SECRETARY OF THE DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS and DISTRICT

ENGINEER CELESTINO R. CONTRERAS, Petitioners,

vs.
SPOUSES HERACLEO and RAMONA TECSON, Respondents.

G.R. No. 179334 July 1, 2013

DECISION

PERALTA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court, assailing the Court of
Appeals (CA) Decision1 dated July 31, 2007 in CA-G.R. CV No. 77997. The assailed decision
affirmed with modification the Regional Trial Court (RTC)2 Decision3 dated March 22, 2002 in Civil
Case No. 208-M-95.

The case stemmed from the following factual and procedural antecedents:

Respondent spouses Heracleo and Ramona Tecson (respondents) are co-owners of a parcel of land
with an area of 7,268 square meters located in San Pablo, Malolos, Bulacan and covered by
Transfer Certificate of Title (TCT) No. T-430064 of the Register of Deeds of Bulacan. Said parcel of
land was among the properties taken by the government sometime in 1940 without the owners
consent and without the necessary expropriation proceedings and used for the construction of the
MacArthur Highway.5

In a letter6 dated December 15, 1994, respondents demanded the payment of the fair market value
of the subject parcel of land. Petitioner Celestino R. Contreras (petitioner Contreras), then District
Engineer of the First Bulacan Engineering District of petitioner Department of Public Works and
Highways (DPWH), offered to pay the subject land at the rate of P0.70 per square meter per
Resolution of the Provincial Appraisal Committee (PAC) of Bulacan.7 Unsatisfied with the offer,
respondents demanded for the return of their property or the payment of compensation at the current
fair market value.8

As their demand remained unheeded, respondents filed a Complaint9 for recovery of possession with
damages against petitioners, praying that they be restored to the possession of the subject parcel of
land and that they be paid attorneys fees.10 Respondents claimed that the subject parcel of land was
assessed at P2,543,800.00.11

Instead of filing their Answer, petitioners moved for the dismissal of the complaint on the following
grounds: (1) that the suit is against the State which may not be sued without its consent; (2) that the
case has already prescribed; (3) that respondents have no cause of action for failure to exhaust
administrative remedies; and (4) if respondents are entitled to compensation, they should be paid
only the value of the property in 1940 or 1941.12

On June 28, 1995, the RTC issued an Order13 granting respondents motion to dismiss based on the
doctrine of state immunity from suit. As respondents claim includes the recovery of damages, there
is no doubt that the suit is against the State for which prior waiver of immunity is required. When
elevated to the CA,14 the appellate court did not agree with the RTC and found instead that the
doctrine of state immunity from suit is not applicable, because the recovery of compensation is the
only relief available to the landowner. To deny such relief would undeniably cause injustice to the
landowner. Besides, petitioner Contreras, in fact, had earlier offered the payment of compensation
although at a lower rate.Thus, the CA reversed and set aside the dismissal of the complaint and,
consequently, remanded the case to the trial court for the purpose of determining the just
compensation to which respondents are entitled to recover from the government.15 With the finality of
the aforesaid decision, trial proceeded in the RTC.

The Branch Clerk of Court was initially appointed as the Commissioner and designated as the
Chairman of the Committee that would determine just compensation,16 but the case was later
referred to the PAC for the submission of a recommendation report on the value of the subject
property.17 In PAC Resolution No. 99-007,18the PAC recommended the amount of P1,500.00 per
square meter as the just compensation for the subject property.

On March 22, 2002, the RTC rendered a Decision,19 the dispositive portion of which reads:

WHEREFORE, premises considered, the Department of Public Works and Highways or its duly
assigned agencies are hereby directed to pay said Complainants/Appellants the amount of One
Thousand Five Hundred Pesos (P1,500.00) per square meter for the lot subject matter of this case
in accordance with the Resolution of the Provincial Appraisal Committee dated December 19, 2001.

SO ORDERED.20

On appeal, the CA affirmed the above decision with the modification that the just compensation
stated above should earn interest of six percent (6%) per annum computed from the filing of the
action on March 17, 1995 until full payment.21

In its appeal before the CA, petitioners raised the issues of prescription and laches, which the CA
brushed aside on two grounds: first, that the issue had already been raised by petitioners when the
case was elevated before the CA in CA-G.R. CV No. 51454. Although it was not squarely ruled upon
by the appellate court as it did not find any reason to delve further on such issues, petitioners did not
assail said decision barring them now from raising exactly the same issues; and second, the issues
proper for resolution had been laid down in the pre-trial order which did not include the issues of
prescription and laches. Thus, the same can no longer be further considered. As to the propriety of
the propertys valuation as determined by the PAC and adopted by the RTC, while recognizing the
rule that the just compensation should be the reasonable value at the time of taking which is 1940,
the CA found it necessary to deviate from the general rule. It opined that it would be obviously unjust
and inequitable if respondents would be compensated based on the value of the property in 1940
which is P0.70 per sq m, but the compensation would be paid only today. Thus, the appellate court
found it just to award compensation based on the value of the property at the time of payment. It,
therefore, adopted the RTCs determination of just compensation of P1,500.00 per sq m as
recommended by the PAC. The CA further ordered the payment of interest at the rate of six percent
(6%) per annum reckoned from the time of taking, which is the filing of the complaint on March 17,
1995.

Aggrieved, petitioners come before the Court assailing the CA decision based on the following
grounds:

I.

THE COURT OF APPEALS GRAVELY ERRED IN GRANTING JUST COMPENSATION TO

RESPONDENTS CONSIDERING THE HIGHLY DUBIOUS AND QUESTIONABLE
CIRCUMSTANCES OF THEIR ALLEGED OWNERSHIP OF THE SUBJECT PROPERTY.

II.
THE COURT OF APPEALS GRAVELY ERRED IN AWARDING JUST COMPENSATION TO
RESPONDENTS BECAUSE THEIR COMPLAINT FOR RECOVERY OF POSSESSION AND
DAMAGES IS ALREADY BARRED BY PRESCRIPTION AND LACHES.

III.

THE COURT OF APPEALS GRAVELY ERRED IN AFFIRMING THE TRIAL COURTS DECISION
ORDERING THE PAYMENT OF JUST COMPENSATION BASED ON THE CURRENT MARKET
VALUE OF THE ALLEGED PROPERTY OF RESPONDENTS.22

Petitioners insist that the action is barred by prescription having been filed fifty-four (54) years after
the accrual of the action in 1940. They explain that the court can motu proprio dismiss the complaint
if it shows on its face that the action had already prescribed. Petitioners likewise aver that
respondents slept on their rights for more than fifty years; hence, they are guilty of laches. Lastly,
petitioners claim that the just compensation should be based on the value of the property at the time
of taking in 1940 and not at the time of payment.23

The petition is partly meritorious.

The instant case stemmed from an action for recovery of possession with damages filed by
respondents against petitioners. It, however, revolves around the taking of the subject lot by
petitioners for the construction of the MacArthur Highway. There is taking when the expropriator
enters private property not only for a momentary period but for a permanent duration, or for the
purpose of devoting the property to public use in such a manner as to oust the owner and deprive
him of all beneficial enjoyment thereof.24

It is undisputed that the subject property was taken by petitioners without the benefit of expropriation
proceedings for the construction of the MacArthur Highway. After the lapse of more than fifty years,
the property owners sought recovery of the possession of their property. Is the action barred by
prescription or laches? If not, are the property owners entitled to recover possession or just
compensation?

As aptly noted by the CA, the issues of prescription and laches are not proper issues for resolution
as they were not included in the pre-trial order. We quote with approval the CAs ratiocination in this
wise:

Procedurally, too, prescription and laches are no longer proper issues in this appeal. In the pre-trial
order issued on May 17, 2001, the RTC summarized the issues raised by the defendants, to wit: (a)
whether or not the plaintiffs were entitled to just compensation; (b) whether or not the valuation
would be based on the corresponding value at the time of the taking or at the time of the filing of the
action; and (c) whether or not the plaintiffs were entitled to damages. Nowhere did the pre-trial order
indicate that prescription and laches were to be considered in the adjudication of the RTC.25

To be sure, the pre-trial order explicitly defines and limits the issues to be tried and controls the
subsequent course of the action unless modified before trial to prevent manifest injustice.26

Even if we squarely deal with the issues of laches and prescription, the same must still fail. Laches is
principally a doctrine of equity which is applied to avoid recognizing a right when to do so would
result in a clearly inequitable situation or in an injustice.27 This doctrine finds no application in this
case, since there is nothing inequitable in giving due course to respondents claim. Both equity and
the law direct that a property owner should be compensated if his property is taken for public
use.28 Neither shall prescription bar respondents claim following the long-standing rule "that where
private property is taken by the Government for public use without first acquiring title thereto either
through expropriation or negotiated sale, the owners action to recover the land or the value thereof
does not prescribe."29

When a property is taken by the government for public use, jurisprudence clearly provides for the
remedies available to a landowner. The owner may recover his property if its return is feasible or, if it
is not, the aggrieved owner may demand payment of just compensation for the land taken.30 For
failure of respondents to question the lack of expropriation proceedings for a long period of time,
they are deemed to have waived and are estopped from assailing the power of the government to
expropriate or the public use for which the power was exercised. What is left to respondents is the
right of compensation.31 The trial and appellate courts found that respondents are entitled to
compensation. The only issue left for determination is the propriety of the amount awarded to
respondents.

Just compensation is "the fair value of the property as between one who receives, and one who
desires to sell, x x x fixed at the time of the actual taking by the government." This rule holds true
when the property is taken before the filing of an expropriation suit, and even if it is the property
owner who brings the action for compensation.32

The issue in this case is not novel.

In Forfom Development Corporation [Forfom] v. Philippine National Railways [PNR],33 PNR entered
the property of Forfom in January 1973 for public use, that is, for railroad tracks, facilities and
appurtenances for use of the Carmona Commuter Service without initiating expropriation
proceedings.34 In 1990, Forfom filed a complaint for recovery of possession of real property and/or
damages against PNR. In Eusebio v. Luis,35 respondents parcel of land was taken in 1980 by the
City of Pasig and used as a municipal road now known as A. Sandoval Avenue in Pasig City without
the appropriate expropriation proceedings. In 1994, respondent demanded payment of the value of
the property, but they could not agree on its valuation prompting respondent to file a complaint for
reconveyance and/or damages against the city government and the mayor. In Manila International
Airport Authority v. Rodriguez,36 in the early 1970s, petitioner implemented expansion programs for
its runway necessitating the acquisition and occupation of some of the properties surrounding its
premises. As to respondents property, no expropriation proceedings were initiated. In 1997,
1w phi 1

respondent demanded the payment of the value of the property, but the demand remained
unheeded prompting him to institute a case for accion reivindicatoria with damages against
petitioner. In Republic v. Sarabia,37 sometime in 1956, the Air Transportation Office (ATO) took
possession and control of a portion of a lot situated in Aklan, registered in the name of respondent,
without initiating expropriation proceedings. Several structures were erected thereon including the
control tower, the Kalibo crash fire rescue station, the Kalibo airport terminal and the headquarters of
the PNP Aviation Security Group. In 1995, several stores and restaurants were constructed on the
remaining portion of the lot. In 1997, respondent filed a complaint for recovery of possession with
damages against the storeowners where ATO intervened claiming that the storeowners were its
lessees.

The Court in the above-mentioned cases was confronted with common factual circumstances where
the government took control and possession of the subject properties for public use without initiating
expropriation proceedings and without payment of just compensation, while the landowners failed for
a long period of time to question such government act and later instituted actions for recovery of
possession with damages. The Court thus determined the landowners right to the payment of just
compensation and, more importantly, the amount of just compensation. The Court has uniformly
ruled that just compensation is the value of the property at the time of taking that is controlling for
purposes of compensation. In Forfom, the payment of just compensation was reckoned from the
time of taking in 1973; in Eusebio, the Court fixed the just compensation by determining the value of
the property at the time of taking in 1980; in MIAA, the value of the lot at the time of taking in 1972
served as basis for the award of compensation to the owner; and in Republic, the Court was
convinced that the taking occurred in 1956 and was thus the basis in fixing just compensation. As in
said cases, just compensation due respondents in this case should, therefore, be fixed not as of the
time of payment but at the time of taking, that is, in 1940.

The reason for the rule has been clearly explained in Republic v. Lara, et al.,38 and repeatedly held
by the Court in recent cases, thus:

x x x "The value of the property should be fixed as of the date when it was taken and not the date of
the filing of the proceedings." For where property is taken ahead of the filing of the condemnation
proceedings, the value thereof may be enhanced by the public purpose for which it is taken; the
entry by the plaintiff upon the property may have depreciated its value thereby; or, there may have
been a natural increase in the value of the property from the time it is taken to the time the complaint
is filed, due to general economic conditions. The owner of private property should be compensated
only for what he actually loses; it is not intended that his compensation shall extend beyond his loss
or injury. And what he loses is only the actual value of his property at the time it is taken x x x.39

Both the RTC and the CA recognized that the fair market value of the subject property in 1940
was P0.70/sq m.40Hence, it should, therefore, be used in determining the amount due respondents
instead of the higher value which is P1,500.00. While disparity in the above amounts is obvious and
may appear inequitable to respondents as they would be receiving such outdated valuation after a
very long period, it is equally true that they too are remiss in guarding against the cruel effects of
belated claim. The concept of just compensation does not imply fairness to the property owner
alone. Compensation must be just not only to the property owner, but also to the public which
ultimately bears the cost of expropriation.41

Clearly, petitioners had been occupying the subject property for more than fifty years without
the benefit of expropriation proceedings. In taking respondents property without the benefit
of expropriation proceedings and without payment of just compensation, petitioners clearly
acted in utter disregard of respondents proprietary rights which cannot be countenanced by
the Court.42 For said illegal taking, respondents are entitled to adequate compensation in the
form of actual or compensatory damages which in this case should be the legal interest of six
percent (6%) per annum on the value of the land at the time of taking in 1940 until full
payment.43 This is based on the principle that interest runs as a matter of law and follows from the
right of the landowner to be placed in as good position as money can accomplish, as of the date of
taking.44

WHEREFORE, premises considered, the pet1t10n is PARTIALLY GRANTED. The Court of Appeals
Decision dated July 31, 2007 in CAG.R. CV No. 77997 is MODIFIED, in that the valuation of the
subject property owned by respondents shall be F0.70 instead of P1,500.00 per square meter, with
interest at six percent ( 6o/o) per annum from the date of taking in 1940 instead of March 17, 1995,
until full payment.

SO ORDERED.
S.C. MEGAWORLD CONSTRUCTION and DEVELOPMENT CORPORATION, Petitioner,
vs.
ENGR. LUIS U. PARADA, represented by ENGR. LEONARDO A. PARADA of GENLITE
INDUSTRIES,Respondent.

G.R. No. 183804 September 11, 2013

DECISION

REYES, J.:

Before us on appeal by certiorari1 is the Decision2 dated April 30, 2008 of the Court of Appeals (CA)
in CA-G.R. CV No. 83811 which upheld the Decision3 dated May 8, 2004 of the Regional Trial Court
(RTC) of Quezon City, Branch 100, in Civil Case No. Q-01-45212.

Factual Antecedents

S.C. Megaworld Construction and Development Corporation (petitioner) bought electrical lighting
materials from Gentile Industries, a sole proprietorship owned by Engineer Luis U. Parada
(respondent), for its Read-Rite project in Canlubang, Laguna. The petitioner was unable to pay for
the above purchase on due date, but blamed it on its failure to collect under its sub-contract with the
Enviro KleenTechnologies, Inc. (Enviro Kleen). It was however able to persuade Enviro Kleen to
agree to settle its above purchase, but after paying the respondent P250,000.00 on June 2,
1999,4 Enviro Kleen stopped making further payments, leaving an outstanding balance
ofP816,627.00. It also ignored the various demands of the respondent, who then filed a suit in the
RTC, docketed as Civil Case No.Q-01-45212, to collect from the petitioner the said balance, plus
damages, costs and expenses, as summarized in the RTCs decision, as follows:

The petitioner in its answer denied liability, claiming that it was released from its indebtedness to the
respondent by reason of the novation of their contract, which, it reasoned, took place when the latter
accepted the partial payment of Enviro Kleen in its behalf, and thereby acquiesced to the substitution
of Enviro Kleen as the new debtor in the petitioners place. After trial, the RTC rendered
judgment6 on May 28, 2004 in favor of the respondent, the fallo of which reads, as follows:

WHEREFORE, judgment is hereby rendered for the respondent. The petitioner is hereby ordered to
pay the respondent the following:

A. the sum of P816,627.00 representing the principal obligation due;

B. the sum equivalent to twenty percent (20%)per month of the principal obligation due from
date of judicial demand until fully paid as and for interest; and

C. the sum equivalent to twenty-five percent (25%) of the principal sum due as and for
attorneys fees and other costs of suits. The compulsory counterclaim interposed by the
petitioner is hereby ordered dismissed for lack of merit.

SO ORDERED.7 (Emphasis supplied)

On appeal to the CA, the petitioner maintained that the trial court erred in ruling that no novation of
the contract took place through the substitution of Enviro Kleen as the new debtor. But for the first
time, it further argued that the trial court should have dismissed the complaint for failure of the
respondent to implead Genlite Industries as "a proper party in interest", as provided in Section 2 of
Rule 3 of the 1997 Rules of Civil Procedure. The said section provides:

SEC. 2. Parties in interest. A real party in interest is the party who stands to be benefited or
injured by the judgment in the suit, or the party entitled to the avails of the suit. Unless otherwise
authorized by law or these Rules, every action must be prosecuted or defended in the name of the
real party in interest.

In Section 1(g) of Rule 16 of the Rules of Court, it is also provided that the defendant may move to
dismiss the suit on the ground that it was not brought in the name of or against the real party in
interest, with the effect that the complaint is then deemed to state no cause of action.

In dismissing the appeal, the CA noted that the petitioner in its answer below raised only the defense
of novation, and that at no stage in the proceedings did it raise the question of whether the suit was
brought in the name of the real party in interest. Moreover, the appellate court found from the sales
invoices and receipts that the respondent is the sole proprietor of Genlite Industries, and therefore
the real party-plaintiff. Said the CA:

Settled is the rule that litigants cannot raise an issue for the first time on appeal as this would
contravene the basic rules of fair play and justice.

In any event, there is no question that respondent Engr.Luis U. Parada is the proprietor of Genlite
Industries, as shown on the sales invoice and delivery receipts. There is also no question that a
special power of attorney was executed by respondent Engr.Luis U. Parada in favor of Engr.
Leonardo A. Parada authorizingthe latter to file a complaint against the petitioner.8 (Citations
omitted)

The petitioner also contended that a binding novation of the purchase contract between the parties
took place when the respondent accepted the partial payment of Enviro Kleen of P250,000.00 in its
behalf, and thus acquiesced to the substitution by Enviro Kleen of the petitioner as the new debtor.
But the CA noted that there is nothing in the two (2) letters of the respondent to Enviro Kleen, dated
April 14, 1999 and June 16, 1999, which would imply that he consented to the alleged novation, and,
particularly, that he intended to release the petitioner from its primary obligation to pay him for its
purchase of lighting materials. The appellate court cited the RTCs finding9 that the respondent
informed Enviro Kleen in his first letter that he had served notice to the petitioner that he would take
legal action against it for its overdue account, and that he retained his option to pull out the lighting
materials and charge the petitioner for any damage they might sustain during the pull-out:

Respondent x x x has served notice to the petitioner that unless the overdue account is paid, the
matter will be referred to its lawyers and there may be a pull-out of the delivered lighting fixtures. It
was likewise stated therein that incidental damages that may result to the structure in the course of
the pull-out will be to the account of the petitioner.10

The CA concurred with the RTC that by retaining his option to seek satisfaction from the petitioner,
any acquiescence which the respondent had made was limited to merely accepting Enviro Kleen as
an additional debtor from whom he could demand payment, but without releasing the petitioner as
the principal debtor from its debt to him.

On motion for reconsideration,11 the petitioner raised for the first time the issue of the validity of the
verification and certification of non-forum shopping attached to the complaint. On July 18, 2008, the
CA denied the said motion for lack of merit.12
Petition for Review in the Supreme Court

In this petition, the petitioner insists, firstly, that the complaint should have been dismissed outright
by the trial court for an invalid non-forum shopping certification; and, secondly, that the appellate
court erred in not declaring that there was a novation of the contract between the parties through
substitution of the debtor, which resulted in the release of the petitioner from its obligation to pay the
respondent the amount of its purchase.13

Our Ruling

The petition is devoid of merit.

The verification and certification of

non-forum shopping in the
complaint is not a jurisdictional but
a formal requirement, and any
objection as to non-compliance
therewith should be raised in the
proceedings below and not for the
first time on appeal.

"It is well-settled that no question will be entertained on appeal unless it has been raised in the
proceedings below. Points of law, theories, issues and arguments not brought to the attention of the
lower court, administrative agency or quasi-judicial body, need not be considered by are viewing
court, as they cannot be raised for the first time at that late stage. Basic considerations of fairness
and due process impel this rule. Any issue raised for the first time on appeal is barred by estoppel."14

Through a Special Power of Attorney (SPA), the respondent authorized Engr. Leonardo A. Parada
(Leonardo), the eldest of his three children, to perform the following acts in his behalf: a) to file a
complaint against the petitioner for sum of money with damages; and b) to testify in the trial thereof
and sign all papers and documents related thereto, with full powers to enter into stipulation and
compromise.15 Incidentally, the respondent, a widower, died of cardio-pulmonary arrest on January
21,2009,16 survived by his legitimate children, namely, Leonardo, Luis, Jr., and Lalaine, all surnamed
Parada. They have since substituted him in this petition, per the Resolution of the Supreme Court
dated September 2, 2009.17 Also, on July 23, 2009, Luis, Jr. and Lalaine Parada executed an SPA
authorizing their brother Leonardo to represent them in the instant petition.18

In the verification and certification of non-forum shopping attached to the complaint in Civil Case No.
Q01-45212, Leonardo as attorney-in-fact of his father acknowledged as follows:

xxxx

That I/we am/are the Plaintiff in the above-captioned case;

That I/we have caused the preparation of this Complaint;

That I/we have read the same and that all the allegations therein are true and correct to the best of
my/our knowledge;

x x x x.19
In this petition, the petitioner reiterates its argument before the CA that the above verification is
invalid, since the SPA executed by the respondent did not specifically include an authority for
Leonardo to sign the verification and certification of non-forum shopping, thus rendering the
complaint defective for violation of Sections 4 and 5 of Rule 7. The said sections provide, as follows:

Sec. 4. Verification. A pleading is verified by an affidavit that the affiant has read the pleading and
that the allegations therein are true and correct of his personal knowledge or based on authentic
records.

Sec. 5. Certification against forum shopping. The plaintiff or principal party shall certify under oath
in the complaint or other initiatory pleading asserting a claim for relief, or in a sworn certification
annexed thereto and simultaneously filed therewith: (a) that he has not thereto fore commenced any
action or filed any claim involving the same issues in any court, or tribunal x x x and, to the best of
his knowledge, no such other action or claim is pending therein; (b) if there is such other pending
action or claim, a complete statement of the present status thereof; and (c) if he should thereafter
learn that the same or similar action or claim has been filed or is pending, he shall report that fact x x
x to the court wherein his aforesaid complaint or initiatory pleading has been filed.

Failure to comply with the foregoing requirements shall not be curable by mere amendment of the
complaint or other initiatory pleading but shall be cause for the dismissal of the case without
prejudice, unless otherwise provided, upon motion and after hearing.

The petitioners argument is untenable. The petitioner failed to reckon that any objection as to
compliance with the requirement of verification in the complaint should have been raised in the
proceedings below, and not in the appellate court for the first time.20 In KILUSAN-OLALIA v. CA,21 it
was held that verification is a formal, not a jurisdictional requisite:

We have emphasized, time and again, that verification is a formal, not a jurisdictional requisite, as it
is mainly intended to secure an assurance that the allegations therein made are done in good faith
or are true and correct and not mere speculation. The Court may order the correction of the
pleading, if not verified, or act on the unverified pleading if the attending circumstances are such that
a strict compliance with the rule may be dispensed with in order that the ends of justice may be
served.

Further, in rendering justice, courts have always been, as they ought to be, conscientiously guided
by the norm that on the balance, technicalities take a backseat vis--vis substantive rights, and not
the other way around. x x x.22 (Citations omitted)

In Young v. John Keng Seng,23 it was also held that the question of forum shopping cannot be raised
in the CA and in the Supreme Court, since such an issue must be raised at the earliest opportunity in
a motion to dismiss or a similar pleading. The high court even warned that "invoking it in the later
stages of the proceedings or on appeal may result in the dismissal of the action x x x."24

Moreover, granting that Leonardo has no personal knowledge of the transaction subject of the
complaint below, Section 4 of Rule 7 provides that the verification need not be based on the verifiers
personal knowledge but even only on authentic records. Sales invoices, statements of accounts,
receipts and collection letters for the balance of the amount still due to the respondent from the
petitioner are such records. There is clearly substantial compliance by the respondents attorney-in-
fact with the requirement of verification.

Lastly, it is well-settled that a strict compliance with the rules may be dispensed with in order that the
ends of substantial justice may be served.25 It is clear that the present controversy must be resolved
on its merits, lest for a technical oversight the respondent should be deprived of what is justly due
him.

A sole proprietorship has no

juridical personality separate and
distinct from that of its owner, and
need not be impleaded as a party-
plaintiff in a civil case.

On the question of whether Genlite Industries should have been impleaded as a party-plaintiff,
Section 1 of Rule 3 of the Rules of Court provides that only natural or juridical persons or entities
authorized by law may be parties in a civil case. Article 44 of the New Civil Code enumerates who
are juridical persons:

Art. 44. The following are juridical persons:

(1) The State and its political subdivisions;

(2) Other corporations, institutions and entities for public interest or purpose, created by law;
their personality begins as soon as they have been constituted according to law;

(3) Corporations, partnerships and associations for private interest or purpose to which the
law grants a juridical personality, separate and distinct from that of each shareholder, partner
or member.

Genlite Industries is merely the DTI-registered trade name or style of the respondent by which he
conducted his business. As such, it does not exist as a separate entity apart from its owner, and
therefore it has no separate juridical personality to sue or be sued.26 As the sole proprietor of Genlite
Industries, there is no question that the respondent is the real party in interest who stood to be
directly benefited or injured by the judgment in the complaint below. There is then no necessity for
Genlite Industries to be impleaded as a party-plaintiff, since the complaint was already filed in the
name of its proprietor, Engr. Luis U. Parada. To heed the petitioners sophistic reasoning is to permit
a dubious technicality to frustrate the ends of substantial justice.

Novation is never presumed but

must be clearly and unequivocally
shown.

Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by

substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the
creditor.27 It is "the substitution of a new contract, debt, or obligation for an existing one between the
same or different parties."28Article 1293 of the Civil Code defines novation as follows:

Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may
be made even without the knowledge or against the will of the latter, but not without the consent of
the creditor. Payment by the new debtor gives him rights mentioned in Articles 1236and 1237.

Thus, in order to change the person of the debtor, the former debtor must be expressly released
from the obligation, and the third person or new debtor must assume the formers place in the
contractual relation.29Article 1293 speaks of substitution of the debtor, which may either be in the
form of expromision or delegacion, as seems to be the case here. In both cases, the old debtor must
be released from the obligation, otherwise, there is no valid novation. As explained in Garcia30:

In general, there are two modes of substituting the person of the debtor: (1) expromision and (2)
delegacion. In expromision, the initiative for the change does not come fromand may even be
made without the knowledge ofthe debtor, since it consists of a third persons assumption of the
obligation. As such, it logically requires the consent of the third person and the creditor. In
delegacion, the debtor offers, and the creditor accepts, a third person who consents to the
substitution and assumes the obligation; thus, the consent of these three persons are necessary.
Both modes of substitution by the debtor require the consent of the creditor.31 (Citations omitted)

From the circumstances obtaining below, we can infer no clear and unequivocal consent by the
respondent to the release of the petitioner from the obligation to pay the cost of the lighting
materials. In fact, from the letters of the respondent to Enviro Kleen, it can be said that he retained
his option to go after the petitioner if Enviro Kleen failed to settle the petitioners debt. As the trial
court held:

The fact that Enviro Kleen Technologies, Inc. made payments to the respondent and the latter
accepted it does not ipso facto result innovation. Novation to be given its legal effect requires that
the creditor should consent to the substitution of a new debtor and the old debtor be released from
its obligation (Art. 1293, New Civil Code). A reading of the letters dated 14 April 1999 (Exh. 1) and
dated 16 June 1999 (Exhs. 4 &4-a) sent by the respondent to Enviro Kleen Technologies, Inc.
clearly shows that there was nothing therein that would evince that the[respondent] has consented to
the exchange of the person of the debtor from the petitioner to Enviro Kleen Technologies, Inc.

xxxx

Notably in Exh. 1, albeit addressed to Enviro Kleen Technologies, Inc., the respondent expressly
stated that it has served notice to the petitioner that unless the overdue account is paid, the matter
will be referred to its lawyers and there may be a pull-out of the delivered lighting fixtures. It was
likewise stated therein that incident damages that may result to the structure in the course of the
pull-out will be to the account of the petitioner.

