latter in the use of the lot until the plaintiffs shall choose one or the other of the two rights granted them by article 361 of the Civil Code.

What is essentially pertinent to the case is the fact that the defendant agree that the plaintiffs have the ownership, and they themselves only the use, of the said lot. On this premise, the nullity of the sale of the lot is in all respects quite evident, whatsoever be the manner in which the sale was effected, whether judicially or extrajudicially. He who has only the use of a thing cannot validly sell the thing itself. The effect of the sale being a transfer of the ownership of the thing, it is evident that he who has only the mere use of the thing cannot transfer its ownership. The sale of a thing effected by one who is not its owner is null and void. The defendants never were the owners of the lot sold. The sale of it by them is necessarily null and void. One cannot convey to another what he has never had himself.

How many years were they in possession of the property. more than 30 years.

Was there a commodatum? No.

Lets take into consideration the inention of the parties when it was allowed to be used by andres, what was the intention therein for the use of said property? why was there no agreement as to period.

Because it is for the benefit of his child. Hwoever it did not materialized because fructos oalready died ahead of andres.

The intention here was not really for commodatum, use for a certain period of time but rather the possession would fall to the hands of fructoso, son of andres but it did not happen because fructuoso died ahead of andres. It appears more likely that Francisco allowed his brother with the intention of lease.

Emphasis on ‘for certain period of time’ and that commodatum is essentially gratuituous. Demand of payment would destroy their theory of commodatum because commodatum is essentially gratituous in nature.

In this case the property involve is a real property it is possible that a real property can be subject of commodatum will be used to build something for use but without rentals without intention to pay rents. So looking at the intention of the parties herein there could be no commodatum.

1938. The bailor in commodatum need not to be the owner of the thing.

Again if there is delivery of the subject matter in a commodatum ownership is not transferred to the bailee and in fact a lessee, usufructuary can be a bailor in a commodatum unless otherwise prohibited by the true owner of the lessor therein.

is

character. Consequently:

1939.

Commodatum

purely

personal

in

(1) The death of either the bailor or the bailee extinguishes the contract;

(2) The bailee can neither lend nor lease the

object of the contract to a third person. However, the members of the bailee’s household may make use of the thing loaned, unless there is a stipulation to the contrary, or unless the nature of the thing forbids such use.

(n)

Commodatum can be personal in nature. You take into consideration the character, conduct, his credit. That is what you mean that commodatum is purely personal you take into consideration the character and conduct of the bailee.

What is the effect if commodatum is purely personal in character? If either of the bailee or the bailor dies then the commodatum is extinguished. The trust reposed by the bailor to the bailee is not transferrable to their respective heirs. This is the trust that is intransmissible so that is why the death of either of the parties terminates the contract unless stipulated by the parties that it is transmissible.

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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Also take note that if there are two or more bailees the death of one bailee does not extinguish the contract. It will continue because you still have one bailee. Exception: stipulation of the parties.

So first paragraph

No 1 in 1939 these are exception of 1178 of your obligations and contracts.

1178. Subject to the laws, all rights acquired in

virtue of an obligation are transmissible, if there has been no stipulation to the contrary.

- under 1939 in the absence of stipulation it is STILL intransmissible because it is clearly provided under the law.

How about the second paragraph? Remember ownership is not required on the part of the bailorit is sufficient that he has possessory interest. How about on the part of the bailee? Is he allowed to lend or the let other person use the property that was loaned to him? As a general rule he cannot do so exception: (p2) members of the bailee’s household may make use of the thing loaned,

exception to the exception.

unless there is a stipulation to the contrary, or

unless the nature of the thing forbids such use.

(n)

for example pinahiram ka ng damit, that is a commodatum pero by the nature of the thing usuall hindi mo siya pinahihiram sa kapitbahay most likely ikaw lang may kasya nyan.

1940. A stipulation that the bailee may make use

of the fruits of the thing loaned is valid. (n)

This is the exception to 1935, by stipulation the bailee is entitled to make use of the principal thing but also the fruits, there could be a stipulation. However take note that the use of the fruits is only incidental to the principal thing because of the main cause of the contract is to allow the bailee to make use of the fruits then that is not a commodatum anymore that would become a usufruct.

De Los Santos vs Jarra

De Los Santos vs Jarra (G.R. No. 4150, February 10, 1910) FELIX DE LOS SANTOS, plaintiff- appelle, vs.AGUSTINA JARRA, administratrix of the estate of Magdaleno Jimenea, deceased, defendant-appellant.

FACTS:

In the latter part of 1901, Magdaleno Jimenea borrowed and obtained from the plaintiff ten first-class carabaos, to be used at the animal- power mill of his hacienda during the season of 1901-2, without recompense or remuneration whatever for the use thereof, under the sole

condition that they should be returned to the owner as soon as the work at the mill was terminated.

Plaintiff alleges in the present suit, however that Magdaleno Jimenea, however, did not return the carabaos, notwithstanding the fact that the plaintiff claimed their return after the work at the mill was finished. The suit was brought against Agustina Jarra , administratrix of Magadaleno after the latter’s death.

Jarra alleges that Magdaleno was actually only able to obtain 3 carabaos from De Los Santos and that these carabaos were afterwards transferred by sale to Magdaleno.

The trial Court ruled in favor of De Los Santos and ordered the return of the remaining 6 carabaos (4 have already died) or to pay the value thereof.

be

compelled to return the carabaos. YES

HELD:

There was enough witnesses and evidence to prove that indeed ten carabaos were obtained by Magdaleno and not ten. The Court also noted that there was no official document evidencing the transfer of the large cattle.

ISSUE:

WON

Jarra,

as

administratrix,

can

The Court found that the six carabaos were not the property of the deceased nor of any of his descendants. Therefore , it is the duty of the administratrix of the estate to return them or indemnify the owner for their value.

The Civil Code, in dealing with loans in general, from which generic denomination the specific one of commodatum is derived, establishes prescriptions in relation to the last-mentioned contract by the following articles:

ART. 1740. By the contract of loan, one of the parties delivers to the other, either anything not perishable, in order that the latter may use it during a certain period and return it to the former, in which case it is called commodatum, or money or any other perishable thing, under the condition to return an equal amount of the same kind and quality, in which case it is merely called a loan. Commodatum is essentially gratuitous. A simple loan may be gratuitous, or made under a stipulation to pay interest.

ART. 1741. The bailee acquires retains the ownership of the thing loaned. The bailee acquires the use thereof, but not its fruits; if any compensation is involved, to be paid by the person requiring the use, the agreement ceases to be a commodatum. ART. 1742. The obligations and rights which arise from the commodatum pass to the heirs of both contracting parties, unless the loan has been in consideration for the person of the bailee, in which case his heirs shall not have the right to continue using the thing loaned. The carabaos delivered to be used not being returned by the defendant upon demand, there is no doubt that she is under obligation to indemnify the owner thereof by paying him their value. Article 1101 of said code reads:

Those who in fulfilling their obligations are guilty of fraud, negligence, or delay, and those who in any

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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manner whatsoever act in contravention of the

stipulations of the same, shall be subjected to

indemnify

for

the

losses

and

damages

caused

thereby.

The

obligation

of

the

bailee

or

of his

successors to return either the thing loaned or its value, is sustained by the supreme tribunal of Sapin. In its decision of March 21, 1895, it sets out with precision the legal doctrine touching

commodatum as follows:

Although it is true that in a contract of commodatum the bailor retains the ownership of the thing loaned, and at the expiration of the period, or after the use for which it was loaned has been accomplished, it is the imperative duty of the bailee to return the thing itself to its owner, or to pay him damages if through the fault of the bailee the thing should have been lost or injured, it is clear that where public securities are involved, the trial court, in deferring to the claim of the bailor that the amount loaned be returned him by the bailee in bonds of the same class as those which constituted the contract, thereby properly applies law 9 of title 11 of partida 5.

Was there a contract of commodatum? Yes.

If the thing itself cannot be returned what is the liability?

Indemnify of the owner the value of the thing that was the subject of commodatum.

Take note here , let us not detract from the fact that death of the bailee terminates the contract of commodatum, because here who is held liable? The estate of the deceased it is not individually the heirs but the estate. Again,the commodatum obligation of the parties are still intransimissible.

Again this emphasizes the primary obligation of the bailee that is to return the thing that was loaned to the bailor however in this case the carabaos delivered could not be returned therefore there was an obligation to indemnify on the part of the estate the bailor bypaying the value thereof. It is the imperative duty to return the thing to the owner or pay damages if through the fault of bailee the thing was lost or injured.

November 16, 2015 (Damalerio)

We discussed the distinctions between a commodatum and mutuum, and from other contracts and arrangements.

We also emphasized as to the subject matter: as a general rule, we have non-consumable goods for commodatum, but consumable goods can be a subject matter of commodatum provided its purpose

is for exhibition.

Ownership on the part of the bailor is not required in

a valid commodatum since there is no transfer of ownership in commodatum.

Art. 1939.

Commodatum is purely personal in character. Consequently:

Commodatum is purely personal in character. Consequently:

(1) The death of either the bailor or the bailee extinguishes the contract; (2) The bailee can neither lend nor lease the object of the contract to a third person. However, the members of the bailee's household may make use of the thing loaned, unless there is a stipulation to the contrary, or unless the nature of the thing forbids such use.

Art. 1940. A stipulation that the bailee may make use of the fruits of the thing loaned is valid.

In the case of Delos Santos last time, it was emphasized that the bailee has the obligation to return the subject matter. Remember in commodatum, there is no transfer of ownership, so the bailee has the obligation to return the EXACT same thing. So that’s the primary obligation of the bailee. Along with Art. 1941.

Art. 1941. The bailee is obliged to pay for the ordinary expenses for the use and preservation of the thing loaned.

Take note, what we have here are ORDINARY EXPENSES. Why is it that the bailee must shoulder these expenses? Because the bailee acquires the use of the same. So it’s just proper that for the ordinary expenses, he should be the one to shoulder it. Along with this obligation for ordinary expenses, we also take into consideration the standard diligence. Diligence of a good father of the family is applicable here. The bailee has the obligation to take good care of the thing with the diligence of a good father of the family.

a

commodatum. Ordinary expenses, we

gasoline, change oil, cleaning, washing, among others.

Example, sasakyan

have

as

the

subject

of

Now one of the important provisions with regard to commodatum is Art. 1942.

Art. 1942. The bailee is liable for the loss of the thing, even if it should be through a fortuitous event:

 

(1) If he devotes the thing to any purpose different from that for which it has been loaned; (2) If he keeps it longer than the period stipulated, or after the accomplishment

of

the

use

for which

the commodatum has been constituted; (3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exemption the bailee from responsibility in case of a fortuitous event; (4) If he lends or leases the thing to a third person, who is not a member of his household; (5) If, being able to save either the thing borrowed or his own thing, he chose to save the latter.

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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Remember the general rule, owner bears the loss. Res perit domino. That’s still the general rule with regard to commodatum. However, we have 1942 as the exceptions to the res perit domino rule. In these instances, the BAILEE would be liable for the loss even if the loss of the thing is due to a fortuitous event.

We have here: if he devotes the thing to any purpose different from that for which it has been loaned. Why? It shows BAD FAITH on the part of the bailee.

If he keeps it longer than the period stipulated, or after the accomplishment of the use, obviously this refers to DELAY. So if there is delay, we already know that even if the thing was lost due to a fortuitous event, the bailee would still be liable.

As to the 3 rd instance, if there is appraisal. Why? Because by putting a value to the thing subject of commodatum, there is an INTENTION that the borrower shall be liable. Unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event, even if there is an appraisal.

As for the 4 th instance, in relation to 1939, remember a commodatum is PURELY PERSONAL in character, and therefore if he lends it to a 3 rd person who is not a member of his household, and without the consent of the bailor, he would be liable.

As to the 5 th instance: by instinct, we save our own personal belongings. However, if there is a commodatum, and you choose to save your own things rather than the thing loaned to you gratuitously, it could be considered as an INGRATITUDE on your part, and therefore you would still be held liable.

We have here the case of Republic vs. Bagtas:

REPUBLIC VS. JOSE BAGTAS

FACTS:

On May 8, 1948, Jose Bagtas borrowed from the Bureau of Animal Industry 3 bulls for 1 year for breeding purposes, subject to breeding fee for 10% of the book value of the bulls. Upon the expiration of the contract, Bagtas asked for a renewal for another year. The renewal granted was only for 1 bull. Bagtas offered to buy the bulls at book value less depreciation, but the Bureau told him that he should either return the bulls or pay for their book value. Bagtas failed to pay the book value, and so the Republic commenced an action with the CFI Manila to order the return of the bulls of the payment of book value. Felicidad Bagtas, the surviving spouse and administratrix of the decedent’s estate, stated that the 2 bulls have already been returned in 1952, and that the remaining one died of gunshot during a Huk raid. As regards the two bulls, is was proven that they were returned and thus, there is no more obligation on the part of the appellant. As to the bull not returned, Felicidad contends that the obligation is extinguished since the contract is that of a commodatum and that the loss through fortuitous event should be borne by the owner.

ISSUE:

Whether, depending on the nature of the contract, the respondent is liable for the death of the bull

HELD:

A

contract of commodatum is essentially gratuitous.

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 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. 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.

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.

So applying Art. 1942, did the Supreme Court say that we had a commodatum here? Can it be considered as a commodatum? NO, the SC did not categorically state that

there is commodatum in this case because there is

a consideration of 10% bidding fee. If this bidding fee is considered as a compensation, then the contract entered into is not a commodatum, but a

Lease.

And of course, there was delivery with appraisal of the value of the said goods.

Now in this case, if the bidding fee will be considered as a compensation, there won’t be a commodatum because again, commodatum is essentially gratuitous. So it could be a Lease.

Nevertheless, whether it is a lease or a commodatum, the SC held that Bagtas will be liable under his continued possession after the expiration of the contract. If it is commodatum, the applicable

provision is 1942, specifically paragraphs 2 and 3 liable for the loss even if it was thru a fortuitous

thing.

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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The gunshot wounds suffered by the bulls here shall be considered fortuitous event, however Bagtas will still be liable because again:

1) He kept them longer than the period stipulated 2) There was delivery with appraisal, without stipulation exempting them from liability. Considering that the 2 bulls were already returned, it is only the value of the bull which was killed in the custody of the administratrix of his estate.

We said that commodatum is a personal contract extinguished by the death of the party, take note here that it was the estate that was held liable. Therefore, we do not say that the obligation was already extinguished just because Bagtas is already dead. It was his estate which was made liable for the value of the bull that died.

Art. 1943. The bailee does not answer for the deterioration of the thing loaned due only to the use thereof and without his fault.

What do we have here? Depreciation expense. Ordinary wear and tear, borne by the bailor. Bailee, of course, will be liable if he’s at fault or negligent or devotes the thing to any purpose different from the nature of the thing, or different from which they have agreed upon.

Art. 1944. The bailee cannot retain the thing loaned on the ground that the bailor owes him something, even though it may be by reason of expenses. However, the bailee has a right of retention for damages mentioned in Article 1951.

Going back to our example last meeting. Jan Michael loaned his car to Lyzzaik. Now while there is a commodatum between them, let’s say that JM also borrowed money from Lyzzaik. So there’s a simple loan. Now the time has come for Lyzzaik to return the car to JM, so JM demanded the return of the car. Lyzzaik cannot say “I will not return the car unless you pay me the obligation, your debt is already due and demandable.”

That could not be used as a defense of the bailee to refuse the return of the thing. The bailee CANNOT retain the thing loaned even as security for claims he has against the bailor.

There is only one exception, under Art. 1951, in case of hidden defects on the subject of the thing loaned.

Now JM, let us say Lyzzaik failed to return the subject matter to you, will it now constitute adverse possession?

What happened in the case of Catholic vs. CA.

CATHOLIC VICAR VS. CA

FACTS:

1962: Catholic Vicar Apostolic of the Mountain Province (Vicar), petitioner, filed with the court an application for the registration of title over lots 1, 2, 3 and 4 situated in Poblacion Central, Benguet, said

lots being used as sites of the Catholic Church, building, convents, high school building, school gymnasium, dormitories, social hall and stonewalls.

1963: Heirs of Juan Valdez and Heirs of Egmidio Octaviano claimed that they have ownership over lots 1, 2 and 3. (2 separate civil cases)

1965: The land registration court confirmed the registrable title of Vicar to lots 1, 2, 3 and 4. Upon appeal by the private respondents (heirs), the decision of the lower court was reversed. Title for lots 2 and 3 were cancelled.

