Catholic Vicar Apostolic of the Mt. Prov. vs.

Court of Appeals
Facts: The documents and records presented reveal that the whole controversy started when the defendant (VICAR for brevity) filed with the Court of First Instance
of Baguio-Benguet an application for registration of title over Lots 1, 2, 3, and 4 in Psu-194357, situated at Poblacion Central, La Trinidad, Benguet, said Lots being
the sites of the Catholic Church building, convents, high school building, school gymnasium, school dormitories, social hall, stonewalls, etc. On 1963 the Heirs of
Juan Valdez and the Heirs of Egmidio Octaviano filed their Answer/Opposition on Lots Nos. 2 and 3, respectively, asserting ownership and title thereto. After trial on
the merits, the 1. LAND REGISTRATION COURT promulgated its Decision confirming the registrable title of VICAR to Lots 1, 2, 3, and 4.
The Heirs of Juan Valdez and the Heirs of Egmidio Octaviano appealed the decision of the land registration court to the then 2. Court of Appeals. The Court of
Appeals rendered its decision, dated May 9, 1977, reversing the decision of the land registration court and dismissing the VICARs application as to Lots 2
and 3.
On May 9, 1977, the Heirs of Octaviano filed a motion for reconsideration praying the Court of Appeals to order the registration of Lot 3 in the names of the Heirs
of Egmidio Octaviano, and on May 17, 1977, the Heirs of Juan Valdez and Pacita Valdez filed their motion for reconsideration praying that both Lots 2 and 3 be
ordered registered in the names of the Heirs of Juan Valdez and Pacita Valdez. On August 12, 1977, the 3. Court of Appeals denied the motion for reconsideration
filed by the Heirs of Juan Valdez on the ground that there was no sufficient merit to justify reconsideration one way or the other, and likewise denied that of the Heirs
of Egmidio Octaviano.
Thereupon, the VICAR filed with the 4.Supreme Court a petition for review on certiorari of the decision of the Court of Appeals dismissing his (its) application for
registration of Lots 2 and 3. From the denial by the Court of Appeals of their motion for reconsideration, the Heirs of Juan Valdez and Pacita Valdezfiled with
the Supreme Court a petition for review. On January 13, 1978, the Supreme Court denied in a minute resolution both petitions (of VICAR on the one hand and the
Heirs of Juan Valdez and Pacita Valdez on the other) for lack of merit. Upon the finality of both Supreme Court resolutions then Heirs of Octaviano filed with the
then Court of First Instance of Baguio, Branch II, a Motion For Execution of Judgment praying that the Heirs of Octaviano be placed in possession of Lot 3. The
Court, presided over by Hon. Salvador J. Valdez, on December 7, 1978, denied the motion on the ground that the Court of Appeals decision did not grant the Heirs of
Octaviano any affirmative relief.
On February 7, 1979, the Heirs of Octaviano filed with the Court of Appeals a petition for certiorari and mandamus In its decision dated May 16, 1979, the Court
of Appeals dismissed the petition.
It was at that stage that the instant cases were filed. The Heirs of Egmidio Octaviano filed Civil Case July 24, 1979, for recovery of possession of Lot 3; and the Heirs
of Juan Valdez filed Civil on September 24, 1979, likewise for recovery of possession of Lot 2. In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of
Egmidio Octaviano presented one (1) witness, Fructuoso Valdez, who testified on the alleged ownership of the land in question (Lot 3) by their predecessor-ininterest, Egmidio Octaviano his written demand to defendant Vicar for the return of the land to them; and the reasonable rentals for the use of the land at P10,000.00
per month. On the other hand, defendant Vicar presented the Register of Deeds for the Province of Benguet, Atty. Nicanor Sison, who testified that the land in
question is not covered by any title in the name of Egmidio Octaviano or any of the plaintiffs). The defendant dispensed with the testimony of Mons. William Brasseur
when the plaintiffs admitted that the witness if called to the witness stand, would testify that defendant Vicar has been in possession of Lot 3, for seventy-five (75)
years continuously and peacefully and has constructed permanent structures thereon.
In these two cases, the plaintiffs argue that the defendant Vicar is barred from setting up the defense of ownership and/or long and continuous possession of the two
lots in question since this is barred by prior judgment of the Court of Appeals under the principle of res judicata. Plaintiffs contend that the question of possession
and ownership have already been determined by the Court of Appeals and affirmed by the Supreme Court. On his part, defendant Vicar maintains that the principle
of res judicata would not prevent them from litigating the issues of long possession and ownership because the dispositive portion of the prior judgment merely
dismissed their application for registration and titling of lots 2 and 3. Defendant Vicar contends that only the dispositive portion of the decision, and not its body, is the
controlling pronouncement of the Court of Appeals.
Issue:
Whether or not the the petitioner had been in possession of lots 2 and 3 are merely bailee (borrower) in commodatum.
Held: Credit Transactions; Commodatum; Property; Adverse Possession; Adverse Claim; Acquisitive Prescription; When petitioner borrowed the house of private
respondents predecessors, and petitioner was allowed its free use, private respondents became bailors in commodatum, and petitioner, the bailee.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.
Republic vs. Bagtas
Facts: On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau of Animal Industry three bulls a Red Sindhi with a
book value of P1,176.46, a Bhagnari, of P1,320.56 and a Sahiniwal, of P744.46, for a period of one year from 8 May 1948 to 7 May 1949 for breeding purposes
subject to a government charge of breeding fee of 10% of the book value of the bulls. Upon the expiration on 7 May 1949 of the contract, the borrower asked
for a renewal for another period of one year.
However, the Secretary of Agriculture and Natural Resources approved a renewal thereof of only one bull for another year from 8 May 1949 to 7 May 1950 and
requested the return of the other two.
On 25 March 1950 Jose V. Bagtas wrote to the Director of Animal Industry that he would pay the value of the three bulls.
On 17 October 1950 he reiterated his desire to buy them at a value with a deduction of yearly depreciation to be approved by the Auditor General.

On 19 October 1950 the Director of Animal Industry advised him that the book value of the three bulls could not be reduced and that they either be returned or their
book value paid not later than 31 October 1950. Jose V. Bagtas failed to pay the book value of the three bulls or to return them.
So, on 20 December 1950 in the Court of First Instance of Manila the Republic of the Philippines commenced an action against him praying that he be ordered
to return the three bulls loaned to him or to pay their book value in the total sum of P3,241.45 and the unpaid breeding fee in the sum of P199.62, both with interests,
and costs; and that other just and equitable relief be granted in.
On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that because of the bad peace and order situation in Cagayan Valley,
particularly in the barrio of Baggao, and of the pending appeal he had taken to the Secretary of Agriculture and Natural Resources and the President of the
Philippines from the refusal by the Director of Animal Industry to deduct from the book value of the bulls corresponding yearly depreciation of 8% from the date of
acquisition, to which depreciation the Auditor General did not object, he could not return the animals nor pay their value and prayed for the dismissal of the complaint.
After hearing, on 30 July 1956 the TRIAL COURT rendered judgment
x x x sentencing the latter (defendant) to pay the sum of P3, 625.09 the total value of the three bulls plus the breeding fees in the amount of P626.17 with interest on
both sums of (at) the legal rate from the filing of this complaint and costs.
On 7 January 1959 she felicidad bagtas filed a motion alleging that on 26 June 1952 the two bulls, Sindhi and Bhagnari, were returned to the Bureau of Animal
Industry and that sometime in November 1958 the third bull, the Sahiniwal, died from gunshot wounds inflicted during a Huk raid on Hacienda Felicidad Intal, and
praying that the writ of execution be quashed and that a writ of preliminary injunction be issued. On 31 January 1959 the plaintiff objected to her motion. On 6
February 1959 she filed a reply thereto. On the same day, 6 February, the Court denied her motion. Hence, this appeal certified by the Court of Appeals to this
Court, as stated at the beginning of this opinion.
It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late defendant, returned the Sindhi and Bhagnari bulls to Roman Remorin,
Superintendent of the NVB Station, Bureau of Animal Industry, Bayombong, Nueva Vizcaya, as evidenced by a memorandum receipt signed by the latter That is why
in its objection of 31 January 1959 to the appellants motion to quash the writ of execution the appellee prays that another writ of execution in the sum of P859.53 be
issued against the estate of defendant deceased Jose V. Bagtas. She cannot be held liable for the two bulls which already had been returned to and received by the
appellee.
The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huks in November 1953 upon the surrounding barrios of Hacienda
Felicidad Intal, Baggao, Cagayan, where the animal was kept, and that as such death was due to force majeure she is relieved from the duty of returning the bull or
paying its value to the appellee. The contention is without merit. The loan by the appellee to the late defendant Jose V. Bagtas of the three bulls for breeding
purposes for a period of one year from 8 May 1948 to 7 May 1949, later on renewed for another year as regards one bull, was subject to the payment by the
borrower of breeding fee of 10% of the book value of the bulls. The appellant contends that the contract was commodatum and that, for that reason, as the appellee
retained ownership or title to the bull it should suffer its loss due to force majeure. A contract of commodatum is essentially gratuitous.1 If the breeding fee be
considered a compensation, then the contract would be a lease of the bull. Under article 1671 of the Civil Code the lessee would be subject to the responsibilities of a
possessor in bad faith, because she had continued possession of the bull after the expiry of the contract.
Issue: Whether or not the nature of contract was commodatum.
Held: Contracts; Loan of bulls for breeding purposes; Nature of contract affected by payment of fee.The loan by the Bureau of Animal Industry to the defendant of
three bulls for breeding purposes for a period of one year, later on renewed for another as regards one bull, was subject to the payment by the borrower of breeding
fee of 10% of the book value of the bulls. If the breeding fee be considered a compensation, the contract would be a lease of the bulls; it could not be a contract of
commodatum, because that contract is essentially gratuitous.
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:
1. (2) If he keeps it longer than the period stipulated x x x
2. (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;
SAURA IMPORT & EXPORT CO., INC vs. DEVELOPMENT BANK OF THE PHILIPPINES
Facts: In Civil Case of the Court of First Instance of Manila, judgment was rendered on June 28, 1965 sentencing defendant Development Bank of the Philippines
(DBP) to pay actual and consequential damages to plaintiff Saura Import and Export Co., Inc. in the amount of P383,-343.68, plus interest at the legal rate from the
date the complaint was filed and attorneys fees in the amount of P5,000.00. The present appeal is from that judgment.
In July 1953 the plaintiff Saura, Inc. applied to the Rehabilitation Finance Corporation (RFC), before its conversion into DBP, for an industrial loan of P500,000.00, to
be used as follows: P250,000.00 for the construction of a factory building (for the manufacture of jute sacks); P240,900.00 to pay the balance of the purchase price of
the jute mill machinery and equipment; and P9,100.00 as additional working capital.
Parenthetically, it may be mentioned that the jute mill machinery had already been purchased by Saura on the strength of a letter of credit extended by the
Prudential Bank and Trust Co., and arrived in Davao City in July 1953; and that to secure its release without first paying the draft, Saura, Inc. executed a trust receipt
in favor of the said bank.
On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for P500,000.00, to be secured by a first mortgage on the factory buildings to be
constructed, the land site thereof, and the machinery and equipment to be installed. Among the other terms spelled out in the resolution were the following:
Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before, however, evidently having otherwise been informed of its approval, Saura, Inc.
wrote a letter to RFC, requesting a modification of the terms laid down by it, namely: that in lieu of having China Engineers, Ltd. (which was willing to assume liability
only to the extent of its stock subscription with Saura, Inc.) sign as comaker on the corresponding promissory notes, Saura, Inc. would put up a bond for
P123,500.00, an amount equivalent to such subscription; and that Maria S. Roca would be substituted for Inocencia Arellano as one of the other comakers, having
acquired the latters shares in Saura, Inc.
In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating of the members of its Board of Governors, for certain reasons stated in
the resolution, to reexamine all the aspects of this approved loan . . . with special reference as to the advisability of financing this particular project based on present
conditions obtaining in the operations of jute mills, and to submit his findings thereon at the next meeting of the Board.
On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act as co-signer for the loan, and asked that the necessary
documents be prepared in accordance with the terms and conditions specified in Resolution No. 145. In connection with the reexamination of the project to be
financed with the loan applied for, as stated in Resolution No. 736, the parties named their respective committees of engineers and technical men to meet with each
other and undertake the necessary studies, although in appointing its own committee Saura, Inc. made the observation that the same should not be taken as an

acquiescence on (its) part to novate, or accept new conditions to, the agreement already entered into, referring to its acceptance of the terms and conditions
mentioned in Resolution No. 145.
On April 13, 1954 the loan documents were executed: the promissory note, with F.R. Hailing, representing China Engineers, Ltd., as one of the co-signers; and the
corresponding deed of mortgage, which was duly registered on the following April 17.
It appears, however, that despite the formal execution of the loan agreement the re-examination contemplated in Resolution No. 736 proceeded. In a
meeting of the RFC Board of Governors on June 10, 1954, at which Ramon Saura, President of Saura, Inc., was present, it was decided to reduce the loan
from P500,000.00 to P300,000.00. Resolution No. 3989 was approved as follows:
RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc. under Resolution No. 145, C.S., from P500,000.00 to P300,000.00.
authorizing the re-examination of all the various aspects of the loan granted the Saura Import & Export Co. under Resolution No. 145, for the purpose of financing the
manufacture of jute sacks in Davao, with special reference as to the advisability of financing this particular project based on present conditions obtaining in the
operation of jute mills, and after having heard Ramon E. Saura and after extensive discussion on the subject the Board, upon recommendation of the Chairman,
RESOLVED that the loan granted the Saura Import & Export Co. be REDUCED from P500,000 to P300,000 and that releases up to P100,000 may be authorized as
may be necessary from time to time to place the factory in actual operation: PROVIDED that all terms and conditions of Resolution No. 145, c.s., not inconsistent
herewith, shall remain in full force and effect.
On June 19, 1954 another hitch developed. F.R. Hailing, who had signed the promissory note for China Engineers Ltd. jointly and severally with the other co-signers,
wrote RFC that his company no longer wished to avail of the loan and therefore considered the same cancelled as far as it was concerned . A follow-up
letter dated July 2 requested RFC that the registration of the mortgage be withdrawn.
In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be granted. The request was denied by RFC, which added in its letterreply that it was constrained to consider as cancelled the loan of P300,000.00 . . . in view of a notification . . . from the China Engineers, Ltd., expressing their
desire to consider the loan cancelled insofar as they are concerned. On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC
that China Engineers, Ltd. will at any time reinstate their signature as co-signer of the note if RFC releases to us the P500,000.00 originally approved by
you.
On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original amount of P500,000.00, it appearing that China Engineers, Ltd. is
now willing to sign the promissory notes jointly with the borrower-corporation, but with the following proviso:
That in view of observations made of the shortage and high cost of imported raw materials, the Department of Agriculture and Natural Resources shall certify to the
following:
1. 1. That the raw materials needed by the borrower-corporation to carry out its operation are available in the immediate vicinity; and
2. 2. That there is prospect of increased production thereof to provide adequately for the requirements of the factory.
The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December 22, 1954, wherein it was explained that the certification by the
Department of Agriculture and Natural Resources was required as the intention of the original approval (of the loan) is to develop the manufacture of sacks on the
basis of locally available raw materials. This point is important, and sheds light on the subsequent actuations of the parties. Saura, Inc. does not deny that the
factory he was building in Davao was for the manufacture of bags from local raw materials. The cover page of its brochure describes the project as a Joint venture
by and between the Mindanao Industry Corporation and the Saura Import and Export Co., Inc. to finance, manage and operate a Kenaf mill plant, to manufacture
copra and corn bags, runners, floor mattings, carpets, draperies; out of 100% local raw materials, principal kenaf. The explanatory note on page 1 of the same
brochure states that the venture is the first serious attempt in this country to use 100% locally grown raw materials notably kenaf which is presently grown
commercially in the Island of Mindanao where the proposed jutemill is located . . .
This fact, according to defendant DBP, is what moved RFC to approve the loan application in the first place, and to require, in its Resolution No. 9083, a certification
from the Department of Agriculture and Natural Resources as to the availability of local raw materials to provide adequately for the requirements of the
factory. Saura, Inc. itself confirmed the defendants stand impliedly in its letter of January 21, 1955: (1) stating that according to a special study made by the Bureau
of Forestry kenaf will not be available in sufficient quantity this year or probably even next year; (2) requesting assurances (from RFC) that my company and
associates will be able to bring in sufficient jute materials as may be necessary for the full operation of the jute mill; and (3) asking that releases of the loan be made
as follows:
This is with reference to your letter of January 21, 1955, regarding the release of your loan under consideration of P500,000. As stated in our letter of December 22, 1954, the releases of the loan, if revived, are proposed to be made from time to time, subject to availability of
funds towards the end that the sack factory shall be placed in actual operating status. We shall be able to act on your request for revised purposes and
manner of releases upon re-appraisal of the securities offered for the loan. With respect to our requirement that the Department of Agriculture and Natural Resources
certify that the raw materials needed are available in the immediate vicinity and that there is prospect of increased production thereof to provide adequately the
requirements of the factory, we wish to reiterate that the basis of the original approval is to develop the manufacture of sacks on the basis of the locally available raw
materials. Your statement that you will have to rely on the importation of jute and your request that we give you assurance that your company will be able to bring in
sufficient jute materials as may be necessary for the operation of your factory, would not be in line with our principle in approving the loan.
With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the matter further. Instead, it requested RFC to cancel the mortgage, and so,
on June 17, 1955 RFC executed the corresponding deed of cancellation and delivered it to Ramon F. Saura himself as president of Saura, Inc.
It appears that the cancellation was requested to make way for the registration of a mortgage contract, executed on August 6, 1954, over the same property in favor
of the Prudential Bank and Trust Co., under which contract Saura, Inc. had up to December 31 of the same year within which to pay its obligation on the trust receipt
heretofore mentioned. It appears further that for failure to pay the said obligation the Prudential Bank and Trust Co. sued Saura, Inc. on May 15, 1955.
On January 9, 1964, almost 9 years after the mortgage in favor of RFC was cancelled at the request of Saura, Inc., the latter commenced the present suit for
damages, alleging failure of RFC (as predecessor of the defendant DBP) to comply with its obligation to release the proceeds of the loan applied for and
approved, thereby preventing the plaintiff from completing or paying contractual commitments it had entered into, in connection with its jute mill project.
The TRIAL COURT rendered judgment for the plaintiff, ruling that there was a perfected contract between the parties and that the defendant was guilty of breach
thereof. The defendant pleaded below, and reiterates in this appeal: (1) that the plaintiffs cause of action had prescribed, or that its claim had been waived or
abandoned; (2) that there was no perfected contract; and (3) that assuming there was, the plaintiff itself did not comply with the terms thereof.
We hold that there was indeed a perfected consensual contract, as recognized in Article 1934 of the Civil Code, which provides:
ART. 1954. An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself
shall not be perfected until the delivery of the object of the contract.
There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan of P500,000.00 was approved by resolution of the defendant, and
the corresponding mortgage was executed and registered. But this fact alone falls short of resolving the basic claim that the defendant failed to fulfill its obligation and
that the plaintiff is therefore entitled to recover damages.It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption that the factory

