ANTONIO CASTELO vs.

COURT OF APPEALS [May 22, 1995]

On 15 October 1982, petitioners Antonio Castelo, Bernabe Banson, Lourdes Banson and Pompeyo Depante entered
into a contract denominated as a "Deed of Conditional Sale" with private respondent Milagros Dela Rosa involving a
parcel of land located in 1524 España Street, Sampaloc, Manila, 84.19 square meters in area. The agreed price of the
land was Two Hundred Sixty Nine Thousand, Four Hundred and Eight Pesos (P269,408.00). Upon signing the contract,
private respondent paid petitioners One Hundred Six Thousand Pesos (P106,000.00) leaving a balance of One
Hundred Sixty Thousand Four Hundred and Eight Pesos (P163,408.00).

The Deed of Conditional Sale also stipulated that:

xxx xxx xxx

b.) The balance of P163,408.00 to be paid on or before December 31, 1982 without interest and penalty
charges;

c.) Should the said balance [remain unpaid] by the VENDEE, the VENDORS hereby agree to give the VENDEE
a grace period of SIX (6) months or up to June 30, 1983 to pay said balance provided that interest at the rate
of 12% per annum shall be charged and 1% penalty charge a month shall be imposed on the remaining
diminishing balance.1 (Emphasis supplied)

Private respondent Dela Rosa was unable to pay the remaining balance on or before 30 June 1983.

On 29 July 1983, petitioners filed an action for specific performance with damages in the Regional Trial Court (RTC) of
Manila against Dela Rosa.

The RTC, in a decision dated 17 August 1984 rendered by Judge Antonio Q. Malaya, ordered the rescission of the
Deed of Conditional Sale.

Petitioners then went on Certiorari to the Court of Appeals questioning the trial court's decision rescinding the Deed
of Conditional Sale. They claimed that rescission of the contract was only an alternative relief available under the Civil
Code, while they, in their complaint before the RTC, had asked for specific performance with damages.

In a decision written by Castro-Bartolome, J., dated 21 November 1986, the Court of Appeals, in CA G.R. No. 07938-
SP, annulled and set aside the RTC's decision of 17 August 1984. In its dispositive portion, the Court of Appeals
decision stated:

WHEREFORE, the writ of certiorari is hereby granted annulling the decision of Judge Malaya dated August 17,
1984 and a new one entered:

1) allowing the amendment of the complaint to conform to the evidence already presented and defaulted
defendant to answer the amendment within the reglementary period; and

2) ordering the defendant to comply with her obligation under the conditional sale to pay the balance of the
conditional sale in the amount of P163,408.00, to pay interest and in default thereof the rescission thereof is
the alternative.2 (Emphasis supplied)

Petitioners filed a motion for execution of the 17 August 1984 judgment of the trial court as modified by the 21
November 1986 judgment of the Court of Appeals. Private respondent opposed this motion.

A writ of execution of the 21 November 1986 judgment of the Court of Appeals was issued by the trial court on 2
September 1988. Accordingly, a Sheriff's Notice to Pay Judgment was served on private respondent Dela Rosa
requiring her to pay petitioners a total of One Hundred Ninety Seven Thousand Seven Hundred Twenty Three Pesos
and Sixty Eight Centavos (P197,723.68), computed as follows:

Principal P163,408.00
plus interest of
12% (per contract)
from 21 Nov. 1986 to
2 Sept. 1988 34,315.6800
——————
Total amount of judgment
(excluding sheriff's fees
and expenses) P197,723.68 3

Petitioners filed a motion for reconsideration and a separate motion for alias writ of execution contending
that the sum of P197,723.68, based on the Sheriff's own computation, was erroneous. They argued that the
obligation of private respondent was to pay (a) interest at the rate of twelve percent (12%) per annum
plus (b) one percent (1%) penalty charge per month, from default, i.e. from 1 January 1983:

a. That the amount to be paid by the Defendant should be P398,814.88 instead and not P197,723.68 or
a difference of P201,091.20; detailed computation of which are as follows:

Unpaid balance with interest of 12% P163,408.00

P.A. and 1% penalty charge a month
January to December 1983 39,217.92
January to December 1984 39,217.92
January to December 1985 39,217.92
January to December 1986 39,217.92
January to December 1987 39,217.92
January to August 1988 26,145.28
1% interest per month (P268.16)
the interest for one (1)
year @ 24% P 39,217.92
x 5 years
P196,089.60
Interest from January to August 1988 26,145.28
Interest from January 1983 to August 1988 222,234,88

Principal 163,408.00
P385,642.88

Plus Real Estate Tax Paid 13,172.00

Amount due to Plaintiffs P398,814.88 4

They also claimed that the amount arrived at by the Sheriff was inconsistent not only with the Court of
Appeal's decision of 21 November 1986, but also the stipulations in the "Deed of Conditional Sale."

In an Order of 18 April 1990, the trial court denied the motion for alias writ of execution and the motion for
reconsideration. In denying petitioners' motions, the trial court stated that it did not have authority to
enlarge the scope of the dispositive portion of the Court of Appeals' decision which was the subject of
execution. Moreover, the trial court continued, the phrase "to pay interest" found in the dispositive portion
of the Court of Appeals' 21 November 1986 decision did not refer to the stipulation in the "Deed of
Conditional Sale" but rather to the legal rate of interest imposed by the Court of Appeals which started to run
from 12 February 1987, the date of entry of judgment. Had it intended otherwise, the Court of Appeals
would have declared so.

Petitioners moved for reconsideration of the 18 April 1990 Order, without success.

Petitioners then went on Certiorari for the second time to the Court of Appeals claiming that the trial court
had acted with grave abuse of discretion in issuing its Orders dated 18 April 1990 and 18 June 1990. The
petition, docketed as C.A.-G.R. SP No. 22464, was, however, dismissed for lack of merit. The Court of Appeals,
speaking this time through Luna, J., pronounced that:

Indeed, what must be the subject of execution is the "new one" or new decision (referring to the
Court of Appeals' decision in CA-G.R. No. 07938 SP dated 21 November 1986), wherein this Court
decreed in paragraph "2" of the dispositive portion, ordering the "defendant . . . to pay the balance
of the conditional sale in the amount of P163,408.00, to pay interest . . . . " Being a "new" judgment
or decision, the computation of the "interest" on the balance of the conditional sale should
commence from the date of its ENTRY on February 12, 1987, when the decision became FINAL and
EXECUTORY. It is the DECISION of this Court WHICH DECREED PAYMENT and ACCRUAL OF INTEREST. 5

Hence this Petition for Review contending that, in the Luna, J. decision, the Court of Appeals had erred in
ignoring the stipulation for payment of interest in case of default found in the "Deed of Conditional Sale."

The instant petition does not seek a review of the decision of the Court of Appeals dated 21 November 1986,
issued in CA G.R. No. 07938-SP, which long ago became final and executory. The Petition before us now
presents the issue of what is the correct interpretation of the phrase "to pay interest" set out in the
dispositive portion of the 21 November 1986 decision of Castro-Bartolome, J.

The established doctrine is that when the dispositive portion of a judgment, which has become final and
executory, contains a clerical error or an ambiguity arising from an inadvertent omission, such error or
ambiguity may be clarified by reference to the body of the decision itself. In Reinsurance Company of the
Orient, Inc. v. Court of Appeals,6 the Court surveyed the applicable case law in the following manner:

It is true that even a judgment which has become final and executory may be clarified under certain
circumstances. The dispositive portion of the judgment may, for instance, contain an error clearly
clerical in nature (perhaps best illustrated by an arithmetical computation) or an ambiguity arising
from inadvertent omission, which error may be rectified or ambiguity clarified and the omission
supplied by reference primarily to the body of the decision itself. Supplementary reference to the
pleadings previously filed in the case may also be resorted to by way of corroboration of the existence
of the error or of the ambiguity in the dispositive art of the judgment. In Locsin, et al. v. Paredes, et al.
(63 Phil. 87 [1936]), this Court allowed a judgment which had become final and executory to be
clarified by supplying a word which had been inadvertently omitted and which, when supplied, in
effect changed the literal import of the original phraseology:

. . . it clearly appears from the allegations of the complaint, the promissory note reproduced therein
and made a part thereof, the prayer and the conclusions of fact and of law contained in the decision
of the respondent judge, that the obligation contracted by the petitioners is joint and several and
that the parties as well as the trial judge so understood it. Under the juridical rule that the judgment
should be in accordance with the allegations, the evidence and the conclusions of fact and law, the
dispositive part of the judgment under consideration should have ordered that the debt be paid
severally, and in omitting the word or adverb "severally" inadvertently, said judgment became
ambiguous. This ambiguity may be clarified at any time after the decision is rendered and even after
it had become final (34 Corpus Juris, 235, 326). The respondent judge did not, therefore, exceed his
jurisdiction in clarifying the dispositive part of the judgment by supplying the omission. (63 Phil. at
91-91)

In Filipino Legion Corporation v. Court of Appeals, et al. (56 SCRA 674 [1974]), the applicable principle was set
out in the following terms:
 [W]here there is ambiguity caused by an omission or mistake in the dispositive portion of a decision,
the court may clarify such ambiguity by an amendment even after the judgment had become final,
and for this purpose it may resort to the pleadings filed by the parties, the court's findings of facts
and conclusions of law as expressed in the body of the decision. (56 SCRA at 691; also Presbitero v.
Court of Appeals, 129 SCRA 443 [1984])

In Republic Surety and Insurance Company, Inc. v. Intermediate Appellate Court (152 SCRA 309 [1987]), the Court
applying the above doctrine said:

. . . We clarify, in other words, what we did affirm. What is involved here is not what is ordinarily
regarded as a clerical error in the dispositive part of the decision of the Court of First Instance, which
type of error is perhaps best typified by an error in arithmetical computation. At the same time, what
is involved here is not a correction of an erroneous judgment or dispositive portion of a judgment.
What we believe is involved here is in the nature of an inadvertent omission on the part of the Court
of First Instance (which should have been noticed by private respondent's counsel who had prepared
the complaint), of what might be described as a logical follow-through of something set forth both in
the body of the decision and in the dispositive portion thereof: the inevitable follow-through, or
translation into, operational or behavioral terms, of the annulment of the Deed of Sale with
Assumption of Mortgage, form which petitioners' title or claim of title embodied in TCT 133153 flow.
(152 SCRA at 315)7 (Emphases in the original)

The question we must resolve is whether or not there is an ambiguity or clerical error and inadvertent
omission in the dispositive portion of the decision of Castro-Bartolome, J. dated 21 November 1986, which
may legitimately be clarified by referring to the body of the decision and perhaps even the pleadings filed
before her. It will be recalled that the second paragraph of the dispositive portion of that decision of Castro-
Bartolome, J. ordered private respondent dela Rosa

to comply with her obligation under the conditional sale to pay the balance of the conditional sale in
the amount of P163, 408.00, to pay interest and in default thereof the rescission thereof is the
alternative. (Emphases supplied)

The dispositive portion itself failed to specify expressly whether Castro-Bartolome, J. was referring to the
payment of interest in accordance with the terms and conditions of the "Deed of Conditional Sale" or
whether, as Luna, J. was to hold almost four (4) years later that the requirement of "to pay interest" related,
not to the interest provisions of the Conditional Sale Deed between petitioners and private respondent, but
rather to legal interest on the amount of the unpaid balance of the purchase price of the land which would
begin to accrue from the date of the entry of the Castro-Bartolome judgment on 12 February 1987. Luna, J.
said:

It is settled that the only portion subject of execution is the dispositive portion of a judgment. The
judgment of the Honorable Court of Appeals does not refer to the interest referred to in the
Conditional Deed of Sale. Said judgment or dispositive portion cannot be stretched or enlarged to
refer to the interest indicated in the Conditional Deed of Sale. If that were the intention of the
Honorable Court of Appeals, as contended by plaintiffs, it would have said so in black and white. This
Court is not authorized to re-write, alter, amend or change the above-mentioned dispositive portion
of the judgment of the Honorable Court of Appeals.

By a fair interpretation, the interest therein referred to is the legal rate of interest imposed by the
Honorable Court of Appeals which must commence from the entry of judgment on February 12,
1987. At this stage, it appearing that the Decision of the Honorable Court of Appeals had long
become final and executory. This Court has no more jurisdiction to entertain reception of evidence in
the matter of the execution of the dispositive portion of the judgment of the Honorable Court of
Appeals.8 (Emphasis supplied)

It thus appears that the Castro-Bartolome decision was ambiguous in the sense that it was too cryptic.
Examination of the body of that decision, however, sheds no light on the reference intended by Castro-
Bartolome, J. in directing private respondent "to pay interest." Luna, J. himself had to resort to "fair
interpretation." We believe that, in these circumstances, we must assume that Mme. Justice Castro-
Bartolome meant to decide in accordance with law; that we cannot fairly assume that she was unfamiliar
with the applicable law or that she had intended to grant petitioners less than that they were entitled to
under the law. Thus, the important question is: under the circumstances which were before Castro-
Bartolome, J., what should private respondent dela Rosa have been held liable for in accordance with law?9

We believe and so hold that the phrase "to pay interest," found in the dispositive portion of the Castro-
Bartolome decision must, under applicable law, refer to the interest stipulated by the parties in the Deed of
Conditional Sale which they had entered into on 15 October 1982. We note, in the first place, that the phrase
"to pay interest" comes close upon the heels of the preceding phrase "to comply with her obligation under
the conditional sale to pay the balance — of P163,408.00." A strong inference thus arises that the "interest"
required to be paid is the interest stipulated as part of the "obligation [of private respondent dela Rosa]
under the conditional sale [agreement] to pay the balance of [the purchase price of the land]."

There is, in the second place, no question that private respondent dela Rosa had failed to pay the balance of
P163,408.00 on or before 31 December 1982. The applicable law is to be found in Article 2209 of the Civil
Code which provides as follows:

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
(6%) per annum. (Emphasis supplied)

Under Article 2209, the appropriate measure for damages in case of delay in discharging an obligation
consisting of the payment of a sum of money is the payment of penalty interest at the rate agreed upon in
the contract of the parties. In the absence of a stipulation of a particular rate of penalty interest, payment of
additional interest at a rate equal to the regular or monetary interest, becomes due and payable. Finally, if no
regular interest had been agreed upon by the contracting parties, then the damages payable will consist of
payment of legal interest 10 which is six percent (6%) or, in the case of loans or forbearances of money, twelve
percent (12%) per annum. 11 Applying Article 2209 to the instant case, we must refer to the "Deed of
Conditional Sale" which, as already noted, had specifically provided for "interest at the rate of 12% per
annum" and a "1% penalty charge a month [to] be imposed on their remaining diminishing balance." There
was, it thus appears, no need for the subsequent Luna, J. decision to refer at all to the payment of legal
interest from the time of entry of the Castro-Bartolome decision.

The contention of private respondent that Article 2209 of the Civil Code is not applicable in this case because
the interest referred to therein is given as compensation for the use of money, not for the incurring of delay
as in the instant case, 12 need not detain us for long. Article 2209 governs transactions involving the payment
of indemnity in the concept of damages arising from delay in the discharge of obligations consisting of the
payment of a sum of money. 13 The "obligation consisting in the payment of a sum of money" referred to in
Article 2209 is not confined to a loan or forbearance of money. The Court has, for instance, consistently
applied Article 2209 in the determination of the interest properly payable where there was default in the
payment of the price or consideration under a contract of sale 14 as in the case at bar. Article 2209 has also
been applied by this Court in cases involving an action for damages for injury to persons and loss of
property; 15 to actions for damages arising from unpaid insurance claims; 16 and an action involving the
appropriate rate of interest on just compensation that is payable for expropriated lands. 17

The stipulation in the "Deed of Conditional Sale" requiring the payment of interest is not unlawful. The
validity of the contract of conditional sale itself has not been put to question by private respondent dela Rosa
and there is nothing in the record to suggest that the same may be contrary to law, morals, good custom,
public order or public policy. Accordingly, the contractual stipulation must be regarded as binding and
enforceable as the law between the parties. 18

We turn, therefore, to the examination of the contractual stipulation on interest which we quoted in full
earlier. Under the terms of that stipulation, private respondent was bound, and entitled, to pay the balance
of P163,408.00 on or before 31 December 1982 without incurring any liability for any interest and penalty
charges. During the grace period of six (6) months, that is, from 1 January 1983 to 30 June 1983, private
respondent vendee was given the right to pay the said balance or any portion that had remained unpaid
provided that "interest at the rate of 12% per annum shall be charged and 1% penalty charge shall be
imposed on the remaining diminishing balance." We observe that residual ambiguity infects this particular
portion of the stipulation on payment of interest. The question is whether, during the period of 1 January
1983 up to 30 June 1983, 12% interest per annum plus 1% penalty charge a month was payable "on the
remaining diminishing balance;" or whether during the period from 1 January 1983 to 30 June
1983, only 12% per annum interest was payable while the 1% per month penalty charge would in addition
begin to accrue on any balance remaining unpaid as of 1 July 1983.

We believe that the contracting parties intended the latter view of their stipulation on interest; for if the
parties had intended that during the grace period from 1 January 1983 to 30 June 1983, interest consisting of
12%per annum plus another 12% per annum (equivalent to 1% per month), or a total of 24% per annum, was
payable, then they could have simply said so. Instead, the parties distinguished between interest at the rate
of 12% per annum and the 1% a month penalty charge. The interpretation we adopt is also supported by the
principle that in case of ambiguity in contract language, that interpretation which establishes a less onerous
transmission of rights or imposition of lesser burdens which permits greater reciprocity between the parties,
is to be adopted. 19

Summarizing the import of the contractual stipulation of the parties:

(1) During the period from 1 January 1983 up to 30 June 1983, private respondent vendee dela Rosa
was bound to pay interest at the rate of 12% per annum on the unpaid balance of P163,408.00.

(2) Commencing on 1 July 1983, and until full payment, dela Rosa was bound to pay interest at the
rate of 12% per annum plus another 12% per annum (or 1% penalty charge a month), or a total of
24% per annum to be computed on the "remaining diminishing [unpaid] balance."

Private respondent finally contends that she had already complied with her obligation considering that after
she had been served with a writ of execution dated 2 September 1988, she deposited with the trial court on
7 September 1988 the amount stated therein, that is, the amount of P197,723.68. 20 Obviously, this
contention raises a question of fact; just as obvious, however, is the rule that questions of fact cannot be
raised in a petition for review on certiorari before this Court. At all events, private respondent's factual
contention is properly addressed not to this Court, but rather to the trial court during execution proceedings.
In the interest of complete resolution of this drawn out litigation and of achieving substantial justice, we
would add that if the trial court finds that, in point of fact, the amount of P197,723.68 had indeed been
deposited with the trial court on 7 September 1988, then the total amount due from private respondent
should be correspondingly reduced by the application of the amount of the deposit in accordance with the
rules on application of payments. 21Conversely, the interest yield or civil fruits of the deposit, commencing
from date of application of the deposit as partial payment, would pertain to petitioners who have not thus
far enjoyed the use of the monies deposited.

The conclusion we have reached renders it unnecessary to pass upon the other contentions made by private
respondent.

WHEREFORE, for all foregoing, the Petition for Review is hereby GRANTED. The Decision of the Court of
Appeals dated 22 August 1990 in C.A.-G.R SP No. 22464 (the Luna, J. decision) is hereby REVERSED and SET
ASIDE and the dispositive portion of the Decision by Castro-Bartolome, J., dated 21 November 1986, in C.A.-
G.R No. 07938-SP is hereby CLARIFIED as follows:

WHEREFORE, the writ of certiorari is hereby GRANTED annulling the Decision of Judge Malaya dated
August 17, 1984 and a new one entered:

(1) allowing the amendment of the complaint to conform to the evidence already presented and
defaulted defendant to answer the amendment within the reglementary period;
 (2) ordering the defendant to comply with her obligation under the conditional sale to pay the
balance of the conditional sale in the amount of P163,408.00, to pay interest on the amount of the
balance remaining unpaid during the period from 1 January 1983 to 30 June 1983 at the rate of 12%
per annum; and, from 1 July 1983 until full payment of the amount due, to pay interest at the rate of
12% per annum plus another 12% per annum (i.e., 1% penalty charge per month), or a total of 24%
per annum, on the balance remaining unpaid; and

(3) In default thereof, the rescission of the "Deed of Conditional Sale" is the alternative.

No pronouncement as to costs.

SO ORDERED.
LIAM LAW vs. OLYMPIC SAWMILL CO. [May 28, 1984]

This is an appeal by defendants from a Decision rendered by the then Court of First Instance of Bulacan. The appeal
was originally taken to the then Court of Appeals, which endorsed it to this instance stating that the issue involved
was one of law.

It appears that on or about September 7, 1957, plaintiff loaned P10,000.00, without interest, to defendant
partnership and defendant Elino Lee Chi, as the managing partner. The loan became ultimately due on January 31,
1960, but was not paid on that date, with the debtors asking for an extension of three months, or up to April 30,
1960.

On March 17, 1960, the parties executed another loan document. Payment of the P10,000.00 was extended to April
30, 1960, but the obligation was increased by P6,000.00 as follows:

That the sum of SIX THOUSAND PESOS (P6,000.00), Philippine currency shall form part of the
principal obligation to answer for attorney's fees, legal interest, and other cost incident thereto to be
paid unto the creditor and his successors in interest upon the termination of this agreement.

Defendants again failed to pay their obligation by April 30, 1960 and, on September 23, 1960, plaintiff instituted this
collection case. Defendants admitted the P10,000.00 principal obligation, but claimed that the additional P6,000.00
constituted usurious interest.

Upon application of plaintiff, the Trial Court issued, on the same date of September 23, 1960, a writ of Attachment on
real and personal properties of defendants located at Karanglan, Nueva Ecija. After the Writ of Attachment was
implemented, proceedings before the Trial Court versed principally in regards to the attachment.

On January 18, 1961, an Order was issued by the Trial Court stating that "after considering the manifestation of both
counsel in Chambers, the Court hereby allows both parties to simultaneously submit a Motion for Summary
Judgment. 1 The plaintiff filed his Motion for Summary Judgment on January 31, 1961, while defendants filed theirs
on February 2, 196l. 2

On June 26, 1961, the Trial Court rendered decision ordering defendants to pay plaintiff "the amount of P10,000.00
plus the further sum of P6,000.00 by way of liquidated damages . . . with legal rate of interest on both amounts from
April 30, 1960." It is from this judgment that defendants have appealed.

We have decided to affirm.

Under Article 1354 of the Civil Code, in regards to the agreement of the parties relative to the P6,000.00 obligation,
"it is presumed that it exists and is lawful, unless the debtor proves the contrary". No evidentiary hearing having
been held, it has to be concluded that defendants had not proven that the P6,000.00 obligation was illegal.
Confirming the Trial Court's finding, we view the P6,000.00 obligation as liquidated damages suffered by plaintiff, as
of March 17, 1960, representing loss of interest income, attorney's fees and incidentals.

The main thrust of defendants' appeal is the allegation in their Answer that the P6,000.00 constituted usurious
interest. They insist the claim of usury should have been deemed admitted by plaintiff as it was "not denied
specifically and under oath". 3

Section 9 of the Usury Law (Act 2655) provided:

SEC. 9. The person or corporation sued shall file its answer in writing under oath to any complaint
brought or filed against said person or corporation before a competent court to recover the money
or other personal or real property, seeds or agricultural products, charged or received in violation of
the provisions of this Act. The lack of taking an oath to an answer to a complaint will mean the
admission of the facts contained in the latter.
The foregoing provision envisages a complaint filed against an entity which has committed usury, for the recovery of
the usurious interest paid. In that case, if the entity sued shall not file its answer under oath denying the allegation of
usury, the defendant shall be deemed to have admitted the usury. The provision does not apply to a case, as in the
present, where it is the defendant, not the plaintiff, who is alleging usury.

Moreover, for sometime now, usury has been legally non-existent. Interest can now be charged as lender and
borrower may agree upon. 4 The Rules of Court in regards to allegations of usury, procedural in nature, should be
considered repealed with retroactive effect.

Statutes regulating the procedure of the courts will be construed as applicable to actions pending
and undetermined at the time of their passage. Procedural laws are retrospective in that sense and
to that extent. 5

... Section 24(d), Republic Act No. 876, known as the Arbitration Law, which took effect on 19
December 1953, and may be retroactively applied to the case at bar because it is procedural in
nature. ... 6

WHEREFORE, the appealed judgment is hereby affirmed, without pronouncement as to costs.

SO ORDERED.
DARIO NACAR vs. GALLERY FRAMES AND/OR FELIPE BORDEY, JR. [August 13, 2013]

This is a petition for review on certiorari assailing the Decision 1 dated September 23, 2008 of the Court of Appeals
(CA) in CA-G.R. SP No. 98591, and the Resolution 2 dated October 9, 2009 denying petitioner’s motion for
reconsideration.

The factual antecedents are undisputed.

Petitioner Dario Nacar filed a complaint for constructive dismissal before the Arbitration Branch of the National Labor
Relations Commission (NLRC) against respondents Gallery Frames (GF) and/or Felipe Bordey, Jr., docketed as NLRC
NCR Case No. 01-00519-97.

On October 15, 1998, the Labor Arbiter rendered a Decision 3 in favor of petitioner and found that he was dismissed
from employment without a valid or just cause. Thus, petitioner was awarded backwages and separation pay in lieu
of reinstatement in the amount of ₱158,919.92. The dispositive portion of the decision, reads:

With the foregoing, we find and so rule that respondents failed to discharge the burden of showing that complainant
was dismissed from employment for a just or valid cause. All the more, it is clear from the records that complainant
was never afforded due process before he was terminated. As such, we are perforce constrained to grant
complainant’s prayer for the payments of separation pay in lieu of reinstatement to his former position, considering
the strained relationship between the parties, and his apparent reluctance to be reinstated, computed only up to
promulgation of this decision as follows:

SEPARATION PAY
Date Hired = August 1990
Rate = ₱198/day
Date of Decision = Aug. 18, 1998
Length of Service = 8 yrs. & 1 month
₱198.00 x 26 days x 8 months = ₱41,184.00
BACKWAGES
Date Dismissed = January 24, 1997
Rate per day = ₱196.00
Date of Decisions = Aug. 18, 1998
a) 1/24/97 to 2/5/98 = 12.36 mos.
₱196.00/day x 12.36 mos. = ₱62,986.56
b) 2/6/98 to 8/18/98 = 6.4 months
Prevailing Rate per day = ₱62,986.00
₱198.00 x 26 days x 6.4 mos. = ₱32,947.20
TOTAL = ₱95.933.76

xxxx

WHEREFORE, premises considered, judgment is hereby rendered finding respondents guilty of constructive dismissal
and are therefore, ordered:

To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred eighty-six pesos and
56/100 (₱62,986.56) Pesos representing his separation pay;
To pay jointly and severally the complainant the amount of nine (sic) five thousand nine hundred thirty-three and
36/100 (₱95,933.36) representing his backwages; and

All other claims are hereby dismissed for lack of merit.

SO ORDERED.4

Respondents appealed to the NLRC, but it was dismissed for lack of merit in the Resolution 5 dated February 29, 2000.
Accordingly, the NLRC sustained the decision of the Labor Arbiter. Respondents filed a motion for reconsideration,
but it was denied.6

Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On August 24, 2000, the CA issued a
Resolution dismissing the petition. Respondents filed a Motion for Reconsideration, but it was likewise denied in a
Resolution dated May 8, 2001.7

Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332. Finding no reversible error
on the part of the CA, this Court denied the petition in the Resolution dated April 17, 2002. 8

An Entry of Judgment was later issued certifying that the resolution became final and executory on May 27,
2002.9The case was, thereafter, referred back to the Labor Arbiter. A pre-execution conference was consequently
scheduled, but respondents failed to appear. 10

On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his backwages be computed
from the date of his dismissal on January 24, 1997 up to the finality of the Resolution of the Supreme Court on May
27, 2002.11 Upon recomputation, the Computation and Examination Unit of the NLRC arrived at an updated amount
in the sum of ₱471,320.31.12

On December 2, 2002, a Writ of Execution 13 was issued by the Labor Arbiter ordering the Sheriff to collect from
respondents the total amount of ₱471,320.31. Respondents filed a Motion to Quash Writ of Execution, arguing,
among other things, that since the Labor Arbiter awarded separation pay of ₱62,986.56 and limited backwages of
₱95,933.36, no more recomputation is required to be made of the said awards. They claimed that after the decision
becomes final and executory, the same cannot be altered or amended anymore. 14 On January 13, 2003, the Labor
Arbiter issued an Order15 denying the motion. Thus, an Alias Writ of Execution 16 was issued on January 14, 2003.

Respondents again appealed before the NLRC, which on June 30, 2003 issued a Resolution 17 granting the appeal in
favor of the respondents and ordered the recomputation of the judgment award.

On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the NLRC to be final and executory.
Consequently, another pre-execution conference was held, but respondents failed to appear on time. Meanwhile,
petitioner moved that an Alias Writ of Execution be issued to enforce the earlier recomputed judgment award in the
sum of ₱471,320.31.18

The records of the case were again forwarded to the Computation and Examination Unit for recomputation, where
the judgment award of petitioner was reassessed to be in the total amount of only ₱147,560.19.

Petitioner then moved that a writ of execution be issued ordering respondents to pay him the original amount as
determined by the Labor Arbiter in his Decision dated October 15, 1998, pending the final computation of his
backwages and separation pay.

On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the judgment award that was due
to petitioner in the amount of ₱147,560.19, which petitioner eventually received.

Petitioner then filed a Manifestation and Motion praying for the re-computation of the monetary award to include
the appropriate interests.19
On May 10, 2005, the Labor Arbiter issued an Order 20 granting the motion, but only up to the amount of ₱11,459.73.
The Labor Arbiter reasoned that it is the October 15, 1998 Decision that should be enforced considering that it was
the one that became final and executory. However, the Labor Arbiter reasoned that since the decision states that the
separation pay and backwages are computed only up to the promulgation of the said decision, it is the amount of
₱158,919.92 that should be executed. Thus, since petitioner already received ₱147,560.19, he is only entitled to the
balance of ₱11,459.73.

Petitioner then appealed before the NLRC,21 which appeal was denied by the NLRC in its Resolution 22 dated
September 27, 2006. Petitioner filed a Motion for Reconsideration, but it was likewise denied in the
Resolution23dated January 31, 2007.

Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No. 98591.

On September 23, 2008, the CA rendered a Decision 24 denying the petition. The CA opined that since petitioner no
longer appealed the October 15, 1998 Decision of the Labor Arbiter, which already became final and executory, a
belated correction thereof is no longer allowed. The CA stated that there is nothing left to be done except to enforce
the said judgment. Consequently, it can no longer be modified in any respect, except to correct clerical errors or
mistakes.

Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution 25 dated October 9, 2009.

Hence, the petition assigning the lone error:

WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED, COMMITTED GRAVE ABUSE OF
DISCRETION AND DECIDED CONTRARY TO LAW IN UPHOLDING THE QUESTIONED RESOLUTIONS OF THE NLRC
WHICH, IN TURN, SUSTAINED THE MAY 10, 2005 ORDER OF LABOR ARBITER MAGAT MAKING THE DISPOSITIVE
PORTION OF THE OCTOBER 15, 1998 DECISION OF LABOR ARBITER LUSTRIA SUBSERVIENT TO AN OPINION
EXPRESSED IN THE BODY OF THE SAME DECISION. 26

Petitioner argues that notwithstanding the fact that there was a computation of backwages in the Labor Arbiter’s
decision, the same is not final until reinstatement is made or until finality of the decision, in case of an award of
separation pay. Petitioner maintains that considering that the October 15, 1998 decision of the Labor Arbiter did not
become final and executory until the April 17, 2002 Resolution of the Supreme Court in G.R. No. 151332 was entered
in the Book of Entries on May 27, 2002, the reckoning point for the computation of the backwages and separation
pay should be on May 27, 2002 and not when the decision of the Labor Arbiter was rendered on October 15, 1998.
Further, petitioner posits that he is also entitled to the payment of interest from the finality of the decision until full
payment by the respondents.

On their part, respondents assert that since only separation pay and limited backwages were awarded to petitioner
by the October 15, 1998 decision of the Labor Arbiter, no more recomputation is required to be made of said awards.
Respondents insist that since the decision clearly stated that the separation pay and backwages are "computed only
up to [the] promulgation of this decision," and considering that petitioner no longer appealed the decision, petitioner
is only entitled to the award as computed by the Labor Arbiter in the total amount of ₱158,919.92. Respondents
added that it was only during the execution proceedings that the petitioner questioned the award, long after the
decision had become final and executory. Respondents contend that to allow the further recomputation of the
backwages to be awarded to petitioner at this point of the proceedings would substantially vary the decision of the
Labor Arbiter as it violates the rule on immutability of judgments.

The petition is meritorious.

The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v. Court of Appeals (Sixth
Division),27 wherein the issue submitted to the Court for resolution was the propriety of the computation of the
awards made, and whether this violated the principle of immutability of judgment. Like in the present case, it was a
distinct feature of the judgment of the Labor Arbiter in the above-cited case that the decision already provided for
the computation of the payable separation pay and backwages due and did not further order the computation of the
monetary awards up to the time of the finality of the judgment. Also in Session Delights, the dismissed employee
failed to appeal the decision of the labor arbiter. The Court clarified, thus:

In concrete terms, the question is whether a re-computation in the course of execution of the labor arbiter's original
computation of the awards made, pegged as of the time the decision was rendered and confirmed with modification
by a final CA decision, is legally proper. The question is posed, given that the petitioner did not immediately pay the
awards stated in the original labor arbiter's decision; it delayed payment because it continued with the litigation until
final judgment at the CA level.

A source of misunderstanding in implementing the final decision in this case proceeds from the way the original labor
arbiter framed his decision. The decision consists essentially of two parts.

The first is that part of the decision that cannot now be disputed because it has been confirmed with finality. This is
the finding of the illegality of the dismissal and the awards of separation pay in lieu of reinstatement, backwages,
attorney's fees, and legal interests.

The second part is the computation of the awards made. On its face, the computation the labor arbiter made shows
that it was time-bound as can be seen from the figures used in the computation. This part, being merely a
computation of what the first part of the decision established and declared, can, by its nature, be re-computed. This
is the part, too, that the petitioner now posits should no longer be re-computed because the computation is already
in the labor arbiter's decision that the CA had affirmed. The public and private respondents, on the other hand, posit
that a re-computation is necessary because the relief in an illegal dismissal decision goes all the way up to
reinstatement if reinstatement is to be made, or up to the finality of the decision, if separation pay is to be given in
lieu reinstatement.

That the labor arbiter's decision, at the same time that it found that an illegal dismissal had taken place, also made a
computation of the award, is understandable in light of Section 3, Rule VIII of the then NLRC Rules of Procedure
which requires that a computation be made. This Section in part states:

[T]he Labor Arbiter of origin, in cases involving monetary awards and at all events, as far as practicable, shall embody
in any such decision or order the detailed and full amount awarded.

Clearly implied from this original computation is its currency up to the finality of the labor arbiter's decision. As we
noted above, this implication is apparent from the terms of the computation itself, and no question would have
arisen had the parties terminated the case and implemented the decision at that point.

However, the petitioner disagreed with the labor arbiter's findings on all counts - i.e., on the finding of illegality as
well as on all the consequent awards made. Hence, the petitioner appealed the case to the NLRC which, in turn,
affirmed the labor arbiter's decision. By law, the NLRC decision is final, reviewable only by the CA on jurisdictional
grounds.

The petitioner appropriately sought to nullify the NLRC decision on jurisdictional grounds through a timely filed Rule
65 petition for certiorari. The CA decision, finding that NLRC exceeded its authority in affirming the payment of 13th
month pay and indemnity, lapsed to finality and was subsequently returned to the labor arbiter of origin for
execution.

It was at this point that the present case arose. Focusing on the core illegal dismissal portion of the original labor
arbiter's decision, the implementing labor arbiter ordered the award re-computed; he apparently read the figures
originally ordered to be paid to be the computation due had the case been terminated and implemented at the labor
arbiter's level. Thus, the labor arbiter re-computed the award to include the separation pay and the backwages due
up to the finality of the CA decision that fully terminated the case on the merits. Unfortunately, the labor arbiter's
approved computation went beyond the finality of the CA decision (July 29, 2003) and included as well the payment
for awards the final CA decision had deleted - specifically, the proportionate 13th month pay and the indemnity
awards. Hence, the CA issued the decision now questioned in the present petition.
We see no error in the CA decision confirming that a re-computation is necessary as it essentially considered the
labor arbiter's original decision in accordance with its basic component parts as we discussed above. To reiterate, the
first part contains the finding of illegality and its monetary consequences; the second part is the computation of the
awards or monetary consequences of the illegal dismissal, computed as of the time of the labor arbiter's original
decision.28

Consequently, from the above disquisitions, under the terms of the decision which is sought to be executed by the
petitioner, no essential change is made by a recomputation as this step is a necessary consequence that flows from
the nature of the illegality of dismissal declared by the Labor Arbiter in that decision. 29 A recomputation (or an
original computation, if no previous computation has been made) is a part of the law – specifically, Article 279 of the
Labor Code and the established jurisprudence on this provision – that is read into the decision. By the nature of an
illegal dismissal case, the reliefs continue to add up until full satisfaction, as expressed under Article 279 of the Labor
Code. The recomputation of the consequences of illegal dismissal upon execution of the decision does not constitute
an alteration or amendment of the final decision being implemented. The illegal dismissal ruling stands; only the
computation of monetary consequences of this dismissal is affected, and this is not a violation of the principle of
immutability of final judgments.30

That the amount respondents shall now pay has greatly increased is a consequence that it cannot avoid as it is the
risk that it ran when it continued to seek recourses against the Labor Arbiter's decision. Article 279 provides for the
consequences of illegal dismissal in no uncertain terms, qualified only by jurisprudence in its interpretation of when
separation pay in lieu of reinstatement is allowed. When that happens, the finality of the illegal dismissal decision
becomes the reckoning point instead of the reinstatement that the law decrees. In allowing separation pay, the final
decision effectively declares that the employment relationship ended so that separation pay and backwages are to be
computed up to that point.31

Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines, Inc. v. Court of
Appeals,32 the Court laid down the guidelines regarding the manner of computing legal interest, 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.33

Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796 dated May 16,
2013, approved the amendment of Section 2 34 of Circular No. 905, Series of 1982 and, accordingly, issued Circular No.
799,35 Series of 2013, effective July 1, 2013, the pertinent portion of which reads:
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 36 of the Manual of Regulations for Banks and Sections
4305Q.1,37 4305S.338 and 4303P.139 of the Manual of Regulations for Non-Bank Financial Institutions are hereby
amended accordingly.

This Circular shall take effect on 1 July 2013.

Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that would govern the
parties, the rate of legal interest for loans or forbearance of any money, goods or credits and the rate allowed in
judgments shall no longer be twelve percent (12%) per annum - as reflected in the case of Eastern Shipping
Lines40and 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, before its amendment by BSP-MB Circular No. 799 -
but will now be six percent (6%) per annum effective July 1, 2013. It should be noted, nonetheless, that the new rate
could only be applied prospectively and not retroactively. Consequently, the twelve percent (12%) per annum legal
interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of six percent (6%) per annum shall be
the prevailing rate of interest when applicable.

Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B. Olaguer v. Bangko Sentral
Monetary Board,41 this Court affirmed the authority of the BSP-MB to set interest rates and to issue and enforce
Circulars when it ruled that "the BSP-MB may prescribe the maximum rate or rates of interest for all loans or
renewals thereof or the forbearance of any money, goods or credits, including those for loans of low priority such as
consumer loans, as well as such loans made by pawnshops, finance companies and similar credit institutions. It even
authorizes the BSP-MB to prescribe different maximum rate or rates for different types of borrowings, including
deposits and deposit substitutes, or loans of financial intermediaries."

Nonetheless, with regard to those judgments that have become final and executory prior to July 1, 2013, said
judgments shall not be disturbed and shall continue to be implemented applying the rate of interest fixed
therein.1awp++i1

To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Lines 42 are
accordingly modified to embody BSP-MB Circular No. 799, as follows:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of
the Civil Code govern in determining the measure of recoverable damages.1âwphi1

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:

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest
shall be 6% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil Code.

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.

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

And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall not be
disturbed and shall continue to be implemented applying the rate of interest fixed therein.

WHEREFORE, premises considered, the Decision dated September 23, 2008 of the Court of Appeals in CA-G.R. SP No.
98591, and the Resolution dated October 9, 2009 are REVERSED and SET ASIDE. Respondents are Ordered to Pay
petitioner:

(1) backwages computed from the time petitioner was illegally dismissed on January 24, 1997 up to May 27,
2002, when the Resolution of this Court in G.R. No. 151332 became final and executory;

(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one month pay per year of
service; and

(3) interest of twelve percent (12%) per annum of the total monetary awards, computed from May 27, 2002
to June 30, 2013 and six percent (6%) per annum from July 1, 2013 until their full satisfaction.

The Labor Arbiter is hereby ORDERED to make another recomputation of the total monetary benefits awarded and
due to petitioner in accordance with this Decision.

SO ORDERED.

SPOUSES BAYANI AND GRACIA ANDAL vs. PHILIPPINE NATIONAL BANK [November 27, 2013]

Before the Court is a Petition for Review on Certiorari 1 under Rule 45 of the Rules of Court seeking to partially set
aside the Decision,2 dated 30 March 2010, and the Resolution, 3 dated 13 October 2010, of the Court of Appeals (CA)
in CA-G.R. CV No. 91250. The challenged Decision dismissed the appeal of herein respondent Philippine National
Bank (respondent bank) and affirmed the decision of the Regional Trial Court (RTC), Branch 84, Batangas City with the
modification that the interest rate to be applied by respondent bank on the principal loan obligation of petitioners
Spouses Bayani H. Andal and Gracia G. Andal (petitionersspouses) shall be 12% per annum, to be computed from
default.

As found by the CA, the facts of this case are as follows:

x x x on September 7, 1995, [petitioners-spouses] obtained a loan from [respondent bank] in the amount of
₱21,805,000.00, for which they executed twelve (12) promissory notes x x x [undertaking] to pay [respondent bank]
the principal loan with varying interest rates of 17.5% to 27% per interest period. It was agreed upon by the parties
that the rate of interest may be increased or decreased for the subsequent interest periods, with prior notice to
[petitioners-spouses], in the event of changes in interest rates prescribed by law or the Monetary Board x x x, or in
the bank’s overall cost of funds.

To secure the payment of the said loan, [petitioners-spouses] executed in favor of [respondent bank] a real estate
mortgage using as collateral five (5) parcels of land including all improvements therein, all situated in Batangas City
and covered by Transfer Certificate of Title (TCT) Nos. T-641, T-32037, T-16730, T-31193 and RT 363 (3351) of the
Registry of Deeds of Batangas City, in the name of [petitioners-spouses].

Subsequently, [respondent bank] advised [petitioners-spouses] to pay their loan obligation, otherwise the former will
declare the latter’s loan due and demandable. On July 17, 2001, [petitioners-spouses] paid ₱14,800,000.00 to
[respondent bank] to avoid foreclosure of the properties subject of the real estate mortgage. Accordingly,
[respondent bank] executed a release of real estate mortgage over the parcels of land covered by TCT Nos. T-31193
and RT-363 (3351). However, despite payment x x x, [respondent bank] proceeded to foreclose the real estate
mortgage, particularly with respect to the three (3) parcels of land covered by TCT Nos. T-641, T-32037 and T-16730 x
x x.

x x x [A] public auction sale of the properties proceeded, with the [respondent bank] emerging as the highest and
winning bidder. Accordingly, on August 30, 2002, a certificate of sale of the properties involved was issued.
[Respondent bank] consolidated its ownership over the said properties and TCT Nos. T-52889, T-52890, and T-52891
were issued in lieu of the cancelled TCT[s] x x x. This prompted [petitioners-spouses] to file x x x a complaint for
annulment of mortgage, sheriff’s certificate of sale, declaration of nullity of the increased interest rates and penalty
charges plus damages, with the RTC of Batangas City.

In their amended complaint, [petitioners-spouses] alleged that they tried to religiously pay their loan obligation to
[respondent bank], but the exorbitant rate of interest unilaterally determined and imposed by the latter prevented
the former from paying their obligation. [Petitioners-spouses] also alleged that they signed the promissory notes in
blank, relying on the representation of [respondent bank] that they were merely proforma [sic] bank requirements.
Further, [petitioners-spouses] alleged that the unilateral increase of interest rates and exorbitant penalty charges are
akin to unjust enrichment at their expense, giving [respondent bank] no right to foreclose their mortgaged
properties. x x x.

xxxx

On August 27, 2004 [respondent bank] filed its answer, denying the allegations in the complaint. x x x [respondent
bank] alleged that: the penalty charges imposed on the loan was expressly stipulated under the credit agreements
and in the promissory notes; although [petitioners-spouses] paid to [respondent bank] ₱14,800,000.00 on July 10,
2001, the former was still indebted to the latter in the amount of ₱33,960,633.87; assuming arguendo that the
imposition was improper, the foreclosure of the mortgaged properties is in order since [respondent bank’s] bid in the
amount of ₱28,965,100.00 was based on the aggregate appraised rates of the foreclosed properties. x x x 4

After trial, the RTC rendered judgment 5 in favor of petitioners-spouses and against respondent bank, ordering that:

1. The rate of interest should be reduced as it is hereby reduced to 6% in accordance with Article 2209 of the Civil
Code effective the next 30, 31 and 180 days respectively from the date of the twelve (12) promissory notes x x x
covered by the real estate x x x mortgages, to be applied on a declining balance of the principal after the partial
payments of ₱14,800,00.00 (paid July 17, 2001) and ₱2,000,000.00 6 (payments of ₱300,000.00 on October 1, 1999,
₱1,800,000.00 as [of] December 1, 1999, ₱700,000.00 [on] January 31, 2000) per certification of [respondent bank]
to be reckoned at (sic) the dates the said payments were made, thus the corrected amounts of the liability for
principal balance and the said 6% charges per annum shall be the new basis for the [petitioners-spouses] to make
payments to the [respondent bank] x x x which shall automatically extinguish and release the mortgage contracts and
the outstanding liabilities of the [petitioners-spouses]; [respondent bank] shall then surrender the new transfer
certificates of title x x x in its name to the [c]ourt x x x, [c]anceling the penalty charges.

xxxx

3. Declaring as illegal and void the foreclosure sales x x x, the Certificates of Sales and the consolidation of titles of
the subject real properties, including the cancellation of the new Transfer Certificates of Title x x x in the name of the
[respondent] bank and reinstating Transfer Certificates of Title Nos. T-641, T-32037 and T-16730 in the names of the
[petitioners-spouses]; the latter acts to be executed by the Register of Deeds of Batangas City. 7

The foregoing disposition of the RTC was based on the following findings of fact:

As of this writing the [respondent] bank have (sic) not complied with the said orders as to the interest rates it had
been using on the loan of [petitioners-spouses] and the monthly computation of interest vis a vis (sic) the total
shown in the statement of account as of Aug 30, 2002. Such refusal amounts to suppression of evidence thus tending
to show that the interest used by the bank was unilaterally increased without the written consent of the [petitioners-
spouses]/borrower as required by law and Central Bank Circular No. 1171. The latter circular provides that any
increase of interest in a given interest period will have to be expressly agreed to in writing by the borrower. The
mortgaged properties were subject of foreclosure and were sold on August 30, 2002 and the [respondent] bank’s
statement of account as of August 30, 2002 x x x shows unpaid interest up to July 17, 2001 of ₱12,695,718.99
without specifying the rate of interest for each interest period of thirty days. Another statement of account of
[respondent bank] x x x as [of] the date of foreclosure on August 30, 2002 shows account balance of ₱20,505,916.51
with a bid price of ₱28,965,100.00 and showing an interest of ₱16,163,281.65. Again, there are no details of the
interest used for each interest period from the time these loans were incurred up to the date of foreclosure. These
statements of account together with the stated interest and expenses after foreclosure were furnished by the
[respondent] bank during the court hearings. The central legal question is that there is no agreement in writing from
the [petitioners-spouses]/borrowers for the interest rate for each interest period neither from the data coming from
the Central Bank or the cost of money which is understood to mean the interest cost of the bank deposits form the
public. Such imposition of the increased interest without the consent of the borrower is null and void pursuant to
Article 1956 of the Civil Code and as held in the pronouncement of the Supreme Court in several cases and C.B.
Circular No. 1191 that the interest rate for each re-pricing period under the floating rate of interest is subject to
mutual agreement in writing. Art. 1956 states that no interest is due unless it has been expressly stipulated and
agreed to in writing.