VICAR filed with the Supreme Court a petition for review on certiorari of the decision of the Court of Appeals dismissing his application for registration of Lots 2 and 3.

During trial, the Heirs of Octaviano presented one (1) witness, who testified on the alleged ownership of the land in question (Lot 3) by their predecessor- in-interest, Egmidio Octaviano; his written demand to Vicar for the return of the land to them; and the reasonable rentals for the use of the land at P10,000 per month.

On the other hand, Vicar presented the Register of Deeds for the Province of Benguet, Atty. Sison, who testified that the land in question is not covered by any title in the name of Egmidio Octaviano or any of the heirs. Vicar dispensed with the testimony of Mons. Brasseur when the heirs admitted that the witness if called to the witness stand, would testify that Vicar has been in possession of Lot 3, for 75 years continuously and peacefully and has constructed permanent structures thereon.

ISSUE: WON Vicar had been in possession of lots 2 and 3 merely as bailee borrower in commodatum, a gratuitous loan for use. HELD:

YES. Private respondents were able to prove that their predecessors' house was borrowed by petitioner Vicar after the church and the convent were destroyed. They never asked for the return of the house, but when they allowed its free use, they became bailors in commodatum and the petitioner the bailee.

The bailees' failure to return the subject matter of commodatum to the bailor did not mean adverse possession on the part of the borrower. The bailee held in trust the property subject matter of commodatum. The adverse claim of petitioner came only in 1951 when it declared the lots for taxation purposes. The action of petitioner Vicar by such adverse claim could not ripen into title by way of ordinary acquisitive prescription because of the absence of just title.

The Court of Appeals found that petitioner Vicar did not meet the requirement of 30 years possession for acquisitive prescription over Lots 2 and 3. Neither did it satisfy the requirement of 10 years possession for ordinary acquisitive prescription because of the absence of just title. The appellate court did not believe the findings of the trial court that Lot 2 was acquired from Juan Valdez by purchase and Lot 3 was acquired also by purchase from Egmidio Octaviano by petitioner Vicar because there was absolutely no documentary evidence to

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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support the same and the alleged purchases were never mentioned in the application for registration.

What was the issue here with regard to Lots 2 & 3? Who was in possession thereof? In what concept? Was is in the concept of an owner? Do you have commodatum here, at any point in time?

What if there was no commodatum and you do not own the subject matter? You’re not obliged to return the thing to the owner? Still obliged!

What is the relevance here of adverse possession? Why was it necessary to determine that it was in 1951 that Catholic Vicar was deemed in adverse possession of the parcel land, not anymore in the concept of a bailee in commodatum? For acquisitive prescription. 10 years in good faith and with just title; if without good faith and just title, 30 years.

Now when Catholic vicar was in possession of the property in 1951 onwards, what was the nature of its possession? IN BAD FAITH.

That means, who would now be entitled to the property in dispute? The land now belongs to the State.

So here, petitioner was in possession as borrower in commodatum only up to 1951. What happened in 1951? Catholic repudiated the trust by declaring the properties in its name for taxation purposes. Now acquisitive prescription: 10 years in good faith with just title, 30 years extraordinary acquisitive prescription when in bad faith.

Why is Catholic deemed to be in possession in bad faith? Because before 1951, it had knowledge that it was the heirs of Valdez who have the right to possess the property. The heirs were able to prove that their predecessors’ house was borrowed by petitioner after the Church and the convent were destroyed. They never asked for the return of the house, and when they allowed its free use, they became bailors in commodatum and petitioner as bailee.

The mere failure to return on the part of the bailee did not mean adverse possession on the part of the borrower. So the acquisitive prescriptive period did not yet begin to run. It was only in 1951 when they were declared for taxation purposes. So predecessors-in-interest and private respondents were possessors under claim of ownership in good faith from 1906, and that petitioner was only a bailee in commodatum, and that the adverse claim and repudiation of trust came only in 1951.

Art. 1945. When there are two or more bailees to whom a thing is loaned in the same contract, they are liable solidarily.

Remember the general rule under obligations and contracts, obligation is presumed to be joint. Instances when it is solidary: by law, by stipulation of the parties, and by nature of the obligation.

Under 1945, the law specifically provides that when there are 2 or more bailees, they are liable solidarily. This is to safeguard effectively the rights

of the lender, wherein it takes into account the personal integrity and responsibility of both the bailees.

So this is an exception to Art. 1208, and in consonance with 1207. There is solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires liability.

So here we can now say that the following are the obligations of the bailee:

1)

To return the thing

2)

To pay for ordinary expenses

3)

To take good care of the thing with the

diligence of a good father of the family 4) For ostentatious expenses, it may be the

bailee who will be liable For extraordinary expenses, we will discuss

5)

that in 1949 6) Loss due to fortuitous event, as a general rule, bailee is not liable unless instances in 1942 are present

7) With regard to deterioration, bailee is not liable. Exception, if it is shown that bailee is negligent, at fault, or have used the thing for other purposes not stipulated

8)

No right to retain the subject matter unless

1951

9)

Solidary liability of 2 or more bailees

How about on the part of the bailor? We have Art.

1946.

Art. 1946. The bailor cannot demand the return of the thing loaned till after the expiration of the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted. However, if in the meantime, he should have urgent need of the thing, he may demand its return or temporary use.

In case of temporary use by the bailor, the contract of commodatum is suspended while the thing is in the possession of the bailor.

Remember the obligation on the part of the bailor: it is to allow the bailee to use the thing for the duration of the period stipulated or until the accomplishment of the purpose, so for a certain time. So with that, as a general rule, the bailor cannot demand the return of the thing unless the period stipulated has arrived or unless the use or the purpose has already been accomplished.

1946 provides for an exception: in case of urgent need of the thing, wherein the bailor may demand for its return or temporary use.

So let us say ang pinahiram is sasakyan. But the bailor’s relative is very sick and he has no other vehicle, he has to take the relative to the hospital. So he can demand form the bailee the temporary use of the car subject of the commodatum. Again, it is solely for temporary use. And as clearly provided in 1946, the commodatum is suspended while the thing is in the possession of the bailor.

Art. 1947

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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The bailor may demand the thing at will, and the contractual relation is called a

The bailor may demand the thing at will, and the contractual relation is called a precarium, in the following cases:

relation is called a precarium, in the following cases: (1) If neither the duration of the

(1) If neither the duration of the contract nor the use to which the thing loaned should be devoted, has been stipulated; or (2) If the use of the thing is merely tolerated by the owner.

Do we have a precarium in the case of Quintos vs. Beck?

MARGARITA QUINTOS vs. BECK

FACTS:

BECK was a tenant of the Quintos 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 them, the former gratuitously granted to the latter the use of the furniture subject to the condition that the BECK would return them to the Quintos upon the latter's demand. Quintos sold the property to Maria Lopez and Rosario Lopez and on September 14, 1936, these three notified BECK of the conveyance, giving him sixty days to vacate the premises under one of the clauses of the contract of lease. There after Quintos required BECK to return all the furniture transferred to him for them in the house where they were found.

On November 5, 1936, BECK, through another person, wrote to Quintos reiterating that she may call for the furniture in the ground floor of the house. On the 7th of the same month, he wrote another letter to Quintos 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. Quintos refused to get the furniture in view of the fact that BECK had declined to make delivery of all of them. On November 15th, before vacating the house, the BECK deposited with the Sheriff all the furniture belonging to Quintos and they are now on deposit in the warehouse situated at No. 1521, Rizal Avenue, in the custody of the said sheriff.

ISSUE 1:

WON BECK complied with his obligation to return the furniture upon the Quintos’ demand. NO.

HELD 1:

The contract entered into between the parties is one of commadatum, because under it Quintos gratuitously granted the use of the furniture to BECK, reserving for herself the ownership thereof; by this contract he bound himself to return the furniture to Quintos, upon the latter’s demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph 1, and 1741 of the Civil Code). The obligation voluntarily assumed by BECK to return the furniture upon demand, means that he should return all of them to Quintos at the latter's residence or house. BECK did not comply with this obligation when he merely placed them at the disposal of the Quintos, 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 Quintos failed to comply with

her obligation to get the furniture when they were offered to her.

ISSUE 2:

WON Quintos is bound to bear the deposit fees. NO.

HELD 2:

As BECK had voluntarily undertaken to return all the furniture to the Quintos, 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 BECK's behest. The latter, as bailee, was not entitled to place the furniture on deposit; nor was Quintos under a duty to accept the offer to return the furniture, because he wanted to retain the three gas heaters and the four electric lamps.

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

ISSUE 3:

WON Quintos is entitled to the costs of litigation. YES.

HELD 3:

The costs in both instances should be borne by BECK because the plaintiff is the prevailing party (section 487 of the Code of Civil Procedure). He was the one who breached the contract of commodatum, and without any reason he refused to return and deliver all the furniture upon 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.

POLICY:

Commodatum is a contract where the bailor delivers to the bailee a non-consumable thing so that the latter may use it for a certain time and return the identical thing.

Is there a difference between commodatum and precarium? Or is precarium a classification of commodatum? Yes it is.

Let’s apply the general rule on obligations and contracts. For payment or performance to extinguish the obligation of the debtor, what should be the nature of the payment or performance? So here, the debtor is the bailee. So to extinguish his obligation as a bailee, he should return the thing to the bailor.

Isn’t it that he is willing to return it to the bailor? Yes ma’am.

So why is it that he is still liable for the expenses for the deposit of the furniture to the sheriff? Apply the rule in obligations and contracts, Payment or performance must be COMPLETE.

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Here, he said that he would still use it and decided not to return it. So with that, the refusal of Quintos was valid. Creditor, as in this case the bailor, cannot be compelled to accept PARTIAL delivery, or partial return of the subject matter. So even if it was deposited with the sheriff, bailee would still be liable for the expenses because there was valid refusal to accept performance on the part of the bailor.

So here, you have a PRECARIUM because of the fact that the use of the furniture is subject to the condition that the defendant would return them to the plaintiff upon the latter’s demand. That is the contract here, a Precarium, and not just an ordinary commodatum.

Remember there are 2 classifications of commodatum:

1)

Ordinary Commodatum stipulated therein

2)

the return of the thing, or the purpose thereof is specific, wherein it must be return after the accomplishment of the use or such purpose Precarium as provided under 1947, if neither the duration or where the use should be devoted is stipulated, or if the use of the thing is merely tolerated by the owner

In this case, plaintiff gratuitously granted the use of the furniture to the defendant reserving for herself the ownership thereof. And the defendant bound himself to return the furniture to the plaintiff upon the latter’s demand.

It means, he should return ALL of them to the plaintiff at the latter’s residence or house. Here, the defendant did not comply with the obligation when he merely placed them at the disposal of the plaintiff and retained for his benefit the heaters and the electric lamps.

The court did not legally compel Quintos to bear the expenses occasioned by the deposit of the furniture of the defendant’s behest. The latter was not entitled to place the furniture on deposit. Nor was the plaintiff under the duty to accept the offer to return the furniture because, again, defendant wanted to retain the heaters and lamps.

So the cost should be borne by the defendant because the plaintiff is the prevailing party.

So again, in Ordinary Commodatum, possession of the bailee si more secure because he has the right to retain the thing loaned until the expiration of the period agreed upon, or the accomplishment of the use for which the commodatum has been constituted.

Unlike that in Precarium, it is less secure on the part of the bailee. Bailor may demand the return of the thing at will, at anytime. Contract by which the owner of the thing, at the request of another person, gives the latter the thing for use as long as the owner shall please. So it’s subject to revocation by the bailor at anytime.

Art. 1948.

The bailor may demand the immediate return of the thing if the bailee commits any act of ingratitude specified in Article 765.

So yung acts of ingratitude as to donation. Apply it to commodatum, 765 will now be:

1) Bailee should commit an offense against the person or property of the bailor, or his wife or children under his parental authority. So act of ingratitude yan.

2)

criminal offense or any act involving moral turpitude, even though he should prove it, unless the act or the crime has been committed against the bailee himself, his wife or children under his authority. 3) Bailee unduly refuses the bailor support when the bailee is legally or morally bound to give support to the bailor

When bailee imputes to the bailor any

Same premise that we have before, similarity between commodatum and donation is that they are essentially gratuitous. So as in a donation, wherein the donee is unworthy of the trust reposed upon him by virtue of his acts of ingratitude, we apply the same to a bailee in a commodatum.

Art. 1949. The bailor shall refund the extraordinary expenses during the contract for the preservation of the thing loaned, provided the bailee brings the same to the knowledge of the bailor before incurring them, except when they are so urgent that the reply to the notification cannot be awaited without danger.

If the extraordinary expenses arise on the occasion of the actual use of the thing by the bailee, even though he acted without fault, they shall be borne equally by both the bailor and the bailee, unless there is a stipulation to the contrary.

Who shall bear the extraordinary expenses? 1949 provides the answer.

First take note, what is the nature of the extraordinary expense? If it is for the preservation of the thing loaned, it shall be borne by the bailor. Because by virtue of this extraordinary expense, it is the bailor who will benefit from it. Why? Because he is still the owner thereof. For example, a property is damaged due to a calamity. So extraordinary expense yan.

Now take note, if the bailee incurs the expenses for this extraordinary expense, the bailor has the obligation to refund the bailee, provided the bailee has notified or informed the bailor before incurring such.

As a general rule, if the bailee fails to notify the bailor before this extraordinary expense is incurred, the bailor has no liability to refund the bailee, UNLESS the need for the extraordinary expense is so urgent that notice or informing the bailor would only delay the said repairs necessary.

However, if the extraordinary expenses are those from the ACTUAL use of the thing loaned, for example, you borrowed a car and then while driving, it had a collision. Now, 50/50. 50% from the

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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bailee, and 50% from the bailor. Why? Sino gumamit? Arising from the use, Bailee. Nevertheless, it would be returned to the bailor, so ownership, Bailor. So general rule, 50/50 sila UNLESS otherwise stipulated.

Art. 1950. If, for the purpose of making use of the thing, the bailee incurs expenses other than those referred to in Articles 1941 and 1949, he is not entitled to reimbursement.

So what do we have here? Yung expenses for display or ostentatious expenses. For this type of expense, it would be the bailee who would be held liable.

Art. 1951. The bailor who, knowing the flaws of the thing loaned, does not advise the bailee of the same, shall be liable to the latter for the damages which he may suffer by reason thereof.

This is the exception with regard to the retention of the subject matter. Again as a general rule, the bailee CANNOT RETAIN the thing for any other liability of the bailor, unless 1951 is applicable.

When do you apply 1951?

1)

If there is a flaw or defect of the thing

2)

subject of the commodatum The flaw or defect is hidden or latent

3)

The bailor is aware of the said defect

4)

The bailor does not advise the bailee of the said flaw or defect

5) The bailee suffers damages by reason of the said flaw or defect

If ALL of these requisites are present, the bailee can RETAIN the thing until he is reimbursed for the expenses, or he is indemnified for the damages he has suffered.

Take note in Sales, sa warranty against hidden defects, good faith on the part of the seller is NOT a defense. He would still be liable.

But under 1951, while it talks about hidden defects, it is required that the bailor is in bad faith. Bailor must be aware thereof in order for 1951 to be applied. Now bailor is in bad faith, and all other requisites in 1951 are present, bailee has the right to retain the subject matter until damages are paid.

Take note, RIGHT TO RETAIN, but he has no right to sell it to other persons. He has NO right to exercise ownership over the subject matter.

Example, may sira or defect pala sa brake ng sasakyan, the bailor was aware thereof and did not tell the bailee, so while driving di nagwork yung brake, the bailee suffered damages.

However, if the bailee could have known after inspection, 1951 is NOT applicable. Bailor could not be held liable. Why? Because the defect is not anymore hidden. And if the bailor has no knowledge or was not aware of the said defect, the bailor will not be liable.

Why is it that there is a difference between a Sale and Commodatum with regard to this hidden

defect? Because unlike Sale, a commodatum is essentially gratuitous. Sale is onerous in nature.

Art. 1952. The bailor cannot exempt himself from the payment of expenses or damages by abandoning the thing to the bailee.

Why? This would be unfair to the bailee. In a sense na hindi pwede sabihin ng bailor na, “imuha nalang ng sakyanan bai, di nalang nako kuhaon, pero di na tika i-reimburse for the expenses.” Why unfair? Because the expenses would be MORE THAN the value of the thing. And it would now be unfair to allow the bailor to just abandon the thing instead of paying the said expenses or damages.