It is evident from the two (2) aforesaid letters that there is no indication of the respondents intention
to release the petitioner from its obligation to pay and to transfer it to Enviro Kleen Technologies, Inc.
The acquiescence of Enviro Kleen Technologies, Inc. to assume the obligation of the petitioner to
pay the unpaid balance of [P]816,627.00 to the respondent when there is clearly no agreement to
release the petitioner will result merely to the addition of debtors and not novation. Hence, the
creditor can still enforce the obligation against the original debtor x x x. A fact which points strongly
to the conclusion that the respondent did not assent to the substitution of Enviro Kleen
Technologies, Inc. as the new debtor is the present action instituted by the respondent against the
petitioner for the fulfillment of its obligation. A mere recital that the respondent has agreed or
consented to the substitution of the debtor is not sufficient to establish the fact that there was a
novation. x x x.32

The settled rule is that novation is never presumed,33 but must be clearly and unequivocally
shown.34 In order for a new agreement to supersede the old one, the parties to a contract must
expressly agree that they are abrogating their old contract in favor of a new one.35 Thus, the mere
substitution of debtors will not result innovation,36 and the fact that the creditor accepts payments
from a third person, who has assumed the obligation, will result merely in the addition of debtors and
not novation, and the creditor may enforce the obligation against both debtors.37 If there is no
agreement as to solidarity, the first and new debtors are considered obligated jointly.38 As explained
in Reyes v. CA39:

The consent of the creditor to a novation by change of debtor is as indispensable as the creditors
consent in conventional subrogation in order that a novation shall legally take place. The mere
circumstance of AFP-MBAI receiving payments from respondent Eleazar who acquiesced to assume
the obligation of petitioner under the contract of sale of securities, when there is clearly no
agreement to release petitioner from her responsibility, does not constitute novation. At most, it only
creates a juridical relation of co-debtorship or surety ship on the part of respondent Eleazar to the
contractual obligation of petitioner to AFP-MBAI and the latter can still enforce the obligation against
the petitioner. In Ajax Marketing and Development Corporation vs. Court of Appeals which is
relevant in the instant case, we stated that

"In the same vein, to effect a subjective novation by a change in the person of the debtor, it is
necessary that the old debtor be released expressly from the obligation, and the third person or new
debtor assumes his place in the relation. There is no novation without such release as the third
person who has assumed the debtors obligation becomes merely a co-debtor or surety. xxx.
Novation arising from a purported change in the person of the debtor must be clear and express
xxx."

In the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in the
Roman Law jurisprudence, the principle novatio non praesumitur that novation is never
presumed. At bottom, for novation to be a jural reality, its animus must be ever present, debitum pro
debito basically extinguishing the old obligation for the new one.40 (Citation omitted)

The trial court found that the respondent never agreed to release the petitioner from its obligation,
and this conclusion was upheld by the CA. We generally accord utmost respect and great weight to
factual findings of the trial court and the CA, unless there appears in the record some fact or
circumstance of weight and influence which has been overlooked, or the significance of which has
been misinterpreted, that if considered would have affected the result of the case.41 We find no such
oversight in the appreciation of the facts below, nor such a misinterpretation thereof, as would
otherwise provide a clear and unequivocal showing that a novation has occurred in the contract
between the parties resulting in the release of the petitioner.

Pursuant to Article 2209 of the

Civil Code, except as provided
under Central Bank Circular
No. 905, and now under Bangko
Sentral ng Pilipinas Circular
No. 799, which took effect on
July 1, 2013, the respondent may
be awarded interest of six percent
(6%) of the judgment amount by
way of actual and compensatory
damages.

It appears from the recital of facts in the trial courts decision that the respondent demanded interest
of two percent (2%) per month upon the balance of the purchase price of P816,627.00, from judicial
demand until full payment. There is then an obvious clerical error committed in the fallo of the trial
courts decision, for it incorrectly ordered the defendant there into pay "the sum equivalent to twenty
percent (20%) per month of the principal obligation due from date of judicial demand until fully paid
as and for interest."42
A clerical mistake is one which is visible to the eyes or obvious to the understanding; an
error made by a clerk or a transcriber; a mistake in copying or writing.43 The Latin maxims
Error placitandi aequitatem non tollit ("A clerical error does not take away equity"), and Error
scribentis nocere non debit ("An error made by a clerk ought not to injure; a clerical error
may be corrected") are apt in this case.44 Viewed against the landmark case of Medel v. CA45,
an award of interest of 20% per month on the amount due is clearly excessive and iniquitous.
It could not have been the intention of the trial court, not to mention that it is way beyond
what the plaintiff had prayed for below.

It is settled that other than in the case of judgments which are void ab initio for lack of jurisdiction, or
which are null and void per se, and thus may be questioned at any time, when a decision is final,
even the court which issued it can no longer alter or modify it, except to correct clerical errors or
mistakes.46

The foregoing notwithstanding, of more important consideration in the case before us is the
fact that it is nowhere stated in the trial courts decision that the parties had in fact stipulated
an interest on the amount due to the respondent. Even granting that there was such an
agreement, there is no finding by the trial court that the parties stipulated that the
outstanding debt of the petitioner would be subject to two percent (2%) monthly interest. The
most that the decision discloses is that the respondent demanded a monthly interest of 2%
on the amount outstanding.

Article 2209 of the Civil Code provides that "if the obligation consists in the payment of a
sum of money, and the debtor incurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of the interest agreed upon, and in the
absence of stipulation, the legal interest, which is six percent per annum." Pursuant to the said
provision, then, since there is no finding of a stipulation by the parties as to the imposition of interest,
only the amount of 12% per annum47 may be awarded by the court by way of damages in its
discretion, not two percent(2%) per month, following the guidelines laid down in the landmark case
of Eastern Shipping Lines v. Court of Appeals,48 to wit:

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

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

2. When an obligation, not constituting a loan or forbearance of money, is breached,

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

3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.49 (Citations omitted)

As further clarified in the case of Sunga-Chan v. CA,50 a loan or forbearance of money, goods
or credit describes a contractual obligation whereby a lender or creditor has refrained during
a given period from requiring the borrower or debtor to repay the loan or debt then due and
payable.51 Thus:

In Reformina v. Tomol, Jr., the Court held that the legal interest at 12% per annum under
Central Bank (CB) Circular No. 416 shall be adjudged only in cases involving the loan or
forbearance of money. And for transactions involving payment of indemnities in the concept
of damages arising from default in the performance of obligations in general and/or for
money judgment not involving a loan or forbearance of money, goods, or credit, the
governing provision is Art. 2209 of the Civil Code prescribing a yearly 6% interest. Art. 2209
pertinently provides:

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

The term "forbearance," within the context of usury law, has been described as a contractual
obligation of a lender or creditor to refrain, during a given period of time, from requiring the borrower
or debtor to repay the loan or debt then due and payable.

Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and
the applicable rate, as follows: The12% per annum rate under CB Circular No. 416 shall apply
only to loans or forbearance of money, goods, or credits, as well as to judgments involving
such loan or forbearance of money, goods, or credit, while the 6% per annum under Art. 2209
of the Civil Code applies "when the transaction involves the payment of indemnities in the
concept of damage arising from the breach or a delay in the performance of obligations in
general," with the application of both rates reckoned "from the time the complaint was filed
until the adjudged amount is fully paid." In either instance, the reckoning period for the
commencement of the running of the legal interest shall be subject to the condition "that the
courts are vested with discretion, depending on the equities of each case, on the award of
interest."52 (Citations omitted and emphasis ours)

Pursuant, then, to Central Bank Circular No. 416, issued on July 29,1974,53 in the absence of a
written stipulation, the interest rate to be imposed in judgments involving a forbearance of credit shall
be 12% per annum, up from 6% under Article 2209 of the Civil Code. This was reiterated in Central
Bank Circular No. 905, which suspended the effectivity of the Usury Law from January 1, 1983.54 But
if the judgment refers to payment of interest as damages arising from a breach or delay in general,
the applicable interest rate is 6% per annum, following Article 2209 of the Civil Code.55 Both interest
rates apply from judicial or extrajudicial demand until finality of the judgment. But from the finality of
the judgment awarding a sum of money until it is satisfied, the award shall be considered a
forbearance of credit, regardless of whether the award in fact pertained to one, and therefore during
this period, the interest rate of 12% per annum for forbearance of money shall apply.56

But notice must be taken that in Resolution No. 796 dated May 16,2013, the Monetary Board
of the Bangko Sentral ng Pilipinas approved the revision of the interest rate to be imposed for
the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in
the absence of an express contract as to such rate of interest. Thus, under BSP Circular
No.799, issued on June 21, 2013 and effective on July 1, 2013, the said rate of interest is now
back at six percent (6%), viz:

BANGKO SENTRAL NG PILIPINAS

OFFICE OF THE GOVERNOR

CIRCULAR NO. 799

Series of 2013

Subject: Rate of interest in the absence of stipulation

The monetary Board, in its Resolution No. 796 dated 16 May 2013,approved the following revisions
governing the rate of interest in the absence of stipulation in loan contracts, thereby amending
Section 2 of Circular No. 905, Series of 1982:

Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and
the rate allowed in judgments, in the absence of an express contract as to such rate of
interest, shall be six percent (6%) per annum.

Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations for Banks
and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank
Financial Institutions are hereby amended accordingly.

This Circular shall take effect on 1 July 2013.

FOR THE MONETARY BOARD:

DIWA C. GUINIGUNDO
Officer-In-Charge

The award of attorneys fees is not proper.

Other than to say that the petitioner "unjustifiably failed and refused to pay the respondent," the trial
court did not state in the body of its decision the factual or legal basis for its award of attorneys fees
to the respondent, as required under Article 2208 of the New Civil Code, for which reason we have
resolved to delete the same. The rule is settled that the trial court must state the factual, legal or
equitable justification for its award of attorneys fees.57 Indeed, the matter of attorneys fees cannot
be stated only in the dispositive portion, but the reasons must be stated in the body of the courts
decision.58 This failure or oversight of the trial court cannot even be supplied by the CA. As concisely
explained in Frias v. San Diego-Sison59:

Article 2208 of the New Civil Code enumerates the instances where such may be awarded and, in all
cases, it must be reasonable, just and equitable if the same were to be granted. Attorneys fees as
part of damages are not meant to enrich the winning party at the expense of the losing litigant. They
are not awarded every time a party prevails in a suit because of the policy that no premium should
be placed on the right to litigate. The award of attorneys fees is the exception rather than the
general rule. As such, it is necessary for the trial court to make findings of facts and law that would
bring the case within the exception and justify the grant of such award. The matter of attorneys fees
cannot be mentioned only in the dispositive portion of the decision. They must be clearly explained
and justified by the trial court in the body of its decision. On appeal, the CA is precluded from
supplementing the bases for awarding attorneys fees when the trial court failed to discuss in its
Decision the reasons for awarding the same. Consequently, the award of attorneys fees should be
1wphi1

deleted.60 (Citations omitted)

WHEREFORE, premises considered, the Decision dated April 30, 2008 of the Court of Appeals in
CA-G.R. CV No. 83811 is AFFIRMED with MODIFICATION. Petitioner S.C. Megaworld Construction
and Development Corporation is ordered to pay respondent Engr. Luis A. Parada, represented by
Engr. Leonardo A. Parada, the principal amount due of P816,627.00, plus interest at twelve percent
(12%) per annum, reckoned from judicial demand until June 30, 2013, and six percent (6%) per an
own from July 1, 2013 until finality hereof, by way of actual and compensatory damages. Thereafter,
the principal amount due as adjusted by interest shall likewise earn interest at six percent (6%) per
annum until fully paid. The award of attorney's fees is DELETED.

SO ORDERED.
ROLANDO C. DE LA PAZ,* Petitioner,
vs.
L & J DEVELOPMENT COMPANY, Respondent

G.R. No. 183360 September 8, 2014.

DECISION

DEL CASTILLO, J.:

"No interest shall be due unless it has been expressly stipulated in writing."1

This is a Petition for Review on Certiorari2 assailing the February 27, 2008 Decision3 of the Court of
Appeals (CA) in CA-G.R. SP No. 100094, which reversed and set aside the Decision4 dated April 19,
2007 of the Regional Trial Court (RTC), Branch 192, Marikina City in Civil Case No. 06-1145-MK.
The said RTC Decision affirmed in all respects the Decision5 dated June 30, 2006 of the Metropolitan
Trial Court (MeTC), Branch 75, Marikina City in Civil Case No. 05-7755, which ordered respondent L
& J Development Company (L&J) to pay petitioner Architect Rolando C. De La Paz (Rolando) its
principal obligation of P350,000.00, plus 12% interest per annumreckoned from the filing of the
Complaint until full payment of the obligation.

Likewise assailed is the CAs June 6, 2008 Resolution6 which denied Rolandos Motion for
Reconsideration.

Factual Antecedents

On December 27, 2000, Rolando lent P350,000.00 without any security to L&J, a property developer
with Atty. Esteban Salonga (Atty. Salonga) as its President and General Manager. The loan, with no
specified maturity date, carried a 6% monthly interest, i.e., P21,000.00. From December 2000 to
August 2003, L&J paid Rolando a total ofP576,000.007 representing interest charges.

As L&J failed to pay despite repeated demands, Rolando filed a Complaint8 for Collection of Sum of
Money with Damages against L&J and Atty. Salonga in his personal capacity before the MeTC,
docketed as Civil Case No. 05-7755. Rolando alleged, amongothers, that L&Js debtas of January
2005, inclusive of the monthly interest, stood at P772,000.00; that the 6% monthly interest was upon
Atty. Salongas suggestion; and, that the latter tricked him into parting with his money without the
loan transaction being reduced into writing.

In their Answer,9 L&J and Atty. Salonga denied Rolandos allegations. While they acknowledged the
loan as a corporate debt, they claimed that the failure to pay the same was due to a fortuitous event,
that is, the financial difficulties brought about by the economic crisis. They further argued that
Rolando cannot enforce the 6% monthly interest for being unconscionable and shocking to the
morals. Hence, the payments already made should be applied to the P350,000.00 principal loan.

During trial, Rolando testified that he had no communication with Atty. Salonga prior to the loan
transaction but knew him as a lawyer, a son of a former Senator, and the owner of L&J which
developed Brentwood Subdivision in Antipolo where his associate Nilo Velasco (Nilo) lives. When
Nilo told him that Atty. Salonga and L&J needed money to finish their projects, heagreed to lend
them money. He personally met withAtty. Salonga and their meeting was cordial.

He narrated that when L&J was in the process of borrowing the P350,000.00 from him, it was Arlene
San Juan (Arlene), the secretary/treasurer of L&J, who negotiated the terms and conditions
thereof.She said that the money was to finance L&Js housing project. Rolando claimed that it was
not he who demanded for the 6% monthly interest. It was L&J and Atty. Salonga, through Arlene,
who insisted on paying the said interest as they asserted that the loan was only a short-term one.

Ruling of the Metropolitan Trial Court

The MeTC, in its Decision10 of June 30, 2006, upheld the 6% monthly interest. In so ruling, it
ratiocinated that since L&J agreed thereto and voluntarily paid the interest at suchrate from 2000 to
2003, it isalready estopped from impugning the same. Nonetheless, for reasons of equity, the
saidcourt reduced the interest rate to 12% per annumon the remaining principal obligation
of P350,000.00. With regard to Rolandos prayer for moral damages, the MeTC denied the same as
it found no malice or bad faith on the part ofL&J in not paying the obligation. It likewise relieved Atty.
Salonga of any liability as it found that he merely acted in his official capacity in obtaining the loan.
The MeTC disposed of the case as follows:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff, Arch.
Rolando C. Dela Paz, and against the defendant, L & J Development Co., Inc., as follows:

a) ordering the defendant L & J Development Co., Inc. to pay plaintiff the amount of Three
Hundred Fifty Thousand Pesos (P350,000.00) representing the principal obligation, plus
interest at the legal rate of 12% per annum to be computed from January 20, 2005, the date
of the filing of the complaint, until the whole obligation is fully paid;

b) ordering the defendant L & J Development Co., Inc. to pay plaintiff the amount of Five
Thousand Pesos (P5,000.00) as and for attorneys fees; and

c) to pay the costs of this suit.

SO ORDERED.11

Ruling of the Regional Trial Court

L&J appealed to the RTC. It asserted in its appeal memorandum12 that from December 2000 to
March 2003, it paid monthly interest of P21,000.00 based on the agreed-upon interest rate of
6%monthly and from April 2003 to August 2003, interest paymentsin various amounts.13 The total of
interest payments made amounts toP576,000.00 an amount which is even more than the principal
obligation of P350,000.00

L&J insisted that the 6% monthly interest rate is unconscionable and immoral. Hence, the 12% per
annumlegal interest should have been applied from the time of the constitution of the obligation. At
12% per annum interest rate, it asserted that the amount of interestit ought to pay from December
2000 to March 2003 and from April 2003 to August 2003, only amounts to P105,000.00. If this
amount is deducted from the total interest paymentsalready made, which is P576,000.00, the
amount of P471,000.00 appears to have beenpaid over and above what is due. Applying the rule on
compensation, the principal loan of P350,000.00 should be set-off against the P471,000.00, resulting
in the complete payment of the principal loan.

Unconvinced, the RTC, inits April 19, 2007 Decision,14 affirmed the MeTC Decision, viz:
WHEREFORE, premises considered, the Decision appealed from is hereby AFFIRMED in all
respects, with costs against the appellant.

SO ORDERED.15

Ruling of the Court of Appeals

Undaunted, L&J went to the CA and echoed its arguments and proposed computation as proffered
before the RTC.

In a Decision16 dated February 27, 2008, the CAreversed and set aside the RTC Decision. The CA
stressed that the parties failedto stipulate in writing the imposition of interest on the loan. Hence, no
interest shall be due thereon pursuant to Article 1956 of the Civil Code.17 And even if payment of
interest has been stipulated in writing, the 6% monthly interest is still outrightly illegal and
unconscionable because it is contrary to morals, if not against the law. Being void, this cannot be
ratified and may be set up by the debtor as defense. For these reasons, Rolando cannot collect any
interest even if L&J offered to pay interest. Consequently, he has to return all the interest payments
of P576,000.00 to L&J.

Considering further that Rolando and L&J thereby became creditor and debtor of each other, the CA
applied the principle of legal compensation under Article 1279 of the Civil Code.18 Accordingly, it set
off the principal loan ofP350,000.00 against the P576,000.00 total interest payments made, leaving
an excess of P226,000.00, which the CA ordered Rolando to pay L&J plus interest. Thus:

WHEREFORE, the DECISION DATED APRIL 19, 2007 is REVERSED and SET ASIDE.

CONSEQUENT TO THE FOREGOING, respondent Rolando C. Dela Paz is ordered to pay to the
petitioner the amount of P226,000.00,plus interest of 12% per annumfrom the finality of this decision.

Costs of suit to be paid by respondent Dela Paz.

SO ORDERED.19

In his Motion for Reconsideration,20 Rolando argued thatthe circumstances exempt both the
application of Article 1956 and of jurisprudence holding that a 6% monthly interest is
unconscionable, unreasonable, and exorbitant. He alleged that Atty. Salonga, a lawyer, should have
taken it upon himself to have the loan and the stipulated rate of interest documented but, by way of
legal maneuver, Atty. Salonga, whom he fully trusted and relied upon, tricked him into believing that
the undocumented and uncollateralized loan was withinlegal bounds. Had Atty. Salonga told him that
the stipulated interest should be in writing, he would have readily assented. Furthermore, Rolando
insisted that the 6% monthly interest ratecould not be unconscionable as in the first place, the
interest was not imposed by the creditor but was in fact offered by the borrower, who also dictated all
the terms of the loan. He stressed that in cases where interest rates were declared unconscionable,
those meant to be protected by such declaration are helpless borrowers which is not the case here.

Still, the CA denied Rolandos motion in its Resolution21 of June 6, 2008.

Hence, this Petition.

The Parties Arguments

Rolando argues that the 6%monthly interest rateshould not have been invalidated because Atty.
Salonga took advantage of his legal knowledge to hoodwink him into believing that no document
was necessaryto reflect the interest rate. Moreover, the cases anent unconscionable interest rates
that the CA relied upon involve lenders who imposed the excessive rates,which are totally different
from the case at bench where it is the borrower who decided on the high interest rate. This case
does not fall under a scenariothat enslaves the borrower or that leads to the hemorrhaging of his
assets that the courts seek to prevent.

L&J, in controverting Rolandos arguments, contends that the interest rate is subject of negotiation
and is agreedupon by both parties, not by the borrower alone. Furthermore, jurisprudence has
nullified interestrates on loans of 3% per month and higher as these rates are contrary to moralsand
public interest. And while Rolando raises bad faithon Atty. Salongas part, L&J avers thatsuch issue
is a question of fact, a matter that cannot be raised under Rule 45.

Issue

The Courts determination of whether to uphold the judgment of the CA that the principal loan is
deemed paid isdependent on the validity of the monthly interest rate imposed. And in determining
such validity, the Court must necessarily delve into matters regarding a) the form of the agreement
of interest under the law and b) the alleged unconscionability of the interest rate. Our Ruling

The Petition is devoid of merit.

The lack of a written stipulation to pay interest on the loaned amount disallows a creditor
from charging monetary interest.

Under Article 1956 of the Civil Code, no interest shall bedue unless it has been expressly
stipulated in writing. Jurisprudence on the matter also holds that for interest to be due and
payable, two conditions must concur: a) express stipulation for the payment of interest; and
b) the agreement to pay interest is reduced in writing.

Here, it is undisputed that the parties did not put down in writing their agreement. Thus, no
interest is due. The collection of interest without any stipulation in writing is prohibited by
law.22

But Rolando asserts that his situation deserves an exception to the application of Article 1956. He
blames Atty. Salonga for the lack of a written document, claiming that said lawyer used his legal
knowledge to dupe him. Rolando thus imputes bad faith on the part of L&J and Atty. Salonga. The
Court, however, finds no deception on the partof L&J and Atty. Salonga. For one, despite the lack of
a document stipulating the payment of interest, L&J nevertheless devotedly paid interests on the
loan. It only stopped when it suffered from financial difficulties that prevented it from continuously
paying the 6% monthly rate. For another,regardless of Atty. Salongas profession, Rolando who is an
architect and an educated man himself could have been a more reasonably prudent person under
the circumstances. To top it all, he admitted that he had no prior communication with Atty. Salonga.
Despite Atty. Salonga being a complete stranger, he immediately trusted him and lent his
company P350,000.00, a significant amount. Moreover, as the creditor,he could have requested or
required that all the terms and conditions of the loan agreement, which include the payment of
interest, be put down in writing to ensure that he and L&J are on the same page. Rolando had a
choice of not acceding and to insist that their contract be put in written form as this will favor and
safeguard him as a lender. Unfortunately, he did not. It must be stressed that "[c]ourts cannot follow
one every step of his life and extricate him from bad bargains, protect him from unwise investments,
relieve him from one-sided contracts,or annul the effects of foolish acts. Courts cannotconstitute
themselves guardians of persons who are not legally incompetent."23

It may be raised that L&J is estopped from questioning the interest rate considering that it has been
paying Rolando interest at such ratefor more than two and a half years. In fact, in its pleadings
before the MeTCand the RTC, L&J merely prayed for the reduction of interest from 6% monthly to
1% monthly or 12% per annum. However, in Ching v. Nicdao,24 the daily payments of the debtor to
the lender were considered as payment of the principal amount of the loan because Article 1956 was
not complied with. This was notwithstanding the debtors admission that the payments made were
for the interests due. The Court categorically stated therein that "[e]stoppel cannot give validity to an
act that is prohibited by law or one thatis against public policy."

Even if the payment of interest has been reduced in writing, a 6% monthly interest rate on a
loan is unconscionable, regardless of who between the parties proposed the rate.

Indeed at present, usury has been legally non-existent in view of the suspension of the Usury
Law25 by Central Bank Circular No. 905 s. 1982.26 Even so, not all interest rates levied upon loans are
permitted by the courts as they have the power to equitably reduce unreasonable interest rates. In
Trade & Investment Development Corporation of the Philippines v. Roblett Industrial Construction
Corporation,27 we said:

While the Court recognizes the right of the parties to enter into contracts and who are
expectedto comply with their terms and obligations, this rule is not absolute. Stipulated
interest rates are illegal if they are unconscionable and the Court is allowed to temper
interest rates when necessary. In exercising this vested power to determine what is iniquitous and
unconscionable, the Court must consider the circumstances of each case. What may be iniquitous
and unconscionable in onecase, may be just in another. x x x28

Time and again, it has been ruled in a plethora of cases that stipulated interest rates of 3% per
month and higher, are excessive, iniquitous, unconscionable and exorbitant. Such stipulations
are void for being contrary to morals, if not against the law.29 The Court, however, stresses that these
rates shall be invalidated and shall be reduced only in cases where the terms of the loans are
open-ended, and where the interest rates are applied for an indefinite period. Hence, the imposition
of a specific sum of P40,000.00 a month for six months on aP1,000,000.00 loan is not considered
unconscionable.30

In the case at bench, there is no specified period as to the payment of the loan. Hence,
levying 6% monthly or 72% interest per annumis "definitely outrageous and inordinate."31 The
situation that it was the debtor who insisted on the interest rate will not exempt Rolando from a ruling
that the rate is void. As this Court cited in Asian Cathay Finance and Leasing Corporation v.
Gravador,32 "[t]he imposition of an unconscionable rate of interest on a money debt, even if
knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant
spoliation and an iniquitous deprivation of property, repulsive to the common sense of
man."33 Indeed, "voluntariness does notmake the stipulation on [an unconscionable] interest valid."34

As exhaustibly discussed,no monetary interest isdue Rolando pursuant to Article 1956. The CA thus
1wphi1

correctly adjudged that the excess interest payments made by L&J should be applied to its principal
loan. As computed by the CA, Rolando is bound to return the excess payment of P226,000.00 to
L&J following the principle of solutio indebiti.35

However, pursuant to Central Bank Circular No. 799 s. 2013 which took effect on July 1, 2013,36 the
interest imposed by the CA must be accordingly modified. The P226,000.00 which Rolando is
ordered to pay L&J shall earn an interest of 6% per annumfrom the finality of this Decision.

WHEREFORE, the Decision dated February 27, 2008 of the Court of Appeals in CA-G.R. SP No.
100094 is hereby AFFIRMED with modification that petitioner Rolando C. De La Paz is ordered to
pay respondent L&J Development Company the amount of ,P226,000.00, plus interest of 6o/o per
annum from the finality of this Decision until fully paid.

SO ORDERED.
G.R. No. 190907 August 23, 2012

VETERANS PHILIPPINE SCOUT SECURITY AGENCY, INC., Petitioner,

vs.
FIRST DOMINION PRIME HOLDINGS, INC., Respondent.

LEONARDO-DE CASTRO, J.,*

PERLAS-BERNABE,**

DECISION

VILLARAMA, JR., J.:

Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as
amended, seeking to reverse the August 24, 2009 Decision1 and December 17, 2009 Resolution2 of
the Court of Appeals (CA) in CA-G.R. SP No. 105894. The CA had reversed and set aside the
Decision3 of the Regional Trial Court (RTC), Branch 76, of Quezon City, insofar as it held that the
'dismissal of petitioner's amended complaint was without prejudice.

The antecedent facts of the case are as follows:

Petitioner Veterans Philippine Scout Security Agency, Inc. (Veterans) is a corporation duly organized
and existing under Philippine laws. It is engaged in the business of providing security services.

Respondent First Dominion Prime Holdings, Inc. (FDPHI), on the other hand, is a holding investment
and management company which owns and operates various subsidiaries and affiliates. Among its
subsidiaries are Clearwater Tuna Corporation, Maranaw Canning Corporation and Nautica Canning
Corporation, collectively referred to as the FDPHI Group of Companies. Said companies are
engaged in the production of canned tuna.

On February 15, 2001, respondent FDPHI and its aforementioned subsidiaries jointly filed before the
RTC of Pasig City, Branch 158 a Petition for Rehabilitation.4 Said petition was docketed as Civil
Case No. 68343. Attached to the petition was a Schedule of Debts and Liabilities as of January 31,
2001 showing that Clearwater Tuna Corporation (Clearwater) had an outstanding indebtedness to
petitioner in the total amount of P356,842.42.5 Said amount represents the security services
rendered by petitioner to Clearwater pursuant to a Contract of Guard Services6 between petitioner
and Inglenook Food Corporation (Clearwaters former name) for the latters manufacturing facility at
the Navotas Fish Port Complex.
After finding the petition sufficient in form and substance, the Rehabilitation Court issued a Stay
Order7 on February 22, 2001. The dispositive portion of the order reads:

WHEREFORE, the Petition being sufficient in form and substance, a stay order pursuant to Section
6, Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation is issued as follows:

(a) Staying enforcement of all claims, whether for money or otherwise and whether such
enforcement is by court action or otherwise, including the extra-judicial foreclosure proceedings in
EJF Case No. 01-02, entitled "Metropolitan Bank and Trust Co. vs. Nautica Canning Corporation", of
the Regional Trial Court of General Santos City, against petitioner FDPHI Group of Companies,
comprising of petitioners First Dominion Prime Holdings, Inc., and its subsidiaries, petitioners
Nautica Canning Corporation, Maranaw Canning Corporation and Clearwater

Tuna Corporation, their guarantors and sureties not solidarily liable with the petitioners;

(b) Prohibiting petitioner FDPHI Group of Companies from selling, encumbering, transferring, or
disposing in any manner any of its properties, except in the ordinary course of business;

(c) Prohibiting petitioner FDPHI Group of Companies from making any payment of its liabilities
outstanding as [of] the date of filing of the Petition;

xxxx

Mr. Monico V. Jacob is appointed rehabilitation receiver who can assume the position upon his
taking an oath and after posting a bond in the amount of Five Hundred Thousand (P 500,000.00)
Pesos, executed in favor of petitioner FDPHI Group of Companies, to guarantee that he will faithfully
discharge his duties and the orders of this Court.