to be constructed would utilize locally grown raw materials, principally kenaf. There is no serious dispute about this. It was in line with such assumption that when
RFC, by Resolution No. 9083 approved on December 17, 1954, restored the loan to the original amount of P500,000.00, it imposed two conditions, to wit: (1) that
the raw materials needed by the borrower-corporation to carry out its operation are available in the immediate vicinity; and (2) that there is prospect of
increased production thereof to provide adequately for the requirements of the factory. The imposition of those conditions was by no means a deviation from
the terms of the agreement, but rather a step in its implementation. There was nothing in said conditions that contradicted the terms laid down in RFC Resolution No.
145, passed on January 7, 1954, namelythat the proceeds of the loan shall be utilized exclusively for the following purposes: for construction of factory building
P250,000.00; for payment of the balance of purchase price of machinery and equipmentP240,900.00; for working capitalP9,100.00 Evidently Saura, Inc.
realized that it could not meet the conditions required by RFC, and so wrote its letter of January 21, 1955, stating that local jute will not be available in sufficient
quantity this year or probably next year, and asking that out of the loan agreed upon the sum of P67,586.09 be released for raw materials and labor. This was a
deviation from the terms laid down in Resolution No. 145 and embodied in the mortgage contract, implying as it did a diversion of part of the proceeds of the loan to
purposes other than those agreed upon.
When RFC turned down the request in its letter of January 25, 1955 the negotiations which had been going on for the implementation of the agreement reached an
impasse. Saura, Inc, obviously was in no position to comply with RFCs conditions. So instead of doing so and insisting that the loan be released as agreed upon,
Saura, Inc. asked that the mortgage be cancelled, which was done on June 15, 1955. The action thus taken by both parties was in the nature of mutual desistance
what Manresa terms mutuo disenso 1which is a mode of extinguishing obligations. It is a concept that derives from the principle that since mutual agreement can
create a contract, mutual disagreement by the parties can cause its extinguishment.
The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against any alleged breach of contract by RFC, or even point out that the latters
stand was legally unjustified. Its request for cancellation of the mortgage carried no reservation of whatever rights it believed it might have against RFC for the latters
noncompliance. In 1962 it even applied with DBP for another loan to finance a rice and corn project, which application was disapproved. It was only in 1964, nine
years after the loan agreement had been cancelled at its own request, that Saura, Inc. brought this action for damages. All these circumstances demonstrate beyond
doubt that the said agreement had been extinguished by mutual desistanceand that on the initiative of the plaintiff-appellee itself.
Issue: Whether or not there was a perfected-consensual contract of loan.
Held: When contract of simple loan perfected. Where an application for a loan of money was approved by resolution of the defendant corporation and the
corresponding mortgage was executed and registered, there arises a perfected-consensual contract of loan.
Extinguishment of obligations by mutual desistance.Where after approval of his loan, the borrower, instead of insisting for its release, asked that the mortgage
given as security be cancelled and the creditor acceded thereto, the action taken by both parties was in the nature of mutual desistancewhat Manresa terms
mutuo disensowhich is a mode of extinguishing obligations. It is a concept that derives from, the principle that since mutual agreement can create a contract,
mutual disagreement by the parties can cause its extinguishment.
We hold that there was indeed a perfected consensual contract, as recognized in Article 1934 of the Civil Code, which provides:
ART. 1954. An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself
shall not be perfected until the delivery of the object of the contract.
FRANCISCO HERRERA vs. PETROPHIL CORPORATION
Facts: On December 5, 1969, the plaintiff-appellant and ESSO Standard Eastern, Inc., (Petrophil Corporation) entered into a "Lease Agreement" whereby the
former leased to the latter a portion of his property for a period of twenty (20) years from said date, subject inter alia to the following conditions:
". Rental: The LESSEE shall pay the LESSOR a rental of P1.40 sqm. per month on 400 sqm. and are to be expropriated later on (sic) or P560 per month
and P1.40 per sqm. per month on 1,693 sqm. or P2,370.21 per month or a total of P2,930.20 per month 2,093 sqm. more or less, payable yearly in advance within
the 1st twenty days of each year; provided, a financial aid in the sum of P1 5,000 to clear the leased premises of existing improvements thereon is paid in this
manner; P10,000 upon execution of this lease and P5,000 upon delivery of leased premises free and clear of improvements thereon within 30 days from the date of
execution of this agreement. The portion on the side of the leased premises with an area of 365 sqm. more or less, will be occupied by LESSEE without
rental during the lifetime of this lease. PROVIDED FINALLY, that the Lessor is paid 8 years advance rental based on P2,930.70 per month discounted at
12% interest per annum or a total net amount of P1 30,288.47 before registration of lease. Leased premises shall be delivered within 30 day s after 1 st
partial payment of financial aid.
On December 31, 1969, pursuant to the said contract, Herrera paid to Petrophil Corp rentals for the first eight years, subtracting therefrom the amount of
P101,010.73, the amount it computed as constituting the interest or discount for the first eight years, in the total sum P180,288.47. On August 20, 1970, Herrera,
explaining that there had been a mistake in computation, paid to Petrophil Corp the additional sum of P2,182.70, thereby reducing the deducted amount to only
P98,828.03.3
On October 14, 1974Herrera sued,Petrophil for the sum of P98,828.03, with interest, claiming this had been illegally deducted from him in violation of the Usury
Law.4 He also prayed for moral damages and attorney's fees. In its answer, the defendant-appellee Petrophil admitted the factual allegations of the complaint but
argued that the amount deducted was not usurious interest but a discount given to it for paying the rentals in advance for eight years. 5 Judgment on the pleadings
was rendered for the defendant.6
Plaintiff-appellant Herrera now prays for a reversal of that judgment, insisting that the lower court erred in the computation of the interest collected out of the
rentals paid for the first eight years; that such interest was excessive and violative of the Usury Law; and that he had neither agreed to nor accepted the defendantappellant's Petrophil computation of the total amount to be deducted for the eight years advance rentals.7
The thrust of the plaintiff-appellant's Herrera position is set forth in paragraph 6 of his complaint, which read:
"6. The interest collected by defendant out of the rentals for the first eight years was excessive and beyond that allowable by law, because the total
interest on the said amount is only P33,755.90 at P4,219.4880 per yearly rental; and considering that the interest should be computed excluding the first
year rental because at the time the amount of P281,199.20 was paid it was already due under the lease contract hence no interest should be collected
from the rental for the first year, the amount of P29,536.42 only as the total interest should have been deducted by defendant from the sum of
P281,299.20."
The defendant maintains that the correct amount of the discount is P98,828.03 and that the same is not excessive and above that allowed by law. As its title plainly
indicates, the contract between the parties is one of lease and not of loan. It is clearly denominated a "LEASE AGREEMENT." Nowhere in the contract is
there any showing that the parties intended a loan rather than a lease. The provision for the payment of rentals in advance cannot be construed as a repayment

of a loan because there was no grant or forbearance of money as to constitute indebtedness on the part of the lessor. On the contrary, the defendant appellee was
discharging its obligation in advance by paying the eight years rentals, and it was for this advance payment that it was getting a rebate or discount.
There is no usury in this case because no money was given by the defendant-appellee to the plaintiff-appellant, nor did it allow him to use its money already in his
possession.
Concerning the computation of the deductible discount, the TRIAL COURT declared :
"As above-quoted, the 'Lease Agreement' expressly provides that the lessee (defendant) shall pay the lessor (plaintiff) eight (8) years in advance rentals based on
P2,930.20 per month discounted at 12% interest per annum. Thus, the total rental for one-year period is P35,162.40 (P2,930.20 multiplied by 12 months) and that the
interest therefrom is P4,219.4880 (P35,162.40 multiplied by 12%). So, therefore, the total interest for the first eight (8) years should be only P33,755.90 (P4,129.4880
multiplied by eight (8) years) and not P98,828.03 as the defendant claimed it to be."
"The afore-quoted manner of computation made by plaintiff is patently erroneous. It is most seriously misleading. He just computed the annual discount to be at
P4,129.4880 and then simply multiplied it by eight (8) years. He did not take into consideration the naked fact that the rentals due on the eight year were paid in
advance by seven (7) years, the rentals due on the seventh year were paid in advance by six (6) years, those due on the sixth year by five (5) years, those due on
the fifth year by four (4) years, those due on the fourth year by three (3) years, those due on the third year by two (2) years, and those due on the second year by one
(1) year, so much so that the total number of years by which the annual rental of P4,129.4880 was paid in advance is twenty-eight (28), resulting in a total amount of
P118.145.44 (P4,129.48 multiplied by 28 years) as the discount. However, defendant was most fair to plaintiff. It did not simply multiply the annual rental discount by
28 years. It computed the total discount with the principal diminishing month to month as shown by Annex 'A' of its memorandum. This is why the total discount
amount to only P8,828.03.
"The allegation of plaintiff Herrera that defendant Petrophil made the computation in a compounded manner is erroneous. AIso after making its own computations
and after examining closely defendant's Annex 'A' of its memorandum, the court finds that defendant did not charge 12% discount on the rentals due for the first year
so much so that the computation conforms with the provision of the Lease Agreement to the effect that the rentals shall be 'payable yearly in advance within the 1st
20 days of each year.' "
The plaintiff-appellant simply understood that for every year of advance payment there would be a deduction of 12% and this amount would be the same f or each of
the eight years. There is no showing that the intricate computation applied by the trial court was explained to him by the defendant-appellee or that he knowingly
accepted it.
The lower court, following the defendant-appellee's formula, declared that the plaintiff-appellant had actually agreed to a 12% reduction for advance rentals for all of
twenty eight years. That is absurd. It is not normal for a person to agree to a reduction corresponding to twenty eight years advance rentals when all he is receiving in
advance rentals is for only eight years.
The deduction shall be for only eight years because that was plainly what the parties intended at the time they signed the lease agreement. " Simplistic" it may be,
as the Solicitor General describes it, but that is how the lessor understood the arrangement. In fact, the Court will reject his subsequent modification that
the interest should be limited to only seven years because the first year rental was not being paid in advance. The agreement was for a uniform deduction
for the advance rentals for each of the eight years, and neither of the parties can deviate from it now.
On the annual rental of P35,168.40, the deducted 12% discount was P4,220.21; and for eight years, the total rental was P281,347.20 from which was
deducted the total discount of P33,761.68, leaving a difference of P247,585.52. Subtracting from this amount, the sum of P182,471.17 already paid will
leave a balance of P65,114.35 still due the plaintiff-appellant.
The above computation is based on the more reasonable interpretation of the contract as a whole rather on the single stipulation invoked by the respondent for the
flat reduction of P130,288.47.
WHEREFORE, the decision of the trial court is hereby modified, and the defendant-appellee Petrophil Corporation is ordered to pay plaintiff-appellant the amount of
Sixty Five Thousand One Hundred Fourteen pesos and Thirty-Five Centavos (P65,114.35), with interest at the legal rate until fully paid, plus Ten Thousand Pesos
(P10,000.00) as attorney's fees. Costs against the defendant-appellee Petrophil.
SO ORDERED.
Issue: Whether or not there is a violation of Usury Law.
Held: Usury Law; No usury where there was no money given by defendant to plaintiff, nor did it allow him to use its money already in his possession, and there was
neither loan nor forbearance but a mere discountThere is no usury in this case because no money was given by the defendant-appellee to the plaintiff-appellant,
nor did it allow him to use its money already in his possession. There was neither loan nor forbearance but a mere discount which the plaintiff-appellant
allowed the defendant-appellee to deduct from the total payments because they were being made in advance for eight years. The discount was in effect a
reduction of the rentals which the lessor had the right to determine, and any reduction thereof, by any amount, would not contravene the Usury law.
Difference between a discount and a loan or forbearance.The difference between a discount and a loan or forbearance is that the former does not have to be
repaid. The loan or forbearance is subject to repayment and is therefore governed by the laws on usury.
Requirements to constitute usury; Elements of usury.To constitute usury, "there must be loan or forbearance; the loan must be of money or something
circulating as money; it must be repayable absolutely and in all events; and something must be exacted for the use of the money in excess of and in addition to
interest allowed by law." It has been held that the elements of usury are (1) a loan, express or implied; (2) an understanding between the parties that the money lent
shall or may be returned; (3) that for such loan a greater rate or interest that is allowed by law shall be paid, or agreed to be paid, as the case may be; and (4) a
corrupt intent to take more than the legal rate for the use of money loaned. Unless these four things concur in every transaction, it is safe to affirm that no case of
usury can be declared.
INTEGRATED REALTY CORPORATION and RAUL L. SANTOS, petitioners, vs. PHILIPPINE NATIONAL BANK
Facts: In G.R. No. 60705, petitioners Integrated Realty Corporation (hereafter, IRC) and Raul L. Santos (hereafter, Santos) seek the dismissal of the complaint filed
by the Philippine National Bank (hereafter, PNB), or in the event that they be held liable thereunder, to revive and affirm that portion of the decision of the trial court
ordering Overseas Bank of Manila (hereafter, OBM) to pay IRC and Santos whatever amounts the latter will pay to PNB, with interest from the date of payment. 2
Under date 11 January 1967 defendant Raul L. Santos made a time deposit with defendant OBM in the amount of P500,000.00. (Exhibit-10 OBM) and was issued a
Certificate of Time Deposit No. 2308 (Exhibit 1-Santos, Exhibit D). Under date 6 February 1967 defendant Raul L. Santos also made a time deposit with defendant
OBM in the amount of P200,000.00 (Exhibit 11-OBM) and was issued certificate of Time Deposit No. 2367 (Exhibit 2-Santos, Exhibit E).
Issue:

Held: Civil Law; Credit Transactions; Pledge; Deed of Assignment; The deed of assignment in the instant case is actually a pledge.For all intents and purposes, the
deed of assignment in this case is actually a pledge. Adverting again to the Courts pronouncements in Lopez, supra, we quote therefrom: The character of the
transaction between the parties is to be determined by their intention, regardless of what language was used or what the form of the transfer was. If it was intended to
secure the payment of money, it must be construed as a pledge; but if there was some other intention, it is not a pledge. However, even though a transfer, if regarded
by itself, appears to have absolute, its object and character might still be qualified and explained by contemporaneous writing declaring it to have been a deposit of
the property as collateral security. It has been said that a transfer of property by the debtor to a creditor, even if sufficient on its face to make an absolute conveyance,
should be treated as a pledge if the debt continues in existence and is not discharged by the transfer, and that accordingly, the use of the terms ordinarily importing
conveyance, of absolute ownership will not be given that effect in such a transaction if they are also commonly used in pledges and mortgages and therefore do not
unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and unambiguous language or other circumstances excluding an intent to pledge.
Requisites of a Contract of Pledge.The facts and circumstances leading to the execution of the deed of assignment, as found by the court a quo and the
respondent court, yield said conclusion that it is in fact a pledge. The deed of assignment has satisfied the requirements of a contract of pledge (1) that it be
constituted to secure the fulfillment of a principal obligation; (2) that the pledgor be the absolute owner of the thing pledged; (3) that the persons constituting the
pledge have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. The further requirement that the thing
pledged be placed in the possession of the creditor, or of a third person by common agreement was complied with by the execution of the deed of assignment in
favor of PNB.
Loans; A contract of simple loan or mutuum is created when Santos invested his money in time deposit with petitioner-bank.Thus, when PNB demanded from
OBM payment of the amounts due on the two time deposits which matured on January 11, 1968 and February 6, 1968, respectively, there was as yet no obstacle to
the faithful compliance by OBM of its liabilities thereunder. Consequently, for having incurred in delay in the performance of its obligation, OBM should be held liable
for damages. When respondent Santos invested his money in time deposits with OBM, they entered into a contract of simple loan or mutuum, not a contract of
deposit.
REPUBLIC OF THE PHILIPPINES (BUREAU OF LANDS), petitioner, vs. THE HON. COURT OF APPEALS, HEIRS OF DOMINGO P. BALOY
Facts: This case originally emanated from a decision of the then Court of First Instance of Zambales in LRC denying respondents' application for registration.
From said order of denial the applicants, heirs of Domingo Baloy, represented by Ricardo P. Baloy, (herein private respondents) interposed on appeal to the Court of
Appeals. The appellate court, thru its Fifth Division with the Hon. Justice Magno Gatmaitan as ponente, rendered a decision dated February 3, 1977 reversing the
decision appealed from and thus approving the application for registration. Oppositors (petitioners herein) filed their Motion for Reconsideration alleging among
other things that applicants' possessory information title can no longer be invoked and that they were not able to prove a registerable title over the land. Said Motion
for Reconsideration was denied, hence this petition for review on certiorari.
Applicants' claim is anchored on their possessory information title coupled with their continuous, adverse and public possession over the land in question. An
examination of the possessory information title shows that the description and the area of the land stated therein substantially coincides with the land applied for and
that said possessory information title had been regularly issued having been acquired by applicants' predecessor, Domingo Baloy, under the provisions of the
Spanish Mortgage Law. Applicants presented their tax declaration on said lands on April 8, 1965.
The Director of Lands opposed the registration alleging that this land had become public land thru the operation of Act 627 of the Philippine Commission. On 1902
pursuant to the executive order of the President of the U.S., the area was declared within the U.S. Naval Reservation. Under Act 627 as amended by Act 1138, a
period was fixed within which persons affected thereby could file their application, (that is within 6 months from July 8, 1905) otherwise " the said lands or interests
therein will be conclusively adjudged to be public lands and all claims on the part of private individuals for such lands or interests therein not to
presented will be forever barred." Petitioner argues that since Domingo Baloy failed to file his claim within the prescribed period, the land had become irrevocably
public and could not be the subject of a valid registration for private ownership.
Considering the foregoing facts respondent Court of Appeals ruled as follows:
"x x x perhaps, the consequence was that upon failure of Domingo Baloy to have filed his application within that period the land had become irrevocably public; but
perhaps also, for the reason that that warning was from the Clerk of the Court of Land Registration, named J.R. Wilson and there has not been presented a formal
order or decision of the said Court of Land Registration so declaring the land public because of that failure, it can with plausibility be said that after all, there was no
judicial declaration to that effect, it is true that the U.S. Navy did occupy it apparently for some time, as a recreation area, as this Court understands from the
communication of the Department of Foreign Affairs to the U.S. Embassy exhibited in the record, but the very tenor of the communication apparently seeks to justify
the title of herein applicants, in other words, what this Court has taken from the occupation by the U.S. Navy is that during the interim, the title of applicants was in a
state of suspended animation so to speak but it had not died either; and the fact being that this land was really originally private from and after the issuance and
inscription of the possessory information Exh. F during the Spanish times, it would be most difficult to sustain position of Director of Lands that it was land of no
private owner; open to public disposition, and over which he has control; and since immediately after U.S. Navy had abandoned the area, applicant came in and
asserted title once again, only to be troubled by first Crispiniano Blanco who however in due time, quitclaimed in favor of applicants, and then by private oppositors
now, apparently originally tenants of Blanco, but that entry of private oppositors sought to be given color of ownership when they sought to and did file tax declaration
in 1965, should not prejudice the original rights of applicants thru their possessory information secured regularly so long ago, the conclusion must have to be that
after all, applicants had succeeded in bringing themselves within the provisions of Sec. 19 of Act 496, the land should be registered in their favor;
IN VIEW WHEREOF, this Court is constrained to reverse, as it now reverses, judgment appealed from the application is approved, and once this decision shall have
become final, if ever it would be, let decree issue in favor of applicants with the personal circumstances outlined in the application, costs against private oppositors."
Issue:
Held: Possessory rights over a piece of land is interrupted only and not lost by temporary occupation thereof by the U.S. Navy for recreational purposes.The
finding of respondent court that during the interim of 57 years from November 26,1902 to December 17, 1959 (when the U.S. Navy possessed the area) the
possessory rights of Baloy or heirs were merely suspended and not lost by prescription, is supported by Exhibit "U," a communication or letter No. 1108-63, dated
June 24, 1963, which contains an official statement of the position of the Republic of the Philippines with regard to the status of the land in question. Said letter
recognizes the fact that Domingo Baloy and/or his heirs have been in continuous possession of said land since 1894 as attested by an "Informacion Possessoria"
Title, which was granted by the Spanish Government. Hence, the disputed property is private land and this possession was interrupted only by the occupation of the
land by the U.S. Navy in 1945 for recreational purposes. The U.S. Navy eventually abandoned the premises. The heirs of the late Domingo P. Baloy, are now in
actual possession, and this has been so since the abandonment by the U.S. Navy. A new recreation area is now being used by the U.S. Navy personnel and this
place is remote from the land in question.Clearly, the occupancy of the U.S. Navy was not in the concept of owner. It partakes of the character of a commodatum. It

cannot therefore militate against the title of Domingo Baloy and his successors-in-interest. One's ownership of a thing may be lost by prescription by reason of
another's possession if such possession be under claim of ownership, not where the possession is only intended to be transient, as in the case of the U.S. Navy's
occupation of the land concerned, in which case the owner is not divested of his title, although it cannot be exercised in the meantime.
MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs and appellants, vs. BECK
Facts: The plaintiff brought this action to compel the defendant to return to her certain furniture which she lent him for his use. She appealed from the judgment of the
Court of First Instance of Manila which ordered that the defendant return to her the three gas heaters and the four electric lamps found in the possession of the
Sheriff of said city, that she call for the other furniture from the said Sheriff of Manila at her own expense, and that the fees which the Sheriff may charge for the
deposit of the furniture be paid pro rata by both parties, without pronouncement as to the costs.
The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H. del Pilar street, No. 1175. On January 14, 1936, upon the novation of
the contract of lease between the plaintiff and the defendant, the former gratuitously granted to the latter the use of the furniture described in the third paragraph of
the stipulation of facts, subject to the condition that the defendant would return them to the plaintiff upon the latter's demand. The plaintiff sold the property to
Maria Lopez and Rosario Lopez and on September 14, 1936, these three notified the defendant of the conveyance, giving him sixty days to vacate the premises
under one of the clauses of the contract of lease. There after the plaintiff required the defendant to return all the furniture transferred to him for his use. The defendant
answered that she may call for them in the house where they are found. On November 5, 1936, the defendant, through another person, wrote to the plaintiff
reiterating that she may call for the furniture in the ground floor of the house. On the 7th of the same month, the defendant wrote another letter to the plaintiff
informing her that he could not give up the three gas heaters and the four electric lamps because he would use them until the 15th of the same month when the lease
is due to expire. The plaintiff refused to get the furniture in view of the fact that the defendant had declined to make delivery of all of them. On November 15th, before
vacating the house, the defendant deposited with the Sheriff all the furniture belonging to the plaintiff and they are now on deposit in the warehouse situated at No.
1521, Rizal Avenue in the custody of the said sheriff.
In their seven assigned errors the plaintiffs contend that the trial court incorrectly applied the law: in holding that they violated the contract by not calling for all the
furniture on November 5, 1936, when the defendant placed them at their disposal; in not ordering the defendant to pay them the value of the furniture in case they
are not delivered; in holding that they should get all the furniture from the Sheriff at their expenses; in ordering them to pay one-half of the expenses claimed by the
Sheriff for the deposit of the furniture; in ruling that both parties should pay their respective legal expenses or the costs; and in denying the motions for
reconsideration and new trial. To dispose of the case, it is only necessary to decide whether the defendant complied with his obligation to return the furniture upon the
plaintiff's demand; whether the latter is bound to bear the deposit fees thereof, and whether she is entitled to the costs of litigation.
Issue: Whether or not the contract entered into between the parties is one of commudatum
Held: COMMODATUM; OBLIGATION OF THE PARTIES.The contract entered into between the parties is one of commodatum, because under it the plaintiff
gratuitously granted the use of the furniture to the defendant, reserving for herself the ownership thereof; by this contract the defendant bound himself to return the
furniture to the plaintiff, upon the 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 the defendant to return the furniture upon the plaintiff's demand, means that he should return all of them to the plaintiff at the latter's residence
or house. The defendant did not comply with this obligation when he merely placed them at the disposal of the plaintiff, retaining for his benefit the three gas heaters
and the four electric lamps.
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs. JOSE GRIJALDO
Facts: In the year 1943 appellant Jose Grijaldo obtained five loans from the branch office of the Bank of Taiwan, Ltd. in Bacolod City, in the total sum of P1,281.97
with interest at the rate of 6% per annum, compounded quarterly. These loans are evidenced by five promissory noteexecuted by the appellant in favor of the Bank of
Taiwan, Ltd., as follows: On June 1, 1943, P600.00; on June 3, 1948, P159.11; on June 18, 1943. P22.86; on August 9, 1943, P300.00; on August 13, 1943, P200.00,
all notes without due dates, but because the loans were crop loans it was considered that 'the loans were due one year after they were incurred. To secure the
payment of the loans the appellant executed a chattel mortgage on the standing crops on his land, Lot No. 1494 known as Hacienda Campugas in Hinigaran. Negros
Occidental.
By virtue of Vesting Order No. P-4, dated January 21, 1946, and under the authority provided for in the Trading with the Enemy Act, as amended, the assets in the
Philippines of the Bank of Taiwan, Ltd. were vested in the Government of the United States. Pursuant to the Philippine Property Act of 1946 of the United States,
these assets, including the loans in question, were subsequently transferred to the Republic of the Philippines by the Government of the United States under Transfer
Agreement dated July 20, 1954. These assets were among the properties that were placed under the administration of the Board of Liquidators created under
Executive Order No. 372, dated November 24, 1950, and in accordance with Republic Acts Nos. 8 and 477 and other pertinent laws.
On September 29, 1954 the appellee, Republic of the Philippines, represented by the Chairman of the Board of Liquidators, made a written extrajudicial demand
upon the appellant for the payment of the account in question. The record shows that the appellant had actually received the written demand for payment, but he
failed to pay..
The aggregate amount due as principal of the five loans in question, computed under the Ballantyne scale of values as of the time that the loans were incurred in
1943, was P889.64; and the interest due thereon at the rate of 6% per annum compounded quarterly, computed as of December 31, 1959. was P 1,457.39; so that
the total account as of December 31, 1959 was P2,377.23.
On January 17, 1961 the appellee filed a complaint in the Justice of the Peace Court of Hinigaran, Negros Occidental, to collect from the appellant the unpaid
account in question. The Justice of the Peace of Hinigaran, after hearing, dismissed the case on the ground that the action had prescribed. The appellee appealed to
the Court of First Instance of Negros Occidental and on March 26, 1982 the court a quo rendered a decision ordering the appellant to pay the appellee the sum of
P2,377.23 as of December 31, 1959, plus interest at the rate of 6% per annum compounded quarterly from the date of the filing of the complaint until full payment
was made. The appellant was also ordered to pay the sum equivalent to 10% of the amount due as attorney's fees and the costs.
The appellant appealed directly to this Court. During the pendency of this appeal the appellant Jose Grijaldo died. Upon motion by the Solicitor General this Court, in
a resolution of May 13, 1963, required Manuel Lagtapon, Jacinto Lagtapon, Ruben Lagtapon and Anita L. Aguilar, who are the legal heirs of Jose Grijaldo, to appear
and be substituted as appellants in accordance with Section 17 of Rule 3 of the Rules of Court.
Issue:
Held: Crop loans obtained from the Bank of Taiwan, Ltd.; Right of Philippine Government to collect the loans.In 1943, appellant obtained crop loans from the Bank
of Taiwan, Ltd., Bacolod City Branch, evidenced by promissory notes. To secure payment of the loans, appellant executed a chattel mortgage over the standing crops
on his land. After the war, the Republic of the Philippines brought the present action to collect from appellant the unpaid account. Held: It is true that the Bank of

Taiwan, Ltd. was the original creditor and the transaction between the appellant and the Bank of Taiwan was a private contract of loans. However, pursuant to the
Trading with the Enemy Act, as amended, and Executive Order No. 9095 of the United States; and under Vesting Order No. P-4, dated January 21, 1946, the
properties of the Bank of Taiwan, Ltd., were vested in the United States Government. Pursuant, further, to the Philippine Property Act of 1946 and Transfer
Agreements dated July 20, 1954 and June 15, 1957, between the United States Government and the Republic of the Philippines, the assets of the Bank of Taiwan,
Ltd. were transferred to and vested in the Republic of the Philippines. The successive transfers of the rights over the loans in question from the Bank of Taiwan, Ltd.
to the United States Government, and from the United States Government to the government of the Republic of the Philippines, made the Republic of the Philippines
the successor of the rights, title and interests in said loans, thereby creating a privity of contract between the appellee and the appellant.
FELIX DE LOS SANTOS, plaintiff and appellee, vs. AGUSTINA JARRA
Facts: On the 1st of September, 1906, Felix de los Santos brought suit against Agustina Jarra, the administratrix of the estate of Magdaleno Jimenea, alleging that in
the latter part of 1901 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; 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; that Magdaleno Jimenea died on the 28th of October, 1904, and the defendant herein was appointed by the Court of First Instance
of Occidental Negros administratrix of his estate and she took over the administration of the same and is still performing her duties as such administratrix; that the
plaintiff presented his claim to the commissioners of the estate of Jimenea, within the legal term, for the return of the said ten carabaos, but the said commissioners
rejected his claim as appears in their report; therefore, the plaintiff prayed that judgment be entered against the defendant as administratrix of the estate of the
deceased, ordering her to return the ten first-class carabaos loaned to the late Jimenea, or their present value, and to pay the costs.
The defendant was duly summoned, and on the 25th of September, 1906, she demurred in writing to the complaint on the ground that it was vague; but on the 2d of
October of the same year, in answer to the complaint, she said that it was true that the late Magdaleno Jimenea asked the plaintiff to loan him ten carabaos, but that
he only obtained three second-class animals, which were afterwards transferred by sale by the plaintiff to the said Jimenea; that she denied the allegations contained
in paragraph 3 of the complaint; for all of which she asked the court to absolve her of the complaint with the costs against the plaintiff.
By a writing dated the 11th of December, 1906, Attorney Jose Felix Martinez notified the defendant and her counsel, Matias Hilado, that he had made an agreement
with the plaintiff to the effect that the latter would not compromise the controversy without his consent, and that as fees for his professional services he was to receive
one half of the amount allowed in the judgment if the same were entered in f avor of the plaintiff.
The case came up for trial, evidence was adduced by both parties, and their exhibits were made of record. On the 10th of January, 1907, the court below entered
judgment sentencing Agustina Jarra, as administratrix of the estate of Magdaleno Jimenea, to return to the plaintiff, Felix de los Santos, the remaining six second and
third class carabaos, or the value thereof at the rate of P120 each, or a total of P720 with the costs.
Counsel for the defendant excepted to the foregoing judgment, and, by a writing dated January 19, moved for a new trial on the ground that the findings of fact were
openly and manifestly contrary to the weight of the evidence. The motion was overruled, the defendant duly excepted, and in due course submitted the
corresponding bill of exceptions, which was approved and submitted to this court.
The defendant has admitted that Magdaleno Jimenea asked the plaintiff for the loan of ten carabaos which are now claimed by the latter, as shown by two letters
addressed by the said Jimenea to Felix de los Santos; but in her answer the said defendant alleged that the late Jimenea only obtained three second-class carabaos,
which were subsequently sold to him by the owner, Santos; therefore, in order to decide this litigation it is indispensable that-proof be forthcoming that Jimenea only
received three carabaos from his son-in-law Santos, and that they were sold by the latter to him.
The record discloses that it has been f ully proven f rom the testimony of a sufficient number of witnesses that the plaintiff, Santos, sent in charge of various persons
the ten carabaos requested by his father-in-law, Magdaleno Jimenea, in the two letters produced at the trial by the plaintiff, and that Jimenea received them in the
presence of some of said persons, one being a brother of said Jimenea, who saw the animals arrive at the hacienda where it was proposed to employ them. Four
died of rinderpest, and it is for this reason that the judgment appealed from only deals with six surviving carabaos.
The alleged purchase of three carabaos by Jimenea from his son-in-law Santos is not evidenced by any trustworthy documents such as those of transfer, nor were
the declarations of the witnesses presented by the defendant affirming it satisfactory; for said reason it can not be considered that Jimenea only received three
carabaos on loan from his sonin-law, and that he afterwards kept them definitely by virtue of the purchase.
By the laws in force the transfer of large cattle was and is still made by means of official documents issued by the local authorities; -these documents constitute the
title of ownership of the carabao or horse so acquired. Furthermore, not only should the purchaser be provided with a new certificate or credential, a document which
has not been produced in evidence by the defendant, nor has the loss of the same been shown in the case, but the old documents ought to be on file in the
municipality, or they should have been delivered to the new purchaser, and in the case at bar neither did the defendant present the old credential on which should be
stated the name of the previous owner of each of the three carabaos said to have been sold by the plaintiff.
From the foregoing it may be logically inferred that the carabaos loaned or given on commodatum to the now deceased Magdaleno Jimenea were ten in number; that
they, or at any rate the six surviving ones, have not been returned to the owner thereof, Felix de los Santos, and that it is not true that the latter sold to the former
three carabaos that the purchaser was already using; therefore, as the said six carabaos were not the property of the deceased nor of any of his descendants, it is
the duty of the administratrix of the estate to return them or indemnify the owner for their value.
Issue:
Held: ESTATES; ACTION AGAINST ADMINISTRATOR J BAILMENT; COMMODATUM.In a contract of commodatum whereby one of the parties thereto delivers to
the other a thing that is not perishable, to be used for a certain time and afterwards returned, it is the imperative duty of the bailee, if he should be unable to return the
thing itself to the owner, to pay damages to the latter if, through the fault of the bailee, the thing loaned was lost or destroyed, inasmuch as the bailor retains the
ownership thereof.
ALEJANDRA MINA ET AL., plaintiffs and appellants, vs. RUPERTA PASCUAL ET AL., defendants and appellees.
1. 1.REALTY; SALE OF LAND BY ONE NOT THE OWNER.A sale of land belonging to another, on which a building of the vendor's is located, is null and
void, for the vendor cannot sell or transfer property that does not belong to him.
1. 2.ID.; BUILDING ON LAND OF ANOTHER; OPTION OF OWNER OF THE LAND,Inasmuch as the acts involved were all performed prior to the
enactment of the Civil Code, the controversy must be settled in accordance with the provisions of Laws 41 and 42, title 28, third Partida, nearly identical
with articles 361 and 362 of the Civil Code. Therefore, as prescribed by article 361, the owner of the land on which a building has been erected by