Again, he cannot exempt himself by abandoning the thing to the bailee. He will still be liable. So with that, what are the obligations of the BAILOR?

1)

2) If what you have is an ordinary commodatum, right to demand only upon expiration of the period or accomplishment of the purpose agreed upon, unless there is an urgent need 3) If it is Precarium, there is right to demand the return of the subject matter anytime

4) Bailor is given the right of the immediate

The right to demand the return of the thing

5)

return of the thing in case of ingratitude on the part of the bailee Liable to refund the bailee for Extraordinary

6)

expenses incurred, provided that he was notified before the said expenses were incurred, UNLESS urgent Liability for damages under 1951

7)

Under 1952, bailor has no right to abandon the subject matter instead of paying the expenses and damages

November 17, 2015 (Calatrava)

III.

MUTUUM

Now, under Article 1953 states:

Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality. (1753a)

So, simple loan or mutuum is a contract whereby one of the parties delivers to another, money or other consumable thing with the understanding that the same amount of the same kind or quality shall be paid.

Notice it involves the return of the equivalent only and not the identical thing because the borrower acquires ownership of the subject matter. Also notice in 1953, you have the term there, ‘bound to pay’ and not to return, because again, the bailee here is obliged to give back, pay the equivalent of what he has received. So here, in mutuum, since there is a transfer of ownership, the borrower can dispose of the thing borrowed and his act will not be considered a misappropriation. In other words, hindi siya mahulog na estafa.

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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Now, do distinguish loan from a contract of lease or rent.

LOAN

 

RENT/LEASE

 

Signifies the delivery of money or some other consumable thing to another with a promise to repay an equivalent amount of the same kind and quality, but not a promise to return the same thing loaned which becomes the property of the obligor.

A

contract by which one

of

the parties delivers to

another some non- consumable thing in order that the latter may use it during a certain

period and return it to the former.

There is a transfer of ownership; the borrower becomes the owner of the thing loaned.

In

a contract of rent, the

owner or lessor of the property does not lose his ownership. He simply loses his control over the property rented during the period of the contract.

The relation between the parties is that of obligor and oblige.

In a contract of “rent,” the relation is that of landlord and tenant.

The creditor receives payment for his loan.

The

owner

of

the

property

receives

the

 

compensation

or

price

either

in

money,

provisions, chattels,

or

labor from the occupant thereof in return for its use.

Now, when we distinguish simple loan from commodatum, we emphasized that the subject matter in a mutuum is money or a consumable thing. But if you take a look at 1953, you have there fungible thing. So if you recall what is a fungible thing, these are things which are dealt by number or measurement. Just like rice, oil or sugar since they are measured by kilos or liters among others wherein any given unit or portion is treated as equivalent to any other given unit or portion. Now, if you strictly define a consumable thing, these are things which are used or consumed by being used. However, under this concept of loan, the terms fungible thing or consumable thing are used interchangeably. So fungible things are considered those which cannot be used without being consumed, again similar to that of a consumable thing.

Now, we have here the case of BPI vs CA.

BPI INVESTMENT CORPORATION vs. HON. COURT OF APPEALS and ALS MANAGEMENT & DEVELOPMENT CORPORATION

FACTS: Frank Roa obtained a loan at an interest rate of 16.25% per annum from Ayala Investment and Development Corporation (AIDC), the predecessor of petitioner BPIIC, for the construction of a house on his lot in New Alabang Village, Muntinlupa. Said house and lot were mortgaged to AIDC to secure the loan. Sometime in 1980, Roa sold the house and lot to private respondents ALS and Antonio Litonjua for P850,000. They paid

P350,000 in cash and assumed the P500,000 balance of Roa’s indebtedness with AIDC.

AIDC, however, was not willing to extend the old

interest rate to ALS and proposed to grant them a

new loan of P500,000 to be applied to Roa’s debt and secured by the same property, at an interest rate of 20% per annum and service fee of 1% per annum on the outstanding principal balance payable within ten years in equal monthly amortization.

Consequently, on March 1981, ALS executed a mortgage deed containing the above stipulations

with the provision that payment of the monthly amortization shall commence on May 1, 1981.

On August 1982, ALS and Litonjua updated Roa’s arrearages by paying BPIIC the sum of P190,601.35. This reduced Roa’s principal balance to P457,204.90 which, in turn, was liquidated when BPIIC applied thereto the proceeds of ALS’s loan of

P500,000.

On September 13, 1982, BPIIC released to ALS P7,146.87, purporting to be what was left of their loan after full payment of Roa’s loan.

In June 1984, BPIIC instituted foreclosure proceedings against ALS on the ground that they failed to pay the mortgage indebtedness which from May 1, 1981 to June 30, 1984, amounted to

P475,585.31.

ALS and Litonjua filed a civil case against BPIIC. They alleged, among others, that they were not in arrears in their payment, but in fact made an overpayment as of June 30, 1984. They maintained that they should not be made to pay amortization before the actual release of the P500,000 loan in August and September 1982. Further, out of the P500,000 loan, only the total amount of P464,351.77 was released to ALS.

RTC favored ALS and Litonjua. CA affirmed in toto.

CA reasoned that a simple loan is perfected only upon the delivery of the object of the contract. The contract of loan between BPIIC and ALS & Litonjua was perfected only on September 13, 1982, the date when BPIIC released the purported balance of the P500,000 loan after deducting therefrom the value of Roa’s indebtedness. Thus, payment of the monthly amortization should commence only a month after the said date, as can be inferred from the stipulations in the contract. This, despite the express agreement of the parties that payment shall commence on May 1, 1981. From October 1982 to June 1984, the total amortization due was only P194,960.43. Evidence showed that ALS had an overpayment. Therefore, there was no basis for BPIIC to extrajudicially foreclose the mortgage.

BPIIC contends among others that CA erred in ruling that because a simple loan is perfected upon the delivery of the object of the contract, the loan contract in this case was perfected only on September 13, 1982. BPIIC claims that a contract of loan is a consensual contract, and a loan contract is perfected at the time the contract of

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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mortgage is executed conformably with SC’s ruling in Bonnevie v. CA, 125 SCRA 122.

ISSUE: WON a contract of loan is a consensual contract. NO, A CONTRACT OF LOAN IS A REAL CONTRACT.

HELD: A loan contract is not a consensual contract but a real contract. It is perfected only upon the DELIVERY of the object of the contract. BPIIC misapplied Bonnevie. The contract in Bonnevie declared by this Court as a perfected consensual contract falls under the first clause of Article 1934, CC. It is an accepted promise to deliver something by way of simple loan. A perfected consensual contract, as shown above, can give rise to an action for damages. However, said contract does not constitute the real contract of loan which requires the delivery of the object of the contract for its perfection and which gives rise to obligations only on the part of the borrower.

In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on the other, was perfected only on September 13, 1982, the date of the second release of the loan. Following the intentions of the parties on the commencement of the monthly amortization, as found by the CA, ALS’s obligation to pay commenced only on October 13, 1982, a month after the perfection of the contract. A contract of loan involves a reciprocal obligation, wherein the obligation or promise of each party is the consideration for that of the other.

As averred by ALS, the promise of BPIIC to extend and deliver the loan is upon the consideration that ALS and Litonjua shall pay the monthly amortization commencing on May 1, 1981, one month after the supposed release of the loan. It is a basic principle in reciprocal obligations that neither party incurs in delay, if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. Only when a party has performed his part of the contract can he demand that the other party also fulfills his own obligation and if the latter fails, default sets in.

Consequently, petitioner could only demand for the payment of the monthly amortization after September 13, 1982 for it was only then when it complied with its obligation under the loan contract. Therefore, in computing the amount due as of the date when BPIIC extrajudicially caused the foreclosure of the mortgage, the starting date is October 13, 1982 and not May 1, 1981.

Other points raised by BPIIC in connection with this issue, such as the date of actual release of the loan and whether ALS were the cause of the delay in the release of the loan, are factual.

CA decision was affirmed but with modification as to the award of damages.

Q: So why was there an issue here as to the perfection of the contract? A: There was an issue here because upon the perfection of the contract, it will then start the

payment of the monthly amortization of ALS and Litonjua. Q: Wherein it would include? A: It would also include the payment for interest. Q: Now, between the allegations of the parties here, which was upheld by the Supreme Court? A: The contention of ALS and Litonjua was upheld by the Supreme Court. It was held that the contract was perfected on September 13, 1982 and that the contract of mutuum or commodatum is a real contract. Q: But in this case, what kind of loan was involved? A: Simple loan.

BPI vs CA: So again here, whether it is a commodatum or mutuum, it is perfected by delivery. Or it is a contract perfected by delivery and therefore a real contract. In this case, even if the loan contract was signed on March 13, 1981, it was only perfected on September 13, 1982 when the full loan was released to private respondents. A perfected loan agreement imposes reciprocal obligations where the obligation or promise of each party is the consideration of the other. The consideration for BPIIC for entering into the loan contract is the promise of the private respondents to pay the monthly amortization. On the part of the private respondent, the promise of BPIIC to deliver the money. As mentioned in reciprocal obligations, neither party occurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. In this case, there was no delay when they did not commence paying the monthly amortization on May 1, 1981 as it was only in September 13, 1982 when petitioner fully complied with its obligation.

Again, a loan contract is not a consensual contract but a real contract perfected only upon delivery. And it is a contract which involves reciprocal obligations.

So, what happens here? If you try to borrow money from a bank and let us say the bank instead of giving you cash delivers a check, so is there a simple loan already perfected? If what was delivered to you was a mere check, is the simple loan already perfected? There is the delivery of the check pero it’s not the subject matter yet. When is the contract of loan perfected in that scenario? When the check has already been encashed. So, mere issuance of the check does not perfect a contract of loan.

Now, what if the thing loaned was destroyed? The thing loaned here is money. So would it extinguish the obligation? No. Why? Genus never perishes. Genus nunquam perit. Destruction of the thing loaned does not extinguish the obligation.

Now we also have here the case of Yong Cham Kim vs People.

YONG CHAN KIM vs. PEOPLE OF THE PHILIPPINES, HON. EDGAR D. GUSTILO Presiding Judge, RTC, 6th Judicial Region, Branch 28 Iloilo City and COURT OF APPEALS (13th Division), SOUTHEAST ASIAN FISHERIES

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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DEVELOPMENT CENTER AQUACULTURE DEPARTMENT (SEAFDEC)

FACTS: Petitioner Yong Chan Kim was employed as a Researcher at the Aquaculture Department of the Southeast Asian Fisheries Development Center (SEAFDEC) with head station at Tigbauan, Province of Iloilo. As Head of the Economics Unit of the Research Division, he conducted prawn surveys which required him to travel to various selected provinces in the country where there are potentials for prawn culture.

On 15 June 1982, petitioner was issued Travel Order No. 2222 which covered his travels to different places in Luzon from 16 June to 21 July 1982, a period of thirty five (35) days. Under this travel order, he received P6,438.00 as cash advance to defray his travel expenses.

Within the same period, petitioner was issued another travel order, T.O. 2268, requiring him to travel from the Head Station at Tigbauan, Iloilo to Roxas City from 30 June to 4 July 1982, a period of five (5) days. For this travel order, petitioner received a cash advance of P495.00.

On 14 January 1983, petitioner presented both travel orders for liquidation, submitting Travel Expense Reports to the Accounting Section. When the Travel Expense Reports were audited, it was discovered that there was an overlap of four (4) days (30 June to 3 July 1982) in the two (2) travel orders for which petitioner collected per diems twice. In sum, the total amount in the form of per diems and allowances charged and collected by petitioner under Travel Order No. 2222, when he did not actually and physically travel as represented by his liquidation papers, was P1,230.00.

Petitioner was required to comment on the internal auditor's report regarding the alleged anomalous claim for per diems. In his reply, petitioner denied the alleged anomaly, claiming that he made make- up trips to compensate for the trips he failed to undertake under T.O. 2222 because he was recalled to the head office and given another assignment.

In September 1983, two (2) complaints for Estafa were filed against the petitioner before the Municipal Circuit Trial Court at Guimbal, Iloilo.

ISSUE: Whether or not petitioner can be held criminally liable on the ground of failure to liquidate her traveling expenses. NO.

RULING: It is undisputed that petitioner received a cash advance from private respondent SEAFDEC to defray his travel expenses under T.O. 2222. It is likewise admitted that within the period covered by T.O. 2222, petitioner was recalled to the head station in Iloilo and given another assignment which was covered by T.O. 2268. The dispute arose when petitioner allegedly failed to return P1,230.00 out of the cash advance which he received under T.O. 2222. For the alleged failure of petitioner to return the amount of P1,230.00, he was charged with the crime of Estafa under Article 315, par. 1(b) of the Revised Penal Code.

In order that a person can be convicted under the

above-quoted provision, it must be proven that he had the obligation to deliver or return the same money, good or personal property that he had received. Was petitioner under obligation to return the same money (cash advance) which he had received? We believe not.

Liquidation simply means the settling of indebtedness. An employee, such as herein petitioner, who liquidates a cash advance is in fact paying back his debt in the form of a loan of money advanced to him by his employer, as per diems and allowances.

Similarly, as stated in the assailed decision of the lower court, "if the amount of the cash advance he

received is less than the amount he spent for actual

he has the right to demand

travel

reimbursement from his employer the amount he

spent coming from his personal funds.

In

other words, the money advanced by either party

is

actually a loan to the other. Hence, petitioner was

under no legal obligation to return the same cash or

money, i.e., the bills or coins, which he received from the private respondent.

Article 1933 and Article 1953 of the Civil Code define the nature of a simple loan.

Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for

a certain time and return it, in which case the

contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a

loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation

to

pay interest.

In

commodatum the bailor retains the ownership of

the thing loaned, while in simple loan, ownership passes to the borrower.

Art.

money or any other fungible thing acquires the

ownership thereof, and is bound to

creditor an equal amount of the same kind and quality.

The ruling of the trial judge that ownership of the cash advanced to the petitioner by private respondent was not transferred to the latter is erroneous. Ownership of the money was transferred to the petitioner.

the

of

1953.A person who

receives a loan

pay to

Since ownership of the money (cash advance) was transferred to petitioner, no fiduciary relationship was created. Absent this fiduciary relationship between petitioner and private respondent, which is an essential element of the crime of estafa by misappropriation or conversion, petitioner could not have committed estafa.

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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Additionally, it has been the policy of private respondent that all cash advances not liquidated

are to be deducted correspondingly from the salary of the employee concerned. The evidence shows that the corresponding salary deduction was made

in

the case of petitioner vis-a-vis the cash advance

in

question.

(Failure of bank to return the amount deposited, not a case of estafa)

Q: What was the defense here of Yong Chan? A: He said that the cash advances were actually a simple loan and that there was no obligation on his part to return the excess. Q: What was his obligation if it does not include the obligation to return the excess? A: Only to pay such (?) and not just to pay the excess. Q: So what was the ruling of the Court? A: So the Supreme Court here ruled that cash

advances are in the form of simple loan, so there is

a transfer of ownership. And, being that there is a

transfer of ownership, Yong Chan, since there was no fiduciary relationship created between him and the one who gave the cash advances, he cannot be made liable since that is the basis for the liability for estafa. And also, based on the policy of the agency, SEAFDEC, in case there was no liquidation, it will only be deducted from the salary of Yong Chan and

he cannot be sued for estafa. Q: So was there liability here on the part of Yong Chan? A: Yes. There is a liability for him to pay but that will only be deducted from his salary but he cannot be held liable for estafa.

YONG CHAN KIM vs PEOPLE: So, there is only civil liability but no criminal liability. So what do you have here? A situation wherein money is released, per diems, allowances to an employee and the employee fails to return the excess back to the employer.

Now, with regard to estafa, in order for a person to be convicted for estafa, you have here Article 315, par. 1 (b), it must be proven that he had the obligation to deliver or return the money, good or personal property that he had received. In this case, Yong Chan had no obligation to do so. His obligation was first, liquidation. Liquidation means the settling of an indebtedness. An employee who liquidates a cash advance is in fact paying his debt

in the form of a loan of money advanced to him by

his employer, as per diems and allowances. So the Supreme Court emphasized the decision of the lower court, kasi what if the cash advance received by the employee is less than the amount for actual travel. He can actually demand reimbursement from his employer. So with that, the money that was released to the employee was in the form of loan and therefore there was no legal obligation for petitioner to return the same cash or money which he received from the private respondent. Now when we say same cash (?) here, do not confuse it with commodatum. Because what you have here is money or consumable thing and the intention here was to transfer ownership. The ruling of the trial judge that the ownership of the cash transfer to the petitioner by private respondent was not transferred

to the latter was erroneous. Again, since what we have here is a simple loan, ownership was transferred to Yong Chan.