Let this Stay Order be published in a newspaper of general circulation in the Philippines once a
week for two (2) consecutive weeks from date of the Order.

All creditors and all interested parties (including the Securities and Exchange Commission) are
directed to file and serve on the petitioner FDPHI Group of Companies, their verified comment on, or
opposition to, the Petition, with supporting affidavits and documents, not later than ten (10) days
before the date of the initial hearing. x x x8

The FDPHI Group of Companies caused the publication of the stay order to give notice to the whole
world of the filing and pendency of the rehabilitation proceedings. Thereafter, after due proceedings,
the Rehabilitation Court approved the rehabilitation plan submitted by FDPHI and its subsidiaries.
On October 24, 2003, the Rehabilitation Court likewise issued an Order9 approving the Amended
Rehabilitation Plan for the FDPHI Group of Companies. The fallo of the October 24, 2003 Order
reads:

WHEREFORE, petitioners Motion to Amend their Rehabilitation Plan is GRANTED and the
Amended Rehabilitation Plan (as of August 26, 2003) which is attached as Annex "A" and made
integral part of this Order is APPROVED.

All provisions of the original Rehabilitation Plan approved by this Court on February 22, 2002 that
are not inconsistent or incompatible with the said Amended Rehabilitation Plan (as of August 26,
2003) shall remain in effect.
Consequently, petitioners are strictly enjoined to abide by the terms and conditions of the original
Rehabilitation Plan approved on February 22, 2002 as amended by the Amended Rehabilitation
Plan (as of August 26, 2003), and they shall, in consultation with the Rehabilitation Receiver, unless
directed otherwise, submit a quarterly report on the progress of the implementation of the
Rehabilitation Plan.

The Rehabilitation Receiver is directed to furnish all the concerned parties including the Securities
and Exchange Commission, copies of this Order and its Annex "A" within ten (10) days from October
28, 2003. He will then furnish this Court proof of service of his undertaking.

SO ORDERED.10

Subsequently, petitioner filed a Complaint11 for Sum of Money and Damages against Clearwater
and/or Atty. Jacob in his capacity as appointed Receiver before the Metropolitan Trial Court (MeTC),
Branch 31, of Quezon City. The complaint, which was filed on May 27, 2004, was docketed as Civil
Case No. 32932. Essentially, petitioner sought to recover from Clearwater the amount
of P 372,219.80 representing the unpaid security services rendered by petitioner from January 16,
2000 to January 31, 2001 pursuant to their contract. On May 24, 2005, the MeTC dismissed the
complaint for failure to prosecute,12 but later reinstated the same upon motion for reconsideration by
petitioner.13

On October 20, 2005, petitioner filed an Amended Complaint14 for Sum of Money and Damages
against herein respondent FDPHI averring that Clearwater had changed its business name to First
Dominion Prime Holdings, Inc.

Respondent FDPHI filed a Motion to Dismiss15 anchored on the following grounds: (1) petitioners
claim for payment of security services is barred by res judicata; (2) the filing of the complaint
constitutes forum shopping; and (3) the complaint fails to state a cause of action against respondent
FDPHI. Respondent asserted that petitioners claim is barred as the same had been settled,
determined and finally adjudicated in the Amended Rehabilitation Plan approved by the
Rehabilitation Court and that the filing of the complaint constitutes forum shopping since petitioner
was fully aware of the pendency of the rehabilitation proceedings involving Clearwater in Civil Case
No. 68343. Respondent likewise argued that the complaint failed to state a cause of action against
respondent FDPHI since as shown in the allegations in the amended complaint itself, as well as the
annexes attached thereto, the obligation sought to be enforced by petitioner is not an obligation
contracted by respondent FDPHI but by Clearwater under its former name Inglenook Food
Corporation.

Petitioner thereafter duly filed its Comment and/or Opposition to the Motion to Dismiss to which
respondent filed a reply.

On April 23, 2007, the MeTC issued a Resolution16 granting respondents motion to dismiss. In
dismissing the amended complaint, the trial court noted that despite the publication and notice of the
petition for rehabilitation in Civil Case No. 68343, petitioner had not filed any comment or opposition
to the petition nor participated in the proceedings. Hence, petitioner was bound by the Rehabilitation
Courts February 22, 2001 stay order staying enforcement of all claims against the FDPHI Group of
Companies as well as the October 24, 2003 Order approving the Amended Rehabilitation Plan
which had already become final. Furthermore, the trial court was convinced that the Amended
Complaint failed to state a cause of action against respondent. The trial court noted that the contract
for security services was entered into by petitioner and Inglenook Food Corporation, now
Clearwater. Respondent FDPHI had no participation whatsoever nor had respondent benefitted from
the said contract. The MeTC was also not persuaded by petitioners claim that respondent FDPHI
acted as an "umbrella company" of all the other corporations which filed a petition for rehabilitation.

Aggrieved, petitioner sought reconsideration of the said Resolution, but the MeTC denied the same
for lack of merit in a Resolution17 dated October 23, 2007. The MeTC likewise denied petitioners
alternative prayer that the dismissal be declared to be without prejudice, stressing that the dismissal
of the case was not merely for failure to state a cause of action but also for having been barred by
the Rehabilitation Courts Stay Order and by its Order finally approving the Amended Rehabilitation
Plan.

Unsatisfied, petitioner appealed to the RTC. On June 4, 2008,18 the RTC partially granted petitioners
appeal. While the RTC dismissed the Amended Complaint for failure to state a cause of action,
nevertheless, it found that the dismissal is without prejudice to petitioners reinstitution of a separate
action for the enforcement of its claim because purportedly, the Stay Order and the approved
Amended Rehabilitation Plan for the FDPHI Group of Companies "cannot operate to deprive
petitioners right to present its own case or have the effect of stifling such right."19

Respondent FDPHI moved for partial reconsideration of the RTC decision insofar as it declared the
dismissal of the Amended Complaint to be "without prejudice," but the motion was denied in an
Order20 dated October 7, 2008. Thus, respondent FDPHI appealed to the CA.

On August 24, 2009, the CA as aforesaid, reversed the trial courts June 4, 2008 Decision and
October 7, 2008 Order. The CA agreed with the ruling of the MeTC that the issuance of a stay order
and the appointment of a rehabilitation receiver in the petition for rehabilitation jointly filed by FDPHI
and its subsidiaries including Clearwater stayed the enforcement of all claims, including petitioners
money claim. Pertinently, the CA ruled that:

Hence, considering that the obligation under the Contract of Guard Services was contracted solely
by Clearwater under its former name, Inglenook Food Corporation, and since the claim is recognized
and admitted as debt of Clearwater in the Rehabilitation Proceedings, respondent has no cause of
action to bring a separate suit for collection of sum of money against petitioner.

WHEREFORE, premises considered, the petition is hereby GRANTED. The Decision of the RTC,
Branch 76, Quezon City dated June 4, 2008 and the Order dated October 7, 2008, in Civil Case No.
Q-07-61692 are hereby REVERSED and SET ASIDE. The Resolutions dated April 23, 2007 and
October 23, 2007 of the MTC, Branch 31, Quezon City, in Civil Case No. 32932 are hereby
AFFIRMED.

SO ORDERED.21

Petitioner sought reconsideration of the CA decision, but its motion was denied by the CA in the
assailed Resolution22 dated December 17, 2009.

Hence, this petition.

Petitioner contends that the dismissal of the Amended Complaint against respondent FDPHI does
not bar petitioner from instituting an action for collection of money against Clearwater. Petitioner
faults the CA for ruling that Clearwaters debt to petitioner was already covered by the Amended
Rehabilitation Plan and insists that said debt was not included in the schedule of payments under
the Amended Rehabilitation Plan. According to petitioner, the Amended Rehabilitation Plan only
pertains to respondent FDPHI and Maranaw Canning Corporation, which remains operational. It is
not applicable to Clearwater considering that there was no mention of how the plan will operate to
benefit Clearwater and its creditors. Purportedly, Clearwaters petition for rehabilitation was not
pursued or was in effect denied. And the amended plan not being applicable to Clearwater,
petitioner argues that its approval will not preclude petitioner from instituting a separate action to
enforce its claim.

Respondent FDPHI counters that in the corporate rehabilitation proceedings for the FDPHI Group of
Companies, petitioners claim had already been passed upon by the Rehabilitation Court and
factored into the approved Amended Rehabilitation Plan as among its unsecured debts.

Hence, it cannot be the subject of a separate action.23 Respondent avers that petitioner is barred
from asserting its payment for security services with Clearwater since the subject claim is already
recognized and admitted in the approved rehabilitation plan which is under implementation. Thus,
respondent asserts that the CA was correct in holding that the existence of the rehabilitation
proceedings effectively barred petitioner from enforcing its money claim against Clearwater. To
respondent, a separate action by petitioner would only result in multiplicity of suits which the law
abhors. Respondent stresses that any and all claims against the FDPHI Group of Companies,
including that of petitioner, are stayed and barred until the termination of rehabilitation proceedings
pursuant to Sections 6 and 11 of the Interim Rules of Procedure on Corporate Rehabilitation.

The issue to be resolved in this case is whether the CA erred in ruling that petitioners action to
enforce the payment of the unpaid security services is covered by the Amended Rehabilitation Plan
such that petitioner can no longer institute a separate action to collect the same.

We deny the petition.

First of all, it must not be overlooked that petitioner initially filed its complaint against Clearwater but
its complaint was dismissed for failure to prosecute. Petitioner amended its complaint and impleaded
respondent FDPHI as defendant, on its own allegation that Clearwater had changed its name to
herein respondent First Dominion Prime Holdings, Inc. However, as can be gleaned from the records
and pleadings of the parties, respondent FDPHI and Clearwater are two separate corporate entities
and the obligation petitioner seeks to enforce was not contracted between petitioner and respondent
FDPHI but by petitioner and Clearwater under its former name, Inglenook Foods Corporation. For
this reason, both the trial court and the appellate court are in agreement that the Amended
Complaint fails to state a cause of action against respondent FDPHI. On this ground alone, the
Amended Complaint filed by petitioner against respondent FDPHI was properly dismissed. Indeed,
while respondent FDPHI may be the parent company of Clearwater, these two corporations have
distinct and separate juridical personalities and therefore respondent FDPHI cannot be held liable for
the debts of its subsidiary Clearwater nor can respondent FDPHI assume the liabilities of
Clearwater. As aptly found by the CA:

Clearwater and FDPHI have been organized as separate corporate entities, as evidenced by their
respective Certificates of Filing of Amended Articles of Incorporation on file with the Securities and
Exchange Commission. The filing of petitioner of Joint Petition for Rehabilitation for the FDPHI
Group of Companies cannot in any way be taken as an assumption by petitioner of any liability of
Clearwater. It must be noted that in the Consolidated Inventory of Assets and Consolidated
Schedule of Accounts Receivables of the FDPHI Group of Companies, Clearwater holds assets
entirely separate from its parent company.24

Now as to the issue of whether the existence of the corporate rehabilitation proceedings of the
FDPHI Group of Companies has the effect of barring petitioner from asserting its claim for the
payment of security services against Clearwater by reason of the approved Amended Rehabilitation
Plan, we rule in the affirmative.
An essential function of corporate rehabilitation is the mechanism of suspension of all actions and
claims against the distressed corporation upon the due appointment of a management committee or
rehabilitation receiver.25Section 6(c) of PD 902-A mandates that upon appointment of a management
committee, rehabilitation receiver, board, or body, all actions for claims against corporations,
partnerships or associations under management or receivership pending before any court, tribunal,
board, or body shall be suspended. The actions to be suspended cover all claims against a
distressed corporation whether for damages founded on a breach of contract of carriage, labor
cases, collection suits or any other claims of pecuniary nature. Jurisprudence is settled that the
suspension of proceedings referred to in the law uniformly applies to "all actions for claims"
filed against the corporation, partnership or association under management or receivership,
without distinction, except only those expenses incurred in the ordinary course of
business.26 The stay order is effective on all creditors of the corporation without distinction, whether
secured or unsecured.

Thus, petitioners action to collect the sum owed to it is not exempted from the coverage of the stay
order. The enforcement of petitioners claim through court action is likewise suspended to give way
to the speedy and effective rehabilitation of the FDPHI Group of Companies.

The justification for the suspension of actions or claims, without distinction, pending rehabilitation
proceedings is to enable the management committee or rehabilitation receiver to effectively exercise
its/his powers free from any judicial or extrajudicial interference that might unduly hinder or prevent
the "rescue" of the debtor company.27 To allow such other actions to continue would only add to the
burden of the management committee or rehabilitation receiver, whose time, effort and resources
would be wasted in defending claims against the corporation instead of being directed toward its
restructuring and rehabilitation.28 It is worthy to note that the stay order remains effective during the
duration of the rehabilitation proceedings.

However, in an attempt to exempt its money claim from the coverage of the rehabilitation
proceedings, petitioner claims that Clearwater was denied rehabilitation and asserts that the
Amended Rehabilitation Plan did not include Clearwaters obligation to petitioner. This contention,
however, is bereft of merit.

Nothing in the records of the case supports petitioners claim that the petition for rehabilitation of
Clearwater was denied or was not pursued. On the contrary, the rehabilitation proceedings involved
all the petitioning corporations, i.e., FDPHI, Maranaw Canning Corporation, Clearwater Tuna
Corporation and Nautica Canning Corporation. The stay order issued by the rehabilitation court also
stayed the enforcement of all the claims against FDPHI and its subsidiaries including Clearwater.
More, the approved Amended Rehabilitation Plan covered all the debts of the FDPHI Group of
Companies. The fact that Clearwater was not specifically mentioned in the Amended Rehabilitation
Plan does not mean the denial of its rehabilitation. A careful perusal of the Amended Rehabilitation
Plan would show that all the assets and liabilities of FDPHI and its subsidiaries undergoing
rehabilitation were collectively managed and a payment scheme was introduced for the settlement of
all of the FDPHI Groups secured and unsecured creditors. The Breakdown and Management of the
First Dominion Groups Secured and Unsecured Debt29 in the Amended Rehabilitation Plan provides:

3.3. The First Dominion Groups Unsecured Debt to the bank and trade creditors in the aggregate
sum of P 2,392,095,015.94 shall be managed as follows:

3.3.1. One percent (1%) of the First Dominion Groups Unsecured Debt, or P 23,920,950.16,
shall be paid pro rata, in cash up front 30 days from Infusion Date to the unsecured creditors
by the Joint Venture Corporation.
 xxxx

3.3.2. A portion of the First Dominion Groups Unsecured Debt amounting to not more
than P67 Million shall be converted into common shares of the JVC, each having a par value
of P1.00, and shall be issued to the unsecured creditors; Provided, that the total of these
common shares shall not exceed 25% of all issued common shares inclusive of those issued
under this clause.

xxxx

3.3.3. A portion of the First Dominion Groups Unsecured Debt amounting to not more
than P300 Million shall be converted into Mandatory Convertible Preferred Shares of the
JVC, to be issued to and prorated among the unsecured creditors.

xxxx

3.4. The balance of First Dominion Groups Unsecured Debt after the cash payment and the
issuance of common and preferred shares to the unsecured creditors shall be restructured and paid
by First Dominion Group under the following terms and conditions:

x x x x (Emphasis in the original)

Thus, contrary to petitioners claim, Clearwaters debt to petitioner pursuant to their security services
was already included as it was specifically included as part of the unsecured debts of the FDPHI
Group in the Amended Rehabilitation Plan. The Amended Rehabilitation Plan also provides for a
debt-to-equity conversion in favor of the creditors which led to the incorporation of a Joint Venture
Corporation (JVC) as vehicle for the repayment of the obligations of the FDPHI Group of
Companies.

More importantly, Section 20 of the 2008 Rules of Procedure on Corporate Rehabilitation provides:

SEC. 20. Effects of Rehabilitation Plan. The approval of the rehabilitation plan by the court shall
result in the following:

(a) The plan and its provisions shall be binding upon the debtor and all persons who may be affected
thereby, including the creditors, whether or not such persons have participated in the proceedings or
opposed the plan or whether or not their claims have been scheduled;

(b) The debtor shall comply with the provisions of the plan and shall take all actions necessary to
carry out the plan;

(c) Payments shall be made to the creditors in accordance with the provisions of the plan;

(d) Contracts and other arrangements between the debtor and its creditors shall be interpreted as
continuing to apply to the extent that they do not conflict with the provisions of the plan; and

(e) Any compromises on amounts or rescheduling of timing of payments by the debtor shall be
binding on creditors regardless of whether or not the plan is successfully implemented. (Emphasis
ours.)
To stress, the rehabilitation plan, once approved, is binding upon the debtor and all persons who
may be affected by it, including the creditors, whether such persons have or have not participated in
the proceedings or have opposed the plan or whether their claims have or have not been scheduled.
With the approval by the Rehabilitation Court of the plan for the FDPHI Group of Companies, there is
nothing left to be done but to enforce the terms and schedule of payment as provided in the said
plan.

At the time petitioner filed the complaint before the trial court, the Amended Rehabilitation Plan had
been under implementation for two years already. We note that various checks30 had been tendered
to petitioner in connection with the implementation of the plan but these were refused by petitioner.
To this date, the Court has not received any notice of termination of the rehabilitation proceedings.
Thus, to allow petitioner to separately enforce its claim for unpaid security services while there is an
ongoing implementation of the rehabilitation plan would violate the provisions of the law.

WHEREFORE, the present petition for review on certiorari is DENIED for lack of merit. The Decision
dated August 24, 2009 and Resolution dated December 17, 2009 of the Court of Appeals in CA-G.R.
SP No. 105894 are herebyAFFIRMED.

Costs against petitioner.

SO ORDERED.
Nadiat vs. CA
NEW SAMPAGUITA BUILDERS G.R. No. 148753
CONSTRUCTION, INC. (NSBCI)
and Spouses EDUARDO R. DEE Present:
and ARCELITA M. DEE,
Petitioners, Panganiban, J,
Chairman,
Sandoval-Gutierrez,
Corona,* and
- versus - Carpio Morales, JJ
PHILIPPINE NATIONAL BANK, Promulgated:
Respondent.
July 30, 2004
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION

PANGANIBAN, J.:

C ourts have the authority to strike down or to modify provisions in

promissory notes that grant the lenders unrestrained power to

increase interest rates, penalties and other

charges at the latters sole discretion and without giving prior notice

to and securing the consent of the borrowers. This unilateral

__________________
* On leave.

authority is anathema to the mutuality of contracts and enable lenders to

take undue advantage of borrowers. Although the Usury Law has been

effectively repealed, courts may still reduce iniquitous or unconscionable

rates charged for the use of money. Furthermore, excessive interests,

penalties and other charges not revealed in disclosure statements

issued by banks, even if stipulated in the promissory notes, cannot be

given effect under the Truth in Lending Act.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of

Court, seeking to nullify the June 20, 2001 Decision[2] of the Court of

Appeals[3] (CA) in CA-GR CV No. 55231. The decretal portion of the

assailed Decision reads as follows:

WHEREFORE, the decision of the Regional Trial Court of

Dagupan City, Branch 40 dated December 28, 1995
is REVERSED and SET ASIDE. The foreclosure proceedings of the
mortgaged properties of defendants-appellees[4] and the February
26, 1992 auction sale are declared legal and valid and said
defendants-appellees are ordered to pay plaintiff-
appellant PNB,[5] jointly and severally[,] the amount of deficiency that
will be computed by the trial court based on the original penalty of
6% per annum as explicitly stated in the loan documents and to pay
attorneys fees in an amount equivalent to x x x 1% of the total
amount due and the costs of suit and expenses of litigation.[6]

The Facts

The facts are narrated by the CA as follows:

On February 11, 1989, Board Resolution No. 05, Series of

1989 was approved by [Petitioner] NSBCI [1)] authorizing the
company to x x x apply for or secure a commercial loan with the
PNB in an aggregate amount ofP8.0M, under such terms agreed by
the Bank and the NSBCI, using or mortgaging the real estate
properties registered in the name of its President and Chairman of
the Board [Petitioner] Eduardo R. Dee as collateral; [and] 2)
authorizing [petitioner-spouses] to secure the loan and to sign any
[and all] documents which may be required by [Respondent] PNB[,]
and that [petitioner-spouses] shall act as sureties or co-obligors who
shall be jointly and severally liable with [Petitioner] NSBCI for the
payment of any [and all] obligations.

On August 15, 1989, Resolution No. 77 was approved by

granting the request of [Respondent] PNB thru its Board NSBCI for
an P8 Million loan broken down into a revolving credit line of P7.7M
and an unadvised line ofP0.3M for additional operating and working
capital[7] to mobilize its various construction projects, namely:

1) MWSS Watermain;
2) NEA-Liberty farm;
3) Olongapo City Pag-Asa Public Market;
4) Renovation of COA-NCR Buildings 1, 2 and 9;
5) Dupels, Inc., Extensive prawn farm development project;
6) Banawe Hotel Phase II;
7) Clark Air Base -- Barracks and Buildings; and
 8) Others: EDSA Lighting, Roxas Blvd. Painting NEA Sapang
Palay and Angeles City.

The loan of [Petitioner] NSBCI was secured by a first

mortgage on the following: a) three (3) parcels of residential land
located at Mangaldan, Pangasinan with total land area of 1,214
square meters[,] including improvements thereon and registered
under TCT Nos. 128449, 126071, and 126072 of the Registry of
Deeds of Pangasinan; b) six (6) parcels of residential land situated
at San Fabian, Pangasinan with total area of 1,767 square meters[,]
including improvements thereon and covered by TCT Nos. 144006,
144005, 120458, 120890, 144161[,] and 121127 of the Registry of
Deeds of Pangasinan; and c) a residential lot and improvements
thereon located at Mangaldan, Pangasinan with an area of 4,437
square meters and covered by TCT No. 140378 of the Registry of
Deeds of Pangasinan.

The loan was further secured by the joint and several

signatures of [Petitioners] Eduardo Dee and Arcelita Marquez Dee,
who signed as accommodation-mortgagors since all the collaterals
were owned by them and registered in their names.

Moreover [Petitioner] NSBCI executed the following

documents, viz: a) promissory note dated June 29, 1989 in the
amount of P5,000,000.00 with due date on October 27, 1989; [b)]
promissory note dated September 1, 1989 in the amount
of P2,700,000.00 with due date on December 30, 1989; and c)
promissory note dated September 6, 1989 in the amount
of P300,000.00 with maturity date on January 4, 1990.

In addition, [petitioner] corporation also signed the Credit

Agreement dated August 31, 1989 relating to the revolving credit line
of P7.7 Million x x x and the Credit Agreement dated September 5,
1989 to support the unadvised line of P300,000.00.

On August 31, 1989, [petitioner-spouses] executed a Joint and

Solidary Agreement (JSA) in favor of [Respondent] PNB
unconditionally and irrevocably binding themselves to be jointly and
severally liable with the borrower for the payment of all sums due
and payable to the Bank under the Credit Document.

Later on, [Petitioner] NSBCI failed to comply with its

obligations under the promissory notes.
 On June 18, 1991, [Petitioner] Eduardo R. Dee on behalf of
[Petitioner] NSBCI sent a letter to the Branch Manager of the PNB
Dagupan Branch requesting for a 90-day extension for the payment
of interests and restructuring of its loan for another term.

Subsequently, NSBCI tendered payment to [Respondent] PNB

[of] three (3) checks aggregatingP1,000,000.00, namely 1) check no.
316004 dated August 8, 1991 in the amount of P200,000.00; 2)
check no. 03499997 dated August 8, 1991 in the amount
of P650,000.00; and 3) check no. 03499998 dated August 15, 1991
in the amount of P150,000.00.[8]

In a meeting held on August 12, 1991, [Respondent] PNBs

representative[,] Mr. Rolly Cruzabra, was informed by [Petitioner]
Eduardo Dee of his intention to remit to [Respondent] PNB post-
dated checks covering interests, penalties and part of the loan
principals of his due account.

On August 22, 1991, [Respondent] banks Crispin Carcamo

wrote [Petitioner] Eduardo Dee[,] informing him that [Petitioner]
NSBCIs proposal [was] acceptable[,] provided the total payment
should be P4,128,968.29 that [would] cover the amount
of P1,019,231.33 as principal, P3,056,058.03 as interests and
penalties[,] and P53,678.93 for insurance[,] with the issuance of
post-dated checks to be dated not later than November 29, 1991.

On September 6, 1991, [Petitioner] Eduardo Dee wrote the

PNB Branch Manager reiterating his proposals for the settlement of
[Petitioner] NSBCIs past due loan account amounting
to P7,019,231.33.

[Petitioner] Eduardo Dee later tendered four (4) post-dated

Interbank checks aggregating P1,111,306.67 in favor of
[Respondent] PNB, viz:

Check No. Date Amount

03500087 Sept. 29, 1991 P277,826.70
03500088 Oct. 29, 1991 P277,826.70
03500089 Nov. 29, 1991 P277,826.70
03500090 Dec. 20, 1991 P277,826.57
 Upon presentment[,] however, x x x check nos. 03500087 and
03500088 dated September 29 and October 29, 1991 were
dishonored by the drawee bank and returned due [to] a stop
payment order from [petitioners].

On November 12, 1991, PNBs Mr. Carcamo wrote [Petitioner]

Eduardo Dee informing him that unless the dishonored checks
[were] made good, said PNB branch shall recall its recommendation
to the Head Office for the restructuring of the loan account and refer
the matter to its legal counsel for legal action.[] [Petitioners] did not
heed [respondents] warning and as a result[,] the PNB Dagupan
Branch sent demand letters to [Petitioner] NSBCI at its office
address at 1611 ERDC Building, E. Rodriguez Sr. Avenue, Quezon
City[,] asking it to settle its past due loan account.

[Petitioners] nevertheless failed to pay their loan obligations

within the [timeframe] given them and as a result, [Respondent]
PNB filed with the Provincial Sheriff of Pangasinan at Lingayen a
Petition for Sale under Act 3135, as amended[,] and Presidential
Decree No. 385 dated January 30, 1992.

The notice of extra-judicial sale of the mortgaged properties

relating to said PNBs [P]etition for [S]ale was published in the
February 8, 15 and 22, 1992 issues of the Weekly Guardian,
allegedly a newspaper of generalcirculation in the Province of
Pangasinan, including the cities of Dagupan and San Carlos. In
addition[,] copies of the notice were posted in three (3) public
places[,] and copies thereof furnished [Petitioner] NSBCI at 1611
[ERDC Building,] E. Rodriguez Sr. Avenue, Quezon City, [and at]
555 Shaw Blvd., Mandaluyong[, Metro Manila;] and [Petitioner] Sps.
Eduardo and Arcelita Dee at 213 Wilson St., San Juan, Metro
Manila.

On February 26, 1992, the Provincial Deputy Sheriff Cresencio

F. Ferrer of Lingayen, Pangasinan foreclosed the real estate
mortgage and sold at public auction the mortgaged properties of
[petitioner-spouses,] with [Respondent] PNB being declared the
highest bidder for the amount of P10,334,000.00.

On March 2, 1992, copies of the Sheriffs Certificate of Sale

were sent by registered mail to [petitioner] corporations address at
1611 [ERDC Building,] E. Rodriguez Sr. Avenue, Quezon City and
[petitioner-spouses] address at 213 Wilson St., San Juan, Metro
Manila.

On April 6, 1992, the PNB Dagupan Branch Manager sent a

letter to [petitioners] at their address at 1611 [ERDC Building,] E.
Rodriguez Sr. Avenue, Quezon City[,] informing them that the
properties securing their loan account [had] been sold at public
auction, that the Sheriffs Certificate of Sale had been registered with
the Registry of Deeds of Pangasinan on March 13, 1992[,] and that a
period of one (1) year therefrom [was] granted to them within which
to redeem their properties.

[Petitioners] failed to redeem their properties within the one-

year redemption period[,] and so [Respondent] PNB executed a
[D]eed of [A]bsolute [S]ale consolidating title to the properties in its
name. TCT Nos. 189935 to 189944 were later issued to [Petitioner]
PNB by the Registry of Deeds of Pangasinan.

On August 4, 1992, [Respondent] PNB informed [Petitioner]

NSBCI that the proceeds of the sale conducted on February 26,
1992 were not sufficient to cover its total claim amounting
to P12,506,476.43[,] and thus demanded from the latter the
deficiency of P2,172,476.43 plus interest and other charges[,] until
the amount [was] fully paid.

[Petitioners] refused to pay the above deficiency claim which

compelled [Respondent] PNB to institute the instant [C]omplaint for
the collection of its deficiency claim.