another in good faith has the option either to appropriate and pay for the building, under articles 453 and 454, or to oblige the builder to purchase the
land.
Francisco Fontanilla and Andres Fontanilla were brothers. Francisco Fontanilla acquired during his lifetime, on March 12, 1874, a lot in the center of the town of
Laoag, the capital of the Province of Ilocos Norte, the property having been awarded to him through its purchase at a public auction held by the alcalde mayor of that
province. The lot has a frontage of 120 meters and a depth of 15.
Andres Fontanilla, with the consent of his brother Francisco, erected a warehouse on a part of the said lot, embracing 14 meters of its frontage by 11 meters of its
depth.
Francisco Fontanilla, the former owner of the lot, being dead, the herein plaintiffs, Alejandra 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 likewise without discussion, though it is not
said how, and consequently are entitled to the said building, or rather, as Ruperta Pascual herself stated, to only six-sevenths of one-half of it, the other half
belonging, as it appears, to the plaintiffs themselves, and the remaining one-seventh of the first one-half to the children of one of the plaintiffs, Elena de Villanueva.
The fact is that the plaintiffs and the defendants are virtually, to all appearance, the owners of the warehouse; while the plaintiff s are undoubtedly the owners of the
part of the lot occupied by that building, as well also 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 Court 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 plaintiffsthat 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 this
building, saying:
"While the trial continues with respect to the ownership of the lot, the court orders the sale at public auction of the said warehouse and of the lot on which it is built,
with the present boundaries of the land and condition of the building, at a price of not less than P2,890 Philippine currency * * *"
So, the warehouse, together with the lot on which it stands, was sold to Cu JOCO, the other def endant in this case, for the price mentioned.
The plaintiffs insisted upon a decision of the question of the ownership of the lot, and the court decided it by holding that this land belonged to the owner of the
warehouse which had been built thereon thirty years before.
The plaintiffs appealed and this court reversed the judgment of the lower court and held that the appellants were the owners of the lot in question. 1 Pascual vs.
Mina, 20 Phil. Rep., 202.
When the judgment became final and executory, a writ of execution issued and the plaintiffs were given possession of the lot; but soon thereafter the trial court
annulled this possession for the reason that it affected Cu Joco, who had not been a party to the suit in which that writ was served.
It was then that the plaintiffs commenced the present action for the purpose of having the sale of the said lot declared null and void and of no force and effect.
An agreement was had as to the facts, the ninth paragraph of which is as f ollows:
"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."
The obvious purport of the clause "although there existed and still exists a commodatum," etc., appears to be that it is a part of the decision of the Supreme Court
and that, while finding the plaintiffs to be the owners of the lot, we recognized in principle the existence of a commodatum under which the defendants held the lot.
Nothing could be more inexact. Possibly, also, the meaning of that clause is that, notwithstanding the finding made by the Supreme Court that the plaintiffs were the
owners, these former and the defendants agree that there existed, and still exists, a commodatum, etc. But such an agreement would not affect the truth of the
contents of the decision of this court, and the opinions held by the litigants in regard to this point could have no bearing whatever on the present decision,
Nor did the decree of the lower court that ordered the sale have the least influence in our previous decision to require our making any finding in regard thereto, for,
with or without that decree, the Supreme Court had to decide the ownership of the lot consistently with its titles and not in accordance with the judicial acts or
proceedings had prior to the setting up of the issue in respect to the ownership of the property that was the subject of the judicial decree.
What is essentially pertinent to the case is the fact that the defendants 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.
The returns of the auction contain the following statements:
"I, Ruperta Pascual, the guardian of the minors, etc., by virtue of the authorization conferred upon me on the 31st of July, 1909, by the Court of First Instance of
Ilocos Norte, proceeded with the sale at public auction of the sixsevenths part of the one-half of the warehouse constructed of rubble stone, etc.
"Whereas I, Ruperta Pascual, the guardian of the minors, etc., sold at public auction all the land and all the rights, title, interest, and ownership in the said property to
Cu Joco, who was the highest bidder, etc.
"Therefore, * * * I cede and deliver forever to the said purchaser, Cu Joco, his heirs and assigns, all the interest, ownership and inheritance rights and others that, as
the guardian of the said minors, I have and may have in the said property, etc."
The purchaser could not acquire anything more than the interest that might be held by a person to whom realty in possession of the vendor might be sold, for at a
judicial auction nothing else is disposed of. What the minor children of Ruperta Pascual had in their possession was the ownership of the six-sevenths part of onehalf of the warehouse and the use of the lot occupied by this building. This, and nothing more, could the Chinaman Cu Joco acquire at that sale: not the ownership of
the lot; neither the other half, nor the remaining one-seventh of the said first half, of the warehouse. Consequently, the sale made to him of this oneseventh of onehalf and the entire other half of the building was null and void, and likewise with still more reason the sale of the lot the building occupies.
The purchaser could and should have known what it was that was offered for sale and what it was that he purchased. There is nothing that can justify the acquisition
by the purchaser of the warehouse of the ownership of the lot that this building occupies, since the minors represented by Ruperta Pascual never were the owners of
the said lot, nor were they ever considered to be such.

The trial court, in the judgment rendered, held that there were no grounds for the requested annulment of the sale, and that the plaintiffs were entitled to the P600
deposited with the clerk of the court as the value of the lot in question. The defendants, Ruperta Pascual and the Chinaman Cu Joco, were absolved from the
complaint, without express finding as to costs.
The plaintiffs cannot be obliged to acquiesce in or allow the sale made and be compelled to accept the price set on the lot by expert appraisers, not even though the
plaintiffs be considered as cowners of the warehouse. It would be much indeed that, on the ground of cownership, they should have to abide by and tolerate the
sale of the said building,which point this court does not decide as it is not a question submitted to us for decision, but, as regards the sale of the lot, it is in all respects
Impossible to hold that the plaintiffs must abide by it and tolerate it, and this conclusion is based on the fact that they did not give their consent (art. 1261, Civil Code),
and only the contracting parties who have given it are obliged to comply (art. 1091, idem).
The sole purpose of the action in the beginning was to obtain an annulment of the sale of the lot; but subsequently the plaintiffs, through motion, asked for an
amendment of their complaint in the sense that the action should be deemed to be one for the recovery of possession of a lot and for the annulment of its sale. The
plaintiffs' petition was opposed by the defendants' attorney, but was allowed by the court; therefore the complaint seeks, after the judicial annulment of the sale of the
lot, to have the def endants sentenced immediately to deliver the same to the plaintiffs.
Such a finding appears to be in harmony with the decision rendered by the Supreme Court in the previous suit, wherein it was held that the ownership of the lot lay in
the plaintiffs, and for this reason steps were taken to give possession thereof to the defendants; but, as the purchaser Cu Joco was not a party to that suit, the
present action is strictly one for recovery against Cu Joco to compel him, once the sale has been annulled, to deliver the lot to its lawful owners, the plaintiffs.
As respects this action for recovery, this Supreme Court finds:
1. 1. That it is a f act 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 plaintiffs' predecessor in
interest.
2. 2. That it also appears to be an admitted fact that the plaintiffs and the defendants are the cowners of the warehouse.
3. 3. That it is a fact explicity admitted in the agreement,
1. that neither Andres Fontanilla nor his successors paid any consideration or price whatever for the use of the lot occupied by the said building; whence it is,
perhaps, that both parties have denominated that use a commodatum.
Upon the premise of these facts, or even merely upon that of the first of them, the sentencing of the defendants to deliver the lot to the plaintiffs does not follow as a
necessary corollary of the judicial declaration of ownership made in the previous suit, nor of that of the nullity of the sale of the lot, made in the present case.
The defendants do not hold lawful possession of the lot in question.
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 a 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 be for a certain period. Francisco Fontanilla did not fix any
definite period of 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 the lot has been used by both Andres and his successors in interest. The present contention of the plaintiffs that Cu Joco, now in
possession of the lot, should pay rent for it at the rate of P5 a month, would destroy the theory of the commodatum sustained by them, since, according to the second
paragraph of the aforecited article 1740, "commodatum is essentially gratuitous," and, if what the plaintiffs themselves aver on page 7 of their brief is to be believed, it
never entered Francisco's mind to limit the period during which his brother Andres was to have the use of the lot, because he expected that the warehouse would
eventually fall into the hands of his son, Fructuoso Fontanilla, called the adopted son of Andres, which did not come to pass for the reason that Fructuoso died before
his uncle Andres. With that expectation in view, it appears more likely that Francisco intended to allow his brother Andres a surface right; but this right supposes the
payment of an annual rent, and Andres had the gratuitous use of the lot.
Hence, as the facts aforestated only show that a building was erected on another's ground, the question should be de.cided 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 plaintiffs 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.
The judgment appealed from is reversed and the sale of the lot in question is held to be null and void and of no f orce or effect. No special finding is made as to the
costs of both instances.
AURELJO G. BRIONES, plaintiff-appellee, vs. PRIMITIVO P. CAMMAYO, ET AL., defendants-appellants.
Usury; Loan with usurious interest; Loan valid but usurious interest void; Right of creditor to recover his capital.To discourage stipulations on usurious interest, said
stipulations are treated as wholly void, so that the loan becomes without stipulation as to payment of interest. It should not, however, be interpreted to mean forfeiture
even of the principal, for this would unjustly enrich the borrower at the expense of the lender. Furthermore, penal sanctions are available against a usurious lender, as
a further deterrence to usury. The principal debt remaining without stipulation for payment of interest can thus be recovered by judicial action.
Same; Same; Divisibility of the contract.A contract of loan with usurious interest consists of principal and accessory stipulations; the principal one is to pay the debt;
the accessory stipulation is to pay interest thereon. And said two stipulations are divisible in the sense that the former can still stand without the latter. In simple loan
with stipulation of usurious interest, the prestation of the debtor to pay the principal debt, which is the cause of the contract, is not illegal. The illegality lies only as to
the prestation to pay the stipulated interest; hence, being separable, the latter only should be deemed void, since it is the only one that is illegal.
Same; Right of the creditor to recover interest on the principal loan at the legal rate.The debt earns interest from the date of demand (in this case from the filing of
the complaint). Such interest is not due to stipulation, for there was none, the same being void. Rather it is due to the general provision of law that in obligations to
pay money, where the debtor incurs in delay, he has to pay interest by way of damages (Art. 2209, Civil Code).BARREDO, J., concurringSame; Article 1957 of the
Civil Code; Effect of.While it is true that Article 1957 of the Civil Code declares that all usurious contracts and stipulations are void, this is nothing new, for such has