Again, it was emphasized also that there was no fiduciary relationship when the cash advance was released to the employee. Absent this fiduciary relationship which is an essential element of the crime of estafa by misappropriation or conversion, petitioner could not have committed estafa.

And then we have the case of Spouses Tan vs Villapaz.

SPOUSES ANTONIO and LOLITA TAN vs. CARMELITO VILLAPAZ

FACTS: On February 6, 1992, respondent Villapaz issued a Philippine Bank of Communications (PBCom) crossed check in the amount of P250,000.00, payable to the order of petitioner Tony Tan. On that date, the check was deposited at the drawee bank, PBCom Davao City branch at Monteverde Avenue, to the account of petitioner Antonio Tan also at said bank.

On November 7, 1994 respondent filed a Complaint for sum of money against the spouses, alleging that on February 6, 1992, the spouses went to his place of business at Malita, Davao and obtained a loan of P250,000.00, hence, his issuance of the February 6, 1992 PBCom crossed check which loan was to be settled interest-free in six (6) months.

On the maturity date of the loan or on August 6, 1992, petitioner Antonio Tan failed to settle the same, and despite repeated demands, petitioners never did, drawing Villapaz to file the complaint; and on account of the willful refusal of petitioners to honor their obligation, he suffered moral damages in the amount of P50,000.00, among other things.

The spouses denied having gone to Malita and having obtained a loan from respondent, alleging that the check was issued by respondent in Davao City on February 6, 1992 "in exchange for equivalent cash"; they never received from respondent any demand for payment, be it verbal or written, respecting the alleged loan; since the alleged loan was one with a period payable in six months, it should have been expressly stipulated upon in writing by the parties but it was not, hence, the essential requisite for the validity and enforceability of a loan is wanting; and the check is inadmissible to prove the existence of a loan for

P250,000.00.

Petitioners maintain that they did not secure a loan from respondent, insisting that they encashed in Davao City respondent's February 6, 1992 crossed check; in the ordinary course of business, prudence dictates that a contract of loan must be in writing as in fact the New Civil Code provides that to be enforceable "contracts where the amount involved exceed[s] P500.00 must appear in writing even a private one," hence, respondent's "self-serving" claim does not suffice to prove the existence of a loan; respondent's allegation that no memorandum in writing of the transaction was executed because he and they are "kumpadres" does not inspire belief

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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for respondent, being a businessman himself, was with more reason expected to be more prudent; and the mere encashment of the check is not a contractual transaction such as a sale or a loan which ordinarily requires a receipt and that explains why they did not issue a receipt when they encashed the check of respondent.

Petitioners furthermore maintain that they were financially stable on February 6, 1992 as shown by the entries of their bank passbook hence, there was no reason for them to go to a distant place like Malita to borrow money.

The lower Court gave four reasons for ruling out a loan:

(a) the defense of spouses Tan that they did not go

to Villapaz's place on February 6, 1992, date the check was given to them;

(b) Spouses Tan could not have borrowed money

on that date because from January to March, 1992, they had an average daily deposit of P700,000 and on February 6, 1992, they had P1,211,400.64 in the bank, hence, they had "surely no reason nor logic" to borrow money from Villapaz;

(c) the alleged loan was not reduced in writing and

the check could not be a competent evidence of

loan.

ISSUE: Whether or not the transaction in dispute was a contract of loan and not a mere matter of check encashment as found by the trial court. YES.

HELD: The four-fold reasoning cannot be sustained. They are faulty and do not accord either with law or ordinary conduct of men. For one thing, the first two given reasons partake more of alibi and speculation, hence, deserve scant consideration. For another, the last two miss the applicable provisions of law.

The existence of a contract of loan cannot be denied merely because it is not reduced in writing. Surely, there can be a verbal loan. Contracts are binding between the parties, whether oral or written. The law is explicit that contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present. A loan (simple loan or mutuum) exists when a person receives a loan of money or any other fungible thing and acquires the ownership thereof. He is bound to pay to the creditor the equal amount of the same kind and quality.

Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, maybe in keeping with good faith, usage and law.

The lower Court misplaced its reliance on Article 1358 of the Civil Code providing that to be enforceable, contracts where the amount involved exceed five hundred pesos, must appear in writing. Such requirement, it has been held, is only for

convenience, not for validity. It bears emphasis that at the time Villapaz delivered the crossed-check to the petitioner spouses, Villapaz had no account whatsoever with them. Spouses' contention that they did not obtain any loan but merely exchanged the latter's check for cash is not borne by any evidence.

That apart from the check, no written proof of the grant of the loan was executed was credibly explained by respondent when he declared that petitioners' son being his godson, he, out of trust and respect, believed that the crossed check sufficed to prove their transaction.

As for petitioners' reliance on Art. 1358[22] of the Civil Code, the same is misplaced for the requirement that contracts where the amount involved exceeds P500.00 must appear in writing is only for convenience.

At all events, a check, the entries of which are no doubt in writing, could prove a loan transaction.

Q: First, what was the contract entered into? A: Loan. Q: So it was a loan, specifically what kind? A: Mutuum. Q: So with that what was the other issue that was needed to be addressed considering that what we have here was a simple loan or mutuum? A: W/N the contract of mutuum should be reduced into writing to be enforceable. The Court here ruled in the negative ruling that in a contract of loan, it is not a consensual contract but rather it is a real contract perfected upon delivery. So, form is not necessary and that it is already perfected upon delivery of the same. Furthermore, it was ruled by the Court that a contract is not one of those enforceable contracts that need to be reduced into writing to be enforceable. Q: Now how about with regard to the defense that there was no promissory note issued in relation to that release of the check? How was the check considered here? How was the loan transaction proven? A: Through the mere existence of the check.

SPOUSES TAN vs VILLAPAZ: The mere existence of the check would already show that there is already a contract of loan. You already have negotiable instruments. Wala pa kayo nag abot ng section 1 but tapos na kayo sa functions? One of the functions of a negotiable instrument is that it is an evidence of indebtedness. So that was taken into consideration here. It was raised as an issue that number 1, there was nothing in writing to show that naghiram ng pera. What they have was only the check. So they were asking that there must be a promissory note to make the contract enforceable. First, it was not necessary because number 1, the contract involved here was not one of those mentioned under Article 1403 (2), statute of frauds, for the contract to be enforceable. Second, as mentioned, again, a contract of loan is perfected by delivery. When the proceeds of the check was released, there was already a perfected contract of loan. And third, in relation to your negotiable instruments, there was no necessity to issue a

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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separate paper contract to show that a contract of loan was perfected. Because the mere issuance of the check could prove that there was a loan transaction. Again, one of the functions of a negotiable instrument as in this case a check, is that it is an evidence of indebtedness.

Notice in this case it was in Digos, Davao del Sur and I think this was a bank here in Davao, PBCOM Monteverde Branch. And I think it was among friends because there was an allegation that the check was not merely, he did not borrow money because he has money in the bank. That does not mean, as held by the Supreme Court, that it is impossible to believe that if a businessman has such an outstanding balance in his account, he would have no need to borrow an extra amount. So no defense in that instance.

Now, Article 1954.

Art. 1954. A contract whereby one person transfers the ownership of non-fungible things to another with the obligation on the part of the latter to give things of the same kind, quantity, and quality shall be considered a barter. (n)

Alright, distinctions between barter or exchange and mutuum.

Art. 1638. By the contract of barter or exchange one of the parties binds himself to give one thing in consideration of the other's promise to give another thing.

Mutuum, commodatum, barter, they are different contracts.

COMMODATUM/MUTUUM

BARTER

 

In mutuum the subject matter is money or consumable things. In commodatum as a general rule, non-consumable.

The subject matter is non-fungible or non- consumable.

In commodatum, the bailee is bound to return the identical thing borrowed. In mutuum, equivalent of the thing that was loaned.

The equivalent thing is given in return for what has been received.

Mutuum may be gratuitous and commodatum is essentially gratuitous.

Barter

is

always

onerous.

Art. 1955. The obligation of a person who borrows money shall be governed by the provisions of Articles 1249 and 1250 of this Code.

If what was loaned is a fungible thing other than money, the debtor owes another thing of the same kind, quantity and quality, even if it should change in value. In case it is impossible to deliver the same kind, its value at the time of the perfection of the loan shall be paid. (1754a)

Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in

the currency which is legal tender in the Philippines. The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired.

In the meantime, the action derived from the

original obligation shall be held in abeyance. (1170)

Art. 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary. (n)

the

What is 1249 of the Civil Code? Payment. Legal tender, in the currency stipulated or legal tender in the Philippines. Mercantile checks, mercantile documents, delivery thereof shall not be considered as payment or performance until the same has been encashed or impaired through the fault of the debtor. In the meantime, demandability of the obligation may be held in abeyance.

1250, inflation, extraordinary inflation or deflation. That is also taken into consideration here since what you have as a subject matter is money or consumable thing. If the subject of mutuum is money, payment must be made in the currency stipulated. In case of extraordinary inflation or deflation, the basis of the payment shall be the value of the currency at the time of the creation of the obligation. Distinguish it if the subject matter is a fungible thing. Obligation is to pay the lender another thing of the same kind, quantity and quality. If impossible to do so, pay its value at the time of the perfection of the loan. In case it is impossible to deliver the same kind, the value at the time of the perfection of the loan shall be paid.

And then we have Article 1956. Very short, but actually, most of our cases and discussion revolve within this provision in relation to interest.

Art. 1956. No interest shall be due unless it has been expressly stipulated in writing. (1755a)

Now, if you take a look at that, we could say that the following are requisites for interest:

1. It must be expressly stipulated; and

2. It must be in writing.

It is not enough that it is expressly stipulated, it must also be in writing. And there is third requisite which is mentioned in the discussion, that the interest must be lawful. But, considered that the usury law has already been suspended, then this requisite that interest must be lawful is likewise not necessary as of this time.

Now, with regard to payment of interest in relation to 1956, considering this is within the chapter on mutuum, therefore the requirement for the express stipulation in writing of interest, is only required if

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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interest is demanded subject of a simple loan or mutuum.

Now, contracting parties may stipulate freely on any adjustment of interest rate because again, usury law has already been suspended. However, as most probably you have already learned in your obligations and contracts, the law does not authorize the increase of interest rate by one party without the other party’s consent and any change must be mutually agreed by the parties.

Now, with regard to interest, in the cases that you have read and you will read, you will always encounter this term, forbearance.

Q: What do you mean by forbearance?

A: Forbearance is a loan.

What

IBARROLA?

happened

in

the

case

of

PNB

vs

PNB VS. CA AND IBARROLA

FACTS: Province of Isabela issued several checks drawn against its account with PNB (P) in favor of Lyndon Pharmaceuticals Laboratories, a business operated by Ibarrola (R), as payments for the purchase of medicines.

The checks were delivered to R’s agents who turned them over to R, except 23 checks amounting to P98k. Due to failure to receive full amount, R filed case against P.

Trial Court, CA and SC ordered PNB to pay; however, all 3 courts failed to specify the legal rate of interest 6% or 12%.

ISSUE: WoN the rate to be used is 6%.

HELD: YES. This case does not involve a loan, forbearance of money or judgment involving a loan or forbearance of money as it arose from a contract of sale whereby R did not receive full payment for her merchandise.

When an obligation arises “from a contract of purchase and sale and not from a contract of loan or mutuum,” the applicable rate is 6% per annum as provided in Art. 2209 of the NCC and not the rate of 12% per annum as provided in (CB) Cir. No. 416.

The rate of 12% interest referred to in Cir. 416 applies only to: Loan or forbearance of money, or to cases where money is transferred from one person to another and the obligation to return the same or a portion thereof is adjudged.

Any other monetary judgment which does not involve or which has nothing to do with loans or forbearance of any money, goods or credit does not fall within its coverage for such imposition is not within the ambit of the authority granted to the Central Bank.

When an obligation not constituting a loan or forbearance of money is breached then an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of

6% per annum in accordance with Art. 2209 of the Civil Code. Indeed, the monetary judgment in favor of private respondent does not involve a loan or forbearance of money, hence the proper imposable rate of interest is six (6%) per cent.

Therefore, the proper rate of interest referred to in the judgment under execution is only 6%. This interest shall be computed from the time of the filing of the complaint considering that the amount adjudged (P98,691.90) can be established with reasonable certainty. Said amount being merely the uncollected balance of the purchase price covered by the 23 checks encashed and appropriated by Ibarrola's agents. However, once the judgment becomes final and executory, the "interim period from the finality of judgment awarding a monetary claim and until payment thereof, is deemed to be equivalent to a forbearance of credit."

*6% from filing of complaint until full payment before finality of judgment.

*12% from finality of judgment.

Q: Now first, before you go to the issue on 6% or 12%, is the requirement in 1956 applicable in this case? Is it required here that the stipulated interest be in writing? A: No. Q: Why not? What was the basis for the claim for interest? It’s clear that there in entitlement for interest, the issue was whether 6% or 12 %. But why was there a demand for payment of interest in the first place? A: There is a demand for payment of interest in the first place because of the failure of the Province of Isabela to pay the balance of P98,691 to Ibarrola. Q: Would that be considered as a forbearance of money? What is forbearance? In this case, how was it defined, forbearance of money? What is involved in forbearance? A: Money. Q: Why would it be relevant that the transaction herein involves forbearance? When do you apply 6%, when do you apply 12%? A: The 6% is applicable if it arises from a contract of sale just like in this case. Q: So only for contracts of sale? When do you apply the 12%? A: The 12% is applied if the obligation arises from a forbearance of money or a contract of loan. Q: So in this case, what is the applicable interest rate? A: The applicable interest rate in this case is 6% because it arises from a contract of sale wherein it was due to the medicines purchased by the Province of Isabela. And according to the Supreme Court, 6% is applicable, aside from the obligation arising from a contract of sale, because the judgment here is not yet final so the 6% shall be computed from the date of the filing of the complaint until satisfaction of such before final judgment. And so the proper rate of interest here in the judgment rendered by the court is 6%. However, the Supreme Court here also cited the case of Eastern Shipping. According to the Supreme Court that, if the judgment becomes final, the interim period from the finality of the judgment which awards the money claim until full payment of such would be considered as a forbearance of credit or treated as a loan. Of which the 12% shall be applicable.

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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PNB vs IBARROLA: What was the action here? It was actually an action for damages. The interest was imposed based on the action for damages. So there was no contract of loan involved here and therefore 1956 is not an applicable provision. For the demand of interest here, it is not required that it must be stipulated in writing. Now, considering that, here you do not have an obligation constituting a loan or forbearance of money, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6%. The case at bench does not involve a loan, forbearance of money, or judgment involving a loan or forbearance of money as it arose from a contract of sale. Forbearance is considered as a contractual obligation of a lender or creditor to refrain during a given period of time from requiring debtor/borrower to repay the loan or debt then due or payable. The rate of 12% only applies to such loan or forbearance of money or cases where money is transferred from one person to another and the obligation is to return the same or a portion thereof is adjudged. Once the judgment becomes final and executory, the interim period from finality of judgment awarding monetary claims until payment from that time will now be considered as a forbearance of credit wherein the 12% p.a. should be imposed and again would be computed from the time the judgment became final and executory until fully satisfied.

So here, it was the 6% from filing of the complaint until its full payment before finality of judgment. And then, if the amount adjudged remains unpaid, the interest shall be paid from the time the judgment became final and executory, in this case on November 1993 until fully satisfied.

Now, also another case dealing with forbearance is the case of Estores vs Supangan.

HERMOJINA ESTORES VS. SPOUSES ARTURO AND LAURA SUPANGAN

FACTS: In Oct. 1993, Hermojina Estores and Spouses Supangan entered into a Conditional Deed of Sale where Estores offered to sell, and Spouses offered to buy a parcel of land in Cavite for

P4.7M.

After almost 7 years and despite the payment of P3.5M by the Spouses, Estores still failed to comply with her obligation to handle the peaceful transfer of ownership as stated in 5 provisions in the contract.

In a letter in 2000, Spouses demanded the return of the amount within 15 days from receipt. In reply, Estores promised to return the same within 120 days. Spouses agreed but imposed an interest of 12% annually. Estores still failed despite demands.

Spouses filed a complaint with the RTC against Estores and Roberto Arias (allegedly acted as Estores’ agent).