Finding that the PNB debt relief package automatically

[granted] to [Petitioner] NSBCI the benefits under the program, the
court a quo ruled in favor of [petitioners] in its Decision dated
December 28, 1995, the fallo of which reads:

In view of the foregoing, the Court believes and so

holds that the [respondent] has no cause of action against
the [petitioners].
 WHEREFORE, the case is hereby DISMISSED,
without costs.[9]

On appeal, respondent assailed the trial courts Decision dismissing its

deficiency claim on the mortgage debt. It also challenged the ruling of the
lower court that Petitioner NSBCIs loan account was bloated, and that the
inadequacy of the bid price was sufficient to set aside the auction sale.

Ruling of the Court of Appeals

Reversing the trial court, the CA held that Petitioner NSBCI did not

avail itself of respondents debt relief package (DRP) or take steps to

comply with the conditions for qualifying under the program. The appellate
court also ruled that entitlement to the program was not a matter of right,

because such entitlement was still subject to the approval of higher bank

authorities, based on their assessment of the borrowers repayment

capability and satisfaction of other requirements.

As to the misapplication of loan payments, the CA held that the

subsidiary ledgers of NSBCIs loan accounts with respondent reflected all

the loan proceeds as well as the partial payments that had been applied
either to the principal or to the interests, penalties and other

charges. Having been made in the ordinary and usual course of the banking

business of respondent, its entries were presumed accurate, regular and fair

under Section 5(q) of Rule 131 of the Rules of Court.Petitioners failed to

rebut this presumption.

The increases in the interest rates on NSBCIs loan were also held to

be authorized by law and the Monetary Board and -- like the increases in

penalty rates -- voluntarily and freely agreed upon by the parties in the

Credit Agreements they executed. Thus, these increases were binding upon

petitioners.

However, after considering that two to three of Petitioner NSBCIs

projects covered by the loan were affected by the economic slowdown in

the areas near the military bases in the cities of Angeles and Olongapo, the

appellate court annulled and deleted the adjustment in penalty from 6

percent to 36 percent per annum. Not only did respondent fail to

demonstrate the existence of market forces and economic conditions that

would justify such increases; it could also have treated petitioners request

for restructuring as a request for availment of the DRP. Consequently, the

original penalty rate of 6 percent per annum was used to compute the

deficiency claim.

The auction sale could not be set aside on the basis of the inadequacy

of the auction price, because in sales made at public auction, the owner is

given the right to redeem the mortgaged properties; the lower the bid price,

the easier it is to effect redemption or to sell such right. The bid price

of P10,334,000.00 vis--vis respondents claim ofP12,506,476.43 was found

to be neither shocking nor unconscionable.

The attorneys fees were also reduced by the appellate court from 10

percent to 1 percent of the total indebtedness. First, there was no extreme

difficulty in an extrajudicial foreclosure of a real estate mortgage, as this

proceeding was merely administrative in nature and did not involve a court

litigation contesting the proceedings prior to the auction sale. Second, the

attorneys fees were exclusive of all stipulated costs and fees. Third, such

fees were in the nature of liquidated damages that did not inure to
respondents salaried counsel.

Respondent was also declared to have the unquestioned right to

foreclose the Real Estate Mortgage. It was allowed to recover any

deficiency in the mortgage account not realized in the foreclosure sale,

since petitioner-spouses had agreed to be solidarily liable for all sums due

and payable to respondent.

Finally, the appellate court concluded that the extrajudicial

foreclosure proceedings and auction sale were valid for the following

reasons: (1) personal notice to the mortgagors, although unnecessary, was

actually made; (2) the notice of extrajudicial sale was duly published and

posted; (3) the extrajudicial sale was conducted through the deputy sheriff,

under the direction of the clerk of court who was concurrently the ex-

oficio provincial sheriff and acting as agent of respondent; (4) the sale was

conducted within the province where the mortgaged properties were

located; and (5) such sale was not shown to have been attended by fraud.

Hence this Petition.[10]

Issues

Petitioners submit the following issues for our consideration:

I
Whether or not the Honorable Court of Appeals correctly ruled that
petitioners did not avail of PNBs debt relief package and were not
entitled thereto as a matter of right.

II

Whether or not petitioners have adduced sufficient and convincing

evidence to overthrow the presumption of regularity and correctness
of the PNB entries in the subsidiary ledgers of the loan accounts of
petitioners.

III

Whether or not the Honorable Court of Appeals seriously erred in not

holding that the Respondent PNB bloated the loan account of
petitioner corporation by imposing interests, penalties and attorneys
fees without legal, valid and equitable justification.

IV

Whether or not the auction price at which the mortgaged properties

was sold was disproportionate to their actual fair mortgage value.

Whether or not Respondent PNB is not entitled to recover the

deficiency in the mortgage account not realized in the foreclosure
sale, considering that:

A. Petitioners are merely guarantors of the mortgage debt

of petitioner corporation which has a separate personality
from the [petitioner-spouses].

B. The joint and solidary agreement executed by [petitioner-

spouses] are contracts of adhesion not binding on them;

C. The NSBCI Board Resolution is not valid and binding on

[petitioner-spouses] because they were compelled to
execute the said Resolution[;] otherwise[,] Respondent
PNB would not grant petitioner corporation the loan;
 D. The Respondent PNB had already in its possession the
properties of the [petitioner-spouses] which served as a
collateral to the loan obligation of petitioner corporation[,]
and to still allow Respondent PNB to recover the
deficiency claim amounting to a very substantial amount
of P2.1 million would constitute unjust enrichment on the
part of Respondent PNB.

VI

Whether or not the extrajudicial foreclosure proceedings and auction

sale, including all subsequent proceedings[,] are null and void for
non-compliance with jurisdictional and other mandatory
requirements; whether or not the petition for extrajudicial foreclosure
of mortgage was filed prematurely; and whether or not the finding of
fraud by the trial court is amply supported by the evidence on
record.[11]

The foregoing may be summed up into two main issues: first, whether the
loan accounts are bloated; and second, whether the extrajudicial foreclosure
and subsequent claim for deficiency are valid and proper.

The Courts Ruling

The Petition is partly meritorious.

First Main Issue:

Bloated Loan Accounts
At the outset, it must be stressed that only questions of law[12] may be

raised in a petition for review on certiorari under Rule 45 of the Rules of

Court. As a rule, questions of fact cannot be the subject of this mode of

appeal,[13] for [t]he Supreme Court is not a trier of facts.[14] As exceptions to

this rule, however, factual findings of the CA may be reviewed on

appeal[15] when, inter alia, the factual inferences are manifestly

mistaken;[16] the judgment is based on a misapprehension of facts;[17] or the

CA manifestly overlooked certain relevant and undisputed facts that, if

properly considered, would justify a different legal conclusion.[18] In the

present case, these exceptions exist in various instances, thus prompting us

to take cognizance of factual issues and to decide upon them in the interest

of justice and in the exercise of our sound discretion.[19]

Indeed, Petitioner NSBCIs loan accounts with respondent appear to

be bloated with some iniquitous imposition of interests, penalties, other

charges and attorneys fees. To demonstrate this point, the Court shall take

up one by one the promissory notes, the credit agreements and the
disclosure statements.
Increases in Interest Baseless

Promissory Notes. In each drawdown, the Promissory Notes specified

the interest rate to be charged: 19.5 percent in the first, and 21.5 percent in

the second and again in the third. However, a uniform clause therein

permitted respondent to increase the rate within the limits allowed by law

at any time depending on whatever policy it may adopt in the future x x

x,[20] without even giving prior notice to petitioners. The Court holds that

petitioners accessory duty to pay interest[21] did not give respondent

unrestrained freedom to charge any rate other than that which was

agreed upon.No interest shall be due, unless expressly stipulated in

writing.[22] It would be the zenith of farcicality to specify and agree upon

rates that could be subsequently upgraded at whim by only one party to the

agreement.

The unilateral determination and imposition[23] of increased rates is

violative of the principle of mutuality of contracts ordained in Article

1308[24] of the Civil Code.[25] One-sided impositions do not have the force

of law between the parties, because such impositions are not based on the

parties essential equality.

 Although escalation clauses[26] are valid in maintaining fiscal stability

and retaining the value of money on long-term contracts,[27] giving

respondent an unbridled right to adjust the interest independently and

upwardly would completely take away from petitioners the right to assent

to an important modification in their agreement[28] and would also negate

the element of mutuality in their contracts. The clause cited earlier made

the fulfillment of the contracts dependent exclusively upon the

uncontrolled will[29] of respondent and was therefore void. Besides, the pro

forma promissory notes have the character of a contract dadhsion,[30] where

the parties do not bargain on equal footing, the weaker partys [the debtors]

participation being reduced to the alternative to take it or leave it.[31]

While the Usury Law[32] ceiling on interest rates was lifted by [Central Bank]

Circular No. 905,[33] nothing in the said Circular grants lenders carte

blanche authority to raise interest rates to levels which will either enslave

their borrowers or lead to a hemorrhaging of their assets.[34] In fact, we

have declared nearly ten years ago that neither this Circular nor PD 1684,

which further amended the Usury Law,

authorized either party to unilaterally raise the interest rate without the

others consent.[35]

Moreover, a similar case eight years ago pointed out to the same

respondent (PNB) that borrowing signified a capital transfusion from

lending institutions to businesses and industries and was done for the

purpose of stimulating their growth; yet respondents continued unilateral

and lopsided policy[36] of increasing interest rates without the prior

assent[37] of the borrower not only defeats this purpose, but also deviates

from this pronouncement. Although such increases are not usurious, since

the Usury Law is now legally inexistent[38] -- the interest ranging from 26

percent to 35 percent in the statements of account[39] -- must be equitably

reduced for being iniquitous, unconscionable and exorbitant.[40] Rates

found to be
iniquitous or unconscionable are void, as if it there were no express

contract thereon.[41] Above all, it is undoubtedly against public policy to

charge excessively for the use of money.[42]

It cannot be argued that assent to the increases can be implied either from

the June 18, 1991 request of petitioners for loan restructuring or from their

lack of response to the statements of account sent by respondent. Such

request does not indicate any agreement to an interest increase; there can

be no implied waiver of a right when there is no clear, unequivocal and

decisive act showing such purpose.[43] Besides, the statements were not

letters of information sent to secure their conformity; and even if we were

to presume these as an offer, there was no acceptance. No one receiving a

proposal to modify a loan contract, especially interest -- a vital component

-- is obliged to answer the proposal.[44]

Furthermore, respondent did not follow the stipulation in the Promissory

Notes providing for the automatic conversion of the portion that remained

unpaid after 730 days -- or two years from date of original release -- into a

medium-term loan, subject to the applicable interest rate to be applied

from the dates of original release.[45]

In the first,[46] second[47] and third[48] Promissory Notes, the amount that

remained unpaid as of October 27, 1989, December 1989 and January 4,

1990 -- their respective due dates -- should have been automatically

converted by respondent into medium-term loans on June 30, 1991,

September 2, 1991, and September 7, 1991, respectively. And on this

unpaid amount should have been imposed the same interest rate charged

by respondent on other medium-term loans; and the rate applied from June

29, 1989, September 1, 1989 and September 6, 1989 -- their respective

original release -- until paid. But these steps were not taken. Aside from

sending demand letters, respondent did not at all exercise its option to

enforce collection as of these Notes due dates. Neither did it renew or

extend the account.
In these three Promissory Notes, evidently, no complaint for collection

was filed with the courts. It was not until January 30, 1992 that a Petition

for Sale of the mortgaged properties was filed -- with the provincial sheriff,

instead.[49]Moreover, respondent did not supply the interest rate to be

charged on medium-term loans granted by automatic conversion. Because

of this deficiency, we shall use the legal rate of 12 percent per annum on

loans and forbearance of money, as provided for by CB Circular 416.[50]

Credit Agreements. Aside from the promissory notes, another main

document involved in the principal obligation is the set of credit

agreements executed and their annexes.

The first Credit Agreement[51] dated June 19, 1989 -- although offered and

admitted in evidence, and even referred to in the first Promissory Note --

cannot be given weight.

First, it was not signed by respondent through its branch

manager.[52] Apparently it was surreptitiously acknowledged before

respondents counsel, who unflinchingly declared that it had been signed by

the parties on every page, although respondents signature does not appear

thereon.[53]
Second, it was objected to by petitioners,[54] contrary to the trial courts

findings.[55] However, it was not the Agreement, but the revolving credit

line[56] of P5,000,000, that expired one year from the Agreements date of

implementation.[57]

Third, there was no attached annex that contained the General

Conditions.[58] Even the Acknowledgment did not allude to its

existence.[59] Thus, no terms or conditions could be added to the

Agreement other than those already stated therein.

Since the first Credit Agreement cannot be given weight, the interest rate

on the first availment pegged at 3 percent over and above respondents

prime rate[60] on the date of such availment[61] has no bearing at all on the

loan. After the first Notes due date, the rate

of 19 percent agreed upon should continue to be applied on the availment,

until its automatic conversion to a medium-term loan.

The second Credit Agreement[62] dated August 31, 1989, provided for

interest -- respondents prime rate, plus the applicable spread[63] in effect as

of the date of each availment,[64] on a revolving credit line of P7,700,000[65] -

- but did not state any provision on its increase or

decrease.[66] Consequently, petitioners could not be made to bear interest

more than such prime rate plus spread. The Court gives weight to this

second Credit Agreement for the following reasons.

First, this document submitted by respondent was admitted by

petitioners.[67] Again, contrary to their assertion, it was not the Agreement -

- but the credit line -- that expired one year from the Agreements date of

implementation.[68]Thus, the terms and conditions continued to apply, even

if drawdowns could no longer be made.

Second, there was no 7-page annex[69] offered in evidence that contained the

General Conditions,[70] notwithstanding the Acknowledgment of its

existence by respondents counsel. Thus, no terms or conditions could be

appended to the Agreement other than those specified therein.

Third, the 12-page General Conditions[71] offered and admitted in evidence

had no probative value. There was no reference to it in the

Acknowledgment of the Agreement; neither was respondents signature on

any of the pages thereof. Thus, the General Conditions stipulations on

interest adjustment,[72] whether on a fixed or a floating scheme, had no

effect whatsoever on the Agreement. Contrary to the trial courts

findings,[73] the General Condition were correctly objected to by

petitioners.[74] The rate of 21.5 percent agreed upon in the second Note

thus continued to apply to the second availment, until its automatic

conversion into a medium-term loan.

The third Credit Agreement[75] dated September 5, 1989, provided for the

same rate of interest as that in the second Agreement. This rate was to be

applied to availments of an unadvised line of P300,000. Since there was no

mention in the third Agreement, either, of any stipulation on increases or

decreases[76] in interest, there would be no basis for imposing amounts

higher than the prime rate plus spread. Again, the 21.5 percent rate agreed
upon would continue to apply to the third availment indicated in the third

Note, until such amount was automatically converted into a medium-term

loan.

The Court also finds that, first, although this document was admitted by

petitioners,[77] it was the credit line that expired one year from the

implementation of the Agreement.[78] The terms and conditions therein

continued to apply, even if availments could no longer be drawn after

expiry.

Second, there was again no 7-page annex[79] offered that contained the

General Conditions,[80] regardless of the Acknowledgment by the same

respondents counsel affirming its existence. Thus, the terms and conditions

in this Agreement relating to interest cannot be expanded beyond that

which was already laid down by the parties.

Disclosure Statements. In the present case, the Disclosure

Statements[81] furnished by respondent set forth the same interest rates as

those respectively indicated in the Promissory Notes. Although no method

of computation was provided showing how such rates were arrived at, we
will nevertheless take up the Statements seriatim in order
to determine the applicable rates clearly.

As to the first Disclosure Statement on Loan/Credit Transaction[82] dated

June 13, 1989, we hold that the 19.5 percent effective interest rate per

annum[83] would indeed apply to the first availment or drawdown evidenced

by the first Promissory Note. Not only was this Statement issued prior to

the consummation of such availment or drawdown, but the rate shown

therein can also be considered equivalent to 3 percent over and above

respondents prime rate in effect.Besides, respondent mentioned no other

rate that it considered to be the prime rate chargeable to petitioners. Even

if we disregarded the related Credit Agreement, we assume that this private

transaction between the parties was fair and regular,[84] and that the

ordinary course of business was followed.[85]

As to the second Disclosure Statement on Loan/Credit

Transaction[86] dated September 2, 1989, we hold that the 21.5 percent

effective interest rate per annum[87] would definitely apply to the second
availment or drawdown evidenced by the second Promissory

Note. Incidentally, this Statement was issued only after the consummation

of its related availment or drawdown, yet such rate can be deemed

equivalent to the prime rate plus spread, as stipulated in the corresponding

Credit Agreement. Again, we presume that this private transaction was fair

and regular, and that the ordinary course of business was followed. That

the related Promissory Note was pre-signed would also bolster petitioners

claim although, under cross-examination Efren Pozon -- Assistant

Department Manager I[88] of PNB, Dagupan Branch -- testified that the

Disclosure Statements were the basis for preparing the Notes.[89]

As to the third Disclosure Statement on Loan/Credit Transaction[90] dated

September 6, 1989, we hold that the same 21.5 percent effective interest

rate per annum[91] would apply to the third

availment or drawdown evidenced by the third Promissory Note. This

Statement was made available to petitioner-spouses, only after the related

Credit Agreement had been executed, but simultaneously with the

consummation of the Statements related availment or

drawdown. Nonetheless, the rate herein should still be regarded as

equivalent to the prime rate plus spread, under the similar presumption that

this private transaction was fair and regular and that the ordinary course of

business was followed.

In sum, the three disclosure statements, as well as the two credit

agreements considered by this Court, did not provide for any increase in

the specified interest rates. Thus, none would now be permitted. When

cross-examined, Julia Ang-Lopez, Finance Account Analyst II of PNB,

Dagupan Branch, even testified that the bases for computing such rates

were those sent by the head office from time to time, and not those

indicated in the notes or disclosure statements.[92]

In addition to the preceding discussion, it is then useless to labor the

point that the increase in rates violates the impairment[93] clause of the

Constitution,[94] because the sole purpose of this provision is to safeguard

the integrity of valid contractual agreements against unwarranted

interference by the State[95] in the form of laws. Private individuals

intrusions on interest rates is governed by statutory enactments like the

Civil Code.

Penalty, or Increases
Thereof, Unjustified

No penalty charges or increases thereof appear either in the Disclosure

Statements[96] or in any of the clauses in the second and the third Credit

Agreements[97] earlier discussed. While a standard penalty charge of 6

percent per annum has been imposed on the amounts stated in all three

Promissory Notes still remaining unpaid or unrenewed when they fell

due,[98] there is no stipulation therein that would justify any increase in that

charges. The effect, therefore, when the borrower is not clearly

informed of the Disclosure Statements -- prior to the consummation

of the availment or drawdown -- is that the lender will have no right

to collect upon such charge[99] or increases thereof, even if stipulated

in the Notes. The time is now ripe to give teeth to the often ignored
forty-one-year old Truth in Lending Act[100] and thus transform it from a
snivelling paper tiger to a growling financial watchdog of hapless

borrowers.

Besides, we have earlier said that the Notes are contracts of adhesion;

although not invalid per se, any apparent ambiguity in the loan contracts --

taken as a whole -- shall be strictly construed against respondent who

caused it.[101]Worse, in the statements of account, the penalty rate has again

been unilaterally increased by respondent to 36 percent without petitioners

consent. As a result of its move, such

liquidated damages intended as a penalty shall be equitably reduced by the

Court to zilch[102] for being iniquitous or unconscionable.[103]

Although the first Disclosure Statement was furnished Petitioner NSBCI

prior to the execution of the transaction, it is not a contract that can be

modified by the related Promissory Note, but a mere statement in writing

that reflects the true and effective cost of loans from respondent. Novation

can never be presumed,[104] and the animus novandi must appear by express

agreement of the parties, or by their acts that are too clear and unequivocal

to be mistaken.[105] To allow novation will surely flout the policy of the

State to protect
its citizens from a lack of awareness of the true cost of credit.[106]

With greater reason should such penalty charges be indicated in the

second and third Disclosure Statements, yet none can be found

therein. While the charges are issued after the respective availment or

drawdown, the disclosure statements are given simultaneously

therewith. Obviously, novation still does not apply.

Other Charges Unwarranted

In like manner, the other charges imposed by respondent are not

warranted. No particular values or rates of service charge are indicated in

the Promissory Notes or Credit Agreements, and no total value or even the

breakdown figures of such non-finance charge are specified in the

Disclosure Statements. Moreover, the provision in the Mortgage that

requires the payment of insurance and other charges is neither made part

of nor reflected in such Notes, Agreements, or Statements.[107]

Attorneys Fees Equitably Reduced

We affirm the equitable reduction in attorneys fees.[108] These are not an

integral part of the cost of borrowing, but arise only when collecting upon

the Notes becomes necessary. The purpose of these fees is not to give

respondent a larger compensation for the loan than the law already allows,

but to protect it against any future loss or damage by being compelled to

retain counsel in-house or not -- to institute judicial proceedings for the

collection of its credit.[109]Courts have has the power[110] to determine their

reasonableness[111] based on quantum meruit[112] and to reduce[113]the amount

thereof if excessive.[114]

In addition, the disqualification argument in the Affidavit of Publication

raised by petitioners no longer holds water, inasmuch as Act 496 [115] has

repealed the Spanish Notarial Law.[116] In the same vein, their engagement

of their counsel in another capacity concurrent with the practice of law is

not prohibited, so long as the roles being assumed by such counsel is made

clear to the client.[117] The only reason for this clarification requirement is

that certain ethical considerations operative in one profession may not be

so in the other.[118]

Debt Relief Package

Not Availed Of

We also affirm the CAs disquisition on the debt relief package (DRP).

Respondents Circular is not an outright grant of assistance or extension of

payment,[119] but a mere offer subject to specific terms and conditions.

Petitioner NSBCI failed to establish satisfactorily that it had been seriously

and directly affected by the economic slowdown in the peripheral areas of

the then US military bases. Its allegations, devoid of any verification,

cannot lead to a supportable conclusion. In fact, for short-term loans, there

is still a need to conduct a thorough review of the borrowers repayment

possibilities.[120]

Neither has Petitioner NSBCI shown enough margin of equity, [121] based

on the latest loan value of hard collaterals,[122] to be eligible for the

package. Additional accommodations on an unsecured basis may be

granted only when regular payment amortizations have been established, or

when the merits of the credit application would so justify.[123]
 The branch managers recommendation to restructure or extend a

total outstanding loan not exceeding P8,000,000 is not final, but subject to

the approval of respondents Branches Department Credit Committee,

chaired by its executive vice-president.[124] Aside from being further

conditioned on other pertinent policies of respondent, [125]such approval

nevertheless needs to be reported to its Board of Directors for

confirmation.[126] In fact, under the General Banking Law of 2000,[127] banks

shall grant loans and other credit accommodations only in amounts and for

periods of time essential to the effective completion of operations to be

financed, consistent with safe and sound banking practices. [128] The

Monetary Board -- then and now -- still prescribes, by regulation, the

conditions and limitations under which banks may grant extensions or

renewals of their loans and other credit accommodations.[129]

Entries in Subsidiary Ledgers
Regular and Correct

Contrary to petitioners assertions, the subsidiary ledgers of respondent

properly reflected all entries pertaining to Petitioner NSBCIs loan

accounts. In accordance with the Generally Accepted Accounting

Principles (GAAP) for the Banking Industry,[130] all interests accrued or

earned on such loans, except those that were restructured and non-

accruing,[131] have been periodically taken into income.[132] Without a doubt,

the subsidiary ledgers in a manual accounting system are mere private

documents[133] that support and are controlled by the general

ledger.[134] Such ledgers are neither foolproof nor standard in format, but

are periodically subject to audit. Besides, we go by the presumption that the

recording of private transactions has been fair and regular, and that the

ordinary course of business has been followed.

Second Main Issue:

Extrajudicial Foreclosure Valid, But
Deficiency Claims Excessive
Respondent aptly exercised its option to foreclose the mortgage,[135] after

petitioners had failed to pay all the Notes in full when they fell due.[136] The

extrajudicial sale and subsequent proceedings are therefore valid, but the

alleged deficiency claim cannot be recovered.

Auction Price Adequate

In the accessory contract[137] of real mortgage,[138] in which immovable

property or real rights thereto are used as security[139] for the fulfillment of

the principal loan obligation,[140] the bid price may be lower than the

propertys fair market value.[141] In fact, the loan value itself is only 70

percent of the appraised value.[142] As correctly emphasized by the appellate

court, a low bid price will make it

easier[143] for the owner to effect redemption[144] by subsequently reacquiring

the property or by selling the right to redeem and thus recover alleged

losses. Besides, the public auction sale has been regularly and fairly

conducted,[145]there has been ample authority to effect the sale,[146] and the

Certificates of Title can be relied upon. No personal notice[147] is even

required,[148] because an extrajudicial foreclosure is an action in rem,

requiring only notice by publication and posting, in order to bind parties

interested in the foreclosed property.[149]

As no redemption[150] was exercised within one year after the date of

registration of the Certificate of Sale with the Registry of

Deeds,[151] respondent -- being the highest bidder -- has the right to a writ

of possession, the final process that will consummate the extrajudicial

foreclosure. On the other hand, petitioner-spouses, who are mortgagors

herein, shall lose all their rights to the property.[152]

No Deficiency Claim Receivable

After the foreclosure and sale of the mortgaged property, the Real Estate

Mortgage is extinguished. Although the mortgagors, being third persons,

are not liable for any deficiency in the absence of a contrary

stipulation,[153] the action for recovery of such amount -- being clearly

sureties to the principal obligation -- may still be directed against

them.[154] However, respondent may impose only the stipulated interest

rates of 19.5 percent and 21.5 percent on the respective availments --

subject to the 12 percent legal rate revision upon automatic conversion into

medium-term loans -- plus 1 percent attorneys fees, without additional

charges on penalty, insurance or any increases thereof.

Accordingly, the excessive interest rates in the Statements of Account

sent to petitioners are reduced to 19.5 percent and 21.5 percent, as

stipulated in the Promissory Notes; upon loan conversion, these rates are

further reduced to the legal rate of 12 percent. Payments made by

petitioners are pro-rated, the charges on penalty and insurance eliminated,

and the resulting total unpaid principal and interest of P6,582,077.70 as of

the date of public auction is then subjected to 1 percent attorneys fees. The

total outstanding obligation is compared to the bid price. On the basis of

these rates and the comparison made, the deficiency claim receivable

amounting to P2,172,476.43 in fact vanishes.Instead, there is an

overpayment by more than P3 million, as shown in the following

Schedules:

SCHEDULE 1: PN (1) drawdown amount on 6/29/89

Less: Interest deducted in advance (per 6/13/89 Disclosure Statement)
Net proceeds

Principal
Add:
Interest at 19.5% p.a.
10/28/89-12/31/89 (5,000,000 x 19.5% x [65/365]) 1
1/1/90-1/5/90 (5,000,000 x 19.5% x [5/365])
Amount due as of 1/5/90
Less: Payment on 1/5/90 (pro-rated upon interest)
Balance

Add:
Interest at 19.5% p.a.
1/6/90-3/30/90 ([5,000,000-356,821.30] x 19.5% x [84/365])
Amount due as of 3/30/90
Less: Payment on 3/30/90 (pro-rated upon interest)
Balance
Add:
Interest at 19.5% p.a.
3/31/90-5/31/90 ([5,000,000-356,821.30] x 19.5% x [62/365])
Amount due as of 5/31/90
Less: Payment on 5/31/90 (pro-rated upon interest)
Balance

Add:
Interest at 19.5% p.a.
6/1/90-6/29/90 ([5,000,000-(356,821.30+821.33)] x 19.5% x [29/365])
Amount due as of 6/29/90
Less: Payment on 6/29/90 (pro-rated upon interest)
Balance
Add:
Interest at 19.5% p.a.
6/30/90-12/31/90 ([5,000,000-(356,821.30+821.33+767,087.92)] x 19.5% x [185/365]) 3
1/1/91-6/29/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 19.5% x [180/365]) 3
Interest at 12% p.a. upon automatic conversion
6/30/91-8/8/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12% x [40/365])
Amount due as of 8/8/91
Less: Payment on 8/8/91 (pro-rated upon interest)
Balance
Add:
Interest at 12% p.a.
8/9/91-8/15/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12% x [7/365])
Amount due as of 8/15/91
Less: Payment on 8/15/91 (pro-rated upon interest)
Balance
Add:
Interest at 12% p.a.
8/16/91-11/29/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12% x [106/365])
Amount due as of 11/29/91
Less: Payment on 11/29/91 (pro-rated upon interest)
Balance
Add:
Interest at 12% p.a.
11/30/91-12/20/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12% x [21/365])
Amount due as of 12/20/91
Less: Payment on 12/20/91 (pro-rated upon interest)
Balance
Add:
Interest at 12% p.a.
12/21/91-12/31/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12% x [11/365])
1/1/92-2/26/92 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12% x [57/365])
Amount due on PN (1) as of 2/26/92
SCHEDULE 2: PN (2) drawdown amount on 9/1/89
Less: Interest deducted in advance (per 9/1/89 Disclosure Statement)
Net proceeds

Principal
Add:
Interest at 21.5% p.a.
12/31/89 (2,700,000 x 21.5% x [1/365])
1/1/90-1/5/90 (2,700,000 x 21.5% x [5/365])
Amount due as of 1/5/90
Less: Payment on 1/5/90 (pro-rated upon interest)
Balance

Add:
Interest at 21.5% p.a.
1/6/90-3/30/90 ([2,700,000-18,209.65] x 21.5% x [84/365])
Amount due as of 3/30/90
Less: Payment on 3/30/90 (pro-rated upon interest)
Balance
Add:
Interest at 21.5% p.a.
3/31/90-5/31/90 ([2,700,000-18,209.65] x 21.5% x [62/365])
Amount due as of 5/31/90
Less: Payment on 5/31/90 (pro-rated upon interest)
Balance

Add:
Interest at 21.5% p.a.
6/1/90-6/29/90 ([2,700,000-(18,209.65+523.04)] x 21.5% x [29/365])
Amount due as of 6/29/90
Less: Payment on 6/29/90 (pro-rated upon interest)
Balance
Add:
Interest at 21.5% p.a.
6/30/90-12/31/90 ([2,700,000-(18,209.65+523.04+488,484.22)] x 21.5% x [185/365]) 23
1/1/91-8/8/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x 21.5% x [220/365]) 28
Amount due as of 8/8/91
Less: Payment on 8/8/91 (pro-rated upon interest)
Balance
Add:
Interest at 21.5% p.a.
8/9/91-8/15/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x 21.5% x [7/365])
Amount due as of 8/15/91
Less: Payment on 8/15/91 (pro-rated upon interest)
Balance
Add:
Interest at 21.5% p.a.
8/16/91-9/1/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x 21.5% x [17/365]) 2
Interest at 12% p.a. upon automatic conversion
9/2/91-11/29/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x 12% x [89/365]) 6
Amount due as of 11/29/91
Less: Payment on 11/29/91 (pro-rated upon interest)
Balance
Add:
Interest at 12% p.a.
11/30/91-12/20/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x 12% x
[21/365])
Amount due as of 12/20/91
Less: Payment on 12/20/91 (pro-rated upon interest)
Balance
Add:
Interest at 12% p.a.
12/21/91-12/31/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x 12% x
[11/365])
1/1/92-2/26/92 ([2,700,000-(18,209.65+523.04+488,484.22)] x 12% x [57/365]) 4
Amount due on PN (2) as of 2/26/92
SCHEDULE 3: PN (3) drawdown amount on 9/6/89
Less: Interest deducted in advance (per 9/6/89 Disclosure Statement)
Net proceeds

Principal
Add:
Interest at 21.5% p.a.
1/5/90 (300,000 x 21.5% x [1/365])
Amount due as of 1/5/90
Less: Payment on 1/5/90 (pro-rated upon interest)
Balance

Add:
Interest at 21.5% p.a.
1/6/90-3/30/90 ([300,000-337.22] x 21.5% x [84/365])
Amount due as of 3/30/90
Less: Payment on 3/30/90 (pro-rated upon interest)
Balance
Add:
Interest at 21.5% p.a.
3/31/90-5/31/90 ([300,000-337.22] x 21.5% x [62/365])
Amount due as of 5/31/90
Less: Payment on 5/31/90 (pro-rated upon interest)
Balance

Add:
Interest at 21.5% p.a.
6/1/90-6/29/90 ([300,000-(337.22+58.44)] x 21.5% x [29/365])
Amount due as of 6/29/90
Less: Payment on 6/29/90 (pro-rated upon interest)
Balance
Add:
Interest at 21.5% p.a.
6/30/90-12/31/90 ([300,000-(337.22+58.44+54,583.14)] x 21.5% x [185/365]) 2
1/1/91-8/8/91 ([300,000-(337.22+58.44+54,583.14)]] x 21.5% x [220/365]) 3
Amount due as of 8/8/91
Less: Payment on 8/8/91 (pro-rated upon interest)
Balance
Add:
Interest at 21.5% p.a.
8/9/91-8/15/91 ([300,000-(337.22+58.44+54,583.14)]] x 21.5% x [7/365])
Amount due as of 8/15/91
Less: Payment on 8/15/91 (pro-rated upon interest)
Balance
Add:
Interest at 21.5% p.a.
8/16/91-9/6/91 ([300,000-(337.22+58.44+54,583.14)]] x 21.5% x [22/365])
Interest at 12% p.a. upon automatic
conversion
9/7/91-11/29/91 ([300,000-(337.22+58.44+54,583.14)]] x 12% x [84/365])
Amount due as of 11/29/91
Less: Payment on 11/29/91 (pro-rated upon
interest)
Balance
Add:
Interest at 12% p.a.
11/30/91-12/20/91 ([300,000-(337.22+58.44+54,583.14)]] x 12% x [21/365])
Amount due as of 12/20/91
Less: Payment on 12/20/91 (pro-rated upon
interest)
Balance
Add:
Interest at 12% p.a.
12/21/91-12/31/91 ([300,000-(337.22+58.44+54,583.14)]] x 12% x [11/365])
1/1/92-2/26/92 ([300,000-(337.22+58.44+54,583.14)]] x 12% x [57/365])
Amount due on PN (3) as of 2/26/92
SCHEDULE 4: Application of Payments Upon Interest

Date Interest
Payable Pro-rated

1/5/90 PN (1) P 186,986.30 P 543,807.61

PN (2) 9,542.47 27,752.12
PN (3) 176.71 513.93
196,705.48 572,073.65

3/30/90 PN (1) 208,370.59 163,182.85

PN (2) 132,693.52 103,917.28
PN (3) 14,827.15 11,611.70
355,891.26 278,711.83

5/31/90 PN (1) 198,985.09 199,806.42

PN (2) 126,716.69 127,239.72
PN (3) 14,159.30 14,217.74
339,861.08 341,263.89

6/29/90 PN (1) 71,924.74 839,012.66

PN (2) 45,801.92 534,286.14
PN (3) 5,117.90 59,701.04
122,844.56 1,432,999.84

8/8/91 PN (1) 806,639.99 493,906.31

PN (2) 523,113.94 320,303.08
PN (3) 58,452.66 35,790.61
1,388,206.59 850,000.00

8/15/91 PN (1) 321,652.11 86,593.37

PN (2) 211,852.33 57,033.69
PN (3) 23,672.34 6,372.93
 557,176.79 150,000.00

11/29/91 PN (1) 370,109.22 161,096.81

PN (2) 240,937.94 104,872.65
PN (3) 27,241.23 11,857.24
638,288.39 277,826.70

12/20/91 PN (1) 235,767.70 162,115.78

PN (2) 151,204.51 103,969.45
PN (3) 17,075.64 11,741.35
P 404,047.85 P 277,826.57
In the preparation of the above-mentioned schedules, these basic legal

principles were followed:

First, the payments were applied to debts that were already

due.[155] Thus, when the first payment was made and applied on January 5,

1990, all Promissory Notes were already due.

Second, payments of the principal were not made until the interests

had been covered.[156] For instance, the first payment on January 15, 1990

had initially been applied to all interests due on the notes, before

deductions were made from their respective principal amounts. The

resulting decrease in interest balances served as the bases for subsequent

pro-ratings.

Third, payments were proportionately applied to all interests that were

due and of the same nature and burden.[157]This legal principle was the

rationale for the pro-rated computations shown on Schedule 4.

Fourth, since there was no stipulation on capitalization, no interests

due and unpaid were added to the principal; hence, such interests did not
earn any additional interest.[158] The simple -- not compounded -- method

of interest calculation[159] was used on all Notes until the date of public

auction.

In fine, under solutio indebiti[160] or payment by mistake,[161] there is no

deficiency receivable in favor of PNB, but rather an excess claim or

surplus[162] payable by respondent; this excess should immediately be

returned to petitioner-spouses or their assigns -- not to mention the

buildings and improvements[163] on and the fruits of the property -- to the

end that no one may be unjustly enriched or benefited at

the expense of another.[164] Such surplus is in the amount of P3,686,101.52,

computed as follows:

Total unpaid principal and interest on the

promissory notes as of February 26, 1992:
Drawdown on June 29, 1989
(Schedule 1) P 4,037,204.10
Drawdown on September 1, 1989
(Schedule 2) 2,289,040.38
Drawdown on September 6, 1989
(Schedule 3) 255,833.22
6,582,077.70
Add: 1% attorneys fees 65,820.78
Total outstanding obligation 6,647,898.48
Less: Bid price 10,334,000.00
Excess P 3,686,101.52

Joint and Solidary Agreement. Contrary to the contention of the

petitioner-spouses, their Joint and Solidary Agreement (JSA)[165] was

indubitably a surety, not a guaranty.[166] They consented to be jointly and

severally liable with Petitioner NSBCI -- the borrower -- not only for the

payment of all sums due and payable in favor of respondent, but also for

the faithful and prompt performance of all the terms and conditions

thereof.[167] Additionally, the corporate secretary of Petitioner NSBCI

certified as early as February 23, 1989, that the spouses should act as such
surety.[168] But, their solidary liability should be carefully studied, not

sweepingly assumed to cover all availments instantly.

First, the JSA was executed on August 31, 1989. As correctly adverted to by

petitioners,[169] it covered only the Promissory Notes of P2,700,000

and P300,000 made after that date. The terms of a contract of suretyship

undeniably determine the suretys liability[170] and cannot extend beyond

what is stipulated therein.[171] Yet, the total amount petitioner-spouses

agreed to be held liable for was P7,700,000; by the time the JSA was

executed, the first Promissory Note was still unpaid and was thus brought

within the JSAs ambit.[172]

Second, while the JSA included all costs, charges and expenses that

respondent might incur or sustain in connection with the credit

documents,[173] only the interest was imposed under the pertinent Credit

Agreements. Moreover, the relevant Promissory Notes had to be resorted

to for proper valuation of the interests charged.

Third, although the JSA, as a contract of adhesion, should be taken contra

proferentum against the party who may have caused any ambiguity therein, no

such ambiguity was found. Petitioner-spouses, who agreed to be

accommodation mortgagors,[174] can no longer be held individually liable

for the entire onerous obligation[175] because, as

it turned out, it was respondent that still owed them.

To summarize, to give full force to the Truth in Lending Act, only the

interest rates of 19.5 percent and 21.5 percent stipulated in the Promissory

Notes may be imposed by respondent on the respective availments. After

730 days, the portions remaining unpaid are automatically converted into

medium-term loans at the legal rate of 12 percent. In all instances, the

simple method of interest computation is followed. Payments made by

petitioners are applied and pro-rated according to basic legal

principles. Charges on penalty and insurance are eliminated, and 1 percent

attorneys fees imposed upon the total unpaid balance of the principal and

interest as of the date of public auction. The P2 million deficiency claim

therefore vanishes, and a refund of P3,686,101.52 arises.

WHEREFORE, this Petition is hereby PARTLY GRANTED. The

Decision of the Court of Appeals isAFFIRMED, with

the MODIFICATION that PNB is ORDERED to refund the sum

of P3,686,101.52 representing the overcollection computed above, plus

interest thereon at the legal rate of six percent (6%) per annum from the

filing of the Complaint until the finality of this Decision. After this
Decision becomes final and executory, the applicable rate shall be twelve

percent (12%) per annum until its satisfaction. No costs.

SO ORDERED.
 G.R. No. L-8164 October 27, 1955

RAMON HERRERA, ET AL. Petitioners, vs. HON. FRANCISCO

ARELLANO, ET AL.,

Respondents.

David G. Fuentebella for petitioners.

Bausa and Ampil for respondent Cu Unjieng & Sons, Inc.
Placido C. Ramos for respondent Francis Cu Unjieng.
Provincial Fiscal Jesus Rodriguez for respondent J. Ascona.

CONCEPCION, J.: chanroble s virtual law lib rary

Petitioners Ramon Herrera, et al. seek a writ of certiorari to annul

certain orders of the Court of First Instance of Negros Occidental,
issued by respondent Judge, Hon. Francisco Arellano. The
controversy stems from the proceedings in civil case No. 8181 of
the Court of First Instance of Negros Occidental, entitled "Ramon
Herrera, et al., vs. The Provincial Sheriff of Negros Occidental,
Siuliong & Co., Inc., and Francis Cu Unjieng." The pertinent facts
are set forth in a decision therein rendered, on appeal, by the Court
of Appeals (CA-G.R. No. L-6388-R) on August 18, 1952, from which
we quote:

. . . In September of 1920, Ramon Herrera, in his capacity as

judicial guardian of his minor children Ricardo, Arturo, Dulcelina,
and Cristeto Herrera, borrowed P7,000 from Siuliong & Co., payable
with 12 per cent annual interest. Between 1920 and 1930, he also
borrowed various other sums of money, and upon liquidation made
on June 31, 1930, the total sum due was ascertained to be
P14,176.26 after deducting payments made. chanroblesvi rtua lawlib rary cha nro bles vi rtua l law lib ra ry

While these acts of the guardian appeared to be unauthorized by

the Court, the wards, upon attaining majority, by public documents
executed on February 20 and 21, 1931 (Exh. 1 Rec. App., pp. 24-
37) and April 26, 1934 (Exh. 2, pp. 38-53), confirmed the previous
arrangements and manifested their entire agreement to the
liquidation of their accounts, and compromised the case filed for the
recovery of the sum due (No. 8442 of the Court of First Instance of
Iloilo), by promising to pay Siuliong & Co., Inc., the acknowledged
balance of P14,176.26, plus interest at 6 per cent per annum from
July 31, 1930, on or before October 31, 1932. The debtors bound
themselves to pay 10 per cent attorney's fees in case of suit for
collection; and to deliver to the creditor in part payment the sugar
corresponding to their 1/4 interest in the Hacienda San Roque,
which interest they mortgaged to secure the payment of the
indebtedness. The mortgagors further stipulated not to alienate,
convey, mortgage, or in any wise encumber their rights and
interests without written consent of the mortgagee. chanroblesv irt u alawlibra ry chan roble s virtual law lib rary

By separate notarial instrument dated March 12, 1932 (Exh. 4), the
spouses Ramon Herrera and Rosa Gallo compromised the pending
civil case No. 8441 of the Court of First Instance of Iloilo, filed
against them by Siuliong & Co., Inc., by acknowledging an
indebtedness in favor of the latter in the sum of P39,084.21 as
balance of their former account and promised to pay said sum,
jointly and in solidum, with interest at 6 per cent per annum, from
April 1, 1931, to be liquidated and compounded annually, on or
before December 31, 1932; to pay 25 per cent attorney's and
collection fees in case of suit for collection; to deliver to the creditor
their entire share of the sugar produced at Hacienda San Roque for
credit against the debt; not to alienate or transfer, mortgage or
otherwise encumber, their rights and interest, and to guarantee
payment by mortgage of their 1/4 interest in the Hacienda San
Roque, the house on Lot 91 of the Manapla Cadastre, plus the
parcels of land designated as Lots 145, 226, and 363 of the
Cadastral Survey of Manapla, and certain work animals described in
the deed (Exh. 4, Rec. App., pp. 63-77). chanroblesvi rtua lawlib rary cha nro bles vi rtua l law lib ra ry

Both mortgage credits were assigned by the creditor Siuliong & Co.,
Inc. to Francisco Cu Unjieng, by public instrument executed on
September 26, 1935 (Exh. 3, Rec. App., pp. 54-63; Exh. 3A of the
Exhibit folder).chan rob lesvi rtualaw lib rary cha nro bles virtual law lib rary

It is also admitted that from 1937 to 1945, the Hacienda San Roque
was leased by the mortgagors to Ricardo Herrera and Lope Ilustre
without the consent of the appellees. chanrob lesvi rtualaw lib rary cha nrob les vi rtua l law lib rary
On December 6, 1934, the mortgagee Siuliong & Co., Inc. notified
the mortgage debtors that the balance of their accounts as of
November 30, 1934 amounted to P14,740.25 for Ricardo Herrera
and his brothers, and P45,904.37 for Ramon Herrera and Rosa
Gallo, and gave notice of their intention to foreclose the mortgages
on January 12, 1935 (Exhs. 5-a and 10-a). Apparently, the sale was
not carried out, for on August 28, 1936, the lawyers of the
mortgagee wrote the debtors complaining that the land taxes of the
mortgaged property had not been paid and the mortgagee had been
forced to disburse the same (Exh. 7-A). Once again, on July 12,
1937, the mortgagees demanded satisfaction of the indebtedness
(Exh. 9). Attempts to settle and compromise were fruitless (Exhs. K
to P) and . . .. (Record, pp. 34-36.)

hence, on October 14, 1939, the mortgagors instituted said case

No. 8181 against the mortgagees and the Provincial Sheriff of
Negros Occidental,

. . . for an accounting and to set aside an extrajudicial foreclosure of

certain mortgages in favor of appellee Siuliong & Co., and assigned
by it to co-appellee Francisco Cu Unjieng. On December 1, 1939,
the answer was filed, pleading the due execution of mortgages on
an undivided one-fourth (1/4) of Hacienda San Roque (Lots 91 and
219 of the Manapla Cadastre) to guarantee an obligation that had a
balance of P17,076.79 as of January 1, 1938, due from and unpaid
by plaintiffs-appellants Cristeto, Ricardo, Arturo, and Dulcelina
Herrera; and another mortgage on a second undivided fourth of the
Hacienda San Roque, plus Lots 145, 225, 226 and 363 of the
Manapla Cadastre, to answer for a balance of P59,815.69 due as of
January 1, 1938 from plaintiffs Ramon Herrera and Rosa Gallo;
counterclaimed non-payment and breach of the obligations of the
mortgage by reason of the lease of the properties without
defendants' consent; and prayed for judgment thereon with interest
and attorney's fees, and for a decree of judicial foreclosure.chanroblesvi rtualaw lib rary cha nrob les vi rtua l law lib rary

The case (Civil Case No. 8181 of Negros Occidental) was first
decided on May 12, 1941, dismissing the complaint but without
rendering judgment for defendants in view of a stipulation for
extrajudicial foreclosure and sale of the mortgaged properties. Upon
seasonable petition for reconsideration by defendants, and motion
for new trial by plaintiffs, the Court granted a reopening, setting it
for August 25, 1941. Hearing was accordingly held on October 23,
1941, but no decision was rendered. chanroblesv irt ualawli bra ry chan robles v irt ual law l ibra ry

On February 15, 1947, defendants filed a petition for rendition of

judgment, alleging that the records of the case were intact. As
plaintiff Rosa Gallo had died in the meantime, she was ordered
substituted by her heirs. chanroble svirtualawl ibra ry chan roble s virtual law l ibra ry

On May 10, 1947, the plaintiffs objected to the petition for

judgment, invoking the moratorium order No. 32 (Rec. App., p.
149), a petition reiterated on August 27, 1947 (Rec. App., p. 165).
The lower court, overruling the objection, rendered judgment on
March 30, 1949 as follows: chanro bles vi rtua l law lib ra ry

"(a) Bajo la primera reconvencion, condenando a los demandados

Ricardo Herrera, Arturo Herrera, Dulcelina Herrera y Cristeto
Herrera a pagar la cantidad de P18,274.88, suma debida en 31 de
diciembre de 1939, con intereses a razon de 6 por ciento anualdes
de enero 1, 1940, hasta su completo pago; a pagar honorarios de
abogado equivalente a 10 por ciento de la deuda hipotecaria debida
a la incoacion de la presente accion, o sea en la cantidad de
P1,827.48; chanrobles vi rt ual law li bra ry

"(b) Bajo la segunda reconvencion, condenando a los demandados

Ramon Herrera y Lope Ilustre, Bernardo Ilustre, Carlos Ilustre y
Rosario Ilustre, estos cuatros ultimos como herederos legales y
ensustitucion de Rosa Gallo, a pagar la suma de P59,322.07,
cantidad debida en 31 de diciembre de 1939, con intereses a razon
de 6 porciento anual desde enero 1.0 de 1940 hasta su completo
pago; a pagar honorarios de abogado equivalente a 10 por ciento
de la deuda hipotecaria; debido a la incoacion de la presente accion,
o sea la cantidad de P5,932.27; chanrobles vi rtual law lib rary

"(c) Ordenando a dichos demandantes a pagar las cantidades arriba

especificadas en el Juzgado dentro de noventa (90) dias desde la
fecha en que reciban copias de esta sentencia, y que deno
verificarse dicho pago se ordenara la venta de las propiedades
hipotecadas y descritas en la contestacion de los demandados
enpublica subasta para hacer efectivo el pago de la deuda
hipotecaria con sus intereses, honorarios de abogado y costas del
juicio; y
chanrobles vi rtua l law lib ra ry

"(d) Sobreseyendo la demanda, con las costas contra los

demandantes." (Record, pp. 31-33.)

The mortgagors appealed, from this decision, to the Court of

Appeals, which in due course rendered its aforementioned decision,
the disposition part of which is of the following tenor:

Wherefore, the judgment appealed from is affirmative insofar as it

fixes the indebtedness of the appellants Dulcelina, Ricardo, Arturo
and Cristeto Herrera at P18,274.88, with interest at 6 per cent
annually from January 1st, 1940, until paid; and that of appellants
Ramon Herrera and the heirs of Rosa Gallo at P59,322.07, plus
interest thereon at 6 per cent per annum from January 1st, 1940,
until full payment. The judgment of the Court below is reversed
insofar as it orders the appellants to pay the amounts
abovementioned within 90 days and decrees the sale of the
mortgaged properties of not so paid. It is hereby declared that no
action lies to enforce appellants' indebtedness until the moratorium
expires or is lifted with respect to the same, reserving the right of
appellees to demand such enforcement when proper. The
indebtedness not being actionable, no attorney's fees can be
allowed. The dismissal of the plaintiffs-appellants' complaint is also
affirmed. Without costs in either instance. (Record, pp. 42-43.)

On May 18, 1953 this Court rendered its decision in the case of
Rutter vs. Esteban (93 Phil., 63), declaring that "the continued
operation and enforcement of Republic Act No. 342 (the Moratorium
Law) at the present time is unreasonable and oppressive and should
not be prolonged a minute longer." Soon, thereafter, or on May 29,
1953, the mortgagee in the case at bar, filed with the Court of First
Instance of Negros Occidental, a motion praying:

. . . that a writ of execution be issued directing the provincial Sheriff

of Negros Occidental to sell at public auction the properties
mortgaged and described in the answer of the defendants to satisfy
the payment of the mortgage obligations as specified in the
judgment rendered by the Court of Appeals. (Record, p. 46.)

This motion was granted by an order, dated June 19, 1953, and the
corresponding writ of execution was issued on July 13, 1953. In
compliance therewith, on September 8, 1953, the Provincial Sheriff
of Negros Occidental sold, at public auction, the mortgaged
properties to the mortgagee, Cu Unjieng & Sons, Inc. On motion of
the latter, the court confirmed this sale by an order dated October
9, 1953. Plaintiffs filed two motions for reconsideration of this order,
the first on October 13, 1953, and the second on July 18, 1954,
which when denied, respectively, on July 20, and August 7, 1954.
Hence, the mortgagors instituted the present case for the purpose
of securing a writ of certiorari"annulling the abovementioned orders
of the respondent Judge dated June 19, 1953 and October 9,
1953." chanrobles vi rtua l law lib rary

Petitioners contend:

That the aforementioned order for writ of execution of Judge

Arellano, the sale at public auction of the properties of the petitioner
and the order confirming said sale are all null and void, as the
petitioners herein were not given the ninety (90) days period within
which to pay their mortgage obligations in favor of the defendant Cu
Unjieng & Sons, Inc., in accordance with Sections 2 and 3 of Rule
70, Rules of Court. (Paragraph 20, Petition.)

Upon the other hand, respondents argue that petitioners had not
objected to respondents' motion for issuance of the writ of
execution; that petitioners had neither sought a reconsideration of
the order of June 19, 1953, granting said motion, nor appealed
therefrom; that said order has already become final and executory;
and that petitioners had had, before the sale effected on September
8, 1953, more than ninety (90) days within which to pay their debt,
computed either from May 18, 1953, when the Rutter case was
decided by this Court, or from August 18, 1952, when the Court of
Appeals rendered its aforementioned decision. chanroblesv irtualawl ibra ry chan roble s virtual law l ibra ry

The issue thus raised has been settled in Jose Ponce de Leon vs.
Judge Fidel Ibaez and Santiago Syjuco, Inc. (95 Phil.,) decided on
May 28, 1954. Said case involved a decision of this Court, dated
April 15, 1952, providing:

In view of the foregoing, the decision appealed from should be

modified in the sense of ordering the plaintiff to pay to defendant
Syjuco the sum of P216,000, Philippine currency, value of two
promissory notes, with interest thereon at the rate of 6 per cent per
annum from August 6, 1944, up to May 5, 1949 until said amount is
paid in full. It is further ordered that should the amount of this
judgment,-principal and interest,-be not paid within ninety (90)
days from the date this judgment becomes final, the properties
mortgaged should be sold at public auction, and the proceeds
applied to the payment of this judgment in accordance with law,
with costs against the plaintiff.
chanroblesvi rtualaw lib rary cha nrob les vi rtual law lib rary

However, this judgment shall be held in abeyance, or no order for

the execution thereof shall be issued, until after the moratorium
orders shall have been lifted.

Invoking our decision in Rutter vs. Esteban (93 Phil., 63), Syjuco
(the mortgagee) filed a motion, on July 7, 1953, for the execution
of the judgment aforementioned. The motion was granted by the
Court of First Instance of Manila on July 22, 1953, and, two (2) days
later, the corresponding writ of execution was issued. A
reconsideration of said order of July 22, 1953 having been denied,
the mortgagor applied for a writ of certiorari upon the ground that
he had not been given the 90-day period provided in the Rules of
Court. In their answer, the mortgagee alleged that the mortgagor
had ample time to pay his debt, from May 5, 1949, when it fell due,
to July, 1953, when the order complained of was issued, and that,
even if the period within which to pay the judgment in favor of the
mortgagee should start to run from June 9, 1953-the date of entry
of judgment in the Rutter case-still more than 90-day period had
already elapsed before the filing of said pleading. In rejecting the
mortgagee's pretense we said:

It must be noted that the 90-day period granted the mortgage

debtor within which to pay the amount of the mortgage is in Section
2 of Rule 70 of the Rules of Court, and it is to be counted "from the
date of the service of the order," not from the date thereof. The
order referred to in the rule is the order requiring the debtor
to pay the judgment within 90 days. This 90-day period given
in the rule is not a procedural requirement merely; it is a
substantive right granted to the mortgage property from
final disposition at the foreclosure sale. It is one of the two
steps necessary to destroy what in law is known as the mortgagor's
"equity of redemption," the other being the sale. It may not be
omitted. As the writ of execution or the order allowing the sale of
the mortgaged property was issued without granting the mortgage
debtor said 90-day period, the order of the sale of the property
would be a denial of a substantial right and void. It is true thatthe
original judgment of this Court required payment within 90
days, but his same judgment was expressly held in abeyance;
therefore, the 90-day period never began to run. Neither was it
effective while the moratorium was in force. The order of execution
that was held in abeyance did not ipso facto become effective upon
the lifting of the moratorium. A new order of the court became
necessary to revive the order of payment, and this new order may
not suppress or deny the 90-day period originally fixed and
required by the rules. The order complained of does not grant this
90-day period, and is, therefore, invalid.
chanroblesvi rtua lawlib rary c hanro bles vi rtua l law li bra ry

In the answer of the respondent, it is alleged that the injunction

issued by this Court should be lifted, and the sale of the property as
ordered by the respondent court now allowed, as the 90-day period
has already transpired since the order was issued. The order of the
court for the sale of the property is null and void,because it denied
petitioner the 90-day period provided by the rules; hence, it may
not be enforced on that ground. Even if it were to be interpreted as
requiring the sheriff not to proceed with the sale unless the 90-day
period has expired, as the order of the sheriff for the sale of the
property was made only one day after the order, it is also null and
void. The claim that the action is moot cannot be sustained,
because it is the validity of the order of execution that is
attacked, not an order that may now be issued. The remedy of the
respondent should have been to seek another order of the court
directing the payment of the judgment within 90 days therefrom
and the sale of the property mortgaged in case of failure to comply
therewith, instead of contesting the petition forcertiorari. If any
delay has been caused the respondent by the delay in the sale, and
petitioner is not to blame but the respondent corporation, which did
not take the more expedient step above indicated. chanroblesv irtualawli bra ry ch anroble s virtual law l ib rary

The petition is hereby granted, and the orders complained of are

hereby declarednull and void. However, in the interest of a speedy
administration of justice, and as the judgment to be executed is our
judgment, we hereby order the petitioner to pay the amount of the
judgment within ninety (90) days, otherwise the property
mortgaged shall be sold to satisfy the amount of the judgment.
Without costs. (Emphasis supplied.)