Any stipulation where the fixing of interest rate is the sole prerogative of the creditor/mortgagee, belongs to the class
of potestative condition which is null and void under Art. 1308 of the New Civil Code. The fulfillment of a condition
cannot be left to the sole will of [one of] the contracting parties.

xxxx

In the instant case, if the interest is declared null and void, the foreclosure sale for a higher amount than what is
legally due is likewise null and void because under the Civil Code, a mortgage may be foreclosed only to enforce the
fulfillment of the obligation for whose security it was constituted (Art. 2126, Civil Code).

xxxx

Following the declaration of nullity of the stipulation on floating rate of interest since no interest may be collected
based on the stipulation that is null and void and legally inexistent and unenforceable. x x x. Since the interest
imposed is illegal and void only the rate of 6% interest per month shall be imposed as liquidated damages under Art.
2209 of the Civil Code.
It is worth mentioning that these forms used by the bank are pre- printed forms and therefore contracts of adhesion
and x x x any dispute or doubt concerning them shall be resolved in favor of the x x x borrower. This (sic)
circumstances tend to support the contention of the [petitioners-spouses] that they were made to sign the real
estate mortgages/promissory notes in blank with respect to the interest rates.

xxxx

[Respondent bank has] no right to foreclose [petitioners-spouses’] property and any foreclosure thereof is illegal,
unreasonable and void, since [petitioners-spouses] are not and cannot be considered in default for their inability to
pay the arbitrarily, illegally, and unconscionably adjusted interest rates and penalty charges unilaterally made and
imposed by [respondent] bank.

The [petitioners-spouses] submitted to the court certified copies of the weighted average of Selected Domestic
Interest Rates of the local banks obtained from the Bangko Sentral ng Pilipinas Statistical Center and it shows a
declining balance of interest rates x x x.

xxxx

There is no showing by the [respondent bank] that any of the foregoing rate was ever used to increase or decrease
the interest rates charged upon the [petitioners-spouses’] mortgage loan for the 30 day re- pricing period subsequent
to the first 30 days from [the] dates of the promissory notes. These documents submitted being certified public
documents are entitled to being taken cognizance of by the court as an aid to its decision making. x x x. 8

Respondent bank appealed the above judgment of the trial court to the CA. Its main contention is that the lower
court erred in ordering the re-computation of petitioners-spouses’ loans and applying the interest rate of 6% per
annum. According to respondent bank, the stipulation on the interest rates of 17.5% to 27%, subject to periodic
adjustments, was voluntarily agreed upon by the parties; hence, it was not left to the sole will of respondent bank.
Thus, the lower court erred in reducing the interest rate to 6% and in setting aside the penalty charges, as such is
contrary to the principle of the obligatory force of contracts under Articles 1315 and 1159 of the Civil Code. 9

The CA disposed of the issue in the following manner:

We partly agree with [respondent bank’s] contention.

Settled is the rule that the contracting parties are free to enter into stipulations, clauses, terms and conditions as
they may deem convenient, as long as these are not contrary to law, morals, good customs, public order or public
policy. Pursuant to Article 1159 of the Civil Code, these obligations arising from such contracts have the force of law
between the parties and should be complied with in good faith. x x x.

xxxx

In the case at bar, [respondent bank] and [petitioners-spouses] expressly stipulated in the promissory notes the rate
of interest to be applied to the loan obtained by the latter from the former, x x x.

xxxx

[Respondent bank] insists that [petitioner-spouses] agreed to the interest rates stated in the promissory notes since
the latter voluntarily signed the same. However, we find more credible and believable the version of [petitioners-
spouses] that they were made to sign the said promissory notes in blank with respect to the rate of interest and
penalty charges, and subsequently, [respondent] bank filled in the blanks, imposing high interest rate beyond which
they were made to understand at the time of the signing of the promissory notes.

xxxx

The signing by [petitioners-spouses] of the promissory notes in blank enabled [respondent] bank to impose interest
rates on the loan obligation without prior notice to [petitioners-spouses]. The unilateral determination and
imposition of interest rates by [respondent] bank without [petitioners-spouses’] assent is obviously violative of the
principle of mutuality of contracts ordained in Article 1308 of the Civil Code x x x.

xxxx

[Respondent bank’s] act converted the loan agreement into a contract of adhesion where the parties do not bargain
on equal footing, the weaker party’s participation, herein [petitioners-spouses], being reduced to the alternative to
take it or leave it. [Respondent] bank tried to sidestep this issue by averring that [petitioners-spouses], as
businessmen, were on equal footing with [respondent bank] as far as the subject loan agreements are concerned.
That may be true insofar as entering into the original loan agreements and mortgage contracts are concerned.
However, that does not hold true when it comes to the unilateral determination and imposition of the escalated
interest rates imposed by [respondent] bank.

xxxx

The Court further notes that in the case at bar, [respondent] bank imposed different rates in the twelve (12)
promissory notes: interest rate of 18% in five (5) promissory notes; 17.5% in two (2) promissory notes; 23% in one (1)
promissory note; and 27% in three (3) promissory notes. Obviously, the interest rates are excessive and arbitrary.
Thus, the foregoing interest rates imposed on [petitioners-spouses’] loan obligation without their knowledge and
consent should be disregarded, not only for being iniquitous and exorbitant, but also for being violative of the
principle of mutuality of contracts.

However, we do not agree with the trial court in fixing the rate of interest of 6%. It is well-settled that when an
obligation is breached and consists in the payment of a sum of money, i.e., loan or forbearance of money, the interest
due shall be that which may have been stipulated in writing. In the absence of stipulation, the rate of interest shall be
12% interest per annum to be computed from default, i.e., from judicial or extra-judicial demand and subject to the
provisions of Article 1169 of the Civil Code. Since the interest rates printed in the promissory notes are void for the
reasons above-stated, the rate of interest to be applied to the loan should be 12% per annum only. 10

The CA, consequently, dismissed respondent bank’s appeal and affirmed the decision of the trial court with the
modification that the rate of interest shall be 12% per annum instead of 6%. Respondent bank filed a Motion for
Reconsideration of the CA decision. Petitioners-spouses, on the other hand, filed a comment praying for the denial of
respondent bank’s motion for reconsideration. They also filed an "Urgent Manifestation" 11 calling the attention of the
CA to its respective decisions in the cases of Spouses Enrique and Epifania Mercado v. China Banking Corporation, et.
al. (CA-GR CV No. 75303)12 and Spouses Bonifacio Caraig and Ligaya Caraig v. The Ex-Officio Sheriff of RTC, Batangas
City, et. al. (CA-G.R. CV No. 76029).13

According to petitioners-spouses, in Spouses Mercado v. China Banking, the Special Seventh Division of the CA held
that where the interest rate is potestative, the entire interest is null and void and no interest is due.

On the other hand, in the case of Spouses Caraig v. The Ex-Officio Sheriff of RTC, Batangas City, the then Ninth
Division of the CA ruled that under the doctrine of operative facts, no interest is due after the auction sale because
the loan is paid in kind by the auction sale, and interest shall commence to run again upon finality of the judgment
declaring the auction sale null and void. 14

The CA denied respondent bank’s Motion for Reconsideration for lack of merit. It likewise found no merit in
petitioners-spouses’ contention that no interest is due on their principal loan obligation from the time of foreclosure
until finality of the judgment annulling the foreclosure sale. According to the CA:

x x x Notably, this Court disregarded the stipulated rate[s] of interest on the subject promissory notes after finding
that the same are iniquitous and exorbitant, and for being violative of the principle of mutuality of contracts.
Nevertheless, in Equitable PCI Bank v. Ng Sheung Ngor, the Supreme Court ruled that because the escalation clause
was annulled, the principal amount of the loan was subject to the original or stipulated interest rate of interest, and
that upon maturity, the amount due was subject to legal interest at the rate of 12% per annum. In this case, while we
similarly annulled the escalation clause contained in the promissory notes, this Court opted not to impose the
original rates of interest stipulated therein for being excessive, the same being 17.5% to 27% per interest period.
Relevantly, the High Court held in Asian Cathay Finance and Leasing Corporation v. Spouses Cesario Gravador and
Norma De Vera, et. al. that stipulations authorizing the imposition of iniquitous or unconscionable interest are
contrary to morals, if not against the law. x x x. The nullity of the stipulation on the usurious interest does not,
however, affect the lender’s right to recover the principal of the loan. The debt due is to be considered without the
stipulation of the excessive interest. A legal interest of 12% per annum will be added in place of the excessive interest
formerly imposed.

Following the foregoing rulings of the Supreme Court, it is clear that the imposition by this Court of a 12% rate of
interest per annum on the principal loan obligation of [petitioners-spouses], computed from the time of default, is
proper as it is consistent with prevailing jurisprudence.

While the decisions of the Special Seventh Division and the Ninth Division of this Court in CA-G.R. CV No. 75303 and
in CA-G.R. No. 76029 are final and executory, the same merely have persuasive effect but do not outweigh the
decisions of the Supreme Court which we are duty-bound to follow, conformably with the principle of stare decisis.

The doctrine of stare decisis enjoins adherence to judicial precedents.1âwphi1 It requires courts in a country to
follow the rule established in a decision of the Supreme Court thereof. That decision becomes a judicial precedent to
be followed in subsequent cases by all courts in the land. The doctrine of stare decisis is based on the principle that
once a question of law has been examined and decided, it should be deemed settled and closed to further
argument.15 (Emphasis supplied.)

Petitioners-spouses are now before us, reiterating their position that no interest should be imposed on their loan,
following the respective pronouncements of the CA in the Caraig and Mercado Cases. Petitioners-spouses insist that
"if the application of the doctrine of operative facts is upheld, as applied in Caraig vs. Alday, x x x, interest in the
instant case would be computed only from the finality of judgment declaring the foreclosure sale null and void. If
Mercado vs. China Banking Corporation x x x, applying by analogy the rule on void usurious interest to void
potestative interest rate, is further sustained, no interest is due when the potestative interest rate stipulation is
declared null and void, as in the instant case. 16

Our Ruling

We dismiss the appeal.

We cannot subscribe to the contention of petitioners-spouses that no interest should be due on the loan they
obtained from respondent bank, or that, at the very least, interest should be computed only from the finality of the
judgment declaring the foreclosure sale null and void, on account of the exorbitant rate of interest imposed on their
loan.

It is clear from the contract of loan between petitioners-spouses and respondent bank that petitioners-spouses, as
borrowers, agreed to the payment of interest on their loan obligation. That the rate of interest was subsequently
declared illegal and unconscionable does not entitle petitioners-spouses to stop payment of interest.1âwphi1 It
should be emphasized that only the rate of interest was declared void. The stipulation requiring petitioners-spouses
to pay interest on their loan remains valid and binding. They are, therefore, liable to pay interest from the time they
defaulted in payment until their loan is fully paid.

It is worth mentioning that both the RTC and the CA are one in saying that "[petitioners-spouses] cannot be
considered in default for their inability to pay the arbitrary, illegal and unconscionable interest rates and penalty
charges unilaterally imposed by [respondent] bank." 17 This is precisely the reason why the foreclosure proceedings
involving petitioners-spouses’ properties were invalidated. As pointed out by the CA, "since the interest rates are null
and void, [respondent] bank has no right to foreclose [petitioners-spouses’] properties and any foreclosure thereof is
illegal. x x x. Since there was no default yet, it is premature for [respondent] bank to foreclose the properties subject
of the real estate mortgage contract." 18

Thus, for the purpose of computing the amount of liability of petitioners-spouses, they are considered in default
from the date the Resolution of the Court in G.R. No. 194164 (Philippine National Bank v. Spouses Bayani H. Andal
and Gracia G. Andal) – which is the appeal interposed by respondent bank to the Supreme Court from the judgment
of the CA – became final and executory. Based on the records of G.R. No. 194164, the Court denied herein
respondent bank’s appeal in a Resolution dated 10 January 2011. The Resolution became final and executory on 20
May 2011.19

In addition, pursuant to Circular No. 799, series of 2013, issued by the Office of the Governor of the Bangko Sentral
ng Pilipinas on 21 June 2013, and in accordance with the ruling of the Supreme Court in the recent case of Dario
Nacar v. Gallery Frames and/or Felipe Bordey, Jr., 20 effective 1 July 2013, 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. Accordingly, the rate of interest of 12% per annum on
petitioners-spouses’ obligation shall apply from 20 May 2011 – the date of default – until 30 June 2013 only. From 1
July 2013 until fully paid, the legal rate of 6% per annum shall be applied to petitioners-spouses’ unpaid obligation.

IN VIEW OF THE FOREGOING, the Petition is DENIED and the Judgment of the Court of Appeals in CA-G.R. CV No.
91250 is AFFIRMED with the MODIFICATION that the 12% interest per annum shall be applied from the date of
default until 30 June 2013 only, after which date and until fully paid, the outstanding obligation of petitioners-
spouses shall earn interest at 6% per annum. Let the records of this case be remanded to the trial court for the
proper computation of the amount of liability of petitioners Spouses Bayani H. Andal and Gracia G. Andal, in
accordance with the pronouncements of the Court herein and with due regard to the payments previously made by
petitioners-spouses.

SO ORDERED.

FIRST UNITED CONSTRUCTORS CORPORATION vs. BAYANIHAN AUTOMOTIVE CORPORATION [January 15,
2014]

This case concerns the applicability of the legal principles of recoupment and compensation.

The Case
Under review is the decision promulgated on July 26, 2004, 1 whereby the Court of Appeals CA) affirmed the
judgment rendered on May 14 1996 by the Regional Trial Court, Branch 107, in Quezon City adjudging the petitioners
defendants) liable to pay to the respondent plaintiff) various sums of money and damages. 2

Antecedents

Petitioner First United Constructors Corporation (FUCC) and petitioner Blue Star Construction Corporation (Blue Star)
were associate construction firms sharing financial resources, equipment and technical personnel on a case-to-case
basis. From May 27, 1992 to July 8, 1992, they ordered six units of dump trucks from the respondent, a domestic
corporation engaged in the business of importing and reconditioning used Japan-made trucks, and of selling the
trucks to interested buyers who were mostly engaged in the construction business, to wit:

TO WHOM
UNIT DATE OF DELIVERY
DELIVERY
Isuzu Dump Truck FUCC 27 May 1992
Isuzu Dump Truck FUCC 27 May 1992
Isuzu Dump Truck FUCC 10 June 1992
Isuzu Dump Truck FUCC 18 June 1992
Isuzu Dump Truck Blue Star 4 July 1992
Isuzu Dump Truck FUCC 8 July 1992

The parties established a good business relationship, with the respondent extending service and repair work to the
units purchased by the petitioners. The respondent also practiced liberality towards the petitioners in the latter’s
manner of payment by later on agreeing to payment on terms for subsequent purchases.

On September 19, 1992, FUCC ordered from the respondent one unit of Hino Prime Mover that the respondent
delivered on the same date. On September 29, 1992, FUCC again ordered from the respondent one unit of Isuzu
Transit Mixer that was also delivered to the petitioners. For the two purchases, FUCC partially paid in cash, and the
balance through post-dated checks, as follows:

BANK/CHECK NO. DATE AMOUNT

Pilipinas Bank 18027379 23 November 1992 ₱360,000.00
Pilipinas Bank 18027384 1 December 1992 ₱375,000.00

Upon presentment of the checks for payment, the respondent learned that FUCC had ordered the payment stopped.
The respondent immediately demanded the full settlement of their obligation from the petitioners, but to no avail.
Instead, the petitioners informed the respondent that they were withholding payment of the checks due to the
breakdown of one of the dump trucks they had earlier purchased from respondent, specifically the second dump
truck delivered on May 27, 1992.

Due to the refusal to pay, the respondent commenced this action for collection on April 29, 1993, seeking payment of
the unpaid balance in the amount of ₱735,000.00 represented by the two checks.

In their answer, the petitioners averred that they had stopped the payment on the two checks worth ₱735,000.00
because of the respondent’s refusal to repair the second dump truck; and that they had informed the respondent of
the defects in that unit but the respondent had refused to comply with its warranty, compelling them to incur
expenses for the repair and spare parts. They prayed that the respondent return the price of the defective dump
truck worth ₱830,000.00 minus the amounts of their two checks worth ₱735,000.00, with 12% per annum interest
on the difference of ₱90,000.00 from May 1993 until the same is fully paid; that the respondent should also
reimburse them the sum of ₱247,950.00 as their expenses for the repair of the dump truck, with 12% per annum
interest from December 16, 1992, the date of demand, until fully paid; and that the respondent pay exemplary
damages as determined to be just and reasonable but not less than ₱500,000, and attorney’s fees of ₱50,000 plus
₱1,000.00 per court appearance and other litigation expenses.

It was the position of the respondent that the petitioners were not legally justified in withholding payment of the
unpaid balance of the purchase price of the Hino Prime Mover and the Isuzu Transit Mixer due the alleged defects in
second dump truck because the purchase of the two units was an entirely different transaction from the sale of the
dump trucks, the warranties for which having long expired.

Judgment of the RTC

On May 14, 1996, the RTC rendered its judgment, 3 finding the petitioners liable to pay for the unpaid balance of the
purchase price of the Hino Prime Mover and the Isuzu Transit Mixer totaling ₱735,000.00 with legal interest and
attorney’s fees; and declaring the respondent liable to pay to the petitioners the sum of ₱71,350.00 as costs of the
repairs incurred by the petitioners. The RTC held that the petitioners could not avail themselves of legal
compensation because the claims they had set up in the counterclaim were not liquidated and demandable. The fallo
of the judgment states:

WHEREFORE, judgment is hereby rendered:

1. Ordering defendants, jointly and severally to pay plaintiff the sum of ₱360,000.00 and ₱375,000.00 with
interest at the legal rate of 12% per annum computed from February 11, 1993, which is the date of the first
extrajudicial demand, until fully paid;

2. Ordering the defendants, jointly and severally, to pay plaintiff the sum equivalent to 10% of the principal
amount due, for attorney’s fees;

3. On the counterclaim, ordering plaintiff to pay defendants the sum of ₱71,350.00 with interest at the legal
rate of 12% per annum computed from the date of this decision until fully paid;

4. Ordering plaintiff to pay the defendants attorney’s fees equivalent to 10% of the amount due;

5. No pronouncement as to costs.

SO ORDERED.4

Decision of the CA

The petitioners appealed, stating that they could justifiably stop the payment of the checks in the exercise of their
right of recoupment because of the respondent’s refusal to settle their claim for breach of warranty as to the
purchase of the second dump truck.

In its decision promulgated on July 26, 2004,5 however, the CA affirmed the judgment of the RTC. It held that the
remedy of recoupment could not be properly invoked by the petitioners because the transactions were different;
that the expenses incurred for the repair and spare parts of the second dump truck were not a proper subject of
recoupment because they did not arise out of the purchase of the Hino Prime Mover and the Isuzu Transit Mixer; and
that the petitioners’ claim could not also be the subject of legal compensation or set-off, because the debts in a set-
off should be liquidated and demandable.

Issues

The petitioners are now before the Court asserting in their petition for review on certiorari that the CA erred in:

I
 x x x NOT UPHOLDING THE RIGHT OF PETITIONER[S] TO RECOUPMENT UNDER PAR. (1) OF ART. 1599 OF THE
CIVIL CODE, WHICH PROVIDES [FOR] THE RIGHTS AND REMEDIES AVAILABLE TO A BUYER AGAINST A SELLER’S
BREACH OF WARRANTY.

II

x x x RULING THAT PETITIONERS CANNOT AVAIL OF COMPENSATION ALLEGEDLY BECAUSE THEIR CLAIMS
AGAINST RESPONDENT ARE NOT LIQUIDATED AND DEMANDABLE.

III

x x x NOT HOLDING RESPONDENT LIABLE TO PETITIONERS FOR LEGAL INTEREST COMPUTED FROM THE FIRST
EXTRAJUDICIAL DEMAND, AND FOR ACTUAL EXEMPLARY DAMAGES. 6

The petitioners submit that they were justified in stopping the payment of the two checks due to the respondent’s
breach of warranty by refusing to repair or replace the defective second dump truck earlier purchased; that the
withholding of payments was an effective exercise of their right of recoupment as allowed by Article 1599(1) of the
Civil Code; due to the seller’s breach of warranty that the CA’s interpretation (that recoupment in diminution or
extinction of price in case of breach of warranty by the seller should refer to the reduction or extinction of the price
of the same item or unit sold and not to a different transaction or contract of sale) was not supported by
jurisprudence; that recoupment should not be restrictively interpreted but should include the concept of
compensation or set-off between two parties who had claims arising from different transactions; and that the series
of purchases and the obligations arising therefrom, being inter-related, could be considered as a single and ongoing
transaction for all intents and purposes.

The respondent counters that the petitioners could not refuse to pay the balance of the purchase price of the Hino
Prime Mover and the Isuzu Transit Mixer on the basis of the right of recoupment under Article 1599 of the Civil Code;
that the buyer’s remedy of recoupment related only to the same transaction; and that compensation was not proper
because the claims of the petitioners as alleged in their counterclaim were not liquidated and demandable.

There is no longer any question that the petitioners were liable to the respondent for the unpaid balance of the
purchase price of the Hino Prime Mover and the Isuzu Transit Mixer. What remain to be resolved are strictly legal,
namely: one, whether or not the petitioners validly exercised the right of recoupment through the withholding of
payment of the unpaid balance of the purchase price of the Hino Prime Mover and the Isuzu Transit Mixer; and, two,
whether or not the costs of the repairs and spare parts for the second dump truck delivered to FUCC on May 27,
1992 could be offset for the petitioners’ obligations to the respondent.

Ruling

We affirm the decision of the CA with modification.

1.
Petitioners could not validly resort to recoupment against respondent

Recoupment (reconvencion) is the act of rebating or recouping a part of a claim upon which one is sued by means of
a legal or equitable right resulting from a counterclaim arising out of the same transaction. 7 It is the setting up of a
demand arising from the same transaction as the plaintiff’s claim, to abate or reduce that claim.

The legal basis for recoupment by the buyer is the first paragraph of Article 1599 of the Civil Code, viz:

Article 1599. Where there is a breach of warranty by the seller, the buyer may, at his election:

(1) Accept or keep the goods and set up against the seller, the breach of warranty by way of recoupment in
diminution or extinction of the price;
 (2) Accept or keep the goods and maintain an action against the seller for damages for the breach of
warranty;

(3) Refuse to accept the goods, and maintain an action against the seller for damages for the breach of
warranty;

(4) Rescind the contract of sale and refuse to receive the goods or if the goods have already been received,
return them or offer to return them to the seller and recover the price or any part thereof which has been
paid.

When the buyer has claimed and been granted a remedy in anyone of these ways, no other remedy can thereafter be
granted, without prejudice to the provisions of the second paragraph of article 1191. (Emphasis supplied)

xxxx

In its decision, the CA applied the first paragraph of Article 1599 of the Civil Code to this case, explaining thusly:

Paragraph (1) of Article 1599 of the Civil Code which provides for the remedy of recoupment in diminution or
extinction of price in case of breach of warranty by the seller should therefore be interpreted as referring to the
reduction or extinction of the price of the same item or unit sold and not to a different transaction or contract of
sale. This is more logical interpretation of the said article considering that it talks of breach of warranty with respect
to a particular item sold by the seller. Necessarily, therefore, the buyer’s remedy should relate to the same
transaction and not to another.

Defendants-appellants’ act of ordering the payment on the prime mover and transit mixer stopped was improper
considering that the said sale was a different contract from that of the dump trucks earlier purchased by defendants-
appellants.

The claim of defendants-appellants for breach of warranty, i.e. the expenses paid for the repair and spare parts of
dump truck no. 2 is therefore not a proper subject of recoupment since it does not arise out of the contract or
transaction sued on or the claim of plaintiff-appellee for unpaid balances on the last two (2) purchases, i. e. the prime
mover and the transit mixer. 8

The CA was correct. It was improper for petitioners to set up their claim for repair expenses and other spare parts of
the dump truck against their remaining balance on the price of the prime mover and the transit mixer they owed to
respondent.1avvphi1 Recoupment must arise out of the contract or transaction upon which the plaintiff’s claim is
founded.9To be entitled to recoupment, therefore, the claim must arise from the same transaction, i.e., the purchase
of the prime mover and the transit mixer and not to a previous contract involving the purchase of the dump truck.
That there was a series of purchases made by petitioners could not be considered as a single transaction, for the
records show that the earlier purchase of the six dump trucks was a separate and distinct transaction from the
subsequent purchase of the Hino Prime Mover and the Isuzu Transit Mixer. Consequently, the breakdown of one of
the dump trucks did not grant to petitioners the right to stop and withhold payment of their remaining balance on
the last two purchases.

2.
Legal compensation was permissible

Legal compensation takes place when the requirements set forth in Article 1278 and Article 1279 of the Civil Code
are present, to wit:

Article 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each
other."

Article 1279. In order that compensation may be proper, it is necessary:

 (1) That each of the obligors be bound principally, and that he be at the same time a principal creditor of the
other;

(2) That both debts consists in a sum of money, or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.

As to whether petitioners could avail themselves of compensation, both the RTC and CA ruled that they could not
because the claims of petitioners against respondent were not liquidated and demandable.

The Court cannot uphold the CA and the RTC.

The RTC already found that petitioners were entitled to the amount of ₱71,350.00 stated in their counterclaim, and
the CA concurred in the finding, stating thusly:

It is noteworthy that in the letter of December 16, 1992 (Exh. "1") defendants were charging plaintiff only for the
following items of repair:

1. Cost of repair and spare parts - ₱46,800.00

2. Cost of repair and spare parts - 24,550.00

₱71,350.00

Said amounts may be considered to have been spent for repairs covered by the warranty period of three (3) months.
While the invoices (Exhs. "2-B" and "3-A") dated September 26, 1992 and September 18, 1992, this delay in repairs is
attributable to the fact that when defects were brought to the attention of the plaintiff in the letter of August 14,
1992 (Exh. "8") which was within the warranty period, the plaintiff did not respond with the required repairs and
actual repairs were undertaken by defendants. Thereafter, the spare parts covered by Exhibits "2-B" and "3-A"
pertain to the engine, which was covered by the warranty.

x x x. Defendants in their letter of August 14, 1992 (Exhb. "8") demanded correction of defects. In their letter of
August 22, 1992 (Exh. "9") they demanded replacement. In their letter of August 27, 1992 (Exh. "10"), they
demanded ‘replacement/repair’. In September, 1992, they undertook repairs themselves (Exhs. "2-B" and "3-A") and
demanded payment for the expenses in their letter of December 16, 1992 (Exh. "1"). All other items of expenses
connected with subsequent breakdowns are no longer chargeable to plaintiff which granted only a 3-month
warranty. x x x10

Considering that preponderant evidence showing that petitioners had spent the amount of ₱71,350.00 for the
repairs and spare parts of the second dump truck within the warranty period of three months supported the finding
of the two lower courts, the Court accepts their finding. Verily, factual findings of the trial court, when affirmed by
the CA, are conclusive on the Court when supported by the evidence on record. 11

A debt is liquidated when its existence and amount are determined. 12 Accordingly, an unliquidated claim set up as a
counterclaim by a defendant can be set off against the plaintiff’s claim from the moment it is liquidated by
judgment.13 Article 1290 of the Civil Code provides that when all the requisites mentioned in Article 1279 of the Civil
Code are present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent
amount. With petitioners’ expenses for the repair of the dump truck being already established and determined with
certainty by the lower courts, it follows that legal compensation could take place because all the requirements were
present. Hence, the amount of ₱71,350.00 should be set off against petitioners’ unpaid obligation of ₱735,000.00,
leaving a balance of ₱663,650.00, the amount petitioners still owed to respondent.

We deem it necessary to modify the interest rate imposed by the trial and appellate courts.1âwphi1 The legal
interest rate to be imposed from February 11, 1993, the time of the extrajudicial demand by respondent, should be
6% per annum in the absence of any stipulation in writing in accordance with Article 2209 of the Civil Code, which
provides:

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

WHEREFORE, the Court AFFIRMS the decision promulgated on July 26, 2004 in all respects subject to the
MODIFICATION that petitioners are ordered, jointly and severally, to pay to respondent the sum of 1 663,650.00, plus
interest of 6% per annum computed from February

11, 1993, the date of the first extrajudicial demand, until fully paid; and ORDERS the petitioners to pay the costs of
suit.

SO ORDERED.

FLORANTE VITUG vs. EVANGELINE ABUDA [January 11, 2016]

Parties who have validly executed a contract and have availed themselves of its benefits may not, to escape their
contractual obligations, invoke irregularities in its execution to seek its invalidation.
This is a Petition for Review on Certiorari under Rule 45 assailing the Court of Appeals' October 26, 2011 Decision and
its March 8, 2012 Resolution. The Court of Appeals affirmed the Regional Trial Court's December 19, 2008 Decision
upholding the validity of the mortgage contract executed by petitioner Florante Vitug (Vitug) and respondent
Evangeline A. Abuda (Abuda).

On March 17, 1997, Abuda loaned P250,000.00 to Vitug and his wife, Narcisa Vitug. 1 As security for the loan, Vitug
mortgaged to Abuda his property in Tondo Foreshore along R-10, Block A-50-3, Del Pan to Kagitingan Streets, Tondo,
Manila.2 The property was then subject of a conditional Contract to Sell between the National Housing Authority and
Vitug. Pertinent portions of the mortgage deed reads:

That, Mortgagor, is the owner, holder of a Conditional Contract to Sell of the National Housing Authority (NHA) over a
piece of property located at the Tondo Foreshore along R-10, Block "A-50-3, Delpan to Kagitingan Streets in the
district of Tondo, Manila;

That, with the full consent of wife Narcisa Vitug, hereby mortgage to Evangeline A. Abuda, with full consent of
husband Paulino Abuda, said property for TWO HUNDRED FIFTY THOUSAND PESOS ONLY (P250,000.00), in hand paid
by Mortgagee and in hand received to full satisfaction by Mortgagor, for SIX MONTHS (6) within which to pay back
the full amount plus TEN PERCENT (10%) agreed interest per month counted from the date stated hereon;

That, upon consummation and completion of the sale by the NHA of said property, the title-award thereof, shall be
received by the Mortgagee by virtue of a Special Power of Attorney, executed by Mortgagor in her favor, authorizing
Mortgagee to expedite, follow-up, cause the release and to received [sic] and take possession of the title award of
the said property from the NHA, until the mortgage amount is fully paid for and settled[.] 3

On November 17, 1997, the parties executed a "restructured" 4 mortgage contract on the property to secure the
amount of P600,000.00 representing the original P250,000.00 loan, additional loans, 5 and subsequent credit
accommodations6 given by Abuda to Vitug with an interest of five (5) percent per month. 7 By then, the property was
covered by Transfer Certificate of Title No. 234246 under Vitug's name. 8

Spouses Vitug failed to pay their loans despite Abuda's demands. 9

On November 21, 2003, Abuda filed a Complaint for Foreclosure of Property before the Regional Trial Court
ofManila.10

On December 19, 2008, the Regional Trial Court promulgated a Decision in favor of Abuda. 11 The dispositive portion
of the Decision reads:

WHEREFORE, judgment is rendered in favor of the plaintiffs [sic] and against the defendant:

1. Ordering the defendant to pay unto the court and/or to the judgment debtor within the
reglementary period of Ninety (90) days the principal sum of P600,000.00 with interest at 5% per
month from May 31, 2002 to actual date of payment plus P20,000.00 as and for attorney's fees;

2. Upon default of the defendant to fully pay the aforesaid sums, the subject mortgaged property
shall be sold at public auction to pay off the mortgage debt and its accumulated interest plus
attorney's fees, expenses and costs; and

3. After the confirmation of the sale, ordering the defendant and all persons claiming rights under
her [sic] to immediately vacate the subject premises.

SO ORDERED.12

Vitug appealed the December 19, 2008 Regional Trial Court Decision before the Court of Appeals. 13 He contended
that the real estate mortgage contract he and Abuda entered into was void on the grounds of fraud and lack of
consent under Articles 1318, 1319, and 1332 of the Civil Code. 14 He alleged that he was only tricked into signing the
mortgage contract, whose terms he did not really understand. Hence, his consent to the mortgage contract was
vitiated.15

On October 26, 2011, the Court of Appeals promulgated a Decision, 16 the dispositive portion of which reads:

WHEREFORE, the instant appeal is PARTIALLY GRANTED. The Decision of the RTC dated December 19, 2008 in Civil
Case No. 03-1084 70 in favor of the appellee and against the appellant is AFFIRMED with the MODIFICATION that an
interest rate of 1 % per month or 12% per annum shall be applied to the principal loan of P600,000.00, computed
from the date of judicial demand, i.e., November 21, 2003; and 12% interest per annum on the amount due from the
date of the finality of the Decision until fully paid.

SO ORDERED.17

The Court of Appeals found that Vitug failed to pay his obligation within the stipulated six-month period under the
March 17, 1997 mortgage contract.18 As a result of this failure, the parties entered into a restructured mortgage
contract on November 17, 1997.19 The new mortgage contract was signed before a notary public by Vitug, his wife
Narcisa, and witnesses Rolando Vitug, Ferdinand Vitug, and Emily Vitug. 20

The Court of Appeals also found that all the elements of a valid mortgage contract were present in the parties'
mortgage contract.21 The mortgage contract was also clear in its terms-that failure to pay the P600,000.00 loan
amount, with a 5% interest rate per month from November 17, 1997 to November 17, 1998, shall result in the
foreclosure of Vitug's mortgaged property. 22 No evidence on record showed that Vitug was defrauded when he
entered into the agreement with Abuda. 23

However, the Court of Appeals found that the interest rates imposed on Vitug's loan were "iniquitous,
unconscionable[,] and exorbitant." 24 It instead ruled that a legal interest of 1 % per month or 12% per annum should
apply from the judicial demand on November 21, 2003. 25

On November 23, 2011, Vitug moved for the reconsideration of the Court of Appeals' October 26, 2011 Decision. 26He
pointed out that not all the requisites of a valid mortgage contract were present since he did not have free disposal
of his property when he mortgaged it to Abuda. His transfer certificate of title had an annotation by the National
Housing Authority, which restricted his right to dispose or encumber the property. 27 The restriction clause provided
that the National Housing Authority's consent must first be obtained before he may dispose or encumber his
property.28

Abuda, according to Vitug, failed to get the National Housing Authority's consent before the property was mortgaged
to him.

Vitug also argued in his Motion for Reconsideration that the property was exempt from execution because it was
constituted as a family home before its mortgage.

In the Resolution promulgated on March 8, 2012, 29 the Court of Appeals denied Vitug's Motion for Reconsideration.

Vitug filed this Petition for Review on Certiorari under Rule 45 to assail the Court of Appeals' October 26, 2011
Decision and its March 8, 2012 Resolution.

Vitug raises the following issues:

First, whether petitioner Florante Vitug may raise in this Petition issues regarding the National Housing Authority's
alleged lack of consent to the mortgage, as well as the exemption of his property from execution;

Second, whether the restriction clause in. petitioner's title rendered invalid the real estate mortgage he and
respondent Evangeline Abuda executed; and

Lastly, whether petitioner's property is a family home that is free from execution, forced sale, or attachment under
the Family Code.30
We deny the Petition.

Petitioner argues that not all the requisites of a valid mortgage are present. 31 A mortgagor must have free disposal of
the mortgaged property.32 The existence of a restriction clause33 in his title means that he does not have free disposal
of his property.34 The restriction clause does not allow him to mortgage the property without the National Housing
Authority's approval.35 Since the National Housing Authority never gave its consent to the mortgage, 36 the mortgage
contract between him and respondent is invalid. 37

On the other hand, respondent argues that the only issue in this case should be the validity of the real estate
mortgage executed by petitioner in her favor. 38 Petitioner raised other issues, such as the alleged lack of written
consent by the National Housing Authority (and the property's exemption from execution), only in his Motion for
Reconsideration before the Court of Appeals.39

Respondent also argues that the National Housing Authority issued a Permit to Mortgage the property. This was
formally offered in evidence before the Regional Trial Court as Exhibit "E." 40 The National Housing Authority even
accepted respondent's personal checks to settle petitioner's mortgage obligations to the National Housing
Authority. 41 The National Housing Authority would have already foreclosed petitioner's property if not for the loan
that respondent extended to petitioner. 42

(1) The Mortgage Contract must provide that:

"In the event of foreclosure, the NHA shall be notified of the date, time and place of the auction sale
so that it can participate in the foreclosure sale of the property."

(2) The mortgage contract must be submitted to NHA for verification and final approval [. ] 43

Thus, according to petitioner, there was neither written consent nor approval by the National Housing Authority of
the mortgage contracts.44

Petitioner further contends that the alleged lack of NHA consent on the mortgage (and, being a family home, his
property's exemption from execution) was raised in his Answer to respondent's complaint for foreclosure filed before
the Regional Trial Court, thus:

20. Similarly, defendant has constituted their family home over said mortgage property and should that property be
sold, defendant and his family will be left with no place to reside with [sic] within Metro Manila, hence, for
humanitarian reason[s], the defendant prayed that he be given ample time within which to settle his obligation with
the plaintiff;

21. Lastly, the Memorandum of Encumbrances contained at the back of defendant's title prohibits her from selling,
encumbering, mortgaging, leasing, sub-leasing or in any manner altering or disposing the lot or right thereon, in
whole or in part within the period of ten (10) years from the time of issuance of said title without first obtaining the
consent of the NHA. As reflected in the title, the same was issued on 25 June 1997 hence, the mortgage executed
even prior to the issuance of said title should be declared void. 45

Due process46 dictates that arguments not raised in the trial court may not be considered by the reviewing court. 47

Petitioner may raise in his Petition the issues of lack of the National Housing Authority's consent to the mortgage and
his property's alleged exemption from execution.

The records show that petitioner mentioned these issues as early as in his Answer to respondent's Complaint 48 and
Pre-trial Brief.49 The trial court acknowledged these issues, but found that his defenses based on these grounds could
not be given credence:
The defendant further stated that he is willing to pay the obligation provided that the interest be equitably reduced
because the interest is unconscionable. Further, the said property constituted their family home. The defendant
claimed that Memorandum of Encumbrance prohibits her from selling, encumbering, mortgaging, leasing, subleasing
or in any manner altering or disposing the lot or right thereon in whole or in part within ten (10) years from the time
of issuance of the said title without obtaining the consent of the NHA.

... The court opines that the defendant has failed to raise a legitimate and lawful ground in order to bar the herein
plaintiff from asserting its lawful right under the law.

The contention of the defendant that the subject mortgaged property is their family home is irrelevant as the debt
secured by mortgages on the premises before or after the constitution of the family home does not exempt the same
from execution (Rule 106 of the Rules of Court).50

Whether these arguments seasonably raised are valid is, however, a different matter.

II

All the elements of a valid mortgage contract were present. For a mortgage contract to be valid, the absolute owner
of a property must have free disposal of the property. 51 That property must be used to secure the fulfillment of an
obligation.52 Article 2085 of the Civil Code provides:

Art. 2085. The following requisites are essential to contracts of pledge and mortgage:

(1) That they be constituted to secure the fulfillment of a principal obligation;

(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;

(3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the
absence thereof, that they be legally authorized for the purpose.

....

Petitioner, who held under his name a transfer certificate of title to the property, mortgaged the property to
respondent to secure the payment of his loan of P600,000.00.

Petitioner claims that he only borrowed P250,000.00 and that he was only made to sign another mortgage contract
whose terms he did not agree to.

These claims were already found by the trial court and the Court of Appeals to be unsupported by evidence.
Petitioner's consent to the mortgage contract dated November 17, 1997 was not vitiated. He voluntarily signed it in
the presence of a notary public, his wife, and other witnesses. 53

Further, the amount of P600,000.00 under the November 17, 1997 mortgage contract represented the initial loan of
P250,000.00 and the subsequent loan amounts, which were found to have been actually released to petitioner. The
November 17, 1997 mortgage contract reflected the changes in the parties' obligations after they executed the
March 17, 1997 mortgage contract.

This court is not a trier of facts. As a general rule, findings of fact of the lower court and of the Court of Appeals are
not reviewable and are binding upon this court 54 unless the circumstances of the case are shown to be covered by
the exceptions.55 Petitioner failed to show any ground for this court to review the trial court's and the Court of
Appeals' finding that petitioner mortgaged his property in consideration of a loan amounting to P600,000.00.

Petitioner's undisputed title to and ownership of the property is sufficient to give him free disposal of it. As owner of
the property, he has the right to enjoy all attributes of ownership including jus disponendi or the right to encumber,
alienate, or dispose his property "without other limitations than those established by law." 56
Petitioner's claim that he lacks free disposal of the property stems from the existence of the restrictions imposed on
his title by the National Housing Authority. These restrictions were annotated on his title, thus:

Entry No. 4519/V-013/T-234246 - RESTRICTI0N - that the Vendee shall not sell, encumber, mortgage, lease, sub-let or
in any manner, alter or dispose the lot or right therein at any time, in whole or in part without obtaining the written
consent of the Vendor. Other restrictions set forth in Doc. No. 287; Page No. 59; Book No. 250; SERIES of 1997 of
Notary Public for Quezon City, Liberty S. Perez.

Date of instrument - June 24, 1997

Date of inscription - June 25, 1997 - 11 :39 a.m. 57

The National Housing Authority's restrictions were provisions in a contract it executed with petitioner. This contract
bound petitioner to certain conditions before transferring or encumbering the property. Specifically, when the
National Housing Authority sold the property to petitioner, petitioner became obligated not to sell, encumber,
mortgage, lease, sublease, alter, or dispose the property without the National Housing Authority's consent.

These restrictions do not divest petitioner of his ownership rights. They are mere burdens or limitations on
petitioner's jus disponendi. Thus, petitioner may dispose or encumber his property. However, the disposition or
encumbrance of his property is subject to the limitations and to the rights that may accrue to the National Housing
Authority. When annotated to the title, these restrictions serve as notice to the whole world that the National
Housing Authority has claims over the property, which it may enforce against others.

Contracts entered into in violation of restrictions on a property owner's rights do not always have the effect of
making them void ab initio.58 This has been clarified as early as 1956 in Municipality of Camiling v. Lopez. 59

The Municipality of Camiling sought to collect from Diego Z. Lopez payments for the lease of "certain fisheries." As. a
defense, Diego Z. Lopez invoked the alleged nullity of the lease contract he entered into with the Municipality of
Camiling.

Citing Municipality of Hagonoy v. Evangelista, 60 the trial court ruled that the lease contract between the Municipality
of Camiling and Diego Z. Lopez was void since it "was not approved by the provincial governor in violation of section
2196 of the Revised Administrative Code. "61 This court reversed the trial court's Decision and noted the incorrect
interpretation in Municipality of Hagonoy of the term "nulos" under Article 4 of the then Civil Code: "Son nulos las
actos ejecutados contra lo dispuesto en la ley, salvo las casos en que la naisma ley ordene su validez." 62

In Municipality of Camiling, this court explained that void acts declared in Article 4 of the Old Civil Code 63 refer to
those made in violation of the law. Not all those acts are void from the beginning. Void acts may be "those that
are ipso facto void and those which are merely voidable." 64

The lease contract executed by the Municipality of Camiling and Diego Z. Lopez was not treated as ipso facto void.
Section 2196 of the Administrative Code required the provincial governor's approval before the municipal council
entered into contracts. However, the same provision did not prohibit the municipal council from entering into
contracts involving the properties of the municipality. 65 The municipal council's exercise of power to enter into these
contracts might have been limited, but its power was recognized. This court found that aside from the lack of
approval, the contract had no badge of illegality that would make it ipso facto void. The execution of the contract was
not tainted with violation of public order, morality, or public policy. The contract could have been ratified. Hence, this
court said that it was "merely voidable at the option of the party who in law is granted the right to invoke its
invalidity."66

The same doctrine was repeated in Sarmiento v. Salud,67 which involved a property in Kamuning, Quezon City. The
property was sold by Philippine Homesite and Housing Corp. to Spouses Francisco and Marcelina Sarmiento. The
transfer certificate of title that covered the property contained an annotation stating that the property was sold on
the condition that it could not be resold within 25 years from contract date. Sale could be made within the period
only to People's Homesite and Housing Corporation. 68 Spouses Sarmiento later mortgaged the property to Jorge
Salud. Because Spouses Sarmiento failed to redeem the property, the sheriff auctioned and sold the property to
Jorge Salud, who was issued a certificate of sale.
Spouses Sarmiento sought to prevent the foreclosure of the property by filing an action for annulment of the
foreclosure proceedings, sale, and certificate of sale on the ground that the prohibition against sale of the property
within 25 years was violated.

This court did not declare the contract void for violating the condition that the property could not be resold within 25
years. Instead, it recognized People's Homesite and Housing Corporation's right to cause the annulment of the
contract. Since the condition was made in favor of People's Homesite and Housing Corporation, it was the
Corporation, not Spouses Sarmiento, who had a cause of action for annulment. 69 In effect, this court considered the
contract between Spouses Sarmiento and Jorge Salud as merely voidable at the option of People's Homesite and
Housing Corporation.

Thus, contracts that contain provisions in favor of one party may be void ab initio or voidable.70 Contracts that lack
consideration,71 those that are against public order or public policy, 72 and .those that are attended by illegality 73 or
immorality74 are void ab initio.

Contracts that only subject a property owner's property rights to conditions or limitations but otherwise contain all
the elements of a valid contract are merely voidable by the person in whose favor the conditions or limitations are
made.75

The mortgage contract entered into by petitioner and respondent contains all the elements of a valid contract of
mortgage. The trial court and the Court of Appeals found no irregularity in its execution. There was no showing that
it was attended by fraud, illegality, immorality, force or intimidation, and lack of consideration.

At most, therefore, the restrictions made the contract entered into by the parties voidable 76 by the person in whose
favor they were made-in this case, by the National Housing Authority. 77 Petitioner has no actionable right or cause of
action based on those restrictions. 78

Having the right to assail the validity of the mortgage contract based on violation of the restrictions, the National
Housing Authority may seek the annulment of the mortgage contract. 79 Without any action from the National
Housing Authority, rights and obligations, including the right to foreclose the property in case of non-payment of the
secured loan, are still enforceable between the parties that executed the mortgage contract.

The voidable nature of contracts entered into in violation of restrictions or conditions necessarily implies that the
person in whose favor the restrictions were made has two (2) options. It may either: (1) waive 80 its rights accruing
from such restrictions, in which case, the duly executed subsequent contract remains valid; or (2) assail the
subsequent contract based on the breach of restrictions imposed in its favor.