In Answer, Estores said they were willing to pay the principal amount but without the interest as it was not agreed upon. That since the Conditional Deed of Sale provided only for the return of the

downpayment in case of breach, they cant be liable for legal interest as well.

RTC ruled saying that the Spouses are entitled to the interest but only at 6% per annum and also entitled to atty’s fees. On appeal, CA said that the issue to resolve is whether it is proper to impose interest for an obligation that does not involve a loan or forbearance of money in the absence of stipulation of the parties. CA affirmed RTC.

That interest should start on date of formal demand by Spouses to return the money not when contract was executed as stated by the RTC; That Arias not be solidarily liable as he acted as agent only and did not expressly bind himself or exceeded his authority.

Estores contends: Not bound to pay interest because the deed only provided for the return of the downpayment in case of failure to comply with her obligations; That atty fees not proper because both RTC and CA sustained her contention that 12% interest was uncalled for so it showed that Spouses did not win.

Spouses contend: It is only fair that interest be imposed because Estores failed to return the amount upon demand and used the money for her benefit.

Estores failed to relocate the house outside the perimeter of the subject lot and complete the necessary documents.

As to the fees, they claim that they were forced to litigate when Estores unjustly held the amount.

ISSUES: Is the imposition of interest and attorney’s fees is proper? YES

Interest based on Art 2209 of CC (6%) or under Central Bank Circular 416 (12%)? 12%

HELD: Interest may be imposed even in the absence of stipulation in the contract.

Article 2210 of the Civil Code expressly provides that “interest may, in the discretion of the court, be allowed upon damages awarded for breach of contract.”

Estores failed on her obligations despite demand. She admitted that the conditions were not fulfilled and was willing to return the full amount of P3.5M but hasn’t done so she is now in default.

The interest at the rate of 12% is applicable in the instant case.

Gen Rule: the applicable interest rate shall be computed in accordance with the stipulation of the parties

Exc: if no stipulation, applicable rate of interest shall be 12% per annum when obligation arises out of a loan or forbearance of money, goods or credits. In other cases, it shall be 6%

In this case, no stipulation was made.

Contract involved in this case is not a loan but a Conditional Deed of Sale.

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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No question that the obligations were not met and the return of money not made

Even if transaction was a Conditional Deed of Sale, the stipulation governing the return of the money can be considered as a forbearance of money which requires 12% interest

In Crismina Garments, Inc. v. Court of Appeals, Forbearance-- “contractual obligation of lender or creditor to refrain during a given period of time, from requiring the borrower or debtor to repay a loan or debt then due and payable.”

In such case, “forbearance of money, goods or credits” will have no distinct definition from a loan. However, the phrase “forbearance of money, goods or credits” is meant to have a separate meaning from a loan, otherwise there would have been no need to add that phrase as a loan is already sufficiently defined in the Civil Code

Forbearance of money, goods or credits should therefore refer to arrangements other than loan agreements, where a person acquiesces to the temporary use of his money, goods or credits pending happening of certain events or fulfillment of certain conditions.

Estores’ unwarranted withholding of the money amounts to forbearance of money which can be considered as an involuntary loan so rate is 12% starting in Sept. 2000

The award of attorney’s fees is warranted.

No doubt that the Spouses were forced to litigate to protect their interest, i.e., to recover their money. The amount of P50,000.00 is more appropriate.

Q: How was it defined here, the term forbearance of money? A: The Supreme Court here defined a forbearance of money as a contractual obligation of the lender or creditor to refrain during a period of time to require the debtor to repay the loan. Q: So if there was a forbearance of money, it should be 12%? A: Yes, Q: What was the rate imposed here? A: it was 12%. Q: But wasn’t it that the basis here for interest was the breach of that conditional deed of sale? Isn’t it that in the case of Ibarrola, it was also a deed of sale, the rate imposed there was 6% and the 12% was only from the finality of judgment? A: The Supreme Court here considered the stipulation in the return of the downpayment as a forbearance of money. Q: In other words, even if there was no loan, there was no lender, as you have mentioned in the definition and also the same in the case of Ibarrola was not exactly the same definition mentioned here by the Supreme Court. In fact it expounded on the definition. What was the definition here? A: It was said that the phrase forbearance of money goods or credits will have no distinct definition from a loan otherwise there would have been no need to add that phrase as a loan is already sufficiently defined in the Civil Code

Forbearance of money, goods or credits should therefore refer to arrangements other than loan agreements, where a person acquiesces to the temporary use of his money, goods or credits pending happening of certain events or fulfillment of certain conditions. Q: So again, why was the 12% imposed here and not the 6%? Even if there was no loan, even if it was a sale, why was it that 12% was the rate imposed? A: Because here, the respondent agreed that the temporary use of his money pending the happening

of a condition.

ESTORES vs SUPANGAN: And even if all the conditions were complied with, there was still

refusal to return the money as stipulated in the said deed. The unwarranted withholding again resulted

to liability for interest since it is now considered as a

forbearance of money.

So here the Supreme Court noted the previous definitions of forbearance as in the case of PNB vs Ibarrola as a contractual obligation of lender or refrain during a given period of time from requiring the borrower or debtor to repay a loan or debt then due and payable. Note that in mutuum, you give the bailee a period to pay. You give time to pay the loan already due and payable. Before that period, you have no right to demand for the payment of the return of whatever has been borrowed.

But in this case of Supangan and in subsequent cases as well, the Supreme Court has already held that the phrase forbearance of money, would have

a separate meaning from a loan. Otherwise there

would have been no need to add that phrase as a loan is already sufficiently defined in the Civil Code Forbearance of money, goods or credits should therefore refer to arrangements other than loan agreements, where a person acquiesces to the temporary use of his money, goods or credits pending happening of certain events or fulfillment of certain conditions.

In this case, respondent spouses parted with their money even before the conditions were fulfilled. They have allowed or granted forbearance to petitioner to use their money pending fulfillment of the conditions. They were deprived for the use of their money pending fulfillment of conditions. And when those conditions were breached, they are entitled not only to the principal amount but also to the compensation for the use of their money. And the compensation for the use of their money absent any stipulation should be the same rate of legal interest applicable to a loan since the use or deprivation is similar to a loan. Petitioners unwarranted withholding of the money which rightfully pertains to spouses amounts to forbearance of money which can be considered as

a voluntary loan and therefore the applicable rate of interest is 12% p.a.

Notice the difference here in the case of PNB vs

Ibarrola and the case if Supangan. In the latter case

of Supangan, the definition of the term forbearance

of money was expounded. Again, it’s not just loan,

but the fact that you allow another person to use your money in the meantime. So even if the basis

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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here was the deed of conditional sale, again the rate that was imposed was 12%.

November 23, 2015 (Jala)

Still under interest for Mutuum. Again we have emphasized last time that under Art. 1956, no interest shall be due unless it has been expressly stipulated in writing. In 1956, the requirements indicated therein apply only to a simple loan of mutuum. The requisites for interest are it must be expressly stipulated and it must be in writing. The discussion by de Leon in his book, he noted that the third requisite, interest must be lawful is not required because of the suspension of the Usury Law.

Also last time, we emphasized that we have in obligations and contracts, I am pretty sure you had your discussion in obligation and contract that contracting parties may stipulate on any adjustment on the interest rate of a loan or forbearance of money. As to what is forbearance of money, we have already discussed the definition in the earlier cases such as Ibarrola wherein the definition was expounded in the subsequent cases such as that of Estores

Now, regarding interest rate adjustments, the law does not authorize increase of interest rate by one party without the other party’s consent kasi any change must be mutually agreed upon by the parties. But we have this case of Pan Pacific vs. Equitable …

PAN PACIFIC vs EQUITABLE PCI BANK

FACTS: Pan Pacific is engaged in contracting mechanical works on airconditioning system. They entered into a contract of mechanical works with respondent for the total consideration for the whole project was P23,311,410.30. The Contract stipulated that Pan Pacific shall be entitled to a price adjustment in case of increase in labor costs and prices of materials under paragraphs 70.1 and 70.2 of the General Conditions for the Construction of PCIB Tower II Extension.

Pan Pacific commenced the mechanical works in the project site. In 1990, labor costs and prices of materials escalated. On 5 April 1991, in accordance with the escalation clause, Pan Pacific claimed a price adjustment of P5,165,945.52. Respondents asked for a reduction in the price adjustment. To show goodwill, Pan Pacific reduced the price adjustment toP4,858,548.67.

On 28 April 1992, respondent asked that the price adjustment should be pegged at P3,730,957.07, based on the DOLE Labor Indices and the General Conditions of their contract.

Due to the extraordinary increases in the costs of labor and materials, Pan Pacific’s operational capital was becoming inadequate for the project. However, respondent withheld the payment of the price adjustment under the escalation clause despite Pan Pacifics repeated demands.

Instead, respondent offered Pan Pacific a

of P1.8 million. Pan Pacific was constrained to execute a promissory note in the amount of P1.8

loan

million as a requirement for the loan. Pan Pacific also posted a surety bond. The P1.8 million was released directly to laborers and suppliers and not a single centavo was given to Pan Pacific.

Pan Pacific made several demands for payment on the price adjustment but respondent merely kept on promising to release the same. Meanwhile, the P1.8 million loan matured and respondent demanded payment plus interest and penalty. Pan Pacific refused to pay the loan. Pan Pacific insisted that it would not have incurred the loan if respondent released the price adjustment on time. Pan Pacific alleged that the promissory note did not express the true agreement of the parties. Pan Pacific maintained that the P1.8 million was to be considered as an advance payment on the price adjustment. Therefore, there was really no consideration for the promissory note; hence, it is null and void from the beginning.

Respondent stood firm that it would not release any amount of the price adjustment to Pan Pacific but it would offset the price adjustment with Pan Pacifics outstanding balance of P3,226,186.01, representing the loan, interests, penalties and collection charges.

Pan Pacific refused the offsetting but agreed to receive the reduced amount of P3,730,957.07 as recommended by the TCGI Engineers for the purpose of extrajudicial settlement, less P1.8 million and P414,942 as advance payments.

On 6 May 1994, petitioners filed a complaint for declaration of nullity/annulment of the promissory note, sum of money, and damages against the respondent with the RTC. On 12 April 1999, the RTC declared the promissory note as null and void

and

Pacific to

pay P1,389,111.10 REPRESENTING UNPAID BALANCE OF THE ADJUSTMENT PRICE, AND INTEREST AT THE LEGAL RATE OF TWELVE (12%) PERCENT PER ANNUM

ordered

Pan

deduction

final

payment on the basic contract price. Hence, the CA ordered respondent to pay P1,516,015.07 to petitioners, with interest at the legal rate of 12% per annum starting 6 May 1994.

The

ofP126,903.97 because it represented

CA

removed

the

the

On MR he CA increased the loan rate to 18%, rate of equitable PCI.

ISSUE: Whether the CA, in awarding the unpaid balance of the price adjustment, erred in fixing the interest rate at 12% instead of the 18% bank lending rate. YES

HELD: The CA went beyond the intent of the parties by requiring respondent to give its consent to the imposition of interest before petitioners can hold respondent liable for interest at the current bank lending rate. This is erroneous. A review of Section 2.6 of the Agreement and Section 60.10 of the General Conditions shows that the consent of the respondent is not needed for the imposition of interest at the current bank lending rate, which occurs upon any delay in payment.

Article

monetary interest, specifically mandates that no

Code, which refers to

1956

of the

Civil

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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interest shall be due unless it has been expressly stipulated in writing. Therefore, payment of monetary interest is allowed only if:

(1) there was an express stipulation for the payment of interest; and (2) the agreement for the payment of interest was reduced in writing. The concurrence of the two conditions is required for the payment of monetary interest.

The consent of the respondent is not needed in order to impose interest at the current bank lending rate.

Under Article 2209 of the Civil Code, the appropriate measure for damages in case of delay in discharging an obligation consisting of the payment of a sum of money is the payment of penalty interest at the rate agreed upon in the contract of the parties. In the absence of a stipulation of a particular rate of penalty interest, payment of additional interest at a rate equal to the regular monetary interest becomes due and payable. Finally, if no regular interest had been agreed upon by the contracting parties, then the damages payable will consist of payment of legal interest which is 6%, or in the case of loans or forbearances of money, 12% per annum. It is only when the parties to a contract have failed to fix the rate of interest or when such amount is unwarranted that the Court will apply the 12% interest per annum on a loan or forbearance of money.

The written agreement entered into between petitioners and respondent provides for an interest at the current bank lending rate in case of delay in payment and the promissory note charged an interest of 18%.

To prove petitioners entitlement to the 18% bank lending rate of interest, petitioners presented the promissory note prepared by respondent bank itself. This promissory note, although declared void by the lower courts because it did not express the real intention of the parties, is substantial proof that the bank lending rate at the time of default was 18% per annum. Absent any evidence of fraud, undue influence or any vice of consent exercised by petitioners against the respondent, the interest rate agreed upon is binding on them.

What was the basis of the 18%? Was there any liability for interest in this case? Was there any issue with regard to the principal amount? Was it proper to impose an interest rate? How do you reconcile their agreement with that of what is required under obligations and contracts? Was their agreement upheld by the Supreme Court? Why was it upheld? What is the reason interest was being imposed here? What is the basis (legal) of interest based on delay? What is the interest to be imposed?

Even if the promissory note was void, the statement there, 18% was considered as evidence. The promissory note was used as an evidence to prove that the bank lending rate was 18%.

So here, it was agreed by the parties that consent of the repondent is not needed for the imposition of interest at the current bank lending rate which occurs upon any delay in payment.

Here, in case of default or delay, the consent of the respondent is not needed in order to impose interest at the current bank lending rate. This is not similar to what I have mentioned earlier that the law does not authorize increase of interest rate without the other party’s consent because sometimes bank would include that. In Obligations and contracts, as what was discussed to you, that just because there is a stipulation such as increase in the lending rate valid na yun just because you agreed that your consent was not necessary. That has already been invalidated. That obligations has been considered void. But here it is different because the imposition of interest is based on delay and 2209 of the Civil Code merely provides for interest in case of delay. Under Article 2209 of the Civil Code merely provides for interest in case of delay. The appropriate measure for damages in case of delay in discharging an obligation consisting of the payment of a sum of money is the payment of penalty interest at the rate agreed upon in the contract of the parties. Clearly in their agreement, there was no specific interest rate. What they mentioned was the current bank lending rate. In the absence of a stipulation of a particular rate of penalty interest, payment of additional interest at a rate equal to the regular monetary interest becomes due and payable. So there was an issue, ok, there is liability based on delay. So what should it be, 18, 12 or 6? Because it was clear in their agreement that the current bank lending rate on the interest rate imposed they had to consider what was the current bank lending rate that time and they saw that on the promissory note.

The promissory note, although it was considered void because it did not express the true intention of the parties, is substantial proof that the bank lending rate at that time of default was 18% per annum.

Now we will be talking about interest, what are that requisites and what are the effects in a contract. But what is really an interest?

What do we mean by interest? Why would there be a need to increase the principal sum?

PRISMA CONSTRUCTION vs. MENCHAVEZ

FACTS: December 8, 1993, Pantaleon, President and Chairman of the Board of PRISMA, obtained a P1M loan from the respondent, with monthly interest of P40,000.00 payable for 6 months, or a total obligation of P1,240,000.00 payable within 6 months.

To secure the payment of the loan, Pantaleon issued a promissory. Pantaleon signed the promissory note in his personal capacity and as duly authorized by the Board of Directors of PRISMA. The petitioners failed to completely pay the loan within the 6-month period.

As of January 4, 1997, respondent found that the petitioners still had an outstanding balance of

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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P1,364,151.00, to which respondent applied a 4% monthly interest.

On August 28, 1997, respondent filed a complaint for sum of money to enforce the unpaid balance, plus 4% monthly interest. The petitioners admitted the loan of P1,240,000.00, but denied the stipulation on the 4% monthly interest, arguing that the interest was not provided in the promissory note. Pantaleon also denied that he made himself personally liable and that he made representations that the loan would be repaid within six (6) months.

RTC found that the respondent issued a check for

P1M in favor of the petitioners for a loan that would earn an interest of 4% or P40,000.00 per month, or

a total of P240,000.00 for a 6-month period. RTC

ordered the petitioners to jointly and severally pay

the respondent the amount of P3,526,117.00 plus 4% per month interest from February 11, 1999 until fully paid.

Petitioners appealed to CA insisting that there was no express stipulation on the 4% monthly interest. CA favored respondent but noted that the interest of 4% per month, or 48% per annum, was unreasonable and should be reduced to 12% per annum. MR denied hence this petition.