The foregoing doctrine is squarely in point. It gives us no choice but

to overrule respondents' pretense and to sustain that of herein
petitioners. Indeed, the position of the latter is stronger than that of
the mortgagor in the case cited, for the judgment therein
specifically ordered De Leon to pay his debt to the mortgagee and
directed foreclosure should the mortgagor fail to pay within ninety
(90) days, whereas, the provision to this effect, found in the original
decision of the court of first instance, in the case under
consideration, was reversed by the Court of Appeals. In other
words, in the case at bar, respondent Judge directed the execution
of a judgment which neither contained an order requiring the
mortgagors to pay their obligation to the mortgagees nor granted
said mortgagors any period within which to effect said payment. At
any rate, the 90-day period, prescribed in Section 2 of Rule 70 of
the Rules of Court, should be counted "from the date of service of
the order" directing the mortgagors to pay their obligation to the
mortgagees and no such order having, as yet, been issued, it
follows that the orders complained of, directing the sale of the
mortgaged property and denying the reconsideration prayed for by
petitioners herein, are "null and void," as held in the
aforementioned De Leon case. chanroblesv irt ualawli bra ry chan robles v irt ual law l ibra ry

Wherefore, the petition is granted, and the orders in question set

aside, with costs against the respondents, except the Judge of First
Instance, the Provincial Sheriff and the Register of Deeds of Negros
Occidental. It is so ordered.
 [G.R. No. 146717. November 22, 2004]

TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON HYDRO

CORPORATION, AUSTRALIA and NEW ZEALAND BANKING
GROUP LIMITED and SECURITY BANK
CORPORATION, respondents.

DECISION
TINGA, J.:

Subject of this case is the letter of credit which has evolved as the
ubiquitous and most important device in international trade. A creation of
commerce and businessmen, the letter of credit is also unique in the number
of parties involved and its supranational character.
Petitioner has appealed from the Decision[1] of the Court of Appeals in CA-
G.R. SP No. 61901 entitled Transfield Philippines, Inc. v. Hon. Oscar
Pimentel, et al., promulgated on 31 January 2001.[2]
On 26 March 1997, petitioner and respondent Luzon Hydro Corporation
(hereinafter, LHC) entered into a Turnkey Contract[3] whereby petitioner, as
Turnkey Contractor, undertook to construct, on a turnkey basis, a seventy
(70)-Megawatt hydro-electric power station at the Bakun River in the
provinces of Benguet and Ilocos Sur (hereinafter, the Project). Petitioner was
given the sole responsibility for the design, construction, commissioning,
testing and completion of the Project.[4]
The Turnkey Contract provides that: (1) the target completion date of the
Project shall be on 1 June 2000, or such later date as may be agreed upon
between petitioner and respondent LHC or otherwise determined in
accordance with the Turnkey Contract; and (2) petitioner is entitled to claim
extensions of time (EOT) for reasons enumerated in the Turnkey Contract,
among which are variations, force majeure, and delays caused by LHC
itself.[5] Further, in case of dispute, the parties are bound to settle their
differences through mediation, conciliation and such other means enumerated
under Clause 20.3 of the Turnkey Contract.[6]
To secure performance of petitioners obligation on or before the target
completion date, or such time for completion as may be determined by the
parties agreement, petitioner opened in favor of LHC two (2) standby letters of
credit both dated 20 March 2000 (hereinafter referred to as the Securities), to
wit: Standby Letter of Credit No. E001126/8400 with the local branch of
respondent Australia and New Zealand Banking Group Limited (ANZ
Bank)[7] and Standby Letter of Credit No. IBDIDSB-00/4 with respondent
Security Bank Corporation (SBC)[8] each in the amount of US$8,988,907.00.[9]
In the course of the construction of the project, petitioner sought various
EOT to complete the Project. The extensions were requested allegedly due to
several factors which prevented the completion of the Project on target date,
such as force majeure occasioned by typhoonZeb, barricades and
demonstrations. LHC denied the requests, however. This gave rise to a series
of legal actions between the parties which culminated in the instant petition.
The first of the actions was a Request for Arbitration which LHC filed
before the Construction Industry Arbitration Commission (CIAC) on 1 June
1999.[10] This was followed by another Request for Arbitration, this time filed
by petitioner before the International Chamber of Commerce (ICC)[11] on 3
November 2000. In both arbitration proceedings, the common issues
presented were: [1) whether typhoon Zeband any of its associated events
constituted force majeure to justify the extension of time sought by petitioner;
and [2) whether LHC had the right to terminate the Turnkey Contract for
failure of petitioner to complete the Project on target date.
Meanwhile, foreseeing that LHC would call on the Securities pursuant to
the pertinent provisions of the Turnkey Contract,[12]petitionerin two separate
letters[13] both dated 10 August 2000advised respondent banks of the
arbitration proceedings already pending before the CIAC and ICC in
connection with its alleged default in the performance of its obligations.
Asserting that LHC had no right to call on the Securities until the resolution of
disputes before the arbitral tribunals, petitioner warned respondent banks that
any transfer, release, or disposition of the Securities in favor of LHC or any
person claiming under LHC would constrain it to hold respondent banks liable
for liquidated damages.
As petitioner had anticipated, on 27 June 2000, LHC sent notice to
petitioner that pursuant to Clause 8.2[14] of the Turnkey Contract, it failed to
comply with its obligation to complete the Project. Despite the letters of
petitioner, however, both banks informed petitioner that they would pay on the
Securities if and when LHC calls on them.[15]
LHC asserted that additional extension of time would not be warranted;
accordingly it declared petitioner in default/delay in the performance of its
obligations under the Turnkey Contract and demanded from petitioner the
payment of US$75,000.00 for each day of delay beginning 28 June 2000 until
actual completion of the Project pursuant to Clause 8.7.1 of the Turnkey
Contract. At the same time, LHC served notice that it would call on the
securities for the payment of liquidated damages for the delay.[16]
On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction,
with prayer for temporary restraining order and writ of preliminary injunction,
against herein respondents as defendants before the Regional Trial Court
(RTC) of Makati.[17] Petitioner sought to restrain respondent LHC from calling
on the Securities and respondent banks from transferring, paying on, or in any
manner disposing of the Securities or any renewals or substitutes thereof. The
RTC issued a seventy-two (72)-hour temporary restraining order on the same
day. The case was docketed as Civil Case No. 00-1312 and raffled to Branch
148 of the RTC of Makati.
After appropriate proceedings, the trial court issued an Order on 9
November 2000, extending the temporary restraining order for a period of
seventeen (17) days or until 26 November 2000.[18]
The RTC, in its Order[19] dated 24 November 2000, denied petitioners
application for a writ of preliminary injunction. It ruled that petitioner had no
legal right and suffered no irreparable injury to justify the issuance of the writ.
Employing the principle of independent contract in letters of credit, the trial
court ruled that LHC should be allowed to draw on the Securities for liquidated
damages. It debunked petitioners contention that the principle of independent
contract could be invoked only by respondent banks since according to it
respondent LHC is the ultimate beneficiary of the Securities. The trial court
further ruled that the banks were mere custodians of the funds and as such
they were obligated to transfer the same to the beneficiary for as long as the
latter could submit the required certification of its claims.
Dissatisfied with the trial courts denial of its application for a writ of
preliminary injunction, petitioner elevated the case to the Court of
Appeals via a Petition for Certiorari under Rule 65, with prayer for the
issuance of a temporary restraining order and writ of preliminary
injunction.[20] Petitioner submitted to the appellate court that LHCs call on the
Securities was premature considering that the issue of its default had not yet
been resolved with finality by the CIAC and/or the ICC. It asserted that until
the fact of delay could be established, LHC had no right to draw on the
Securities for liquidated damages.
Refuting petitioners contentions, LHC claimed that petitioner had no right
to restrain its call on and use of the Securities as payment for liquidated
damages. It averred that the Securities are independent of the main contract
between them as shown on the face of the two Standby Letters of Credit
which both provide that the banks have no responsibility to investigate the
authenticity or accuracy of the certificates or the declarants capacity or
entitlement to so certify.
In its Resolution dated 28 November 2000, the Court of Appeals issued a
temporary restraining order, enjoining LHC from calling on the Securities or
any renewals or substitutes thereof and ordering respondent banks to cease
and desist from transferring, paying or in any manner disposing of the
Securities.
However, the appellate court failed to act on the application for preliminary
injunction until the temporary restraining order expired on 27 January 2001.
Immediately thereafter, representatives of LHC trooped to ANZ Bank and
withdrew the total amount of US$4,950,000.00, thereby reducing the balance
in ANZ Bank to US$1,852,814.00.
On 2 February 2001, the appellate court dismissed the petition for
certiorari. The appellate court expressed conformity with the trial courts
decision that LHC could call on the Securities pursuant to the first principle in
credit law that the credit itself is independent of the underlying transaction and
that as long as the beneficiary complied with the credit, it was of no moment
that he had not complied with the underlying contract. Further, the appellate
court held that even assuming that the trial courts denial of petitioners
application for a writ of preliminary injunction was erroneous, it constituted
only an error of judgment which is not correctible by certiorari, unlike error of
jurisdiction.
Undaunted, petitioner filed the instant Petition for Review raising the
following issues for resolution:

WHETHER THE INDEPENDENCE PRINCIPLE ON LETTERS OF CREDIT MAY

BE INVOKED BY A BENEFICIARY THEREOF WHERE THE BENEFICIARYS
CALL THEREON IS WRONGFUL OR FRAUDULENT.

WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE

SECURITIES BEFORE THE RESOLUTION OF PETITIONERS AND LHCS
DISPUTES BY THE APPROPRIATE TRIBUNAL.

WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN

RELEASING THE AMOUNTS DUE UNDER THE SECURITIES DESPITE BEING
NOTIFIED THAT LHCS CALL THEREON IS WRONGFUL.

WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND

IRREPARABLE DAMAGE IN THE EVENT THAT:
 A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND
SECURITY BANK ARE ALLOWED TO RELEASE, THE REMAINING
BALANCE OF THE SECURITIES PRIOR TO THE RESOLUTION OF THE
DISPUTES BETWEEN PETITIONER AND LHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY
DRAWN FROM THE SECURITIES.[21]
Petitioner contends that the courts below improperly relied on the
independence principle on letters of credit when this case falls squarely within
the fraud exception rule. Respondent LHC deliberately misrepresented the
supposed existence of delay despite its knowledge that the issue was still
pending arbitration, petitioner continues.
Petitioner asserts that LHC should be ordered to return the proceeds of
the Securities pursuant to the principle against unjust enrichment and that,
under the premises, injunction was the appropriate remedy obtainable from
the competent local courts.
On 25 August 2003, petitioner filed a Supplement to the
Petition[22] and Supplemental Memorandum,[23] alleging that in the course of
the proceedings in the ICC Arbitration, a number of documentary and
testimonial evidence came out through the use of different modes of discovery
available in the ICC Arbitration. It contends that after the filing of the petition
facts and admissions were discovered which demonstrate that LHC knowingly
misrepresented that petitioner had incurred delays notwithstanding its
knowledge and admission that delays were excused under the Turnkey
Contractto be able to draw against the Securities. Reiterating that fraud
constitutes an exception to the independence principle, petitioner urges that
this warrants a ruling from this Court that the call on the Securities was
wrongful, as well as contrary to law and basic principles of equity. It avers that
it would suffer grave irreparable damage if LHC would be allowed to use the
proceeds of the Securities and not ordered to return the amounts it had
wrongfully drawn thereon.
In its Manifestation dated 8 September 2003,[24] LHC contends that the
supplemental pleadings filed by petitioner present erroneous and misleading
information which would change petitioners theory on appeal.
In yet another Manifestation dated 12 April 2004,[25] petitioner alleges that
on 18 February 2004, the ICC handed down its Third Partial Award, declaring
that LHC wrongfully drew upon the Securities and that petitioner was entitled
to the return of the sums wrongfully taken by LHC for liquidated damages.
LHC filed a Counter-Manifestation dated 29 June 2004,[26] stating that
petitioners Manifestation dated 12 April 2004 enlarges the scope of its Petition
for Review of the 31 January 2001 Decision of the Court of Appeals. LHC
notes that the Petition for Review essentially dealt only with the issue of
whether injunction could issue to restrain the beneficiary of an irrevocable
letter of credit from drawing thereon. It adds that petitioner has filed two other
proceedings, to wit: (1) ICC Case No. 11264/TE/MW, entitled Transfield
Philippines Inc. v. Luzon Hydro Corporation, in which the parties made claims
and counterclaims arising from petitioners performance/misperformance of its
obligations as contractor for LHC; and (2) Civil Case No. 04-332,
entitled Transfield Philippines, Inc. v. Luzon Hydro Corporation before Branch
56 of the RTC of Makati, which is an action to enforce and obtain execution of
the ICCs partial award mentioned in petitioners Manifestation of 12 April 2004.
In its Comment to petitioners Motion for Leave to File Addendum to
Petitioners Memorandum, LHC stresses that the question of whether the
funds it drew on the subject letters of credit should be returned is outside the
issue in this appeal. At any rate, LHC adds that the action to enforce the ICCs
partial award is now fully within the Makati RTCs jurisdiction in Civil Case No.
04-332. LHC asserts that petitioner is engaged in forum-shopping by keeping
this appeal and at the same time seeking the suit for enforcement of the
arbitral award before the Makati court.
Respondent SBC in its Memorandum, dated 10 March 2003[27] contends
that the Court of Appeals correctly dismissed the petition for certiorari.
Invoking the independence principle, SBC argues that it was under no
obligation to look into the validity or accuracy of the certification submitted by
respondent LHC or into the latters capacity or entitlement to so certify. It adds
that the act sought to be enjoined by petitioner was already fait accompli and
the present petition would no longer serve any remedial purpose.
In a similar fashion, respondent ANZ Bank in its Memorandum dated 13
March 2003[28] posits that its actions could not be regarded as unjustified in
view of the prevailing independence principle under which it had no obligation
to ascertain the truth of LHCs allegations that petitioner defaulted in its
obligations. Moreover, it points out that since the Standby Letter of Credit No.
E001126/8400 had been fully drawn, petitioners prayer for preliminary
injunction had been rendered moot and academic.
At the core of the present controversy is the applicability of the
independence principle and fraud exception rule in letters of credit. Thus, a
discussion of the nature and use of letters of credit, also referred to simply as
credits, would provide a better perspective of the case.
The letter of credit evolved as a mercantile specialty, and the only
way to understand all its facets is to recognize that it is an entity unto
itself. The relationship between the beneficiary and the issuer of a letter
of credit is not strictly contractual, because both privity and a meeting of
the minds are lacking, yet strict compliance with its terms is an
enforceable right. Nor is it a third-party beneficiary contract, because the
issuer must honor drafts drawn against a letter regardless of problems
subsequently arising in the underlying contract. Since the banks customer
cannot draw on the letter, it does not function as an assignment by the
customer to the beneficiary. Nor, if properly used, is it a contract of suretyship
or guarantee, because it entails a primary liability following a default. Finally, it
is not in itself a negotiable instrument, because it is not payable to order or
bearer and is generally conditional, yet the draft presented under it is often
negotiable.[29]
In commercial transactions, a letter of credit is a financial device
developed by merchants as a convenient and relatively safe mode of
dealing with sales of goods to satisfy the seemingly irreconcilable
interests of a seller, who refuses to part with his goods before he is
paid, and a buyer, who wants to have control of the goods before
paying.[30] The use of credits in commercial transactions serves to reduce the
risk of nonpayment of the purchase price under the contract for the sale of
goods. However, credits are also used in non-sale settings where they serve
to reduce the risk of nonperformance. Generally, credits in the non-sale
settings have come to be known as standby credits.[31]
There are three significant differences between commercial and
standby credits. First, commercial credits involve the payment of money
under a contract of sale. Such credits become payable upon the
presentation by the seller-beneficiary of documents that show he has
taken affirmative steps to comply with the sales agreement. In the
standby type, the credit is payable upon certification of a party's
nonperformance of the agreement. The documents that accompany the
beneficiary's draft tend to show that the applicant has not performed.
The beneficiary of a commercial credit must demonstrate by documents
that he has performed his contract. The beneficiary of the standby credit
must certify that his obligor has not performed the contract.[32]
By definition, a letter of credit is a written instrument whereby the
writer requests or authorizes the addressee to pay money or deliver
goods to a third person and assumes responsibility for payment of debt
therefor to the addressee.[33] A letter of credit, however, changes its nature
as different transactions occur and if carried through to completion ends up as
a binding contract between the issuing and honoring banks without any regard
or relation to the underlying contract or disputes between the parties
thereto.[34]
Since letters of credit have gained general acceptability in international
trade transactions, the ICC has published from time to time updates on the
Uniform Customs and Practice (UCP) for Documentary Credits to standardize
practices in the letter of credit area. The vast majority of letters of credit
incorporate the UCP.[35] First published in 1933, the UCP for Documentary
Credits has undergone several revisions, the latest of which was in 1993.[36]
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,[37] this
Court ruled that the observance of the UCP is justified by Article 2 of the Code
of Commerce which provides that in the absence of any particular provision in
the Code of Commerce, commercial transactions shall be governed by
usages and customs generally observed. More recently, in Bank of America,
NT & SA v. Court of Appeals,[38] this Court ruled that there being no specific
provisions which govern the legal complexities arising from transactions
involving letters of credit, not only between or among banks themselves but
also between banks and the seller or the buyer, as the case may be, the
applicability of the UCP is undeniable.
Article 3 of the UCP provides that credits, by their nature, are separate
transactions from the sales or other contract(s) on which they may be based
and banks are in no way concerned with or bound by such contract(s), even if
any reference whatsoever to such contract(s) is included in the credit.
Consequently, the undertaking of a bank to pay, accept and pay draft(s) or
negotiate and/or fulfill any other obligation under the credit is not subject to
claims or defenses by the applicant resulting from his relationships with the
issuing bank or the beneficiary. A beneficiary can in no case avail himself of
the contractual relationships existing between the banks or between the
applicant and the issuing bank.
Thus, the engagement of the issuing bank is to pay the seller or
beneficiary of the credit once the draft and the required documents are
presented to it. The so-called independence principle assures the seller or the
beneficiary of prompt payment independent of any breach of the main contract
and precludes the issuing bank from determining whether the main contract is
actually accomplished or not. Under this principle, banks assume no liability or
responsibility for the form, sufficiency, accuracy, genuineness, falsification or
legal effect of any documents, or for the general and/or particular conditions
stipulated in the documents or superimposed thereon, nor do they assume
any liability or responsibility for the description, quantity, weight, quality,
condition, packing, delivery, value or existence of the goods represented by
any documents, or for the good faith or acts and/or omissions, solvency,
performance or standing of the consignor, the carriers, or the insurers of the
goods, or any other person whomsoever.[39]
The independent nature of the letter of credit may be: (a) independence in
toto where the credit is independent from the justification aspect and is a
separate obligation from the underlying agreement like for instance a typical
standby; or (b) independence may be only as to the justification aspect like in
a commercial letter of credit or repayment standby, which is identical with the
same obligations under the underlying agreement. In both cases the payment
may be enjoined if in the light of the purpose of the credit the payment of the
credit would constitute fraudulent abuse of the credit.[40]
Can the beneficiary invoke the independence principle?
Petitioner insists that the independence principle does not apply to the
instant case and assuming it is so, it is a defense available only to respondent
banks. LHC, on the other hand, contends that it would be contrary to common
sense to deny the benefit of an independent contract to the very party for
whom the benefit is intended. As beneficiary of the letter of credit, LHC
asserts it is entitled to invoke the principle.
As discussed above, in a letter of credit transaction, such as in this case,
where the credit is stipulated as irrevocable, there is a definite undertaking by
the issuing bank to pay the beneficiary provided that the stipulated documents
are presented and the conditions of the credit are complied with.[41] Precisely,
the independence principle liberates the issuing bank from the duty of
ascertaining compliance by the parties in the main contract. As the principles
nomenclature clearly suggests, the obligation under the letter of credit is
independent of the related and originating contract. In brief, the letter of credit
is separate and distinct from the underlying transaction.
Given the nature of letters of credit, petitioners argumentthat it is only the
issuing bank that may invoke the independence principle on letters of
creditdoes not impress this Court. To say that the independence principle may
only be invoked by the issuing banks would render nugatory the purpose for
which the letters of credit are used in commercial transactions. As it is, the
independence doctrine works to the benefit of both the issuing bank and
the beneficiary.
Letters of credit are employed by the parties desiring to enter into
commercial transactions, not for the benefit of the issuing bank but mainly for
the benefit of the parties to the original transactions. With the letter of credit
from the issuing bank, the party who applied for and obtained it may
confidently present the letter of credit to the beneficiary as a security to
convince the beneficiary to enter into the business transaction. On the other
hand, the other party to the business transaction, i.e., the beneficiary of the
letter of credit, can be rest assured of being empowered to call on the letter of
credit as a security in case the commercial transaction does not push through,
or the applicant fails to perform his part of the transaction. It is for this reason
that the party who is entitled to the proceeds of the letter of credit is
appropriately called beneficiary.
Petitioners argument that any dispute must first be resolved by the parties,
whether through negotiations or arbitration, before the beneficiary is entitled to
call on the letter of credit in essence would convert the letter of credit into a
mere guarantee. Jurisprudence has laid down a clear distinction between
a letter of credit and a guarantee in that the settlement of a dispute
between the parties is not a pre-requisite for the release of funds under
a letter of credit. In other words, the argument is incompatible with the
very nature of the letter of credit. If a letter of credit is drawable only
after settlement of the dispute on the contract entered into by the
applicant and the beneficiary, there would be no practical and beneficial
use for letters of credit in commercial transactions.
Professor John F. Dolan, the noted authority on letters of credit, sheds
more light on the issue:

The standby credit is an attractive commercial device for many of the same reasons
that commercial credits are attractive. Essentially, these credits are inexpensive and
efficient. Often they replace surety contracts, which tend to generate higher costs than
credits do and are usually triggered by a factual determination rather than by the
examination of documents.

Because parties and courts should not confuse the different functions of the surety
contract on the one hand and the standby credit on the other, the distinction between
surety contracts and credits merits some reflection. The two commercial devices share
a common purpose. Both ensure against the obligors nonperformance. They function,
however, in distinctly different ways.

Traditionally, upon the obligors default, the surety undertakes to complete the
obligors performance, usually by hiring someone to complete that performance.
Surety contracts, then, often involve costs of determining whether the obligor
defaulted (a matter over which the surety and the beneficiary often litigate) plus the
cost of performance. The benefit of the surety contract to the beneficiary is obvious.
He knows that the surety, often an insurance company, is a strong financial institution
that will perform if the obligor does not. The beneficiary also should understand that
such performance must await the sometimes lengthy and costly determination that the
obligor has defaulted. In addition, the suretys performance takes time.

The standby credit has different expectations. He reasonably expects that he will
receive cash in the event of nonperformance, that he will receive it promptly, and that
he will receive it before any litigation with the obligor (the applicant) over the nature
of the applicants performance takes place. The standby credit has this opposite effect
of the surety contract: it reverses the financial burden of parties during litigation.

In the surety contract setting, there is no duty to indemnify the beneficiary until the
beneficiary establishes the fact of the obligors performance. The beneficiary may have
to establish that fact in litigation. During the litigation, the surety holds the money and
the beneficiary bears most of the cost of delay in performance.

In the standby credit case, however, the beneficiary avoids that litigation burden and
receives his money promptly upon presentation of the required documents. It may be
that the applicant has, in fact, performed and that the beneficiarys presentation of
those documents is not rightful. In that case, the applicant may sue the beneficiary in
tort, in contract, or in breach of warranty; but, during the litigation to determine
whether the applicant has in fact breached the obligation to perform, the beneficiary,
not the applicant, holds the money. Parties that use a standby credit and courts
construing such a credit should understand this allocation of burdens. There is a
tendency in some quarters to overlook this distinction between surety contracts and
standby credits and to reallocate burdens by permitting the obligor or the issuer to
litigate the performance question before payment to the beneficiary.[42]

While it is the bank which is bound to honor the credit, it is the beneficiary
who has the right to ask the bank to honor the credit by allowing him to draw
thereon. The situation itself emasculates petitioners posture that LHC cannot
invoke the independence principle and highlights its puerility, more so in this
case where the banks concerned were impleaded as parties by petitioner
itself.
Respondent banks had squarely raised the independence principle to
justify their releases of the amounts due under the Securities. Owing to the
nature and purpose of the standby letters of credit, this Court rules that the
respondent banks were left with little or no alternative but to honor the credit
and both of them in fact submitted that it was ministerial for them to honor the
call for payment.[43]
Furthermore, LHC has a right rooted in the Contract to call on the
Securities. The relevant provisions of the Contract read, thus:
4.2.1. In order to secure the performance of its obligations under this Contract, the
Contractor at its cost shall on the Commencement Date provide security to the
Employer in the form of two irrevocable and confirmed standby letters of credit (the
Securities), each in the amount of US$8,988,907, issued and confirmed by banks or
financial institutions acceptable to the Employer. Each of the Securities must be in
form and substance acceptable to the Employer and may be provided on an annually
renewable basis.[44]

8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the
Employer by way of liquidated damages (Liquidated Damages for Delay) the amount
of US$75,000 for each and every day or part of a day that shall elapse between the
Target Completion Date and the Completion Date, provided that Liquidated Damages
for Delay payable by the Contractor shall in the aggregate not exceed 20% of the
Contract Price. The Contractor shall pay Liquidated Damages for Delay for each day
of the delay on the following day without need of demand from the Employer.

8.7.2 The Employer may, without prejudice to any other method of recovery, deduct
the amount of such damages from any monies due, or to become due to the Contractor
and/or by drawing on the Security.[45]

A contract once perfected, binds the parties not only to the fulfillment of
what has been expressly stipulated but also to all the consequences which
according to their nature, may be in keeping with good faith, usage, and
law.[46] A careful perusal of the Turnkey Contract reveals the intention of the
parties to make the Securities answerable for the liquidated damages
occasioned by any delay on the part of petitioner. The call upon the
Securities, while not an exclusive remedy on the part of LHC, is certainly an
alternative recourse available to it upon the happening of the contingency for
which the Securities have been proffered. Thus, even without the use of the
independence principle, the Turnkey Contract itself bestows upon LHC the
right to call on the Securities in the event of default.
Next, petitioner invokes the fraud exception principle. It avers that LHCs
call on the Securities is wrongful because it fraudulently misrepresented to
ANZ Bank and SBC that there is already a breach in the Turnkey Contract
knowing fully well that this is yet to be determined by the arbitral tribunals. It
asserts that the fraud exception exists when the beneficiary, for the purpose of
drawing on the credit, fraudulently presents to the confirming bank,
documents that contain, expressly or by implication, material representations
of fact that to his knowledge are untrue. In such a situation, petitioner insists,
injunction is recognized as a remedy available to it.
 Citing Dolans treatise on letters of credit, petitioner argues that the
independence principle is not without limits and it is important to fashion those
limits in light of the principles purpose, which is to serve the commercial
function of the credit. If it does not serve those functions, application of the
principle is not warranted, and the commonlaw principles of contract should
apply.
It is worthy of note that the propriety of LHCs call on the Securities is
largely intertwined with the fact of default which is the self-same issue pending
resolution before the arbitral tribunals. To be able to declare the call on the
Securities wrongful or fraudulent, it is imperative to resolve, among others,
whether petitioner was in fact guilty of delay in the performance of its
obligation. Unfortunately for petitioner, this Court is not called upon to rule
upon the issue of defaultsuch issue having been submitted by the parties to
the jurisdiction of the arbitral tribunals pursuant to the terms embodied in their
agreement.[47]
Would injunction then be the proper remedy to restrain the alleged
wrongful draws on the Securities?
Most writers agree that fraud is an exception to the independence
principle. Professor Dolan opines that the untruthfulness of a certificate
accompanying a demand for payment under a standby credit may
qualify as fraud sufficient to support an injunction against
payment.[48] The remedy for fraudulent abuse is an injunction. However,
injunction should not be granted unless: (a) there is clear proof of fraud;
(b) the fraud constitutes fraudulent abuse of the independent purpose of
the letter of credit and not only fraud under the main agreement; and (c)
irreparable injury might follow if injunction is not granted or the
recovery of damages would be seriously damaged.[49]
In its complaint for injunction before the trial court, petitioner alleged that it
is entitled to a total extension of two hundred fifty-three (253) days which
would move the target completion date. It argued that if its claims for
extension would be found meritorious by the ICC, then LHC would not be
entitled to any liquidated damages.[50]
Generally, injunction is a preservative remedy for the protection of ones
substantive right or interest; it is not a cause of action in itself but merely a
provisional remedy, an adjunct to a main suit. The issuance of the writ of
preliminary injunction as an ancillary or preventive remedy to secure the rights
of a party in a pending case is entirely within the discretion of the court taking
cognizance of the case, the only limitation being that this discretion should be
exercised based upon the grounds and in the manner provided by law.[51]
 Before a writ of preliminary injunction may be issued, there must be a
clear showing by the complaint that there exists a right to be protected and
that the acts against which the writ is to be directed are violative of the said
right.[52] It must be shown that the invasion of the right sought to be protected
is material and substantial, that the right of complainant is clear and
unmistakable and that there is an urgent and paramount necessity for the writ
to prevent serious damage.[53] Moreover, an injunctive remedy may only be
resorted to when there is a pressing necessity to avoid injurious
consequences which cannot be remedied under any standard
compensation.[54]
In the instant case, petitioner failed to show that it has a clear and
unmistakable right to restrain LHCs call on the Securities which would justify
the issuance of preliminary injunction. By petitioners own admission, the right
of LHC to call on the Securities was contractually rooted and subject to the
express stipulations in the Turnkey Contract.[55] Indeed, the Turnkey Contract
is plain and unequivocal in that it conferred upon LHC the right to draw upon
the Securities in case of default, as provided in Clause 4.2.5, in relation to
Clause 8.7.2, thus:

4.2.5 The Employer shall give the Contractor seven days notice of calling upon any of
the Securities, stating the nature of the default for which the claim on any of the
Securities is to be made, provided that no notice will be required if the Employer calls
upon any of the Securities for the payment of Liquidated Damages for Delay or for
failure by the Contractor to renew or extend the Securities within 14 days of their
expiration in accordance with Clause 4.2.2.[56]

8.7.2 The Employer may, without prejudice to any other method of recovery, deduct
the amount of such damages from any monies due, or to become due, to the
Contractor and/or by drawing on the Security.[57]

The pendency of the arbitration proceedings would not per se make LHCs
draws on the Securities wrongful or fraudulent for there was nothing in the
Contract which would indicate that the parties intended that all disputes
regarding delay should first be settled through arbitration before LHC would
be allowed to call upon the Securities. It is therefore premature and absurd to
conclude that the draws on the Securities were outright fraudulent given the
fact that the ICC and CIAC have not ruled with finality on the existence of
default.
Nowhere in its complaint before the trial court or in its pleadings filed
before the appellate court, did petitioner invoke the fraud exception rule as a
ground to justify the issuance of an injunction.[58] What petitioner did assert
before the courts below was the fact that LHCs draws on the Securities would
be premature and without basis in view of the pending disputes between
them. Petitioner should not be allowed in this instance to bring into play the
fraud exception rule to sustain its claim for the issuance of an injunctive relief.
Matters, theories or arguments not brought out in the proceedings below will
ordinarily not be considered by a reviewing court as they cannot be raised for
the first time on appeal.[59] The lower courts could thus not be faulted for not
applying the fraud exception rule not only because the existence of fraud was
fundamentally interwoven with the issue of default still pending before the
arbitral tribunals, but more so, because petitioner never raised it as an issue in
its pleadings filed in the courts below. At any rate, petitioner utterly failed to
show that it had a clear and unmistakable right to prevent LHCs call upon the
Securities.
Of course, prudence should have impelled LHC to await resolution of the
pending issues before the arbitral tribunals prior to taking action to enforce the
Securities. But, as earlier stated, the Turnkey Contract did not require LHC to
do so and, therefore, it was merely enforcing its rights in accordance with the
tenor thereof. Obligations arising from contracts have the force of law between
the contracting parties and should be complied with in good faith.[60] More
importantly, pursuant to the principle of autonomy of contracts embodied in
Article 1306 of the Civil Code,[61] petitioner could have incorporated in its
Contract with LHC, a proviso that only the final determination by the arbitral
tribunals that default had occurred would justify the enforcement of the
Securities. However, the fact is petitioner did not do so; hence, it would have
to live with its inaction.
With respect to the issue of whether the respondent banks were
justified in releasing the amounts due under the Securities, this Court
reiterates that pursuant to the independence principle the banks were
under no obligation to determine the veracity of LHCs certification that
default has occurred. Neither were they bound by petitioners declaration
that LHCs call thereon was wrongful. To repeat, respondent banks
undertaking was simply to pay once the required documents are
presented by the beneficiary.
At any rate, should petitioner finally prove in the pending arbitration
proceedings that LHCs draws upon the Securities were wrongful due to the
non-existence of the fact of default, its right to seek indemnification for
damages it suffered would not normally be foreclosed pursuant to general
principles of law.
 Moreover, in a Manifestation,[62] dated 30 March 2001, LHC informed this
Court that the subject letters of credit had been fully drawn. This fact alone
would have been sufficient reason to dismiss the instant petition.
Settled is the rule that injunction would not lie where the acts sought to be
enjoined have already become fait accompli or an accomplished or
consummated act.[63] In Ticzon v. Video Post Manila, Inc.[64] this Court ruled
that where the period within which the former employees were prohibited from
engaging in or working for an enterprise that competed with their former
employerthe very purpose of the preliminary injunction has expired, any
declaration upholding the propriety of the writ would be entirely useless as
there would be no actual case or controversy between the parties insofar as
the preliminary injunction is concerned.
In the instant case, the consummation of the act sought to be restrained
had rendered the instant petition mootfor any declaration by this Court as to
propriety or impropriety of the non-issuance of injunctive relief could have no
practical effect on the existing controversy.[65]The other issues raised by
petitioner particularly with respect to its right to recover the amounts
wrongfully drawn on the Securities, according to it, could properly be threshed
out in a separate proceeding.
One final point. LHC has charged petitioner of forum-shopping. It raised
the charge on two occasions. First, in its Counter-Manifestationdated 29 June
2004[66] LHC alleges that petitioner presented before this Court the same
claim for money which it has filed in two other proceedings, to wit: ICC Case
No. 11264/TE/MW and Civil Case No. 04-332 before the RTC of Makati. LHC
argues that petitioners acts constitutes forum-shopping which should be
punished by the dismissal of the claim in both forums. Second, in its Comment
to Petitioners Motion for Leave to File Addendum to Petitioners
Memorandum dated 8 October 2004, LHC alleges that by maintaining the
present appeal and at the same time pursuing Civil Case No. 04-332wherein
petitioner pressed for judgment on the issue of whether the funds LHC drew
on the Securities should be returnedpetitioner resorted to forum-shopping. In
both instances, however, petitioner has apparently opted not to respond to the
charge.
Forum-shopping is a very serious charge. It exists when a party
repetitively avails of several judicial remedies in different courts,
simultaneously or successively, all substantially founded on the same
transactions and the same essential facts and circumstances, and all raising
substantially the same issues either pending in, or already resolved adversely,
by some other court.[67] It may also consist in the act of a party against whom
an adverse judgment has been rendered in one forum, of seeking another and
possibly favorable opinion in another forum other than by appeal or special
civil action of certiorari, or the institution of two or more actions or proceedings
grounded on the same cause on the supposition that one or the other court
might look with favor upon the other party.[68] To determine whether a party
violated the rule against forum-shopping, the test applied is whether the
elements of litis pendentia are present or whether a final judgment in one case
will amount to res judicata in another.[69] Forum-shopping constitutes improper
conduct and may be punished with summary dismissal of the multiple
petitions and direct contempt of court.[70]
Considering the seriousness of the charge of forum-shopping and the
severity of the sanctions for its violation, the Court will refrain from making any
definitive ruling on this issue until after petitioner has been given ample
opportunity to respond to the charge.
WHEREFORE, the instant petition is DENIED, with costs against
petitioner.
Petitioner is hereby required to answer the charge of forum-shopping
within fifteen (15) days from notice.
SO ORDERED.
G.R. No. 94209 April 30, 1991

FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING CORPORATION), petitioner,
vs.
THE COURT OF APPEALS, and BERNARDO E. VILLALUZ, respondents.

Pelaez, Adriano & Gregorio for petitioner.

Ezequiel S. Consulta for private respondent.

GUTIERREZ, JR., J.:

This is a petition for review seeking the reversal of the decision of the Court of Appeals dated June
29, 1990 which affirmed the decision of the Regional Trial Court of Rizal dated October 20, 1986
ordering the defendants Christiansen and the petitioner, to pay various sums to respondent Villaluz,
jointly and severally.

The facts of the case are as follows:

On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant Axel Christiansen 2,000
cubic meters of lauan logs at $27.00 per cubic meter FOB.

After inspecting the logs, Christiansen issued purchase order No. 76171.

On the arrangements made and upon the instructions of the consignee, Hanmi Trade Development,
Ltd., de Santa Ana, California, the Security Pacific National Bank of Los Angeles, California issued
Irrevocable Letter of Credit No. IC-46268 available at sight in favor of Villaluz for the sum of
$54,000.00, the total purchase price of the lauan logs.

The letter of credit was mailed to the Feati Bank and Trust Company (now Citytrust) with the
instruction to the latter that it "forward the enclosed letter of credit to the beneficiary." (Records, Vol.
I, p. 11)

The letter of credit further provided that the draft to be drawn is on Security Pacific National Bank
and that it be accompanied by the following documents:
 1. Signed Commercial Invoice in four copies showing the number of the purchase order and
certifying that

a. All terms and conditions of the purchase order have been complied with and that
all logs are fresh cut and quality equal to or better than that described in H.A.
Christiansen's telex #201 of May 1, 1970, and that all logs have been marked "BEV-
EX."

b. One complete set of documents, including 1/3 original bills of lading was airmailed
to Consignee and Parties to be advised by Hans-Axel Christiansen, Ship and
Merchandise Broker.

c. One set of non-negotiable documents was airmailed to Han Mi Trade

Development Company and one set to Consignee and Parties to be advised by
Hans-Axel Christiansen, Ship and Merchandise Broker.

2. Tally sheets in quadruplicate.

3. 2/3 Original Clean on Board Ocean Bills of Lading with Consignee and Parties to be
advised by Hans Axel Christiansen, showing Freight Prepaid and marked Notify:

Han Mi Trade Development Company, Ltd., Santa Ana, California.

Letter of Credit No. 46268 dated June 7, 1971

Han Mi Trade Development Company, Ltd., P.O. Box 10480, Santa Ana, California 92711
and Han Mi Trade Development Company, Ltd., Seoul, Korea.

4. Certification from Han-Axel Christiansen, Ship and Merchandise Broker, stating that logs
have been approved prior to shipment in accordance with terms and conditions of
corresponding purchase Order. (Record, Vol. 1 pp. 11-12)

Also incorporated by reference in the letter of credit is the Uniform Customs and Practice for
Documentary Credits (1962 Revision).

The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by Christiansen.
Before its loading, the logs were inspected by custom inspectors Nelo Laurente, Alejandro Cabiao,
Estanislao Edera from the Bureau of Customs (Records, Vol. I, p. 124) and representatives Rogelio
Cantuba and Jesus Tadena of the Bureau of Forestry (Records, Vol. I, pp. 16-17) all of whom
certified to the good condition and exportability of the logs.

After the loading of the logs was completed, the Chief Mate, Shao Shu Wang issued a mate receipt
of the cargo which stated the same are in good condition (Records, Vol. I, p. 363). However,
Christiansen refused to issue the certification as required in paragraph 4 of the letter of credit,
despite several requests made by the private respondent.

Because of the absence of the certification by Christiansen, the Feati Bank and Trust Company
refused to advance the payment on the letter of credit.

The letter of credit lapsed on June 30, 1971, (extended, however up to July 31, 1971) without the
private respondent receiving any certification from Christiansen.
The persistent refusal of Christiansen to issue the certification prompted the private respondent to
bring the matter before the Central Bank. In a memorandum dated August 16, 1971, the Central
Bank ruled that:

. . . pursuant to the Monetary Board Resolution No. 1230 dated August 3, 1971, in all log
exports, the certification of the lumber inspectors of the Bureau of Forestry . . . shall be
considered final for purposes of negotiating documents. Any provision in any letter of credit
covering log exports requiring certification of buyer's agent or representative that said logs
have been approved for shipment as a condition precedent to negotiation of shipping
documents shall not be allowed. (Records, Vol. I, p. 367)

Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee, Hanmi Trade
Development Company, to whom Christiansen sold the logs for the amount of $37.50 per cubic
meter, for a net profit of $10 per cubic meter. Hanmi Trade Development Company, on the other
hand sold the logs to Taisung Lumber Company at Inchon, Korea. (Rollo, p. 39)

Since the demands by the private respondent for Christiansen to execute the certification proved
futile, Villaluz, on September 1, 1971, instituted an action for mandamus and specific performance
against Christiansen and the Feati Bank and Trust Company (now Citytrust) before the then Court of
First Instance of Rizal. The petitioner was impleaded as defendant before the lower court only to
afford complete relief should the court a quo order Christiansen to execute the required certification.

The complaint prayed for the following:

1. Christiansen be ordered to issue the certification required of him under the Letter of Credit;

2. Upon issuance of such certification, or, if the court should find it unnecessary, FEATI
BANK be ordered to accept negotiation of the Letter of Credit and make payment thereon to
Villaluz;

3. Order Christiansen to pay damages to the plaintiff. (Rollo, p. 39)

On or about 1979, while the case was still pending trial, Christiansen left the Philippines without
informing the Court and his counsel. Hence, Villaluz, filed an amended complaint to make the
petitioner solidarily liable with Christiansen.

The trial court, in its order dated August 29, 1979, admitted the amended complaint.

After trial, the lower court found:

The liability of the defendant CHRISTIANSEN is beyond dispute, and the plaintiffs right to
demand payment is absolute. Defendant CHRISTIANSEN having accepted delivery of the
logs by having them loaded in his chartered vessel the "Zenlin Glory" and shipping them to
the consignee, his buyer Han Mi Trade in Inchon, South Korea (Art. 1585, Civil Code), his
obligation to pay the purchase order had clearly arisen and the plaintiff may sue and recover
the price of the goods (Art. 1595, Id).

The Court believes that the defendant CHRISTIANSEN acted in bad faith and deceit and
with intent to defraud the plaintiff, reflected in and aggravated by, not only his refusal to issue
the certification that would have enabled without question the plaintiff to negotiate the letter
of credit, but his accusing the plaintiff in his answer of fraud, intimidation, violence and
 deceit. These accusations said defendant did not attempt to prove, as in fact he left the
country without even notifying his own lawyer. It was to the Court's mind a pure swindle.

The defendant Feati Bank and Trust Company, on the other hand, must be held liable
together with his (sic) co-defendant for having, by its wrongful act, i.e., its refusal to negotiate
the letter of credit in the absence of CHRISTIANSEN's certification (in spite of the Central
Bank's ruling that the requirement was illegal), prevented payment to the plaintiff. The said
letter of credit, as may be seen on its face, isirrevocable and the issuing bank, the Security
Pacific National Bank in Los Angeles, California, undertook by its terms that the same shall
be honored upon its presentment. On the other hand, the notifying bank, the defendant Feati
Bank and Trust Company, by accepting the instructions from the issuing bank, itself
assumed the very same undertaking as the issuing bank under the terms of the letter of
credit.

xxx xxx xxx

The Court likewise agrees with the plaintiff that the defendant BANK may also be held liable
under the principles and laws on both trust and estoppel. When the defendant BANK
accepted its role as the notifying and negotiating bank for and in behalf of the issuing bank, it
in effect accepted a trust reposed on it, and became a trustee in relation to plaintiff as the
beneficiary of the letter of credit. As trustee, it was then duty bound to protect the interests of
the plaintiff under the terms of the letter of credit, and must be held liable for damages and
loss resulting to the plaintiff from its failure to perform that obligation.

Furthermore, when the defendant BANK assumed the role of a notifying and negotiating
BANK it in effect represented to the plaintiff that, if the plaintiff complied with the terms and
conditions of the letter of credit and presents the same to the BANK together with the
documents mentioned therein the said BANK will pay the plaintiff the amount of the letter of
credit. The Court is convinced that it was upon the strength of this letter of credit and this
implied representation of the defendant BANK that the plaintiff delivered the logs to
defendant CHRISTIANSEN, considering that the issuing bank is a foreign bank with whom
plaintiff had no business connections and CHRISTIANSEN had not offered any other
Security for the payment of the logs. Defendant BANK cannot now be allowed to deny its
commitment and liability under the letter of credit:

A holder of a promissory note given because of gambling who indorses the same to
an innocent holder for value and who assures said party that the note has no legal
defect, is in estoppel from asserting that there had been an illegal consideration for
the note, and so, he has to pay its value. (Rodriguez v. Martinez, 5 Phil. 67).

The defendant BANK, in insisting upon the certification of defendant CHRISTIANSEN as a

condition precedent to negotiating the letter of credit, likewise in the Court's opinion acted in
bad faith, not only because of the clear declaration of the Central Bank that such a
requirement was illegal, but because the BANK, with all the legal counsel available to it must
have known that the condition was void since it depended on the sole will of the debtor, the
defendant CHRISTIANSEN. (Art. 1182, Civil Code) (Rollo, pp. 29-31)

On the basis of the foregoing the trial court on October 20, 1986, ruled in favor of the private
respondent. The dispositive portion of its decision reads:

WHEREFORE, judgment is hereby rendered for the plaintiff, ordering the defendants to pay
the plaintiff, jointly and severally, the following sums:
 a) $54,000.00 (US), or its peso equivalent at the prevailing rate as of the time payment is
actually made, representing the purchase price of the logs;

b) P17,340.00, representing government fees and charges paid by plaintiff in connection with
the logs shipment in question;

c) P10,000.00 as temperate damages (for trips made to Bacolod and Korea).

All three foregoing sums shall be with interest thereon at 12% per annum from September 1,
1971, when the complaint was filed, until fully paid:

d) P70,000.00 as moral damages;

e) P30,000.00 as exemplary damages; and

f) P30,000.00 as attorney's fees and litigation expense.

(Rollo, p. 28)

The petitioner received a copy of the decision on November 3, 1986. Two days thereafter, or on
November 5, 1986, it filed a notice of appeal.

On November 10, 1986, the private respondent filed a motion for the immediate execution of the
judgment on the ground that the appeal of the petitioner was frivolous and dilatory.

The trial court ordered the immediate execution of its judgment upon the private respondent's filing
of a bond.

The petitioner then filed a motion for reconsideration and a motion to suspend the implementation of
the writ of execution. Both motions were, however, denied. Thus, petitioner filed before the Court of
Appeals a petition forcertiorari and prohibition with preliminary injunction to enjoin the immediate
execution of the judgment.

The Court of Appeals in a decision dated April 9, 1987 granted the petition and nullified the order of
execution, the dispositive portion of the decision states:

WHEREFORE, the petition for certiorari is granted. Respondent Judge's order of execution
dated December 29, 1986, as well as his order dated January 14, 1987 denying the
petitioner's urgent motion to suspend the writ of execution against its properties are hereby
annulled and set aside insofar as they are sought to be enforced and implemented against
the petitioner Feati Bank & Trust Company, now Citytrust Banking Corporation, during the
pendency of its appeal from the adverse decision in Civil Case No. 15121. However, the
execution of the same decision against defendant Axel Christiansen did not appeal said
decision may proceed unimpeded. The Sheriff s levy on the petitioner's properties, and the
notice of sale dated January 13, 1987 (Annex M), are hereby annulled and set aside. Rollo p.
44)

A motion for reconsideration was thereafter filed by the private respondent. The Court of Appeals, in
a resolution dated June 29, 1987 denied the motion for reconsideration.
In the meantime, the appeal filed by the petitioner before the Court of Appeals was given due
course. In its decision dated June 29, 1990, the Court of Appeals affirmed the decision of the lower
court dated October 20, 1986 and ruled that:

1. Feati Bank admitted in the "special and negative defenses" section of its answer that it
was the bank to negotiate the letter of credit issued by the Security Pacific National Bank of
Los Angeles, California. (Record, pp. 156, 157). Feati Bank did notify Villaluz of such letter of
credit. In fact, as such negotiating bank, even before the letter of credit was presented for
payment, Feati Bank had already made an advance payment of P75,000.00 to Villaluz in
anticipation of such presentment. As the negotiating bank, Feati Bank, by notifying Villaluz of
the letter of credit in behalf of the issuing bank (Security Pacific), confirmed such letter of
credit and made the same also its own obligation. This ruling finds support in the authority
cited by Villaluz:

A confirmed letter of credit is one in which the notifying bank gives its assurance also that the
opening bank's obligation will be performed. In such a case, the notifying bank will not simply
transmit but will confirm the opening bank's obligation by making it also its own undertaking,
or commitment, or guaranty or obligation. (Ward & Hatfield, 28-29, cited in Agbayani,
Commercial Laws, 1978 edition, p. 77).

Feati Bank argues further that it would be considered as the negotiating bank only upon
negotiation of the letter of credit. This stance is untenable. Assurance, commitments or
guaranties supposed to be made by notifying banks to the beneficiary of a letter of credit, as
defined above, can be relevant or meaningful only with respect to a future transaction, that
is, negotiation. Hence, even before actual negotiation, the notifying bank, by the mere act of
notifying the beneficiary of the letter of credit, assumes as of that moment the obligation of
the issuing bank.

2. Since Feati Bank acted as guarantor of the issuing bank, and in effect also of the latter's
principal or client, i.e. Hans Axel-Christiansen. (sic) Such being the case, when Christiansen
refused to issue the certification, it was as though refusal was made by Feati Bank itself.
Feati Bank should have taken steps to secure the certification from Christiansen; and, if the
latter should still refuse to comply, to hale him to court. In short, Feati Bank should have
honored Villaluz's demand for payment of his logs by virtue of the irrevocable letter of credit
issued in Villaluz's favor and guaranteed by Feati Bank.

3. The decision promulgated by this Court in CA-G.R. Sp No. 11051, which contained the
statement "Since Villaluz" draft was not drawn strictly in compliance with the terms of the
letter of credit, Feati Bank's refusal to negotiate it was justified," did not dispose of this
question on the merits. In that case, the question involved was jurisdiction or discretion, and
not judgment. The quoted pronouncement should not be taken as a preemptive judgment on
the merits of the present case on appeal.

4. The original action was for "Mandamus and/or specific performance." Feati Bank may not
be a party to the transaction between Christiansen and Security Pacific National Bank on the
one hand, and Villaluz on the other hand; still, being guarantor or agent of Christiansen
and/or Security Pacific National Bank which had directly dealt with Villaluz, Feati Bank may
be sued properly on specific performance as a procedural means by which the relief sought
by Villaluz may be entertained. (Rollo, pp. 32-33)

The dispositive portion of the decision of the Court of Appeals reads:

 WHEREFORE, the decision appealed from is affirmed; and accordingly, the appeal is hereby
dismissed. Costs against the petitioner. (Rollo, p. 33)

Hence, this petition for review.

The petitioner interposes the following reasons for the allowance of the petition.

First Reason

THE RESPONDENT COURT ERRONEOUSLY CONCLUDED FROM THE ESTABLISHED

FACTS AND INDEED, WENT AGAINST THE EVIDENCE AND DECISION OF THIS
HONORABLE COURT, THAT PETITIONER BANK IS LIABLE ON THE LETTER OF
CREDIT DESPITE PRIVATE RESPONDENTS NON-COMPLIANCE WITH THE TERMS
THEREOF,

Second Reason

THE RESPONDENT COURT COMMITTED AN ERROR OF LAW WHEN IT HELD THAT

PETITIONER BANK, BY NOTIFYING PRIVATE RESPONDENT OF THE LETTER OF
CREDIT, CONFIRMED SUCH CREDIT AND MADE THE SAME ALSO ITS OBLIGATION
AS GUARANTOR OF THE ISSUING BANK.

Third Reason

THE RESPONDENT COURT LIKEWISE COMMITTED AN ERROR OF LAW WHEN IT

AFFIRMED THE TRIAL COURT'S DECISION. (Rollo, p. 12)

The principal issue in this case is whether or not a correspondent bank is to be held liable under
the letter of credit despite non-compliance by the beneficiary with the terms thereof?

The petition is impressed with merit.

It is a settled rule in commercial transactions involving letters of credit that the documents
tendered must strictly conform to the terms of the letter of credit. The tender of documents
by the beneficiary (seller) must include all documents required by the letter. A correspondent
bank which departs from what has been stipulated under the letter of credit, as when it
accepts a faulty tender, acts on its own risks and it may not thereafter be able to recover from
the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary
Thus the rule of strict compliance.

In the United States, commercial transactions involving letters of credit are governed by the rule of
strict compliance. In the Philippines, the same holds true. The same rule must also be followed.

The case of Anglo-South America Trust Co. v. Uhe et al. (184 N.E. 741 [1933]) expounded clearly
on the rule of strict compliance.

We have heretofore held that these letters of credit are to be strictly complied with which
documents, and shipping documents must be followed as stated in the letter. There is no
discretion in the bank or trust company to waive any requirements. The terms of the letter
constitutes an agreement between the purchaser and the bank. (p. 743)
Although in some American decisions, banks are granted a little discretion to accept a faulty tender
as when the other documents may be considered immaterial or superfluous, this theory could lead to
dangerous precedents. Since a bank deals only with documents, it is not in a position to determine
whether or not the documents required by the letter of credit are material or superfluous. The mere
fact that the document was specified therein readily means that the document is of vital importance
to the buyer.

Moreover, the incorporation of the Uniform Customs and Practice for Documentary Credit (U.C.P. for
short) in the letter of credit resulted in the applicability of the said rules in the governance of the
relations between the parties.

And even if the U.C.P. was not incorporated in the letter of credit, we have already ruled in the
affirmative as to the applicability of the U.C.P. in cases before us.

In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance of the U.C.P.
in this jurisdiction is justified by Article 2 of the Code of Commerce. Article 2 of the Code of
Commerce enunciates that in the absence of any particular provision in the Code of Commerce,
commercial transactions shall be governed by the usages and customs generally observed.

There being no specific provision which governs the legal complexities arising from
transactions involving letters of credit not only between the banks themselves but also
between banks and seller and/or buyer, the applicability of the U.C.P. is undeniable.

The pertinent provisions of the U.C.P. (1962 Revision) are:

Article 3.

An irrevocable credit is a definite undertaking on the part of the issuing bank and
constitutes the engagement of that bank to the beneficiary and bona fide holders of
drafts drawn and/or documents presented thereunder, that the provisions for
payment, acceptance or negotiation contained in the credit will be duly
fulfilled, provided that all the terms and conditions of the credit are complied with.

An irrevocable credit may be advised to a beneficiary through another bank (the advising
bank) without engagement on the part of that bank, but when an issuing bank authorizes or
requests another bank to confirm its irrevocable credit and the latter does so, such
confirmation constitutes a definite undertaking of the confirming bank. . . .

Article 7.

Banks must examine all documents with reasonable care to ascertain that they appear on
their face to be in accordance with the terms and conditions of the credit,"

Article 8.

Payment, acceptance or negotiation against documents which appear on their face to be in

accordance with the terms and conditions of a credit by a bank authorized to do so, binds the
party giving the authorization to take up documents and reimburse the bank which has
effected the payment, acceptance or negotiation. (Emphasis Supplied)
Under the foregoing provisions of the U.C.P., the bank may only negotiate, accept or pay, if
the documents tendered to it are on their face in accordance with the terms and conditions of
the documentary credit. And since a correspondent bank, like the petitioner, principally deals
only with documents, the absence of any document required in the documentary credit
justifies the refusal by the correspondent bank to negotiate, accept or pay the beneficiary, as
it is not its obligation to look beyond the documents. It merely has to rely on the
completeness of the documents tendered by the beneficiary.

In regard to the ruling of the lower court and affirmed by the Court of Appeals that the petitioner is
not a notifying bank but a confirming bank, we find the same erroneous.

The trial court wrongly mixed up the meaning of an irrevocable credit with that of a confirmed credit.
In its decision, the trial court ruled that the petitioner, in accepting the obligation to notify the
respondent that theirrevocable credit has been transmitted to the petitioner on behalf of the private
respondent, has confirmed the letter.

The trial court appears to have overlooked the fact that an irrevocable credit is not synonymous with
a confirmed credit. These types of letters have different meanings and the legal relations arising
from there varies. A credit may be an irrevocable credit and at the same time a confirmed credit or
vice-versa.

An irrevocable credit refers to the duration of the letter of credit. What is simply means is that the
issuing bank may not without the consent of the beneficiary (seller) and the applicant (buyer) revoke
his undertaking under the letter. The issuing bank does not reserve the right to revoke the credit. On
the other hand, a confirmed letter of credit pertains to the kind of obligation assumed by the
correspondent bank. In this case, the correspondent bank gives an absolute assurance to the
beneficiary that it will undertake the issuing bank's obligation as its own according to the terms and
conditions of the credit. (Agbayani, Commercial Laws of the Philippines, Vol. 1, pp. 81-83)

Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the
correspondent bank in accepting the instructions of the issuing bank has also confirmed the letter of
credit. Another error which the lower court and the Court of Appeals made was to confuse the
obligation assumed by the petitioner.

In commercial transactions involving letters of credit, the functions assumed by a correspondent

bank are classified according to the obligations taken up by it. The correspondent bank may be
called a notifying bank, a negotiating bank, or a confirming bank.

In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or
transmit to the beneficiary the existence of the letter of credit. (Kronman and Co., Inc. v. Public
National Bank of New York, 218 N.Y.S. 616 [1926]; Shaterian, Export-Import Banking, p. 292, cited
in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76). A negotiating bank, on the other
hand, is a correspondent bank which buys or discounts a draft under the letter of credit. Its liability is
dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to
the seller but after negotiation, a contractual relationship will then prevail between the negotiating
bank and the seller. (Scanlon v. First National Bank of Mexico, 162 N.E. 567 [1928]; Shaterian,
Export-Import Banking, p. 293, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76)

In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller
and its liability is a primary one as if the correspondent bank itself had issued the letter of credit.
(Shaterian, Export-Import Banking, p. 294, cited in Agbayani Commercial Laws of the Philippines,
Vol. 1, p. 77)
In this case, the letter merely provided that the petitioner "forward the enclosed original credit to the
beneficiary." (Records, Vol. I, p. 11) Considering the aforesaid instruction to the petitioner by the
issuing bank, the Security Pacific National Bank, it is indubitable that the petitioner is only a notifying
bank and not a confirming bank as ruled by the courts below.

If the petitioner was a confirming bank, then a categorical declaration should have been stated in the
letter of credit that the petitioner is to honor all drafts drawn in conformity with the letter of credit.
What was simply stated therein was the instruction that the petitioner forward the original letter of
credit to the beneficiary.

Since the petitioner was only a notifying bank, its responsibility was solely to notify and/or transmit
the documentary of credit to the private respondent and its obligation ends there.

The notifying bank may suggest to the seller its willingness to negotiate, but this fact alone does not
imply that the notifying bank promises to accept the draft drawn under the documentary credit.

A notifying bank is not a privy to the contract of sale between the buyer and the seller, its
relationship is only with that of the issuing bank and not with the beneficiary to whom he assumes no
liability. It follows therefore that when the petitioner refused to negotiate with the private respondent,
the latter has no cause of action against the petitioner for the enforcement of his rights under the
letter. (See Kronman and Co., Inc. v. Public National Bank of New York, supra)

In order that the petitioner may be held liable under the letter, there should be proof that the
petitioner confirmed the letter of credit.

The records are, however, bereft of any evidence which will disclose that the petitioner has
confirmed the letter of credit. The only evidence in this case, and upon which the private respondent
premised his argument, is the P75,000.00 loan extended by the petitioner to him.

The private respondent relies on this loan to advance his contention that the letter of credit was
confirmed by the petitioner. He claims that the loan was granted by the petitioner to him, "in
anticipation of the presentment of the letter of credit."

The proposition advanced by the private respondent has no basis in fact or law. That the loan
agreement between them be construed as an act of confirmation is rather far-fetched, for it depends
principally on speculative reasoning.

As earlier stated, there must have been an absolute assurance on the part of the petitioner that it will
undertake the issuing bank's obligation as its own. Verily, the loan agreement it entered into cannot
be categorized as an emphatic assurance that it will carry out the issuing bank's obligation as its
own.

The loan agreement is more reasonably classified as an isolated transaction independent of the
documentary credit.

Of course, it may be presumed that the petitioner loaned the money to the private respondent in
anticipation that it would later be paid by the latter upon the receipt of the letter. Yet, we would have
no basis to rule definitively that such "act" should be construed as an act of confirmation.

The private respondent no doubt was in need of money in loading the logs on the ship "Zenlin Glory"
and the only way to satisfy this need was to borrow money from the petitioner which the latter
granted. From these circumstances, a logical conclusion that can be gathered is that the letter of
credit was merely to serve as a collateral.

At the most, when the petitioner extended the loan to the private respondent, it assumed the
character of a negotiating bank. Even then, the petitioner will still not be liable, for a negotiating bank
before negotiation has no contractual relationship with the seller.

The case of Scanlon v. First National Bank (supra) perspicuously explained the relationship between
the seller and the negotiating bank, viz:

It may buy or refuse to buy as it chooses. Equally, it must be true that it owes no contractual
duty toward the person for whose benefit the letter is written to discount or purchase any
draft drawn against the credit. No relationship of agent and principal, or of trustee and cestui,
between the receiving bank and the beneficiary of the letter is established. (P.568)

Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held liable.
Absent any definitive proof that it has confirmed the letter of credit or has actually negotiated with the
private respondent, the refusal by the petitioner to accept the tender of the private respondent is
justified.

In regard to the finding that the petitioner became a "trustee in relation to the plaintiff (private
respondent) as the beneficiary of the letter of credit," the same has no legal basis.

A trust has been defined as the "right, enforceable solely in equity, to the beneficial enjoyment of
property the legal title to which is vested to another." (89 C.J.S. 712)

The concept of a trust presupposes the existence of a specific property which has been conferred
upon the person for the benefit of another. In order therefore for the trust theory of the private
respondent to be sustained, the petitioner should have had in its possession a sum of money as
specific fund advanced to it by the issuing bank and to be held in trust by it in favor of the private
respondent. This does not obtain in this case.

The mere opening of a letter of credit, it is to be noted, does not involve a specific appropriation of a
sum of money in favor of the beneficiary. It only signifies that the beneficiary may be able to draw
funds upon the letter of credit up to the designated amount specified in the letter. It does not convey
the notion that a particular sum of money has been specifically reserved or has been held in trust.

What actually transpires in an irrevocable credit is that the correspondent bank does not receive in
advance the sum of money from the buyer or the issuing bank. On the contrary, when the
correspondent bank accepts the tender and pays the amount stated in the letter, the money that it
doles out comes not from any particular fund that has been advanced by the issuing bank, rather it
gets the money from its own funds and then later seeks reimbursement from the issuing bank.

Granting that a trust has been created, still, the petitioner may not be considered a trustee. As the
petitioner is only a notifying bank, its acceptance of the instructions of the issuing bank will not
create estoppel on its part resulting in the acceptance of the trust. Precisely, as a notifying bank, its
only obligation is to notify the private respondent of the existence of the letter of credit. How then can
such create estoppel when that is its only duty under the law?
We also find erroneous the statement of the Court of Appeals that the petitioner "acted as a
guarantor of the issuing bank and in effect also of the latter's principal or client, i.e., Hans Axel
Christiansen."

It is a fundamental rule that an irrevocable credit is independent not only of the contract between the
buyer and the seller but also of the credit agreement between the issuing bank and the buyer.
(See Kingdom of Sweden v. New York Trust Co., 96 N.Y.S. 2d 779 [1949]). The relationship
between the buyer (Christiansen) and the issuing bank (Security Pacific National Bank) is entirely
independent from the letter of credit issued by the latter.

The contract between the two has no bearing as to the non-compliance by the buyer with the
agreement between the latter and the seller. Their contract is similar to that of a contract of services
(to open the letter of credit) and not that of agency as was intimated by the Court of Appeals. The
unjustified refusal therefore by Christiansen to issue the certification under the letter of credit should
not likewise be charged to the issuing bank.

As a mere notifying bank, not only does the petitioner not have any contractual relationship with the
buyer, it has also nothing to do with the contract between the issuing bank and the buyer regarding
the issuance of the letter of credit.

The theory of guarantee relied upon by the Court of Appeals has to necessarily fail. The concept of
guarantee vis-a-vis the concept of an irrevocable credit are inconsistent with each other.

In the first place, the guarantee theory destroys the independence of the bank's responsibility from
the contract upon which it was opened. In the second place, the nature of both contracts is mutually
in conflict with each other. In contracts of guarantee, the guarantor's obligation is merely collateral
and it arises only upon the default of the person primarily liable. On the other hand, in an irrevocable
credit the bank undertakes a primary obligation. (SeeNational Bank of Eagle Pass, Tex v. American
National Bank of San Francisco, 282 F. 73 [1922])

The relationship between the issuing bank and the notifying bank, on the contrary, is more similar to
that of an agency and not that of a guarantee. It may be observed that the notifying bank is merely to
follow the instructions of the issuing bank which is to notify or to transmit the letter of credit to the
beneficiary. (See Kronman v. Public National Bank of New York, supra). Its commitment is only to
notify the beneficiary. It does not undertake any assurance that the issuing bank will perform what
has been mandated to or expected of it. As an agent of the issuing bank, it has only to follow the
instructions of the issuing bank and to it alone is it obligated and not to buyer with whom it has no
contractual relationship.

In fact the notifying bank, even if the seller tenders all the documents required under the letter of
credit, may refuse to negotiate or accept the drafts drawn thereunder and it will still not be held liable
for its only engagement is to notify and/or transmit to the seller the letter of credit.

Finally, even if we assume that the petitioner is a confirming bank, the petitioner cannot be forced to
pay the amount under the letter. As we have previously explained, there was a failure on the part of
the private respondent to comply with the terms of the letter of credit.

The failure by him to submit the certification was fatal to his case. The U.C.P. which is incorporated
1wphi1

in the letter of credit ordains that the bank may only pay the amount specified under the letter if all
the documents tendered are on their face in compliance with the credit. It is not tasked with the duty
of ascertaining the reason or reasons why certain documents have not been submitted, as it is only
concerned with the documents. Thus, whether or not the buyer has performed his responsibility
towards the seller is not the bank's problem.

We are aware of the injustice committed by Christiansen on the private respondent but we are
deciding the controversy on the basis of what the law is, for the law is not meant to favor only those
who have been oppressed, the law is to govern future relations among people as well. Its
commitment is to all and not to a single individual. The faith of the people in our justice system may
be eroded if we are to decide not what the law states but what we believe it should declare. Dura lex
sed lex.

Considering the foregoing, the materiality of ruling upon the validity of the certificate of approval
required of the private respondent to submit under the letter of credit, has become insignificant.

In any event, we affirm the earlier ruling of the Court of Appeals dated April 9, 1987 in regard to the
petition before it for certiorari and prohibition with preliminary injunction, to wit:

There is no merit in the respondent's contention that the certification required in condition
No. 4 of the letter of credit was "patently illegal." At the time the letter of credit was issued
there was no Central Bank regulation prohibiting such a condition in the letter of credit. The
letter of credit (Exh. C) was issued on June 7, 1971, more than two months before the
issuance of the Central Bank Memorandum on August 16, 1971 disallowing such a condition
in a letter of credit. In fact the letter of credit had already expired on July 30, 1971 when the
Central Bank memorandum was issued. In any event, it is difficult to see how such a
condition could be categorized as illegal or unreasonable since all that plaintiff Villaluz, as
seller of the logs, could and should have done was to refuse to load the logs on the vessel
"Zenlin Glory", unless Christiansen first issued the required certification that the logs had
been approved by him to be in accordance with the terms and conditions of his purchase
order. Apparently, Villaluz was in too much haste to ship his logs without taking all due
precautions to assure that all the terms and conditions of the letter of credit had been strictly
complied with, so that there would be no hitch in its negotiation. (Rollo, p. 8)

WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby NULLIFIES and SETS
ASIDE the decision of the Court of Appeals dated June 29, 1990. The amended complaint in Civil
Case No. 15121 is DISMISSED.

SO ORDERED.
G.R. No. 135462 December 7, 2001

SOUTH CITY HOMES, INC., FORTUNE MOTORS (PHILS.), PALAWAN LUMBER

MANUFACTURING CORPORATION, petitioners,
vs.
BA FINANCE CORPORATION, respondent.

PARDO, J.:

The Case

The case is a petition to set aside the decision1 of the Court of Appeals, the dispositive portion of
which reads:

"WHEREFORE, premises considered, the appealed Decision (as amended by that Order of
July 22, 1992) of the lower court in Civil Case No. 21944 is hereby AFFIRMED with the
MODIFICATION that defendant-appellee South City Homes, Inc. is hereby ordered to pay,
jointly and severally, with Fortune Motors Corporation, Palawan Lumber Manufacturing
Corporation and Joseph L. G. Chua, the outstanding amounts due under the six (6) drafts
and trust receipts, with interest thereon at the legal rate from the date of filing of this case
until said amounts shall have been fully paid, as follows:

Date of Draft Amount Due

Balance
July 26, 1983 P244,269.00 P198,659.52
July 27, 1983 967,765.50 324,767.41
July 28, 1983 1,138,941.00 1,138,941.00
August 2, 1983 244,269.00 244,269.00
August 5, 1983 275,079.00 275,079.60
August 8, 1983 475,046.10 475,046.10

and the attorney's fees and costs of suit.

"SO ORDERED."2
 The Facts

The facts, as found by the Court of Appeals, are as follows:

"The present controversy relates to the rights of an assignee (financing company) of drafts
and trust receipts backed up by sureties, in the event of default by the debtor (car dealer) to
whom the assignor creditor (car manufacturer) sold and delivered motor vehicles for resale.
A consistent ruling on these cases is hereby reiterated: that a surety may secure obligations
incurred subsequent to the execution of the surety contract.

"Prior to the transactions covered by the subject drafts and trust receipts, defendant-
appellant Fortune Motors Corporation (Phils.) has been availing of the credit facilities of
plaintiff-appellant BA Finance Corporation. On January 17, 1983, Joseph L. G. Chua,
President of Fortune Motors Corporation, executed in favor of plaintiff-appellant a Continuing
Suretyship Agreement, in which he "jointly and severally unconditionally" guaranteed the
"full, faithful and prompt payment and discharge of any and all indebtedness" of Fortune
Motors Corporation to BA Finance Corporation (Folder of Exhibits, pp. 21-22).

"On February 3, 1983, Palawan Lumber Manufacturing Corporation represented by Joseph

L.G. Chua, George D. Tan, Edgar C. Rodrigueza and Joselito C. Baltazar, executed in favor
of plaintiff-appellant a Continuing Suretyship Agreement in which, said corporation "jointly
and severally unconditionally" guaranteed the "full, faithful and prompt payment and
discharge of any and all indebtedness of Fortune Motors Corporation to BA Finance
Corporation (Folder of Exhibits, pp. 19-20). On the same date, South City Homes, Inc.
represented by Edgar C. Rodrigueza and Aurelio F. Tablante, likewise executed a
Continuing Suretyship Agreement in which said corporation "jointly and severally
unconditionally" guaranteed the "full, faithful and prompt payment and discharge of any and
all indebtedness" of Fortune Motors Corporation to BA Finance Corporation (Folder of
Exhibits, pp. 17-18).

"Subsequently, Canlubang Automotive Resources Corporation (CARCO) drew six (6) Drafts
in its own favor, payable thirty (30) days after sight, charged to the account of Fortune
Motors Corporation, as follows:

Date of Draft Amount

July 26, 1983 P244,269.00
July 27, 1983 967,765.50
July 28, 1983 1,138,941.00
August 2, 1983 244,269.00
August 5, 1983 275,079.00
August 8, 1983 475,046.10

"(Folder of Exhibits, pp. 1, 4, 7, 8, 11 and 14).

"Fortune Motors Corporation thereafter executed trust receipts covering the motor vehicles
delivered to it by CARCO under which it agreed to remit to the Entruster (CARCO) the
proceeds of any sale and immediately surrender the remaining unsold vehicles (Folder of
Exhibits, pp. 2, 5, 7-A, 9, 12 and 15). The drafts and trust receipts were assigned to plaintiff-
appellant, under Deeds of Assignment executed by CARCO (Folder of Exhibits, pp. 3, 6, 7-B,
10, 13 and 16).

"Upon failure of the defendant-appellant Fortune Motors Corporation to pay the amounts due
under the drafts and to remit the proceeds of motor vehicles sold or to return those remaining
unsold in accordance with the terms of the trust receipt agreements, BA Finance Corporation
sent demand letter to Edgar C. Rodrigueza, South City Homes, Inc., Aurelio Tablante,
Palawan Lumber Manufacturing Corporation, Joseph L. G. Chua, George D. Tan and
Joselito C. Baltazar (Folder of Exhibits, pp. 29-37). Since the defendants-appellants failed to
settle their outstanding account with plaintiff-appellant, the latter filed on December 22, 1983
a complaint for a sum of money with prayer for preliminary attachment, with the Regional
Trial Court of Manila, Branch 1, which was docketed as Civil Case No. 83-21944 (Record,
pp. 1-12). Plaintiff-appellant filed a surety bond in the amount of P3,391,546.56 and
accordingly, Judge Rosalio C. Segundo ordered the issuance of a writ of preliminary
attachment on January 3, 1984 (Record, pp. 37-47). Defendants Fortune Motors
Corporation, South City Homes, Inc., Edgar C. Rodrigueza, Aurelio F. Tablante, Palawan
Lumber Manufacturing Corporation, Joseph L. G. Chua, George D. Tan and Joselito C.
Baltazar filed a Motion to Discharge Attachment, which was opposed by plaintiff-appellant
(Record, pp. 49-56). In an Order dated January 11, 1984, Judge Segundo dissolved the writ
of attachment except as against defendant Fortune Motors Corporation and set the said
incident for hearing (Record, p. 57). On January 19, 1984, the defendants filed a Motion to
Dismiss. Therein, they alleged that conventional subrogation effected a novation without the
consent of the debtor (Fortune Motors Corporation) and thereby extinguished the latter's
liability; that pursuant to the trust receipt transaction, it was premature under P. D. No. 115 to
immediately file a complaint for a sum of money as the remedy of the entruster is an action
for specific performance; that the suretyship agreements are null and void for having been
entered into without an existing principal obligation; and that being such sureties does not
make them solidary debtors (Record, pp. 58-64).

"After due hearing, the court denied the motion to discharge attachment with respect to
defendant Fortune Motors Corporation as well as the motion to dismiss by the defendants
(Record, pp. 68 and 87). In their Answer, defendants stressed that their obligations to the
creditor (CARCO) was extinguished by the assignment of the drafts and trust receipts to
plaintiff-appellant without their knowledge and consent, and pursuant to legal provision on
conventional subrogation a novation was effected, thereby extinguishing the liability of the
sureties; that plaintiff-appellant failed to immediately demand the return of the goods under
the trust receipt agreements or exercise the courses of action by the entruster as provided
for under P. D. No. 115; and that at the time the suretyship agreements were entered into,
there were no principal obligations, thus rendering them null and void. A counterclaim for the
award of actual, moral and exemplary damages was prayed for by defendants (Record, pp.
91-110).

"During the pre-trial, efforts to reach a compromise was not successful, and in view of the
retirement of Judge Rosalio C. Segundo of RTC Manila, Branch 1, the case was-re-raffled off
to Branch XXXIII, presided over by Judge Felix V. Barbers (Record, pp. 155-160).

"Fortune Motors Corporation filed a motion to lift the writ of attachment covering three (3)
vehicles described in the Third-Party Claim filed with the Office of Deputy Sheriff Jorge C.
Victorino (RTC, Branch 1) by Fortune Equipment, Inc. which was opposed by plaintiff-
appellant (Record, pp. 173-181). On June 15, 1984, Deputy Sheriff Jorge C. Victorino issued
a "Notice of Levy Upon Personal Properties Pursuant to Order of Attachment" which was
duly served on defendant Fortune Motors Corporation (Record, pp. 191-199). In an Order
dated April 28, 1986, the court a quo denied the motion to lift the writ of attachment on three
(3) vehicles described in the Third-Party Claim filed by Fortune Equipment Inc. (Record, p.
207). On motion of their respective counsel, the trial court granted the parties time to sit
down and appraise the machineries and spare parts owned by defendant Fortune Motors
Corporation which are now in the possession of plaintiff corporation by virtue of the
attachment. A series of conferences was allowed by the court, as means toward possible
compromise agreement. In an Order dated June 2, 1987, the case was returned to Branch I,
now presided over by Judge Rebecca G. Salvador (Record, p. 237). The pre-trial period was
terminated and the case was set for trial on the merits (Record, p. 259).

"Acting on the motion to sell levied properties filed by defendant George D. Tan, the trial
court ordered the public sale of the attached properties (Record, p. 406). The court likewise
allowed the complaint-in-intervention filed by Fortune Equipment Inc. and South Fortune
Motors Corporation who claimed ownership of four (4) vehicles earlier seized and attached
(Record, p. 471-475). Plaintiff corporation admitted the allegations contained in the
complaint-in-intervention only with respect to one truck so attached but denied the rest of
intervenors' allegations (Record, pp. 479-482). Thereafter, the parties submitted their
respective pre-trial briefs on the complaint-in-intervention, and after the submission of
evidence thereon, the case was submitted for decision (Record, pp. 573-577).

"On November 25, 1991, the lower court rendered its judgment, the dispositive portion of
which reads as follows:

"WHEREFORE, judgment is hereby rendered:

"1. Ordering defendants Fortune Motors, Palawan Lumber Manufacturing Corporation and
Joseph Chua, jointly and severally to pay the plaintiff on the July 27, 1983 Draft, the sum of
P324,767.41 with the interest thereon at the legal rate from the date of filing of this case,
December 21, 1983 until the amount shall have been fully paid;

"2. Ordering defendants Fortune Motors, Palawan Manufacturing Corporation and Joseph
Chua jointly and severally to pay to the plaintiff on the July 26, 1983 Draft, the sum of
P198,659.52 with interest thereon at the legal rate from the date of filing of this case, until the
amount shall have been fully paid;

"3. Ordering defendant Fortune Motors, Palawan Manufacturing Corporation and Joseph
Chua jointly and severally to pay to the plaintiff on the July 28, 1983 Draft the sum of
P1,138,941.00 with interest thereon at the legal rate from the date of filing of this case, until
the amount shall have been fully paid;

"4. Ordering defendants Fortune Motors, Palawan Lumber Manufacturing Corporation and
Joseph Chua jointly and severally to pay to the plaintiff on the August 2, 1983 Draft, the sum
of P244,269.00 with interest thereon at the legal rate from the date of filing of this case, until
the amount shall have been fully paid;

"5. Ordering defendants Fortune Motors, Palawan Lumber Manufacturing Corporation and
Joseph Chua jointly and severally to pay to the plaintiff on the August 5, 1983 Draft the sum
of P275,079.60 with interest thereon at the legal rate from the date of the filing of this case,
until the amount shall have been fully paid;

"6. Ordering defendants Fortune Motors, Palawan Lumber Manufacturing Corporation and
Joseph Chua jointly and severally to pay to the plaintiff on the August 8, 1983 Draft the sum
of P475,046.10 with interest thereon at legal rate from the date of the filing of this case, until
the amount shall been fully paid;

"7. Ordering defendant Fortune Motors, Palawan Lumber Manufacturing Corporation and
Joseph Chua jointly and severally to pay the sum of P300,000.00 as attorney's fees and the
costs of this suit;

"8. Dismissing plaintiff's complaint against South City Homes, Aurelio Tablante, Joselito
Baltazar, George Tan and Edgar Rodrigueza and the latter's counterclaim for lack of basis;

"9. Ordering Deputy Sheriff Jorge Victorino to return to Intervenor Fortune Equipment the
Mitsubishi Truck Canter with Motor No. 310913 and Chassis No. 513234;

"10. Dismissing the complaint-in-intervention in so far as the three other vehicles mentioned
in the complaint-in-intervention are concerned for lack of cause of action;

"11. Dismissing the complaint-in-intervention against Fortune Motor for lack of basis; and

"12. Ordering the parties-in-intervention to bear their respective damages, attorneys fees and
the costs of the suit.

"Upon execution, the sheriff may cause the judgment to be satisfied out of the properties
attached with the exception of one (1) unit Mitsubishi Truck Canter with Motor No. 310913
and Chassis No. 513234, if they be sufficient for that purpose. The officer shall make a return
in writing to the court of his proceedings. Whenever the judgment shall have been paid, the
officer, upon reasonable demand must return to the judgment debtor the attached properties
remaining in his hand, and any of the proceeds of the properties not applied to the judgment.

"SO ORDERED.

"On two (2) separate motions for reconsideration, one filed by plaintiffs-intervenors dated
December 18, 1991 and the other by plaintiff dated December 26, 1991, the trial court issued
an Order dated July 22, 1992 amending its Decision dated November 25, 1991. Specifically,
said Order amended paragraphs 9 and 10 thereof and deleted the last paragraph of the said
Decision.

"Paragraphs 9 and 10 now read:

"9. Ordering Deputy Sheriff Jorge C. Victorino to return to Intervenor Fortune

Equipment, Inc. the Mitsubishi Truck Canter with Motor No. 310913 and Chassis No.
513234; Mitsubishi Truck Canter with Motor No. 4D30-313012 and Chassis No.
513696, and Fuso Truck with Motor No. 006769 and Chassis No. 20756, and to
Intervenor South Fortune Motors Corporation the Cimaron Jeepney with Plate No.
NET-849;

"10. Ordering the plaintiff, in the event the motor vehicles could no longer be returned
to pay the estimated value thereof i.e., P750,000.00 for the three trucks, and
P5,000.00 for the Cimaron Jeepney, to the plaintiffs-intervenors.

"x x x" (Records, pp. 664-665)

 "Plaintiffs BA Finance Corporation, defendants Fortune Motors Corp. (Phils.) and Palawan
Lumber Manufacturing Corporation, and intervenors Fortune Equipment and South Fortune
Motors, interposed the present appeal and filed their respective Briefs."3

On September 8, 1998, the Court of Appeals promulgated a decision, the dispositive portion of
which is quoted in the opening paragraph of this decision.

Hence, this appeal.4

The Issues

The issues presented are: (1) whether the suretyship agreement is valid; (2) whether there was a
novation of the obligation so as to extinguish the liability of the sureties; and (3) whether respondent
BAFC has a valid cause of action for a sum of money following the drafts and trust receipts
transactions.5

The Court's Ruling

On the first issue, petitioners assert that the suretyship agreement they signed is void because there
was no principal obligation at the time of signing as the principal obligation was signed six (6)
months later. The Civil Code, however, allows a suretyship agreement to secure future loans even if
the amount is not yet known.

Article 2053 of the Civil Code provides that:

"Art. 2053. A guaranty may also be given as security for future debts, the amount of which is
not yet known. x x x"

In Fortune Motors (Phils.) Corporation v. Court of Appeals,6 we held:

"To fund their acquisition of new vehicles (which are later retailed or resold to the general
public), car dealers normally enter into wholesale automotive financing schemes whereby
vehicles are delivered by the manufacturer or assembler on the strength of trust receipts or
drafts executed by the car dealers, which are backed up by sureties. These trust receipts or
drafts are then assigned and/or discounted by the manufacturer to/with financing companies,
which assume payment of the vehicles but with the corresponding right to collect such
payment from the car dealers and/or the sureties. In this manner, car dealers are able to
secure delivery of their stock-in-trade without having to pay cash therefor; manufacturers get
paid without any receivables/collection problems; and financing companies earn their
margins with the assurance of payment not only from the dealers but also from the sureties.
When the vehicles are eventually resold, the car dealers are supposed to pay the financing
companies and the business goes merrily on. However, in the event the car dealer
defaults in paying the financing company, may the surety escape liability on the legal ground
that the obligations were incurred subsequent to the execution of the surety contract?

"x x x Of course, a surety is not bound under any particular principal obligation until that
principal obligation is born. But there is no theoretical or doctrinal difficulty inherent in saying
that the suretyship agreement itself is valid and binding even before the principal obligation
intended to be secured thereby is born, any more than there would be in saying that
obligations which are subject to a condition precedent are valid and binding before the
occurrence of the condition precedent.
 "Comprehensive or continuing surety agreements are in fact quite commonplace in present
day financial and commercial practice. A bank or financing company which anticipates
entering into a series of credit transactions with a particular company, commonly requires the
projected principal debtor to execute a continuing surety agreement along with its sureties.
By executing such an agreement, the principal places itself in a position to enter into the
projected series of transactions with its creditor; with such suretyship agreement, there would
be no need to execute a separate surety contract or bond for each financing or credit
accommodation extended to the principal debtor."

Petitioners next posit (second issue) that a novation, as a result of the assignment of the drafts and
trust receipts by the creditor (CARCO) in favor of respondent BAFC without the consent of the
principal debtor (Fortune Motors), extinguished their liabilities.

An assignment of credit is an agreement by virtue of which the owner of a credit, known as

the assignor, by a legal cause, such as sale, dacion en pago, exchange or donation, and
without the consent of the debtor, transfers his credit and accessory rights to another, known
as the assignee, who acquires the power to enforce it to the same extent as the assignor
could enforce it against the debtor.7 As a consequence, the third party steps into the shoes of
the original creditor as subrogee of the latter. Petitioners' obligations were not extinguished.
Thus:

"x x x Moreover, in assignment, the debtor's consent is not essential for the validity of the
assignment (Art. 1624 in relation to Art. 1475, Civil Code), his knowledge thereof affecting
only the validity of the payment he might make (Article 1626, Civil Code).

"Article 1626 also shows that payment of an obligation which is already existing does not
depend on the consent of the debtor. It, in effect, mandates that such payment of the existing
obligation shall already be made to the new creditor from the time the debtor acquires
knowledge of the assignment of the obligation.

"The law is clear that the debtor had the obligation to pay and should have paid from the
date of notice whether or not he consented.

"We have ruled in Sison & Sison vs. Yap Tico and Avancea, 37 Phil. 587 [1918] that
definitely, consent is not necessary in order that assignment may fully produce legal effects.
Hence, the duty to pay does not depend on the consent of the debtor. Otherwise, all
creditors would be prevented from assigning their credits because of the possibility of the
debtor's refusal to give consent.

"What the law requires in an assignment of credit is not the consent of the debtor but
merely notice to him. A creditor may, therefore, validly assign his credit and its
accessories without the debtor's consent (National Investment and Development Co.
v. De Los Angeles, 40 SCRA 489 [1971]. The purpose of the notice is only to inform
that debtor from the date of the assignment, payment should be made to the assignee
and not to the original creditor."8

Petitioners finally posit (third issue) that as an entruster, respondent BAFC must first demand the
return of the unsold vehicles from Fortune Motors Corporation, pursuant to the terms of the trust
receipts. Having failed to do so, petitioners had no cause of action whatsoever against Fortune
Motors Corporation and the action for collection of sum of money was, therefore, premature. A trust
receipt is a security transaction intended to aid in financing importers and retail dealers who do not
have sufficient funds or resources to finance the importation or purchase of merchandise, and who
may not be able to acquire credit except through utilization, as collateral, of the merchandise
imported or purchased.9 In the event of default by the entrustee on his obligations under the trust
receipt agreement, it is not absolutely necessary that the entruster cancel the trust and take
possession of the goods to be able to enforce his rights thereunder. We ruled:

"x x x Significantly, the law uses the word "may" in granting to the entruster the right to
cancel the trust and take possession of the goods. Consequently, petitioner has the
discretion to avail of such right or seek any alternative action, such as a third party claim or a
separate civil action which it deems best to protect its right, at any time upon default or
failure of the entrustee to comply with any of the terms and conditions of the trust
agreement."10

The Judgment