In Sarmiento, this court recognized that the right to waive follows from the right to invoke any violation of conditions
under the contract. Only the person who has the right to invoke this violation has the cause of action for annulment
of contract. The validity or invalidity of the contract on the ground of the violation is dependent on whether that
person will invoke this right. Hence, there was effectively a waiver on the part of People's Homesite and Housing
Corporation when it did riot assail the validity of the mortgage in that case:

It follows that on the assumption that the mortgage to appellee Salud and the foreclosure sale violated the condition
in the Sarmiento contract, only the PHHC was entitled to invoke the condition aforementioned, and not the
Sarmientos. The validity or invalidity of the sheriffs foreclosure sale to appellant Salud thus depended exclusively on
the PHHC; the latter could attack the sale as violative of its right of exclusive reacquisition; but it (PHHC) also could
waive the condition and treat the sale as good, in which event, the sale can not be assailed [for] breach of the
condition aforestated. Since it does not appear anywhere in the record that the PHHC treated the mortgage and
foreclosure sale as an infringement of the condition, the validity of the mortgage, with all its consequences, including
its foreclosure and sale thereat, can not be an issue between the parties to the present case. In the last analysis, the
appellant, as purchaser at the foreclosure sale, should be regarded as the owner of the lot, subject only to the right
of PHHC to have his acquisition of the land set aside if it so desires. 81

There is no showing that the National Housing Authority assailed the validity of the mortgage contract on the ground
of violation of restrictions on petitioner's title. The validity of the mortgage contract based on the restrictions is not
an issue between the parties. Petitioner has no cause of action against respondent based on those restrictions. The
mortgage contract remains binding upon petitioner and respondent.

In any case, there was at least substantial compliance with the consent requirement given the National Housing
Authority's issuance of a Permit to Mortgage. The Permit reads:

25 November 1997

MR. FLORANTE VITUG

901 Del Pan Street
Tondo, Manila

PERMIT TO MORTGAGE

Dear Mr. Vitug,

Please be informed that your request dated 20 November 1997 for permission to mortgage Commercial Lot 5, Block
1, Super Block 3, Area I, Tondo Foreshore Estate Management Project covered by TCT No. 234246 is hereby GRANTED
subject to the following terms and conditions:

1. The Mortgage Contract must provide that:

"In the event of foreclosure, the NHA shall be notified of the date, time and place of the auction sale so that it can
participate in the foreclosure sale of the property."

2. The mortgage contract must be submitted to NHA for verification and final approval; and

3. This permit shall be good only for a period of ninety (90) days from date of receipt hereof.

Very truly yours,

(Signed)
Mariano M. Pineda
General Manager82

Petitioner insists that the Permit cannot be treated as consent by the National Housing Authority because of
respondent's failure to comply with its conditions.

However, a reading of the mortgage contract executed by the parties on November 17, 1997 shows otherwise. The
November 17, 1997 mortgage contract had references to the above conditions imposed by the National Housing
Authority, thus:

It is the essence of this Contract, that if and should the Mortgagor fails to comply and pay the principal obligations
hereon within the period of the Contract, the Mortgage shall be foreclosed according to law and in which case the
NHA shall be duly notified of the matter.

That this mortgage contract shall be submitted to the NHA for verifixation [sic] and final approval in accordance with
NHA permit to mortgage the property. 83 (Emphasis supplied)

Assuming there was non-compliance with the conditions set forth in the Permit, petitioner cannot blame
respondent. The restrictions were part of the contract between the National Housing Authority and petitioner. It was
petitioner, not respondent, who had the obligation to notify and obtain the National Housing Authority's consent
within the prescribed period before sale or encumbrance of the property.

Petitioner cannot invoke his own mistake to assail the validity of a contract he voluntarily entered into. 84
 III

Even if the mortgage contract were illegal or wrongful, neither of the parties may assail the contract's validity as
against the other because they were equally at fault. 85 This is the principle of in pari delicto (or in delicto) as
embodied in Articles 1411 and 1412 of the Civil Code:

Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes
a criminal offense, both parties being in pari delicto, they shall have no action against each other, and both shall be
prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of effects or instruments of a crime
shall be applicable to the things or the price of the contract.

This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given,
and shall not be bound to comply with his promise.

Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the
following rules shall be observed:

(1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue
of the contract, or demand the performance of the other's undertaking;

(2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the
contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may
demand the return of what he has given without any obligation to comply his promise.

Under this principle, courts shall not aid parties in their illegal acts. 86 The court shall leave them as they are.87 It is an
equitable principle that bars parties from enforcing their illegal acts, assailing the validity of their acts, or using its
invalidity as a defense.88

In the 1906 case of Batarra v. Marcos,89 this court declared that a person cannot enforce a promise to marry based
on the consideration of "carnal connection." This court ruled that whether or not such consideration was a crime,
neither of the parties can recover because the acts "were common to both parties." 90

In Bough v. Cantiveros,91 this court refused to enforce in favor of the guilty parties a contract of sale that was not only
simulated but also executed to defeat any attempt by a husband to recover properties from his wife.

Another case, Liguez v. Court of Appeals,92 involves a party's claim over a property based on a deed of donation
executed in her favor when she was 16 years old. The heirs of the donor assailed the donation on the ground of
having an illicit causa.

The donor in that case was found to have had sexual relations with the claimant. The donation was done to secure
the claimant's continuous cohabitation with the donor, as well as to gratify the donor's sexual impulses. At the time
of the donation, the donor was married to another woman. The donated property was part of their conjugal
property.

This court held that the donation was founded on an illicit causa. While this court found the principle of in pari
delicto inapplicable in that case given the claimant's minority at the time of donation, it had the occasion to say that
the parties were barred "from pleading the illegality of the bargain either as a cause of action or as a defense." 93 The
claimant was declared entitled to the donated property, without prejudice to the share and legitimes of the donor's
forced heirs.

In the later case of Villegas v. Rural Bank of Tanjay, Inc.,94 this court ruled that the petitioners in that case were not
entitled to relief because they did not come to court with clean hands.

This court found that they "readily participated in a ploy to circumvent the Rural Banks Act and offered no objection
when their original loan of P350,000.00 was divided into small separate loans not exceeding P50,000.00 each." 95They
and respondent bank were in pari delicto. They could not be given affirmative relief against each other. 96Hence,
Spouses Villegas may not seek the annulment of the loan and mortgage contracts they voluntarily executed with
respondent bank on the ground that these contracts were simulated to make it appear that the loans were sugar
crop loans, allowing respondent bank to approve it pursuant to Republic Act No. 720, otherwise known as the Rural
Banks Act.

The principle of in pari delicto admits exceptions. It does not apply when the result of its application is clearly against
statutory law, morals, good customs, and public policy. 97

In Philippine Banking Corporation, representing the Estate of Justina Santos v. Lui She, 98 this court refused to apply
the principle of in pari delicto. Applying the principle meant that this court had to declare as valid between the
parties a 50-year lease contract with option to buy, which was executed by a Filipino and a Chinese citizen. This court
ruled that the policy to conserve land in favor of Filipinos would be defeated if the principle of in pari delicto was
applied instead of setting aside the contracts executed by the parties. 99

Petitioner in this case did not come to this court with clean hands. He was aware of the restrictions in his title when
he executed the loan and mortgage contracts with respondent. He voluntarily executed the contracts with
respondent despite this knowledge. He also availed himself of the benefits of the loan and mortgage contract. He
cannot now assail the validity of the mortgage contract to escape the obligations incurred because of it. 100

Petitioner also failed to show that upholding the validity of the mortgage contract would be contrary to law, morals,
good customs, and public policy.

Petitioner's contract with the National Housing Authority is not a law prohibiting the transfer or encumbrance of his
property. It does not render subsequent transactions involving the property a violation of morals, good customs, and
public policy. Violation of its terms does not render subsequent transactions involving the property void ab initio.101 It
merely provides the National Housing Authority with a cause of action to annul subsequent transactions involving the
property.

IV

Petitioner argues that the property should be exempt from forced sale, attachment, and execution, based on Article
155 of the Family Code.102 Petitioner and his family have been neighbors with respondent since 1992, before the
execution of the mortgage contract.103

Even though petitioner's property has been constituted as a family home, it is not exempt from execution. Article 155
of the Family Code explicitly provides that debts secured by mortgages are exempted from the rule against execution,
forced sale, or attachment of family home:

Art. 155. The family home shall be exempt from execution, forced sale or attachment except:

....

(3) For debts secured by mortgages on the premises before or after such constitution[.]

Since petitioner's property was voluntarily used by him as security for a loan he obtained from respondent, it may be
subject to execution and attachment.

The Court of Appeals correctly found that the interest rates of 5% or 10% per month imposed on petitioner's loan
were unconscionable.

Parties are free to stipulate interest rates in their loan contracts in view of the suspension of the implementation of
the Usury Law ceiling on interest effective January 1, 1983. 104
The freedom to stipulate interest rates is granted under the assumption that we have a perfectly competitive market
for loans where a borrower has many options from whom to borrow. It assumes that parties are on equal footing
during bargaining and that neither of the parties has a relatively greater bargaining power to command a higher or
lower interest rate. It assumes that the parties are equally in control of the interest rate and equally have options to
accept or deny the other party's proposals. In other words, the freedom is granted based on the premise that parties
arrive at interest rates that they are willing but are not compelled to take either by force of another person or by
force of circumstances.105

However, the premise is not always true. There are imperfections in the loan market. One party may have more
bargaining power than the other. A borrower may be in need of funds more than a lender is in need of lending them.
In that case, the lender has more commanding power to set the price of borrowing than the borrower has the
freedom to negotiate for a lower interest rate.

Hence, there are instances when the state must step in to correct market imperfections resulting from unequal
bargaining positions of the parties.

Article 1306 of the Civil Code limits the freedom to contract to promote public morals, safety, and welfare: 106

Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

In stipulating interest rates, parties must ensure that the rates are neither iniquitous nor unconscionable. Iniquitous
or unconscionable interest rates are illegal and, therefore, void for being against public morals. 107 The lifting of the
ceiling on interest rates may not be read as "grant[ing] lenders carte blanche [authority] to raise interest rates to
levels which will either enslave their borrowers or lead to a hemorrhaging of their assets." 108

Voluntariness of stipulations on interest rates is not sufficient to make the interest rates valid. 109 In Castro v. Tan:110

The 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. It has no support in law, in principles of justice, or in the human conscience nor is there
any reason whatsoever which may justify such imposition as righteous and as one that may be sustained within the
sphere of public or private morals. 111

Thus, even if the parties voluntarily agree to an interest rate, courts are given the discretionary power to equitably
reduce it if it is later found to be iniquitous or unconscionable. 112 Courts approximate what the prevailing market rate
would have been under the circumstances had the parties had equal bargaining power.

An interest rate is not inherently conscionable or unconscionable. Interest rates become unconscionable in light of
the context in which they were imposed or applied. In Medel v. Court of Appeals,113 this Court ruled that the
stipulated interest of 5.5% or 66% per annum was unconscionable and contrary to morals. It was declared void. This
court reduced the interest rate to 1 % per month or 12% per annum. 114

This court also ruled that the interest rates of 3%, 5%, and 10% per month were unconscionable, thus justifying the
need to reduce the interest rates to 12% per annum. 115

On the other hand, despite rulings that interest rates of 3% and 5% per month are unconscionable, this court
in Toledo v. Hyden116 found that the interest rate of 6% to 7% per month was not unconscionable. This court noted
circumstances that differentiated that case from Medel and found that the borrower in Toledo was not in dire need of
money when she obtained a loan; this implied that the interest rates were agreed upon by the parties on equal
footing. This court also found that it was the borrower in Toledo who was guilty of inequitable acts:

Noteworthy is the fact that in Medel, the defendant-spouses were never able to pay their indebtedness from the very
beginning and when their obligations ballooned into a staggering sum, the creditors filed a collection case against
them. In this case, there was no urgency of the need for money on the part of Jocelyn, the debtor, which compelled
her to enter into said loan transactions. She used the money from the loans to make advance payments for
prospective clients of educational plans offered by her employer. In this way, her sales production would increase,
thereby entitling her to 50% rebate on her sales. This is the reason why she did not mind the 6% to 7% monthly
interest. Notably too, a business transaction of this nature between Jocelyn and Marilou continued for more than five
years. Jocelyn religiously paid the agreed amount of interest until she ordered for stop payment on some of the
checks issued to Marilou. The checks were in fact sufficiently funded when she ordered the stop payment and then
filed a case questioning the imposition of a 6% to 7% interest rate for being allegedly iniquitous or unconscionable
and, hence, contrary to morals.

It was clearly shown that before Jocelyn availed of said loans, she knew fully well that the same carried with it an
interest rate of 6% to 7% per month, yet she did not complain. In fact, when she availed of said loans, an advance
interest of 6% to 7% was already deducted from the loan amount, yet she never uttered a word of protest.

After years of benefiting from the proceeds of the loans bearing an interest rate of 6% to 7% per month and paying
for the same, Jocelyn cannot now go to court to have the said interest rate annulled on the ground that it is
excessive, iniquitous, unconscionable, exorbitant, and absolutely revolting to the conscience of man. "This is so
because among the maxims of equity are (1) he who seeks equity must do equity, and (2) he who comes into equity
must come with clean hands. The latter is a frequently stated maxim which is also expressed in the principle that he
who has done inequity shall not have equity. It signifies that a litigant may be denied relief by a court of equity on the
ground that his conduct has been inequitable, unfair and dishonest, or fraudulent, or deceitful as to the controversy
in issue."

We are convinced that Jocelyn did not come to court for equitable relief with equity or with clean hands. It is patently
clear from the above summary of the facts that the conduct of Jocelyn can by no means be characterized as nobly
fair, just, and reasonable. This Court likewise notes certain acts of Jocelyn before filing the case with the RTC. In
September 1998, she requested Marilou not to deposit her checks as she can cover the checks only the following
month.1âwphi1 On the next month, Jocelyn again requested for another extension of one month. It turned out that
she was only sweet-talking Marilou into believing that she had no money at that time. But as testified by Serapio
Romarate, an employee of the Bank of Commerce where Jocelyn is one of their clients, there was an available
balance of ?276,203.03 in the latter's account and yet she ordered for the stop payments of the seven checks which
can actually be covered by the available funds in said account. She then caught Marilou by surprise when she
surreptitiously filed a case for declaration of nullity of the document and for damages. 117 (Emphases supplied,
citations omitted)

Under the circumstances of this case, we find no reason to uphold the stipulated interest rates of 5% to 10% per
month on petitioner's loan. Petitioner obtained the loan out of extreme necessity. As pointed out by respondent, the
property would have been earlier foreclosed by the National Housing Authority if not for the loan. Moreover, it
would be unjust to impose a heavier burden upon petitioner, who would already be losing his and his family's home.
Respondent would not be unjustly deprived if the interest rate is reduced. After all, respondent still has the right to
foreclose the property. Thus, we affirm the Court of Appeals Decision to reduce the interest rate to I% per month or
12% per annum.

However, we modify the rates in accordance with the guidelines set forth in Nacar v. Gallery Frames:118

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

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

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

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

And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall not be
disturbed and shall continue to be implemented applying the rate of interest fixed therein. 119

Thus, the interest rate for petitioner's loan should be further reduced to 6% per annum from July 1, 2013 until full
satisfaction.

WHEREFORE, the Petition is DENIED. The Court of Appeals Decision dated October 26, 2011 and its Resolution dated
March 8, 2012 are AFFIRMED. The interest rate for the loan of P600,000.00 is further reduced to 6% per annum from
July 1, 2013 until fully paid.

SO ORDERED.

SPOUSES SALVADOR AND ALMA ABELLA vs. SPOUSES ROMEO AND ANNIE ABELLA [July 8, 2015]

This resolves a Petition for Review on Certiorari under Rule 45 of the Rules of Court praying that judgment be
rendered reversing and setting aside the September 30, 2010 Decision 1 and the January 4, 2011 Resolution2 of the
Court of Appeals Nineteenth Division in CA-G.R. CV No. 01388. The Petition also prays that respondents Spouses
Romeo and Annie Abella be ordered to pay petitioners Spouses Salvador and Alma Abella 2.5% monthly interest plus
the remaining balance of the amount loaned.

The assailed September 30, 2010 Decision of the Court of Appeals reversed and set aside the December 28, 2005
Decision3 of the Regional Trial Court, Branch 8, Kalibo, Aklan in Civil Case No. 6627. It directed petitioners to pay
respondents P148,500.00 (plus interest), which was the amount respondents supposedly overpaid. The assailed
January 4, 2011 Resolution of the Court of Appeals denied petitioners’ Motion for Reconsideration.

The Regional Trial Court’s December 28, 2005 Decision ordered respondents to pay petitioners the supposedly
unpaid loan balance of P300,000.00 plus the allegedly stipulated interest rate of 30% per annum, as well as litigation
expenses and attorney’s fees.4

On July 31, 2002, petitioners Spouses Salvador and Alma Abella filed a Complaint 5 for sum of money and damages
with prayer for preliminary attachment against respondents Spouses Romeo and Annie Abella before the Regional
Trial Court, Branch 8, Kalibo, Aklan. The case was docketed as Civil Case No. 6627. 6

In their Complaint, petitioners alleged that respondents obtained a loan from them in the amount of P500,000.00.
The loan was evidenced by an acknowledgment receipt dated March 22, 1999 and was payable within one (1) year.
Petitioners added that respondents were able to pay a total of P200,000.00— P100,000.00 paid on two separate
occasions—leaving an unpaid balance of P300,000.00. 7

In their Answer8 (with counterclaim and motion to dismiss), respondents alleged that the amount involved did not
pertain to a loan they obtained from petitioners but was part of the capital for a joint venture involving the lending of
money.9

Specifically, respondents claimed that they were approached by petitioners, who proposed that if respondents were
to "undertake the management of whatever money [petitioners] would give them, [petitioners] would get 2.5% a
month with a 2.5% service fee to [respondents]." 10 The 2.5% that each party would be receiving represented their
sharing of the 5% interest that the joint venture was supposedly going to charge against its debtors. Respondents
further alleged that the one year averred by petitioners was not a deadline for payment but the term within which
they were to return the money placed by petitioners should the joint venture prove to be not lucrative. Moreover,
they claimed that the entire amount of P500,000.00 was disposed of in accordance with their agreed terms and
conditions and that petitioners terminated the joint venture, prompting them to collect from the joint venture’s
borrowers. They were, however, able to collect only to the extent of P200,000.00; hence, the P300,000.00 balance
remained unpaid.11

In the Decision12 dated December 28, 2005, the Regional Trial Court ruled in favor of petitioners. It noted that the
terms of the acknowledgment receipt executed by respondents clearly showed that: (a) respondents were indebted
to the extent of P500,000.00; (b) this indebtedness was to be paid within one (1) year; and (c) the indebtedness was
subject to interest. Thus, the trial court concluded that respondents obtained a simple loan, although they later
invested its proceeds in a lending enterprise. 13 The Regional Trial Court adjudged respondents solidarily liable to
petitioners. The dispositive portion of its Decision reads:

WHEREFORE, premises considered, judgment is hereby rendered:

1. Ordering the defendants jointly and severally to pay the plaintiffs the sum of P300,000.00 with interest at
the rate of 30% per annum from the time the complaint was filed on July 31, 2002 until fully paid;

2. Ordering the defendants to pay the plaintiffs the sum of P2,227.50 as reimbursement for litigation
expenses, and another sum of P5,000.00 as attorney’s fees.

For lack of legal basis, plaintiffs’ claim for moral and exemplary damages has to be denied, and for lack of merit the
counter-claim is ordered dismissed.14

In the Order dated March 13, 2006,15 the Regional Trial Court denied respondents’ Motion for Reconsideration.
On respondents’ appeal, the Court of Appeals ruled that while respondents had indeed entered into a simple loan
with petitioners, respondents were no longer liable to pay the outstanding amount of P300,000.00. 16

The Court of Appeals reasoned that the loan could not have earned interest, whether as contractually stipulated
interest or as interest in the concept of actual or compensatory damages. As to the loan’s not having earned
stipulated interest, the Court of Appeals anchored its ruling on Article 1956 of the Civil Code, which requires interest
to be stipulated in writing for it to be due. 17 The Court of Appeals noted that while the acknowledgement receipt
showed that interest was to be charged, no particular interest rate was specified. 18 Thus, at the time respondents
were making interest payments of 2.5% per month, these interest payments were invalid for not being properly
stipulated by the parties. As to the loan’s not having earned interest in the concept of actual or compensatory
damages, the Court of Appeals, citing Eusebio-Calderon v. People,19 noted that interest in the concept of actual or
compensatory damages accrues only from the time that demand (whether judicial or extrajudicial) is made. It
reasoned that since respondents received petitioners’ demand letter only on July 12, 2002, any interest in the
concept of actual or compensatory damages due should be reckoned only from then. Thus, the payments for the
2.5% monthly interest made after the perfection of the loan in 1999 but before the demand was made in 2002 were
invalid.20

Since petitioners’ charging of interest was invalid, the Court of Appeals reasoned that all payments respondents
made by way of interest should be deemed payments for the principal amount of P500,000.00. 21

The Court of Appeals further noted that respondents made a total payment of P648,500.00, which, as against the
principal amount of P500,000.00, entailed an overpayment of P148,500.00. Applying the principle of solutio indebiti,
the Court of Appeals concluded that petitioners were liable to reimburse respondents for the overpaid amount of
P148,500.00.22 The dispositive portion of the assailed Court of Appeals Decision reads:

WHEREFORE, the Decision of the Regional Trial Court is hereby REVERSED and SET ASIDE, and a new one issued,
finding that the Spouses Salvador and Alma Abella are DIRECTED to jointly and severally pay Spouses Romeo and
Annie Abella the amount of P148,500.00, with interest of 6% interest (sic) per annum to be computed upon receipt
of this decision, until full satisfaction thereof. Upon finality of this judgment, an interest as the rate of 12% per
annum, instead of 6%, shall be imposed on the amount due, until full payment thereof. 23

In the Resolution24 dated January 4, 2011, the Court of Appeals denied petitioners’ Motion for Reconsideration.

Aggrieved, petitioners filed the present appeal 25 where they claim that the Court of Appeals erred in completely
striking off interest despite the parties’ written agreement stipulating it, as well as in ordering them to reimburse and
pay interest to respondents.

In support of their contentions, petitioners cite Article 1371 of the Civil Code, 26 which calls for the consideration of
the contracting parties’ contemporaneous and subsequent acts in determining their true intention. Petitioners insist
that respondents’ consistent payment of interest in the year following the perfection of the loan showed that interest
at 2.5% per month was properly agreed upon despite its not having been expressly stated in the acknowledgment
receipt. They add that during the proceedings before the Regional Trial Court, respondents admitted that interest
was due on the loan.27

In their Comment,28 respondents reiterate the Court of Appeals’ findings that no interest rate was ever stipulated by
the parties and that interest was not due and demandable at the time they were making interest payments. 29

In their Reply,30 petitioners argue that even though no interest rate was stipulated in the acknowledgment receipt,
the case fell under the exception to the Parol Evidence Rule. They also argue that there exists convincing and
sufficiently credible evidence to supplement the imperfection of the acknowledgment receipt. 31

For resolution are the following issues:

First, whether interest accrued on respondents’ loan from petitioners. If so, at what rate?
Second, whether petitioners are liable to reimburse respondents for the latter’s supposed excess payments and for
interest.

As noted by the Court of Appeals and the Regional Trial Court, respondents entered into a simple loan or mutuum,
rather than a joint venture, with petitioners.

Respondents’ claims, as articulated in their testimonies before the trial court, cannot prevail over the clear terms of
the document attesting to the relation of the parties. "If the terms of a contract are clear and leave no doubt upon
the intention of the contracting parties, the literal meaning of its stipulations shall control." 32

Articles 1933 and 1953 of the Civil Code provide the guideposts that determine if a contractual relation is one of
simple loan or mutuum:

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

Commodatum is essentially gratuitous.

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

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

....

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

On March 22, 1999, respondents executed an acknowledgment receipt to petitioners, which states:

Batan, Aklan

March 22, 1999

This is to acknowledge receipt of the Amount of Five Hundred Thousand (P500,000.00) Pesos from Mrs. Alma R.
Abella, payable within one (1) year from date hereof with interest.

Annie C. Abella (sgd.) Romeo M. Abella (sgd.) 33 (Emphasis supplied)

The text of the acknowledgment receipt is uncomplicated and straightforward. It attests to: first, respondents’ receipt
of the sum of P500,000.00 from petitioner Alma Abella; second, respondents’ duty to pay back this amount within
one (1) year from March 22, 1999; and third, respondents’ duty to pay interest. Consistent with what typifies a
simple loan, petitioners delivered to respondents with the corresponding condition that respondents shall pay the
same amount to petitioners within one (1) year.

II

Although we have settled the nature of the contractual relation between petitioners and respondents, controversy
persists over respondents’ duty to pay conventional interest, i.e., interest as the cost of borrowing money. 34

Article 1956 of the Civil Code spells out the basic rule that "[n]o interest shall be due unless it has been expressly
stipulated in writing."
On the matter of interest, the text of the acknowledgment receipt is simple, plain, and unequivocal. It attests to the
contracting parties’ intent to subject to interest the loan extended by petitioners to respondents. The controversy,
however, stems from the acknowledgment receipt’s failure to state the exact rate of interest.

Jurisprudence is clear about the applicable interest rate if a written instrument fails to specify a rate. In Spouses
Toring v. Spouses Olan,35 this court clarified the effect of Article 1956 of the Civil Code and noted that the legal rate of
interest (then at 12%) is to apply: "In a loan or forbearance of money, according to the Civil Code, the interest due
should be that stipulated in writing, and in the absence thereof, the rate shall be 12% per annum."36

Spouses Toring cites and restates (practically verbatim) what this court settled in Security Bank and Trust Company v.
Regional Trial Court of Makati, Branch 61: "In a loan or forbearance of money, the interest due should be that
stipulated in writing, and in the absence thereof, the rate shall be 12% per annum."37

Security Bank also refers to Eastern Shipping Lines, Inc. v. Court of Appeals, which, in turn, stated:38

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. 39 (Emphasis supplied)

The rule is not only definite; it is cast in mandatory language. From Eastern Shipping to Security Bank to Spouses
Toring, jurisprudence has repeatedly used the word "shall," a term that has long been settled to denote something
imperative or operating to impose a duty.40 Thus, the rule leaves no room for alternatives or otherwise does not
allow for discretion. It requires the application of the legal rate of interest.

Our intervening Decision in Nacar v. Gallery Frames41 recognized that the legal rate of interest has been reduced to
6% per annum:

Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796 dated May 16,
2013, approved the amendment of Section 2 of Circular No. 905, Series of 1982 and, accordingly, issued Circular No.
799, Series of 2013, effective July 1, 2013, the pertinent portion of which reads:

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.

Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that would govern the
parties, the rate of legal interest for loans or forbearance of any money, goods or credits and the rate allowed in
judgments shall no longer be twelve percent (12%) per annum — as reflected in the case of Eastern Shipping Lines
and 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, before its amendment by BSP-MB Circular No. 799 — but
will now be six percent (6%) per annum effective July 1, 2013. It should be noted, nonetheless, that the new rate
could only be applied prospectively and not retroactively. Consequently, the twelve percent (12%) per annum legal
interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of six percent (6%) per annum shall be
the prevailing rate of interest when applicable. 42 (Emphasis supplied, citations omitted)
Nevertheless, both Bangko Sentral ng Pilipinas Circular No. 799, Series of 2013 and Nacar retain the definite and
mandatory framing of the rule articulated in Eastern Shipping, Security Bank, and Spouses Toring. Nacar even
restates Eastern Shipping:

To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Lines are accordingly
modified to embody BSP-MB Circular No. 799, as follows:

....

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 6% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code. 43 (Emphasis supplied, citations omitted)

Thus, it remains that where interest was stipulated in writing by the debtor and creditor in a simple loan or mutuum,
but no exact interest rate was mentioned, the legal rate of interest shall apply. At present, this is 6% per annum,
subject to Nacar’s qualification on prospective application.

Applying this, the loan obtained by respondents from petitioners is deemed subjected to conventional interest at the
rate of 12% per annum, the legal rate of interest at the time the parties executed their agreement. Moreover, should
conventional interest still be due as of July 1, 2013, the rate of 12% per annum shall persist as the rate
of conventional interest.

This is so because interest in this respect is used as a surrogate for the parties’ intent, as expressed as of the time of
the execution of their contract. In this sense, the legal rate of interest is an affirmation of the contracting parties’
intent; that is, by their contract’s silence on a specific rate, the then prevailing legal rate of interest shall be the cost
of borrowing money. This rate, which by their contract the parties have settled on, is deemed to persist regardless of
shifts in the legal rate of interest. Stated otherwise, the legal rate of interest, when applied as conventional interest,
shall always be the legal rate at the time the agreement was executed and shall not be susceptible to shifts in rate.

Petitioners, however, insist on conventional interest at the rate of 2.5% per month or 30% per annum. They argue
that the acknowledgment receipt fails to show the complete and accurate intention of the contracting parties. They
rely on Article 1371 of the Civil Code, which provides that the contemporaneous and subsequent acts of the
contracting parties shall be considered should there be a need to ascertain their intent. 44 In addition, they claim that
this case falls under the exceptions to the Parol Evidence Rule, as spelled out in Rule 130, Section 9 of the Revised
Rules on Evidence.45

It is a basic precept in legal interpretation and construction that a rule or provision that treats a subject with
specificity prevails over a rule or provision that treats a subject in general terms. 46

The rule spelled out in Security Bank and Spouses Toring is anchored on Article 1956 of the Civil Code and specifically
governs simple loans or mutuum. Mutuum is a type of nominate contract that is specifically recognized by the Civil
Code and for which the Civil Code provides a specific set of governing rules: Articles 1953 to 1961. In contrast, Article
1371 is among the Civil Code provisions generally dealing with contracts. As this case particularly involves a simple
loan, the specific rule spelled out in Security Bank and Spouses Toring finds preferential application as against Article
1371.

Contrary to petitioners’ assertions, there is no room for entertaining extraneous (or parol) evidence. In Spouses
Bonifacio and Lucia Paras v. Kimwa Construction and Development Corporation,47 we spelled out the requisites for
the admission of parol evidence:

In sum, two (2) things must be established for parol evidence to be admitted: first, that the existence of any of the
four (4) exceptions has been put in issue in a party’s pleading or has not been objected to by the adverse party; and
second, that the parol evidence sought to be presented serves to form the basis of the conclusion proposed by the
presenting party.48
The issue of admitting parol evidence is a matter that is proper to the trial, not the appellate, stage of a case.
Petitioners raised the issue of applying the exceptions to the Parol Evidence Rule only in the Reply they filed before
this court. This is the last pleading that either of the parties has filed in the entire string of proceedings culminating in
this Decision. It is, therefore, too late for petitioners to harp on this rule. In any case, what is at issue is not admission
of evidence per se, but the appreciation given to the evidence adduced by the parties. In the Petition they filed
before this court, petitioners themselves acknowledged that checks supposedly attesting to payment of monthly
interest at the rate of 2.5% were admitted by the trial court (and marked as Exhibits "2," "3," "4," "5," "6," "7," and
"8").49 What petitioners have an issue with is not the admission of these pieces of evidence but how these have not
been appreciated in a manner consistent with the conclusions they advance.

Even if it can be shown that the parties have agreed to monthly interest at the rate of 2.5%, this is unconscionable. As
emphasized in Castro v. Tan,50 the willingness of the parties to enter into a relation involving an unconscionable
interest rate is inconsequential to the validity of the stipulated rate:

The 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. It has no support in law, in principles of justice, or in the human conscience nor is there
any reason whatsoever which may justify such imposition as righteous and as one that may be sustained within the
sphere of public or private morals. 51

The imposition of an unconscionable interest rate is void ab initio for being "contrary to morals, and the law." 52

In determining whether the rate of interest is unconscionable, the mechanical application of pre-established floors
would be wanting. The lowest rates that have previously been considered unconscionable need not be an
impenetrable minimum. What is more crucial is a consideration of the parties’ contexts. Moreover, interest rates
must be appreciated in light of the fundamental nature of interest as compensation to the creditor for money lent to
another, which he or she could otherwise have used for his or her own purposes at the time it was lent. It is not the
default vehicle for predatory gain. As such, interest need only be reasonable. It ought not be a supine mechanism for
the creditor’s unjust enrichment at the expense of another.

Petitioners here insist upon the imposition of 2.5% monthly or 30% annual interest. Compounded at this rate,
respondents’ obligation would have more than doubled—increased to 219.7% of the principal—by the end of the
third year after which the loan was contracted if the entire principal remained unpaid. By the end of the ninth year, it
would have multiplied more than tenfold (or increased to 1,060.45%). In 2015, this would have multiplied by more
than 66 times (or increased to 6,654.17%). Thus, from an initial loan of only P500,000.00, respondents would be
obliged to pay more than P33 million. This is grossly unfair, especially since up to the fourth year from when the loan
was obtained, respondents had been assiduously delivering payment. This reduces their best efforts to satisfy their
obligation into a protracted servicing of a rapacious loan.

The legal rate of interest is the presumptive reasonable compensation for borrowed money. While parties are free to
deviate from this, any deviation must be reasonable and fair. Any deviation that is far-removed is suspect. Thus, in
cases where stipulated interest is more than twice the prevailing legal rate of interest, it is for the creditor to prove
that this rate is required by prevailing market conditions. Here, petitioners have articulated no such justification.

In sum, Article 1956 of the Civil Code, read in light of established jurisprudence, prevents the application of any
interest rate other than that specifically provided for by the parties in their loan document or, in lieu of it, the legal
rate. Here, as the contracting parties failed to make a specific stipulation, the legal rate must apply. Moreover, the
rate that petitioners adverted to is unconscionable. The conventional interest due on the principal amount loaned by
respondents from petitioners is held to be 12% per annum.

III

Apart from respondents’ liability for conventional interest at the rate of 12% per annum, outstanding conventional
interest—if any is due from respondents—shall itself earn legal interest from the time judicial demand was made by
petitioners, i.e., on July 31, 2002, when they filed their Complaint. This is consistent with Article 2212 of the Civil
Code, which provides:
Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may
be silent upon this point.

So, too, Nacar states that "the interest due shall itself earn legal interest from the time it is judicially demanded." 53

Consistent with Nacar, as well as with our ruling in Rivera v. Spouses Chua,54 the interest due on conventional interest
shall be at the rate of 12% per annum from July 31, 2002 to June 30, 2013. Thereafter, or starting July 1, 2013, this
shall be at the rate of 6% per annum.

IV

Proceeding from these premises, we find that respondents made an overpayment in the amount of P3,379.17.

As acknowledged by petitioner Salvador Abella, respondents paid a total of P200,000.00, which was charged against
the principal amount of P500,000.00. The first payment of P100,000.00 was made on June 30, 2001, 55 while the
second payment of P100,000.00 was made on December 30, 2001. 56

The Court of Appeals’ September 30, 2010 Decision stated that respondents paid P6,000.00 in March 1999. 57

The Pre-Trial Order dated December 2, 2002,58 stated that the parties admitted that "from the time the principal
sum of P500,000.00 was borrowed from [petitioners], [respondents] ha[d] been religiously paying" 59 what was
supposedly interest "at the rate of 2.5% per month." 60

From March 22, 1999 (after the loan was perfected) to June 22, 2001 (before respondents’ payment of P100,000.00
on June 30, 2001, which was deducted from the principal amount of P500,000.00), the 2.5% monthly "interest" was
pegged to the principal amount of P500,000.00. These monthly interests, thus, amounted to P12,500.00 per month.
Considering that the period from March 1999 to June 2001 spanned twenty seven (27) months, respondents paid a
total of P337,500.00.61

From June 22, 2001 up to December 22, 2001 (before respondents’ payment of another P100,000.00 on December
30, 2001, which was deducted from the remaining principal amount of P400,000.00), the 2.5% monthly "interest"
was pegged to the remaining principal amount of P400,000.00. These monthly interests, thus, amounted to
P10,000.00 per month. Considering that this period spanned six (6) months, respondents paid a total of P60,000.00. 62

From after December 22, 2001 up to June 2002 (when petitioners filed their Complaint), the 2.5% monthly "interest"
was pegged to the remaining principal amount of P300,000.00. These monthly interests, thus, amounted to
P7,500.00 per month. Considering that this period spanned six (6) months, respondents paid a total of P45,000.00. 63

Applying these facts and the properly applicable interest rate (for conventional interest, 12% per annum; for interest
on conventional interest, 12% per annum from July 31, 2002 up to June 30, 2013 and 6% per annum henceforth), the
following conclusions may be drawn:

By the end of the first year following the perfection of the loan, or as of March 21, 2000, P560,000.00 was due from
respondents. This consisted of the principal of P500,000.00 and conventional interest of P60,000.00.

Within this first year, respondents made twelve (12) monthly payments totalling P150,000.00 (P12,500.00 each from
April 1999 to March 2000). This was in addition to their initial payment of P6,000.00 in March 1999.

Application of payments must be in accordance with Article 1253 of the Civil Code, which reads:

Art. 1253. If the debt produces interest, payment of the principal shall not be deemed to have been made until the
interests have been covered.

Thus, the payments respondents made must first be reckoned as interest payments. Thereafter, any excess payments
shall be charged against the principal. As respondents paid a total of P156,000.00 within the first year, the
conventional interest of P60,000.00 must be deemed fully paid and the remaining amount that respondents paid
(i.e., P96,000.00) is to be charged against the principal. This yields a balance of P404,000.00. By the end of the
second year following the perfection of the loan, or as of March 21, 2001, P452,480.00 was due from respondents.
This consisted of the outstanding principal of P404,000.00 and conventional interest of P48,480.00.

Within this second year, respondents completed another round of twelve (12) monthly payments totaling
P150,000.00.

Consistent with Article 1253 of the Civil Code, as respondents paid a total of P156,000.00 within the second year, the
conventional interest of P48,480.00 must be deemed fully paid and the remaining amount that respondents paid
(i.e., P101,520.00) is to be charged against the principal. This yields a balance of P302,480.00.

By the end of the third year following the perfection of the loan, or as of March 21, 2002, P338,777.60 was due from
respondents. This consists of the outstanding principal of P302,480.00 and conventional interest of P36,297.60.

Within this third year, respondents paid a total of P320,000.00, as follows:

(a) Between March 22, 2001 and June 30, 2001, respondents completed three (3) monthly payments of
P12,500.00 each, totaling P37,500.00.

(b) On June 30, 2001, respondents paid P100,000.00, which was charged as principal payment.

(c) Between June 30, 2001 and December 30, 2001, respondents delivered monthly payments of P10,000.00
each. At this point, the monthly payments no longer amounted to P12,500.00 each because the supposed
monthly interest payments were pegged to the supposedly remaining principal of P400,000.00. Thus, during
this period, they paid a total of six (6) monthly payments totaling P60,000.00.

(d) On December 30, 2001, respondents paid P100,000.00, which, like the June 30, 2001 payment, was
charged against the principal.

(e) From the end of December 2002 to the end of February 2002, respondents delivered monthly payments
of P7,500.00 each. At this point, the supposed monthly interest payments were now pegged to the
supposedly remaining principal of P300,000.00. Thus, during this period, they delivered three (3) monthly
payments totaling P22,500.00.

Consistent with Article 1253 of the Civil Code, as respondents paid a total of P320,000.00 within the third year, the
conventional interest of P36,927.50 must be deemed fully paid and the remaining amount that respondents paid
(i.e., P283,702.40) is to be charged against the principal. This yields a balance of P18,777.60.

By the end of the fourth year following the perfection of the loan, or as of March 21, 2003, P21,203.51 would have
been due from respondents. This consists of: (a) the outstanding principal of P18,777.60, (b) conventional interest of
P2,253.31, and (c) interest due on conventional interest starting from July 31, 2002, the date of judicial demand, in
the amount of P172.60. The last (i.e., interest on interest) must be pro-rated. There were only 233 days from July 31,
2002 (the date of judicial demand) to March 21, 2003 (the end of the fourth year); this left 63.83% of the fourth year,
within which interest on interest might have accrued. Thus, the full annual interest on interest of 12% per annum
could not have been completed, and only the proportional amount of 7.66% per annum may be properly imposed for
the remainder of the fourth year.

From the end of March 2002 to June 2002, respondents delivered three (3) more monthly payments of P7,500.00
each. Thus, during this period, they delivered three (3) monthly payments totalling P22,500.00.

At this rate, however, payment would have been completed by respondents even before the end of the fourth
year. Thus, for precision, it is more appropriate to reckon the amounts due as against payments made on a
monthly, rather than an annual, basis.

By April 21, 2002, _18,965.38 (i.e., remaining principal of P18,777.60 plus pro-rated monthly conventional interest at
1%, amounting to P187.78) would have been due from respondents. Deducting the monthly payment of P7,500.00
for the preceding month in a manner consistent with Article 1253 of the Civil Code would yield a balance of
P11,465.38.

By May 21, 2002, _11,580.03 (i.e., remaining principal of P11,465.38 plus pro-rated monthly conventional interest at
1%, amounting to P114.65) would have been due from respondents. Deducting the monthly payment of P7,500.00
for the preceding month in a manner consistent with Article 1253 of the Civil Code would yield a balance of
P4,080.03.

By June 21, 2002, P4,120.83 (i.e., remaining principal of P4,080.03 plus pro-rated monthly conventional interest at
1%, amounting to P40.80) would have been due from respondents. Deducting the monthly payment of P7,500.00 for
the preceding month in a manner consistent with Article 1253 of the Civil Code would yield a negative balance of
P3,379.17.

Thus, by June 21, 2002, respondents had not only fully paid the principal and all the conventional interest that had
accrued on their loan. By this date, they also overpaid P3,379.17. Moreover, while hypothetically, interest on
conventional interest would not have run from July 31, 2002, no such interest accrued since there was no longer any
conventional interest due from respondents by then.

As respondents made an overpayment, the principle of solutio indebiti as provided by Article 2154 of the Civil
Code64 applies. Article 2154 reads:

Article 2154. If something is received when there is no right to demand it, and it was unduly delivered through
mistake, the obligation to return it arises.

In Moreno-Lentfer v. Wolff,65 this court explained the application of solutio indebiti:

The quasi-contract of solutio indebiti harks back to the ancient principle that no one shall enrich himself unjustly at
the expense of another. It applies where (1) a payment is made when there exists no binding relation between the
payor, who has no duty to pay, and the person who received the payment, and (2) the payment is made through
mistake, and not through liberality or some other cause. 66

As respondents had already fully paid the principal and all conventional interest that had accrued, they were no
longer obliged to make further payments.1awp++i1 Any further payment they made was only because of a mistaken
impression that they were still due. Accordingly, petitioners are now bound by a quasi-contractual obligation to
return any and all excess payments delivered by respondents.

Nacar provides that "[w]hen 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."67This applies to obligations arising from quasi-contracts such as solutio indebiti.

Further, Article 2159 of the Civil Code provides:

Art. 2159. Whoever in bad faith accepts an undue payment, shall pay legal interest if a sum of money is involved, or
shall be liable for fruits received or which should have been received if the thing produces fruits.

He shall furthermore be answerable for any loss or impairment of the thing from any cause, and for damages to the
person who delivered the thing, until it is recovered.

Consistent however, with our finding that the excess payment made by respondents were borne out of a mere
mistake that it was due, we find it in the better interest of equity to no longer hold petitioners liable for interest
arising from their quasi-contractual obligation.

Nevertheless, Nacar also provides:

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. 68

Thus, interest at the rate of 6% per annum may be properly imposed on the total judgment award. This shall be
reckoned from the finality of this Decision until its full satisfaction.

WHEREFORE, the assailed September 30, 2010 Decision and the January 4, 2011 Resolution of the Court of Appeals
Nineteenth Division in CA-G.R. CV No. 01388 are SET ASIDE. Petitioners Spouses Salvador and Alma Abella
are DIRECTED to jointly and severally reimburse respondents Spouses Romeo and Annie Abella the amount of
P3,379.17, which respondents have overpaid.

A legal interest of 6% per annum shall likewise be imposed on the total judgment award from the finality of this
Decision until its full satisfaction.

SO ORDERED.

SPOUSES IGNACIO and ALICE JUICO vs. CHINA BANKING CORPORATION [April 10, 2013]

Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended,
assailing the February 20, 2009 Decision 1 and April 27, 2009 Resolution2 of the Court of Appeals (CA) in CA G.R. CV
No. 80338. The CA affirmed the April 14, 2003 Decision 3 of the Regional Trial Court (RTC) of Makati City, Branch 147.

The factual antecedents:

Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a loan from China Banking Corporation (respondent)
as evidenced by two Promissory Notes both dated October 6, 1998 and numbered 507-001051-3 4 and 507-001052-
0,5 for the sums of !!6,216,000 and ₱4, 139,000, respectively. The loan was secured by a Real Estate Mortgage (REM)
over petitioners’ property located at 49 Greensville St., White Plains, Quezon City covered by Transfer Certificate of
Title (TCT) No. RT-103568 (167394) PR-41208 6 of the Register of Deeds of Quezon City.

When petitioners failed to pay the monthly amortizations due, respondent demanded the full payment of the
outstanding balance with accrued monthly interests. On September 5, 2000, petitioners received respondent’s last
demand letter7 dated August 29, 2000.

As of February 23, 2001, the amount due on the two promissory notes totaled ₱19,201,776.63 representing the
principal, interests, penalties and attorney’s fees. On the same day, the mortgaged property was sold at public
auction, with respondent as highest bidder for the amount of ₱10,300,000.

On May 8, 2001, petitioners received 8 a demand letter9 dated May 2, 2001 from respondent for the payment of
₱8,901,776.63, the amount of deficiency after applying the proceeds of the foreclosure sale to the mortgage debt. As
its demand remained unheeded, respondent filed a collection suit in the trial court. In its Complaint, 10 respondent
prayed that judgment be rendered ordering the petitioners to pay jointly and severally: (1) ₱8,901,776.63
representing the amount of deficiency, plus interests at the legal rate, from February 23, 2001 until fully paid; (2) an
additional amount equivalent to 1/10 of 1% per day of the total amount, until fully paid, as penalty; (3) an amount
equivalent to 10% of the foregoing amounts as attorney’s fees; and (4) expenses of litigation and costs of suit.

In their Answer,11 petitioners admitted the existence of the debt but interposed, by way of special and affirmative
defense, that the complaint states no cause of action considering that the principal of the loan was already paid
when the mortgaged property was extrajudicially foreclosed and sold for ₱10,300,000. Petitioners contended that
should they be held liable for any deficiency, it should be only for ₱55,000 representing the difference between the
total outstanding obligation of ₱10,355,000 and the bid price of ₱10,300,000. Petitioners also argued that even
assuming there is a cause of action, such deficiency cannot be enforced by respondent because it consists only of the
penalty and/or compounded interest on the accrued interest which is generally not favored under the Civil Code. By
way of counterclaim, petitioners prayed that respondent be ordered to pay ₱100,000 in attorney’s fees and costs of
suit.