ISSUE: Whether the parties agreed to the 4% monthly interest on the loan. If so, does the rate of interest apply to the 6-month payment period only or until full payment of the loan?

RULING: Interest due should be stipulated in writing; otherwise, 12% per annum APPLIES.

Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. When the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of its stipulations governs. Courts have no

authority to alter the contract by construction or to make a new contract for the parties; a court’s duty

is confined to the interpretation of the contract the

parties made for themselves without regard to its wisdom or folly, as the court cannot supply material stipulations or read into the contract words the contract does not contain. It is only when the contract is vague and ambiguous that courts are permitted to resort to the interpretation of its terms to determine the parties’ intent.

In the present case, the respondent issued a check

for P1M. In turn, Pantaleon, in his personal capacity and as authorized by the Board, executed the

promissory note. Thus, the P1M loan shall be payable within 6 months. The loan shall earn an interest of P40,000.00 per month, for a total obligation of P1,240,000.00 for the six-month period. We note that this agreed sum can be computed at 4% interest per month, but no such rate of interest was stipulated in the promissory note; rather a fixed sum equivalent to this rate was agreed upon.

Article 1956 of the Civil Code specifically mandates that “no interest shall be due unless it has been expressly stipulated in writing.” The payment of interest in loans or forbearance of money is allowed only if: (1) there was an express stipulation for the

payment of interest; and (2) the agreement for the payment of interest was reduced in writing. The concurrence of the two conditions is required for the payment of interest at a stipulated rate. The collection of interest without any stipulation in writing is prohibited by law.

The interest of P40,000.00 per month corresponds only to the six-month period of the loan, or from January 8, 1994 to June 8, 1994, as agreed upon by the parties in the promissory note. Thereafter, the interest on the loan should be at the legal interest rate of 12% per annum.

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.

The facts show that the parties agreed to the payment of a specific sum of money of P40,000.00 per month for six months, not to a 4% rate of interest payable within a 6-month period.

No issue on the excessiveness of the stipulated amount of P40,000.00 per month was ever put in issue by the petitioners; they only assailed the application of a 4% interest rate, since it was not agreed upon.

It is a familiar doctrine in obligations and contracts that the parties are bound by the stipulations, clauses, terms and conditions they have agreed to, which is the law between them, the only limitation being that these stipulations, clauses, terms and conditions are not contrary to law, morals, public order or public policy. The payment of the specific sum of money of P40,000.00 per month was voluntarily agreed upon by the petitioners and the respondent. There is nothing from the records and, in fact, there is no allegation showing that petitioners were victims of fraud when they entered into the agreement with the respondent.

Therefore, as agreed by the parties, the loan of P1M shall earn P40,000.00 per month for a period of 6 months, for a total principal and interest amount of P1,240,000.00. Thereafter, interest at the rate of 12% per annum shall apply. The amounts already paid by the petitioners during the pendency of the suit, amounting toP1,228,772.00 as of February 12, 1999, should be deducted from the total amount due, computed as indicated above. We remand the case to the trial court for the actual computation of the total amount due.

Did it comply with article 1956? Yes So what is the issue here? Application of 4% Why did the SC apply 12% The 4% to be applied to the 6-month period, can we say that it is excessive?

Here, while there was a stipulated interest at 40 thousand per month for a 6-month period, the Supreme Court ruled that no such rate of interest

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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was stipulated in the promissory note. Rather, it was a fixed sum equivalent to the rate that was agreed upon, again only for that 6-month period. So with that stipulation, there is compliance of the requirement under 1956.

However, as to the interest to be imposed beyond the 6-month period, the Supreme Court held that it was an interest of loan, the legal interest should be 12% per annum.

As to whether the 4% per month is excessive, the Supreme Court held that this was not held that no issue on the excessiveness of the stipulated amount of P40,000.00 per month was ever put in issue by the petitioners they only assailed the application of a 4% interest rate, since it was not agreed upon.

What is the effect if deemed to excessive? Reduce to what extent?

CHUA vs. TIMAN

FACTS:In February and March 1999, petitioners Salvador and Violeta Chua granted respondents Rodrigo, Ma. Lynn and Lydia Timan the following loans: a) P100,000; b) P200,000; c) P150,000; d) P107,000; e) P200,000; and f) P107,000. These loans were evidenced by promissory notes with interest of 7% per month, which was later reduced to 5% per month.

Respondents paid the loans initially at 7% interest rate per month until September 1999 and then at 5% interest rate per month from October to December 1999. Sometime in March 2000, respondents offered to pay the principal amount of the loans through a Philippine National Bank manager’s check worth P764,000, but petitioners refused to accept the same insisting that the principal amount of the loans totalled P864,000.

On May 3, 2000, respondents deposited P864,000 with the Clerk of Court of the RTC of Quezon City. Later, they filed a case for consignation and damages which was released to the petitioners.

The RTC rendered a decision in favor of respondents which was affirmed by the CA. It ruled that the original stipulated interest rates of 7% and 5% per month were excessive. It further ordered petitioners to refund to respondents all interest payments in excess of the legal rate of 1% per month or 12% per annum.

The Court of Appeals declared illegal the stipulated interest rates of 7% and 5% per month for being excessive, iniquitous, unconscionable and exorbitant. Accordingly, the Court of Appeals reduced the stipulated interest rates of 7% and 5% per month (equivalent to 84% and 60% per annum, respectively) to a fair and reasonable rate of 1% per month or 12% per annum. The Court of Appeals also ordered petitioners to refund to respondents all interest payments in excess of 12% per annum.

Petitioners aver that the stipulated interest of 5% monthly and higher cannot be considered unconscionable because these rates are not usurious by virtue of Central Bank (C.B.) Circular No. 905-82 which had expressly removed the

interest ceilings prescribed by the Usury Law. Petitioners add that respondents were in pari delicto since they agreed on the stipulated interest rates of 7% and 5% per month. They further aver they honestly believed that the interest rates they imposed on respondents’ loans were not usurious.

ISSUE:Whether or not the original stipulated interest rates of 7% and 5%, equivalent to 84% and 60% per annum, are unconscionable

RULING: Yes. The stipulated interest rates of 7% and 5% per month imposed on respondents’ loans must be equitably reduced to 1% per month or 12% per annum. We need not unsettle the principle we had affirmed in a plethora of cases that stipulated interest rates of 3% per month and higher are excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for being contrary to morals, if not against the law. While C.B. Circular No. 905-82, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless of maturity,nothing in the said circular could possibly be read as granting carte blanche authority to lenders to raise interest rates to levels which would either enslave their borrowers or lead to a hemorrhaging of their assets.

Petitioners cannot also raise the defenses of in pari delicto and good faith. The defense of in pari delicto was not raised in the RTC, hence, such an issue cannot be raised for the first time on appeal. The defense of good faith must also fail because such an issue is a question of factwhich may not be properly raised in a petition for review under Rule 45 of the Rules of Civil Procedure which allows only questions of law.

As well set forth in Medel:

We agree … that the stipulated rate of interest at 5.5% per month on the P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant. However, we can not consider the

consistently held that Circular No. 905 of the Central Bank, adopted on December 22, 1982, has expressly removed the interest ceilings prescribed by the Usury Law and that the Usury Law is now "legally inexistent."

In Security Bank and Trust Company vs. Regional Trial Court of Makati, it was held that CB Circular No. 905 "did not repeal nor in any way amend the Usury Law but simply suspended the latter’s effectivity." "Usury has been legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon."

Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in the promissory note iniquitous or unconscionable, and, hence, contrary to morals ("contra bonos mores"), if not against the law. The stipulation is void.

rate

"usurious"

rate "usurious" because this Court has

because

this

Court

has

What was the status of the rate that was agreed upon? The stipulation is void. What was the interest imposed by the SC? Why

12%?

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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What is the effect if the interest rate imposed by the creditor or agreed by the parties is iniquitous, unconscionable, excessive and exorbitant? As in this case the Supreme Court held that such stipulation being contrary to morals, if not against the law, is considered void. However, this does not mean that the debtor shall not be liable for any interest at all. In this case, the interest was equitably reduced to 1% per month or 12% per annum.

Notice in this case that the Supreme Court held that there is no need to unsettle the principle we had affirmed in a plethora of cases that stipulated interest rates of 3% per month and higher are excessive, iniquitous, unconscionable and exorbitant. However, there is no definite figure of interest rate which we can say is an excessive or iniquitous. In fact in the case we discussed, the parties agreed to the 4% interest per month. Nevertheless, the Supreme Court held that it was not placed as an issue and upheld the imposition of interest.

So aside from the cases ruled by the Supreme Court, it is not an absolute rule that the 3% per month and above interest rate would automatically be unconscionable. We still have to know other circumstances in the case.

Also it was held by the Supreme Court that even with the 5.5% per month, again it was not considered as usurious because the usury law has already been suspended.

Kinds of interest, we have there, one classification, monetary and compensatory interest. Then you also have the kinds of interest classified as follows:

(1) Simple interest. that which is paid for the principal at acertain rate fixed or stipulated by the parties (2) Compound interest. that which is imposed upon interest due and unpaid. The accrued interest is added to the principal sum and the whole (principal and accrued interest) is treated as a new principal upon which the interest for the next period is calculated. This is an interest already earned but not yet received on the part of the creditor. (3) Legal interest. that which the law directs to be charged in the absence of any agreement as to the rate between the parties.

If you look at the provisions of the new civil code which was enacted in 1950, you have therein the legal interest rate at 6%, but it was on 1974, with the resolution of the monetary board wherein the legal interest rate was 12%. Then, as we have mentioned before, that in january 1 (?), 2013, the legal interest rate is now 6%.

Do not confuse the term legal interest from lawful interest. When we talk about lawful or unlawful interest it touches upon the interest rate being usurious or not. So when we say lawful it means it does not exceed the maximum prescribed by law. Again, there is no lawful or unlawful because there is no usury law which fixes the maximum interest rate.

PILIPINAS BANK vs. COURT OF APPEALS

FACTS:Private respondent Lilia Echaus filed a complaint against petitioner and its president, Constantino Bautista, for collection of a sum of money. The complaint alleged: (1) that petitioner and Greatland Realty Corporation executed a "Dacion en Pago," wherein Greatland conveyed to petitioner several parcels of land in consideration of the sum of P7,776,335.69; (2) that Greatland

consideration of the Dacion en Pago, in favor of private respondent; and (3) that notwithstanding her demand for payment, petitioner in bad faith, refused and failed to pay the said amount assigned to her.

The trial court ordered petitioner and its co- defendant, jointly and severally, to pay private respondent P2,300,000.00 the total amount assigned by Greatland in her favor out of the P2,300,000.00 liability of defendant Pilipinas to Greatland plus legal interest from the dates of assignments until fully paid.

On March 22, 1985, petitioner appealed the decision of the trial court to the Court of Appeals. On the same day, private respondent filed a motion for Immediate Execution Pending Appeal which the trial court granted.

pending appeal by issuing two manager's checks in the total amount of P5,517,707.00 and which was encashed by the private respondent.

On June 28, 1990, the Court of Appeals rendered a decision in CA-G.R. No. CV-06017, which modified the judgment and ordered Pilipinas Bank to pay 2,300,000,00 Pesos, representing the total amount assigned by Greatland to her, with interest at the legal rate starting July 24, 1981, date when demand was first made.

On September 4, 1990, petitioner filed a motion in the trial court praying that private respondent to refund to her the excess payment of P1,898,623.67 with interests at 6%.

Private respondent opposed the motion of petitioner with respect to the rate of interest to be charged on the amount of P2,300,000.00. According to private respondent, the legal interest on the principal amount of P2,300,000.00 due her should be 12% per annum pursuant to CB Circular No. 416 and not 6% per annum as computed by petitioner.

On October 12, 1990, the trial court, while ordering the refund to petitioner of the excess payment, fixed the interest rate due on the amount of P2,300.000.00 at 12% per annum as proposed by private respondent, instead of 6% per annum as proposed by petitioner.

The Court of Appeals was of the theory that the action in Civil Case No. 239-A filed by private respondent against petitioner "involves forbearance of money, as the principal award to plaintiff- appellee (private respondent) in the amount of P2,300.000.00 was the overdue debt of defendant- appellant to her since July 1981. The case is, in effect, a simple collection of the money due to plaintiff-appellee, as the unpaid creditor from the

assigned

P2,300,000.00

out

of

the

total

Petitioner

complied

with

the

writ

of

execution

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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defendant bank, the debtor" (Resolution, p.3; Rollo, p. 33). Applying Central Bank Circular No. 416, the Court of Appeals held that the applicable rate of interest is 12% per annum.

Petitioner argues that the applicable law is Article 2209 of the Civil Code, not the Central Bank Circular No. 416. Said Article 2209 provides:

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

ISSUE: Whether or not the legal rate of interest on the amount of P2,300,000.00 adjudged to be paid by petitioner to private respondent is 12% per annum.

RULING:Presidential Decree No. 116 authorized the Monetary Board to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits and amended the Usury Law (Act No. 2655) for that purpose.

As amended, the Usury Law now provides:

Sec. The rate of interest for the loan or forbearance of any money, goods, or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall be six per centum per annum or such rate as may be prescribed by the Monetary Board of the Central Bank of the Philippines for that purpose in accordance with the authority hereby granted.

Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to charge such rate or rates whenever warranted by prevailing economic and social conditions:Provided, That such changes shall not be made oftener that once every twelve months.

In the exercise of the authority herein granted, the Monetary Board may prescribe higher maximum rates for consumer loans or renewals thereof as well as such loans made by pawnshops, finance companies and other similar credit institutions although the rates prescribed for these institutions need not necessarily be uniform.

Acting on the authority vested on it by the Usury Law, as amended by P.D. No. 116, the Monetary Board of Central Bank issued Central Bank Circular No. 416, which provides:

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

immediately.

Note that Circular No. 416, fixing the rate of interest at 12% per annum, deals with (1) loans; (2) forbearance of any money, goods or credit; and (3) judgments.

What then is the nature of the judgment ordering petitioner to pay private respondent the amount of

P2,300,000.00?

The said amount was a portion of the P7,776,335.69 which petitioner was obligated to pay Greatland as consideration for the sale of several parcels of land by Greatland to petitioner. The amount of P2,300,000.00 was assigned by Greatland in favor of private respondent. The said obligation therefore arose from a contract of purchase and sale and not from a contract of loan or mutuum. Hence, what is applicable is the rate of 6% per annum as provided in Article 2209 of the Civil Code of the Philippines and not the rate of 12% per annum as provided in Circular No. 416.

Petitioner next contends that, consistent with its thesis that Circular No. 416 applies only to judgments involving the payment of loans or forbearance of money, goods and credit, the Court of Appeals should have ordered private respondent to pay interest at the rate of 12% on the overpayment collected by her pursuant to the advance execution of the judgment.

We sustain petitioner's contention as correct.Private respondent was paid in advance the amount of P5,517,707.00 by petitioner to the order for the execution pending appeal of the judgment of the trial court. On appeal, the Court of Appeals reduced the total damages to P3,619,083.33, leaving a balance of P1,898,623.67 to be refunded by private respondent to petitioner. In an execution pending appeal, funds are advanced by the losing party to the prevailing party with the implied obligation of the latter to repay former, in case the appellate court cancels or reduces the monetary award.

In the case before us, the excess amount ordered to refunded by private respondent falls within the ruling in Viloria and Buiser that Circular No. 416 applies to cases where money is transferred from one person to another and the obligation to return the same or a portion thereof is subsequently adjudged.

When we say 6% or 12%, when will it start to run?

When do we begin to demand the interest rate?

EASTERN SHIPPING LINES, INC. vs.HON. COURT OF APPEALS

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

On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for delivery vessel "SS EASTERN COMET" owned by defendant Eastern Shipping Lines. The shipment was insured under plaintiff's Marine Insurance

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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Policy No. 81/01177 for P36,382,466.38.

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

On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from defendant Metro Port Service, Inc., one drum opened and without seal.

On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of the shipment to the consignee's warehouse. The latter excepted to one drum which contained spillages, while the rest of the contents was adulterated/fake.

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

As a consequence of the losses sustained, plaintiff was compelled to pay the consignee P19,032.95 under the aforestated marine insurance policy, so that it became subrogated to all the rights of action of said consignee against defendants

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

ISSUE:

1. Whether or not a claim for damage sustained on

a shipment of goods can be a solidary, or joint and several, liability of the common carrier, the arrastre operator and the customs broker. YES

2. Whether the payment of legal interest on an

award for loss or damage is to be computed from

the time the complaint is filed or from the date the decision appealed from is rendered.