been the law even under the Usury Law before the Civil Code went into effect, and, moreover, it is evident that the Civil Code itself yields to the Usury Law when it
comes to the question of how much of the loan and interests paid by the borrower may be recovered by him, and the Usury Law is clear that he may recover only all
the interests, including, of course, the legal part thereof, with legal interest from the date of judicial demand, without maintaining that he can also recover the principal
he has already paid to the lender.
On February 22, 1962. Aurelio G. Briones filed an action in the Municipal Court of Manila against Primitivo, Nicasio, Pedro, Hilario and Artemio, all surnamed
Cammayo, to recover from them, jointly and severally, the amount of P1,500.00, plus damages, attorneys fees and costs of suit. The defendants answered the
complaint with specific denials and the following special defenses and compulsory counterclaim:
x x x;
By way of
SPECIAL DEFENSES
Defendants allege:
1. 4. Defendants executed the real estate mortgage, Annex A of the complaint, as security for the loan of P 1,200.00 given to defendant Primitivo
P. Cammayo upon the usurious agreement that defendant pays to the plaintiff and that the plaintiff reserve and secure, as in fact plaintiff
reserved and secured himself, out of the alleged loan of P1,500.00 as interest the sum of P300.00 for one year;
2. 5. That although the mortgage contract, Annex A was executed for securing the payment of P1,500.00 for a period of one year, without
interest, the truth and the real fact is that plaintiff delivered to the defendant Primitivo P. Cammayo only the sum of P1,200.00 and withheld the
sum of P300.00 which was intended as advance interest for one year;
3. 6. That on account of said loan of P1,200.00, defendant Primitivo P. Cammayo paid to the plaintiff during the period from October 1955 to July
1956 the total sum of P330.00 which plaintiff, illegally and unlawfully refuse to acknowledge as part payment of the account but as in interest of
the said loan for an extension of another term of one year;
7. That said contract of loan entered into between plaintiff and defendant Primitivo P. Cammayo is a usurious contract and is contrary to law, morals, good customs,
public order or public policy and is therefore, inexistent and void from the beginning (Art. 1407 Civil Code);
And as
COMPULSORY COUNTERCLAIM
Defendants replead all their allegations in the preceding paragraphs;
1. 8. That plaintiff, by taking and receiving interest in excess of that allowed by law, with full intention to violate the law, at the expense of the
defendants, committed a flagrant violation of Act 2655, otherwise known as the Usury Law, causing the defendants damages and attorneys
fees, the amount of which will be proven at the trial;
2. 9. That this is the second time this same case is filed before this court, the first having been previously filed and docketed in this court as Civil
Case No. 75845 (Branch VII) and the same was dismissed by the Court of First Instance of Manila on July 13, 1961 in Civil Case No. 43121
(Branch XVII) and for repeatedly bringing this case to the court, harassing and persecuting defendants in that manner, defendants have
suffered mental anguish and anxiety for which they should be compensated for moral damages.
On September 7, 1962, Briones filed an unverified reply in which he merely denied the allegations of the counterclaim. Thereupon the defendants moved for the
rendition of a summary judgment on the ground that, upon the record, there was no genuine issue of fact between the parties. The Municipal Court granted the
motion and rendered judgment sentencing the defendants to pay the plaintiff the sum of P 1,500.00, with interests thereon at the legal rate from February 22, 1962,
plus the sum of P150.00 as attorneys fees. From this judgment, the defendants appealed to the Court of First Instance of Manila where, according to the appealed
decision, defendant has asked for summary judgment and plaintiff has agreed to the same. (Record on Appeal p. 21). Having found the motion for summary
judgment to be in order, the court then, proceeded to render judgment as follows:
Judgment is, therefore, rendered, ordering Defendant to pay plaintiff the sum of P1,180.00 with interest thereon at the legal rate from October 16, 1962 until fully
paid. This judgment represents Defendants debt of P1,500.00 less usurious interest of P120.00 and the additional sum of P200.00 as attorneys fees or a total
deduction of P320.00. Plaintiff shall pay the costs.
In the present appeal defendants claim that the trial court erred in sentencing them to pay the principal of the loan notwithstanding its finding that the same was
tainted with usury, and erred likewise in not dismissing the case.
It is not now disputed that the contract of loan in question was tainted with usury. The only questions to be resolved, therefore, are firstly, whether the creditor is
entitled to collect from the debtor the amount representing the principal obligation; secondly, in the affirmative, if he is entitled to collect interests thereon, and if so, at
what rate.
The Usury Law penalizes any person or corporation who, for any loan or renewal thereof or forbearance, shall collect or receive a higher rate or greater sum or value
than is allowed by law, and provides further that, in such case, the debtor may recover the whole interest, commissions, premiums, penalties and surcharges paid or
delivered, with costs and attorneys fees, in an aippropriate action against his creditor, within two (2) years after such payment or delivery (Section 6, Act 2655, as
amended by Acts 3291 and 3998).
Construing the above provision, We held in Go Chioco vs. Martinez, 45 Phil. 256 that even if the contract of loan is declared usurious the creditor is entitled to collect
the money actually loaned and the legal interest due thereon.
In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court likewise declared that, in any event, the debtor in a usurious contract of loan should pay the creditor the
amount which he justly owes him, citing in support of this ruling its previous decisions in Go Chioco Supra,
Aguilar vs. Rubiato, et al., 40 Phil. 570, and Delgado vs. Duque Valgona, 44 Phil. 739.
In all the above cited cases it was recognized and held that under Act 2655 a usurious contract is void; that the creditor had no right of action to recover the interest in
exicess of the lawful rate; but that this did not mean that the debtor may keep the principal received by him as loanthus unjustly enriching himself to the damage of
the creditor.
Then in Lopez and Javelona vs. El Hogar Filipino, 47 249, We also held that the standing jurisprudence of this Court on the question under consideration was clearly
to the effect that the Usury Law, by its letter and spirit, did not deprive the lender of his right to recover from the borrower the money actually loaned to and enjoyed
by the latter. This Court went further to say that the Usury Law did not provide for the forfeiture of the capital in favor of the debtor in usurious contracts, and that
while the forfeiture might appear to be convenient as a drastic measure to eradicate the evil of usury, the legal question involved should not be resolved on the basis
of convenience.
Other cases upholding the same principle are Palileo vs. Cosio, 97 Phil. 919 and Pascua vs. Perez, L-19554, January 31, 1964, 10 SCRA 199, 200-202. In the latter
We expressly held that when a contract is found to be tainted with usury the only right of the respondent (creditor) x x was merely to collect the aanount of the loan,
plus interest due thereon.
The view has been expressed, however, that the ruling thus consistently adhered to should now be abandoned because Article 1957 of the new Civil Codea
subsequent lawprovides that contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against usury, shall be void, and that

in such cases the borrower may recover in accordance with the laws on usury. From this the conclusion is drawn that the whole contract is void and that, therefore,
the creditor has no right to recovernot even his capital.
The meaning and scope of our ruling in the cases mentioned heretofore is clearly stated, and the view referred to in the preceding paragraph is adequately
answered, in Angel Jose, etc. vs. Chelda Enterprises, et al. (L-25704, April 24, 1968). On the question of whether a creditor in a usurious contract may or may not
recover the principal of the loan, and, in the affirmative, whether or not he may also recover interest thereon at the legal rate, We said the following:
x x x.
The court found that there remained due from defendants an unpaid principal amount of P20,287.50; that plaintiff charged usurious interests, of which P1,048.15 had
actually been deducted in advance by plaintiff from the loan; that said amount of P1,048.15 should therefore be deducted from the unpaid principal of P20,287.50,
leaving a balance of P19,247.35 still payable to the plaintiff. Said court held that notwithstanding the usurious interests charged, plaintiff is not barred from collecting
the principal of the loan or its balance of P19,247.36. Accordingly, it stated in the dispositive portion of the decision, thus:
WHEREFORE, judgment is hereby rendered, ordering the defendant partnership to pay to the plaintiff the amount of P19,247.35, with legal interest thereon from
May 29, 1964 until paid, plus an additional sum of P2,000.00 as damages for attorneys fee; and, in case the assets of defendant partnership be insufficient to satisfy
this judgment in full, ordering the defendant David Syjueco to pay to the plaintiff one-half (1/2) of the unsatisfied portion of this judgment.
With costs against the defendants.
Appealing directly to Us, defendants raise two questions of law: (1) In a loan with usurious interest, may the creditor recover the principal of the loan? (2) Should
attorneys fees be awarded in plaintiffs favor?
Great reliance is made by appellants on Art. 1411 of the New Civil Code which states:
ART. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act constituted a criminal offense, both parties being in pari
delicto, they shall have no action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative
to the disposal of effects or instruments of a crime shall be applicable to the things or the price of the contract.
This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given, and shall not be bound to comply with his
promise.
Since, according to the appellants, a usurious loan is void due to illegality of cause or object, the rule of pari delicto expressed in Article 1411, supra, applies, so that
neither party can bring action against each other. Said rule, however, appellants add, is modified as to the borrower, by express provision of the law (Art. 1413, New
Civil Code), allowing the borrower to recover interest paid in excess of the interest allowed by the Usury Law. As to the lender, no exception is made to the rule;
hence, he cannot recover on the contract. Sothey continuethe New Civil Code provisions must be upheld as against the Usury Law, under which a loan with
usurious interest is not totally void, because of Article 1961 of the New Civil Code, that: Usurious contracts shall be governed by the Usury Law and other special
laws, so far as they are not inconsistent with this Code. (Italics ours.)
We do not agree with such reasoning. Article 1411 of the New Civil Code is not new; it is the same as Article 1305 of the Old Civil Code. Therefore, said provision is
no warrant for departing from previous interpretation that, as provided in the Usury Law (Act No. 2655, as amended), a loan with usurious interest is not totally void
only as to the interest.
True, as stated in Article 1411 of the New Civil Code, the rule of pari delicto applies where a contracts nullity proceeds from illegality of the cause or object of said
contract.
However, appellants fail to consider that a contract of loan with usurious interest consists of principal and accessory stipulations; the principal one is to pay the debt;
the accessory stipulation is to pay interest thereon.
And said two stipulations are divisible in the sense that the former can still stand without the latter. Article 1273, Civil Code, attests to this: The renunciation of the
principal debt shall extinguish the accessory obligations; but the waiver of the latter shall leave the former in force.
The question therefore to resolve is whether the illegal terms as to payment of interest likewise renders a nullity the legal terms as to payments of the principal debt.
Article 1420 of the New Civil Code provides in this regard: In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be
enforced.
In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt, which is the cause of the contract (Article 1350, Civil Code), is
not illegal. The illegality lies only as to the prestation to pay the stipulated interest; hence, being separable, the latter only should be deemed void, since it is the only
one that is illegal.
Neither is there a conflict between the New Civil Code and the Usury Law. Under the latter, in Sec. 6, any person who for a loan shall have paid a higher rate or
greater sum or value than is allowed in said law, may recover the whole interest paid. The New Civil Code, in Article 1413 states: Interest paid in excess of the
interest allowed by the usury laws may be recovered by the debtor, with interest thereon from the date of payment. Article 1413, in speaking of interest paid in
excess of the interest allowed by the usury laws means the whole usurious interest; that is, in a loan of P1,000, with interest of 20% per annum or P200 for one year,
if the borrower pays said P200, the whole P200 is the usurious interest, not just that part thereof in excess of the interest allowed by law. It is in this case that the law
does not allow division. The whole stipulation as to interest is void, since payment of said interest is illegal. The only change effected, therefore, by Article 1413, New
Civil Code, is not to provide for the recovery of the interest paid in excess of that allowed by law, which the Usury Law already provided for, but to add that the same
can be recovered with interest thereon from the date of payment.
The foregoing interpretation is reached with the philosophy of usury legislation in mind; to discourage stipulations on usurious interest, said stipulations are treated as
wholly void, so that the loan becomes one without stipulation as to payment of interest. It should not, however, be interpreted to mean forfeiture even of the principal,
for this would unjustly enrich the borrower at the expense of the lender. Furthermore, penal sanctions are available against a usurious lender, as a further deterrence
to usury.
The principal debt remaining without stipulation for payment of interest can thus be recovered by judicial action. And in case of such demand, and the debtor incurs in
delay, the debt earns interest from the date of the demand (in this case from the filing of the complaint). Such interest is not due to stipulation, for there was none, the
same being void. Rather, it is due to the general provision of law that in obligations to pay money, where the debtor incurs in delay, he has to pay interest by way of
damages (Art. 2209, Civil Code). The court a quo therefore, did not err in ordering defendants to pay the principal debt with interest thereon at the legal rate, from the
date of filing of the complaint.In answer to the contention that the forfeiture of the principal of the usurious loan is necessary to punish the usurer, We say this: Under
the Usury Law there is already provision for adequate punishment for the usurer, namely, criminal prosecution where, if convicted, he may be sentenced to pay a fine
of not less than P50 nor more than P500, or imprisonment of not less than 30 days nor more than one year, or both, in the discretion of the court. He may further be
sentenced to return the entire sum received as interest, with subsidiary imprisonment in case of non-payment thereof. It is, of course, to be assumed that this last
penalty may be imposed only if the return of the entire sum received as interest had not yet been the subject of judgment in a civil action involving the usurious
contract of loan.
In arriving at the above conclusion. We also considered our decision in Mulet vs. The People of the Philippines (73 Phil. p. 60), but found that the same does not
apply to the present case. The facts therein involved were as follows:
On July 25, 1929, Alejandra Rubillos and Espectacin Rubillos secured from petitioner Miguel Mulet a loan of P550, payable within 5 years at 30 per cent interest
per annum. In the deed of mortgage executed by the Rubillos as a security; the sum of P1,375 was made to appear as the capital of the loan. This amount obviously

represented the actual loan of P550 and the total interest of P825 computed at 30 per cent per annum for 5 years. Within four years of following the execution of the
mortgage, the debtors made partial payments aggregating P278.27, on account of interest. Thereafter, the debtors paid the whole capital of P550, due to petitioners
promise to condone the unpaid interest upon payment of such capital. But to their surprise, petitioner informed them that they were still indebted in the sum of
P546.73 which represented the balance of the usurious interest. And in consideration of this amount, petitioner pressed upon the debtors to execute in October,
1933, in his favor, a deed of sale with pacto de retro of a parcel of land, in substitution of the original mortgage which was cancelled. From the date of the execution
of the new deed up to 1936, petitioner received, as his share of the products of the land, the total sum of P480. Prosecuted on November 18, 1936, for the violation
of the Usury Law, petitioner was convicted by the trial court, and on appeal, the judgment was affirmed by the Court of Appeals. The instant petition for certiorari is
directed at that portion of the decision of the appellate court ordering petitioner to return to the offended parties the sum of P373.27, representing interests received
by him in excess of that allowed by law.
It was Mulets claim that, as the amount of P373.27 had been paid more than two years prior to the filing of the complaint for usury against him, its return could no
longer be ordered in accordance with the prescriptive period provided therefor in Section 6 of the Usury Law. Said amount was made up of the usurious interest
amounting to P278.27 paid to Mulet, in cash, and the sum of P480.00 paid to him in kind, from the total of which two amounts 14% interest allowed by law
amounting to P385.00was deducted. Our decision was that Mulct should return the amount of P480.00 which represented the value of the produce of the land sold
to him under pacto de retro which, with the unpaid balance of the usurious interest, was the consideration of the transactionmeaning the pacto de retro sale. This
Court then said:
x x x. This last amount is not usurious interest on the capital of the loan but the value of the produce of the land sold to petitioner under pacto de retro, with the
unpaid balance of the usurious interest (P546.73) as the consideration of the transaction. This consideration, because contrary to law, is illicit, and the contract which
results therefrom, null and void. (Art. 1275, Civil Code). And, under the provisions of article 1305, in connection with article 1303, of the Civil Code, when the nullity of
a contract arises from the illegality of the consideration which in itself constitutes a felony, the guilty party shall be subject to criminal proceeding while the innocent
party may recover whatever he has given, including the fruits thereof. (italics supplied).
It is clear, therefore, that in the Mulet case, the principal of the obligation had been fully paid by the debtor to the creditor; that the latter was not sentenced to pay it
back to the former, and that what this Court declared recoverable by the debtor were only the usurious interest paid as well as the fruits of the property sold under
pacto de retro.
IN VIEW OF THE FOREGOING, the decision appealed from is modified in the sense that asppellee may recover from appellant the principal of the loan (P1,180.00)
only, with interest thereon at the legal rate of 6% per annum from the date of the filing of the complaint. With costs
FROILAN LOPEZ, plaintiff and appellant, vs. SALVADOR V. DEL ROSARIO and BENITA QUIOGUE DE V. DEL ROSARIO, defendants and appellants.
OBLIGATIONS; CONTRACTS FOR THE PAYMENT OF A SUM OF MONEY; MEASURE OF DAMAGES FOR DELAY; INTEREST.In contracts for the payment of a
sum of money, the measure of damages for delay is limited to the interest provided by law. The deprivation of an opportunity for making money, which might have
proved beneficial or might have been ruinous, is of too uncertain character to be weighed in the even balances of the lawINSURANCE; POLICY EFFECTED BY
BAILEE; LIABILITY OF WAREHOUSEMAN TO OWNER OF STORED GOODS.A policy effected by a bailee and covering by its terms his own property and
property held in trust, inures, in the event of a loss, equally and proportionately to the benefit of all the owners of the property insured. Even if one secured insurance
covering his own goods and goods stored with him, and even if the owner of the stored goods did not request or know of the insurance, and did not ratify it before the
payment of the loss, the warehouseman is liable to the owner of such stored goods for his share
STATEMENT OF THE FACTS
On and prior to June 6, 1920, Benita Quiogue de V. del Rosario, whom we will hereafter call Mrs. Del Rosario, was the owner of a bonded warehouse situated in the
City of Manila. She was engaged in the business of a warehouse keeper, and stored copra and other merchandise in the said building. Among the persons who had
copra deposited in the Del Rosario warehouse was Froilan Lopez, the holder of fourteen warehouse receipts in his own name, and the name of Elias T. Zamora.
(Exhibits C, D, and R.) The warehouse receipts, or negotiable warrants, or quedans (as they are variously termed) of Lopez named a declared value of P107,990.40
(Exhibits L-1 to L-13).
The warehouse receipts provided: (1) For insurance at the rate of 1 per cent per month on the declared value; (2) the company reserves to itself the right to raise and
/or lower the rates of storage and /or of insurance on giving one calendar month's notice in writing; (3) this warrant carries no insurance unless so noted on the face
hereof, cost of which is in addition to storage; (4) the time for which storage and /or insurance is charged is thirty (30) days; (5) payment for storage and /or
insurance, etc., shall be made in advance, and /or within five (5) days after presentation of bill. It is admitted that insurance was paid by Lopez to May 18, 1920, but
not thereafter.
Mrs. Del Rosario secured insurance on the warehouse and its contents with the National Insurance Co., Inc., the Commercial Union Insurance Company, the Alliance
Insurance Company, the South British Insurance Co., Ltd., and the British Traders Insurance Co., Ltd., in the amount of P404,800. All the policies were in the name of
Sra. Benita Quiogue de V. del Rosario, with the exception of one of the National Insurance Company, Inc., for P40,000, In favor of the Compaa Coprera de
Tayabas. (Exhibits N, O, P, R-1 to R-4.)
The warehouse of Mrs. Del Rosario and its contents were destroyed by fire on June 6, 1920. The warehouse was a total loss, while of the copra stored therein, only
an amount equal to P49,985 was salvaged.
Following an unsuccessful attempt by Henry Hunter Bayne, Fire Loss Adjuster, to effect a settlement between the insurance companies and Mrs. Del Rosario, the
latter, on August 24, 1920, authorized Attorney F. C. Fisher to negotiate with the various insurance companies. (Exhibit A.) As a result, an agreement between Mrs.
Del Rosario and the insurance companies to submit the matter to arbitration was executed in September, 1920. (Exhibit B.) Mrs. Del Rosario laid claim before the
arbitrators, Messrs. Muir and Campbell, to P419,683.95, and the proceeds of the salvage sale. The arbitrators in their report allowed Mrs. Del Rosario P363,610,
which, with the addition of the money received from the salvaged copra amounting to P49,985, and interest, made a total of P414,258, collected by her from the
companies. (Exhibits E, F, G, H, and Q.)
Mrs. Del Rosario seems to have satisfied all of the persons who had copra stored in her warehouse, including the stockholders in the Compaa Coprera de Tayabas
(whose stock she took over), with the exception of Froilan Lopez, the plaintiff. Ineffectual attempts by Mrs. Del Rosario to effect a compromise with Lopez first for
P71,994, later raised to P72,724, and finally reduced to P17,000, were made. (Exhibits Y, 1, 3, 4, 6, 7, 8, 12.) But Lopez stubbornly contended, or, at least, his
attorney contended for him, that he should receive not a centavo less than P88,595.43. (Exhibits 4, 5.)
PLAINTIFF'S APPEAL
Plaintiff, by means of his first assignment of error, lays claim to P88,595.43 in lieu of P88,495.21 allowed by the trial court. The slight difference of P100.22 is asked
for so that plaintiff can participate in the interest money which accrued on the amount received for the salvaged copra. (Exhibits EE and FF.) Defendant makes no
specific denial of this claim. We think the additional sum should accrue to the plaintiff.

Plaintiff's second and third assignments of error present the point that the defendant has fraudulentlyand even criminallyrefrained from paying the plaintiff, and
that the plaintiff should recover interest at the rate of 12 per cent per annum. We fail to grasp plaintiff's point of view. The defendant has not sought to elude her moral
and legal obligations. The controversy is merely one which unfortunately all too often arises between litigious persons. Plaintiff has exactly the rights of any litigant,
equally situated, and no more.
It has been the constant practice of the court to make article 1108 of the Civil Code the basis for the calculation of interest. Damages in the form of interest at the rate
of 12 per cent, as claimed by the plaintiff, are too remote and speculative to be allowed. The deprivation of an opportunity for making money which might have proved
beneficial or might have been ruinous is of too uncertain character to be weighed in the even balances of the law. (Civil Code, art. 1108; Gonzales Quiros vs. Palanca
TanGuinlay [1906], 5 Phil., 675; Tin Fian vs. Tan [1909], 14 Phil., 126; Sun Life Insurance Co. of Canada vs. Rueda
DEFENDANT'S APPEAL
Counsel for defendant have adroitly and ingeniously attempted to avoid all liability. However, we remain unimpressed by many of these arguments.Much time has
been spent by counsel for both parties in discussing the question, of whether the defendant acted as the agent of the plaintiff, in taking out insurance on the contents
of the bodega, or whether the defendant acted as a reinsurer of the copra. Giving a natural expression to the terms of the warehouse receipts, the first hypothesis is
the correct one. The agency can be deduced from the warehouse receipts, the insurance policies, and the circumstances surrounding the transaction.
After all, however, this is not so vitally important, for it might well bealthough we do not have to decidethat under any aspect of the case, the defendant would be
liable. The law is that a policy effected by a bailee and covering by its terms his own property and property held in trust, inures, in the event of a loss, equally and
proportionately to the benefit of all the owners of the property insured. Even if one secured insurance covering his own goods and goods stored with him, and even if
the owner of the stored goods did not request or know of the insurance, and did not ratify it before the payment of the loss, yet it has been held by a reputable court
that the warehouseman is liable to the owner of such stored goods for his share. (Snow vs. Carr [1878], 61 Ala., 363; 32 Am. Rep., 3; Broussard vs. South Texas
Rice Co. [1910], 103 Tex., 535; Ann, Cas., 1913-A, 142, and note; Home Insurance Co. of New York vs. Baltimore Warehouse Co. [1876], 93 U. S'., 527.)
Moreover, it has not escaped our notice that in two documents, one the agreement for arbitration, and the other the statement of claim of Mrs. Del Rosario, against
the insurance companies, she acknowledged her responsibility to the owners of the stored merchandise, against risk of loss by fire. (Exhibits B and C-3.) The award
of the arbitrators covered not alone Mrs. Del Rosario's warehouse but the products stored in the warehouse by Lopez and others.
Plaintiff's rights to the insurance money have not been forfeited by failure to pay the insurance provided for in the warehouse receipts. A preponderance of the proof
does not demonstrate that the plaintiff ever ordered the cancellation of his insurance with the defendant. Nor is it shown that the plaintiff ever refused to pay the
insurance when the bills were presented to him, and that notice of an intention to cancel the insurance was ever given the plaintiff.
The record of the proceedings before the board of arbitrators, and its report and findings, were properly taken into consideration by the trial court as a basis for the
determination of the amount due from the defendant to the plaintiff. In a case of contributing policies, adjustments of loss made by an expert or by a board of
arbitrators may be submitted to the court not as evidence of the f acts stated therein, or as obligatory, but for the purpose of assisting the court in calculating the
amount of liability. (Home Insurance Co. vs. Baltimore Warehouse Co., supra.)
Counsel for the defendant have dwelt at length on the phraseology of the policies of the National Insurance Company, Inc. Special emphasis has been laid upon one
policy (Exhibit 9) in the name of the Compaa Coprera de Tayabas. In this connection it may be said that three members of the court, including the writer riter of this
opinion, have been favorably impressed by this argument, and would have preferred at least to eliminate the policy for which premiums were paid, not by Mrs. Del
Rosario on behalf of Lopez and others, but by the Compaa Coprera de Tayabas. A majority of the court, however, believe that all the assets should be marshalled
and that the plaintiff should receive the benefit accruing from the gross amount realized from all the policies. Consequently, no deduction for this claim can be made.
The remaining contention of the defendant that the plaintiff cannot claim the benefits of the agency without sharing in the expenses, is well taken. Although the
plaintiff did not expressly authorize the agreement to submit the matter to arbitration, yet on his own theory of the case, Mrs. Del Rosario was acting as his agent in
securing insurance, while he benefits from the amicable adjustment of the insurance claims. As no intimation is made that the expenses were exorbitant, we
necessarily accept the statement of the same appearing in Exhibits Q and 8.
Of the insurance money, totalling P414,258, P382,558 was for copra and the remainder for buildings, corn, etc. The expenses for collecting the P414,258 totalled
P33,600.
of P33,600 equals P31,028.85, the proportionate part of the expenses with reference to the copra. Of the expenses amounting, as we have

said, to P31,028.85, plaintiff would be liable for his proportionate share or

of P31,028.85 or P7,185.875.

The parties finally agree that the plaintiff at the time of the fire was indebted to the defendant for storage and insurance in the sum of P315.90.
JUDGMENT
In rsum, the result is to sustain plaintiff's first assignment of error and to overrule his second and third assignments of error, to overrule def endant's assignments of
error 1 2, 3, and 4 in toto and to accede to defendant's assignments of error 5, 6, and 7 in part. If our mathematics are correct, and the amounts can be figured in
several different ways, plaintiff is entitled to P88,595.43 minus P7,185.88, his share of the expenses, minus P315.90, due for insurance and storage, or approximately
a net amount of P81,093.65, with legal interest. This sum the defendant must disgorge.Wherefore, judgment is modified and the plaintiff shall have and recover from
the defendants the sum of P81,093.65, with interest at 6 per cent per annum from May 13, 1921, until paid. Without special finding as to costs in either instance, it is
so ordered.
JACOBO ZOBEL ET AL., plaintiffs and appellants, vs. THE CITY OF MANILA
INTEREST; STIPULATION THAT CONTRACT SHALL NOT BEAR INTEREST; How INTERPRETED.A stipulation in a contract for the payment of money at a
certain fixed date to the effect that the contract shall not bear interest must be understood as applicable only to the period which is to elapse prior to maturity. It does
not have the effect of depriving the obligee of the right to recover interest as damages in case of default in the payment of the obligation at the due date.
ID.; STIPULATION AS TO RATE OF INTEREST; ACCUMULATION OF INTEREST DUE AT DATE OF INSTITUTION OF ACTION.Where a stipulation governing
the rate of interest is inserted in a contract for the payment of money, this rate, if lawful, remains in force until the obligation is satisfied; and under article 1109 of the
Civil Code the interest that accrues prior to the date of the filing of the complaint should be capitalized and consolidated as of that date with the capital, after which
the whole bears interest at the contract rate until the amount due is paid. The contract obligation is not merged in the judgment but remains in full force until the debt
is paid.
ID.; ID.; ARTICLE 1109 OF THE CIVIL CODE.Article 1109 of the Civil Code, providing for interest upon interest, is applicable only to obligations containing a
stipulation for interest.

PACITA F. REFORMINA and HEIRS OF FRANCISCO REFORMINA, petitioners, vs. THE HONORABLE VALERIANO P. TOMOL, JR., as Judge of the Court of First
Instance, Branch XI, CEBU CITY, SHELL REFINING COMPANY (PHILS.), INC., and MICHAEL, INCORPORATED, respondents.
Damages; Judgment; Interest; Loans; Banks; Circular No. 416 of the Central Bank which took effect on July 29, 1974 pursuant to P.D. 116, which amended, Act 2655
(Usury Law), which raised the legal rate of interest from 6% to 12% per annum applies only to forbearances of money, goods or credit and court judgments thereon,
but not to court judgments for damages arising from injury to persons and loss of property which does not involve a loan in which cases the rate remains at 6%.The
judgments spoken of and referred to are judgments in litigations involving loans or forbearance of any money, goods or credits. Any other kind of monetary judgment
which has nothing to do with, nor involving loans or forbearance of any money, goods or credits does not fall within the coverage of the said law for it is not within the
ambit of the authority granted to the Central Bank. The Monetary Board may not tread on forbidden grounds. It cannot rewrite other laws. That function is vested
solely with the legislative authority. It is axiomatic in legal hermeneutics that statutes should be construed as a whole and not as a series 01 disconnected articles and
phrases. In the absence of a clear contrary intention, words and phrases in statutes should not be interpreted in isolation from one another. A word or phrase in a
statute is always used in association with other words or phrases and its meaning may thus be modified or restricted by the latter,
Same; Same; Same; Same; Same; Same.Coming to the case at bar, the decision herein sought to be executed is one rendered in an Action for Damages for injury
to persons and loss of property and does not involve any loan, much less forbearances of any money, goods or credits. As correctly argued by the private
respondents, the law applicable to the said case is Article 2209 of the New Civil Code.
Same; Same; Same; Same; Same; Same.The above provision remains untouched despite the grant of authority to the Central Bank by Act No. 2655, as amended.
To make Central Bank Circular No. 416 applicable to any case other than those specifically provided for by the Usury Law will make the same of doubtful
constitutionality since the Monetary Board will be exercising legislative functions which was beyond the intendment of P.D. No. 116.
LIAM LAW, plaintiff-appellee, vs. OLYMPIC SAWMILL CO. and ELINO LEE CHI, defendants-appellants.
Civil Law; Obligations; Damages; Liquidated damages, nature of; Presumption that the amount of P6,000 obligation, added to the P10,000 principal obligation after
extension of payment of original obligation, exists and is lawful unless the debtor proves the contrary; P6,000 obligation considered as liquidated damages.Under
Article 1354 of the Civil Code, in regards to the agreement of the parties relative to the P6,000.00 obligation, it is presumed that it exists and is lawful, unless the
debtor proves the contrary. No evidentiary hearing having been held, it has to be concluded that defendants had not proven that the P6,000.00 obligation was
illegal. Confirming the Trial Courts finding, we view the P6,000.00 obligation as liquidated damages suffered by plaintiff, as of March 17, 1960, representing loss of
interest income, attorneys fees and incidentals.
Same; Same; Mercantile Law; Usury Law; Provision that claim of usury deemed admitted if it was not denied specifically and under oath, not applicable to a case
where it is the defendant, not the plaintiff, who is alleging usury; Case at bar.The foregoing provision envisages a complaint filed against an entity which has
committed usury, for the recovery of the usurious interest paid. In that case, if the entity sued shall not file its answer under oath denying the allegation of usury, the
defendant shall be deemed to have admitted the usury. The provision does not apply to a case, as in the present, where it is the defendant, not the plaintiff, who is
alleging usury.
Same; Same; Same; Same; Retroactivity; Usury now legally nonexistent under CB Circular No. 905; Interest chargeable now depends upon agreement of lender and
borrower, Rules of Court as to allegations of usury being procedural in nature, considered repealed with retroactive effect.Moreover, for sometime now, usury has
been legally non-existent. Interest can now be charged as lender and borrower may agree upon. The Rules of Court in regards to allegations of usury, procedural in
nature, should be considered repealed with retroactive effect.
This is an appeal by defendants from a Decision rendered by the then Court of First Instance of Bulacan. The appeal was originally taken to the then Court of
Appeals, which endorsed it to this instance stating that the issue involved was one of law.
It appears that on or about September 7, 1957, plaintiff loaned P10,000.00, without interest, to defendant partnership and defendant Elino Lee Chi, as the managing
partner. The loan became ultimately due on January 31, 1960, but was not paid on that date, with the debtors asking for an extension of three months, or up to April
30, 1960.
On March 17, 1960, the parties executed another loan document. Payment of the P10,000.00 was extended to April 30, 1960, but the obligation was increased by
P6,000.00 as follows:
That the sum of SIX THOUSAND PESOS (P6,000.00), Philippine currency shall form part of the principal obligation to answer for attorneys fees, legal interest, and
other cost incident thereto to be paid unto the creditor and his successors in interest upon the termination of this agreement.
Defendants again failed to pay their obligation by April 30, 1960 and, on September 23, 1960, plaintiff instituted this collection case. Defendants admitted the
P10,000.00 principal obligation, but claimed that the additional P6,000.00 constituted usurious interest.
Upon application of plaintiff, the Trial Court issued, on the same date of September 23, 1960, a writ of Attachment on real and personal properties of defendants
located at Karanglan, Nueva Ecija. After the Writ of Attachment was implemented, proceedings before the Trial Court versed principally in regards to the attachment.
On January 18, 1961, an Order was issued by the Trial Court stating that after considering the manifestation of both counsel in Chambers, the Court hereby allows
both parties to simultaneously submit a Motion for Summary Judgment.1 p. 81, Record on Appeal. The plaintiff filed his Motion for Summary Judgment on January
31, 1961, while defendants filed theirs on February 2, 1961.2 p. 116, ibid.
On June 26, 1961, the Trial Court rendered decision ordering defendants to pay plaintiff the amount of P10,000.00 plus the further sum of P6,000.00 by way of
liquidated damages . . . with legal rate of interest on both amounts from April 30, 1960. It is from this judgment that defendants have appealed.
We have decided to affirm.
Under Article 1354 of the Civil Code, in regards to the agreement of the parties relative to the P6,000.00 obligation, it is presumed that it exists and is lawful, unless
the debtor proves the contrary. No evidentiary hearing having been held, it has to be concluded that defendants had not proven that the P6,000.00 obligation was
illegal. Confirming the Trial Courts finding, we view the P6,000.00 obligation as liquidated damages suffered by plaintiff, as of March 17, 1960, representing loss of
interest income, attorneys fees and incidentals.
The main thrust of defendants appeal is the allegation in their Answer that the P6,000.00 constituted usurious interest. They insist the claim of usury should have
been deemed admitted by plaintiff as it was not denied specifically and under oath.3 Section 1, Rule 9.
Section 9 of the Usury Law (Act 2655) provided:

SEC. 9. The person or corporation sued shall file its answer in writing under oath to any complaint brought or filed against said person or corporation before a
competent court to recover the money or other personal or real property, seeds or agricultural products,
charged or received in violation of the provisions of this Act. The lack of taking an oath to an answer to a complaint will mean the admission of the facts contained in
the latter.
The foregoing provision envisages a complaint filed against an entity which has committed usury, for the recovery of the usurious interest paid. In that case, if the
entity sued shall not file its answer under oath denying the allegation of usury, the defendant shall be deemed to have admitted the usury. The provision does not
apply to a case, as in the present, where it is the defendant, not the plaintiff, who is alleging usury.
Moreover, for sometime now, usury has been legally nonexistent. Interest can now be charged as lender and borrower may agree upon. 4 SECTION 1. The rate of
interest, including commissions, premiums, fees and other charges, on a loan or forbearance of any money, goods, or credits, regardless of maturity and whether
secured or unsecured, that may be charged or collected by any pers... The Rules of Court in regards to allegations of usury, procedural in nature, should be
considered repealed with retroactive effect.
Statutes regulating the procedure of the courts will be construed as applicable to actions pending and undetermined at the time of their passage. Procedural laws
are retrospective in that sense and to that extent.5 People vs. Sumilang, 77 Phil. 764 (1946).
x x x. Section 24(d), Republic Act No. 876, known as the Arbitration Law, which took effect on 19 December 1953, and may be retroactively applied to the case at
bar because it is procedural in nature x x x.6 De Lopez, et al. vs. Vda. de Fajardo, et al., 101 Phil., pp. 1104, 1109 (1957).
WHEREFORE, the appealed judgment is hereby affirmed, without pronouncement as to costs.SO ORDERED.
BANCO FILIPINO SAVINGS and MORTGAGE BANK, petitioner, vs. HON. MIGUEL NAVARRO, Presiding Judge, Court of First Instance of Manila, Branch XXXI and
FLORANTE DEL VALLE, respondents.
Contracts; Banking Laws; A contract which embodies an Escalation Clause authorizing automatic increase in interest rates in the event a law increasing the lawful
rates of interest that may be charged, does not include a Central Bank Circular, which, altho', having the face and effect of law, is not strictly a statute or a law.The
Escalation Clause reads as follows: "I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance
notice to me/us in the event a law increasing the lawful rates of interest that may be charged on this particular kind of loan." (Paragraphing and italics supplied) It is
clear from the stipulation between the parties that the interest rate may be increased "in the event a law should be enacted increasing the lawful rate of interest that
may be charged on this particular kind of loan." The Escalation Clause was dependent on an increase of rate made by "law" alone. CIRCULAR No. 494, although it
has the effect of law, is not a law. "Although a circular duly issued is not strictly a statute or a law, it has, however, the force and effect of law." (Italics supplied). "An
administrative regulation adopted pursuant to law has the force and effect of law." "That administrative rules and regulations have the force of law can no longer be
questioned." The distinction between a law and an administrative regulation is recognized in the Monetary Board guidelines quoted in the letter to the BORROWER
of Ms. Paderes of September 24, 1976 (supra). According to the guidelines, for a loan's interest to be subject to the increases provided in CIRCULAR No. 494, there
must be an Escalation Clause allowing the increase "in the event that any law or Central Bank regulation is promulgated increasing the maximum interest rate for
loans." The guidelines thus presuppose that a Central Bank regulation is not within the term "any law." The distinction is again recognized by P.D. No. 1684,
promulgated on March 17, 1980, adding section 7-a to the Usury Law, providing that parties to an agreement pertaining to a loan could stipulate that the rate of
interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased "by law or by the Monetary Board." To quote: "Sec. 7-a.
Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the
event that the applicable maximum rate of interest is increased by law or by the Monetary Board: Provided, That such stipulation shall be valid only if there is also a
stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by
the Monetary Board; Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in
the maximum rate of interest."
Same; Escalation Clause to be valid must include de-escalation clause.There can be an increase in interest if increased by law or by the Monetary Board; and in
order for such stipulation to be valid, it must include a provision for reduction of the stipulated interest "in the event that the applicable maximum rate of interest is
reduced by law or by the Monetary Board."
PHILIPPINE NATIONAL BANK, petitioner, vs. The HON. INTERMEDIATE APPELLATE COURT and SPOUSES FERMIN MAGLASANG and ANTONIA SEDIGO,
respondents.
Commercial Law; Contracts; Escalation Clause; An Escalation Clause is a valid provision in the loan agreement. Its enforceability, however, is subject to certain
conditions.In Insular Bank of Asia and America v. Spouses Salazar, (159 SCRA 133 [1988]), the Court ruled that the Escalation Clause is a valid provision in the
loan agreement provided that(1) the increased rate imposed or charged does not exceed the ceiling fixed by law or the Monetary Board; (2) the increase is made
effective not earlier than the effectivity of the law or regulation authorizing such an increase; and (3) the remaining maturities of the loans are more than 730 days as
of the effectivity of the law or regulation authorizing such an increase.
Same; Same; An Escalation Clause to be valid must include a deescalation clause.Likewise in Banco Filipino Savings and Mortgage Bank v. Navarro, (152 SCRA
346 [1987]), the Court said that for an Escalation Clause to be valid, it must include a de-escalation clause. There can be an increase in interest if increased by law or
by the Monetary Board; and in order for such stipulation to be valid, it must include a provision for reduction of the stipulated interest in the event that the applicable
maximum rate of interest is reduced by law or by the Monetary Board, as provided for in P.D. No. 1684, promulgated on March 17, 1980.
Same; Same; Banking Laws; The remaining maturity days of the loan as of the effectivity of the law i.e., Central Bank Circular No. 705 being less than 730 days, the
increased rate imposed is not valid.Central Bank Circular No. 705, authorizing the increase from 12% to 21% was issued on December 1, 1979. The promissory
notes executed by the private respondents show that they are all payable on demand but the records do not show when payment was demanded. Even granting that

it was demanded on the effectivity of the law, it is obvious that the period of 730 days has not yet elapsed at the date the mortgaged properties were sold at public
auction on November 27, 1981 (Certificate of Sheriffs Sale, Records of Exhibits, p. 84). Accordingly, as of December 1, 1979, the remaining maturity days of the
loans were less than 730 days. Hence, the increased rate imposed or charged is not valid.
Remedial Law; Evidence; Findings of facts of C.A. are conclusive on the parties and the S.C. decides appeals which only involve questions of law.Absent the
recognized exceptions, findings of facts of the Court of Appeals are conclusive on the parties and Supreme Court on the tenet that this Court decides appeals which
only involve questions of law and that it is not the function of the Supreme Court to analyze and to weigh such evidence all over again, its jurisdiction being limited to
reviewing errors of law that might have been committed by the lower court (Philippine National Bank v. Court of Appeals, 159 SCRA 433 [1988]).
PETITION for certiorari to review the decision of the then Intermediate Appellate Court. Coquia, J.
The factual background of this case is as follows:
The petitioner, a government banking institution, extended financial assistance to the private respondents in the form of loans, the total amount of which is
P82,682.39 as embodied in the promissory notes that the latter have executed on various dates from February 5, 1976 to May 18, 1979, the payment of which to
come from the proceeds of sugar sales of the private respondents. The promissory notes bore 12% interest per annum plus 1% interest as penalty charge in case of
default in the payments.
On January 16, 1969, the private respondents mortgaged several real estate properties in favor of the petitioner as security of their loans, which mortgage was
amended on December 17, 1969, December 22, 1970 and February 12, 1975, as to the consideration thereof.
When the price of sugar went down in 1977, the private respondents incurred deficits in the payment of their loans.
On December 1, 1979, the Monetary Board of the Central Bank, by virtue of Presidential Decree No. 116, issued CB Circular No. 705 increasing the ceiling on the
rate of interest on both secured and unsecured loans up to no more than 21% per annum. In view of this development, the PNB Board of Directors revised its lending
interest rates on the medium and long-term loans effective June 1, 1980, per PNB board resolution dated May 26, 1980.
When the private respondents defaulted in the payments of their loans, the petitioner demanded not only the settlement of their outstanding obligation but also the
payment of the new interest rate of 21% per annum beginning June 1, 1980 per the PNB board resolution.
For failure of the private respondents to settle their obligation, then in the amount of P84,743.34, the petitioner foreclosed the mortgage. Since the proceeds of the
auction sale, P63,000.00 was not enough to satisfy private respondents outstanding obligation, the petitioner filed an action for deficiency judgment the decision with
the concurrence of Justices Floreliana Castro-Bartolome and Bienvenido Ejercito with the Court of First Instance of Leyte against the private respondents.
After due trial, the trial court*** Judge Francisco C. Pedrosa rendered the decision. rendered its judgment on February 20, 1985, in favor of the petitioner and
against the private respondents, the dispositive portion of which reads as follows:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of the plaintiff and against the defendants:
1. 1. Ordering the defendants to pay the plaintiff the amount of P21,743.34; said amount shall earn interest at 21% per annum and 3% penalty charge
starting November 27, 1981, until the whole obligation is fully paid;
2. 2. Ordering the defendants to pay the plaintiff attorneys fees in the amount equivalent to 10% of the total amount due as of November 28, 1981;
3. 3. Ordering the defendants to pay the plaintiff the amount of P700.00 as litigation expenses; and ordering the defendants also to pay the costs of this
action.
SO ORDERED. (Records, p. 235).
The private respondents appealed to the Intermediate Appellate Court, docketed as AC-G.R. CV No. 07678.
On June 30, 1986, the appellate court affirmed the decision of the trial court with modification as follows:
WHEREFORE, in view of the foregoing consideration, the appealed decision is hereby AFFIRMED with modification as follows:
1. 1. Ordering the defendants to pay the plaintiff the amount of P12,551.16 which shall earn interest at 12% per annum and 1% penalty charge starting
November 27, 1981 until fully paid; and
2. 2. No other pronouncement as to attorneys fees and costs of suit.
SO ORDERED. (Rollo, p. 28)
Hence, this petition.
In the resolution of September 14, 1987, the Court gave due course to the petition and required the parties to submit simultaneously their respective memoranda
within thirty (30) days from notice (Rollo, p. 80).
The main issue in this case is whether or not the revised rate of interest imposed on the loans of the private respondents is legal.
The petitioner contends that in all the promissory notes executed by the private respondents, it is stipulated that the loans are to be paid together with the interest
thereon at the rate of 12% per annum until paid, which interest rate the Bank may, at any time without notice, raise within the limits allowed by law, and also 1% per
annum penalty charges by way of liquidated damages should the note be unpaid or is not renewed on due date. Likewise stipulated in the covering Real Estate
Mortgage Contracts and the Amendment to Real Estate Mortgage of February 12, 1979 that this account is also subject to the upward revision of interest rate as
may be imposed by the mortgagee PNB. By these explicit contractual clauses, the private respondents fully agreed to an upward revision of interest rates on their
accounts depending on the rule, regulation, or policy that the petitioner may adopt. At the time when said promissory notes and Amendment of Real Estate Mortgage
were executed by private respondent Fermin Maglasang, Presidential Decree No. 116 (amending further certain sections of Act No. 2655, as amended, otherwise
known as the Usury Law) had long been promulgated on January 29, 1973, and was already in full force and effect in the Philippines.

Pursuant to Presidential Decree No. 116, the Monetary Board issued Central Bank Circular No. 705 on December 1, 1979, prescribing the maximum rate of interest
on loan transactions with maturities of more than seven hundred thirty (730) days and shall not exceed twenty-one percent (21%) per annum. Hence, the upward
revision of interest rate as stipulated in the Promissory Notes and Amendment of Real Estate Mortgage dated February 12, 1975, is in accordance with Presidential
Decree No. 116 promulgated on January 29, 1973 and Central Bank Circular No. 705 issued on December 1, 1979, and the imposition of 21% rate of interest on the
loan obligations of private respondents is within the limits prescribed by law.
On the other hand, the private respondents maintain that the collection of service charge and liquidated damages in excess of the maximum 12% interest originally
agreed, are illegal and void for being contrary to or prohibited under Section 2 of Act No. 2655, as amended by Act No. 4070.
The private respondents also insist that the Court of Appeals committed mathematical error in computing the 12% interest due their deficiencies. According to them,
their total deficiency is P45,427.02 and the total 12% interest of the said amount is P15,731.08, hence, their total liability is in the amount of P61,158.10. Since the
proceeds of the sale of their mortgaged properties are P63,000.00, there is still a residue in the amount of P1,841.90 from the proceeds of the sale which is
recoverable or collectible by them.
The petition is without merit.
In Insular Bank of Asia and America v. Spouses Salazar, (159 SCRA 133 [1988]), the Court ruled that the Escalation Clause is a valid provision in the loan agreement
provided that(1) the increased rate imposed or charged does not exceed the ceiling fixed by law or the Monetary Board; (2) the increase is made effective not
earlier than the effectivity of the law or regulation authorizing such an increase; and (3) the remaining maturities of the loans are more than 730 days as of the
effectivity of the law or regulation authorizing such an increase.
Likewise in Banco Filipino Savings and Mortgage Bank v. Navarro, (152 SCRA 346 [1987]), the Court said that for an Escalation Clause to be valid, it must include a
de-escalation clause. There can be an increase in interest if increased by law or by the Monetary Board; and in order for such stipulation to be valid, it must include a
provision for reduction of the stipulated interest in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board, as provided
for in P.D. No. 1684, promulgated on March 17, 1980. There is no question that PNB board resolution dated May 26, 1980 contains such de-escalation clause, under
paragraph 8 thereof, to wit:
(8) To enable us to adjust interest rates in accordance with CB Circular Letter of March 19, 1980, the covering promissory note for all short/medium/long-term loans
shall include the following conditions:
The Bank reserves the right to increase the interest rate within the limits allowed by law or by the Monetary Board,provided, that the interest rate agreed upon shall
be reduced in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board: Provided, further, that the adjustment in the interest
rate shall take effect on or after the effectivity of the increase or increase in the maximum rate of interest. (Exhibits, p. 77)
Central Bank Circular No. 705, authorizing the increase from 12% to 21% was issued on December 1, 1979. The promissory notes executed by the private
respondents show that they are all payable on demand but the records do not show when payment was demanded. Even granting that it was demanded on the
effectivity of law, it is obvious that the period of 730 days has not yet elapsed at the date the mortgaged properties were sold at the public auction on November 27,
1981 (Certificate of Sheriffs Sale, Records of Exhibits, p. 84). Accordingly, as of December 1, 1979, the remaining maturity days of the loans were less than 730
days. Hence, the increased rate imposed or charged is not valid.
The claim of private respondents that the respondent appellate court committed mathematical error in computing the 12% interest due their deficiencies is a factual
issue.
Absent the recognized exceptions, finding of facts of the Court of Appeals are conclusive on the parties and Supreme Court on the tenet that this Court decides
appeals which only involve questions of law and that it is not the function of the Supreme Court to analyze and to weigh such evidence all over again, its jurisdiction
being limited to reviewing errors of law that might have been committed by the lower court (Philippine National Bank v. Court of Appeals, 159 SCRA 433 [1988]).
PREMISES CONSIDERED, the petition is hereby DENIED for lack of merit, and the assailed decision of the Court of Appeals is hereby AFFIRMED.
SO ORDERED.
PHILIPPINE NATIONAL BANK, petitioner, vs. THE HON. COURT OF APPEALS and AMBROSIO PADILLA, respondents.
Commercial Law; CB Circular No. 905; PD 116; Although CB Circular No. 905 Series of 1982 removed the Usury Law ceiling on interest rates, it did not authorize the
PNB or any bank to increase the agreed interest rates from 18% to 48% within 4 months, in violation of PD 116 which limits such charges to once every twelve
months.In the present case, the PNB relied on its own Board Resolution No. 681 (Exh. 10), PNB Circular No. 40-79-84 (Exh. 13), and PNB Circular No. 40-129-84
(Exh. 15), but those resolution and circulars are neither laws nor resolutions of the Monetary Board. CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury
Law ceiling on interest ratesx x x increases in interest rates are not subject to any ceiling prescribed by the Usury Law. but it did not authorize the PNB, or any
bank for that matter, to unilaterally and successively increase the agreed interest rates from 18% to 48% within a span of four (4) months, in violation of P.D. 116
which limits such changes to once every twelve months.
Same; Civil Law; Mutuality of Contracts; A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties is void.Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest rate on the private respondents loan, violated the
mutuality of contracts ordained in Article 1308 of the Civil Code: ART. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left
to the will of one of them. In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties
based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan agreement between the PNB and the
private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have
been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of
adhesion, where the parties do not bargain on equal footing, the weaker partys (the debtor) participation being reduced to the alternative to take it or leave it (Qua
vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and
imposition.
Same; Same; Increase of interest rate; The increases imposed by PNB contravene Art. 1956 of the Civil Code.PNBs successive increases of the interest rate on
the private respondents loan, over the latters protest, were arbitrary as they violated an express provision of the Credit Agreement (Exh. 1) Section 9.01 that its
terms may be amended only by an instrument in writing signed by the party to be bound as burdened by such amendment. The increases imposed by PNB also
contravene Art. 1956 of the Civil Code which provides that no interest shall be due unless it has been expressly stipulated in writing.

SPOUSES MARIANO and GILDA FLORENDO, petitioners, vs. COURT OF APPEALS and LAND BANK OF THE PHILIPPINES, respondents.

Contracts; Loans; Interest; Escalation clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term
contracts.In Banco Filipino Savings v. Mortgage Bank vs. Navarro, this Court in essence ruled that in general there is nothing inherently wrong with escalation
clauses. In IBAA vs. Spouses Salazar, the Court reiterated the rule that escalation clauses are valid stipulations in commercial contracts to maintain fiscal stability
and to retain the value of money in long term contracts.
Same; Same; Same; Usury; By virtue of CB Circular 905, the Usury Law has been rendered ineffective.We have already mentioned (and now reiterate our holding
in several cases) that by virtue of CB Circular 905, the Usury Law has been rendered ineffective. Thus, petitioners' contention that the escalation clause is violative of
the said law is bereft of any merit.
Same; Same; Same; The unilateral determination and imposition of increased interest rates by the herein respondent bank is obviously violative of the principle of
mutuality of contracts.On the other hand, it will not be amiss to point out that the unilateral determination and imposition of increased interest rates by the herein
respondent bank is obviously violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil Code.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
May a bank unilaterally raise the interest rate on a housing loan granted an employee, by reason of the voluntary resignation of the borrower?
Such is the query raised in the petition for review on certiorari now before us, which assails the Decision promulgated on June 19, 1991 by respondent Court of
Appeals1 Seventh Division, composed of J. Serafin E. Camilon, ponente, and JJ. Celso L. Magsino and Artemon D. Luna, concurring. in CA-G.R. CV No. 24956,
upholding the validity and enforceability of the escalation by private respondent Land Bank of the Philippines of the applicable interest rate on the housing loan taken
out by petitioner-spouses.
The Antecedent Facts
Petitioners filed an action for Injunction with Damages docketed as Civil Case No. 86-38146 before the Regional Trial Court of Manila, Branch XXII against
respondent bank. Both parties, after entering into a joint stipulation of facts, submitted the case for decision on the basis of said stipulation and
memoranda. The stipulation reads in part:2 Rollo, p. 49.
1. "1. That (Petitioner) Gilda Florendo (was) an employee of (Respondent Bank) from May 17, 1976 until August 16, 1984 when she voluntarily
resigned. However, before her resignation, she applied for a housing loan of P148,000.00, payable within 25 years from (respondent bank's)
Provident Fund on July 20, 1983;
1. 2. That (petitioners) and (respondent bank), through the latter's duly authorized representative, executed the Housing Loan Agreement, x x x;
2. 3. That, together with the Housing Loan Agreement, (petitioners) and (respondent bank), through the latter's authorized representative, also
executed a Real Estate Mortgage and Promissory Note, x x x;
3. 4. That the loan x x x was actually given to (petitioner) Gilda Florendo, wi wi x, in her capacity as employee of (respondent bank);
4. 5. That on March 19, 1985, (respondent bank) increased the interest rate on (petitioner's) loan from 9% per annum to 17%, the said increase to
take effect on March 19, 1985;
5. 6. That the details of the increase are embodied in (Landbank's) ManCom Resolution No. 85-08 dated March 19, 1985, x x x, and in a PF
(Provident Fund) Memorandum Circular (No. 8508, Series of 1985), x x x;
6. 7. That (respondent bank) first informed (petitioners) of the said increase in a letter dated June 7, 1985, wi wi x. Enclosed with the letter are a
copy of the PF Memo Circular wi wi wi and a Statement of Account as of May 31, 1985, x x x;
7. 8. That (petitioners) protested the increase in a letter dated June 11, 1985 to which (respondent bank) replied through a letter dated July 1, 1985,
wi wi x. Enclosed with the letter is a Memorandum dated June 26, 1985 of (respondent bank's) legal counsel, A.B.F. Gaviola, Jr., x x x;
8. 9. That thereafter, (respondent bank) kept on demanding that (petitioner) pay the increased interest or the new monthly installments based on
the increased interest rate, but Plaintiff just as vehemently maintained that the said increase is unlawful and unjustifiable. Because of
(respondent bank's) repeated demands, (petitioners) were forced to file the instant suit for Injunction and Damages;
9. 10. That, just the same, despite (respondent bank's) demands that (petitioners) pay the increased interest or increased monthly installments,
they (petitioners) have faithfully paid and discharged their loan obligations, more particularly the monthly payment of the original stipulated
installment of P1,248.72. Disregarding (respondent bank's) repeated demand for increased interest and monthly installment, (petitioners) are
presently up-to-date in the payments of their obligations under the original contracts (Housing Loan Agreement, Promissory Note and Real
Estate Mortgage) with (respondent bank);
x x x x x x x x x"
The clauses or provisions in the Housing Loan Agreement and the Real Estate Mortgage referred to above as the basis for the escalation are:
a. Section I-F of Article VI of the Housing Loan Agreement,3 Rollo, p. 35. which provides that, for as long as the loan or any portion thereof or any sum
that may be due and payable under the said loan agreement remains outstanding, the borrower shall
"f) Comply with all the rules and regulations of the program imposed by the LENDER and to comply with all the rules and regulations that the Central
Bank of the Philippines has imposed or will impose in connection with the financing programs for bank officers and employees in the form of fringe
benefits."
b. Paragraph (f) of the Real Estate Mortgage4 Rollo, p. 67. which states:
The rate of interest charged on the obligation secured by this mortgage wi wi x, shall be subject, during the life of this contract, to such an
increase/decrease in accordance with prevailing rules, regulations and circulars of the Central Bank of the Philippines as the Provident Fund Board of

Trustees of the Mortgagee may prescribe for its debtors and subject to the condition that the increase/decrease shall only take effect on the date of
effectivity of said increase/decrease and shall only apply to the remaining balance of the loan."
c. and ManCom (Management Committee) Resolution No. 85-08, together with PF (Provident Fund) Memorandum Circular No. 85-08, which escalated the
interest rates on outstanding housing loans of bank employees who voluntarily "secede" (resign) from the Bank;the range of rates varied depending
upon the number of years service rendered by the employees concerned. The rates were made applicable to those who had previously resigned from the
bank as well as those who would be resigning in the future.
The trial court ruled in favor of respondent bank, and held that the bank was vested with authority to increase the interest rate (and the corresponding
monthly amortizations) pursuant to said escalation provisions in the housing loan agreement and the mortgage contract. The dispositive portion of the
said decision reads:5 Rollo, p. 84.
"WHEREFORE, judgment is hereby rendered denying the instant suit for injunction and declaring that the rate of interest on the loan agreement in
question shall be 17% per annum and the monthly amortization on said loan properly raised to P2,064.74 a month, upon the finality of this judgment.
xxx

xxx

x x x."

Petitioners promptly appealed, arguing that, inter alia, the increased rate of interest is onerous and was imposed unilaterally, without the consent of the
borrower-spouses. Respondent bank likewise appealed and contested the propriety of having the increased interest rate apply only upon the finality of
the judgment and not from March 19, 1985.
The respondent Court subsequently affirmed with modification the decision of the trial court, holding that: 6 CA Decision, rollo, pp. 128-129.
"x x x Among the salient provisions of the mortgage is paragraph (f) which provides that the interest rate shall be subject, during the term of the loan, to
such increases/decreases as may be allowed under the prevailing rules and/or circulars of the Central Bank and as the Provident Fund of the Bank may
prescribe for its borrowers. In other words, the spouses agreed to the escalation of the interest rate on their original loan. Such an agreement is a
contractual one and the spouses are bound by it. Escalation clauses have been ruled to be valid stipulations in contracts in order to maintain fiscal
stability and to retain the value of money in long term contracts (Insular Bank of Asia and America vs. Spouses Epifania Salazar and Ricardo Salazar, 159
SCRA 133). One of the conditions for the validity of an escalation clause such as the one which refers to an increase rate is that the contract should also
contain a proviso for a decrease when circumstances so warrant it. Paragraph (f) referred to above contains such provision.
A contract is binding on the parties no matter that a provision thereof later proves onerous and which on hindsight, a party feels he should not have
agreed to in the first place."
and disposed as follows:7 Rollo, p. 129.
"WHEREFORE, the dispositive part of the decision is MODIFIED in the sense that the interest of 17% on the balance of the loan of the spouses shall be
computed starting July 1, 1985."
Dissatisfied, the petitioners had recourse to this Court.
The Issues
Petitioners ascribe to respondent Court "a grave and patent error" in not nullifying the respondent bank's unilateral increase of the interest rate and
monthly amortizations of the loan
1.
2.
3.
4.

"1. x x x (simply because of) a bare and unqualified stipulation that the interest rate may be increased;
2. x x x on the ground that the increase has no basis in the contracts between the parties;
3. x x x on the ground that the increase violates Section 7-A of the Usury Law;
4. x x x on the ground that the increase and the contractual provision that (respondent bank) relies upon for the increase are contrary to
morals, good customs, public order and public policy."8 Rollo, p. 12.

The key issue may be simply presented as follows: Did the respondent bank have a valid and legal basis to impose an increased interest rate on the
petitioner's housing loan?
The Court's Ruling
Basis for Increased Interest Rate
Petitioners argue that the HLA provision covers only administrative and other matters, and does not include interest rates per se, since Article VI of the
agreement deals with insurance on and upkeep of the mortgaged property. As for the stipulation in the mortgage deed, they claim that it is vague because
it does not state if the "prevailing CB rules and regulations referred to therein are those prevailing at the time of the execution of these contracts or at
the time of the increase or decrease of the interest rate. They insist that the bank's authority to escalate interest rates has not been shown to be "crystalclear as a matter of fact" and established beyond doubt. The contracts being "contracts of adhesion," any vagueness in their provisions should be
interpreted in favor of petitioners.
We note that Section 1-F of Article VI of the HLA cannot be read as an escalation clause as it does not make any reference to increases or decreases in
the interest rate on loans. However, paragraph (f) of the mortgage contract is clearly and indubitably an escalation provision, and therefore, the parties

were and are bound by the said stipulation that "(t)he rate of interest charged on the obligation secured by this mortgage x x x, shall be subject, during
the life of this contract, to such an increase/decrease in accordance with prevailing rules, regulations and circulars of the Central Bank of the Philippines
as the Provident Fund Board of Trustees of the Mortgagee (respondent bank) may prescribe for its debtors x x x."9 Real Estate Mortgage, supra, rollo,
p. 67. Contrary to petitioners' allegation, there is no vagueness in the aforequoted proviso; even their own arguments (below) indicate that this
provision is quite clear to them.
In Banco Filipino Savings v. Mortgage Bank vs. Navarro,10 152 SCRA 346, 353, July 28, 1987. this Court in essence ruled that in general there is nothing
inherently wrong with escalation clauses. In IBAA vs. Spouses Salazar11 159 SCRA 133, 137, March 25, 1988. the Court reiterated the rule that escalation
clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term contracts,
Application of the Escalation to Petitioners
Petitioners however insist that while ManCom Resolution No. 85-08 authorized a rate increase for resigned employees, it could not apply as to petitioneremployee because nowhere in the loan agreement or mortgage contract is it provided that petitioner-wife's resignation will be a ground for the
adjustment of interest rates, which is the very bedrock of and the raison d'tre specified in said ManCom Resolution.
They additionally contend that the escalation is violative of Section 7-A of the Usury Law (Act No. 2655, as amended) which requires a law or MB act
fixing an increased maximum rate of interest, and that escalation upon the will of the respondent bank is contrary to the principle of mutuality of
contracts, per Philippine National Bank vs. Court of Appeals.12 196 SCRA 536, 544-545, April 30, 1991.
What is actually central to the disposition of this case is not really the validity of the escalation clause but the retroactive enforcement of the ManCom
Resolution as against petitioneremployee. In the case at bar, petitioners have put forth a telling argument that there is in fact no Central Bank rule,
regulation or other issuance which would have triggered an application of the escalation clause as to her factual situation.
In Banco Filipino,13 Supra, p. 355. this Court, speaking through Mme. Justice Ameurfina M. Herrera, disallowed the bank from increasing the interest
rate on the subject loan from 12% to 17% despite an escalation clause in the loan agreement authorizing the bank to "correspondingly increase the
interest rate stipulated in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest that
may be charged on this particular kind of loan." In said case, the bank had relied upon a Central Bank circular as authority to up its rates. The Court ruled
that CB Circular No. 494, although it has the effect of law, is not a law, but an administrative regulation.
In PNB vs. Court of Appeals,14 196 SCRA 536, 544, April 30, 1991. this Court disallowed the increases in interest rate imposed by the petitioner-bank
therein, on the ground, among others, that said bank relied merely on its own Board Resolution (No. 681), PNB Circular No. 40-79-84, and PNB Circular
No. 40-129-84, which were neither laws nor resolutions of the Monetary Board.
In the case at bar, the loan was perfected on July 20, 1983. PD No. 116 became effective on January 29, 1973. CB Circular No. 416 was issued on July 29,
1974. CB Circ. 504 was issued February 6, 1976. CB Circ. 706 was issued December 1, 1979. CB Circ. 905, lifting any interest rate ceiling prescribed under
or pursuant to the Usury Law, as amended, was promulgated in 1982. These and other relevant CB issuances had already come into existence prior to the
perfection of the housing loan agreement and mortgage contract, and thus it may be said that these regulations had been taken into consideration by the
contracting parties when they first entered into their loan contract. In light of the CB issuances in force at that time, respondent bank was fully aware that
it could have imposed an interest rate higher than 9% per annum rate for the housing loans of its employees, but it did not. In the subject loan, the
respondent bank knowingly agreed that the interest rate on petitioners' loan shall remain at 9% p.a. unless a CB issuance is passed authorizing an
increase (or decrease) in the rate on such employee loans and the Provident Fund Board of Trustees acts accordingly. Thus, as far as the parties were
concerned, all other onerous factors, such as employee resignations, which could have been used to trigger an application of the escalation clause were
considered barred or waived. If the intention were otherwise, theyespecially respondent bankshould have included such factors in their loan
agreement. ManCom Resolution No. 85-08, which is neither a rule nor a resolution of the Monetary Board, cannot be used as basis for the escalation in
lieu of CB issuances, since paragraph (f) of the mortgage contract very categorically specifies that any interest rate increase be in accordance with
"prevailing rules, regulations and circulars of the Central Bank x x x as the Provident Fund Board x x x may prescribe." The Banco Filipino and PNB
doctrines are applicable four-square in this case. As a matter of fact, the said escalation clause further provides that the increased interest rate "shall
only take effect on the date of effectivity of (the) increase/decrease" authorized by the CB rule, regulation or circular. Without such CB issuance, any
proposed increased rate will never become effective.
We have already mentioned (and now reiterate our holding in several cases15 Liam Law vs. Olympic Sawmill Co., 129 SCRA 439, 442, May 28, 1984 and
Javier vs. De Guzman, 192 SCRA 434, 439, December 19, 1990. ) that by virtue of CB Circular 905, the Usury Law has been rendered ineffective. Thus,
petitioners' contention that the escalation clause is violative of the said law is bereft of any merit.
On the other hand, it will not be amiss to point out that the unilateral determination and imposition of increased interest rates by the herein respondent
bank is obviously violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil Code. As this Court held in PNB: 16 Supra, p.
545.
"In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on
their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the x x x loan agreement between the PNB and the
private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license
would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the
character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the debtor) participation being reduced to the
alternative "to take it or leave it" (Qua vs. Law Union v. Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the
courts of justice must protect against abuse and imposition."
The respondent bank tried to sidestep this difficulty by averring that petitioner Gilda Florendo as a former bank employee was very knowledgeable
concerning respondent bank's lending rates and procedures, and therefore, petitioners were "on an equal footing" with respondent bank as far as the
subject loan contract was concerned. That may have been true insofar as entering into the original loan agreement and mortgage contract was

concerned. However, that does not hold true when it comes to the determination and imposition of escalated rates of interest as unilaterally provided in
the ManCom Resolution, where she had no voice at all in its preparation and application.
To allay fears that respondent bank will inordinately be prejudiced by being stuck with this "sweetheart loan" at patently concessionary interest rates,
which according to respondent bank is the "sweetest deal" anyone could obtain and is an act of generosity considering that in 1985 lending rates in the
banking industry were peaking well over 30% p.a.,17 Rollo, p. 206. we need only point out that the bank had the option to impose in its loan contracts
the condition that resignation of an employeeborrower would be a ground for escalation. The fact is it did not. Hence, it must live with such omission.
And it would be totally unfair to now impose said condition, not to mention that it would violate the principle of mutuality of consent in contracts. It goes
without saying that such escalation ground can be included in future contracts 6 not to agreements already validly entered into.
Let it be clear that this Court understands respondent bank's position that the concessional interest rate was really intended as a means to remunerate
its employees and thus an escalation due to resignation would have been a valid stipulation. But no such stipulation was in fact made, and thus the
escalation provision could not be legally applied and enforced as against herein petitioners.
WHEREFORE, the petition is hereby GRANTED. The Court hereby REVERSES and SETS ASIDE the challenged Decision of the Court of Appeals. The
interest rate on the subject housing loan remains at nine (9) percent per annum and the monthly amortization at P1,248.72.
SO ORDERED.
Narvasa (C.J., Chairman), Davide, Jr., Melo and Francisco, JJ., concur.
Petition granted. Judgment reversed and set aside.
Note.The legal interest should commence to run from the time of the rendition of the trial court's decision. (Ines vs. Court of Appeals, 247 SCRA 312
[1995])