At the trial, respondent presented Ms. Annabelle Cokai Yu, its Senior Loans Assistant, as witness. She testified that
she handled the account of petitioners and assisted them in processing their loan application. She called them
monthly to inform them of the prevailing rates to be used in computing interest due on their loan. As of the date of
the public auction, petitioners’ outstanding balance was ₱19,201,776.63 12 based on the following statement of
account which she prepared:

STATEMENT OF ACCOUNT
As of FEBRUARY 23, 2001
IGNACIO F. JUICO

PN# 507-0010520 due on 04-07-2004

1âwphi1

Principal balance of PN# 5070010520. . . . . . . . . . . . . . 4,139,000.00

Interest on ₱4,139,000.00 fr. 04-Nov-99

04-Nov-2000 366 days @ 15.00%. . . . . . . . . . . . . . . . . 622,550.96

Interest on ₱4,139,000.00 fr. 04-Nov-2000

04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . . 83,346.99

Interest on ₱4,139,000.00 fr. 04-Dec-2000

 04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . . 75,579.27

Interest on ₱4,139,000.00 fr. 04-Jan-2001

04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . . 68,548.64

Interest on ₱4,139,000.00 fr. 04-Feb-2001

23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . . 38,781.86

Penalty charge @ 1/10 of 1% of the total amount due
(₱4,139,000.00 from 11-04-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . . 1,974,303.00

Sub-total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,002,110.73
PN# 507-0010513 due on 04-07-2004
Principal balance of PN# 5070010513. . . . . . . . . . . . . . 6,216,000.00
Interest on ₱6,216,000.00 fr. 06-Oct-99
04-Nov-2000 395 days @ 15.00%. . . . . . . . . . . . . . . . . 1,009,035.62
Interest on ₱6,216,000.00 fr. 04-Nov-2000
04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . . 125,171.51
Interest on ₱6,216,000.00 fr. 04-Dec-2000
04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . . 113,505.86
Interest on ₱6,216,000.00 fr. 04-Jan-2001
04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . . 102,947.18
Interest on ₱6,216,000.00 fr. 04-Feb-2001
23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . . 58,243.07
Penalty charge @ 1/10 of 1% of the total amount due
(₱6,216,000.00 from 10-06-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . . 3,145,296.00

Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,770,199.23

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,772,309.96

Less: A/P applied to balance of principal (55,000.00)

Less: Accounts payable L & D (261,149.39) 17,456,160.57

Add: 10% Attorney’s Fee 1,745,616.06

Total amount due 19,201,776.63

Less: Bid Price 10,300,000.00

TOTAL DEFICIENCY AMOUNT AS OF
13
FEB. 23, 2001 8,901,776.63

Petitioners thereafter received a demand letter 14 dated May 2, 2001 from respondent’s counsel for the deficiency
amount of ₱8,901,776.63. Ms. Yu further testified that based on the Statement of Account 15 dated March 15, 2002
which she prepared, the outstanding balance of petitioners was ₱15,190,961.48. 16
On cross-examination, Ms. Yu reiterated that the interest rate changes every month based on the prevailing market
rate and she notified petitioners of the prevailing rate by calling them monthly before their account becomes past
due. When asked if there was any written authority from petitioners for respondent to increase the interest rate
unilaterally, she answered that petitioners signed a promissory note indicating that they agreed to pay interest at the
prevailing rate.17

Petitioner Ignacio F. Juico testified that prior to the release of the loan, he was required to sign a blank promissory
note and was informed that the interest rate on the loan will be based on prevailing market rates. Every month,
respondent informs him by telephone of the prevailing interest rate. At first, he was able to pay his monthly
amortizations but when he started to incur delay in his payments due to the financial crisis, respondent pressured
him to pay in full, including charges and interests for the delay. His property was eventually foreclosed and was sold
at public auction.18

On cross-examination, petitioner testified that he is a Doctor of Medicine and also engaged in the business of
distributing medical supplies. He admitted having read the promissory notes and that he is aware of his obligation
under them before he signed the same. 19

In its decision, the RTC ruled in favor of respondent. The fallo of the RTC decision reads:

WHEREFORE, premises considered, the Complaint is hereby sustained, and Judgment is rendered ordering herein
defendants to pay jointly and severally to plaintiff, the following:

1. ₱8,901,776.63 representing the amount of the deficiency owing to the plaintiff, plus interest thereon at
the legal rate after February 23, 2001;

2. An amount equivalent to 10% of the total amount due as and for attorney’s fees, there being stipulation
therefor in the promissory notes;

3. Costs of suit.

SO ORDERED.20

The trial court agreed with respondent that when the mortgaged property was sold at public auction on February 23,
2001 for ₱10,300,000 there remained a balance of ₱8,901,776.63 since before foreclosure, the total amount due on
the two promissory notes aggregated to ₱19,201,776.63 inclusive of principal, interests, penalties and attorney’s
fees. It ruled that the amount realized at the auction sale was applied to the interest, conformably with Article 1253
of the Civil Code which provides that if the debt produces interest, payment of the principal shall not be deemed to
have been made until the interests have been covered. This being the case, petitioners’ principal obligation subsists
but at a reduced amount of ₱8,901,776.63.

The trial court further held that Ignacio’s claim that he signed the promissory notes in blank cannot negate or
mitigate his liability since he admitted reading the promissory notes before signing them. It also ruled that
considering the substantial amount involved, it is unbelievable that petitioners threw all caution to the wind and
simply signed the documents without reading and understanding the contents thereof. It noted that the promissory
notes, including the terms and conditions, are pro forma and what appears to have been left in blank were the
promissory note number, date of the instrument, due date, amount of loan, and condition that interest will be at the
prevailing rates. All of these details, the trial court added, were within the knowledge of the petitioners.

When the case was elevated to the CA, the latter affirmed the trial court’s decision. The CA recognized respondent’s
right to claim the deficiency from the debtor where the proceeds of the sale in an extrajudicial foreclosure of
mortgage are insufficient to cover the amount of the debt. Also, it found as valid the stipulation in the promissory
notes that interest will be based on the prevailing rate. It noted that the parties agreed on the interest rate which
was not unilaterally imposed by the bank but was the rate offered daily by all commercial banks as approved by the
Monetary Board. Having signed the promissory notes, the CA ruled that petitioners are bound by the stipulations
contained therein.
Petitioners are now before this Court raising the sole issue of whether the interest rates imposed upon them by
respondent are valid. Petitioners contend that the interest rates imposed by respondent are not valid as they were
not by virtue of any law or Bangko Sentral ng Pilipinas (BSP) regulation or any regulation that was passed by an
appropriate government entity. They insist that the interest rates were unilaterally imposed by the bank and thus
violate the principle of mutuality of contracts. They argue that the escalation clause in the promissory notes does not
give respondent the unbridled authority to increase the interest rate unilaterally. Any change must be mutually
agreed upon.

Respondent, for its part, points out that petitioners failed to show that their case falls under any of the exceptions
wherein findings of fact of the CA may be reviewed by this Court. It contends that an inquiry as to whether the
interest rates imposed on the loans of petitioners were supported by appropriate regulations from a government
agency or the Central Bank requires a reevaluation of the evidence on records. Thus, the Court would in effect, be
confronted with a factual and not a legal issue.

The appeal is partly meritorious.

The principle of mutuality of contracts is expressed in Article 1308 of the Civil Code, which provides:

Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of
one of them. Article 1956 of the Civil Code likewise ordains that "no interest shall be due unless it has been expressly
stipulated in writing."

The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that any
obligation arising from contract has the force of law between the parties; and (2) that there must be mutuality
between the parties based on their essential equality. Any contract which appears to be heavily weighed in favor of
one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or
compliance of the contract which is left solely to the will of one of the parties, is likewise, invalid. 21

Escalation clauses refer to stipulations allowing an increase in the interest rate agreed upon by the contracting
parties. This Court has long recognized that there is nothing inherently wrong with escalation clauses which are valid
stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term
contracts.22 Hence, such stipulations are not void per se.23

Nevertheless, an escalation clause "which grants the creditor an unbridled right to adjust the interest independently
and upwardly, completely depriving the debtor of the right to assent to an important modification in the agreement"
is void. A stipulation of such nature violates the principle of mutuality of contracts. 24 Thus, this Court has previously
nullified the unilateral determination and imposition by creditor banks of increases in the rate of interest provided in
loan contracts.25

In Banco Filipino Savings & Mortgage Bank v. Navarro, 26 the escalation clause stated: "I/We hereby authorize Banco
Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in
the event a law should be enacted increasing the lawful rates of interest that may be charged on this particular kind
of loan." While escalation clauses in general are considered valid, we ruled that Banco Filipino may not increase the
interest on respondent borrower’s loan, pursuant to Circular No. 494 issued by the Monetary Board on January 2,
1976, because said circular is not a law although it has the force and effect of law and the escalation clause has no
provision for reduction of the stipulated interest "in the event that the applicable maximum rate of interest is
reduced by law or by the Monetary Board" (de-escalation clause).

Subsequently, in Insular Bank of Asia and America v. Spouses Salazar 27 we reiterated that escalation clauses are valid
stipulations but their enforceability are subject to certain conditions. The increase of interest rate from 19% to 21%
per annum made by petitioner bank was disallowed because it did not comply with the guidelines adopted by the
Monetary Board to govern interest rate adjustments by banks and non-banks performing quasi-banking functions.

In the 1991 case of Philippine National Bank v. Court of Appeals, 28 the promissory notes authorized PNB to increase
the stipulated interest per annum "within the limits allowed by law at any time depending on whatever policy PNB
may adopt in the future; Provided, that, the interest rate on this note shall be correspondingly decreased in the event
that the applicable maximum interest rate is reduced by law or by the Monetary Board." This Court declared the
increases (from 18% to 32%, then to 41% and then to 48%) unilaterally imposed by PNB to be in violation of the
principle of mutuality essential in contracts. 29

A similar ruling was made in a 1994 case 30 also involving PNB where the credit agreement provided that "PNB
reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever
policy it may adopt in the future: Provided, that the interest rate on this accommodation shall be correspondingly
decreased in the event that the applicable maximum interest is reduced by law or by the Monetary Board x x x".

Again, in 1996, the Court invalidated escalation clauses authorizing PNB to raise the stipulated interest rate at any
time without notice, within the limits allowed by law. The Court observed that there was no attempt made by PNB to
secure the conformity of respondent borrower to the successive increases in the interest rate. The borrower’s assent
to the increases cannot be implied from their lack of response to the letters sent by PNB, informing them of the
increases.31

In the more recent case of Philippine Savings Bank v. Castillo, 32 we sustained the CA in declaring as unreasonable the
following escalation clause: "The rate of interest and/or bank charges herein stipulated, during the terms of this
promissory note, its extensions, renewals or other modifications, may be increased, decreased or otherwise changed
from time to time within the rate of interest and charges allowed under present or future law(s) and/or government
regulation(s) as the PSBank may prescribe for its debtors." Clearly, the increase or decrease of interest rates under
such clause hinges solely on the discretion of petitioner as it does not require the conformity of the maker before a
new interest rate could be enforced. We also said that respondents’ assent to the modifications in the interest rates
cannot be implied from their lack of response to the memos sent by petitioner, informing them of the amendments,
nor from the letters requesting for reduction of the rates. Thus:

… the validity of the escalation clause did not give petitioner the unbridled right to unilaterally adjust interest rates.
The adjustment should have still been subjected to the mutual agreement of the contracting parties. In light of the
absence of consent on the part of respondents to the modifications in the interest rates, the adjusted rates cannot
bind them notwithstanding the inclusion of a de-escalation clause in the loan agreement. 33

It is now settled that an escalation clause is void where the creditor unilaterally determines and imposes an increase
in the stipulated rate of interest without the express conformity of the debtor. Such unbridled right given to creditors
to adjust the interest independently and upwardly would completely take away from the debtors the right to assent
to an important modification in their agreement and would also negate the element of mutuality in their
contracts.34While a ceiling on interest rates under the Usury Law was already lifted under Central Bank Circular No.
905, nothing therein "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." 35

The two promissory notes signed by petitioners provide:

I/We hereby authorize the CHINA BANKING CORPORATION to increase or decrease as the case may be, the interest
rate/service charge presently stipulated in this note without any advance notice to me/us in the event a law or
Central Bank regulation is passed or promulgated by the Central Bank of the Philippines or appropriate government
entities, increasing or decreasing such interest rate or service charge. 36

Such escalation clause is similar to that involved in the case of Floirendo, Jr. v. Metropolitan Bank and Trust
Company37 where this Court ruled:

The provision in the promissory note authorizing respondent bank to increase, decrease or otherwise change from
time to time the rate of interest and/or bank charges "without advance notice" to petitioner, "in the event of change
in the interest rate prescribed by law or the Monetary Board of the Central Bank of the Philippines," does not give
respondent bank unrestrained freedom to charge any rate other than that which was agreed upon. Here, the
monthly upward/downward adjustment of interest rate is left to the will of respondent bank alone. It violates the
essence of mutuality of the contract. 38
More recently in Solidbank Corporation v. Permanent Homes, Incorporated, 39 we upheld as valid an escalation clause
which required a written notice to and conformity by the borrower to the increased interest rate. Thus:

The Usury Law had been rendered legally ineffective by Resolution No. 224 dated 3 December 1982 of the Monetary
Board of the Central Bank, and later by Central Bank Circular No. 905 which took effect on 1 January 1983. These
circulars removed the ceiling on interest rates for secured and unsecured loans regardless of maturity. The effect of
these circulars is to allow the parties to agree on any interest that may be charged on a loan. The virtual repeal of the
Usury Law is within the range of judicial notice which courts are bound to take into account. Although interest rates
are no longer subject to a ceiling, the lender still does not have an unbridled license to impose increased interest
rates. The lender and the borrower should agree on the imposed rate, and such imposed rate should be in writing.

The three promissory notes between Solidbank and Permanent all contain the following provisions:

"5. We/I irrevocably authorize Solidbank to increase or decrease at any time the interest rate agreed in this Note or
Loan on the basis of, among others, prevailing rates in the local or international capital markets. For this purpose,
We/I authorize Solidbank to debit any deposit or placement account with Solidbank belonging to any one of us. The
adjustment of the interest rate shall be effective from the date indicated in the written notice sent to us by the bank,
or if no date is indicated, from the time the notice was sent.

6. Should We/I disagree to the interest rate adjustment, We/I shall prepay all amounts due under this Note or Loan
within thirty (30) days from the receipt by anyone of us of the written notice. Otherwise, We/I shall be deemed to
have given our consent to the interest rate adjustment."

The stipulations on interest rate repricing are valid because (1) the parties mutually agreed on said stipulations; (2)
repricing takes effect only upon Solidbank’s written notice to Permanent of the new interest rate; and (3) Permanent
has the option to prepay its loan if Permanent and Solidbank do not agree on the new interest rate. The phrases
"irrevocably authorize," "at any time" and "adjustment of the interest rate shall be effective from the date indicated
in the written notice sent to us by the bank, or if no date is indicated, from the time the notice was sent," emphasize
that Permanent should receive a written notice from Solidbank as a condition for the adjustment of the interest
rates. (Emphasis supplied.)

In this case, the trial and appellate courts, in upholding the validity of the escalation clause, underscored the fact that
there was actually no fixed rate of interest stipulated in the promissory notes as this was made dependent on
prevailing rates in the market. The subject promissory notes contained the following condition written after the first
paragraph:

With one year grace period on principal and thereafter payable in 54 equal monthly instalments to start on the
second year. Interest at the prevailing rates payable quarterly in arrears. 40

In Polotan, Sr. v. CA (Eleventh Div.), 41 petitioner cardholder assailed the trial and appellate courts in ruling for the
validity of the escalation clause in the Cardholder’s Agreement. On petitioner’s contention that the interest rate was
unilaterally imposed and based on the standards and rate formulated solely by respondent credit card company, we
held:

The contractual provision in question states that "if there occurs any change in the prevailing market rates, the new
interest rate shall be the guiding rate in computing the interest due on the outstanding obligation without need of
serving notice to the Cardholder other than the required posting on the monthly statement served to the
Cardholder." This could not be considered an escalation clause for the reason that it neither states an increase nor a
decrease in interest rate. Said clause simply states that the interest rate should be based on the prevailing market
rate.

Interpreting it differently, while said clause does not expressly stipulate a reduction in interest rate, it nevertheless
provides a leeway for the interest rate to be reduced in case the prevailing market rates dictate its reduction.

Admittedly, the second paragraph of the questioned proviso which provides that "the Cardholder hereby authorizes
Security Diners to correspondingly increase the rate of such interest in the event of changes in prevailing market
rates x x x" is an escalation clause. However, it cannot be said to be dependent solely on the will of private
respondent as it is also dependent on the prevailing market rates.

Escalation clauses are not basically wrong or legally objectionable as long as they are not solely potestative but based
on reasonable and valid grounds. Obviously, the fluctuation in the market rates is beyond the control of private
respondent.42 (Emphasis supplied.)

In interpreting a contract, its provisions should not be read in isolation but in relation to each other and in their
entirety so as to render them effective, having in mind the intention of the parties and the purpose to be achieved.
The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which
may result from all of them taken jointly. 43

Here, the escalation clause in the promissory notes authorizing the respondent to adjust the rate of interest on the
basis of a law or regulation issued by the Central Bank of the Philippines, should be read together with the statement
after the first paragraph where no rate of interest was fixed as it would be based on prevailing market rates. While
the latter is not strictly an escalation clause, its clear import was that interest rates would vary as determined by
prevailing market rates. Evidently, the parties intended the interest on petitioners’ loan, including any upward or
downward adjustment, to be determined by the prevailing market rates and not dictated by respondent’s policy. It
may also be mentioned that since the deregulation of bank rates in 1983, the Central Bank has shifted to a market-
oriented interest rate policy.44

There is no indication that petitioners were coerced into agreeing with the foregoing provisions of the promissory
notes. In fact, petitioner Ignacio, a physician engaged in the medical supply business, admitted having understood his
obligations before signing them. At no time did petitioners protest the new rates imposed on their loan even when
their property was foreclosed by respondent.

This notwithstanding, we hold that the escalation clause is still void because it grants respondent the power to
impose an increased rate of interest without a written notice to petitioners and their written consent. Respondent’s
monthly telephone calls to petitioners advising them of the prevailing interest rates would not suffice. A detailed
billing statement based on the new imposed interest with corresponding computation of the total debt should have
been provided by the respondent to enable petitioners to make an informed decision. An appropriate form must also
be signed by the petitioners to indicate their conformity to the new rates. Compliance with these requisites is
essential to preserve the mutuality of contracts. For indeed, one-sided impositions do not have the force of law
between the parties, because such impositions are not based on the parties’ essential equality. 45

Modifications in the rate of interest for loans pursuant to an escalation clause must be the result of an agreement
between the parties. Unless such important change in the contract terms is mutually agreed upon, it has no binding
effect.46 In the absence of consent on the part of the petitioners to the modifications in the interest rates, the
adjusted rates cannot bind them. Hence, we consider as invalid the interest rates in excess of 15%, the rate charged
for the first year.

Based on the August 29, 2000 demand letter of China Bank, petitioners’ total principal obligation under the two
promissory notes which they failed to settle is ₱10,355,000. However, due to China Bank’s unilateral increases in the
interest rates from 15% to as high as 24.50% and penalty charge of 1/10 of 1% per day or 36.5% per annum for the
period November 4, 1999 to February 23, 2001, petitioners’ balance ballooned to ₱19,201,776.63. Note that the
original amount of principal loan almost doubled in only 16 months. The Court also finds the penalty charges
imposed excessive and arbitrary, hence the same is hereby reduced to 1% per month or 12% per annum.1âwphi1

Petitioners’ Statement of Account, as of February 23, 2001, the date of the foreclosure proceedings, should thus be
modified as follows:

Principal ₱10,355,000.00
Interest at 15% per annum
₱10,355,000 x .15 x 477 days/365 days 2,029,863.70
Penalty at 12% per annum 1,623 ,890. 96
 ₱10,355,000 x .12 x 477days/365 days
Sub-Total 14,008,754.66
Less: A/P applied to balance of principal (55,000.00)
Less: Accounts payable L & D (261,149.39)
13,692,605.27
Add: Attorney's Fees 1,369,260.53
Total Amount Due 15,061,865.79
Less: Bid Price 10,300,000.00

TOTAL DEFICIENCY AMOUNT 4,761,865.79

WHEREFORE, the petition for review on certiorari is PARTLY GRANTED. The February 20, 2009 · Decision and April 27,
2009 Resolution of the Court of Appeals in CA G.R. CV No. 80338 are hereby MODIFIED. Petitioners Spouses Ignacio F.
Juico and Alice P. Juico are hereby ORDERED to pay jointly and severally respondent China Banking Corporation ₱4, 7
61 ,865. 79 representing the amount of deficiency inclusive of interest, penalty charge and attorney's fees. Said
amount shall bear interest at 12% per annum, reckoned from the time of the filing of the complaint until its full
satisfaction.

No pronouncement as to costs.

SO ORDERED.

SPOUSES ROBERT and NANCY LIMSO vs. PHILIPPINE NATIONAL BANK [January 27, 2016]

There is no mutuality of contract when the interest rate in a loan agreement is set at the sole discretion of one party.
Nor is there any mutuality when there is no reasonable means by which the other party can determine the applicable
interest rate. These types of interest rates stipulated in the loan agreement are null and void. However, the nullity of
the stipulated interest rate does not automatically nullify the provision requiring payment of interest. Certainly, it
does not nullify the obligation to pay the principal loan obligation.

These consolidated cases arose from three related actions filed before the trial courts of Davao City.
In 1993, Spouses Robert Alan L. Limso and Nancy Lee Limso (Spouses Limso) 1 and Davao Sunrise Investment and
Development Corporation (Davao Sunrise) took out a loan secured by real estate mortgages from Philippine National
Bank.2

The loan was in the total amount of P700 million, divided into two (2) kinds of loan accommodations: a revolving
credit line of P300 million, and a seven-year long-term loan of P400 million. 3

To secure the loan, real estate mortgages were constituted on four (4) parcels of land registered with the Registry of
Deeds of Davao City.4 The parcels of land covered by TCT Nos. T-147820, T-151138, and T-147821 were registered in
the name of Davao Sunrise, while the parcel of land covered by TCT No. T-140122 was registered in the name of
Spouses Limso.5

In 1995, Spouses Limso sold the parcel of land covered by TCT No. T-140122 to Davao Sunrise. 6

Spouses Limso and Davao Sunrise had difficulty in paying their loan. In 1999, they requested that their loan be
restructured. After negotiations, Spouses Limso, Davao Sunrise, and Philippine National Bank executed a Conversion,
Restructuring and Extension Agreement. 7

The principal obligation in the restructured agreement totalled ₱1.067 billion. This included ₱217.15 million unpaid
interest.8

The restructured loan was divided into two (2) parts. Loan I was for the principal amount of ₱583.18 million, while
Loan II was for the principal amount of ₱483.78 million. 9 The restructured loan was secured by the same real estate
mortgage over four (4) parcels of land in the original loan agreement. All the properties were registered in the name
of Davao Sunrise.10

The terms of the restructured loan agreement state:

SECTION 1. TERMS OF THE CONVERSION, RESTRUCTURING AND EXTENSION

1.01 The Conversion/Restructuring/Extension. Upon compliance by the Borrowers with the conditions precedent
provided herein, the Obligations shall be converted, restructured and/or its term extended effective January 1, 1999
(the "Effectivity Date") in the form of term loans (the "Loans") as follows:

(a) The Credit Line portion of the Obligations is hereby converted and restructured into a Seven-Year
Long Term Loan (the "Loan I") in the principal amount of ₱583.18 Million;

(b) The original term of the Loan is hereby extended for another four (4) years (from September 1,
2001 to December 31, 2005), and interest portion of the Obligations (including the interest accruing
on the Credit Line and Loan up to December 31, 1998 estimated at ₱49.83 Million) are hereby
capitalized. Accordingly, both the Loan and Interest portions of the Obligations are hereby
consolidated into a Term Loan (the "Loan II") in the aggregate principal amount of ₱483.78 Million;

SECTION 2. TERMS OF LOAN I

2.01 Amount of Loan I. Loan I shall be in the principal amount not exceeding PESOS: FIVE HUNDRED
EIGHTY THREE MILLION ONE HUNDRED EIGHTY THOUSAND (₱583,180,000.00).

2.02 Promissory Note. Loan I shall be evidenced by a promissory note (the "Note I") to be issued by
the Borrowers in favor of the Bank in form and substance satisfactory to the Bank.

2.03 Principal Repayment. The Borrowers agree to repay Loan I within a period of seven (7) years
(inclusive of a one (1) year grace period) in monthly amortizations with the first amortization to
commence on January 2000 and a balloon payment on or before the end of the 7th year on
December 2005.
 2.04 Interest. (a) The Borrowers agree to pay the Bank interest on Loan I from the Effective Date, until
the date of full payment thereof at the rate per annum to be set by the Bank. The interest rate shall
be reset by the Bank every month.

(b) The interest provided in clause (a) above shall be payable monthly in arrears to
commence on January, 1999.

SECTION 3. TERMS OF LOAN II

3.01 Amount of Loan II. Loan II shall be in the principal amount not exceeding PESOS: FOUR
HUNDRED EIGHTY THREE MILLION SEVEN HUNDRED EIGHTY THOUSAND (₱483,780,00.00).

3.02 Promissory Note. Loan II shall be evidenced by a promissory note (the "Note II") to be issued by
the Borrowers in favor of the Bank in form and substance satisfactory to the Bank.

3.03 Principal Repayment. The Borrowers agree to repay Loan II within a period of seven (7) years
(inclusive of a one (1) year grace period) in monthly amortizations with the first amortization to
commence on January 2000 and a balloon payment on or before December 2005.

3.04 Interest. (a) The Borrowers agree to pay the Bank interest on Loan II from the Effective Date,
until the date of full payment thereof at the rate per annum to be set by the Bank. The interest rate
shall be reset by the Bank every month.

(b) The interest provided in clause (a) above shall be payable monthly in arrears to
commence on January 1999.11 (Emphasis provided)

Spouses Limso and Davao Sunrise executed promissory notes, both dated January 5, 1999, in Philippine National
Bank’s favor. The promissory notes bore the amounts of ₱583,183,333.34 and ₱483,811,798.93. 12 The promissory
note for Loan II includes interest charges because one of the preambular clauses of the Conversion, Restructuring
and Extension Agreement states that:

WHEREAS, the Borrowers acknowledge that they have outstanding obligations (the "Obligations") with the Bank
broken down as follows:

(i) Credit Line – ₱583.18 Million (as of September 30, 1998);

(ii) Loan – ₱266.67 Million (as of September 30, 1998); and

(iii) Interest – ₱217.15 Million (as of December 31, 1998)[.] 13

Spouses Limso and Davao Sunrise encountered financial difficulties. Despite the restructuring of their loan, they were
still unable to pay.14 Philippine National Bank sent demand letters. Still, Spouses Limso and Davao Sunrise failed to
pay.15

On August 21, 2000, Philippine National Bank filed a Petition for Extrajudicial Foreclosure of Real Estate Mortgage
before the Sheriff’s Office in Davao City. 16 The Notice of Foreclosure was published. The bank allegedly complied with
all the other legal requirements under Act No. 3135. 17 The auction sale was held on October 26, 2000. Ball Park
Realty Corporation, through its representative Samson G. To, submitted its bid in the amount of
₱1,521,045,331.49.18 Philippine National Bank’s bid was in the amount of ₱1,521,055,331.49. Thus, it was declared
the highest bidder.19

After the foreclosure sale, but before the Sheriff could issue the Provisional Certificate of Sale, 20 Spouses Limso and
Davao Sunrise filed a Complaint for Reformation or Annulment of contract against Philippine National Bank, Atty.
Marilou D. Aldevera, in her capacity as Ex-Officio Provincial Sheriff of Davao City, and the Register of Deeds of Davao
City.21 The Complaint was filed on October 30, 2000, raffled to Branch 17 of the Regional Trial Court of Davao City,
and docketed as Civil Case No. 28,170-2000. 22 It prayed for:
[the] declaration of nullity of unilateral imposition and increases of interest rates, crediting of illegal interests
collected to [Spouses Limso and Davao Sunrise’s] account; elimination of all uncollected illegal interests; reimposition
of new interest rates at 12% per annum only from date of filing of Complaint, total elimination of penalties;
elimination also of attorney’s fees or its reduction; declaration of nullity of auction sale and the foreclosure
proceedings; reduction of both loan accounts; reformation or annulment of contract, reconveyance, damages and
injunction and restraining order. 23

Immediately after the Complaint was filed, the Executive Judge 24 of the Regional Trial Court of Davao City issued a 72-
hour restraining order preventing Philippine National Bank from taking possession and selling the foreclosed
properties.25

Spouses Limso subsequently filed an amended Complaint. 26 The prayer in the amended Complaint stated:

PRAYER

WHEREFORE, it is respectfully prayed that judgment issue in favor of plaintiffs and against the defendants:

ON THE TEMPORARY RESTRAINING ORDER

1. That, upon the filing of the above-entitled case, a TEMPORARY RESTRAINING ORDER be
maintained enjoining the defendants from executing the provisional Certificate of Sale and final Deed
of Absolute Sale; confirmation of such sale; taking immediate possession thereof and from selling to
third parties those properties covered by TCT Nos. T-147820, T-147821,T-246386 and T-247012 and
its improvements nor to mortgage or pledge the same prior to the final outcome of the above-
entitled case, including other additional acts of foreclosure;.

2. That, plaintiffs’ application for the issuance of the [Writ of Preliminary Injunction] be concluded
within the 20 days lifetime period of the [Temporary Restraining Order], and

AFTER TRIAL ON THE MERITS

3. To declare the injunction as final;

4. Declaring that the unilateral increases of interest rates imposed by the defendant bank over and
above the stipulated interest rates provided for in the Promissory Notes, be also considered as null
and void and thereafter lowering the same to 12% per annum only, from the date of the filing of the
Complaint;

5. Declaring also that all illegally imposed interest rates and penalty charges be considered
eliminated and/or deducted from any account balance of plaintiffs;

6. Declaring also either the complete elimination of attorney’s fees, or in the alternative, reducing
the same to P500,000.00 only;

7. Declaring the reduction of the loan account balance to P827,012,149.50 only;

8. That subsequent thereto, ordering a complete reformation of the loan agreement and Real Estate
Mortgage which will now embody the lawful terms and conditions adjudicated by this Honorable
Court, or in the alternative, ordering its annulment, as may be warranted under the provision of
Article 1359 of the New Civil Code;

9. Ordering the defendant Register of Deeds to refrain from issuing a new title in favor of third
parties, and to execute the necessary documents necessary for the reconveyance of the properties
now covered by TCT Nos. T-147820, T-147821, T-246386 and T-247012 from the defendant bank in
favor of the plaintiffs upon payment of the recomputed loan accounts;
 10. Ordering also the defendant bank to pay to the plaintiffs the sum of at least P500,000.00
representing business losses and loss of income by the later [sic] arising from the improvident and
premature institution of extrajudicial foreclosure proceedings against the plaintiffs;

11. Ordering again the defendant bank to pay to the plaintiffs the sum of P400,000.00 as attorney’s
fees and the additional sum of P100,000.00 for expenses incident to litigation; and

12. To pay the costs and for such other reliefs just and proper under the
circumstances.27(Underscoring in the original)

Through the Order28 dated November 20, 2000, Branch 17 of the Regional Trial Court of Davao City denied Spouses
Limso’s application for the issuance of a writ of preliminary injunction. 29

Spouses Limso moved for reconsideration. On December 4, 2000, Branch 17 of the Regional Trial Court of Davao City
set aside its November 20, 2000 Order and issued a writ of preliminary injunction. 30

Philippine National Bank then moved for reconsideration of the trial court’s December 4, 2000 Order. The bank’s
Motion was denied on December 21, 2000. Hence, Philippine National Bank filed before the Court of Appeals a
Petition for Certiorari assailing the December 4, 2000 and December 21, 2000 Orders of the trial court. This was
docketed as CA G.R. SP. No. 63351.31

In the meantime, Branch 17 continued with the trial of the Complaint for Reformation or Annulment of Contract with
Damages.32

On January 10, 2002, the Court of Appeals issued the Decision 33 in CA G.R. SP. No. 63351 setting aside and annulling
the Orders dated December 4, 2000 and December 21, 2000 and dissolving the writ of preliminary injunction. 34

Spouses Limso and Davao Sunrise moved for reconsideration of the Court of Appeals’ January 2, 2002 Resolution in
CA G.R. SP No. 63351 but the motion was denied. 35 They then filed a Petition for Review on Certiorari before this
court.36 Their Petition was docketed as G.R. No. 152812, which was denied on procedural grounds. 37

In view of the dissolution of the writ of preliminary injunction, Acting Clerk of Court and Ex-officio Provincial Sheriff
Rosemarie T. Cabaguio issued the Sheriff’s Provisional Certificate of Sale dated February 4, 2002 in the amount of
₱1,521,055,331.49.38 However, the Sheriff’s Provisional Certificate of Sale 39 did not state the applicable redemption
period and the redemption price payable by the mortgagor or redemptioner. 40

On the same date, Philippine National Bank presented the Sheriff’s Provisional Certificate of Sale to the Register of
Deeds of Davao City in order that the title to the foreclosed properties could be consolidated and registered in
Philippine National Bank’s name. The presentation was recorded in the Primary Entry Book of Davao City’s Registry of
Deeds under Act No. 496 and entered as Entry Nos. 4762 to 4765. 41

On February 5, 2002, the registration of the Certificate of Sale was elevated en consulta by Atty. Florenda T. Patriarca
(Atty. Patriarca) , Acting Register of Deeds of Davao City, to the Land Registration Authority in Manila. This was
docketed as Consulta No. 3405.42

Acting on the consulta, the Land Registration Authority issued the Resolution dated May 21, 2002, which states: 43

"WHEREFORE, in view of the foregoing, the Sheriff’s Provisional Certificate of Sale dated February 4, 2002 is
registrable on TCT Nos. T-147820, T-147386, T-247012 provided all other registration requirements are complied
with."44

Meanwhile, on March 25, 2002, the Spouses Limso filed a Petition for Declaratory Relief with Prayer for Temporary
Restraining Order/Injunction on March 25, 2002 against Philippine National Bank, Atty. Rosemarie T. Cabaguio, in her
capacity as Ex-Officio Provincial Sheriff, and the Register of Deeds of Davao City (Petition for Declaratory Relief). The
Sheriff’s Provisional Certificate of Sale allegedly did not state any redemption price and period for redemption. This
case was raffled to Branch 14 of the Regional Trial Court of Davao City and docketed as Civil Case No. 29,036-2002. 45
The Petition for Declaratory Relief was filed while the Complaint for Reformation or Annulment with Damages was
still pending before Branch 17 of the Regional Trial Court of Davao City.

Spouses Limso subsequently filed an Amended Petition for Declaratory Relief, alleging:

6. That Petitioners with the continuing crisis and the unstable interest rates imposed by respondent PNB admittedly
failed to pay their loan, the demand letters were sent to both debtors-mortgagors separately, one addressed to the
Petitioners and another addressed to DSIDC, the last of which was dated April 12, 2000 xxx;

7. That on August 21, 200(0), respondent PNB filed a Petition for Extrajudicial Foreclosure of the mortgaged
properties against the petitioners-mortgagors-debtors and DSIDC;

8. That on October 26, 2000, the mortgaged properties were auctioned with the respondent PNB as the highest
bidder;

9. That on February 4, 2002, a Sheriff’s Provisional Certificate of Sale was issued by respondent Sheriff who certified
xxxx

10. That the said Sheriff’s Provisional Certificate of Sale did not contain a provision usually contained in a regular
Sheriff’s Provisional Certificate of Sale as regards the period of redemption and the redemption price to be raised
within the ONE (1) YEAR redemption period in accordance with Act 3135, under which same law the extrajudicial
petition for sale was conducted as mentioned in the Certificate;

11. That the Sheriff’s Provisional Certificate of Sale has not yet been registered with the office of respondent Register
of Deeds yet; that petitioners and DSIDC are still in actual possession of the subject properties;

12. That sometime in the middle part of year 2000, Republic Act No. 8791 otherwise known as General Banking Laws
of 2000 was approved and finally passed on April 12, 2000 and took effect sometime thereafter;

13. That among the provisions of the said law particularly, Section 47 dealt with Foreclosure of Real Estate Mortgage,
quoted verbatim hereunder as follows:

"Sec. 47. Foreclosure of Real Estate Mortgage. – In the event of foreclosure, whether judicially or extrajudicially, or
any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or
debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within
one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage
deed, with interest thereon at rate specified in the mortgage, and all the costs and expenses incurred by the bank or
institution from the sale and custody of said property less the income derived therefrom. However, the purchaser at
the auction sale concerned whether in a judicial or extra-judicial foreclosure shall have the right to enter upon and
take possession of such property immediately after the date of the confirmation of the auction sale and administer
the same in accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings
instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an
amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or
the restraint of the foreclosure proceeding.

Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure,
shall have the right to redeem the property in accordance with this provision until, but not after, the registration of
the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3)
months after foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale prior to
the effectivity of this Act shall retain their redemption rights until their expiration."

14. That it is clear and evident that the absence of provisions as to redemption period and price in the Sheriff’s
Provisional Certificate of Sale issued by respondent Sheriff, that respondent PNB and Sheriff intended to apply the
provisions of Section 47 of Republic Act No. 8791 which reduced the period of redemption of a juridical person
whose property is being sold pursuant to an extrajudicial foreclosure sale until but not after the registration of the
Certificate of Sale with the applicable Register of Deeds which in no case shall be more than three (3) months after
foreclosure, whichever is earlier;

15. That Petitioners in this subject mortgage are Natural Persons who are principal mortgagors-debtors and at the
same time registered owners of some properties at the time of the mortgage;

16. That the provisions of Republic Act No. 8791 do not make mention nor exceptions to this situation where the Real
Estate Mortgage is executed by both Juridical and Natural Persons; hence, the need to file this instant case of
Declaratory Relief under Rule 63 of the Revised Rules of Court of the Philippines;

....

PRAYER

WHEREFORE, it is respectfully prayed that judgment in favor of petitioners and against the respondent-PNB;

1. That upon the filing of the above-entitled case, a TEMPORARY RESTRAINING INJUNCTION be issued immediately
ordering a status quo, enjoining the Register of Deeds and defendant-PNB from registering the subject Provisional
Certificate of Sale from consolidating the title of the property covered by Transfer Certificate of Title Nos. T-147820,
T-147821, T-246386, T-24712 and Land Improvement, Etc.

2. That petitioners’ application of the issuance of the Writ of Preliminary Injunctions be considered and granted
within 20 days lifetime period of the TRO.

AFTER TRIAL ON THE MERITS

3. To declare the injunction as final;

4. Ordering the Register of Deeds to refrain from registering the Sheriff’s Certificate of Sale and further from
consolidating the titles of the said properties in its name and offering to sell the same to interested buyers during the
pendency of the above entitled case, while setting the date of hearing on the propriety of the issuance of such Writ
of Preliminary Injunction.

ON THE MAIN CASE

5. To declare the petitioners’ right as principal mortgagors/owner jointly with a juridical person to redeem within a
period of 1 year the properties foreclosed by respondent PNB still protected and covered by Act 3135.

6. To declare the provisions on Foreclosure of Real Estate Mortgage under Republic Act 8791 or General Banking Laws
of 2000 discriminating and therefore unconstitutional.

OTHER RELIEFS AND REMEDIES are likewise prayed for. 46

Branch 14 of the Regional Trial Court of Davao City issued a temporary restraining order 47 on April 10, 2002. This
temporary restraining order enjoined the Register of Deeds from registering the Sheriff’s Provisional Certificate of
Sale.48

The temporary restraining order was issued without first hearing the parties to the case. Hence, the temporary
restraining order was recalled by the same trial court in the Order 49 dated April 16, 2002.

During the hearing for the issuance of a temporary restraining order in the Petition for Declaratory Relief, Spouses
Limso presented several exhibits, which included: Philippine National Bank’s demand letter dated April 12, 2000;
Philippine National Bank’s letter to the Acting Register of Deeds of Davao City dated February 4, 2002 requesting the
immediate registration of the Sheriff’s Provisional Certificate of Sale; and the Notice of Foreclosure dated September
5, 2000.50
Counsel for Philippine National Bank objected to the purpose of the presentation of the exhibits and argued that
since Spouses Limso were Davao Sunrise’s co-debtors, they "were notified as a matter of formality[.]" 51

On May 3, 2002, Branch 14 granted the prayer for the issuance of the writ of preliminary injunction enjoining the
registration of the Sheriff’s Provisional Certificate of Sale. 52

Branch 14 reasoned as follows:

This Court finds no merit in the claims advanced by private respondent Bank for the following reasons:

1. That the primary ground why the Court of Appeals dissolved the preliminary injunction granted by
Branch 17 of this Court was because the ground upon which the same was issued was based on a
pleading which was not verified;

2. That Civil Case No. 28,170-2000 and Civil Case No. 29,036-2002 while involving substantially the
same parties, the same do not involved [sic] the same issues as the former involves nullity of
unilateral imposition and increases of interest rates, etc. nullity of foreclosure proceedings, reduction
of both loan accounts, reformation or annulment of contract, reconveyance and damages, whereas
the issues raised in the instant petition before this Court is the right and duty of the petitioners
under the last paragraph of Sec. 47, Republic Act No. 8791 and whether the said section of said law is
applicable to the petitioners considering that the mortgage contract was executed when Act No.
3135 was the controlling law and was in fact made part of the contract;

3. That the petition, contrary to the claim of private respondent Bank, clearly states a cause of action;
and

4. That since petitioners are parties to the mortgage contract they, therefore, have locus standi to file
the instant petition.

If Section 7 of Republic Act 8791 were made to apply to the petitioners, the latter would have a shorter period of
three (3) months to exercise the right of redemption after the registration of the Certificate of Sale, hence, the
registration of the Sheriff’s Provisional Certificate of Sale would cause great and irreparable injury to them as their
rights to the properties sold at public auction would be lost forever if the registration of the same is not enjoined. 53

Spouses Limso posted an injunction bond that was approved by the trial court in the Order dated May 6, 2002. Thus,
the writ of preliminary prohibitory injunction was issued. 54

Philippine National Bank moved for reconsideration of the Orders dated May 3, 2002 and May 6, 2002. 55

Around this time, Judge William M. Layague (Judge Layague), Presiding Judge of Branch 14, was on leave. 56Philippine
National Bank’s Motion for Reconsideration was granted by the Pairing Judge, Judge Jesus V. Quitain (Judge
Quitain),57 and the writ of preliminary prohibitory injunction was dissolved in the Order dated May 23, 2002. 58

On May 30, 2002, Philippine National Bank’s lawyers went to the Register of Deeds of Davao City "to inquire on the
status of the registration of the Sheriff’s Provisional Certificate of Sale." 59

Philippine National Bank’s lawyers were informed that the documents they needed "could not be found and that the
person in charge thereof, Deputy Register of Deeds Jorlyn Paralisan, was absent." 60

Philippine National Bank contacted Jorlyn Paralisan at her residence. She informed Philippine National Bank that the
documents they were looking for were all inside Atty. Patriarca’s office. 61

Subsequently, Atty. Patriarca informed the representatives of Philippine National Bank that the Register of Deeds
"would not honor certified copies of [Land Registration Authority] resolutions even if an official copy of the [Land
Registration Authority] Resolution was already received by that Office through mail." 62
On May 31, 2002, Philippine National Bank’s representatives returned to the Register of Deeds of Davao City and
learned that Atty. Patriarca, the Acting Register of Deeds, had not affixed her signature, which was necessary to
complete the registration of the Sheriff’s Certificate of Sale. 63

Subsequently, Judge Layague reinstated the writ of preliminary prohibitory injunction in the Order 64 dated June 24,
2002.

Aggrieved, Philippine National Bank filed before the Court of Appeals a Petition for Certiorari, Prohibition and
Mandamus with Prayer for Temporary Restraining Order and Writ of Preliminary Injunction, both Prohibitory and
Mandatory, docketed as CA G.R. SP No. 71527. The Petition assailed the June 24, 2002 Order of Branch 14 of the
Regional Trial Court, which reinstated the writ of preliminary prohibitory injunction. 65

On July 3, 2002, Philippine National Bank inspected the titles and found that correction fluid had been applied over
Atty. Patriarca’s signature on the titles.66

Also on July 3, 2002, Philippine National Bank filed before the Regional Trial Court of Davao City a Petition for
Issuance of the Writ of Possession under Act No. 3135, as amended, and Section 47 of Republic Act No. 8791. 67This
was docketed as Other Case No. 124-2002 and raffled to Branch 15 of the Regional Trial Court of Davao City, presided
by Judge Quitain.68

Davao Sunrise filed a Motion to Expunge and/or Dismiss Petition for Issuance of Writ of Possession dated July 12,
2002.69 In the Motion to Expunge, Davao Sunrise pointed out that Branch 1470 (in the Petition for Declaratory Relief
docketed as Civil Case No. 29,036-2002) issued a writ of preliminary injunction "enjoining the Provincial Sheriff, the
Register of Deeds of Davao City[,] and [Philippine National Bank] from registering the Sheriff’s Provisional Certificate
of Sale and, if registered, enjoining [Philippine National Bank] to refrain from consolidating the title of the said
property in its name and/or offering to sell the same to interested buyers during the pendency of the case." 71

On July 18, 2002, Spouses Limso filed a Motion to Intervene 72 in Other Case No. 124-2002.73

In the Resolution dated August 13, 2002, the Court of Appeals granted the temporary restraining order prayed for by
Philippine National Bank (in CA G.R. SP No. 71527) enjoining the implementation of Judge Layague’s Orders dated
May 3, 2002 and June 24, 2002. These Orders pertained to the writ of preliminary injunction enjoining the
registration of the Sheriff’s Provisional Certificate of Sale. 74

Spouses Limso filed a Motion for Reconsideration with Prayers for the Dissolution of Temporary Restraining Order
and to Post Counter Bond.75

The Court of Appeals granted Philippine National Bank’s Petition for Certiorari in the Decision 76 dated December 11,
2002. The dispositive portion of the Decision states:

WHEREFORE, premises considered, the writ prayed for in the herein petition is GRANTED and the assailed Orders of
respondent judge dated May 3 and June 24, 2002 granting the writ of preliminary injunction are SET ASIDE. Civil Case
No. 29,036-2002 is hereby ordered DISMISSED and respondent Register of Deeds of Davao City is hereby ordered to
register petitioner PNB’s Sheriff’s Provisional Certificate of Sale and cause its annotation on TCT Nos. T-147820, T-
147821, T-246386 and T-247012.77

Spouses Limso filed a Motion to Reconsider Decision and To Call Case For Hearing on Oral Argument, which was
opposed by Philippine National Bank.78 Oral arguments were conducted on March 19, 2003. 79

On June 10, 2003, the Court of Appeals denied Spouses Limso’s Motion for Reconsideration. 80

Spouses Limso then filed a Petition for Review on Certiorari 81 before this court, questioning the Decision in CA G.R. SP
No. 71527, which ordered the Register of Deeds to register the Sheriff’s Provisional Certificate of Sale. This was
docketed as G.R. No. 158622.82
With regard to the Complaint for Reformation or Annulment of Contract with Damages, Branch 17 of the Regional
Trial Court of Davao City promulgated its Decision 83 on June 19, 2002.

Branch 17 ruled in favor of Spouses Limso and Davao Sunrise. It found the interest rate provisions in the loan
agreement to be unreasonable and unjust because the imposable interest rates were to be solely determined by
Philippine National Bank. The arbitrary imposition of interest rates also had the effect of increasing the total loan
obligation of Spouses Limso and Davao Sunrise to an amount that would be beyond their capacity to pay. 84

The dispositive portion of the Decision in the Complaint for Reformation or Annulment with Damages states:

WHEREFORE, finding the evidence of plaintiffs corporation through counsel, more than sufficient, to constitute a
preponderance to prove the various unilateral impositions of increased interest rates by defendant bank, such
usurious, unreasonable, arbitrary, unilateral imposition of interest rates, are declared, null and void.

Accordingly, decision is issued in favor of the defendant bank, in a reduced amount based on the following:

1. The amount of One Hundred Twenty Seven Million, One Hundred Fifty Thousand (P127,150,000.00) Pesos,
representing illegal interest rate, the amount of One Hundred Seventy Six Million, Ninety Eight Thousand,
Forty Five and 95/100 (P176,098,045.95) Pesos, representing illegal penalty charges and the amount of One
Hundred Thirty Six Million, Nine Hundred Thousand, Nine Hundred Twenty Eight and 85/100
(P136,900,928.85) Pesos, as unreasonable 10% Attorney’s fees or in the total amount of Four Hundred Forty
Million, One Hundred Forty Eight Thousand, Nine Hundred Seventy Four and 79/100 (P440,148,974.79)
Pesos, are declared null and void, rescending [sic] and/or altering the loan agreement of parties, on the
ground of fraud, collusion, mutual mistake, breach of trust, misconduct, resulting to gross inadequacy of
consideration, in favor of plaintiffs corporation, whose total reduced and remaining principal loan obligation
with defendant bank, shall only be the amount of Eight Hundred Eighty Two Million, Twelve Thousand, One
Hundred Forty Nine and 50/100 (P882,012,149.50) Pesos, as outstanding remaining loan obligation of
plaintiffs corporation, with defendant bank, to be deducted from the total payments so far paid by plaintiffs
corporation with defendant bank as already stated in this decision.

2. That thereafter, the above-amount as ordered reduced, shall earn an interest of 12% per annum, the
lawful rate of interest that should legitimately be imposed by defendant bank to the outstanding remaining
reduced principal loan obligation of plaintiffs corporation.

3. Notwithstanding, defendant bank, is entitled to a reduced Attorney’s fees of Five Hundred Thousand
(P500,000.00) Pesos, as a reasonable Attorney’s fees, subject to subsequent pronouncement as to the real
status of defendant bank, on whether or not, said institution is now a private agency or still a government
instrumentality in its capacity to be entitled or not of the said Attorney’s fees.

4. The prayer of defendant bank for award of moral damages and exemplary damages, are denied, for lack of
factual and legal basis.

SO ORDERED.85 (Emphasis in the original)

Philippine National Bank moved for reconsideration of the Decision, while Spouses Limso and Davao Sunrise filed a
Motion for partial clarification of the Decision.86

Branch 17 of the Regional Trial Court of Davao City subsequently issued the Order 87 dated August 13, 2002 clarifying
the correct amount of Spouses Limso and Davao Sunrise’s obligation, thus:

WHEREFORE, finding the motion for reconsideration of defendant bank through counsel, to the decision of the court,
grossly bereft of merit, merely a reiteration and rehash of the arguments already set forth during the hearing,
including therein matters not proved during the trial on the merits, and considered admitted, is denied.

To provide a clarification of the decision of this court, relative to plaintiffs motion for partial clarification with
comment of defendant bank through counsel, the correct remaining balance of plaintiffs account with defendant
bank, pursuant to the decision of this court, in pages 17 and 18, dated June 19, 2002, is Two Hundred Five Million
Eighty Four Thousand Six Hundred Eighty Two Pesos & 61/100 (P205,084,682.61), as above-clarified.

SO ORDERED.88

Philippine National Bank appealed the Decision and Order in the Complaint for Reconstruction or Annulment with
Damages by filing a Notice of Appeal on August 16, 2002. 89 The Notice of Appeal was approved by the trial court in
the Order dated September 25, 2002. 90 The appeal was docketed as CA-G.R. CV No. 79732. 91

On August 20, 2002,92 Spouses Limso and Davao Sunrise filed, in Other Case No. 124-2002 (Petition for Issuance of
Writ of Possession), a Motion to Inhibit the Presiding Judge (referring to Judge Quitain, before whom the Petition for
Issuance of Writ of Possession was pending) because his wife, Gladys Isla Quitain, was a long-time Philippine National
Bank employee who had retired. 93 Spouses Limso and Davao Sunrise also heard rumors that Gladys Isla Quitain had
been serving as consultant for Philippine National Bank even after retirement.94 Davao Sunrise also filed a Motion to
Expunge and/or Dismiss Petition and argued that the person who signed for Philippine National Bank was not
authorized because no Board Resolution was attached to the Verification and Certification against Forum Shopping.

In the Order95 dated March 21, 2003, Judge Quitain denied three motions:

(1) The Motion to Intervene filed by Spouses Robert Alan Limso and Nancy Limso;

(2) The Motion to Expunge and/or Dismiss Petition for the Issuance of Writ of Possession filed by Davao
Sunrise Investment and Development Corporation; and

(3) The Motion for Voluntary Inhibition filed by Davao Sunrise Investment and Development Corporation. 96

Judge Quitain denied the Motion to Inhibit on the ground that the allegations against him were mere suspicions and
conjectures.97 The Motion to Intervene was denied on the ground that Spouses Limso have no interest in the case,
not being the owners of the property. 98

The Motion to Expunge and/or Dismiss filed by Davao Sunrise was also denied for lack of merit. Judge Quitain ruled
that "PNB Vice President Leopoldo is clearly clothed with authority to represent and sign in behalf of the petitioner
[referring to Philippine National Bank] as shown by the Verification and Certification of the said petition as well as the
Secretary’s Certificate."99

Spouses Limso and Davao Sunrise filed a Motion for Reconsideration 100 of the Order dated March 21, 2003. Judge
Quitain denied the Motion for Reconsideration in an Order dated September 1, 2003, only with regard to the Motion
to Intervene and Motion for Voluntary Inhibition. The Motion to Expunge and/or Dismiss was not mentioned in the
September 1, 2003 Order. 101

Spouses Limso and Davao Sunrise questioned the denial of the Motion for Inhibition by filing a Petition for Certiorari
before the Court of Appeals on September 26, 2003. This was docketed as CA G.R. SP No. 79500. 102 Spouses Limso
and Davao Sunrise subsequently filed a Supplemental Petition for Certiorari before the Court of Appeals on October
3, 2003.103

In the meantime, Other Case No. 124-2002 (Petition for Issuance of Writ of Possession) was set for an ex-parte
hearing on October 10, 2003.104

However, on October 8, 2003, the Court of Appeals granted the prayer for the issuance of a temporary restraining
order in CA G.R. SP No. 79500 "enjoining public respondent Judge Quitain from proceeding with Other Case No. 124-
2002 for a period of sixty (60) days from receipt by respondents thereof." 105

The temporary restraining order was effective from October 10, 2003 to December 9, 2003. 106

On December 12, 2003, Judge Quitain issued the Order allowing Philippine National Bank to present evidence ex-
parte on December 18, 2003 despite the pendency of other incidents to be resolved. 107
Spouses Limso and Davao Sunrise filed an Urgent Motion for Cancellation of the December 18, 2003 hearing due to
the pendency of CA G.R. SP No. 79500. 108

Judge Quitain reset the hearing for Other Case No. 124-2002 to January 23, 2004. The hearing was subsequently
reset to January 30, 2004. In the January 30, 2004 hearing, Judge Quitain heard the arguments of parties regarding
the Urgent Motion to Cancel Hearing.109

In the Order dated March 12, 2004, Judge Quitain "resolved the pending Urgent Motion to Cancel Hearing and
[Davao Sunrise’s] Motion to Re-schedule Newly Scheduled Hearing Date." 110

The March 12, 2004 Order also stated that "the Spouses Limso have no right to intervene because they are no longer
owners of the subject foreclosed property." 111

Spouses Limso treated the March 12, 2004 Order as a denial of their Motion for Reconsideration regarding their
Motion to Intervene. Thus, they, together with Davao Sunrise, filed a Petition for Certiorari before the Court of
Appeals, which was docketed as CA G.R. SP No. 84279. 112

CA G.R. SP No. 84279 was denied by the Court of Appeals in the Decision 113 dated September 20, 2004.

Spouses Limso and Davao Sunrise filed a Motion for Reconsideration 114 dated September 13, 2004, which was denied
in the Resolution115 dated July 8, 2005.

Spouses Limso and Davao Sunrise then filed a Petition for Review on Certiorari dated July 26, 2005 before this court.
This was docketed as G.R. No. 168947.116

Despite the pendency of Spouses Limso and Davao Sunrise’s Motion for Reconsideration of the Order denying Davao
Sunrise’s Motion to Expunge and/or Dismiss, Philippine National Bank filed a Motion for Reception of Evidence
and/or Resume Hearing dated March 30, 2004 in Other Case No. 124-2002. 117

Judge Quitain granted the Motion "and set the hearing for reception of petitioner’s evidence on 06 April 2004 at 2:00
p.m."118

Spouses Limso and Davao Sunrise filed an Extremely Urgent Manifestation and Motion dated April 5, 2004. They
prayed for the cancellation of the hearing for the reason that the March 12, 2004 Order was not yet final and that
Davao Sunrise had a pending Motion for Reconsideration of the Order denying its Motion to Expunge and/or
Dismiss.119

Judge Quitain cancelled the April 6, 2004 hearing due to the Manifestation and Motion filed by Spouses Limso and
Davao Sunrise.120

Spouses Limso filed a Motion for Reconsideration of the March 12, 2004 Order because it addressed issues other
than those raised in the Motion for Intervention. 121

On April 20, 2004, Judge Quitain issued the Order and reset the case for hearing to May 7, 2004, even though the
Motion for Reconsideration of the Order denying the Motion to Expunge and/or Dismiss had not been acted upon. 122

During the May 7, 2004 hearing, counsel for Spouses Limso and Davao Sunrise pointed out to Judge Quitain the
pendency of the Motion for Reconsideration of the Order denying the Motion to Expunge and/or Dismiss. 123

Judge Quitain issued the Order dated July 5, 2004 denying Spouses Limso and Davao Sunrise’s Motion for
Reconsideration to the March 12, 2004 Order (referring to the denial of Spouses Limso’s Motion to Intervene).

Judge Quitain also set hearing dates on August 4 and 5, 2004 for the reception of Philippine National Bank’s
evidence. Once again, the hearings were scheduled even though the Motion to Expunge and/or Dismiss had yet to be
resolved.124
Davao Sunrise then filed a Motion to Transfer Case or in the Alternative to Dismiss the Same on July 30, 2004. Davao
Sunrise reiterated the arguments in its Motion to Expunge and/or Dismiss. 125

Subsequently, Spouses Limso and Davao Sunrise filed an Extremely Urgent Manifestation and Motion dated August 3,
2004 asking that the hearings scheduled for August 4 and 5, 2004 be cancelled, considering that Davao Sunrise’s
Motion to Dismiss/Expunge the Petition was still unresolved. 126

On August 4, 2004, Judge Quitain took cognizance of the Extremely Urgent Manifestation and Motion dated August
3, 2004 and a Very Urgent Motion for Intervention filed by a third party. Thus, Judge Quitain cancelled the hearings
scheduled on August 4 and 5, 2004, reset the hearing to August 11, 2004, and "impressed upon the parties that he
would be able to resolve all pending incidents by that time." 127

Spouses Limso and Davao Sunrise alleged that the pending incidents were hastily acted upon by Judge Quitain, as
follows:

[O]n 11 August 2004, at around 11:45 a.m., petitioners’ counsel was furnished a copy of public
respondent’s Order allegedly dated 06 August 2004 which declared as submitted for resolution the following
incidents, to wit: (a) petitioner DSIDC’s Motion to Transfer the Case to Branch 17; (b) Petitioner DSIDC’s Motion to
Postpone Hearing; (c) Motion for Intervention filed by a certain Karlan Lou Ong; (d) petitioners’ (DSIDC and Spouses
Limso) Extremely Urgent Manifestation and Motion; and (e) Petitioner DSIDC’s Manifestation.

. . . And then, at around 2:10 p.m. of the same day, 11 August 2004, when petitioners’ counsel was already in court
for the said hearing, he was furnished by a staff of public respondent Judge Quitain a copy of an Order dated 11
August 2004 and consisting of two (2) pages, the dispositive portion of which reads as follows:

"WHEREFOREM(sic), the Court hereby resolves the following motions: 1) DSIDC’s motion to transfer case to Branch
17 or dismiss the same is denied for lack of merit. 2) DSIDC’s (sic) motion to postpone the hearing is denied for lack
of merit. 3) The motion of Karla Ong to intervene is denied for lack of merit. 4) The August 5 manifestation of DSIDC
is noted."128 (Emphasis in the original)

Spouses Limso and Davao Sunrise also claimed that the Order dated August 11, 2004 was done hastily so that
Philippine National Bank would be able to present its evidence without objection. 129

Spouses Limso and Davao Sunrise alleged that the August 11, 2004 Order contained factual findings not supported by
the record. When counsel for Spouses Limso and Davao Sunrise pointed out the errors, Judge Quitain acknowledged
the mistake and reset the August 11, 2004 hearing to August 27, 2004. 130

Because of Judge Quitain’s actions, Spouses Limso and Davao Sunrise filed a Motion for Compulsory Disqualification
on the ground that Judge Quitain was biased in Philippine National Bank’s favor. 131

In the Order132 dated March 10, 2005, Judge Quitain denied the Motion for Compulsory Disqualification.

Spouses Limso and Davao Sunrise moved for reconsideration of the March 10, 2005 Order, while Philippine National
Bank filed an Opposition to the Motion for Reconsideration. 133

The August 11, 2004 Order also denied Davao Sunrise’s Motion to Transfer Case to Branch 17 or Dismiss the Same.
Since the Motion to Transfer is a rehash of Davao Sunrise’s Motion to Expunge and/or Dismiss Petition, the denial of
the Motion to Transfer is tantamount to the denial of Davao Sunrise’s Motion to Expunge and/or Dismiss. 134The
August 11, 2004 Order did not specifically state that Spouses Limso and Davao Sunrise’s Motion for Reconsideration
dated March 28, 2003 was denied, but since the issues raised in the Motion to Reconsideration were also raised in
the Motion to Expunge, the August 11, 2004 Order also effectively denied the Motion for Reconsideration. 135

Thus, Spouses Limso and Davao Sunrise filed a Petition 136 for Certiorari before the Court of Appeals, which was
docketed as CA G.R. SP No. 85847.137 Spouses Limso and Davao Sunrise assailed the March 21, 2003 Order denying
Davao Sunrise’s Motion to Expunge and/or Dismiss Petition for Issuance of Writ of Possession, as well as the August
11, 2004 Order denying Davao Sunrise’s Motion to Dismiss. 138
On September 1, 2004, the Court of Appeals promulgated its Decision 139 in CA G.R. No. 79500140 denying Spouses
Limso and Davao Sunrise’s Petition, which assailed Judge Quitain’s denial of their Motion to Inhibit. 141 The Court of
Appeals ruled that Judge Quitain’s reversal of Judge Layague’s Orders "may constitute an error of judgment . . . but it
is not necessarily an evidence of bias and partiality." 142

Spouses Limso and Davao Sunrise moved for reconsideration on September 23, 2004. The Motion was denied in the
Resolution143 dated August 11, 2005.144

While the cases between Spouses Limso, Davao Sunrise, and Philippine National Bank were pending, Philippine
National Bank, through counsel, filed administrative 145 and criminal complaints146 against Atty. Patriarca.

The administrative case against Atty. Patriarca was docketed as Administrative Case No. 02-13. 147

In the Resolution148 dated January 12, 2005, the Land Registration Authority found Atty. Patriarca guilty of grave
misconduct and dismissed her from the service. 149 Included in the Resolution are the following pronouncements:

The registration of these documents became complete when respondent affixed her signature below these
annotations. Whatever information belatedly gathered thereafter relative to the circumstances as to the registrability
of these documents, respondent cannot unilaterally take judicial notice thereof and proceed to lift at her whims and
caprices what has already been officially in force and effective, by erasing thereon her signature. With her years of
experience in the Registry, not to mention her being a lawyer, respondent should have taken the appropriate steps in
filing a query to this Authority regarding the matter or should have consulted Section 117 of PD 1529 in relation to
Section 12 of Rule 43. The deplorable act of Respondent was fraught with partiality to favor the DSIDC and Sps.
Limso.150

Atty. Asteria E. Cruzabra (Atty. Cruzabra) replaced Atty. Patriarca as Register of Deeds of Davao City. 151 Philippine
National Bank wrote a letter to Atty. Cruzabra, arguing "that the Sheriff’s Provisional Certificate of Sale was already
validly registered[,]"152 and the unauthorized application of correction fluid 153 to cover the original signature of the
Acting Register of Deeds "did not deprive the Bank of its rights under the registered documents." 154

Meanwhile, on February 10, 2005, as CA-G.R. CV No. 79732, which was an appeal from Civil Case No. 28,170-2000
(Petition for Reformation and Annulment of Contract with Damages), was still pending, Philippine National Bank filed
the following applications before the Court of Appeals Nineteenth Division: 155

a. Application to Hold Davao Sunrise Investment and Development Corporation, the Spouses Robert Alan L.
Limso and Nancy Lee Limso and Wellington Insurance Company, Inc. Jointly and Severally liable for Damages
on the Injunction Bond; and

b. Application for the Appointment of PNB as Receiver[.] 156

Spouses Limso and Davao Sunrise filed their opposition to Philippine National Bank’s application on March 29,
2005.157 Philippine National Bank filed its Reply to the Opposition on May 5, 2005. 158

On March 2, 2006, the Court of Appeals denied Philippine National Bank’s applications, reasoning that:

It is a settled rule that the procedure for claiming damages on account of an injunction wrongfully issued shall be the
same as that prescribed in Section 20 of Rule 57 of the Revised Rules of Court. Section 20 provides:

Sec. 20. Claim for damages on account of improper, irregular or excessive attachment. - An application for damages
on account of improper, irregular or excessive attachment must be filed before the trial or before appeal is perfected
or before the judgment becomes executory, with due notice to the attaching obligee or his surety or sureties, setting
forth the facts showing his right to damages and the amount thereof. Such damages may be awarded only after
proper hearing and shall be included in the judgment on the main case.

If the judgment of the appellate court be favorable to the party against whom the attachment was issued, he must
claim damages sustained during the pendency of the appeal by filing an application in the appellate court with notice
to the party in whose favor the attachment was issued or his surety or sureties, before the judgment of the appellate
court becomes executory. The appellate court may allow the application to be heard and decided by the trial court.

Nothing herein contained shall prevent the party against whom the attachment was issued from recovering in the
same action the damages awarded to him from any property of the attaching obligee not exempt from execution
should the bond or deposit given by the latter be insufficient or fail to fully satisfy the award.

Records show that when this Court annulled the RTC’s order of injunction, Davao Sunrise thereafter elevated the
matter to the Supreme Court. On July 24, 2002, the Supreme Court denied its petition for having been filed out of
time and an Entry of Judgment was issued on Sept. 11, 2002.

PNB’s instant application however was filed only on February 17, 2005 and/or in the course of its appeal on the main
case – about two (2) years and five (5) months after the judgment annulling the injunction order attained finality.

Clearly, despite that it already obtained a favorable judgment on the injunction matter, PNB failed to file (before the
court a quo) an application for damages against the bond before judgment was rendered in the main case by the
court a quo. Thus, even for this reason alone, Davao Sunrise and its bondsman are relieved of further liability
thereunder.159 (Citations omitted)

The Court of Appeals also denied Philippine National Bank’s application to be appointed as receiver for failure to
fulfill the requirements to be appointed as receiver and for failure to prove the grounds for receivership. 160 It
discussed that to appoint Philippine National Bank as receiver would violate the rule that "neither party to a litigation
should be appointed as receiver without the consent of the other because a receiver should be a person indifferent
to the parties and should be impartial and disinterested." 161 The Court of Appeals noted that Philippine National Bank
was not an impartial and disinterested party, and Davao Sunrise objected to Philippine National Bank’s appointment
as receiver.162

In addition, Rule 59, Section 1(a)163 of the 1997 Rules of Court requires that the "property or fund involved is in
danger of being lost, removed, or materially injured." The Court of Appeals found that the properties involved were
"not in danger of being lost, removed[,] or materially injured." 164 Further, Philippine National Bank’s application was
premature since the loan agreement was still pending appeal and "a receiver should not be appointed to deprive a
party who is in possession of the property in litigation." 165

The dispositive portion of the Court of Appeals Resolution 166 states:

WHEREFORE, above premises considered, the Philippine National Bank’s Application to Hold Davao Sunrise
Investment and Development Corporation, the Spouses Robert Alan L. Limso and Nancy Lee Limso and Wellington
Insurance Company, Inc. Jointly and Severally Liable for Damages on the Injunction Bond and its Application for the
Appointment of PNB as Receiver are hereby both DENIED. And, for the reasons above set forth, the Plaintiff-
Appellees’ Motion to Dismiss is likewise DENIED.

With the filing of the Appellants’ and the Appellees’ respective Brief(s), this case is considered SUBMITTED for
Decision and ORDERED re-raffled to another justice for study and report.

SO ORDERED.167

Philippine National Bank filed a Motion for Reconsideration on March 28, 2006, which was denied in the
Resolution168 dated May 26, 2006.169

Thus, on July 21, 2006, Philippine National Bank filed before this

court a Petition for Review170 on Certiorari questioning the Court of

Appeals’ denial of its applications.171 This was docketed as G.R. No. 173194.172
On February 16, 2007, Philippine National Bank’s Ex-Parte Petition for Issuance of a Writ of Possession docketed as
Other Case No. 124-2002 was dismissed173 based on the following grounds:

(1) For purposes of the issuance of the writ of possession, Petitioner should complete the entire process in
extrajudicial foreclosure . . .

(2) The records disclose the [sic] contrary to petitioner’s claim, the Certificate of Sale covering the subject
properties has not been registered with the Registry of Deeds of Davao City as the Court finds no annotation
thereof. As such, the sale is not considered perfected to entitled petitioner to the writ of possession as a
matter of rights [sic].174

Philippine National Bank filed a Motion for Reconsideration with Motion for Evidentiary Hearing. 175

Acting on the Motion for Reconsideration, the trial court required the Registry of Deeds to comment on the matter. 176

The trial court eventually denied the Motion for Reconsideration. 177

Philippine National Bank appealed the trial court Decision dismissing the Petition for Issuance of a Writ of Possession
by filing a Rule 41 Petition before the Court of Appeals, which was docketed as CA-G.R. CV No. 01464-MIN. 178

Meanwhile, when CA-G.R. CV No. 79732 was re-raffled, 179 it was redocketed as CA-G.R. CV No. 79732-MIN. 180

In CA-G.R. CV No. 79732-MIN, the Court of Appeals resolved the issue of "whether or not there has been mutuality
between the parties, based on their essential equality, on the subject imposition of interest rates on plaintiffs-
appellees’ loan obligation, i.e., the original loan and the restructured loan." 181

On August 13, 2009, the Court of Appeals promulgated its Decision 182 in CA-G.R. CV No. 79732-MIN. It held that there
was no mutuality between the parties because the interest rates were unilaterally determined and imposed by
Philippine National Bank.183

The Court of Appeals further explained that the contracts between Spouses Limso and Davao Sunrise, on one hand,
and Philippine National Bank, on the other, did not specify the applicable interest rates. The contracts merely stated
the interest rate to be "at a rate per annum that is determined by the bank[;]" 184 "at the rate that is determined by
the Bank to be the Bank’s prime rate in effect at the Date of Drawdown[;]" 185 and "at the rate per annum to be set by
the Bank. The interest rate shall be reset by the Bank every month." 186 In addition, the interest rate would depend on
the prime rate, which was "to be determined by the bank[.]" 187 It was also discussed that:

But it even gets worse. After appellant bank had unilaterally determined the imposable interest on plaintiffs-
appellees loans and after the latter had been notified thereof, appellant bank unilaterally increased the interest rates.
Further aggravating the matter, appellant bank did not increase the interest rate only once but on numerous
occasions. Appellant bank unilaterally and arbitrarily increased the already arbitrarily imposed interest rate within
intervals of only seven (7) days and/or one (1) month.

....

The interests imposed under the Conversion, Restructuring and Extension Agreement, is not a valid imposition. DSIDC
and Spouses Limso have no choice except to assent to the conditions therein as they are heavily indebted to PNB. In
fact, the possibility of the foreclosure of their mortgage securities is right in their doorsteps. Thus it cannot be
considered "contracts" between the parties, as the borrower’s participation thereat has been reduced to an
unreasonable alternative that is to "take it or leave it." It has been used by PNB to raise interest rates to levels which
have enslaved appellees or have led to a hemorrhaging of the latter’s assets. Hence, for being an exploitation of the
weaker party, the borrower, the alleged letter-contracts should also be struck down for being violative of the
principle of mutuality of contracts under Article 1308. 188 (Emphasis in the original)

Thus, the Court of Appeals nullified the interest rates imposed by Philippine National Bank:
We reiterate that since the unilateral imposition of rates of interest by appellant bank is not only violative of the
principle of mutuality of contracts, but also were found to be unconscionable, iniquitous and unreasonable, it is as if
there was no express contract thereon. Thus, the interest provisions on the (a) revolving credit line in the amount of
three hundred (300) million pesos, (b) seven-year long term loan in the amount of four hundred (400) million pesos;
and (c) Conversions, Restructuring and Extension Agreement, Real Estate Mortgage, promissory notes, and all other
loan documents executed contemporaneous with or subsequent to the execution of the said agreements are hereby
declared null and void.

Such being the case, We apply the ruling of the Supreme Court in the case of United Coconut Planters Bank vs.
Spouses Samuel and Odette Beluso which stated:

"We see, however, sufficient basis to impose a 12% legal interest in favor of petitioner in the case at
bar, as what we have voided is merely the stipulated rate of interest and not the stipulation that the
loan shall earn interest."189 (Citation omitted)

As to the trial court’s reduction of the penalty charges and attorney’s fees, the Court of Appeals affirmed the trial
court’s ruling and stated that Article 1229 190 of the Civil Code allows for the reduction of penalty charges that are
unconscionable.191 The Court of Appeals discussed that:

The penalties imposed by PNB are clearly unconscionable. Any doubt as to this fact can be removed by simply
glancing at the penalties charged by defendant-appellant which . . . already amounted to an incredibly huge amount
of P176,098,045.94 despite payments that already exceeded the amount of the loan as of 1998.

With respect to attorney’s fees, the Supreme Court had consistently and invariably ruled that even with the presence
of an agreement between the parties, the court may nevertheless reduce attorney’s fees though fixed in the contract
when the amount thereof appears to be unconscionable or unreasonable. Again, the fact that the attorney’s fees
imposed by PNB are unconscionable and unreasonable can clearly be seen. The attorney’s fees imposed similarly
points to an incredibly huge sum of P136,900,928.85 as of October 30, 2000. Therefore, its reduction in the assailed
decision is well-grounded.192 (Citation omitted)

The dispositive portion of the Court of Appeals Decision states:

WHEREFORE, the assailed Decision dated June 19, 2002 and Order dated August 13, 2002 of the Regional Trial Court
of Davao City, Branch 17 in Civil Case No. 28,170-2000 declaring the unilateral imposition of interest rates by
defendant-appellant PNB as null and void appealed from are AFFIRMED with the MODIFICATION that the obligation
of plaintiffs-appellees arising from the Loan and Revolving Credit Line and subsequent Conversion, Restructuring and
Extension Agreement as Loan I and Loan II shall earn interest at the legal rate of twelve percent (12%) per annum
computed from September 1, 1993, until fully paid and satisfied.

SO ORDERED.193 (Emphasis in the original)

Philippine National Bank moved for reconsideration on September 3, 2009, 194 arguing that the interest rates were
"mutually agreed upon[;]"195 that Spouses Limso and Davao Sunrise "never questioned the . . . interest rates[;]" 196and
that they "acknowledged the total amount of their debt (inclusive of loan principal and accrued interest) to
[Philippine National Bank] in the Conversion, Restructuring and Extension Agreement which restructured their
obligation to [Philippine National Bank] in the amount of P1.067 Billion[.]" 197

Spouses Limso and Davao Sunrise moved for partial reconsideration on September 9, 2009, 198 pointing out that their
obligation to Philippine National Bank was only ₱205,084,682.61, as stated in the trial court’s Order dated August 13,
2002 in Civil Case No. 28,170-2000.199

Both Motions were denied by the Court of Appeals in the Resolution 200 dated May 18, 2011.

The Court of Appeals held that Philippine National Bank’s Motion for Reconsideration raised issues that were a mere
rehash of the issues already ruled upon. 201
With regard to Spouses Limso and Davao Sunrise’s Motion for Partial

Reconsideration, the Court of Appeals ruled that:

Since the appellees did not appeal from the decision of the lower court, they are not entitled to any award of
affirmative relief. It is well settled that an appellee who has not himself appealed cannot obtain from the appellate
court any affirmative relief other than those granted in the decision of the court below. The appellee can only
advance any argument that he may deem necessary to defeat the appellant’s claim or to uphold the decision that is
being disputed. . . . Thus, the lower court’s finding that the appellees have an unpaid obligation with PNB, and not
the other way around, should stand. It bears stressing that appellees even acknowledged their outstanding
indebtedness with the PNB when they filed their "Urgent Motion for Execution Pending Appeal" of the August 13,
2002 Order of the lower court decreeing that appellees’ remaining obligation with PNB is P205,084,682.61. They
cannot now claim that PNB is the one indebted to them in the amount of P15,915,588.89. 202

Philippine National Bank filed a Petition for Review on Certiorari 203 assailing the Decision in CA-G.R. CV No. 79732-
MIN. Philippine National Bank argues that there was mutuality of contracts between the parties, and that the
interest rates imposed were valid in view of the escalation clauses in their contract. 204 Philippine National Bank’s
Petition for Review was docketed as G.R. No. 196958. 205

Spouses Limso and Davao Sunrise also filed a Petition for Review 206 on Certiorari questioning the ruling of the Court
of Appeals in CA-G.R. CV No. 79732-MIN that their outstanding obligation was ₱803,185,411.11. 207 Spouses Limso
and Davao Sunrise argue that they "made overpayments in the amount of P15,915,588.89." 208 This was docketed as
G.R. No. 197120.209

On January 21, 2013, the Court of Appeals dismissed Philippine National Bank’s appeal docketed as CA-G.R. CV No.
01464-MIN (referring to the Petition for the Issuance of a Writ of Possession) on the ground that Philippine National
Bank availed itself of the wrong remedy. 210 What the Philippine National Bank should have filed was a "petition for
review under Rule 45 and not an appeal under Rule 41[.]" 211

On March 15, 2013, the Philippine National Bank filed a Petition for Review on Certiorari212 before this court,
assailing the dismissal of its appeal before the Court of Appeals and praying that the Decision of the trial court—that
the Sheriff’s Provisional Certificate of Sale was not signed by the Register of Deeds and was not registered—be
reversed and set aside. The Petition was docketed as G.R. No. 205463. 213

G.R. No. 158622 was filed on July 1, 2003; 214 G.R. No. 169441 was filed on September 14, 2005; 215 G.R. No. 172958
was filed on June 26, 2006;216 G.R. No. 173194 was filed on July 21, 2006;217 G.R. No. 196958 was filed on June 17,
2011;218 G.R. No. 197120 was filed on June 22, 2011;219 and G.R. No. 205463 was filed on March 15, 2013. 220

Docket Original Case Assailed Order/Decision

Number

G.R. No. 158622 Petition for Declaratory Relief with
Prayer for the Issuance of Preliminary
Injunction and Application for
Temporary Restraining Order221
Court of Appeals Decision dated
December 11, 2002 dismissing the
Petition for Certiorari filed by
Philippine National Bank. The Petition
for Certiorari questioned the issuance
of a writ of preliminary injunction in
favor of Spouses Limso and Davao
Sunrise.222

G.R. No. 169441 Ex-Parte Petition223 for Issuance of
Writ of Possession under Act No. 3135
filed by Philippine National Bank,
praying that it be granted possession
over four (4) parcels of land owned by
Davao Sunrise
Court of Appeals Decision dated
September 1, 2004 and Resolution
dated August 11, 2005.224 Spouses
Limso and Davao Sunrise filed a
Motion to Inhibit Judge Quitain, which
was denied by Judge Quitain. Thus,

G.R. No. 172958 Ex-Parte Petition226 for Issuance of the
Writ of Possession under Act No. 3135
filed by Philippine National Bank,
praying that it be granted possession
over four (4) parcels of land owned by
Davao Sunrise
G.R. No. 173194 Petition for Reformation or Annulment Court of Appeals Resolution231dated
of Contract with Damages filed by
Spouses Limso and Davao Sunrise230
G.R. No. 196958 Petition for Reformation or Annulment Court of Appeals Decision234 dated
of Contract with Damages filed by
Davao Sunrise and Spouses Limso233
G.R. No. 197120 Petition239 for Reformation or
Annulment of Contract with Damages
filed by Spouses Limso and Davao
Sunrise
G.R. No. 205463 Ex-Parte Petition for Issuance of the
Spouses Limso and Davao Sunrise
questioned the denial of their Motion
before the Court of Appeals.225
Court of Appeals Decision227 dated
September 1, 2005 and
Resolution228 dated May 26, 2006. The
Petition for Certiorari and Prohibition
filed by Spouses Limso and Davao
Sunrise assailed two Orders of Judge
Quitain, which denied their Motion to
Expunge and/or Dismiss Petition for
Issuance of Writ of Possession.229
March 2, 2006, which denied
Philippine National Bank’s (1)
Application to Hold [Spouses Limso
and Davao Sunrise] and the Surety
Bond Company Jointly and Severally
Liable for Damages on the Injunction
Bond, and (2) Application for the
Appointment of [Philippine National
Bank] as Receiver. Also assailed was
the Court of Appeals
Resolution232 dated May 26, 2006,
which denied the Motion for
Reconsideration filed by Philippine
National Bank.
August 13, 2009 and Court of Appeals
Resolution235 dated May 18, 2011
docketed as CA-G.R. CV No. 79732-
Min. The decision dated August 13,
2009 affirmed with modification the
decision of the trial court in Civil Case
No. 28,170-2000.236 The Resolution
dated May 18, 2011 in CA-G.R. CV No.
79732-Min denied the Motion for
Reconsideration filed by Philippine
National Bank and also denied the
Motion for Partial Reconsideration
filed by Spouses Limso and Davao
Sunrise.237 The Rule 41 appeal was
filed by Philippine National Bank.238
Court of Appeals Decision240 dated
August 13, 2009 and Court of Appeals
Resolution241 dated May 18, 2011.
Spouses Limso and Davao Sunrise
assailed the portion of the Court of
Appeals Decision stating that their
outstanding obligation was
₱803,185,411.11.242
Court of Appeals Decision244 dated
 Writ of Possession under Act No. 3135
filed by Philippine National Bank,
praying that it be granted possession
over four parcels of land owned by
Davao Sunrise243
January 21, 2013 dismissing the
appeal under Rule 41 filed by
Philippine National Bank for being the
wrong remedy.

In the Manifestation and Motion245 dated May 26, 2006, Davao Sunrise prayed that it be allowed to withdraw G.R.
No. 169441 since the issues in the Petition had become moot and academic.

In the Resolution246 dated August 7, 2006, this court consolidated G.R. Nos. 172958, 173194, and 169441, with G.R.
No. 158622 as the lowest-numbered case.

Davao Sunrise’s Manifestation and Motion dated May 26, 2006, which prayed that it be allowed to withdraw G.R. No.
169441, was granted in the Resolution247 dated October 16, 2006. Thus, G.R. No. 169441 was deemed closed and
terminated as of October 16, 2006.248

In the Resolution249 dated March 7, 2007 in G.R. No. 173194, this court required respondents Spouses Limso and
Davao Sunrise to file their comment.

In the Resolution250 dated July 4, 2011, G.R. No. 197120 was consolidated with G.R. No. 196958.

On May 17, 2012, counsel for Spouses Limso and Davao Sunrise notified this court of the death of Robert Alan L.
Limso.251

On October 9, 2013, Spouses Limso and Davao Sunrise filed a Motion to Withdraw Petitions in G.R. Nos. 172958,
169441 and 158622.252 Davao Sunrise and Spouses Limso, through counsel, explained that G.R. No. 169441 had been
mooted by Judge Quitain’s voluntary inhibition from hearing and deciding Other Case No. 124-2002. 253

After Judge Quitain had inhibited, Other Case No. 124-2002 was re-raffled to Branch 16 of the Regional Trial Court of
Davao City.254 Other Case No. 124-2002 was dismissed in the Order 255 dated February 16, 2007. Since Other Case No.
124-2002 was dismissed, G.R. No. 172958 was mooted as well. 256

With regard to G.R. No. 158622, counsel for Spouses Limso and Davao Sunrise explained:

It is clear, however, that the ruling of the Regional Trial Court of Davao City in Civil Case No. 28,170-2000 and the
Court of Appeals in CA G.R. No. 79732 already rendered Civil Case No. 29,036-2002 moot and academic. Under the
premises, there is no need for this Honorable Court to rule on the propriety of the dismissal of the said action
for Declaratory Relief as the loan agreements --- from which the entire case stemmed --- had already been
declared NULL AND VOID.257 (Emphasis in the original)

In the Resolution258 dated March 12, 2014, this court granted the Motion to Withdraw Petitions with regard to G.R.
Nos. 172958 and 158622. The prayer for the withdrawal of G.R. No. 169441 was noted without action since G.R. No.
169441 was deemed closed and terminated in this court’s Resolution dated October 16, 2006. 259

On April 2, 2014, Spouses Limso and Davao Sunrise filed an "Omnibus Motion for Leave [1] To Intervene; [2] To File/
Admit Herein Attached Comment-in-Intervention; and [3] To Consolidate Cases" 260 in G.R. No. 205463.

Spouses Limso and Davao Sunrise argue that they were allowed to participate in Other Case No. 124-2002, and that
Philippine National Bank was in bad faith when it did not furnish Nancy Limso and Davao Sunrise copies of the
Petition for Review it had filed.261

In the Resolution262 dated April 2, 2014, this court gave due course to the Petition and required the parties to submit
their memoranda.
On April 15, 2014, Spouses Limso and Davao Sunrise filed a Motion to Dismiss the Petition in G.R. No. 173194 on the
ground that the issues raised by Philippine National Bank are moot and academic. Spouses Limso and Davao Sunrise
also reiterated that Philippine National Bank availed of the wrong remedy. 263

In the Resolution264 dated July 9, 2014, this court recommended the consolidation of G.R. No. 205463 with G.R. Nos.
158622, 169441, 172958, 173194, 196958, and 197120.

In the Resolution265 dated October 13, 2014, this court noted and granted the Omnibus Motion for Leave to Intervene
filed by counsel for Nancy Limso and Davao Sunrise. 266 This court also noted the memoranda filed by counsel for
Philippine National Bank, the Office of the Solicitor General, and counsel for Spouses Limso and Davao Sunrise. 267

The remaining issues for resolution are those raised in G.R. Nos. 173194, 196958, 197120, and 205463, which are:

First, whether the Philippine National Bank’s Petition for Review on Certiorari in G.R. No. 173194 is the wrong
remedy to assail the March 2, 2006 Court of Appeals Resolution, 268 which denied Philippine National Bank’s (1)
Application to Hold [Spouses Limso and Davao Sunrise] and the Surety Bond Company Jointly and Severally Liable for
Damages on the Injunction Bond, and (2) Application for the Appointment of [Philippine National Bank] as Receiver;

Second, whether Philippine National Bank committed forum shopping when it filed an ex-parte Petition for the
Issuance of a Writ of Possession and an Application to be Appointed as Receiver;

Third, whether the Court of Appeals erred in ruling that the interest rates imposed by Philippine National Bank were
usurious and unconscionable;

Fourth, whether the Conversion, Restructuring and Extension Agreement executed in 1999 novated the original Loan
and Credit Agreement executed in 1993;

Fifth, whether the Court of Appeals erred in dismissing the appeal under Rule 41 filed by Philippine National Bank,
which assailed the Court of Appeals Decision dated January 21, 2013 in CA-G.R. CV No. 01464-MIN, for being the
wrong remedy;

Sixth, whether the Sheriff’s Provisional Certificate of Sale should be considered registered in view of the entry made
by the Register of Deeds in the Primary Entry Book; and

Lastly, whether Philippine National Bank is entitled to a writ of possession.

The Petition for Review in G.R. No. 173194 should be denied.

The Petition docketed as G.R. No. 173194, filed by Philippine National Bank, questions the Court of Appeals
Resolutions in CA- G.R. CV No. 79732-MIN dated March 2, 2006 and May 26, 2006, which denied Philippine National
Bank’s applications for damages on the injunction bond and to be appointed as receiver. 269

The assailed Resolutions in G.R. No. 173194 are interlocutory orders and are not appealable.

Rule 41, Section 1270 of the Rules of Court provides:

SECTION 1. Subject of Appeal. — An appeal may be taken from a judgment or final order that completely disposes of
the case, or of a particular matter therein when declared by these Rules to be appealable.

No appeal may be taken from:

....

(b) An interlocutory order;

....

In any of the foregoing circumstances, the aggrieved party may file an appropriate special civil action as provided in
Rule 65.

In addition, Rule 45, Section 1 of the Rules of Court provides:

SECTION 1. Filing of Petition with Supreme Court. — A party desiring to appeal by certiorari from a judgment, final
order or resolution of the Court of Appeals, the Sandiganbayan, the Court of Tax Appeals, the Regional Trial Court or
other courts, whenever authorized by law, may file with the Supreme Court a verified petition for review on
certiorari[.] (Emphasis supplied)

The difference between an interlocutory order and a final order was discussed in United Overseas Bank v. Judge
Ros:271

The word interlocutory refers to something intervening between the commencement and the end of the suit which
decides some point or matter but is not a final decision of the whole controversy. This Court had the occasion to
distinguish a final order or resolution from an interlocutory one in the case of Investments, Inc. v. Court of Appeals,
thus:

x x x A "final" judgment or order is one that finally disposes of a case, leaving nothing more to be done by the Court
in respect thereto, e.g., an adjudication on the merits which, on the basis of the evidence presented on the trial,
declares categorically what the rights and obligations of the parties are and which party is in the right; or a judgment
or order that dismisses an action on the ground, for instance, of res judicata or prescription. Once rendered, the task
of the Court is ended, as far as deciding the controversy or determining the rights and liabilities of the litigants is
concerned. Nothing more remains to be done by the Court except to await the parties’ next move (which among
others, may consist of the filing of a motion for new trial or reconsideration, or the taking of an appeal) and
ultimately, of course, to cause the execution of the judgment once it becomes "final" or, to use the established and
more distinctive term, "final and executory."

xxx xxx xxx

Conversely, an order that does not finally dispose of the case, and does not end the Court's task of adjudicating the
parties’ contentions and determining their rights and liabilities as regards each other, but obviously indicates that
other things remain to be done by the Court, is "interlocutory" e.g., an order denying motion to dismiss under Rule
16 of the Rules, or granting of motion on extension of time to file a pleading, or authorizing amendment thereof, or
granting or denying applications for postponement, or production or inspection of documents or things, etc. Unlike a
"final" judgment or order, which is appealable, as above pointed out, an "interlocutory" order may not be questioned
on appeal except only as part of an appeal that may eventually be taken from the final judgment rendered in the
case.272 (Citations omitted)

The Resolutions denying Philippine National Bank’s applications were interlocutory orders since the Resolutions did
not dispose of the merits of the main case.

CA-G.R. CV No. 79732-MIN originated from Civil Case No. 28,170-2000, which involved the issues regarding the
interest rates imposed by Philippine National Bank. Hence, the denial of Philippine National Bank’s applications did
not determine the issues on the interest rates imposed by Philippine National Bank.

The proper remedy for Philippine National Bank would have been to file a petition for certiorari under Rule 65 or, in
the alternative, to await the outcome of the main case and file an appeal, raising the denial of its applications as an
assignment of error.

In any case, we continue to resolve the arguments raised in G.R. No. 173194.

Philippine National Bank argues in its Petition for Review docketed as G.R. No. 173194 that its application to hold the
injunction bond liable for damages was filed on time. It points out that the phrase "before the judgment becomes
executory" found in Section 20273 of Rule 57 refers to the judgment in the main case, which, in this case, refers to CA-
G.R. CV No. 79732.274

Philippine National Bank also argues that the Court of Appeals erred in denying its application to be appointed as
receiver because although the Sheriff’s Provisional Certificate of Sale was not registered, the Certificate of Sale
"provides the basis for [Philippine National Bank] to claim ownership over the foreclosed properties." 275 As the
highest bidder, Philippine National Bank had the right to receive the rental income of the foreclosed properties. 276

Spouses Limso and Davao Sunrise filed their Comment, 277 countering that the Court of Appeals did not err in denying
Philippine National Bank’s applications to hold the injunction bond liable for damages and to be appointed as
receiver.278 They cite San Beda College v. Social Security System,279 where this court ruled that "the claim for damages
for wrongful issuance of injunction must be filed before the finality of the decree dissolving the questioned writ." 280

They highlight Philippine National Bank’s admission that the writ of preliminary injunction was dissolved in January
2002, and that the Decision281 dissolving the writ attained finality on September 11, 2002. 282

Spouses Limso and Davao Sunrise further point out that while CA-G.R. CV No. 79732 was still pending before the
Court of Appeals, "the decree dissolving the questioned Writ of Preliminary Injunction had already become
final."283Thus, Philippine National Bank filed its application out of time. 284

They argue that in any case, Philippine National Bank cannot claim damages on the injunction bond since it was
unable to secure a judgment in its favor in Civil Case No. 28,170-2000. 285

They further argue that the Court of Appeals was correct in denying Philippine National Bank’s application to be
appointed as receiver on the ground that Philippine National Bank is a party to the case and hence, it cannot be
appointed as receiver. 286

Spouses Limso and Davao Sunrise then allege that Philippine National Bank is guilty of forum shopping. They argue
that Philippine National Bank’s ex-parte Petition for the issuance of a writ of possession, docketed as Other Case No.
124-2002, and the application to be appointed as receiver have the same purpose: to obtain possession of the
properties.287

Philippine National Bank, through counsel, filed its Reply, countering that San Beda College was decided when the
1964 Rules of Court was still in effect.288 It argues that the cited case is no longer applicable because the 1964 Rules
was superseded by the 1997 Rules of Civil Procedure.289 The applicable case is Hanil Development Co., Ltd. v.
Intermediate Appellate Court,290 where this court ruled that "the judgment against the attachment bond could be
included in the final judgment of the main case." 291

Philippine National Bank also argued that under the 1997 Rules of Civil Procedure, the applicant for damages does
not have to be the winning party.292

Philippine National Bank further argues that it did not commit forum shopping since "there is no identity of parties
between CA G.R. CV No. 79732 . . . and Other Case No. 124-2002." 293 The causes of action and reliefs sought in the
two cases are different.294 It points out that its application to be appointed as receiver is a provisional remedy under
Rule 59 of the 1997 Rules of Civil Procedure, while its prayer for the issuance of a writ of possession in Other Case
No. 124-2002 is based on its right to possess the properties involved. 295

We rule that the Court of Appeals properly denied Philippine National Bank’s application to hold the injunction bond
liable for damages and be appointed as receiver. We also rule that no forum shopping was committed by Philippine
National Bank. However, the Court of Appeals erred in ruling that Philippine National Bank filed its application to hold
the injunction bond liable for damages out of time.

The Court of Appeals, in its Resolution dated March 2, 2006, explained:

Records show that when this Court annulled the RTC’s order of injunction, Davao Sunrise thereafter elevated the
matter to the Supreme Court. On July 24, 2002, the Supreme Court denied its petition for having been filed out of
time and an Entry of Judgment was issued on Sept[ember] 11, 2002.

PNB’s instant application however was filed only on February 17, 2005 and/or in the course of its appeal on the main
case – about two (2) years and five (5) months after the judgment annulling the injunction order attained finality.

Clearly, despite that it already obtained a favorable judgment on the injunction matter, PNB failed to file (before the
court a quo) an application for damages against the bond before judgment was rendered in the main case by the
court a quo. Thus, even for this reason alone, Davao Sunrise and its bondsman are relieved of further liability
thereunder.296 (Citations omitted)

The Petition referred to by the Court of Appeals in the quoted Resolution was docketed as G.R. No. 152812 and was
entitled Davao Sunrise Investment and Development Corporation, et al. v. Court of Appeals, et al.297 G.R. No. 152812
originated from CA G.R. SP No. 63351.298 CA G.R. SP No. 63351 was a Petition for Certiorari filed by Philippine
National Bank, which questioned the issuance of a writ of preliminary injunction in Civil Case No. 28,170-2000. 299

In the Decision300 dated January 10, 2002, the Court of Appeals granted Philippine National Bank’s Petition for
Certiorari and held that:

In the case at bar, respondents’ claim to a right to preliminary injunction based on PNB’s purported unilateral
imposition of interest rates and subsequent increases thereof, is not a right warranting the issuance of an injunction
to halt the foreclosure proceedings. On the contrary, it is petitioner bank which has proven its right to foreclose
respondents’ mortgaged properties, especially since respondents have admitted their indebtedness to PNB and
merely questioning the interest rates imposed by the bank. . . .

....

Above all, the core and ultimate issue raised in the main case below is the interest stipulation in the loan agreements
between the petitioner and private respondents, the validity of which is still to be determined by the lower court.
Injunctive relief cannot be made to rest on the assumption that said interest stipulation is void as it would preempt
the merits of the main case.

WHEREFORE, premises considered, the assailed Orders of respondent judge dated December 4 and 21, 2000 are
hereby ANNULLED and SET ASIDE, and the Order dated November 20, 2000 denying private respondents prayer for
the issuance of a writ of preliminary injunction is REINSTATED.

SO ORDERED.301

Spouses Limso and Davao Sunrise assailed the Decision in CA-G.R. SP No. 63351 and filed before this court a Petition
for Review, docketed as G.R. No. 152812. However, the Petition for Review was denied in the Resolution 302dated July
24, 2002 for being filed out of time, and Entry of Judgment 303 was made on September 11, 2002.

The issuance of the writ of preliminary injunction in Civil Case No. 28,170-2000 was an interlocutory order, and was
properly questioned by Philippine National Bank through a Petition for Certiorari.

However, the Court of Appeals erred in ruling that Philippine National Bank’s application was filed out of time.

Section 20 of Rule 57 of the Rules of Civil Procedure provides: SECTION 20. Claim for Damages on Account of
Improper, Irregular or Excessive Attachment. — An application for damages on account of improper, irregular or
excessive attachment must be filed before the trial or before appeal is perfected or before the judgment becomes
executory, with due notice to the attaching party and his surety or sureties, setting forth the facts showing his right to
damages and the amount thereof. Such damages may be awarded only after proper hearing and shall be included in
the judgment on the main case.
If the judgment of the appellate court be favorable to the party against whom the attachment was issued, he must
claim damages sustained during the pendency of the appeal by filing an application in the appellate court, with
notice to the party in whose favor the attachment was issued or his surety or sureties, before the judgment of the
appellate court becomes executory. The appellate court may allow the application to be heard and decided by the
trial court.

Nothing herein contained shall prevent the party against whom the attachment was issued from recovering in the
same action the damages awarded to him from any property of the attaching party not exempt from execution
should the bond or deposit given by the latter be insufficient or fail to fully satisfy the award.

The judgment referred to in Section 20 of Rule 57 should mean the judgment in the main case. In Carlos v.
Sandoval:304

Section 20 essentially allows the application to be filed at any time before the judgment becomes executory.
It should be filed in the same case that is the main action, and cannot be instituted separately. It should be
filed with the court having jurisdiction over the case at the time of the application. The remedy provided by
law is exclusive and by failing to file a motion for the determination of the damages on time and while the
judgment is still under the control of the court, the claimant loses his right to damages. 305 (Citations omitted)

In this case, Philippine National Bank filed its application 306 during the pendency of the appeal before the Court of
Appeals. The application was dated January 12, 2005, 307 while the appeal in the main case, docketed as CA-G.R. CV
No. 79732-MIN, was decided on August 13, 2009. 308 Hence, Philippine National Bank’s application to hold the
injunction bond liable for damages was filed on time.

The Court of Appeals properly denied Philippine National Bank’s application to be appointed as a receiver.

Rule 59, Section 1 provides the grounds when a receiver may be appointed:

SECTION 1. Appointment of Receiver. — Upon a verified application, one or more receivers of the property subject of
the action or proceeding may be appointed by the court where the action is pending, or by the Court of Appeals or
by the Supreme Court, or a member thereof, in the following cases:

(a) When it appears from the verified application, and such other proof as the court may require,
that the party applying for the appointment of a receiver has an interest in the property or fund
which is the subject of the action or proceeding, and that such property or fund is in danger of being
lost, removed, or materially injured unless a receiver be appointed to administer and preserve it;

(b) When it appears in an action by the mortgagee for the foreclosure of a mortgage that the
property is in danger of being wasted or dissipated or materially injured, and that its value is
probably insufficient to discharge the mortgage debt, or that the parties have so stipulated in the
contract of mortgage;

(c) After judgment, to preserve the property during the pendency of an appeal, or to dispose of it
according to the judgment, or to aid execution when the execution has been returned unsatisfied or
the judgment obligor refuses to apply his property in satisfaction of the judgment, or otherwise to
carry the judgment into effect;

(d) Whenever in other cases it appears that the appointment of a receiver is the most convenient
and feasible means of preserving, administering, or disposing of the property in litigation.

During the pendency of an appeal, the appellate court may allow an application for the appointment of a receiver to
be filed in and decided by the court of origin and the receiver appointed to be subject to the control of said court.

In Commodities Storage & Ice Plant Corporation v. Court of Appeals:309

The general rule is that neither party to a litigation should be appointed as receiver without the consent of the other
because a receiver should be a person indifferent to the parties and should be impartial and disinterested. The
receiver is not the representative of any of the parties but of all of them to the end that their interests may be
equally protected with the least possible inconvenience and expense. 310(Citations omitted)

The Court of Appeals cited Spouses Limso and Davao Sunrise’s

objection to Philippine National Bank’s application to be appointed as

receiver as one of the grounds why the application should fail. 311

Also, the Court of Appeals found that the mortgaged properties of Spouses Limso and Davao Sunrise were earning
approximately ₱12,000,000.00 per month. This proves that the properties were being administered properly and did
not require the appointment of a receiver. Also, to appoint Philippine National Bank as receiver would be premature
since the trial court’s Decision was pending appeal. 312

Philippine National Bank did not commit forum shopping when it filed an ex-parte Petition for the issuance of a writ
of possession and an application for appointment as receiver.

The elements of forum shopping are:

(a) identity of parties, or at least such parties as represent the same interests in both actions;

(b) identity of rights asserted and relief prayed for, the relief being founded on the same facts; and

(c) the identity of the two preceding particulars, such that any judgment rendered in the other action will,
regardless of which party is successful, amount to res judicata in the action under consideration. 313 (Citation
omitted)

There is no identity of parties because the party to the Petition for Issuance of Writ of Possession is Philippine
National Bank only, while there are two parties to application for appointment as receiver: Philippine National Bank
on one hand, and Spouses Limso and Davao Sunrise on the other.

The causes of action are also different. In the Petition for Issuance of Writ of Possession, Philippine National Bank
prays that it be granted a writ of possession over the foreclosed properties because it is the winning bidder in the
foreclosure sale.314 On the other hand, Philippine National Bank’s application to be appointed as receiver is for the
purpose of preserving these properties pending the resolution of CA-G.R. CV No. 79732. 315 While the issuance of a
writ of possession or the appointment as receiver would have the same result of granting possession of the
foreclosed properties to Philippine National Bank, Philippine National Bank’s right to possess these properties as the
winning bidder in the foreclosure sale is different from its interest as creditor to preserve these properties.

II

There is no mutuality of contracts when the determination or imposition of interest rates is at the sole discretion of a
party to the contract. Further, escalation clauses in contracts are void when they allow the creditor to unilaterally
adjust the interest rates without the consent of the debtor.

The Petitions docketed as G.R. Nos. 196958 and 197120 assail the Decision in CA-G.R. CV No. 79732-MIN. 316

Philippine National Bank argues that the principle of mutuality of contracts was not violated because Spouses Limso
and Davao Sunrise were notified as to the applicable interest rates, and their consent was obtained before the
effectivity of the agreement.317 There was no unilateral imposition of interest rates since the rates were dependent
on the prevailing market rates. 318
Philippine National Bank also argues that Spouses Limso and Davao Sunrise were regularly informed by Philippine
National Bank of the interest rates imposed on their loan, as shown by Robert Alan L. Limso’s signatures on the
letters sent by Philippine National Bank.319

Philippine National Bank further argues that loan agreements with escalation clauses, by their nature, "would not
indicate the exact rate of interest applicable to a loan precisely because it is made to depend by the parties to
external factors such as market indicators and/or government regulations affecting the cost of money." 320

Philippine National Bank cites Solidbank Corp., (now Metropolitan Bank and Trust Company) v. Permanent Homes,
Incorporated,321 where this court held that "contracts with escalation clause do not violate the principle of mutuality
of contracts."322

Philippine National Bank contends that the Conversion, Restructuring and Extension Agreement novated the previous
contracts with Spouses Limso and Davao Sunrise. In addition, the alleged infirmities in the previous contracts were
set aside upon the execution of the Conversion, Restructuring and Extension Agreement. 323

On the other hand, Spouses Limso and Davao Sunrise argue that the Court of Appeals did not err in ruling that the
interest rates were imposed unilaterally. Spouses Limso and Davao Sunrise allege that the interest rates were not
stipulated in writing, in violation of Article 1956 of the Civil Code. 324 Also, the Court of Appeals did not err in reducing
the penalties and attorney’s fees since Article 2227 of the Civil Code states: 325

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

Spouses Limso and Davao Sunrise add that the letters sent by Philippine National Bank to Davao Sunrise were not
agreements but mere notices that the interest rates were increased by Philippine National Bank. 326 Moreover, the
letters were received by Davao Sunrise’s employees who were not authorized to receive such letters. 327 Some of the
letters did not even appear to have been received by anyone at all. 328

Spouses Limso and Davao Sunrise allege that Philippine National Bank admitted that the penalties stated in the
agreements were in the nature of liquidated damages.329 Nevertheless, Spouses Limso and Davao Sunrise question
the Court of Appeals’ ruling insofar as it held that their remaining obligation to Philippine National Bank is
₱803,185,411.11 as of September 1, 2008. According to Spouses Limso and Davao Sunrise, they have overpaid
Philippine National Bank in the amount of ₱15,915,588.89. 330

Philippine National Bank counters that Davao Sunrise and Spouses Limso’s promissory notes had a provision stating:

[T]he rate of interest shall be set at the start of every Interest Period. For this purpose, I/We agree that the rate of
interest herein stipulated may be increased or decreased for the subsequent Interest Periods, with PRIOR NOTICE TO
THE BORROWER in the event of changes in the interest rate prescribed by law or the Monetary Board of Central Bank
of the Philippines or in the Bank’s overall cost of funds. I/We hereby agree that IN THE EVENT I/WE ARE NOT
AGREEABLE TO THE INTEREST RATE FIXED FOR ANY INTEREST PERIOD, I/WE HAVE THE OPTION TO PREPAY THE
LOAN OR CREDIT FACILITY WITHOUT PENALTY within ten (10) calendar days from the Interest Setting
Date.331 (Emphasis in the original)

As to the letters sent by Philippine National Bank, these letters were received by the Chief Finance Officer, Chairman,
and President of Davao Sunrise. In addition, assuming that the employees who allegedly received the letters were
not authorized to do so, the unauthorized acts were ratified by Spouses Limso and Davao Sunrise when they used the
proceeds of the loan.332

We rule that there was no mutuality of contract between the parties since the interest rates imposed were based on
the sole discretion of Philippine National Bank.333 Further, the escalation clauses in the real estate mortgage "[did]
not specify a fixed or base interest[.]" 334 Thus, the interest rates are invalid.

The principle of mutuality of contracts is stated in Article 1308 of the Civil Code as follows:
Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of
one of them.

The importance of the principle of mutuality of contracts was discussed in Juico v. China Banking Corporation:335

The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that any
obligation arising from contract has the force of law between the parties; and (2) that there must be mutuality
between the parties based on their essential equality. Any contract which appears to be heavily weighed in favor of
one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or
compliance of the contract which is left solely to the will of one of the parties, is likewise, invalid. 336 (Citation omitted)

When there is no mutuality between the parties to a contract, it means that the parties were not on equal footing
when the terms of the contract were negotiated. Thus, the principle of mutuality of contracts dictates that a contract
must be rendered void when the execution of its terms is skewed in favor of one party. 337

The Court of Appeals also noted that since the interest rates imposed were at the sole discretion of Philippine
National Bank, and that Spouses Limso and Davao Sunrise were merely notified when there were changes in the
interest rates, Philippine National Bank violated the principle of mutuality of contracts. 338 The Court of Appeals ruled
that:

We cannot subscribe to appellant bank’s allegation that plaintiffs-appellees agreed to these interest rates by
receiving various letters from PNB. Those letters cannot be construed as agreements as a simple reading of those
letters would show that they are mere notices informing plaintiffs-appellees that the bank, through its top
management, had already imposed interest rates on their loan. The uniform wordings of the said letters go this way:

This refers to your existing credit facility in the principal amount of P850.0 MM granted by the Philippine National
Bank by and under the terms and conditions of that Credit Agreement dated 12.2.97 (Renewal of Credit Facility).

We wish to advise you that the top management has approved an interest rate of 20.756% which will be used in
computing the interest due on your existing peso and redenominated availments against the credit facility for the
period July 20 to August 19, 1998.

If you are amenable to this arrangement, please signify your conformity on the space provided below and return to
us the original copy of the document. If we receive no written objection by the end of 10 days from date of receipt of
this letter, we will take it to mean that you agree to the new interest rate we quote. On the other hand, if you
disagree with the quoted rate, you will have to pay the loan in full within the same ten-day period otherwise, the
entire loan will be considered due and demandable. 339 (Citation omitted)

The contents of the letter quoted by the Court of Appeals show that there was no room for negotiation among
Philippine National Bank, Spouses Limso, and Davao Sunrise when it came to the applicable interest rate. Since there
was no room for negotiations between the parties with regard to the increases of the rates of interest, the principle
of mutuality of contracts was violated. There was no meeting of the minds between Spouses Limso, Davao Sunrise,
and Philippine National Bank because the increases in the interest rates were imposed on them unilaterally.

Meeting of the minds between parties to a contract is manifested when the elements of a valid contract are all
present.340 Article 1318 of the Civil Code provides:

Article 1318. There is no contract unless the following requisites concur:

(1) Consent of the contracting parties;

(2) Object certain which is the subject matter of the contract;

(3) Cause of the obligation which is established.

When one of the elements is wanting, no contract can be perfected. 341 In this case, no consent was given by Spouses
Limso and Davao Sunrise as to the increase in the interest rates. Consequently, the increases in the interest rates are
not valid.

Even the promissory notes contained provisions granting Philippine National Bank the sole discretion to set the
interest rate:

[Promissory Note] NO. 0015138516350115 . . .

....

. . . I/We, jointly and severally, promise to pay to the order of the Philippine National Bank (the ‘Bank’) at its office
in cm recto avenue davao city [sic], Philippines, the sum of PHILIPPINE PESOS: 583,183,333.34 (P583,183,333.34)
together with interest thereon for the current Interest Period at a rate of to be set by mgt. [management]. Interest
Period shall mean the period commencing on the date hereof and having a duration not exceeding monthly (____)
days and each similar period thereafter commencing upon the expiry of the immediately preceding Interest Period.
The rate of interest shall be set at the start of every Interest Period. For this purpose, I/We agree that the rate of
interest herein stipulated may be increased or decreased for the subsequent Interest Periods, with prior notice to the
Borrower in the event of changes in interest rate prescribed by law or the Monetary Board of the Central Bank of the
Philippines, or in the Bank’s overall cost of funds. I/We hereby agree that in the event I/We are not agreeable to the
interest rate fixed for any Interest Period, I/we shall have the option to prepay the loan or credit facility without
penalty within ten (10) calendar days from the Interest Setting Date. 342

Promissory Note No. 0015138516350116343 contained the same provisions, differing only as to the amount of the
obligation.

Assuming that Davao Sunrise and Spouses Limso agreed to the increase in interest rates, the interest rates are still
null and void for being unreasonable.344

This court has held that while the Usury Law was suspended by Central Bank Circular No. 905, Series of 1982,
unconscionable interest rates may be declared illegal. 345 The suspension of the Usury Law did not give creditors an
unbridled right to impose arbitrary interest rates. To determine whether an interest rate is unconscionable, we are
guided by the following pronouncement:

In determining whether the rate of interest is unconscionable, the mechanical application of pre-established floors
would be wanting. The lowest rates that have previously been considered unconscionable need not be an
impenetrable minimum. What is more crucial is a consideration of the parties’ contexts. Moreover, interest rates
must be appreciated in light of the fundamental nature of interest as compensation to the creditor for money lent to
another, which he or she could otherwise have used for his or her own purposes at the time it was lent. It is not the
default vehicle for predatory gain. As such, interest need only be reasonable. It ought not be a supine mechanism for
the creditor’s unjust enrichment at the expense of another. 346

A reading of the interest provisions in the original agreement and the Conversion, Restructuring and Extension
Agreement shows that the interest rates imposed by Philippine National Bank were usurious and unconscionable.

In the original credit and loan agreements executed in 1993, the interest provisions provide:

CREDIT AGREEMENT

....

1.04 Interest on Availments. (a) The Borrowers agree to pay interest on each availment from date of each availment
up to, but not including the date of full payment thereof at a rate per annum that is determined by the Bank to be
equivalent to the Bank’s prime rate less 1.0% in effect as of the date of the relevant Availment, subject to quarterly
review and to maintenance of deposits with ADB of at least 5% of the amount availed in its savings and current
account. Non compliance of ADB requirement shall subject the credit line to regular interest rate which is the prime
rate plus applicable spread.347

LOAN AGREEMENT

....

1.03 Interest. (a) The Borrowers hereby agree to pay interest on the loan from the date of Drawdown up to
Repayment Date at the rate that is determined by the Bank to be the Bank’s prime rate in effect at the Date of
Drawdown less 1.0% and which shall be reset every 90 days to coincide with interest payments.

(b) The determination by the Bank of the amount of interest due and payable hereunder shall be conclusive and
binding on the borrower in the absence of manifest error in the computation. 348(Emphasis supplied, underscoring in
the original)

In the Conversion, Restructuring and Extension Agreement, the interest provisions state:

SECTION 2. TERMS OF LOAN I

....

2.04 Interest. (a) The Borrowers agree to pay the Bank interest on Loan I from the Effective Date, until the date of full
payment thereof at the rate per annum to be set by the Bank. The interest rate shall be reset by the Bank every
month.

....

SECTION 3. TERMS OF LOAN II

....

3.04 Interest. (a) The Borrowers agree to pay the Bank interest on Loan II from the Effective Date, until the date of full
payment thereof at the rate per annum to be set by the Bank. The interest rate shall be reset by the Bank every
month.349 (Emphasis supplied, underscoring in the original)

From the terms of the loan agreements, there was no way for Spouses Limso and Davao Sunrise to determine the
interest rate imposed on their loan because it was always at the discretion of Philippine National Bank.

Nor could Spouses Limso and Davao Sunrise determine the exact amount of their obligation because of the frequent
changes in the interest rates imposed.

As found by the Court of Appeals, the loan agreements merely stated that interest rates would be imposed. However,
the specific interest rates were not stipulated, and the subsequent increases in the interest rates were all at the
discretion of Philippine National Bank.350

Also invalid are the escalation clauses in the real estate mortgage and promissory notes. The escalation clause in the
real estate mortgage states:

"(k) INCREASE OF INTEREST RATE:

"The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount which
may have been advanced by the mortgagee, in accordance with the provisions hereof shall be subject during the life
of this contract to such an increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may
prescribe for its debtors."351

The escalation clause in the promissory notes352 states:

For this purpose, I/We agree that the rate of interest herein stipulated may be increased or decreased for the
subsequent Interest Periods, with prior notice to the Borrower in the event of changes in interest rate prescribed by
law or the Monetary Board or the Central Bank of the Philippines, or in the Bank’s overall cost of funds. 353

Banco Filipino Savings and Mortgage Bank v. Judge Navarro 354 defined an escalation clause as "one which the
contract fixes a base price but contains a provision that in the event of specified cost increases, the seller or
contractor may raise the price up to a fixed percentage of the base." 355

This court has held that escalation clauses are not always void since they serve "to maintain fiscal stability and to
retain the value of money in long term contracts." 356 However:

[A]n escalation clause "which grants the creditor an unbridled right to adjust the interest independently and
upwardly, completely depriving the debtor of the right to assent to an important modification in the agreement" is
void. A stipulation of such nature violates the principle of mutuality of contracts. Thus, this Court has previously
nullified the unilateral determination and imposition by creditor banks of increases in the rate of interest provided in
loan contracts.

....

. . . [W]e hold that the escalation clause is . . . void because it grants respondent the power to impose an increased
rate of interest without a written notice to petitioners and their written consent. Respondent’s monthly telephone
calls to petitioners advising them of the prevailing interest rates would not suffice. A detailed billing statement based
on the new imposed interest with corresponding computation of the total debt should have been provided by the
respondent to enable petitioners to make an informed decision. An appropriate form must also be signed by the
petitioners to indicate their conformity to the new rates. Compliance with these requisites is essential to preserve
the mutuality of contracts. For indeed, one-sided impositions do not have the force of law between the parties,
because such impositions are not based on the parties' essential equality. 357 (Citations omitted)

The interest rate provisions in Philippine National Bank’s loan agreements and real estate mortgage contracts have
been nullified by this court in several cases. Even the escalation clauses in Philippine National Bank’s contracts were
noted to be violative of the principle of mutuality of contracts. 358

The original loan agreement in this case was executed in 1993. Prior

to the execution of the original loan agreement, this court promulgated a Decision in 1991 ruling that "the unilateral
action of the [Philippine National Bank] in increasing the interest rate on the private respondent’s loan, violated the
mutuality of contracts ordained in Article 1308 of the Civil Code[.]" 359

In Philippine National Bank v. Court of Appeals,360 the interest rate provisions were nullified because these allowed
Philippine National Bank to unilaterally increase the interest rate. 361 The nullified interest rate provisions were
worded as follows:

"The Credit Agreement provided inter alia, that—

‘(a) The BANK reserves the right to increase the interest rate within the limits allowed by law at any time depending
on whatever policy it may adopt in the future: Provided, that the interest rate on this accommodation shall be
correspondingly decreased in the event that the applicable maximum interest is reduced by law or by the Monetary
Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the
increase or decrease in the maximum interest rate.’

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

The Real Estate Mortgage contract likewise provided that—

‘(k) INCREASE OF INTEREST RATE: The rate of interest charged on the obligation secured by this mortgage as well as
the interest on the amount which may have been advanced by the MORTGAGEE, in accordance with the provision
hereof, shall be subject during the life of this contract to such an increase within the rate allowed by law, as the Board
of Directors of the MORTGAGEE may prescribe for its debtors.’ 362

This court explained that:

Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the parties
must meet as to the proposed modification, especially when it affects an important aspect of the agreement. In the
case of loan contracts, it cannot be gainsaid that the rate of interest is always a vital component, for it can make or
break a capital venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of any binding
effect.363

In a subsequent case364 also involving Philippine National Bank, this court likewise nullified the interest rate provisions
of Philippine National Bank and discussed:

In this case no attempt was made by PNB to secure the conformity of private respondents to the successive increases
in the interest rate. Private respondents’ assent to the increases cannot be implied from their lack of response to the
letters sent by PNB, informing them of the increases. For as stated in one case, no one receiving a proposal to change
a contract is obliged to answer the proposal. 365 (Citation omitted)

However, only the interest rate imposed is nullified; hence, it is deemed not written in the contract. The agreement
on payment of interest on the principal loan obligation remains. It is a basic rule that a contract is the law between
contracting parties.366 In the original loan agreement and the Conversion, Restructuring and Extension Agreement,
Spouses Limso and Davao Sunrise agreed to pay interest on the loan they obtained from Philippine National Bank.
Such obligation was not nullified by this court. Thus, their obligation to pay interest in their loan obligation subsists. 367

Spouses Abella v. Spouses Abella368 involved a simple loan with an agreement to pay interest. Unfortunately, the
applicable interest rate was not stipulated by the parties. This court discussed that in cases where the parties fail to
specify the applicable interest rate, the legal rate of interest applies. This court also discussed that the applicable
legal rate of interest shall be the prevailing rate at the time when the agreement was entered into: 369

This is so because interest in this respect is used as a surrogate for the parties’ intent, as expressed as of the time of
the execution of their contract. In this sense, the legal rate of interest is an affirmation of the contracting parties’
intent; that is, by their contract’s silence on a specific rate, the then prevailing legal rate of interest shall be the cost
of borrowing money. This rate, which by their contract the parties have settled on, is deemed to persist regardless of
shifts in the legal rate of interest. Stated otherwise, the legal rate of interest, when applied as conventional interest,
shall always be the legal rate at the time the agreement was executed and shall not be susceptible to shifts in rate. 370

Further, Spouses Abella cited Article 2212371 of the Civil Code and the ruling in Nacar v. Gallery Frames,372 which
both state that "interest due shall itself earn legal interest from the time it is judicially demanded:" 373

[T]he interest due on conventional interest shall be at the rate of 12% per annum from [date of judicial demand] to
June 30, 2013. Thereafter, or starting July 1, 2013, this shall be at the rate of 6% per annum. 374

In this case, the Conversion, Restructuring and Extension Agreement was executed on January 28, 1999. Thus, the
applicable interest rate on the principal loan obligation (conventional interest) is at 12% per annum. With regard to
the interest due on the conventional interest, judicial demand was made on August 21, 2000 when Philippine
National Bank filed a Petition375 for Extrajudicial Foreclosure of Real Estate Mortgage. 376 Thus, from August 21, 2000
to June 30, 2013, the interest rate on conventional interest shall be at 12%. From July 1, 2013 until full payment, the
applicable interest rate on conventional interest shall be at 6%.

III
The Conversion, Restructuring and Extension Agreement novated the original agreement executed in 1993. However,
the nullified interest rate provisions in the original loan agreement cannot be deemed as having been legitimized,
ratified, or set aside.

Philippine National Bank argues that the Conversion, Restructuring and Extension Agreement novated the original
loan agreement and that the novation effectively set aside the infirmities in the original loan agreement. 377

The Civil Code provides that:

Article 1292. In order that an obligation may be extinguished by another which substitutes the same, it is imperative
that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible
with each other.

Novation has been defined as:

Novation may either be express, when the new obligation declares in unequivocal terms that the old obligation is
extinguished, or implied, when the new obligation is on every point incompatible with the old one. The test of
incompatibility lies on whether the two obligations can stand together, each one with its own independent existence.

For novation, as a mode of extinguishing or modifying an obligation, to apply, the following requisites must concur:

1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.

3) The old contract must be extinguished.

4) There must be a valid new contract. 378 (Citations omitted)

The original Credit Agreement379 was executed on September 1, 1993, 380 while the Conversion, Restructuring and
Extension Agreement381 was executed on January 28, 1999.382

Pertinent portions of the Conversion, Restructuring and Extension Agreement state:

WITNESSETH: That –

....

WHEREAS, the Borrowers [referring to DSIDC and spouses Limso] acknowledge that they have outstanding
obligations (the "Obligations") with the Bank broken down as follows:

(i) Credit Line – ₱583.18 Million (as of September 30, 1998);

(ii) Loan – ₱266.67 Million (as of September 30, 1998); and

(iii) Interest – ₱217.15 Million (as of December 31, 1998);

WHEREAS, at the request of the Borrowers, the Bank has approved (a) the conversion and restructuring of the Credit
Line portion of the Obligations into a term loan, (b) the extension of the term of the Loan for another four (4) years,
(c) the capitalization on accrued interest (up to December 31, 1998) on the Obligations, (d) the waiver of the
penalties charges (if any) accruing on the Obligations, and (e) the partial release of chattel mortgage on stock
inventories, subject to the terms and conditions hereinafter set forth;

....

SECTION 2. TERMS OF LOAN I

2.01 Amount of Loan I. Loan I shall be in the principal amount not exceeding PESOS: FIVE HUNDRED EIGHTY THREE
MILLION ONE HUNDRED EIGHTY THOUSAND (₱583,180,000.00)

....

SECTION 3. TERMS OF LOAN II

3.01 Amount of Loan II. Loan II shall be in the principal amount not exceeding PESOS: FOUR HUNDRED EIGHTY THREE
MILLION SEVEN HUNDRED EIGHTY THOUSAND (₱483,780,000.00). 383

In this case, the previous valid obligation of Spouses Limso and Davao Sunrise was the payment of a loan in the total
amount of ₱700 million, plus interest.

Upon the request of Spouses Limso and Davao Sunrise, Philippine National Bank agreed to restructure the original
loan agreement.384

Philippine National Bank summarized the Conversion, Restructuring and Extension Agreement as follows:

(a) The conversion of the Revolving Credit Line into a Term Loan in the principal amount of 583.18 Million
and denominated as "Loan I".

(b) The Extension for another four (4) years of the original long term loan (from 01 September 2001 to 31
December 2005);

(c) The capitalization of the accrued interest on both the Revolving Credit Line and the Long Term Loan up to
31 December 1998;

(d) The consolidation of the accrued interest and the outstanding obligation of the original Long Term Loan to
form "Loan 2" with the total principal amount of P483.82 Million;

(e) Waiver of penalty charges;

(f) Partial release of chattel mortgage on the stock inventories;

(g) Both "Loan I" and "Loan II" were made payable within seven (7) years in monthly amortization and a
balloon payment on or before December 2005. 385

When the loan agreement was restructured, the principal obligation of Spouses Limso and Davao Sunrise became
₱1.067 billion.

The Conversion, Restructuring and Extension Agreement novated the original credit agreement because the principal
obligation itself changed.

Important provisions of the original agreement were altered. For example, the penalty charges were waived and the
terms of payment were extended.

Further, the preambular clauses of the Conversion, Restructuring and Extension Agreement show that Spouses Limso
and Davao Sunrise sought to change the terms of the original agreement and that they themselves acknowledged
their obligation to be ₱1.067 billion. They are now estopped from claiming that their obligation should be based on
the original agreement when it was through their own actions that the loan was restructured.

Thus, the Court of Appeals in CA-G.R. CV No. 79732-MIN erred in not declaring that the Conversion, Restructuring
and Extension Agreement novated the original agreement and in computing Spouses Limso and Davao Sunrise’s
obligation based on the original agreement.
Since the Conversion, Restructuring and Extension Agreement novated the original credit agreement, we modify the
Court of Appeals Decision in that the outstanding obligation of Spouses Limso and Davao Sunrise should be
computed on the basis of the Conversion, Restructuring and Extension Agreement.

In the Court of Appeals Decision dated August 13, 2009:

Computing the interest at 12% per annum on the principal amount of 700 Million Pesos, the interest should be 84
Million Pesos per annum. Multiplying 84 Million Pesos by 15 years from September 1, 1993 to September 1, 2008,
the interest for the 15-year period would be One Billion Two Hundred Sixty Million Pesos (P1,260,000,000.00). Then,
by adding the interest of P1,260,000,000.00 to the principal amount of 700 Million Pesos, the total obligation of
plaintiffs-appellees would be One Billion Nine Hundred Sixty Million Pesos (P1,960,000,000.00) by September 1,
2008. And since plaintiffs-appellees has paid a total amount of One Billion One Hundred Fifty Six Million Eight
Hundred Fourteen Thousand Five Hundred Eighty Eight Pesos and 89/100 (P1,156,814,588.89) to appellant PNB as of
December 5, 1998, as per PNB’s official computation of payments per official receipts, then, plaintiffs-appellees
would still have an outstanding balance of about Eight Hundred Three Million One Hundred Eighty Five Thousand
Four Hundred Eleven and 11/100 Pesos (P 803,185,411.11) as of September 1, 2008. The amount of P
803,185,411.11 will earn interest at the legal rate of 12% per annum from September 1, 2008 until fully paid.

....

WHEREFORE, the assailed Decision dated June 19, 2002 and Order dated August 13, 2002 of the Regional Trial Court
of Davao City, Branch 17 in Civil Case No. 28,170-2000 declaring the unilateral imposition of interest rates by
defendant-appellant PNB as null and void appealed from are AFFIRMED with the MODIFICATION that the obligation
of plaintiffs-appellees arising from the Loan and Revolving Credit Line and subsequent Conversion, Restructuring and
Extension Agreement as Loan I and Loan II shall earn interest at the legal rate of twelve percent (12%) per annum
computed from September 1, 1993, until fully paid and satisfied.

SO ORDERED.386

Notably, in the body of the Court of Appeals Decision, Spouses Limso and Davao Sunrise’s obligation was computed
on the basis of the original loan agreement, while in the dispositive portion, the Court of Appeals cited both the
original loan agreement and the Conversion, Restructuring and Extension Agreement.

The general rule is that:

Where there is a conflict between the dispositive part and the opinion of the court contained in the text or body of
the decision, the former must prevail over the latter on the theory that the dispositive portion is the final order, while
the opinion is merely a statement ordering nothing. 387 (Citation omitted)

To avoid confusion, we also rule that the interest rate provisions and the escalation clauses in the Conversion,
Restructuring and Extension Agreement are nullified insofar as they allow Philippine National Bank to unilaterally
determine and increase the imposable interest rates.

Article 1409388 of the Civil Code provides that void contracts cannot be ratified. Hence, the void interest rate
provisions in the original loan agreement could not have been ratified by the execution of the Conversion,
Restructuring and Extension Agreement.

IV

The proper remedy to assail a decision on pure questions of law is to file a petition for review on certiorari under
Rule 45, not an appeal under Rule 41 of the 1997 Rules of Civil Procedure.

One of the issues raised by Philippine National Bank in G.R. No. 205463 is the dismissal of its appeal under Rule 41 by
the Court of Appeals in its Decision dated January 21, 2013. 389
Philippine National Bank, through counsel, argues that Rule 41 is the proper remedy because its Petition raises
questions of fact and of law.390 For example, the issue of whether there is an annotation of encumbrance on the titles
of the mortgaged properties is a question of fact. 391

Denying Philippine National Bank’s appeal under Rule 41, the Court of Appeals stated that:

[Philippine National Bank] simply takes issue against the conclusions made by the court a quo which pertains to the
matter of whether mere entry in the Primary Entry Book, sans the signature of the registrar, already completes
registration. It does not question the weight and probative value of the fact that the signature of Atty. Patriarcha [sic]
was previously entered in the records then revoked by her. What PNB seeks, therefore, is a review of the decision of
the court a quo dismissing its petition, without delving into the weight of the evidence, but on the correctness of the
court a quo’s conclusions based on the evidence presented before it. This is clearly a question of law.

....

To the mind of this Court, PNB seeks to harp repeatedly on the issue of the court a quo’s failure to consider that the
certificate of sale has been duly registered on February 4, 2002 upon mere entry in the Primary Entry Book, even
without the signature of the then register of deeds. Though couched in different creative presentations, all the errors
assigned by PNB point to one vital question: What completes registration? To answer it, this Court is not asked to
calibrate the evidence presented, or gauge the truth or falsity, but to apply the appropriate law to the situation. This
is clearly a question of law.392 (Emphasis in the original)

In Land Bank of the Philippines v. Yatco Agricultural Enterprises,393 this court discussed the difference between
questions of law and questions of fact:

As a general rule, the Court’s jurisdiction in a Rule 45 petition is limited to the review of pure questions of law. A
question of law arises when the doubt or difference exists as to what the law is on a certain state of facts. Negatively
put, Rule 45 does not allow the review of questions of fact. A question of fact exists when the doubt or difference
arises as to the truth or falsity of the alleged facts.

The test in determining whether a question is one of law or of fact is "whether the appellate court can determine the
issue raised without reviewing or evaluating the evidence, in which case, it is a question of law[.]" Any question that
invites calibration of the whole evidence, as well as their relation to each other and to the whole, is a question of fact
and thus proscribed in a Rule 45 petition. 394 (Citations omitted)

Based on the foregoing, there was no error on the part of the Court of Appeals when it dismissed Philippine National
Bank’s Petition for being the wrong remedy. Indeed, Philippine National Bank was not questioning the probative
value of the evidence. Instead, it was questioning the conclusion of the trial court that registration had not been
perfected based on the evidence presented.

The registration of the Sheriff’s Provisional Certificate of Sale was completed.

Philippine National Bank argues that the registration was completed, and restates the doctrine in National Housing
Authority v. Basa, Jr., et al.:395

Once the Certificate of Sale is entered in the Primary Book of Entry of the Registry of Deeds with the registrant having
paid all the required fees and accomplished all that is required of him under the law to cause registration, the
registration is complete.396

Philippine National Bank further argues that "[t]he records of all the transactions are recorded in the Primary Entry
Book and the annotation on the titles of the transaction do not control registration. It is the recording in the Primary
Entry Book which controls registration." 397
Philippine National Bank adds that though the annotation of a certificate of sale at the back of the certificates of title
is immaterial in the perfection of registration, the evidence shows that the Certificate of Sale was annotated. 398

Philippine National Bank alleges that registration was completed because Atty. Patriarca, the Register of Deeds at that
time, affixed her signature but would later erase it. 399

Philippine National Bank cites Atty. Cruzabra’s Comment, which alleges that the Sheriff’s Provisional Certificate of
Sale and other documents relative to the sale were registered in the Primary Entry Book of the Registry of Deeds of
Davao City.400 The Comment also states that:

3. The Sheriff’s Provisional Certificate of Sale was annotated at the back of the aforementioned titles but it does not
bear the signature of the former Registrar of Deeds. Noted however is that the portion below the annotation of the
Provisional Sheriff’s [sic] Certificate of Sale there appears to be erasures ("snowpake"), and [Atty. Cruzabra] is not in a
position to conclude as to the circumstances [relative to said erasures], for lack of personal knowledge as to what
transpired at that time.401 (Citation omitted)

Philippine National Bank also cites the Decision in Administrative Case No. 02-13 dated January 12, 2005, which was
the case against Atty. Patriarca for Grave Misconduct and Conduct Unbecoming of a Public Official. In the Decision,
the Land Registration Authority found that:

Respondent herein likewise admits that she finally signed the PNB transaction annotated on the subject titles when
she was informed that the motion for reconsideration was denied by this Authority, but she subsequently erased her
signature when she subsequently found out that an appeal was filed by the Limso spouses.

....

The registration of these documents became complete when respondent affixed her signature below these
annotations. Whatever information belatedly gathered thereafter relative to the circumstances as to the registrability
of these documents, respondent can not unilaterally take judicial notice thereof and proceed to lift at her whims and
caprices what has already been officially in force and effective, by erasing thereon her signature. 402

In addition, Philippine National Bank argues that the erasure of Atty. Patriarca’s signature using correction fluid could
not have revoked, cancelled, or annulled the registration since under Section 108 of Presidential Decree 1529, only a
court order can revoke registration. 403

Philippine National Bank alleges that it has complied with the requirements under Section 7 of Act No. 3135 and
Section 47 of Republic Act No. 8791.404 Thus, it is entitled to a writ of possession. 405

The Office of the Solicitor General filed its Comment, 406 quoting the dispositive portion of the Land Registration
Authority’s Consulta No. 3405 dated May 21, 2002:407

WHEREFORE, in view of the foregoing, the Sheriff’s Provisional Certificate of Sale dated February 04, 2002 is
registerable on TCT Nos. T-147820, T-147386, and T-247012, provided all other registration requirements are
complied with.408 (Emphasis supplied)

The Office of the Solicitor General also quotes the dispositive portion of the Land Registration Authority’s Resolution
in the Motion for Reconsideration: 409

WHEREFORE, in view of the foregoing[,] the Sheriff’s Provisional Certificate of Sale dated February 4, 2002 is
registrable on TCT Nos. T-147820, T-147821, T-147386 and T-247012, provided all other registration requirements are
complied with.410 (Emphasis supplied)

The Office of the Solicitor General then cites National Housing Authority and Autocorp Group and Autographics, Inc.
v. Court of Appeals411 and discusses that when all the requirements for registration of annotation has been complied
with, it is ministerial upon the Register of Deeds to register the annotation. 412 The Register of Deeds is not authorized
"to make an appraisal of proofs outside of the documents sought to be registered." 413
For the Office of the Solicitor General, the Register of Deeds’ refusal to affix the annotation on the foreclosed
properties’ titles "should not preclude the completion of the registration of any applicant who has complied with the
requirements of the law to register its right or interest in registered lands." 414

Spouses Limso and Davao Sunrise, as intervenors-oppositors, filed a Memorandum. 415 They cite Section 117416 of
Presidential Decree No. 1529417 and argue that registration of the Certificate of Sale in the Primary Entry Book is a
preliminary step in registration. 418 Since Philippine National Bank withdrew the documents it submitted to the
Register of Deeds of Davao City, the Sheriff’s Provisional Certificate of Sale was not registered. 419

Further, Philippine National Bank’s argument that "entry . . . in the Primary Entry Book is equivalent to
registration"420 is not in accordance with Section 56421 of Presidential Decree No. 1529.422 Moreover, "[t]he signature
of the Register of Deeds is crucial to the completeness of the registration process." 423

Spouses Limso and Davao Sunrise posit that Philippine National Bank admitted that the Certificate of Sale is not
registered in various hearings.424

These admissions are judicial admissions that should be binding on Philippine National Bank. 425

Spouses Limso and Davao Sunrise allege that during the oral arguments held on March 19, 2003 at the Court of
Appeals in CA G.R. SP No. 71527, counsel for Philippine National Bank stated: 426

ATTY. [BENILDA A.] TEJADA:

Yes, we can show the documents which we are going to file your Honors.

We would like to state also your Honors the fact of why no registration was ever made in this case. Counsel forgot to
mention that the fact of no registration is simply because the Register of Deeds refused to register our Certificate of
Sale. We have a pending case against them Sir before the LRA and before the Ombudsman fore [sic] refusal to
register our Certificate of Sale. Now, we have filed this case because inspite [sic] of the fact the Register of Deeds
addressed a consulta to the Land Registration Authority on the registerity of the Certificate of Sale your Honors[,] [i]t
was at their instance that there was a consulta.

And then, the Land Registration Authority has already rendered its opinion that the document is registrable. Despite
that your Honors, the document has never been registered. So that was the subject of our case against them. We do
not understand the intransigencies we do not understand the refusal. 427

In addition, the Court of Appeals correctly dismissed Philippine National Bank’s appeal because the issue raised
involved a question of law, specifically "whether or not mere entry in the Primary Entry Book is considered as
registration of the subject Certificate of Sale."428

Section 56 of Presidential Decree No. 1529 states:

SECTION 56. Primary Entry Book; Fees; Certified Copies. — Each Register of Deeds shall keep a primary entry book in
which, upon payment of the entry fee, he shall enter, in the order of their reception, all instruments including copies
of writs and processes filed with him relating to registered land. He shall, as a preliminary process in registration,
note in such book the date, hour and minute of reception of all instruments, in the order in which they were
received. They shall be regarded as registered from the time so noted, and the memorandum of each instrument,
when made on the certificate of title to which it refers, shall bear the same date: Provided, that the national
government as well as the provincial and city governments shall be exempt from the payment of such fees in advance
in order to be entitled to entry and registration. (Emphasis supplied)

In this case, Philippine National Bank filed the Sheriff’s Provisional Certificate of Sale, which was duly approved by the
Executive Judge, before the Registry of Deeds of Davao City. Entries were made in the Primary Entry Book. Hence, the
Sheriff’s Provisional Certificate of Sale should be considered registered.
Autocorp Group and Autographics, Inc. involved an extrajudicial foreclosure of mortgaged property and the
registration of a Sheriff’s Certificate of Sale. Autocorp sought the issuance of a writ of injunction "to prevent the
register of deeds from registering the subject certificate of sale[.]" 429

This court explained that a Sheriff’s Certificate of Sale is an involuntary instrument and that a writ of injunction will
no longer lie because of the following reasons:

[F]or the registration of an involuntary instrument, the law does not require the presentation of the owner’s
duplicate certificate of title and considers the annotation of such instrument upon the entry book, as sufficient to
affect the real estate to which it relates.

...

....

It is a ministerial duty on the part of the Register of Deeds to annotate the instrument on the certificate of sale after a
valid entry in the primary entry book.1awp++i1 P.D. No. 1524 provides:

SEC. 63. Foreclosure of Mortgage. — x x x

(b) If the mortgage was foreclosed extrajudicially, a certificate of sale executed by the officer who conducted the
sale shall be filed with the Register of Deeds who shall make a brief memorandum thereof on the certificate of title.

In fine, petitioner’s prayer for the issuance of a writ of injunction, to prevent the register of deeds from registering
the subject certificate of sale, had been rendered moot and academic by the valid entry of the instrument in the
primary entry book. Such entry is equivalent to registration.430 (Emphasis supplied, citation omitted)

Based on the records of this case, the Sheriff’s Certificate of Sale filed by Philippine National Bank was already
recorded in the Primary Entry Book.

The refusal of the Register of Deeds to annotate the registration on the titles of the properties should not affect
Philippine National Bank’s right to possess the properties.

As to the argument that Philippine National Bank admitted in open court that the Certificate of Sale was not
registered, it is evident from Spouses Limso and Davao Sunrise’s Memorandum that Philippine National Bank
immediately explained that the non-registration was due to the Register of Deeds’ refusal. Thus, the alleged non-
registration was not due to Philippine National Bank’s fault.

It appears on record that Philippine National Bank already complied with the requirements for registration. Thus,
there was no reason for the Register of Deeds to persistently refuse the registration of the Certificate of Sale.

At any rate, the Land Registration Authority stated in its Resolution in Administrative Case No. 02-13 that Atty.
Patriarca herself admitted that she already affixed her signature on the annotation at the back of the certificate of
titles, and that she subsequently erased her signature. 431 This finding of fact in the administrative case supports the
argument of Philippine National Bank and the opinion of the Office of the Solicitor General that the Certificate of Sale
should be considered registered.

With regard to the issue of whether Philippine National Bank is entitled to a writ of possession, the trial court in
Other Case No. 124 2002 denied the application for the writ of possession and explained:

Portion of Sec. 47 of RA No. 8791 is quoted:

x x x the purchaser at the auction sale concerned whether in a judicial or extra judicial foreclosure shall have the right
to enter upon and take possession of such property immediately after the date of the confirmation of the auction
sale and administer the same in accordance with law x x x.
From the quoted provision, one can readily conclude that before the sale is confirmed, it is not considered final or
perfected to entitle the purchaser at the auction sale to the writ of possession as a matter of right. .

...

In extra-judicial foreclosure, there is technically no confirmation of the auction sale in the manner provided for by
Sec. 7 of Rule 68. The process though involves an application, preparation of the notice of extrajudicial sale, the
extra-judicial foreclosure sale, issuance of the certificate of sale, approval of the Executive Judge or in the latter’s
absence, the Vice-Executive Judge and the registration of the certificate of sale with the Register of Deeds.

While it may be true that as found by the CA in the case earlier cited that DSIDC had only until January 24, 2001 to
redeem its properties and that the registration of the certificate of foreclosure sale is no longer relevant in the
reckoning of the redemption period, for purposes of the issuance of the writ of possession, petitioner to this Court’s
belief should complete the entire process in extra-judicial foreclosure. Otherwise the sale may not be considered
perfected and the application for writ of possession may be denied.

The records disclose that contrary to petitioner’s claim, the Certificate of Sale covering the subject properties has not
been registered with the Registry of Deeds of Davao City as the Court finds no annotation thereof. As such, the sale is
not considered perfected to entitle petitioner to the writ of possession as a matter of right.

Accordingly, for reason stated, the petition is DISMISSED. With the dismissal of the petition, PNB’s Motion for
Reception and Admission of PNB’s Ex-parte Testimonial and Documentary Evidence is DENIED.

SO ORDERED.432

However, Philippine National Bank is applying for the writ of possession on the ground that it is the winning bidder
during the auction sale, and not because it consolidated titles in its name. As such, the applicable provisions of law
are Section 47 of Republic Act No. 8791 433 and Section 7 of Act No. 3135.434

Section 47 of Republic Act No. 8791 provides:

SECTION 47. Foreclosure of Real Estate Mortgage. — In the event of foreclosure, whether judicially or extrajudicially,
of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor
or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right
within one year after the sale of the real estate, to redeem the property by paying the amount due under the
mortgage deed, with interest thereon at the rate specified in the mortgage, and all the costs and expenses incurred
by the bank or institution from the sale and custody of said property less the income derived therefrom. However,
the purchaser at the auction sale concerned whether in a judicial or extrajudicial foreclosure shall have the right to
enter upon and take possession of such property immediately after the date of the confirmation of the auction sale
and administer the same in accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure
proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a
bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the
enjoining or the restraint of the foreclosure proceeding.

Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure,
shall have the right to redeem the property in accordance with this provision until, but not after, the registration of
the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3)
months after foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale prior to
the effectivity of this Act shall retain their redemption rights until their expiration. (Emphasis supplied)

Section 7 of Act No. 3135 provides:

SECTION 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of First Instance
of the province or place where the property or any part thereof is situated, to give him possession thereof during the
redemption period, furnishing bond in an amount equivalent to the use of the property for a period of twelve
months, to indemnify the debtor in case it be shown that the sale was made without violating the mortgage or
without complying with the requirements of this Act. Such petition shall be made under oath and filed in form of an
ex parte motion in the registration or cadastral proceedings if the property is registered, or in special proceedings in
the case of property registered under the Mortgage Law or under section one hundred and ninety-four of the
Administrative Code, or of any other real property encumbered with a mortgage duly registered in the office of any
register of deeds in accordance with any existing law, and in each case the clerk of the court shall, upon the filing of
such petition, collect the fees specified in paragraph eleven of section one hundred and fourteen of Act Numbered
Four hundred and ninety-six, as amended by Act Numbered Twenty-eight hundred and sixty-six, and the court shall,
upon approval of the bond, order that a writ of possession issue, addressed to the sheriff of the province in which
the property is situated, who shall execute said order immediately.1avvphi1

The rule under Section 7 of Act No. 3135 was restated in Nagtalon v. United Coconut Planters Bank:435

During the one-year redemption period, as contemplated by Section 7 of the above-mentioned law, a purchaser may
apply for a writ of possession by filing an ex parte motion under oath in the registration or cadastral proceedings if
the property is registered, or in special proceedings in case the property is registered under the Mortgage Law. In this
case, a bond is required before the court may issue a writ of possession. 436

On the other hand, a writ of possession may be issued as a matter of right when the title has been consolidated in
the buyer’s name due to nonredemption by the mortgagor. Under this situation, the basis for the writ of possession
is ownership of the property.437

The Sheriff’s Provisional Certificate of Sale should be deemed registered. However, Philippine National Bank must still
file a bond before the writ of possession may be issued.

VI

To fully dispose of all the issues in these consolidated cases, this court shall also rule on one of the issues raised in
G.R. No. 158622. In G.R. No. 158622, Spouses Limso and Davao Sunrise allege that the Sheriff’s Provisional Certificate
of Sale does not state the appropriate redemption period; thus, they filed a Petition for Declaratory Relief, which was
docketed as Civil Case No. 29,036-2002. 438

In the loan agreement, natural and juridical persons are co-debtors, while the properties mortgaged to secure the
loan are owned by Davao Sunrise.

Act No. 3135 provides that the period of redemption is one (1) year after the sale. 439 On the other hand, Republic Act
No. 8791 provides a shorter period of three (3) months to redeem in cases involving juridical persons. 440

We rule that the period of redemption for this case should be not more than three (3) months in accordance with
Section 47 of Republic Act No. 8791. The mortgaged properties are all owned by Davao Sunrise. Section 47 of
Republic Act No. 8791 states: "the mortgagor or debtor whose real property has been sold" and "juridical persons
whose property is being sold[.]" Clearly, the law itself provides that the right to redeem belongs to the owner of the
property mortgaged. As the mortgaged properties all belong to Davao Sunrise, the shorter period of three (3) months
is the applicable redemption period.

The policy behind the shorter redemption period was explained in Goldenway Merchandising Corporation v.
Equitable PCI Bank:441

The difference in the treatment of juridical persons and natural persons was based on the nature of the
properties foreclosed—whether these are used as residence, for which the more liberal one-year redemption
period is retained, or used for industrial or commercial purposes, in which case a shorter term is deemed
necessary to reduce the period of uncertainty in the ownership of property and enable mortgagee-banks to
dispose sooner of these acquired assets. It must be underscored that the General Banking Law of 2000,
crafted in the aftermath of the 1997 Southeast Asian financial crisis, sought to reform the General Banking
Act of 1949 by fashioning a legal framework for maintaining a safe and sound banking system. In this context,
the amendment introduced by Section 47 embodied one of such safe and sound practices aimed at ensuring
the solvency and liquidity of our banks. 442 (Citation omitted)
To grant a longer period of redemption on the ground that a co-debtor is a natural person defeats the purpose of
Republic Act No. 8791. In addition, the real properties mortgaged by Davao Sunrise appear to be used for commercial
purposes.443

WHEREFORE, the Petition for Review on Certiorari in G.R. No. 173194 is DENIED.

The Petition docketed as G.R. No. 196958 is PARTIALLY GRANTED, while the Petition docketed as G.R. No. 197120
is DENIED.

The Decision of the Court of Appeals in CA-G.R. CV No. 79732-MIN is AFFIRMED with MODIFICATION.

The Conversion, Restructuring and Extension Agreement executed in 1999 is deemed to have novated the Credit
Agreement and Loan Agreement executed in 1993. Thus, the principal loan obligation of Davao Sunrise Investment
and Development Corporation and Spouses Robert Alan and Nancy Limso shall be computed on the basis of the
amounts indicated in the Conversion, Restructuring and Extension Agreement.

Interest on the principal loan obligation shall be at the rate of 12% per annum and computed from January 28, 1999,
the date of the execution of the Conversion, Restructuring and Extension Agreement. Interest rate on the
conventional interest shall be at the rate of 12% per annum from August 21, 2000, the date of judicial demand, to
June 30, 2013. From July 1, 2013 until full satisfaction, the interest rate on the conventional interest shall be
computed at 6% per annum in view of this court’s ruling in Nacar v. Gallery Frames.444

This case is ordered REMANDED to Branch 17 of the Regional Trial Court of Davao City for the computation of the
total amount of Davao Sunrise Investment and Development Corporation and Spouses Robert Alan and Nancy
Limso's remaining obligation.

The Petition docketed as G.R. No. 205463 is PARTIALLY GRANTED. The Sheriffs Provisional Certificate of Sale is
deemed to have been registered. In view of the facts of this case, the applicable period of redemption shall be three
(3) months as provided under Republic Act No. 8791.

In case the final computation shows that Davao Sunrise Investment and Development Corporation and Spouses
Robert Alan and Nancy Limso overpaid Philippine National Bank, Philippine National Bank must return the excess
amount.

The writ of possession prayed for by Philippine National Bank may only be issued after all the requirements for the
issuance of a writ of possession are complied with.

SO ORDERED.

MAMBULAO LUMBER COMPANY vs. PHILIPPINE NATIONAL BANK [January 30, 1968]

An appeal from a decision, dated April 2, 1964, of the Court of First Instance of Manila in Civil Case No. 52089,
entitled "Mambulao Lumber Company, plaintiff, versus Philippine National Bank and Anacleto Heraldo, defendants",
dismissing the complaint against both defendants and sentencing the plaintiff to pay to defendant Philippine National
Bank (PNB for short) the sum of P3,582.52 with interest thereon at the rate of 6% per annum from December 22,
1961 until fully paid, and the costs of suit.

In seeking the reversal of the decision, the plaintiff advances several propositions in its brief which may be restated
as follows:

1. That its total indebtedness to the PNB as of November 21, 1961, was only P56,485.87 and not P58,213.51
as concluded by the court a quo; hence, the proceeds of the foreclosure sale of its real property alone in the
 amount of P56,908.00 on that date, added to the sum of P738.59 it remitted to the PNB thereafter was more
than sufficient to liquidate its obligation, thereby rendering the subsequent foreclosure sale of its chattels
unlawful;

2. That it is not liable to pay PNB the amount of P5,821.35 for attorney's fees and the additional sum of
P298.54 as expenses of the foreclosure sale;

3. That the subsequent foreclosure sale of its chattels is null and void, not only because it had already settled
its indebtedness to the PNB at the time the sale was effected, but also for the reason that the said sale was
not conducted in accordance with the provisions of the Chattel Mortgage Law and the venue agreed upon by
the parties in the mortgage contract;

4. That the PNB, having illegally sold the chattels, is liable to the plaintiff for its value; and

5. That for the acts of the PNB in proceeding with the sale of the chattels, in utter disregard of plaintiff's
vigorous opposition thereto, and in taking possession thereof after the sale thru force, intimidation, coercion,
and by detaining its "man-in-charge" of said properties, the PNB is liable to plaintiff for damages and
attorney's fees.

The antecedent facts of the case, as found by the trial court, are as follows:

On May 5, 1956 the plaintiff applied for an industrial loan of P155,000 with the Naga Branch of defendant
PNB and the former offered real estate, machinery, logging and transportation equipments as collaterals. The
application, however, was approved for a loan of P100,000 only. To secure the payment of the loan, the
plaintiff mortgaged to defendant PNB a parcel of land, together with the buildings and improvements existing
thereon, situated in the poblacion of Jose Panganiban (formerly Mambulao), province of Camarines Norte,
and covered by Transfer Certificate of Title No. 381 of the land records of said province, as well as various
sawmill equipment, rolling unit and other fixed assets of the plaintiff, all situated in its compound in the
aforementioned municipality.

On August 2, 1956, the PNB released from the approved loan the sum of P27,500, for which the plaintiff
signed a promissory note wherein it promised to pay to the PNB the said sum in five equal yearly installments
at the rate of P6,528.40 beginning July 31, 1957, and every year thereafter, the last of which would be on July
31, 1961.

On October 19, 1956, the PNB made another release of P15,500 as part of the approved loan granted to the
plaintiff and so on the said date, the latter executed another promissory note wherein it agreed to pay to the
former the said sum in five equal yearly installments at the rate of P3,679.64 beginning July 31, 1957, and
ending on July 31, 1961.

The plaintiff failed to pay the amortization on the amounts released to and received by it. Repeated demands
were made upon the plaintiff to pay its obligation but it failed or otherwise refused to do so. Upon inspection
and verification made by employees of the PNB, it was found that the plaintiff had already stopped operation
about the end of 1957 or early part of 1958.

On September 27, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines Norte requesting him to
take possession of the parcel of land, together with the improvements existing thereon, covered by Transfer
Certificate of Title No. 381 of the land records of Camarines Norte, and to sell it at public auction in
accordance with the provisions of Act No. 3135, as amended, for the satisfaction of the unpaid obligation of
the plaintiff, which as of September 22, 1961, amounted to P57,646.59, excluding attorney's fees. In
compliance with the request, on October 16, 1961, the Provincial Sheriff of Camarines Norte issued the
corresponding notice of extra-judicial sale and sent a copy thereof to the plaintiff. According to the notice,
the mortgaged property would be sold at public auction at 10:00 a.m. on November 21, 1961, at the ground
floor of the Court House in Daet, Camarines Norte.
On November 6, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines Norte requesting him to
take possession of the chattels mortgaged to it by the plaintiff and sell them at public auction also on
November 21, 1961, for the satisfaction of the sum of P57,646.59, plus 6% annual interest therefore from
September 23, 1961, attorney's fees equivalent to 10% of the amount due and the costs and expenses of the
sale. On the same day, the PNB sent notice to the plaintiff that the former was foreclosing extrajudicially the
chattels mortgaged by the latter and that the auction sale thereof would be held on November 21, 1961,
between 9:00 and 12:00 a.m., in Mambulao, Camarines Norte, where the mortgaged chattels were situated.

On November 8, 1961, Deputy Provincial Sheriff Anacleto Heraldo took possession of the chattels mortgaged
by the plaintiff and made an inventory thereof in the presence of a PC Sergeant and a policeman of the
municipality of Jose Panganiban. On November 9, 1961, the said Deputy Sheriff issued the corresponding
notice of public auction sale of the mortgaged chattels to be held on November 21, 1961, at 10:00 a.m., at
the plaintiff's compound situated in the municipality of Jose Panganiban, Province of Camarines Norte.

On November 19, 1961, the plaintiff sent separate letters, posted as registered air mail matter, one to the
Naga Branch of the PNB and another to the Provincial Sheriff of Camarines Norte, protesting against the
foreclosure of the real estate and chattel mortgages on the grounds that they could not be effected unless a
Court's order was issued against it (plaintiff) for said purpose and that the foreclosure proceedings, according
to the terms of the mortgage contracts, should be made in Manila. In said letter to the Naga Branch of the
PNB, it was intimated that if the public auction sale would be suspended and the plaintiff would be given an
extension of ninety (90) days, its obligation would be settled satisfactorily because an important negotiation
was then going on for the sale of its "whole interest" for an amount more than sufficient to liquidate said
obligation.

The letter of the plaintiff to the Naga Branch of the PNB was construed by the latter as a request for
extension of the foreclosure sale of the mortgaged chattels and so it advised the Sheriff of Camarines Norte
to defer it to December 21, 1961, at the same time and place. A copy of said advice was sent to the plaintiff
for its information and guidance.

The foreclosure sale of the parcel of land, together with the buildings and improvements thereon, covered by
Transfer Certificate of Title No. 381, was, however, held on November 21, 1961, and the said property was
sold to the PNB for the sum of P56,908.00, subject to the right of the plaintiff to redeem the same within a
period of one year. On the same date, Deputy Provincial Sheriff Heraldo executed a certificate of sale in favor
of the PNB and a copy thereof was sent to the plaintiff.

In a letter dated December 14, 1961 (but apparently posted several days later), the plaintiff sent a bank draft
for P738.59 to the Naga Branch of the PNB, allegedly in full settlement of the balance of the obligation of the
plaintiff after the application thereto of the sum of P56,908.00 representing the proceeds of the foreclosure
sale of parcel of land described in Transfer Certificate of Title No. 381. In the said letter, the plaintiff
reiterated its request that the foreclosure sale of the mortgaged chattels be discontinued on the grounds that
the mortgaged indebtedness had been fully paid and that it could not be legally effected at a place other
than the City of Manila.

In a letter dated December 16, 1961, the plaintiff advised the Provincial Sheriff of Camarines Norte that it
had fully paid its obligation to the PNB, and enclosed therewith a copy of its letter to the latter dated
December 14, 1961.

On December 18, 1961, the Attorney of the Naga Branch of the PNB, wrote to the plaintiff acknowledging the
remittance of P738.59 with the advice, however, that as of that date the balance of the account of the
plaintiff was P9,161.76, to which should be added the expenses of guarding the mortgaged chattels at the
rate of P4.00 a day beginning December 19, 1961. It was further explained in said letter that the sum of
P57,646.59, which was stated in the request for the foreclosure of the real estate mortgage, did not include
the 10% attorney's fees and expenses of the sale. Accordingly, the plaintiff was advised that the foreclosure
sale scheduled on the 21st of said month would be stopped if a remittance of P9,161.76, plus interest
thereon and guarding fees, would be made.
 On December 21, 1961, the foreclosure sale of the mortgaged chattels was held at 10:00 a.m. and they were
awarded to the PNB for the sum of P4,200 and the corresponding bill of sale was issued in its favor by Deputy
Provincial Sheriff Heraldo.

In a letter dated December 26, 1961, the Manager of the Naga Branch of the PNB advised the plaintiff giving
it priority to repurchase the chattels acquired by the former at public auction. This offer was reiterated in a
letter dated January 3, 1962, of the Attorney of the Naga Branch of the PNB to the plaintiff, with the
suggestion that it exercise its right of redemption and that it apply for the condonation of the attorney's fees.
The plaintiff did not follow the advice but on the contrary it made known of its intention to file appropriate
action or actions for the protection of its interests.

On May 24, 1962, several employees of the PNB arrived in the compound of the plaintiff in Jose Panganiban,
Camarines Norte, and they informed Luis Salgado, Chief Security Guard of the premises, that the properties
therein had been auctioned and bought by the PNB, which in turn sold them to Mariano Bundok. Upon being
advised that the purchaser would take delivery of the things he bought, Salgado was at first reluctant to
allow any piece of property to be taken out of the compound of the plaintiff. The employees of the PNB
explained that should Salgado refuse, he would be exposing himself to a litigation wherein he could be held
liable to pay big sum of money by way of damages. Apprehensive of the risk that he would take, Salgado
immediately sent a wire to the President of the plaintiff in Manila, asking advice as to what he should do. In
the meantime, Mariano Bundok was able to take out from the plaintiff's compound two truckloads of
equipment.

In the afternoon of the same day, Salgado received a telegram from plaintiff's President directing him not to
deliver the "chattels" without court order, with the information that the company was then filing an action
for damages against the PNB. On the following day, May 25, 1962, two trucks and men of Mariano Bundok
arrived but Salgado did not permit them to take out any equipment from inside the compound of the
plaintiff. Thru the intervention, however, of the local police and PC soldiers, the trucks of Mariano Bundok
were able finally to haul the properties originally mortgaged by the plaintiff to the PNB, which were bought
by it at the foreclosure sale and subsequently sold to Mariano Bundok.

Upon the foregoing facts, the trial court rendered the decision appealed from which, as stated in the first paragraph
of this opinion, sentenced the Mambulao Lumber Company to pay to the defendant PNB the sum of P3,582.52 with
interest thereon at the rate of 6% per annum from December 22, 1961 (day following the date of the questioned
foreclosure of plaintiff's chattels) until fully paid, and the costs. Mambulao Lumber Company interposed the instant
appeal.

We shall discuss the various points raised in appellant's brief in seriatim.

The first question Mambulao Lumber Company poses is that which relates to the amount of its indebtedness to the
PNB arising out of the principal loans and the accrued interest thereon. It is contended that its obligation under the
terms of the two promissory notes it had executed in favor of the PNB amounts only to P56,485.87 as of November
21, 1961, when the sale of real property was effected, and not P58,213.51 as found by the trial court.

There is merit to this claim. Examining the terms of the promissory note executed by the appellant in favor of the
PNB, we find that the agreed interest on the loan of P43,000.00 — P27,500.00 released on August 2, 1956 as per
promissory note of even date (Exhibit C-3), and P15,500.00 released on October 19, 1956, as per promissory note of
the same date (Exhibit C-4) — was six per cent (6%) per annum from the respective date of said notes "until paid". In
the statement of account of the appellant as of September 22, 1961, submitted by the PNB, it appears that in arriving
at the total indebtedness of P57,646.59 as of that date, the PNB had compounded the principal of the loan and the
accrued 6% interest thereon each time the yearly amortizations became due, and on the basis of these compounded
amounts charged additional delinquency interest on them up to September 22, 1961; and to this erroneously
computed total of P57,646.59, the trial court added 6% interest per annum from September 23, 1961 to November
21 of the same year. In effect, the PNB has claimed, and the trial court has adjudicated to it, interest on accrued
interests from the time the various amortizations of the loan became due until the real estate mortgage executed to
secure the loan was extra-judicially foreclosed on November 21, 1961. This is an error. Section 5 of Act No. 2655
expressly provides that in computing the interest on any obligation, promissory note or other instrument or contract,
compound interest shall not be reckoned, except by agreement, or in default thereof, whenever the debt is judicially
claimed. This is also the clear mandate of Article 2212 of the new Civil Code which provides that interest due shall
earn legal interest only from the time it is judicially demanded, and of Article 1959 of the same code which ordains
that interest due and unpaid shall not earn interest. Of course, the parties may, by stipulation, capitalize the interest
due and unpaid, which as added principal shall earn new interest; but such stipulation is nowhere to be found in the
terms of the promissory notes involved in this case. Clearly therefore, the trial court fell into error when it awarded
interest on accrued interests, without any agreement to that effect and before they had been judicially demanded.

Appellant next assails the award of attorney's fees and the expenses of the foreclosure sale in favor of the PNB. With
respect to the amount of P298.54 allowed as expenses of the extra-judicial sale of the real property, appellant
maintains that the same has no basis, factual or legal, and should not have been awarded. It likewise decries the
award of attorney's fees which, according to the appellant, should not be deducted from the proceeds of the sale of
the real property, not only because there is no express agreement in the real estate mortgage contract to pay
attorney's fees in case the same is extra-judicially foreclosed, but also for the reason that the PNB neither spent nor
incurred any obligation to pay attorney's fees in connection with the said extra-judicial foreclosure under
consideration.

There is reason for the appellant to assail the award of P298.54 as expenses of the sale. In this respect, the trial court
said:

The parcel of land, together with the buildings and improvements existing thereon covered by Transfer
Certificate of Title No. 381, was sold for P56,908. There was, however, no evidence how much was the
expenses of the foreclosure sale although from the pertinent provisions of the Rules of Court, the Sheriff's
fees would be P1 for advertising the sale (par. k, Sec. 7, Rule 130 of the Old Rules) and P297.54 as his
commission for the sale (par. n, Sec. 7, Rule 130 of the Old Rules) or a total of P298.54.

There is really no evidence of record to support the conclusion that the PNB is entitled to the amount awarded as
expenses of the extra-judicial foreclosure sale. The court below committed error in applying the provisions of the
Rules of Court for purposes of arriving at the amount awarded. It is to be borne in mind that the fees enumerated
under paragraphs k and n, Section 7, of Rule 130 (now Rule 141) are demandable, only by a sheriff serving processes
of the court in connection with judicial foreclosure of mortgages under Rule 68 of the new Rules, and not in cases of
extra-judicial foreclosure of mortgages under Act 3135. The law applicable is Section 4 of Act 3135 which provides
that the officer conducting the sale is entitled to collect a fee of P5.00 for each day of actual work performed in
addition to his expenses in connection with the foreclosure sale. Admittedly, the PNB failed to prove during the trial
of the case, that it actually spent any amount in connection with the said foreclosure sale. Neither may expenses for
publication of the notice be legally allowed in the absence of evidence on record to support it. 1 It is true, as pointed
out by the appellee bank, that courts should take judicial notice of the fees provided for by law which need not be
proved; but in the absence of evidence to show at least the number of working days the sheriff concerned actually
spent in connection with the extra-judicial foreclosure sale, the most that he may be entitled to, would be the
amount of P10.00 as a reasonable allowance for two day's work — one for the preparation of the necessary notices
of sale, and the other for conducting the auction sale and issuance of the corresponding certificate of sale in favor of
the buyer. Obviously, therefore, the award of P298.54 as expenses of the sale should be set aside.

But the claim of the appellant that the real estate mortgage does not provide for attorney's fees in case the same is
extra-judicially foreclosed, cannot be favorably considered, as would readily be revealed by an examination of the
pertinent provision of the mortgage contract. The parties to the mortgage appear to have stipulated under paragraph
(c) thereof, inter alia:

. . . For the purpose of extra-judicial foreclosure, the Mortgagor hereby appoints the Mortgagee his attorney-
in-fact to sell the property mortgaged under Act 3135, as amended, to sign all documents and to perform all
acts requisite and necessary to accomplish said purpose and to appoint its substitute as such attorney-in-fact
with the same powers as above specified. In case of judicial foreclosure, the Mortgagor hereby consents to
the appointment of the Mortgagee or any of its employees as receiver, without any bond, to take charge of
the mortgaged property at once, and to hold possession of the same and the rents, benefits and profits
derived from the mortgaged property before the sale, less the costs and expenses of the receivership; the
Mortgagor hereby agrees further that in all cases, attorney's fees hereby fixed at Ten Per cent (10%) of the
 total indebtedness then unpaid which in no case shall be less than P100.00 exclusive of all fees allowed by
law, and the expenses of collection shall be the obligation of the Mortgagor and shall with priority, be paid to
the Mortgagee out of any sums realized as rents and profits derived from the mortgaged property or from
the proceeds realized from the sale of the said property and this mortgage shall likewise stand as security
therefor. . . .

We find the above stipulation to pay attorney's fees clear enough to cover both cases of foreclosure sale mentioned
thereunder, i.e., judicially or extra-judicially. While the phrase "in all cases" appears to be part of the second
sentence, a reading of the whole context of the stipulation would readily show that it logically refers to extra-judicial
foreclosure found in the first sentence and to judicial foreclosure mentioned in the next sentence. And the ambiguity
in the stipulation suggested and pointed out by the appellant by reason of the faulty sentence construction should
not be made to defeat the otherwise clear intention of the parties in the agreement.

It is suggested by the appellant, however, that even if the above stipulation to pay attorney's fees were applicable to
the extra-judicial foreclosure sale of its real properties, still, the award of P5,821.35 for attorney's fees has no legal
justification, considering the circumstance that the PNB did not actually spend anything by way of attorney's fees in
connection with the sale. In support of this proposition, appellant cites authorities to the effect: (1) that when the
mortgagee has neither paid nor incurred any obligation to pay an attorney in connection with the foreclosure sale,
the claim for such fees should be denied; 2 and (2) that attorney's fees will not be allowed when the attorney
conducting the foreclosure proceedings is an officer of the corporation (mortgagee) who receives a salary for all the
legal services performed by him for the corporation. 3 These authorities are indeed enlightening; but they should not
be applied in this case. The very same authority first cited suggests that said principle is not absolute, for there is
authority to the contrary. As to the fact that the foreclosure proceeding's were handled by an attorney of the legal
staff of the PNB, we are reluctant to exonerate herein appellant from the payment of the stipulated attorney's fees
on this ground alone, considering the express agreement between the parties in the mortgage contract under which
appellant became liable to pay the same. At any rate, we find merit in the contention of the appellant that the award
of P5,821.35 in favor of the PNB as attorney's fees is unconscionable and unreasonable, considering that all that the
branch attorney of the said bank did in connection with the foreclosure sale of the real property was to file a petition
with the provincial sheriff of Camarines Norte requesting the latter to sell the same in accordance with the provisions
of Act 3135.

The principle that courts should reduce stipulated attorney's fees whenever it is found under the circumstances of
the case that the same is unreasonable, is now deeply rooted in this jurisdiction to entertain any serious objection to
it. Thus, this Court has explained:

But the principle that it may be lawfully stipulated that the legal expenses involved in the collection of a debt
shall be defrayed by the debtor does not imply that such stipulations must be enforced in accordance with
the terms, no matter how injurious or oppressive they may be. The lawful purpose to be accomplished by
such a stipulation is to permit the creditor to receive the amount due him under his contract without a
deduction of the expenses caused by the delinquency of the debtor. It should not be permitted for him to
convert such a stipulation into a source of speculative profit at the expense of the debtor.

Contracts for attorney's services in this jurisdiction stands upon an entirely different footing from contracts
for the payment of compensation for any other services. By express provision of section 29 of the Code of
Civil Procedure, an attorney is not entitled in the absence of express contract to recover more than a
reasonable compensation for his services; and even when an express contract is made the court can ignore it
and limit the recovery to reasonable compensation if the amount of the stipulated fee is found by the court
to be unreasonable. This is a very different rule from that announced in section 1091 of the Civil Code with
reference to the obligation of contracts in general, where it is said that such obligation has the force of law
between the contracting parties. Had the plaintiff herein made an express contract to pay his attorney an
uncontingent fee of P2,115.25 for the services to be rendered in reducing the note here in suit to judgment,
it would not have been enforced against him had he seen fit to oppose it, as such a fee is obviously far
greater than is necessary to remunerate the attorney for the work involved and is therefore unreasonable. In
order to enable the court to ignore an express contract for an attorney's fees, it is not necessary to show, as
in other contracts, that it is contrary to morality or public policy (Art. 1255, Civil Code). It is enough that it is
unreasonable or unconscionable. 4
Since then this Court has invariably fixed counsel fees on a quantum meruit basis whenever the fees stipulated
appear excessive, unconscionable, or unreasonable, because a lawyer is primarily a court officer charged with the
duty of assisting the court in administering impartial justice between the parties, and hence, the fees should be
subject to judicial control. Nor should it be ignored that sound public policy demands that courts disregard
stipulations for counsel fees, whenever they appear to be a source of speculative profit at the expense of the debtor
or mortgagor. 5 And it is not material that the present action is between the debtor and the creditor, and not between
attorney and client. As court have power to fix the fee as between attorney and client, it must necessarily have the
right to say whether a stipulation like this, inserted in a mortgage contract, is valid. 6

In determining the compensation of an attorney, the following circumstances should be considered: the amount and
character of the services rendered; the responsibility imposed; the amount of money or the value of the property
affected by the controversy, or involved in the employment; the skill and experience called for in the performance of
the service; the professional standing of the attorney; the results secured; and whether or not the fee is contingent
or absolute, it being a recognized rule that an attorney may properly charge a much larger fee when it is to be
contingent than when it is not. 7 From the stipulation in the mortgage contract earlier quoted, it appears that the
agreed fee is 10% of the total indebtedness, irrespective of the manner the foreclosure of the mortgage is to be
effected. The agreement is perhaps fair enough in case the foreclosure proceedings is prosecuted judicially but,
surely, it is unreasonable when, as in this case, the mortgage was foreclosed extra-judicially, and all that the attorney
did was to file a petition for foreclosure with the sheriff concerned. It is to be assumed though, that the said branch
attorney of the PNB made a study of the case before deciding to file the petition for foreclosure; but even with this in
mind, we believe the amount of P5,821.35 is far too excessive a fee for such services. Considering the above
circumstances mentioned, it is our considered opinion that the amount of P1,000.00 would be more than sufficient
to compensate the work aforementioned.

The next issue raised deals with the claim that the proceeds of the sale of the real properties alone together with the
amount it remitted to the PNB later was more than sufficient to liquidate its total obligation to herein appellee bank.
Again, we find merit in this claim. From the foregoing discussion of the first two errors assigned, and for purposes of
determining the total obligation of herein appellant to the PNB as of November 21, 1961 when the real estate
mortgage was foreclosed, we have the following illustration in support of this conclusion:1äwphï1.ñët

A. -
I. Principal Loan
(a) Promissory note dated August 2, 1956 P27,500.00
(1) Interest at 6% per annum from Aug. 2, 1956 to Nov. 21, 1961 8,751.78
(b) Promissory note dated October 19, 1956 P15,500.00
(1) Interest at 6% per annum from Oct.19, 1956 to Nov. 21, 1961 4,734.08
II. Sheriff's fees [for two (2) day's work] 10.00
III. Attorney's fee 1,000.00

Total obligation as of Nov. 21, 1961 P57,495.86

B. -
I. Proceeds of the foreclosure sale of the real estate mortgage on Nov. 21, 1961 P56,908.00
II. Additional amount remitted to the PNB on Dec. 18, 1961 738.59

Total amount of Payment made to PNB as of Dec. 18, 1961 P57,646.59

Deduct: Total obligation to the PNB P57,495.86

 Excess Payment to the PNB P 150.73
========

From the foregoing illustration or computation, it is clear that there was no further necessity to foreclose the
mortgage of herein appellant's chattels on December 21, 1961; and on this ground alone, we may declare the sale of
appellant's chattels on the said date, illegal and void. But we take into consideration the fact that the PNB must have
been led to believe that the stipulated 10% of the unpaid loan for attorney's fees in the real estate mortgage was
legally maintainable, and in accordance with such belief, herein appellee bank insisted that the proceeds of the sale
of appellant's real property was deficient to liquidate the latter's total indebtedness. Be that as it may, however, we
still find the subsequent sale of herein appellant's chattels illegal and objectionable on other grounds.

That appellant vigorously objected to the foreclosure of its chattel mortgage after the foreclosure of its real estate
mortgage on November 21, 1961, can not be doubted, as shown not only by its letter to the PNB on November 19,
1961, but also in its letter to the provincial sheriff of Camarines Norte on the same date. These letters were followed
by another letter to the appellee bank on December 14, 1961, wherein herein appellant, in no uncertain terms,
reiterated its objection to the scheduled sale of its chattels on December 21, 1961 at Jose Panganiban, Camarines
Norte for the reasons therein stated that: (1) it had settled in full its total obligation to the PNB by the sale of the real
estate and its subsequent remittance of the amount of P738.59; and (2) that the contemplated sale at Jose
Panganiban would violate their agreement embodied under paragraph (i) in the Chattel Mortgage which provides as
follows:

(i) In case of both judicial and extra-judicial foreclosure under Act 1508, as amended, the parties hereto
agree that the corresponding complaint for foreclosure or the petition for sale should be filed with the courts
or the sheriff of the City of Manila, as the case may be; and that the Mortgagor shall pay attorney's fees
hereby fixed at ten per cent (10%) of the total indebtedness then unpaid but in no case shall it be less than
P100.00, exclusive of all costs and fees allowed by law and of other expenses incurred in connection with the
said foreclosure. [Emphasis supplied]

Notwithstanding the abovequoted agreement in the chattel mortgage contract, and in utter disregard of the
objection of herein appellant to the sale of its chattels at Jose Panganiban, Camarines Norte and not in the City of
Manila as agreed upon, the PNB proceeded with the foreclosure sale of said chattels. The trial court, however,
justified said action of the PNB in the decision appealed from in the following rationale:

While it is true that it was stipulated in the chattel mortgage contract that a petition for the extra-judicial
foreclosure thereof should be filed with the Sheriff of the City of Manila, nevertheless, the effect thereof was
merely to provide another place where the mortgage chattel could be sold in addition to those specified in
the Chattel Mortgage Law. Indeed, a stipulation in a contract cannot abrogate much less impliedly repeal a
specific provision of the statute. Considering that Section 14 of Act No. 1508 vests in the mortgagee the
choice where the foreclosure sale should be held, hence, in the case under consideration, the PNB had three
places from which to select, namely: (1) the place of residence of the mortgagor; (2) the place of the
mortgaged chattels were situated; and (3) the place stipulated in the contract. The PNB selected the second
and, accordingly, the foreclosure sale held in Jose Panganiban, Camarines Norte, was legal and valid.

To the foregoing conclusion, We disagree. While the law grants power and authority to the mortgagee to sell the
mortgaged property at a public place in the municipality where the mortgagor resides or where the property is
situated, 8 this Court has held that the sale of a mortgaged chattel may be made in a place other than that where it is
found, provided that the owner thereof consents thereto; or that there is an agreement to this effect between the
mortgagor and the mortgagee. 9 But when, as in this case, the parties agreed to have the sale of the mortgaged
chattels in the City of Manila, which, any way, is the residence of the mortgagor, it cannot be rightly said that
mortgagee still retained the power and authority to select from among the places provided for in the law and the
place designated in their agreement over the objection of the mortgagor. In providing that the mortgaged chattel
may be sold at the place of residence of the mortgagor or the place where it is situated, at the option of the
mortgagee, the law clearly contemplated benefits not only to the mortgagor but to the mortgagee as well. Their right
arising thereunder, however, are personal to them; they do not affect either public policy or the rights of third
persons. They may validly be waived. So, when herein mortgagor and mortgagee agreed in the mortgage contract
that in cases of both judicial and extra-judicial foreclosure under Act 1508, as amended, the corresponding complaint
for foreclosure or the petition for sale should be filed with the courts or the Sheriff of Manila, as the case may be, they
waived their corresponding rights under the law. The correlative obligation arising from that agreement have the
force of law between them and should be complied with in good faith. 10

By said agreement the parties waived the legal venue, and such waiver is valid and legally effective, because
it, was merely a personal privilege they waived, which is not contrary, to public policy or to the prejudice of
third persons. It is a general principle that a person may renounce any right which the law gives unless such
renunciation is expressly prohibited or the right conferred is of such nature that its renunciation would be
against public policy. 11

On the other hand, if a place of sale is specified in the mortgage and statutory requirements in regard
thereto are complied with, a sale is properly conducted in that place. Indeed, in the absence of a statute to
the contrary, a sale conducted at a place other than that stipulated for in the mortgage is invalid, unless the
mortgagor consents to such sale. 12

Moreover, Section 14 of Act 1508, as amended, provides that the officer making the sale should make a return of his
doings which shall particularly describe the articles sold and the amount received from each article. From this, it is
clear that the law requires that sale be made article by article, otherwise, it would be impossible for him to state the
amount received for each item. This requirement was totally disregarded by the Deputy Sheriff of Camarines Norte
when he sold the chattels in question in bulk, notwithstanding the fact that the said chattels consisted of no less than
twenty different items as shown in the bill of sale. 13 This makes the sale of the chattels manifestly objectionable. And
in the absence of any evidence to show that the mortgagor had agreed or consented to such sale in gross, the same
should be set aside.

It is said that the mortgagee is guilty of conversion when he sells under the mortgage but not in accordance with its
terms, or where the proceedings as to the sale of foreclosure do not comply with the statute. 14 This rule applies
squarely to the facts of this case where, as earlier shown, herein appellee bank insisted, and the appellee deputy
sheriff of Camarines Norte proceeded with the sale of the mortgaged chattels at Jose Panganiban, Camarines Norte,
in utter disregard of the valid objection of the mortgagor thereto for the reason that it is not the place of sale agreed
upon in the mortgage contract; and the said deputy sheriff sold all the chattels (among which were a skagit with
caterpillar engine, three GMC 6 x 6 trucks, a Herring Hall Safe, and Sawmill equipment consisting of a 150 HP Murphy
Engine, plainer, large circular saws etc.) as a single lot in violation of the requirement of the law to sell the same
article by article. The PNB has resold the chattels to another buyer with whom it appears to have actively cooperated
in subsequently taking possession of and removing the chattels from appellant compound by force, as shown by the
circumstance that they had to take along PC soldiers and municipal policemen of Jose Panganiban who placed the
chief security officer of the premises in jail to deprive herein appellant of its possession thereof. To exonerate itself of
any liability for the breach of peace thus committed, the PNB would want us to believe that it was the subsequent
buyer alone, who is not a party to this case, that was responsible for the forcible taking of the property; but assuming
this to be so, still the PNB cannot escape liability for the conversion of the mortgaged chattels by parting with its
interest in the property. Neither would its claim that it afterwards gave a chance to herein appellant to repurchase or
redeem the chattels, improve its position, for the mortgagor is not under obligation to take affirmative steps to
repossess the chattels that were converted by the mortgagee. 15 As a consequence of the said wrongful acts of the
PNB and the Deputy Sheriff of Camarines Norte, therefore, We have to declare that herein appellant is entitled to
collect from them, jointly and severally, the full value of the chattels in question at the time they were illegally sold by
them. To this effect was the holding of this Court in a similar situation. 16

The effect of this irregularity was, in our opinion to make the plaintiff liable to the defendant for the full value
of the truck at the time the plaintiff thus carried it off to be sold; and of course, the burden is on the
defendant to prove the damage to which he was thus subjected. . . .

This brings us to the problem of determining the value of the mortgaged chattels at the time of their sale in 1961.
The trial court did not make any finding on the value of the chattels in the decision appealed from and denied
altogether the right of the appellant to recover the same. We find enough evidence of record, however, which may
be used as a guide to ascertain their value. The record shows that at the time herein appellant applied for its loan
with the PNB in 1956, for which the chattels in question were mortgaged as part of the security therefore, herein
appellant submitted a list of the chattels together with its application for the loan with a stated value of P107,115.85.
An official of the PNB made an inspection of the chattels in the same year giving it an appraised value of P42,850.00
and a market value of P85,700.00. 17 The same chattels with some additional equipment acquired by herein appellant
with part of the proceeds of the loan were reappraised in a re-inspection conducted by the same official in 1958, in
the report of which he gave all the chattels an appraised value of P26,850.00 and a market value of
P48,200.00. 18 Another re-inspection report in 1959 gave the appraised value as P19,400.00 and the market value at
P25,600.00. 19 The said official of the PNB who made the foregoing reports of inspection and re-inspections testified
in court that in giving the values appearing in the reports, he used a conservative method of appraisal which, of
course, is to be expected of an official of the appellee bank. And it appears that the values were considerably
reduced in all the re-inspection reports for the reason that when he went to herein appellant's premises at the time,
he found the chattels no longer in use with some of the heavier equipments dismantled with parts thereof kept in
the bodega; and finding it difficult to ascertain the value of the dismantled chattels in such condition, he did not give
them anymore any value in his reports. Noteworthy is the fact, however, that in the last re-inspection report he made
of the chattels in 1961, just a few months before the foreclosure sale, the same inspector of the PNB reported that
the heavy equipment of herein appellant were "lying idle and rusty" but were "with a shed free from
rains" 20 showing that although they were no longer in use at the time, they were kept in a proper place and not
exposed to the elements. The President of the appellant company, on the other hand, testified that its caterpillar
(tractor) alone is worth P35,000.00 in the market, and that the value of its two trucks acquired by it with part of the
proceeds of the loan and included as additional items in the mortgaged chattels were worth no less than P14,000.00.
He likewise appraised the worth of its Murphy engine at P16,000.00 which, according to him, when taken together
with the heavy equipments he mentioned, the sawmill itself and all other equipment forming part of the chattels
under consideration, and bearing in mind the current cost of equipments these days which he alleged to have
increased by about five (5) times, could safely be estimated at P120,000.00. This testimony, except for the appraised
and market values appearing in the inspection and re-inspection reports of the PNB official earlier mentioned, stand
uncontroverted in the record; but We are not inclined to accept such testimony at its par value, knowing that the
equipments of herein appellant had been idle and unused since it stopped operating its sawmill in 1958 up to the
time of the sale of the chattels in 1961. We have no doubt that the value of chattels was depreciated after all those
years of inoperation, although from the evidence aforementioned, We may also safely conclude that the amount of
P4,200.00 for which the chattels were sold in the foreclosure sale in question was grossly unfair to the mortgagor.
Considering, however, the facts that the appraised value of P42,850.00 and the market value of P85,700.00 originally
given by the PNB official were admittedly conservative; that two 6 x 6 trucks subsequently bought by the appellant
company had thereafter been added to the chattels; and that the real value thereof, although depreciated after
several years of inoperation, was in a way maintained because the depreciation is off-set by the marked increase in
the cost of heavy equipment in the market, it is our opinion that the market value of the chattels at the time of the
sale should be fixed at the original appraised value of P42,850.00.

Herein appellant's claim for moral damages, however, seems to have no legal or factual basis. Obviously, an artificial
person like herein appellant corporation cannot experience physical sufferings, mental anguish, fright, serious
anxiety, wounded feelings, moral shock or social humiliation which are basis of moral damages. 21 A corporation may
have a good reputation which, if besmirched, may also be a ground for the award of moral damages. The same
cannot be considered under the facts of this case, however, not only because it is admitted that herein appellant had
already ceased in its business operation at the time of the foreclosure sale of the chattels, but also for the reason
that whatever adverse effects of the foreclosure sale of the chattels could have upon its reputation or business
standing would undoubtedly be the same whether the sale was conducted at Jose Panganiban, Camarines Norte, or
in Manila which is the place agreed upon by the parties in the mortgage contract.

But for the wrongful acts of herein appellee bank and the deputy sheriff of Camarines Norte in proceeding with the
sale in utter disregard of the agreement to have the chattels sold in Manila as provided for in the mortgage contract,
to which their attentions were timely called by herein appellant, and in disposing of the chattels in gross for the
miserable amount of P4,200.00, herein appellant should be awarded exemplary damages in the sum of P10,000.00.
The circumstances of the case also warrant the award of P3,000.00 as attorney's fees for herein appellant.

WHEREFORE AND CONSIDERING ALL THE FOREGOING, the decision appealed from should be, as hereby, it is set
aside. The Philippine National Bank and the Deputy Sheriff of the province of Camarines Norte are ordered to pay,
jointly and severally, to Mambulao Lumber Company the total amount of P56,000.73, broken as follows: P150.73
overpaid by the latter to the PNB, P42,850.00 the value of the chattels at the time of the sale with interest at the rate
of 6% per annum from December 21, 1961, until fully paid, P10,000.00 in exemplary damages, and P3,000.00 as
attorney's fees. Costs against both appellees.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro and Fernando, JJ., concur.
Bengzon, J.P. J., took no part.

PHILIPPINE NATIONAL BANK vs. COURT OF APPEALS [April 30, 1991]

1. COMMERCIAL LAW; BANKING LAWS; RATE OF INTEREST; INCREASE OF INTEREST RATE; NOT TO BE MADE OFTENER
THAN ONCE A YEAR. — PNB, over the objection of the private respondent, and without authority from the Monetary
Board, within a period of only four (4) months, increased the 18% interest rate on the private respondent’s loan
obligation three (3) times: (a) to 32% in July 1984; (b) to 41% in October 1984; and (c) to 48% in November 1984.
Those increases were null and void. Although Section 2, P.D. No. 116 of January 29, 1973, authorizes the Monetary
Board to prescribe the maximum rate or rates of interest for loans or renewal thereof and to change such rate or
rates whenever warranted by prevailing economic and social conditions, it expressly provides that "such changes
shall not be made oftener than once every twelve months. "If the Monetary Board itself was not authorized to make
such changes oftener than once a year, even less so may a bank which is subordinate to the Board.

2. ID.; ID.; ID.; ID.; MAY BE INCREASED WITHIN LIMITS OF LAW; PNB CIRCULARS AND RESOLUTION ARE NEITHER LAWS
NOR RESOLUTIONS OF MONETARY BOARD. — While the private respondent-debtor did agree in the Deed of Real
Estate Mortgage (Exh. 5) that the interest rate may be increased during the life of the contract "to such increase
within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe" (Exh. 5-e-1) or "within
the limits allowed by law" (Promissory Notes, Exhs. 2, 3, and 4), no laws was ever passed in July to November 1984
increasing the interest rates on loans or renewals thereof to 32%, 41% and 48% (per annum), and no documents
were executed and delivered by the debtor to effectuate the increases. The PNB relied on its own Board Resolution
No. 681 (Exh. 10), PNB Circular No. 40-79-84 (Exh. 13), and PNB Circular No. 40-129-84 (Exh. 15), but those resolution
and circulars are neither laws nor resolutions of the Monetary Board.

3. ID.; ID.; ID.; REMOVAL OF USURY LAW CEILING ON INTEREST RATES DOES NOT AUTHORIZE BANKS TO
UNILATERALLY AND SUCCESSIVELY INCREASE INTEREST RATES. — CB Circular No. 905, Series of 1982 (Exh. 11)
removed the Usury law ceiling on interest rates — but it did not authorize the PNB, or any bank for that matter, to
unilaterally and successively increase the agreed interest rates from 18% to 48% within a span of four (4) months, in
violation of P.D. 116 which limits such changes to "once every twelve months."cralaw virtua1aw library

4. ID.; ID.; ID.; UNILATERAL ACTION TO INCREASE INTEREST RATES, A VIOLATION OF ARTICLE 1308 OF CIVIL CODE. —
Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest rate on the private respondent’s
loan, violated the mutuality of contracts ordained in Article 1308 of the civil Code: "ART. 1308. The contract must
bind both contracting parties; its validity or compliance cannot be left to the will of one of them."cralaw virtua1aw
library

5. ID.; ID.; ID.; SUCCESSIVE INCREASE OF INTEREST RATES, A VIOLATION OF ARTICLE 1956 OF CIVIL CODE. — PNB’s
successive increases of the interest rate on the private respondent’s loan, over the latter’s protest, were arbitrary as
they violated an express provision of the Credit Agreement (Exh. 1) Section 9.01 that its terms "may be amended
only by an instrument in writing signed by the party to be bound as burdened by such amendment." The increases
imposed by PNB also contravene Art. 1956 of the Civil Code which provides that "no interest shall be due unless it
has been expressly stipulated in writing."

DECISION

GRIÑO-AQUINO, J.:

The Philippine National Bank (PNB) has appealed by certiorari from the decision promulgated on June 27, 1989 by
the Court of Appeals in CA-G.R. CV No. 09791 entitled, "AMBROSIO PADILLA, plaintiff-appellant versus PHILIPPINE
NATIONAL BANK, defendant-appellee," reversing the decision of the trial court which had dismissed the private
respondent’s complaint "to annul interest increases." (p. 32, Rollo.) The Court of Appeals rendered
judgment:jgc:chanrobles.com.ph

". . . declaring the questioned increases of interest as unreasonable, excessive and arbitrary and ordering the
defendant-appellee [PNB] to refund to the plaintiff-appellant the amount of interest collected from July, 1984 in
excess of twenty-four percent (24%) per annum. Costs against the defendant-appellee." (pp 14-15, Rollo.)

In July 1982, the private respondent applied for, and was granted by petitioner PNB, a credit line of 321.8 million,
secured by a real estate mortgage, for a term of two (2) years, with 18% interest per annum. Private respondent
executed in favor of the PNB a Credit Agreement, two (2) promissory notes in the amount of P900,000.00 each, and a
Real Estate Mortgage Contract.

The Credit Agreement provided that

"9.06 Other Conditions. The Borrowers hereby agree to be bound by the rules and regulations of the Central Bank
and the current and general policies of the Bank and those which the Bank may adopt in the future, which may have
relation to or in any way affect the Line, which rules, regulations and policies are incorporated herein by reference as
if set forth herein in full. Promptly upon receipt of a written request from the Bank, the Borrowers shall execute and
deliver such documents and instruments, in form and substance satisfactory to the Bank, in order to effectuate or
otherwise comply with such rules, regulations and policies." (p. 85, Rollo.)

The Promissory Notes, in turn, uniformly authorized the PNB to increase the stipulated 18% interest per annum
"within the limits allowed by law at any time depending on whatever policy it [PNB] may adopt in the future;
Provided, that, the interest rate on this note shall be correspondingly decreased in the event that the applicable
maximum interest rate is reduced by law or by the Monetary Board." (pp. 85-86, Rollo; Emphasis ours.)

The Real Estate Mortgage Contract likewise provided that:jgc:chanrobles.com.ph

"(k) INCREASE OF INTEREST RATE

"The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount which
may have been advanced by the MORTGAGEE, in accordance with the provisions hereof, shall be subject during the
life of this contract to such an increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE
may prescribe for its debtors." (p. 86, Rollo; Emphasis supplied.)

Four (4) months advance interest and incidental expenses/charges were deducted from the loan, the net proceeds of
which were released to the private respondent by crediting or transferring the amount to his current account with
the bank.chanrobles.com : virtual law library

On June 20, 1984, PNB informed the private respondent that (1) his credit line of P1.8 million "will expire on July 4,
1984," (2)" [i]f renewal of the line for another year is intended, please submit soonest possible your request," and (3)
the "present policy of the Bank requires at least 30% reduction of principal before your line can be renewed." (pp.
86-87, Rollo.) Complying, private respondent on June 25, 1984, paid PNB P540,000 00 (30% of P1.8 million) and
requested that "the balance of P1,260,000.00 be renewed for another period of two (2) years under the same
arrangement" and that "the increase of the interest rate of my mortgage loan be from 18% to 21%" (p. 87, Rollo.).

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

On July 18, 1984, private respondent reiterated in writing his request that "the increase in the rate of interest from
18% be fixed at 21% of 24%. (p. 87, Rollo.)

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

On August 10, 1984, PNB informed private respondent that "we can not give due course to your request for
preferential interest rate in view of the following reasons: Existing Loan Policies of the bank requires 32% for loan of
more than one year; our present cost of funds has substantially increased." (pp. 8788, Rollo.)

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

In a letter dated August 24, 1984 to PNB, private respondent announced that he would "continue making further
payments, and instead of a ‘loan of more than one year,’ I shall pay the said loan before the lapse of one year or
before July 4, 1985. . . . I reiterate my request that the increase of my rate of interest from 18% ‘be fixed at 21% or
24%.’" (p. 88, Rollo.)

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

In letters dated September 12, 1984 and September 13, 1984, PNB informed private respondent that "the interest
rate on your outstanding line/loan is hereby adjusted from 32% p.a. to 41% p.a. (35% prime rate + 6%) effective
September 6, 1984;" and further explained "why we can not grant your request for a lower rate of 21% or 24%." (pp.
88-89, Rollo.)

In a letter dated September 24, 1984 to PNB, private respondent registered his protest against the increase of
interest rate from 18% to 32% on July 4, 1984 and from 32% to 41% on September 6, 1984.

On October 15, 1984, private respondent reiterated his request that the interest rate should not be increased from
18% to 32% and from 32% to 41%. He also attached (as payment) a check for P140,000.00.chanrobles.com.ph :
virtual law library

Like rubbing salt on the private respondent’s wound, the petitioner informed private respondent on October 29,
1984, that "the interest rate on your outstanding line/loan is hereby adjusted from 41% p.a. to 48% p.a. (42% prime
rate plus 6% spread) effective 25 October 1984." (p. 89, Rollo.)

In November 1984, private respondent paid PNB P50,000.00 thus reducing his principal loan obligation to
P300,000.00.

On December 18, 1984, private respondent filed in the Regional Trial Court of Manila a complaint against PNB
entitled, "AMBROSIO PADILLA v. PHILIPPINE NATIONAL BANK" (Civil Case No. 84-28391), praying that judgment be
rendered:jgc:chanrobles.com.ph

"a. Declaring that the unilateral increase of interest rates from 18% to 32%, then to 41% and again to 48% are illegal,
not valid nor binding on plaintiff, and that an adjustment of his interest rate from 18% to 24% is reasonable, fair and
just;

"b. The interest rate on the P900,000.00 released on September 27, 1982 be counted from said date and not from
July 4, 1984;

"c. The excess of interest payment collected by defendant bank by debiting plaintiffs current account be refunded to
plaintiff or credited to his current account;

"d. Pending the determination of the merits of this case, a restraining order and or a writ of preliminary injunction be
issued (1) to restrain and or enjoin defendant bank for [sic] collecting from plaintiff and/or debiting his current
account with illegal and excessive increases of interest rates; and (2) to prevent defendant bank from declaring
plaintiff in default for non-payment and from instituting any foreclosure proceeding, extrajudicial or judicial, of the
valuable commercial property of plaintiff." (pp. 89-90, Rollo.)

In its answer to the complaint, PNB denied that the increases in interest rates were illegal, unilateral excessive and
arbitrary and recited the reasons justifying said increases.

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

The trial court rendered judgment on April 14, 1986, dismissing the complaint because the increases of interest were
properly made.

The private respondent appealed to the Court of Appeals. On June 27, 1989, the Court of Appeals reversed the trial
court, hence, NB’s recourse to this Court by a petition for review under Rule 45 of the Rules of Court.

The assignments of error raised in PNB’s petition for review can be resolved into a single legal issue of whether the
bank, within the term of the loan which it granted to the private respondent, may unilaterally change or increase the
interest rate stipulated therein at will and as often as it pleased.

The answer to that question is no.

In the first place, although Section 2, PD. No. 116 of January 29, 1973, authorizes the Monetary Board to prescribe
the maximum rate or rates of interest for loans or renewal thereof and to change such rate or rates whenever
warranted by prevailing economic and social conditions, it expressly provides that "such changes shall not be made
oftener than once every twelve months."cralaw virtua1aw library

In this case, PNB, over the objection of the private respondent, and without authority from the Monetary Board,
within a period of only four (4) months, increased the 18% interest rate on the private respondent’s loan obligation
three (3) times: (a) to 32% in July 1984; (b) to 41% in October 1984; and (c) to 48% in November 1984. Those
increases were null and void, for if the Monetary Board itself was not authorized to make such changes oftener than
once a year, even less so may a bank which is subordinate to the Board.chanrobles law library : red

Secondly, as pointed out by the Court of Appeals, while the private respondent-debtor did agree in the Deed of Real
Estate Mortgage (Exh. 5) that the interest rate may be increased during the life of the contract "to such increase
within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe" (Exh. 5-e-1) or "within
the limits allowed by law" (Promissory Notes, Ex’s. 2, 3, and 4), no law was ever passed in July to November 1984
increasing the interest rates on loans or renewals thereof to 32%, 41% and 48% (per annum), and no documents
were executed and delivered by the debtor to effectuate the increases. The Court of Appeals observed.

". . . We focus Our attention first of all on the agreement between the parties as embodied in the following
instruments, to wit: (1) Exhibit ‘1’ — Credit Agreement dated July 1, 1982; (2) Exhibit ‘2’ — Promissory Note dated
July 5, 1982; (3) Exhibit ‘(3)’ — Promissory Note dated January 3, 1983; (4) Exhibit ‘4’ — Promissory Note, dated
December 13, 1983; and (5) Exhibit ‘5’ — Real Estate Mortgage contract dated July 1, 1982.

"Exhibit ‘1’ states in its portion marked Exhibit ‘1-g-1’:chanrob1es virtual 1aw library

‘9 .06 Other Conditions. The Borrowers hereby agree to be bound by the rules and regulations of the Central Bank
and the current and general policies of the Bank and those which the Bank may adopt in the future, which may have
relation to or in any way affect the Line, which rules, regulations and policies are incorporated herein by reference as
if set forth herein in full. Promptly upon receipt of a written request from the Bank, the Borrowers shall execute and
deliver such documents and instruments, in form and substance satisfactory to the Bank, in order to effectuate or
otherwise comply with such rules, regulations and policies.’

"Exhibits ‘2,’ ‘3,’ and ‘4’ in their portions respectively marked Exhibits ‘2-B,’ ‘3-B,’ and ‘4-B’ uniformly authorize the
defendant bank to increase the stipulated interest rate of 18% per annum ‘within the limits allowed by law at any
time depending on whatever policy it may adopt in the future: Provided, that, the interest rate on this note shall be
correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the
Monetary Board.’

"Exhibit ‘5’ in its portion marked Exhibit ‘5-e-1’ stipulates:chanrob1es virtual 1aw library

‘(k) INCREASE OF INTEREST RATE

‘The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount which
may have been advanced by the MORTGAGEE, in accordance with the provisions hereof, shall be subject during the
life of this contract to such an increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE
may prescribe for its debtors.’

"Clearly, then, the agreement between the parties authorized the defendant bank to increase the interest rate
beyond the original rate of 18% per annum but ‘within the limits allowed by law’ or ‘within the rate allowed by law,’
it being declared the obligation of the plaintiff as borrower to execute and deliver the corresponding documents and
instruments to effectuate the increase." (pp. 11-12, Rollo.)

In Banco Filipino Savings and Mortgage Bank v. Navarro, 15 SCRA 346 (1987), this Court disauthorized the bank from
raising the interest rate on the borrowers’ loan from 12% to 17% despite an escalation clause in the loan agreement
signed by the debtors authorizing Banco Filipino "to correspondingly increase the interest rate stipulated in this
contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest
that may be charged on this particular kind of loan." (Emphasis supplied.)chanrobles virtual lawlibrary

In the Banco Filipino case, the bank relied on Section 3 of CB Circular No. 494 dated July 1, 1976 (72 O.G. No. 3, p.
676-J) which provided that "the maximum rate of interest, including commissions premiums, fees and other charges
on loans with a maturity of more than 730 days by banking institution . . . shall be 19%."cralaw virtua1aw library

This Court disallowed the increase for the simple reason that said "Circular No. 494, although it has the effect of law
is not a law." Speaking through Mme. Justice Ameurfina M. Herrera, this Court held:jgc:chanrobles.com.ph
"It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1) that there can
be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation to be
valid, it must include a provision for reduction of the stipulated interest ‘in the event that the applicable maximum
rate of interest is reduced by law or by the Monetary Board.’" p. 111, Rollo.).

In the present case, the PNB relied on its own Board Resolution No. 681 (Exh. 10), PNB Circular No. 40-79-84 (Exh.
13), and PNB Circular No. 40-129-84 (Exh. 15), but those resolution and circulars are neither laws nor resolutions of
the Monetary Board.

CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest rates —". . . increases in
interest rates are not subject to any ceiling prescribed by the Usury Law." but it did not authorize the PNB, or any
bank for that matter, to unilaterally and successively increase the agreed interest rates from 18% to 48% within a
span of four (4) months, in violation of PD. 116 which limits such changes to "once every twelve months."cralaw
virtua1aw library

Besides violating PD. 116, the unilateral action of the PNB in increasing the interest rate on the private respondent’s
loan, violated the mutuality of contracts ordained in Article 1308 of the Civil Code:jgc:chanrobles.com.ph

"ART. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of
one of them."cralaw virtua1aw library

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

PNB’S successive increases of the interest rate on the private respondent’s loan, over the latter’s protest, were
arbitrary as they violated an express provision of the Credit Agreement (Exh. 1) Section 9.01 that its terms "may be
amended only by an instrument in writing signed by the party to be bound as burdened by such amendment." The
increases imposed by PNB also contravene Art. 1956 of the Civil Code which provides that "no interest shall be due
unless it has been expressly stipulated in writing."cralaw virtua1aw library

The debtor herein never agreed in writing to pay the interest increases fixed by the PNB beyond 24% per annum,
hence, he is not bound to pay a higher rate than that. That an increase in the interest rate from 18% to 48% within a
period of four (4) months is excessive, as found by the Court of Appeals, is indisputable.

WHEREFORE, finding no reversible error in the decision of the Court of Appeals in CA-G.R. CV No. 09791, the Court
resolved to deny the petition for review for lack of merit, with costs against the petitioner. SO ORDERED.

EULALIO and ILUMINADA RUIZ vs. DOROTEO CANEBA (CITY SHERIFF OF MANILA) [December 3, 1990]
This is a petition for Certiorari and prohibition with preliminary injunction and/or restraining order of the Order of
the respondent judge 1 dated July 27, 1988 in Civil Case No. 84-24032 entitled "Eulalio M. Ruiz and Iluminada M.
Ruiz vs. Zenaida S. Sangalang and Adolfo Cruz" amending the May 15, 1986 decision of Judge Antonio M. Martinez
(now Justice of the Court of Appeals). The facts of the case are as follows:
Private respondents Zenaida Sangalang and Adolfo Cruz are common-law spouses and owners in common of a 2-
storey house and lots described in Transfer Certificate of Title (TCT) No. 56053 of the Registry of Deeds of Caloocan
City but registered only in the name of Zenaida Sangalang.
Petitioners, the spouses Eulalio M. Ruiz and Iluminada M. Ruiz are the lessees of Door No. 1 of the aforesaid two
storey house divided into 2 doors, for a monthly rental of P650.00.:- nad
Sometime on November 19, 1982, Eulalio Ruiz and Zenaida Sangalang executed an agreement where it was provided
that Ruiz will buy the house and lot for the sum of P175,000.00 under the following terms and conditions:
"That I, EULALIO M. RUIZ, of legal age, Filipino, married to Iluminada M. Ruiz, with residence and postal address at
399 Gen. Luna, Caloocan City, Metro Manila, Philippines, am a tenant of MISS ZENAIDA S. SANGALANG and I agree to
purchase the above mentioned parcel of land from MISS ZENAIDA S. SANGALANG for the total amount of ONE
HUNDRED AND SEVENTY FIVE THOUSAND PESOS (175,000.00), Philippine Currency, to be paid as follows: SIXTY FIVE
THOUSAND PESOS (P65,000.00) down payment and will assume the amount of balance of THIRTY ONE THOUSAND
FIVE HUNDRED PESOS (P31,500.00) with the BANK OF THE PHILIPPINE ISLAND, Marulas Branch, Metro Manila; that
after payment of said balance mortgage, a balance of seventy eight thousand five hundred pesos (P78,500.00) will be
payable on or before December 31, 1983; my failure to comply with the above conditions of payment, the said
property above described will be open for sale and all partial payments will be refunded by Miss Zenaida S.
Sangalang". (Rollo, p. 45)
It was also stipulated that the Ruiz spouses will continue paying the monthly rental of P650.00 until the amount of
P175,000.00 shall have been fully satisfied.
There is no dispute that the following payments were made by Ruiz: P65,000.00 to Sangalang as down payment and
P21,119.62 to the Bank on the assumed mortgage. There is disagreement however as to the amount paid to
Sangalang on the balance of P78,500.00. Sangalang maintains that she received only P33,793.00 while Ruiz insists
that they paid P53,073.00.
Thus, the Ruiz spouses filed a complaint on April 24, 1984 for specific performance with damages against Zenaida
Sangalang and Adolfo Cruz. (Ibid, p. 14)
In any event, the trial court found that the Ruiz spouses failed to pay in full the balance of P78,500.00 on or before
December 31, 1983 as stipulated and even on the extended period of March 22, 1984. Hence, the Ruiz spouses are
not entitled to their prayer for specific performance with damages. In the same breath, the trial court decided that it
is only fair that Zenaida Sangalang return/refund to the Ruiz spouses the payment made by the latter. Further, it ruled
that the Ruiz spouses shall continue to pay the agreed amount of rental in the amount of P650.00 until the property
is surrendered to Sangalang (RTC decision, May 15, 1986, p. 7; Rollo, p. 48).: nad
More specifically, the dispositive portion of the decision reads:
"Wherefore, in view of all the foregoing, we hereby rule as follows:
"1. Ordering the plaintiffs to pay defendant Zenaida Sangalang the amount of P20,000.00 moral damages;
"2. Ordering plaintiffs to pay defendant Sangalang, attorney's fees in the amount of P15,000.00; and to pay
the costs of suit; and
"3. Defendant Zenaida Sangalang is hereby ordered to return the payments made by the plaintiffs pursuant
to the Agreement.
SO ORDERED". (Rollo, p. 48)
The Ruiz spouses appealed the decision to the Court of Appeals but the same was dismissed for failure to pay the
docket fee. (Rollo, p. 162) On May 29, 1987, an entry of judgment was made by the Court of Appeals.
On motion of the private respondents, respondent Judge issued an order for the issuance of a writ of execution.
(Ibid., p. 59)
The Clerk of Court, in his capacity as ex-oficio city sheriff, caused the execution of the 1st and 2nd paragraphs of the
dispositive portion of the May 15, 1986 decision without including in the writ, the execution of the 3rd par. thereof in
favor of the Ruizes. A notice of levy as well as a notice of garnishment were both issued to the petitioners. (Rollo, p.
51)
On September 2, 1987, the Ruiz spouses filed an "Ex-parte Motion for Execution of Decision Now Partly Executed,"
praying that a writ of execution be issued for par. 3 of the said dispositive portion and that the sheriff be ordered to
make full execution of the decision by "off-setting" and/or setting-off par. 3 as against pars. 1 and 2 thereof. (Ibid, p.
92)
An order was issued by the respondent judge on September 8, 1987 the dispositive portion of which reads as
follows:: nad
"WHEREFORE, in view of the fact that a writ of execution has already been issued and the same was enforced
only with respect to paragraphs 1 and 2 of the dispositive portion of the decision dated May 15, 1986, let a
writ of execution be issued with respect to paragraph 3 of the said dispositive portion of the decision.
"SO ORDERED" (Rollo, p. 59)
The aforequoted order was reiterated by the respondent judge in his order dated December 11, 1987 (Ibid., p. 60)
after an omnibus motion was filed by the petitioners on September 8, 1987. (Ibid., p. 53)
As expected, the parties could not agree on the execution of the decision, as regards par. 3 thereof; that is the
amount to be returned by Sangalang to the Ruiz spouses. Sangalang and Adolfo Cruz on May 7, 1988 moved to
amend said decision of May 15, 1986 which they alleged to have clear disparities and evident ambiguities between
the body of said decision and the dispositive portion.
Thus, while the trial court is fully aware that a decision once final and executory can no longer be amended or
corrected, it opted, for the purpose of finally settling the claims of the parties and thereby avoid multiplicity of suits,
to amend the decision in question, on July 27, 1988, the dispositive portion of which reads:
"WHEREFORE, Order is hereby issued directing:
"1. the cancellation of lis pendens annotated at the back of the title of the subject property by the
Register of Deeds of Caloocan City;
"2. the plaintiffs to pay the defendant the sum of P1,500.00 monthly from May 15, 1986, the
effective date of the decision up to the date they vacate door No. 2;
"3. the return of payments made by the plaintiffs to defendant Zenaida Sangalang which shall be
without prejudice to off-setting of rental payments from November 1982; and
"4. the writ of possession be issued on the property, subject matter of the rescission of the contract.
"SO ORDERED" (Rollo, p. 64)
Sangalang and Cruz filed a Motion for Execution on the above-quoted order on September 1, 1988 (Ibid., p. 65) but
before the day of the hearing of said motion, the Ruiz spouses filed an "Urgent Motion to Cancel Hearing of Motion."
(Ibid., p. 127)
On September 15, 1988, the Ruizes filed the present petition.
In the resolution of the 2nd Division of this Court dated January 10, 1990, the petition was given due course (Rollo, p.
152-A). Petitioners' memorandum was filed on April 11, 1990 (Ibid., p. 192) while respondents' memorandum was
filed on March 30, 1990 (Ibid., p. 171).
The petition is impressed with merit.
The principal issue to be resolved in the instant petition is: whether or not there is an ambiguity in the dispositive
portion of the May 15, 1986 decision sufficient to warrant the questioned order of the respondent court amending
subject final and executory judgment.:-cralaw
There is no question that the Ruizes failed to comply with the agreement and rescission of the contract is in order.
The parties are also agreed that the Ruizes must return the physical possession of the property to Sangalang while
the latter is obliged to return all partial payments made on the property to the Ruizes in accordance with the
agreement. But the bone of contention in this case is the exact amount to be returned by Sangalang to the Ruiz
spouses which was not spelled out by the trial court. The Ruizes claim that they are entitled to a refund of
P124,192.62 plus 24% interest compounded annually, the alleged legal rate under Central Bank Circular, or a total
amount of P169,414.95.
Sangalang, on the other hand, countered that she received only the amount of P120,092.62 or a difference of
P4,100.00 from that claimed by the Ruizes, let alone the computation of interest. Furthermore, Sangalang insists that
she is entitled to a P1,500.00 a month rental for Door No. 2 of said house which the Ruizes occupied after the
execution of the agreement (Rollo, p. 166) instead of confining themselves to Door No. 1 which they used to occupy
and for which they have originally been paying rentals.: nad
A careful study of the decision of the trial court of May 15, 1986 shows that aside from the fact that the refund
ordered to be made by Sangalang was not specified in exact numbers, there appears to be no ambiguity in the
decision to such an extent as to warrant an amendment of the dispositive portion.
From the total amount of P139,192.62 claimed by the Ruiz spouses to have been actually paid to Sangalang, only the
amount of P15,000.00 in the form of dishonored checks have been discounted by the trial court leaving a balance of
P124,192.62; more specifically shown as follows:
Downpayment on Nov. 19, 1982 P 65,000.00
Payment to the Bank of P.I. P 21,119.62
Payment made to Zenaida
Sangalang P53,073.00 less
P15,000.00 total sum of two
(2) dishonored checks P 38,073.00
—————
Total Payments Made P124,192.62
Decision, p. 2 & 3.
Hence, it is evident that this is the amount that Sangalang was ordered to return to the Ruizes pursuant to par. 3 of
the said dispositive portion.
The only set-off specified by the trial court in the assailed May 15, 1986 decision were the lost profits suffered by
Sangalang because of the annotation of the notice of lis pendens on her title by the Ruiz spouses which were
considered compensated by the increase in value of the property due to the repair made by the latter. Moreover, it
appearing that there was in fact a part execution of pars. 1 and 2 of the dispositive portion of the 1986 decision
against the Ruizes, it is but proper that the amount to be paid by Sangalang is the total payments made by the
petitioners in the amount of P124,192.62.
Anent the Ruizes' claim of interest as aforementioned, it has been held in the case of Santulan v. Fule, 133 SCRA 762
(1984) that where the court judgment which did not provide for interest is already final, there is no reason to add
interest in the judgment. Interest was not demanded by the Ruizes when the case was pending before the lower
court, hence, there is no reason for this Court to grant such claim. As ruled by this Court, such claim is groundless
since the decision and orders sought to be enforced do not direct the payment of interest and have long become
final (Canonizado v. Ordoñez-Benitez, 149 SCRA 555 [1987]).
Finally, as to Sangalang's claim for P1,500.00 as monthly rental for Door No. 2, the records show that such claim was
never raised in the trial court. The issue of additional rentals was brought up by Sangalang only when the motion for
execution of par. 3 of the dispositive portion of the decision was filed by the Ruiz spouses (Rollo, p. 189). It is a basic
rule that an issue which was not raised in the court below cannot be raised for the first time on appeal as it would be
offensive to the basic rules of fair play, justice and due process (Matienzo v. Servidad, 107 SCRA 276 [1981]; De la
Santa v. CA, 140 SCRA 44, [1985]; Dihiansan v. CA, 157 SCRA 434 [1987]; Auchuelo v. CA, 147 SCRA 434 [1987]; Dulos
Realty and Dev't. Corp. v. CA, 157 SCRA 425 [1988]; Ramos v. IAC, GR No. 78282, July 5, 1989; Filipino Merchants
vs. CA GR No. 85141, Nov. 28, 1989). Consequently, Sangalang's claim cannot be granted.:-cralaw
Hence, since the May 15, 1986 decision has long become final and executory and in fact has been partly executed,
the respondent judge had lost its jurisdiction thereon (Marcopper Mining Corp. vs. Briones, G.R. 77210, Sept. 19,
1988; Baclayon et al. v. CA, G.R. No. 89132, Feb. 26, 1990). He has exceeded his authority, considering that the trial
court has no authority to modify or vary the terms and conditions of a final and executory judgment (Vda. de Nabong
v. Sadang, 167 SCRA 232 [1988]; Commercial Credit Corporation vs. CA, 169 SCRA 1 [1989]; Christian Literature
Crusade v. NLRC, 171 SCRA 712 [1989]). What remains in his authority in relation thereto is purely the ministerial
enforcement or execution of the judgment. (Christian Lit. Crusade, supra; Baclayan vs. CA, supra.) Therefore, for
having substantially affected the final and executory judgment such Order of the respondent judge dated July 27,
1988 is null and void for lack of jurisdiction, including the entire proceedings held for the purpose (Marcopper Mining
vs. Briones, supra).
PREMISES CONSIDERED, (a) the instant petition for Certiorari and prohibition is hereby GRANTED; (b) the Order of
the respondent judge dated July 27, 1988 is hereby DECLARED null and void ab initio; (c) respondent Sangalang is
hereby required to PAY petitioners-spouses Ruizes the amount of P124,192.62; (d) petitioners Ruizes are hereby
required to VACATE the property in question and PAY P650.00 monthly as rental as agreed upon and as required by
the May 15, 1986 decision until they vacate the premises and (e) the Register of Deeds of Caloocan City is hereby
required to CANCEL the lis pendens annotated on the title of subject property.
SO ORDERED.

AMPARO & NOEL DE CORTES (Jesus Noel) vs. MARY VENTURANZA [October 28, 1977]

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

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

The background facts may be gleaned from the pertinent portions of the decision of the court a quo, as follows:

Plaintiff Felix Cortes y Ochoa and Noel J. Cortes filed the instant action for foreclosure of real estate
against the defendants Gregorio Venturanza, Mary E. Venturanza, Jose Oledan and Erlinda M.
Oledan. The complaint alleges that plaintiff Felix Cortez y Ochoa was the original owner of nine (9)
parcels of land covered by Transfer Certificates of Title Nos. 21334 to 21342, inclusive, while plaintiff
Noel J. Cortes was likewise the original owner of twenty-four (24) parcels of land covered by Transfer
Certificates off Title Nos. 21343, 21345, 21347 to 21367, inclusive, all of the land records of Bulacan;
that on October 24, 1958 said plaintiffs sold and delivered to the defendants all the above-
mentioned thirty-three (33) parcels of land with all the improvements thereon for the total sum of
P716,573.90 of which defendants agreed to pay jointly and severally the plaintiffs the sum of
P100,000.00 upon the signing and execution of a deed of sale and P40,000.00 on January 1, 1959
thereby leaving a balance of P576,573.90 which the defendants agreed and bound themselves to pay
plaintiffs jointly and severally within three (3) years from January 1, 1959 with interest thereon at the
rate of 6% per annum; that defendants further agreed and bound themselves to secure the payment
of the said balance of P576,573.90 with a first mortgage upon the said 33 parcels of land with
improvements; that the defendants have already paid the plaintiffs the total sum of P140,000.00;
that of the unpaid balance owing to plaintiffs, P169,484.24 pertaining to plaintiff Felix Cortes and
P407,089.66 pertains to plaintiff Noel J. Cortes; that upon the registration of the deed of sale and
mortgage with the office of the register of deeds of Bulacan new certificates of title for the 33 parcels
of land were issued in the names of the defendants and the mortgage obligation was noted thereon;
that the mortgage obligation fell due on January 1, 1962, but despite repeated demands for
payment, defendants failed and refused to pay the said balance of P576,573.90 to plaintiffs; that
from the time the mortgage obligation fell due and demandable up to December 1, 1962 the total
interest due from the defendants on the balance of their obligation is P103,783.32 computer led at
the stipulated interest of 6% per annum; that it is stipulated in the deed of sale with purchase money
mortgage that in the event or default by defendants to pay the obligation secured by the mortgage
and a suit is brought for the foreclosure of the mortgage or any other legal proceedings is instituted
for the enforcement of plaintiffs' right, defendants would be obligated and hound to pay the plaintiffs
reasonable compensation for attorney's fees which plaintiffs fixed at P50,000.00.

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

Defendants Jose Oledan and Erlinda M. Oledan deny the material allegations of the complaint with
respect to the mortgage obligation alleging that plaintiffs cause of action against them has been
extinguished and, therefore did not become due against them on January 1, 1962; that even as
regards their co-defendants Venturanzas the mortgage obligation did not become due on January 1,
1962 there hating been a novation of the original agreement which affected material changes in the
manner and condition of time of payment of the balance of the mortgage obligation. By way of
affirmative defenses defendants Oledans alleged that the deed of sale with purchase money
mortgage fails to express the true intent and agreement of the parties thereto insofar as the nature
of the liability of the defendants is concerned, the true intention being to hold them (defendants
Oledan) obligated unto plaintiffs only to the extent of the proportion of their share, ownership and
interests in the property conveyed; that their obligation to plaintiffs has been extinguished by
novation; that their obligation to plaintiffs has been extinguished by the assumption of the obligation
by defendants Venturanza as provided for in the agreement among defendants dated December 28,
1959, such assumption of the obligation being inside' with full knowledge (of) and consent of
plaintiffs which partakes of the character of a novation of the original agreement and that by their
failure to seasonably interrupt any opposition to the assumption of any obligation by defendants
Venturanza and to take appropriate action thereon, plaintiffs have waived their right to proceed
against them.

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

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

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

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

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

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

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

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

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

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

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

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

On the cross-claim filed by defendants-cross-claimants Oledans, cross-defendants Venturanzas are

ordered to reimburse to the former the amount which cross-claimants are to pay to plaintiffs under
the above judgment.

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

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

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

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

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

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

'WHEREFORE, judgment is hereby rendered in favor of plaintiff.s, and against the

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

'On the cross-claim by the defendants-cross-claimants Venturanzas are ordered to

reimburse to the former the amount which cross-claimants are to pay to plaintiff
under the judgment.

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

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

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

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

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

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

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

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

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

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

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

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

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

This claim of defendants Venturanzas is equally devoid of merit. A careful reading of the Deed of Sale with Purchase
Money Mortgage, Exhibit B, reveals the conspicuous absence of any provision making the consummation of the said
contract dependent on the ability of defendants Venturanzas to collect the purchase price of their two haciendas. If
this were the intention of the parties, they should have clearly stated it in the contract. It is true the defendants
wrote two letters to Dr. Cortes and/or his lawyer (Exhibits H and I-Venturanza, p. 90, Folder of Exhibits), wherein the
defendants Venturanzas requested an extension of time within which to pay and Dr. Cortes admitted having been
informed of the alleged projected sale of defendants Venturanzas' properties. Dr. Cortes, however, vehemently
denied having given said defendants any extension of time.

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

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

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

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

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

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

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

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

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

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

From the Coleman case:

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

From the Gemperle case:ñé+.£ªwph!1

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

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

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

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

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

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

The Supreme Court ruled —ñé+.£ªwph!1

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

In the case at bar, the agreement, Exhibit 1-Oledan relied upon by the defendants Oledans, does not show on its face
that the plaintiffs intervened in, much less gave their consent to, the substitution; as a matter of fact, plaintiff Cortes
vehemently denied having consented to the transfer of rights from the Oledans to the Venturanzas alone. Res inter
alios acta alteri nocere non debet , no less than defendant lose Oledan himself testified that he did not personally
see Dr. Cortes about the transfer of rights in Exhibit 1-Oledan, despite his commitment with his co-defendants in said
agreement 'to inform Messrs. Felix Cortes and Noel J. Cortes (Jesus Noel) of the execution of the said agreement" (p.
15, t.s.n. hearing of January 19, 1965). There is thus a complete absence of animus novandi, whether express or
implied, on the part of the creditors — the Corteses.
With respect to the claim of plaintiffs for reasonable attorney's fees, paragraph III (G) of the Deed of Sale with
Purchase Money Mortgage, Exhibit B, provides:ñé+.£ªwph!1

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

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

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

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

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

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

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

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

xxx xxx xxx

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

xxx xxx xxx

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

xxx xxx xxx

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

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

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

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

3. That in case of non-payment of the whole obligation of P22,285.80 within the stipulated period of three (3) years
from August 28, 1960 to August 28, 1963, such obligation or any balance thereof remaining unpaid, plus the
penalties due at the rate of P6,367.30 annually for three (3) years, shall earn interest at the legal rate.

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

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

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

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

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

5. That the sum of P20,000.00 was the only amount paid by the Oledans to and/or invested with the Venturanzas in
their joint venture envisioned in the deed of sale with mortgage, Exhibit B.
In support of their claim for penalties and interests, the cross-claimants and defendants Oledans contend that "this is
a normal stipulation in contracts of this character." WE do not agree and hereby reject such claim for penalties as
well as for interests.

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

Notwithstanding the imprudence and temerity shown by the defendants by their execution of a
ruinous engagement, assumed, as it appears, knowingly and voluntarily, morality and justice cannot
consent to and sanction a repugnant spoliation and iniquitous deprivation of property, repulsive to
the common sense of man; and therefore, as all acts performed against the provisions of law are null
and void, and as the penal clause referred to, notwithstanding its being an ostensible violation of
morals, was inserted in said promissory note, and as there is no law that expressly authorizes it, we
must conclude that the contracting party favored by said penal clause totally lacks all right of action
to enforce its fulfillment (emphasis supplied).

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

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

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

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

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

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

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

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

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

RIZAL COMMERCIAL BANKING CORPORATION vs. COURT OF APPEALS [April 20, 1998]

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

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

The undisputed facts may be summarized as follows:

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

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

GOYU obtained in its name a total of ten insurance policies from MICO. In February 1992, Alchester Insurance
Agency, Inc., the insurance agent where GOYU obtained the Malayan insurance policies, issued nine endorsements in
favor of RCBC seemingly upon instructions of GOYU (Exhibits "1-Malayan" to "9-Malayan").

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

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

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

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

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

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

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

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

b. To pay the plaintiff damages by was of interest for the duration of

the delay since July 27, 1992 (ninety days after defendant insurer's
 receipt of the required proof of loss and notice of loss) at the rate of
twice the ceiling prescribed by the Monetary Board, on the following
amounts:

1) P50,000,000.00 — from July 27, 1992 up to the

time said amount was deposited with this Court on
January 7, 1994;

2) P24,040,518.58 — from July 27, 1992 up to the

time when the writs of attachments were received
by defendant Malayan;

2. For defendant Rizal Commercial Banking Corporation:

a. To pay the plaintiff actual and compensatory damages in the

amount of P2,000,000.00;

3. For both defendants Malayan and RCBC:

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

1) P1,000,000.00 as exemplary damages;

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

3) Costs of suit.

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

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

(Record, pp. 478-479.)

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

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

1. FOR DEFENDANT MALAYAN INSURANCE CO., INC:

a) To pay the plaintiff its fire loss claim in the total amount of
P74,040,518.58 less the amount of P50,505,594.60 (per O.R. No.
3649285) plus deposited in court and damages by way of interest
commencing July 27, 1992 until the time Goyu receives the said
amount at the rate of thirty-seven (37%) percent per annum which is
twice the ceiling prescribed by the Monetary Board.

2. FOR DEFENDANT RIZAL COMMERCIAL BANKING CORPORATION;

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

3. FOR DEFENDANTS MALAYAN INSURANCE CO., INC., RIZAL COMMERCIAL BANKING

CORPORATION, UY CHUN BING AND ELI D. LAO:

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

1. P1,500,000.00 as exemplary damages;

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

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

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

(Rollo, p. 200.)

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

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

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

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

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

We do not quite agree.

It is settled that a mortgagor and a mortgagee have separated and distinct insurable interests in the same mortgaged
property, such that each one of them may insure the same property for his own sole benefit. There is no question
that GOYU could insure the mortgaged property for its own exclusive benefit. In the present case, although it appears
that GOYU obtained the subject insurance policies naming itself as the sole payee, the intentions of the parties as
shown by their contemporaneous acts, must be given due consideration in order to better serve the interest of
justice and equity.
It is to be noted that nine endorsement documents were prepared by Alchester in favor of RCBC. The Court is in a
quandary how Alchester could arrive at the idea of endorsing any specific insurance policy in favor of any particular
beneficiary or payee other than the insured had not such named payee or beneficiary been specifically disclosed by
the insured itself. It is also significant that GOYU voluntarily and purposely took the insurance policies from MICO, a
sister company of RCBC, and not just from any other insurance company. Alchester would not have found out that
the subject pieces of property were mortgaged to RCBC had not such information been voluntarily disclosed by GOYU
itself. Had it not been for GOYU, Alchester would not have known of GOYU's intention of obtaining insurance
coverage in compliance with its undertaking in the mortgage contracts with RCBC, and verily, Alchester would not
have endorsed the policies to RCBC had it not been so directed by GOYU.

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

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

(p. 368.)

Evelyn Lozada of Alchester testified that upon instructions of Mr. Go, through a certain Mr. Yam, she prepared in
quadruplicate on February 11, 1992 the nine endorsement documents for GOYU's nine insurance policies in favor of
RCBC. The original copies of each of these nine endorsement documents were sent to GOYU, and the others were
sent to RCBC and MICO, while the fourth copies were detained for Alchester's file (tsn, February 23, pp. 7-8). GOYU
has not denied having received from Alchester the originals of these documents.

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

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

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

2. GOYU voluntarily procured insurance policies to cover the mortgaged property from MICO, no less than a sister
company of RCBC and definitely an acceptable insurance company to RCBC.
3. Endorsement documents were prepared by MICO's underwriter, Alchester Insurance Agency, Inc., and copies
thereof were sent to GOYU, MICO, and RCBC. GOYU did not assail, until of late, the validity of said endorsements.

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

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

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

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

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

INSURANCE POLICY PARTICULARS ENDORSEMENT

a. Policy Number F-114-07795 None

Issue Date March 18, 1992
Expiry Date April 5, 1993
Amount P9,646,224.92

b. Policy Number ACIA/F-174-07660 Exhibit "1-Malayan"

Issue Date January 18, 1992
Expiry Date February 9, 1993
Amount P4,307,217.54

c. Policy Number ACIA/F-114-07661 Exhibit "2-Malayan"

Issue Date January 18, 1992
Expiry Date February 15, 1993
Amount P6,603,586.43

d. Policy Number ACIA/F-114-07662 Exhibit "3-Malayan"

Issue Date January 18, 1992
Expiry Date (not legible)
Amount P6,603,586.43

e. Policy Number ACIA/F-114-07663 Exhibit "4-Malayan"

Issue Date January 18, 1992
Expiry Date February 9, 1993
Amount P9,457,972.76
 f. Policy Number ACIA/F-114-07623 Exhibit "7-Malayan"
Issue Date January 13, 1992
Expiry Date January 13, 1993
Amount P24,750,000.00

g. Policy Number ACIA/F-174-07223 Exhibit "6-Malayan"

Issue Date May 29, 1991
Expiry Date June 27, 1992
Amount P6,000,000.00

h. Policy Number CI/F-128-03341 None

Issue Date May 3, 1991
Expiry Date May 3, 1992
Amount P10,000,000.00

i. Policy Number F-114-07402 Exhibit "8-Malayan"

Issue Date September 16, 1991
Expiry Date October 19, 1992
Amount P32,252,125.20

j. Policy Number F-114-07525 Exhibit "9-Malayan"

Issue Date November 20, 1991
Expiry Date December 5, 1992
Amount P6,603,586.43

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

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

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

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

The Court of Appeals simply echoed the declaration of the trial court finding that GOYU's total obligation to RCBC
was only P68,785,060.04 as of April 27, 1992, thus sanctioning the trial court's exclusion of Promissory Note No. 421-
92 (renewal of Promissory Note No. 908-91) and Promissory Note No. 420-92 (renewal of Promissory Note No. 952-
91) on the ground that their execution is highly questionable for not only are these dated after the fire, but also
because the signatures of either GOYU or any its representative are conspicuously absent. Accordingly, the Court of
Appeals speculated thusly:
 . . . Hence, this Court is inclined to conclude that said promissory notes were pre-signed by plaintiff in
bank terms, as averred by plaintiff, in contemplation of the speedy grant of future loans, for the same
practice of procedure has always been adopted in its previous dealings with the bank.

(Rollo, pp. 181-182.)

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

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

ATTY. NATIVIDAD

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

A: Yes, sir, I received the amount.

COURT

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

WITNESS:

Yes, Your Honor, I received all the amounts.

COURT

Indicated in the Promissory Notes?

WITNESS

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

COURT

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

A Yes, Your Honor.

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

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

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

(Exhibit BB.)

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

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

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

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

Total Obligation as admitted by GOYU

as of January 21, 1993: P116,301,992.60

Broken down as follows:

Principal 1 Interest

Regular 80,535,946.32
FDU 27,548,025.17
____________
Total 108,083,971.49 8,218,021.11 2

LESS:

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

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

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

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

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

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

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

(Record, p. 476)

The essence or rationale for the payment of interest or cost of money is separate and distinct from that of surcharges
and penalties. What may justify a court in not allowing the creditor to charge surcharges and penalties despite
express stipulation therefor in a valid agreement, may not equally justify non-payment of interest. The charging of
interest for loans forms a very essential and fundamental element of the banking business, which may truly be
considered to be at the very core of its existence or being. It is inconceivable for a bank to grant loans for which it will
not charge any interest at all. We fail to find justification for the Court of Appeal's outright deletion of the payment of
interest as agreed upon in the respective promissory notes. This constitutes gross error.

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

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

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

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

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

the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date of the
judgment of the court is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any case,
be on the amount finally adjudged.
 3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.

(pp. 95-97).

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

On the issue of payment of surcharges and penalties, we partly agree that GOYU's pitiful situation must be taken into
account. We do not agree, however, that payment of any amount as surcharges and penalties should altogether be
deleted. Even assuming that RCBC, through its responsible officers, herein petitioners Eli Lao and Uy Chun Bing, may
have relayed its assurance for assistance to GOYU immediately after the occurrence of the fire, we cannot accept the
lower courts' finding that RCBC had thereby ipso facto effectively waived collection of any additional interests,
surcharges, and penalties from GOYU. Assurances of assistance are one thing, but waiver of additional interests,
surcharges, and penalties is another.

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

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

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

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

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

Secondly, for an insurance company to be held liable for unreasonably delaying and withholding payment of
insurance proceeds, the delay must be wanton, oppressive, or malevolent (Zenith Insurance Corporation vs. CA. 185
SCRA 403 [1990]). It is generally agreed, however, that an insurer may in good faith and honesty entertain a
difference of opinion as to its liability. Accordingly, the statutory penalty for vexatious refusal of an insurer to pay a
claim should not be inflicted unless the evidence and circumstances show that such refusal was willful and without
reasonable cause as the facts appear to a reasonable and prudent man (Bufallo Ins. Co. vs. Bommarito [CCA 8th] 42 F
[2d] 53, 70 ALR 1211; Phoenix Ins. Co. vs. Clay, 101 Ga. 331, 28 SE 853, 65 Am St. Rep 307; Kusnetsky vs. Security Ins.
Co., 313 Mo. 143, 281 SW 47, 45 ALR 189). The case at bar does not show that MICO wantonly and in bad faith
delayed the release of the proceeds. The problem in the determination of who is the actual beneficiary of the
insurance policies, aggravated by the claim of various creditors who wanted to partake of the insurance proceeds,
not to mention the importance of the endorsement to RCBC, to our mind, and as now borne out by the outcome
herein, justified MICO in withholding payment to GOYU.
In adjudging RCBC liable in damages to GOYU, the Court of Appeals said that RCBC cannot avail itself of two
simultaneous remedies in enforcing the claim of an unpaid creditor, one for specific performance and the other for
foreclosure. In doing so, said the appellate court, the second action is deemed barred, RCBC having split a single
cause of action (Rollo, pp. 195-199). The Court of Appeals was too accommodating in giving due consideration to this
argument of GOYU, for the foreclosure suit is still pending appeal before the same Court of Appeals in CA G.R. CV No.
46247, the case having been elevated by RCBC.

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

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

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

(pp. 701-702.)

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

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

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

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

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

4. Ordering Goyu & Sons, Inc. to pay its loan obligation with Rizal Commercial Banking Corporation in
the principal amount of P107,246,887.90, with interest at the respective rates stipulated in each
promissory note from January 21, 1993 until finality of this judgment, and surcharges at 2% and
penalties at 3% from January 21, 1993 to March 9, 1993, minus payments made by Malayan
Insurance Company, Inc. and the proceeds of the amount deposited with the trial court and its
earned interest. The total amount due RCBC at the time of the finality of this judgment shall earn
interest at the legal rate of 12% in lieu of all other stipulated interests and charges until fully paid.

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

SO ORDERED.