3. Whether the applicable rate of interest, referred

to above, is twelve percent (12%) or six percent (6%). 6%

HELD:

1. Solidary. Since it is the duty of the ARRASTRE to take good care of the goods that are in its custody and to deliver them in good condition to the consignee, such responsibility also devolves upon the CARRIER. Both the ARRASTRE and the CARRIER are therefore charged with the obligation to deliver the goods in good condition to the consignee.

The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the time the articles are surrendered to or

unconditionally placed in the possession of, and received by, the carrier for transportation until delivered to, or until the lapse of a reasonable time for their acceptance by, the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods shipped either are lost or arrive in damaged condition, a presumption arises against the carrier of its failure to observe that diligence, and there need not be an express finding of negligence to hold it liable.

2. It may not be unwise, by way of clarification and

reconciliation, to suggest the following rules of thumb for future guidance.

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

II. With regard particularly to an award of interest in the concept of actual and compensatory damages,

the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists

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

2. When an obligation, not constituting a loan or

forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per

annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the

claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum

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

3. The legal interest to be paid is SIX PERCENT

(6%) on the amount due computed from the decision, dated 03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT (6%), shall be imposed on such amount upon finality of this decision until the

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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payment thereof.

NOTE:The Central Bank Circular imposing the 12% interest per annum applies only to loans or forbearance of money, goods or credits, as well as to judgments involving such loan or forbearance of money, goods or credits, and that the 6% interest under the Civil Code governs when the transaction involves the payment of indemnities in the concept of damage arising from the breach or a delay in the performance of obligations in general. Observe, too, that in these cases, a common time frame in the computation of the 6% interest per annum has been applied, i.e., from the time the complaint is filed until the adjudged amount is fully paid.

*Focus on guidelines laid down in the case

Here the cause of action was for damages (?) and the parties referred to different cases by the Supreme Court. The Supreme Court herein had groups of cases. With regard to the imposition of 6% or 12%, there was no issue.

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

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

That is why the Supreme Court, by way of clarification and reconciliation, to suggest the following rules for future guidance.

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.

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

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in

writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded (from the time this is filed in court). 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.

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. Where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made. 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 satisfaction…

finality until its

Which in this case was applied by the Supreme Court the legal interest to be paid is 6% of the amount due and 12 % of the amount upon finality until payment. So that was the guideline that was used by the Supreme Court. Notice that in Pilipinas Bank did not refer to Eastern Shipping ruling, unlike the previous cases we discussed last time. Why? Because na una itong pilipinas bank. Subsequent cases dealing with issues on interest, Eastern shipping was the case referred to and guideline provided therein. With the amendment of the legal interest rate, actually it is still the same, kaya lang lahat 6%.

Also take note that this guideline in Eastern Shipping, we could also take into consideration, articles 2209 2213 of the civil code. This article is about torts, but still in relation to interest.

Article 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum. (1108) Article 2210. Interest may, in the discretion of the court, be allowed upon damages awarded for breach of contract. Article 2211. In crimes and quasi-delicts, interest as a part of the damages may, in a proper case, be adjudicated in the discretion of the court. Article 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point. (1109a) Article 2213. Interest cannot be recovered upon unliquidated claims or damages, except when the demand can be established with reasonable certainty.

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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November 24, 2015 (Romero)

Given for example, the parties voluntarily agree as to interest rates (let us say 5%/month), can we not say that the debtor is already estopped from raising the defense that the interest rate is excessive? Can you apply the principle of estoppel even if the rates can be deemed as excessive? A: The interest rate agreed upon may be valid during the period stipulated upon by the parties.

DIO vs. SPOUSES JAPOR

FACTS: Herein respondents Spouses Virgilio Japor and Luz Roces Japor were the owners of an 845.5 square-meter residential lot including its improvements. Adjacent to the Japor’s lot is another lot owned by respondent Marta Japor.

On August 23, 1982, the respondents obtained a loan of P90,000 from the Quezon Development Bank (QDB), and as security therefor, they mortgaged the two lots as evidenced by a Deed of Real Estate Mortgage duly executed by and between the respondents and QDB.

On December 6, 1983, respondents and QDB amended the Deed of Real Estate Mortgage increasing respondents’ loan to P128,000.

The respondents failed to pay their aforesaid loans. However, before the bank could foreclose on the mortgage, respondents, thru their broker, one Lucia G. Orian, offered to mortgage their properties to petitioner Teresita Dio. Petitioner prepared a Deed of Real Estate Mortgage, whereby respondents mortgaged anew the two properties already mortgaged with QDB to secure the timely payment of a P350,000 loan that respondents had from petitioner Dio.

Under the terms of the deed, respondents agreed to

pay the petitioner interest at the rate of five percent (5%) a month, within a period of two months or until April 14, 1989. In the event of default, an additional

amount then due, for every month of delay, would be charged on them.

The respondents failed to settle their obligation to petitioner on April 14, 1989, the agreed deadline for settlement.

On August 27, 1991, petitioner made written demands upon the respondents to pay their debt.

Despite repeated demands, respondents did not pay, hence petitioner applied for extrajudicial foreclosure of the mortgage.

Meanwhile, on February 24, 1992, respondents filed an action for Fixing of Contractual Obligation with Prayer for Preliminary Mandatory Injunction/ Restraining Order, praying that the Deed of Real Estate Mortgage dated February 13, 1989 be declared null and void, and the plea that the trial court fix the contractual obligations of the Japors with Dio.

interest

equivalent

to

five

percent

(5%)

of

the

On May 8, 1996, the bidding invoving the properties was conducted, with petitioner Dio as the sole bidder, purchased the properties for P3,500,000.

The appellate court affirmed the decision of the trial court with respect to the validity of the Deed of Real Estate Mortgage, but modified the interest and penalty rates for being unconscionable and exorbitant.

ISSUE: Whether or not the stipulations on interest and penalty in the Deed of Real Estate Mortgage is contrary to morals, if not illegal and were respondents entitled to any "surplus" on the auction sale price

RULING: On the main issue, petitioner contends that The Usury Law 1 has been rendered ineffective by Central Bank Circular No. 905, series of 1982 and accordingly, usury has become legally non- existent in this jurisdiction, thus, interest rates may accordingly be pegged at such levels or rates as the lender and the borrower may agree upon.

Respondents admit they owe petitioner P350,000 and do not question any lawful interest on their loan but they maintain that the Deed of Real Estate Mortgage is null and void since it did not state the true intent of the parties, which limited the 5% interest rate to only two (2) months from the date of the loan and which did not provide for penalties and other charges in the event of default or delay. Respondents vehemently contend that they never consented to the said stipulations and hence, should not be bound by them.

On the first issue, we are constrained to rule against the petitioner’s contentions.

Central Bank Circular No. 905, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless of maturity. However, nothing in said Circular grants lenders carte blanche authority to impose interest rates, which would result in the enslavement of their borrowers or to the hemorrhaging of their assets. While a stipulated rate of interest may not technically and necessarily be usurious under Circular No. 905, usury now being legally non-existent in our jurisdiction, nonetheless, said rate may be equitably reduced should the same be found to be iniquitous, unconscionable, and exorbitant, and hence, contrary to morals (contra bonos mores), if not against the law. What is iniquitous, unconscionable, and exorbitant shall depend upon the factual circumstances of each case. In the instant case, the Court of Appeals found that the 5% interest rate per month and 5% penalty rate per month for every month of default or delay is in reality interest rate at 120% per annum. This Court has held that a stipulated interest rate of 5.5% per month or 66% per annum is void for being iniquitous or unconscionable. We have likewise ruled that an interest rate of 6% per month or 72% per annum is outrageous and inordinate. Conformably to these precedent cases, a combined interest and penalty rate at 10% per month or 120% per annum, should be deemed iniquitous, unconscionable, and inordinate. Hence, we sustain the appellate court when it found the interest and penalty rates in the Deed of Real Estate Mortgage

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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in the present case excessive, hence legally impermissible. Reduction is legally called for now in rates of interest and penalty stated in the mortgage contract.

What then should the interest and penalty rates be?

The evidence shows that it was indeed the respondents who proposed the 5% interest rate per month for two (2) months. Having agreed to said rate, the parties are now estopped from claiming otherwise. For the succeeding period after the two months, however, the Court of Appeals correctly reduced the interest rate to 12% per annumand the penalty rate to 1% per month, in accordance with Article 2227 of the Civil Code.

But were respondents entitled to the "surplus" of P2,247,326 as a result of the "overpricing" in the auction?

We note that the "surplus" was the result of the computation by the Court of Appeals of respondents’ outstanding liability based on a reduced interest rate of 12% per annum and the reduced penalty rate of 1% per month.

In the instant case, however, there is no "surplus" to speak of. In adjusting the interest and penalty rates to equitable and conscionable levels, what the Court did was merely to reflect the true price of the land in the foreclosure sale. The amount of the petitioner’s bid merely represented the true amount of the mortgage debt. No surplus in the purchase price was thus created to which the respondents as the mortgagors have a vested right.

** The interest rate for the subject loan owing to QDB is hereby fixed at five percent (5%) for the first two (2) months following the date of execution of the Deed of Real Estate Mortgage, and twelve percent (12%) for the succeeding period. The penalty rate thereafter shall be fixed at one percent (1%) per month. Petitioner Teresita Dio is declared free of any obligation to return to the respondents, the Spouses Virgilio Japor and Luz Roces Japor and Marta Japor, any surplus in the foreclosure sale price. There being no surplus, after the court below had applied our ruling in Sulit, respondents could not legally claim any overprice from the petitioner, much less the amount of P2,247,326.00.

Q: So in this case, it was 2 months, and in the case of Prisma it was 6 months, now what if the parties stipulated for 5% interest per month until fully paid? What will be taken into consideration by the court? Do you think the court will deem such interest rate as unconscionable? A: The court said that what is iniquitous and unconscionable would depend on the facts of the case, and in this case the 2 month period is where the 5% interest will apply. Q: But what if the parties voluntarily agreed that there will be a 5% interest until fully paid? Could the interest be deemed as excessive? A: It is excessive. Q: What is the effect if it is found to be excessive? A: The court will reduce the interest rate to 12% per annum.

Take

excessive

note,

with

regard

to

whether

or

unconscionable,

always

is

deemed

into

take

consideration the factual circumstances of the case. Take note, even if, for example in the case of Prisma and even in this case (wherein the SC said that the parties are now estopped from claiming that the 5% for 2 months is excessive), you cannot apply it in every scenario or case. Even if the parties stipulated for a 5% interest per month, again you cannot say that it is valid because in this case, such ruling that the parties are now estopped from claiming otherwise.

We have discussed interest in obligations and contracts. If you recall your cases in obligations and contracts, again there is no exact rule as to what specific rate is considered is unconscionable or iniquitous. And in fact, you cannot always choose the defense or allegation, such as in this case of Dio, that the debtor could be held in estoppel because they already agreed to that 5% per month. I think what was also taken into consideration here is because of the 2 month period. If you compare it to the case of Prisma, it is also a 6 month period. But again, looking at the factual circumstances of the case, the interest for these 2 cases were not deemed iniquitous for that short period of time. So that is one factual circumstance to consider.

Factual circumstances to consider:

Period of time

Interest rate

Purpose

Again, there is no definite rate and you cannot always use estoppel, otherwise what will be the effect? The SC will now be bound to the stipulations they voluntarily agreed upon, and the SC will impose the interest agreed upon. Again, if we use the same premise, remember that the SC, in the same stipulation by the parties in the case of Dio vs Japor, as to the additional interest of 5% of month. In fact that was also voluntarily agreed upon by the parties, but the SC held that this time, this part of the interest should be reduced to 12% per annum. Plus the penalty rate of 1% per month for the succeeding period after 2 months. Again take note, there is no exact rule as to what specific rate should be considered as unconscionable or excessive.

In the case of Medel vs CA (GR 131622 Nov 27, 1998), the stipulated rate of 5.5% is considered excessive but not usurious (since we all know that the Usury Law has already been suspended), so it was reduced to 12% per annum plus 1% per month as penalty charge as liquidated damages. Also take note there was a surplus as the result of the computation of the outstanding liability, so the SC held that in this case, there is no surplus to speak of in adjusting the interest and penalty rates to equitable levels, what the court did was merely to reflect true price of the land in the foreclosure sale.

Last night we also discussed the case of Eastern Shipping, which laid down the guidelines for the imposition of interest, like when to apply 6% or when to 12%, as well as the guideline as to when will interest begin to run. Now after the Central Bank issued Circular 799, the new legal interest is now effective July 1, 2013 and one of the earlier cases applied to this circular is the case of NACAR vs GALLERY FRAMES.

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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DARIO NACAR vs GALLERY FRAMES AND/OR FELIPE BORDEY, JR.

FACTS: Petitioner Dario Nacar filed a complaint for constructive dismissal before the National Labor Relations Commission (NLRC) against Gallery Frames (GF) and/or Felipe Bordey, Jr.

On October 15, 1998, the Labor Arbiter rendered a Decision in favor of petitioner and found that he was dismissed from employment without a valid or just cause and was never afforded due process. Thus, petitioner was awarded backwages and separation pay in lieu of reinstatement, in the amount of P158,919.92, computed only up to promulgation of this decision. Length of service was 8 yrs and 1 day.

On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his backwages be computed from the date of his dismissal on January 24, 1997 up to the finality of the Resolution of the Supreme Court on May 27, 2002. Upon recomputation, NLRC arrived at an updated amount

in the sum of P471,320.31.w

Respondents filed a Motion to Quash Writ of Execution, arguing that no more recomputation is required after the decision becomes final and executory, the same cannot be altered or amended anymore. Denied. Reappealed and a recomputation was granted but only in the amount of P147,560.19.

Nacar then filed a Motion praying for the re- computation of the monetary award to include the appropriate interests.

The Labor Arbiter granted the motion, but reasoned that it is the October 15, 1998 Decision that should be enforced considering that it was the one that became final and executory. However, the Labor Arbiter reasoned that since the decision states that the separation pay and backwages are computed only up to the promulgation of the said decision, it is the amount of P158,919.92 that should be executed. Thus, since petitioner already received P147,560.19, he is only entitled to the balance of

P11,459.73.

Nacar appealed to the CA. Denied. It opined that since petitioner no longer appealed the October 15, 1998 Decision of the Labor Arbiter, which already became final and executory, a belated correction thereof is no longer allowed. The CA stated that there is nothing left to be done except to enforce the said judgment.

ISSUE: WON a re-computation in the course of

execution of the labor arbiter's original computation

of the awards made is legally proper. YES

HELD: Computation should start from the time Nacar was illegally dismissed until judgment has become final and executory on May 27, 2013. Moreover, a recomputation is necessary and is not

a violation of the principle of immutability of final judgments. The recomputation of the consequences of illegal dismissal upon execution of the decision does not constitute an alteration or amendment of the final decision being implemented. The illegal dismissal ruling stands; only the computation of

monetary

consequences

of

the

dismissal

is

affected.

As to the payment of legal interest, the guidelines laid down in the case of Eastern Shipping Lines are accordingly modified to embody BSP-MB Circular No. 799, as follows:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi- delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on “Damages” of the Civil Code govern in determining the measure of recoverable damages. II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists

in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. 2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages, except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

The Decision of the CA is reversed and set aside. The case is remanded back to the LA for the proper recomputation.

* The rate of interest starting July 1, 2013 is 6% per annum (since the original case was decided in 2002, 12% int was still applied) and applies prospectively. Computation of backwages and separation pay should start from the time an employee is illegally dismissed to the time judgment

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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has become final and executory. Interest of such amount acrrues until full payment is made.

Q: What were the interest rates applied in the decision of the SC? When did it begin and when did it end? A: 12% was applied from the date of the finality of judgment up to July 1, 2013 (this is with regard to the monetary award). Q: How about when you take into consideration the time when he was dismissed?(because we are talking about backwages) So when will the 12% interest begin to run? A: From May 27, 2002. It was when the judgment became final. Q: Until when?

Just take note first that this is a labor case and this was an illegal dismissal case. So there was need for backwages and separation pay. The SC took into consideration Circular 799 stating the legal interest rate at 6% per annum effective July 1, 2013. The SC emphasized that the new rate will only be applied prospectively and not retroactively, and that is why we still discuss the cases as to the imposition and the guidelines mentioned in Eastern Shipping.

In fact, in this case, this is an August 2013 case, the SC held that the (???) for backwages, for illegal dismissal, until finality, separation pay from August 1990 until May 27, 2002 (from the time he started employment in 1990). And interest, 12% per annum May 27, 2002, that is the time when the resolution of the board became final and executory to June 30, 2013, and another 6% from July 1, 2013 until their full satisfaction.

Now consolidating what we have discussed, we all know that we take into consideration factual circumstances to determine whether the interest is usurious, excessive, or exorbitant. Generally, 3% and above is deemed excessive, but again that is not sufficient. You take into consideration factual circumstances, like what happened in the case of Dio and Prisma.

Now what is the effect of this BSP Circular (6% legal interest rate). Because in the cases we have discussed where the interest rate is deemed excessive, it reduced the interest rate at 12% per month, and if there was a stipulation for penalties, just an additional 1% per month as a penalty. Now 12%, that was deemed applied most probably because that was the legal interest at the time that the SC promulgated the said decision.

But with this BSP Circular, lowering the legal interest at 6%, does it mean that for cases deemed excessive and exorbitant, the SC will now reduce it to 6% or just 12%? Now in the recent 2014 cases, the SC still applied 12% interest rate.

Take note of these cases:

ALBOS vs SPOUSES EMBISAN (GR 210831 Nov 26, 2014): 5% per month was deemed as unconscionable and the SC imposed and called it a simple interest of 12% per annum. Kasi if you compare it to older cases that state: “reduce it to the legal interest of 12%”, in this case, it is still 12%

but it referred to simple interest of 12% per annum. MCMP vs MONARK EQUIPMENT (GR 201001 Nov. 10, 2014): Again the SC reduced the interest to 12% and its guide was prevailing jurisprudence.

So these are all 2014 cases. Why did I mention these? Because it means that by reducing it to a reasonable rate, 12% is still deemed proper. In these cases, it is not necessary na 6% na ung interest rate, magbaba na rin dapat. When I discussed 2 years ago, when this BSP Circular took effect, we had no idea at that time as to whether reduction of interest would be 6% or if it will stay at 12%. So apparently the SC, despite the legal interest of 6%, the SC still applied the prevailing jurisprudence of reducing it to 12% per annum.

ART 1957 Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against usury shall be void. The borrower may recover in accordance with the laws on usury.

So usury refers to prohibitive interest. But again it was suspended as interest rates are no longer subject to a ceiling, the rate will depend on the agreement of the parties provided that it is not excessive or unconscionable. Take note that when we talk about usurious interest, it is with reference to a contract of loan or forbearance of money, goods, or credits. In other words, if there is no loan or forbearance, there could be no usury to speak of. With regard to usurious interest, the agreement as to the usurious interest will be considered void, but not the principal obligation.

Why do I still include in your outline the Usury Law? Because it is just suspended. When you mean suspended, it can used again although I doubt that. So just take not of that.

ART 1958 In the determination of the interest, if it is payable in kind, its value shall be appraised at the current price of the products or goods at the time and place of payment.

I’d like you to differentiate that from Art 1955. Kasi sa Art 1955, borrows money Art 1249 and 1250. Basis: currency at the time the obligation was created. In Art 1955, wherein the subject matter is money or a fungible thing, remember the value thereof in case of extraordinary deflation or inflation. This is the payment for the value of money, its currency at the time of the creation of the obligation.

If the subject of the loan is a fungible thing, same kind and quality, and if it is impossible, value thereof at the time of the perfection of the loan. But if we’re talking about interest, it is appraised at the time and place of payment.

Q: What do you mean by compound interest? How is it different from a simple interest?

ANTONIO TAN v. COURT OF APPEALS and the CULTURAL CENTER OF THE PHILIPPINES

FACTS: On May 14, 1978 and July 6, 1978, petitioner Antonio Tan obtained two (2) loans each in the principal amount of (P2,000,000.00), or in the total principal amount of Four Million Pesos

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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(P4,000,000.00) from respondent Cultural Center of the Philippines (CCP) evidenced by two (2) promissory notes with maturity dates on May 14, 1979 and July 6, 1979, respectively. Petitioner defaulted but after a few partial payments he had the loans restructured by respondent CCP, and petitioner accordingly executed a promissory note on August 31, 1979 in the amount of (P3,411,421.32) payable in five (5) installments. Petitioner Tan failed to pay any installment on the said restructured loan of (P3,411,421.32), the last installment falling due on December 31, 1980.

In a letter dated January 26, 1982, petitioner requested and proposed to respondent CCP a mode of paying the restructured loan, i.e., (a) twenty percent (20%) of the principal amount of the loan upon the respondent giving its conformity to his proposal; and (b) the balance on the principal obligation payable in thirty-six (36) equal monthly installments until fully paid.

On October 20, 1983, petitioner again sent a letter to respondent CCP requesting for a moratorium on his loan obligation until the following year allegedly due to a substantial deduction in the volume of his business and on account of the peso devaluation. No favorable response was made to said letters. Instead, respondent CCP, through counsel, wrote a letter dated May 30, 1984 to the petitioner demanding full payment, within ten (10) days from receipt of said letter, of the petitioner’s restructured loan which as of April 30, 1984 amounted to

(P6,088,735.03).

On August 29, 1984, respondent CCP filed in the RTC of Manila a complaint for collection of a sum of money against the petitioner after the latter failed to settle his said restructured loan obligation. The petitioner interposed the defense that he merely accommodated a friend, Wilson Lucmen, who allegedly asked for his help to obtain a loan from respondent CCP. Petitioner claimed that he has not been able to locate Wilson Lucmen.

While the case was pending in the trial court, the petitioner filed a Manifestation wherein he proposed to settle his indebtedness to respondent CCP by proposing to make a down payment of (P140,000.00) and to issue twelve (12) checks every beginning of the year to cover installment payments for one year, and every year thereafter until the balance is fully paid. However, respondent CCP did not agree to the petitioner’s proposals and so the trial of the case ensued.

TC: Ruled in favor of CCP. CA: Affirmed trial court’s decision.

ISSUE (1): Whether there are contractual and legal bases for the imposition of the penalty, interest on the penalty and attorney’s fees. YES

HELD 1: The petitioner imputes error on the part of the appellate court in not totally eliminating the award of attorney’s fees and in not reducing the penalties considering that the petitioner, contrary to the appellate court’s findings, has allegedly made partial payments on the loan. And if penalty is to be awarded, the petitioner is asking for the non- imposition of interest on the surcharges inasmuch as the compounding of interest on surcharges is not

provided in the promissory note marked Exhibit “A”. The petitioner takes exception to the computation of the private respondent whereby the interest, surcharge and the principal were added together and that on the total sum interest was imposed. Petitioner also claims that there is no basis in law for the charging of interest on the surcharges for the reason that the New Civil Code is devoid of any provision allowing the imposition of interest on surcharges.

We find no merit in the petitioner’s contention. Article 1226 of the New Civil Code provides that:

In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance, if

there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay

the

penalty or is guilty of fraud in the fulfillment of

the

obligation.

The penalty may be enforced only when it is demandable in accordance with the provisions of

this Code.

In the case at bar, the promissory note (Exhibit “A”) expressly provides for the imposition of both interest and penalties in case of default on the part of the petitioner in the payment of the subject restructured loan. The pertinent portion of the promissory note (Exhibit “A”) imposing interest and penalties provides that:

xxx xxx xxx

With interest at the rate of FOURTEEN per cent (14%) per annum from the date hereof until paid. PLUS THREE PERCENT (3%) SERVICE CHARGE.

In case of non-payment of this note at maturity/on demand or upon default of payment of any portion

of it when due, I/We jointly and severally agree to pay additional penalty charges at the rate of TWO

per cent (2%) per month on the total amount due

until paid, payable and computed monthly. Default

of payment of this note or any portion thereof when due shall render all other installments and all existing promissory notes made by us in favor of

the CULTURAL CENTER OF THE PHILIPPINES

immediately due and demandable.

xxx xxx xxx

The stipulated fourteen percent (14%) per annum interest charge until full payment of the loan

constitutes the monetary interest on the note and is allowed under Article 1956 of the New Civil Code.

On

the other hand, the stipulated two percent (2%)

per

month penalty is in the form of penalty charge

which is separate and distinct from the monetary interest on the principal of the loan.

Penalty on delinquent loans may take different forms. In Government Service Insurance System v.

Court of Appeals, this Court has ruled that the New Civil Code permits an agreement upon a penalty apart from the monetary interest. If the parties stipulate this kind of agreement, the penalty does

not include the monetary interest, and as such the

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

CREDIT TRANSACTIONS 2 SANCHEZ ROMAN- ATTY. JAZZIE SARONA-LOZARE

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two are different and distinct from each other and may be demanded separately.

The penalty charge of two percent (2%) per month in the case at bar began to accrue from the time of default by the petitioner. There is no doubt that the petitioner is liable for both the stipulated monetary interest and the stipulated penalty charge. The penalty charge is also called penalty or compensatory interest.

ISSUE (2): whether interest may accrue on the penalty or compensatory interest without violating the provisions of Article 1959 of the New Civil Code. YES

HELD 2: Art. 1959. Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest.

According to the petitioner, there is no legal basis for the imposition of interest on the penalty charge for the reason that the law only allows imposition of interest on monetary interest but not the charging of interest on penalty. He claims that since there is no law that allows imposition of interest on penalties, the penalties should notearn interest. But as we have already explained, penalty clauses can be in the form of penalty or compensatory interest. Thus, the compounding of the penalty or compensatory interest is sanctioned by and allowed pursuant to the above-quoted provision of Article 1959 of the New Civil Code considering that:

First, there is an express stipulation in the promissory note (Exhibit “A”) permitting the compounding of interest. The fifth paragraph of the said promissory note provides that: “Any interest which may be due if not paid shall be added to the total amount when due and shall become part thereof, the whole amount to bear interest at the maximum rate allowed by law.” Therefore, any penalty interest not paid, when due, shall earn the legal interest of twelve percent (12%) per annum, in the absence of express stipulation on the specific rate of interest, as in the case at bar.

Second, Article 2212 of the New Civil Code provides that “Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.” In the instant case, interest likewise began to run on the penalty interest upon the filing of the complaint in court by respondent CCP on August 29, 1984. Hence, the courts a quo did not err in ruling that the petitioner is bound to pay the interest on the total amount of the principal, the monetary interest and the penalty interest.

In the case at bar, however, equity cannot be considered inasmuch as there is a contractual stipulation in the promissory note whereby the petitioner expressly agreed to the compounding of interest in case of failure on his part to pay the loan at maturity. Inasmuch as the said stipulation on the compounding of interest has the force of law between the parties and does not appear to be inequitable or unjust, the said written stipulation should be respected.

The said statement of account also shows that the amounts stated therein are net of the partial payments amounting to a total of (P452,561.43) which were made during the period from May 13, 1983 to September 30, 1983. The petitioner now seeks the reduction of the penalty due to the said partial payments. The principal amount of the promissory note (Exhibit “A”) was (P3,411,421.32) when the loan was restructured on August 31, 1979. As of August 28, 1986, the principal amount of the said restructured loan has been reduced to (P2,838,454.68). Thus, petitioner contends that reduction of the penalty is justifiable pursuant to Article 1229 of the New Civil Code which provides that: “The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.” Petitioner insists that the penalty should be reduced to ten percent (10%) of the unpaid debt in accordance with Bachrach Motor Company v. Espiritu.

There appears to be a justification for a reduction of the penalty charge but not necessarily to ten percent (10%) of the unpaid balance of the loan as suggested by petitioner. Inasmuch as petitioner has made partial payments which showed his good faith, a reduction of the penalty charge from two percent (2%) per month on the total amount due, compounded monthly, until paid can indeed be justified under the said provision of Article 1229 of the New Civil Code.

In other words, we find the continued monthly accrual of the two percent (2%) penalty charge on the total amount due to be unconscionable inasmuch as the same appeared to have been compounded monthly.

Considering petitioner’s several partial payments and the fact he is liable under the note for the two percent (2%) penalty charge per month on the total amount due, compounded monthly, for twenty-one (21) years since his default in 1980, we find it fair and equitable to reduce the penalty charge to a straight twelve percent (12%) per annum on the total amount due starting August 28, 1986, the date of the last Statement of Account.

Q: Was there a stipulation as to the term of interest? A: Yes. It is provided in the promissory note that the interest rate is 14% per annum, plus 3% for service charge. There is also stipulation that in case of default, there is an additional 2% penalty per month.

Q: What kind of interest will a penalty clause be? A: The penalty clause is deemed to constitute a compensatory interest.

Q: How about the 14% interest, what kind of interest is that? A: As provided by the PN, the 14% is with respect to the principal amount and it is a simple interest.

Q: Did the SC upheld the imposition of the 14% interest and the 2% per month penalty? Was it deemed excessive?

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

CREDIT TRANSACTIONS 2 SANCHEZ ROMAN- ATTY. JAZZIE SARONA-LOZARE

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A: Yes, but the SC reduced it because there was already partial payment that was made.

Q: Compounding of the penalty interest, was it also upheld by the SC?

Here, the PN expressly provides for the imposition for both interest and penalties. The stipulated 14% interest per annum charged until full payment constitutes as the monetary interest. In other words, they applied Art 1956, it is expressly stipulated in writing, so the SC upheld that. As to the stipulated 2% per month penalty, it is form of a penalty charge, separate and distinct from the monetary interest. The new Civil Code permits an agreement upon the penalty apart from the monetary interest. If the parties stipulate this kind of agreement, the penalty does not include the monetary interest and as such they are different and distinct from each other and may be demanded separately.

Now the penalty charge of 2% per month that begins at the time of default, there is no doubt that petitioner is liable for the stipulated monetary interest of 14% per annum and the stipulated penalty charge of 2% per month, which is considered as the compensatory interest. Penalty clauses can be in the form of penalty or compensatory interest. Compounding of the penalty or compensatory interest is sanctioned by the provisions of the CC. We have Art 1959

ART 1959 Without prejudice to the provisions of Art 2212, interest due and unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest.

Here the PN provides that any interest which may be due if not paid shall be added to the total amount when due and shall become part thereof, the whole amount to bear interest at the maximum rate allowed by law. Therefore there is a stipulation for the compounding of interest rate. Any penalty interest not paid when due shall earn the legal interest of 12% per annum in the absence of an express stipulation on the specific rate of interest.

Now Art 2212 also provides that…

ART 2212 Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.

So in this case, interest began to run on the penalty interest upon the filing of the complaint in court by respondent CCP. So the SC affirmed the findings of the CA, however it reduced the penalty charge to 12% per annum starting Aug 28, 1996 because of the good faith on the part of the debtor.

November 27, 2015 (Gementiza)

ECE REALTY AND DEVELOPMENT, INC., VS. HAYDYN HERNANDEZ

FACTS: Haydn filed a complaint for specific performance with damages against EMIR and ECE Realty due to the failure of the respondents to deliver a condominium unit which he purchased from them. The respondents allegedly promised to turn over to him the unit by December 31, 1999, but

failed to do so. Worse, he learned that the actual area was only 26 square meters, not 30 square meters as indicated in their contract to sell, and the company refused to grant his corresponding reduction in the purchase price; instead the companies told him to settle his arrears in amortizations. He learned later that that company sold Unit 808 to a third party. In their defense, the respondent faulted complainant for unjustifiably refusing to accept delivery of the condominium unit; that they were forced to cancel the contract to sell because of the refusal of the complainant to settle his past arrears. The HLURB ruled in favor of the complainant and ordered the company to reimburse the respondent the amount of P452,551.65, plus legal interest, from the filing of the complaint, and to pay the respondent P50,000.00 as moral damages, P50,000.00 as attorney’s fees, and P50,000.00 as exemplary damages.[11] The company appealed the case all the way to the CA and eventually to the Supreme Court.

ISSUE: W/N ECE should be liable to reimburse Hernandez

RULING: YES. The Supreme Court affirmed the ruling of the lower four and tribunals, with a slight modification of the legal interest imposable:

“Article 2209 of the New Civil Code provides that “If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum.” There is no doubt that ECE incurred in delay in delivering the subject condominium unit, for which reason the trial court was justified in awarding interest to the respondent from the filing of his complaint. There being no stipulation as to interest, under Article 2209 the imposable rate is six percent (6%) by way of damages, following the guidelines laid down in the landmark case of Eastern Shipping Lines v. Court of Appeals:

II. With regard particularly to an award of interest in

the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows: