G.R. No. 175139 April 18, 2012
Vendee shall be informed as to the status of DAR
HERMOJINA ESTORES, Petitioner,
vs.
SPOUSES ARTURO and LAURA SUPANGAN, Respondents.
DECISION
DEL CASTILLO, J.:
The only issue posed before us is the propriety of the
imposition of interest and attorney’s fees.
Assailed in this Petition for Review1 filed under Rule 45 of
the Rules of Court is the May 12, 2006 Decision2 of the
Court of Appeals (CA) in CA-G.R. CV No. 83123, the
dispositive portion of which reads:
WHEREFORE, the appealed decision is MODIFIED. The
rate of interest shall be six percent (6%) per annum,
computed from September 27, 2000 until its full payment
before finality of the judgment. If the adjudged principal
and the interest (or any part thereof) remain unpaid
thereafter, the interest rate shall be adjusted to twelve
percent (12%) per annum, computed from the time the
judgment becomes final and executory until it is fully
satisfied. The award of attorney’s fees is hereby reduced
to ₱100,000.00. Costs against the defendants-appellants.
SO ORDERED.3
Also assailed is the August 31, 2006 Resolution4 denying
the motion for reconsideration.
Factual Antecedents
On October 3, 1993, petitioner Hermojina Estores and
respondent-spouses Arturo and Laura Supangan entered
into a Conditional Deed of Sale5 whereby petitioner
offered to sell, and respondent-spouses offered to buy, a
parcel of land covered by Transfer Certificate of Title No.
TCT No. 98720 located at Naic, Cavite for the sum of ₱4.7
million. The parties likewise stipulated, among others, to
wit:
xxxx
1. Vendor will secure approved clearance from DAR
requirements of which are (sic):
a) Letter request
b) Title
c) Tax Declaration
d) Affidavit of Aggregate Landholding – Vendor/Vendee
e) Certification from the Prov’l. Assessor’s as to
Landholdings of Vendor/Vendee
f) Affidavit of Non-Tenancy
g) Deed of Absolute Sale
xxxx
4.
clearance within 10 days upon signing of the documents.
xxxx
6. Regarding the house located within the perimeter of
the subject [lot] owned by spouses [Magbago], said house
shall be moved outside the perimeter of this subject
property to the 300 sq. m. area allocated for [it]. Vendor
hereby accepts the responsibility of seeing to it that such
agreement is carried out before full payment of the sale
is made by vendee.
7. If and after the vendor has completed all necessary
documents for registration of the title and the vendee
fails to complete payment as per agreement, a forfeiture
fee of 25% or downpayment, shall be applied. However,
if the vendor fails to complete necessary documents
within thirty days without any sufficient reason, or
without informing the vendee of its status, vendee has
the right to demand return of full amount of down
payment.
xxxx
9. As to the boundaries and partition of the lots (15,018
sq. m. and 300 sq. m.) Vendee shall be informed
immediately of its approval by the LRC.
10. The vendor assures the vendee of a peaceful transfer
of ownership.
xxxx6
After almost seven years from the time of the execution
of the contract and notwithstanding payment of ₱3.5
million on the part of respondent-spouses, petitioner still
failed to comply with her obligation as expressly provided
in paragraphs 4, 6, 7, 9 and 10 of the contract. Hence, in
a letter7 dated September 27, 2000, respondent-spouses
demanded the return of the amount of ₱3.5 million
within 15 days from receipt of the letter. In reply,8
petitioner acknowledged receipt of the ₱3.5 million and
promised to return the same within 120 days.
Respondent-spouses were amenable to the proposal
provided an interest of 12% compounded annually shall
be imposed on the ₱3.5 million.9 When petitioner still
failed to return the amount despite demand, respondent-
spouses were constrained to file a Complaint10 for sum
of money before the Regional Trial Court (RTC) of
Malabon against herein petitioner as well as Roberto U.
Arias (Arias) who allegedly acted as petitioner’s agent.
The case was docketed as Civil Case No. 3201-MN and
raffled off to Branch 170. In their complaint, respondent-
spouses prayed that petitioner and Arias be ordered to:
1. Pay the principal amount of ₱3,500,000.00 plus
interest of 12% compounded annually starting October 1,
1993 or an estimated amount of ₱8,558,591.65;
2. Pay the following items of damages:
a) Moral damages in the amount of ₱100,000.00;
b) Actual damages in the amount of ₱100,000.00;
c) Exemplary damages in the amount of ₱100,000.00;

d) [Attorney’s] fee in the amount of ₱50,000.00 plus 20%
of recoverable amount from the [petitioner].
e) [C]ost of suit.11
In their Answer with Counterclaim,12 petitioner and Arias
averred that they are willing to return the principal
amount of ₱3.5 million but without any interest as the
same was not agreed upon. In their Pre-Trial Brief,13 they
reiterated that the only remaining issue between the
parties is the imposition of interest. They argued that
since the Conditional Deed of Sale provided only for the
return of the downpayment in case of breach, they
cannot be held liable to pay legal interest as well.14
In its Pre-Trial Order15 dated June 29, 2001, the RTC
noted that "the parties agreed that the principal amount
of 3.5 million pesos should be returned to the
[respondent-spouses] by the [petitioner] and the issue
remaining [is] whether x x x [respondent-spouses] are
entitled to legal interest thereon, damages and attorney’s
fees."16
Trial ensued thereafter. After the presentation of the
respondent-spouses’ evidence, the trial court set the
presentation of Arias and petitioner’s evidence on
September 3, 2003.17 However, despite several
postponements, petitioner and Arias failed to appear
hence they were deemed to have waived the
presentation of their evidence. Consequently, the case
was deemed submitted for decision.18
Ruling of the Regional Trial Court
On May 7, 2004, the RTC rendered its Decision19 finding
respondent-spouses entitled to interest but only at the
rate of 6% per annum and not 12% as prayed by them.20
It also found respondent-spouses entitled to attorney’s
fees as they were compelled to litigate to protect their
interest.21
The dispositive portion of the RTC Decision reads:
WHEREFORE, premises considered, judgment is hereby
rendered in favor of the [respondent-spouses] and
ordering the [petitioner and Roberto Arias] to jointly and
severally:
1. Pay [respondent-spouses] the principal amount of
Three Million Five Hundred Thousand pesos
(₱3,500,000.00) with an interest of 6% compounded
annually starting October 1, 1993 and attorney’s fee in
the amount of Fifty Thousand pesos (₱50,000.00) plus
20% of the recoverable amount from the defendants and
cost of the suit.
The Compulsory Counter Claim is hereby dismissed for
lack of factual evidence.
SO ORDERED.22
Ruling of the Court of Appeals
Aggrieved, petitioner and Arias filed their notice of
appeal.23 The CA noted that the only issue submitted for
its resolution is "whether it is proper to impose interest
for an obligation that does not involve a loan or
forbearance of money in the absence of stipulation of the
parties."24
On May 12, 2006, the CA rendered the assailed Decision
affirming the ruling of the RTC finding the imposition of
6% interest proper.25 However, the same shall start to
run only from September 27, 2000 when respondent-
spouses formally demanded the return of their money
and not from October 1993 when the contract was
executed as held by the RTC. The CA also modified the
RTC’s ruling as regards the liability of Arias. It held that
Arias could not be held solidarily liable with petitioner
because he merely acted as agent of the latter. Moreover,
there was no showing that he expressly bound himself to
be personally liable or that he exceeded the limits of his
authority. More importantly, there was even no showing
that Arias was authorized to act as agent of petitioner.26
Anent the award of attorney’s fees, the CA found the
award by the trial court (₱50,000.00 plus 20% of the
recoverable amount) excessive27 and thus reduced the
same to ₱100,000.00.28
The dispositive portion of the CA Decision reads:
WHEREFORE, the appealed decision is MODIFIED. The
rate of interest shall be six percent (6%) per annum,
computed from September 27, 2000 until its full payment
before finality of the judgment. If the adjudged principal
and the interest (or any part thereof) remain[s] unpaid
thereafter, the interest rate shall be adjusted to twelve
percent (12%) per annum, computed from the time the
judgment becomes final and executory until it is fully
satisfied. The award of attorney’s fees is hereby reduced
to ₱100,000.00. Costs against the [petitioner].
SO ORDERED.29
Petitioner moved for reconsideration which was denied
in the August 31, 2006 Resolution of the CA.
Hence, this petition raising the sole issue of whether the
imposition of interest and attorney’s fees is proper.
Petitioner’s Arguments
Petitioner insists that she is not bound to pay interest on
the ₱3.5 million because the Conditional Deed of Sale
only provided for the return of the downpayment in case
of failure to comply with her obligations. Petitioner also
argues that the award of attorney’s fees in favor of the
respondent-spouses is unwarranted because it cannot be
said that the latter won over the former since the CA even
sustained her contention that the imposition of 12%
interest compounded annually is totally uncalled for.
Respondent-spouses’ Arguments
Respondent-spouses aver that it is only fair that interest
be imposed on the amount they paid considering that
petitioner failed to return the amount upon demand and
had been using the ₱3.5 million for her benefit.
Moreover, it is undisputed that petitioner failed to
perform her obligations to relocate the house outside the
perimeter of the subject property and to complete the
necessary documents. As regards the attorney’s fees,
they claim that they are entitled to the same because they
were forced to litigate when petitioner unjustly withheld
the amount. Besides, the amount awarded by the CA is
even smaller compared to the filing fees they paid.
Our Ruling
The petition lacks merit.
Interest may be imposed even in the absence of
stipulation in the contract.
We sustain the ruling of both the RTC and the CA that it is
proper to impose interest notwithstanding the absence of
stipulation in the contract. Article 2210 of the Civil Code
expressly provides that "[i]nterest may, in the discretion
of the court, be allowed upon damages awarded for
breach of contract." In this case, there is no question that
petitioner is legally obligated to return the ₱3.5 million
because of her failure to fulfill the obligation under the
Conditional Deed of Sale, despite demand. She has in fact
admitted that the conditions were not fulfilled and that
she was willing to return the full amount of ₱3.5 million
but has not actually done so. Petitioner enjoyed the use
of the money from the time it was given to her30 until
now. Thus, she is already in default of her obligation from
the date of demand, i.e., on September 27, 2000.
The interest at the rate of 12% is applicable in the instant
case.
Anent the interest rate, the general rule is that the
applicable rate of interest "shall be computed in
accordance with the stipulation of the parties."31 Absent
any stipulation, the applicable rate of interest shall be
12% per annum "when the obligation arises out of a loan
or a forbearance of money, goods or credits. In other
cases, it shall be six percent (6%)."32 In this case, the
parties did not stipulate as to the applicable rate of
interest. The only question remaining therefore is
whether the 6% as provided under Article 2209 of the
Civil Code, or 12% under Central Bank Circular No. 416, is
due.
The contract involved in this case is admittedly not a loan
but a Conditional Deed of Sale. However, the contract
provides that the seller (petitioner) must return the
payment made by the buyer (respondent-spouses) if the
conditions are not fulfilled. There is no question that they
have in fact, not been fulfilled as the seller (petitioner) has
admitted this. Notwithstanding demand by the buyer
(respondent-spouses), the seller (petitioner) has failed to
return the money and
should be considered in default from the time that
demand was made on September 27, 2000.
Even if the transaction involved a Conditional Deed of
Sale, can the stipulation governing the return of the
money be considered as a forbearance of money which
required payment of interest at the rate of 12%? We
believe so.
In Crismina Garments, Inc. v. Court of Appeals,33
"forbearance" was defined as a "contractual obligation of
lender or creditor to refrain during a given period of time,
from requiring the borrower or debtor to repay a loan or
debt then due and payable." This definition describes a
loan where a debtor is given a period within which to pay
a loan or debt. In such case, "forbearance of money,
goods or credits" will have no distinct definition from a
loan. We believe however, that the phrase "forbearance
of money, goods or credits" is meant to have a separate
meaning from a loan, otherwise there would have been
no need to add that phrase as a loan is already sufficiently
defined in the Civil Code.34 Forbearance of money, goods
or credits should therefore refer to arrangements other
than loan agreements, where a person acquiesces to the
temporary use of his money, goods or credits pending
happening of certain events or fulfillment of certain
conditions. In this case, the respondent-spouses parted
with their money even before the conditions were
fulfilled. They have therefore allowed or granted
forbearance to the seller (petitioner) to use their money
pending fulfillment of the conditions. They were deprived
of the use of their money for the period pending
fulfillment of the conditions and when those conditions
were breached, they are entitled not only to the return of
the principal amount paid, but also to compensation for
the use of their money. And the compensation for the use
of their money, absent any stipulation, should be the
same rate of legal interest applicable to a loan since the
use or deprivation of funds is similar to a loan.
Petitioner’s unwarranted withholding of the money
which rightfully pertains to respondent-spouses amounts
to forbearance of money which can be considered as an
involuntary loan. Thus, the applicable rate of interest is
12% per annum. In Eastern Shipping Lines, Inc. v. Court of
Appeals,35 cited in Crismina Garments, Inc. v. Court of
Appeals,36 the Court suggested the following guidelines:
I. When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for
damages. The provisions under Title XVIII on ‘Damages’ of
the Civil Code govern in determining the measure of
recoverable damages.
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil
Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated
claims or damages except when or until the demand can
be established with reasonable certainty. Accordingly,
where the demand is established with reasonable
certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil
Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest
shall begin to run only from the date the judgment of the
court is made (at which time the quantification of
damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally
adjudged.
3. When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of
credit.37
Eastern Shipping Lines, Inc. v. Court of Appeals38 and its
predecessor case, Reformina v. Tongol39 both involved
torts cases and hence, there was no forbearance of
money, goods, or credits. Further, the amount claimed
(i.e., damages) could not be established with reasonable
certainty at the time the claim was made. Hence, we
arrived at a different ruling in those cases.
Since the date of demand which is September 27, 2000
was satisfactorily established during trial, then the
interest rate of 12% should be reckoned from said date of
demand until the principal amount and the interest
thereon is fully satisfied.1âwphi1
The award of attorney’s fees is warranted.
Under Article 2208 of the Civil Code, attorney’s fees may
be recovered:
xxxx
(2) When the defendant’s act or omission has compelled
the plaintiff to litigate with third persons or to incur
expenses to protect his interest;
xxxx
(11) In any other case where the court deems it just and
equitable that attorney’s fees and expenses of litigation
should be recovered.
In all cases, the attorney’s fees and expenses of litigation
must be reasonable.
Considering the circumstances of the instant case, we find
respondent-spouses entitled to recover attorney’s fees.
There is no doubt that they were forced to litigate to
protect their interest, i.e., to recover their money.
However, we find the amount of ₱50,000.00 more
appropriate in line with the policy enunciated in Article
2208 of the Civil Code that the award of attorney’s fees
must always be reasonable.
WHEREFORE, the Petition for Review is DENIED. The May
12, 2006 Decision of the Court of Appeals in CA-G.R. CV
No. 83123 is AFFIRMED with MODIFICATIONS that the
rate of interest shall be twelve percent (12%) per annum,
computed from September 27, 2000 until fully satisfied.
The award of attorney’s fees is further reduced to
₱50,000.00.SO ORDERED.
G.R. No. 115324 February 19, 2003
PRODUCERS BANK OF THE PHILIPPINES (now FIRST
INTERNATIONAL BANK), petitioner,
vs.
HON. COURT OF APPEALS AND FRANKLIN
VIVES, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari of the
Decision1 of the Court of Appeals dated June 25, 1991 in
CA-G.R. CV No. 11791 and of its Resolution2 dated May 5,
1994, denying the motion for reconsideration of said
decision filed by petitioner Producers Bank of the
Philippines.
Sometime in 1979, private respondent Franklin Vives was
asked by his neighbor and friend Angeles Sanchez to help
her friend and townmate, Col. Arturo Doronilla, in
incorporating his business, the Sterela Marketing and
Services ("Sterela" for brevity). Specifically, Sanchez asked
private respondent to deposit in a bank a certain amount
of money in the bank account of Sterela for purposes of
its incorporation. She assured private respondent that he
could withdraw his money from said account within a
month’s time. Private respondent asked Sanchez to bring
Doronilla to their house so that they could discuss
Sanchez’s request.3
On May 9, 1979, private respondent, Sanchez, Doronilla
and a certain Estrella Dumagpi, Doronilla’s private
secretary, met and discussed the matter. Thereafter,
relying on the assurances and representations of Sanchez
and Doronilla, private respondent issued a check in the
amount of Two Hundred Thousand Pesos (₱200,000.00)
in favor of Sterela. Private respondent instructed his wife,
Mrs. Inocencia Vives, to accompany Doronilla and
Sanchez in opening a savings account in the name of
Sterela in the Buendia, Makati branch of Producers Bank
of the Philippines. However, only Sanchez, Mrs. Vives and
Dumagpi went to the bank to deposit the check. They had
with them an authorization letter from Doronilla
authorizing Sanchez and her companions, "in
coordination with Mr. Rufo Atienza," to open an account
for Sterela Marketing Services in the amount of
₱200,000.00. In opening the account, the authorized
signatories were Inocencia Vives and/or Angeles Sanchez.
A passbook for Savings Account No. 10-1567 was
thereafter issued to Mrs. Vives.4
Subsequently, private respondent learned that Sterela
was no longer holding office in the address previously
given to him. Alarmed, he and his wife went to the Bank
to verify if their money was still intact. The bank manager
referred them to Mr. Rufo Atienza, the assistant manager,
who informed them that part of the money in Savings
Account No. 10-1567 had been withdrawn by Doronilla,
and that only ₱90,000.00 remained therein. He likewise
told them that Mrs. Vives could not withdraw said
remaining amount because it had to answer for some
postdated checks issued by Doronilla. According to
Atienza, after Mrs. Vives and Sanchez opened Savings
Account No. 10-1567, Doronilla opened Current Account
No. 10-0320 for Sterela and authorized the Bank to debit
Savings Account No. 10-1567 for the amounts necessary
to cover overdrawings in Current Account No. 10-0320. In
opening said current account, Sterela, through Doronilla,
obtained a loan of ₱175,000.00 from the Bank. To cover
payment thereof, Doronilla issued three postdated
checks, all of which were dishonored. Atienza also said
that Doronilla could assign or withdraw the money in
Savings Account No. 10-1567 because he was the sole
proprietor of Sterela.5
Private respondent tried to get in touch with Doronilla
through Sanchez. On June 29, 1979, he received a letter
from Doronilla, assuring him that his money was intact
and would be returned to him. On August 13, 1979,
Doronilla issued a postdated check for Two Hundred
Twelve Thousand Pesos (₱212,000.00) in favor of private
respondent. However, upon presentment thereof by
private respondent to the drawee bank, the check was
dishonored. Doronilla requested private respondent to
present the same check on September 15, 1979 but when
the latter presented the check, it was again dishonored.6
Private respondent referred the matter to a lawyer, who
made a written demand upon Doronilla for the return of
his client’s money. Doronilla issued another check for
₱212,000.00 in private respondent’s favor but the check
was again dishonored for insufficiency of funds.7
Private respondent instituted an action for recovery of
sum of money in the Regional Trial Court (RTC) in Pasig,
Metro Manila against Doronilla, Sanchez, Dumagpi and
petitioner. The case was docketed as Civil Case No. 44485.
He also filed criminal actions against Doronilla, Sanchez
and Dumagpi in the RTC. However, Sanchez passed away
on March 16, 1985 while the case was pending before the
trial court. On October 3, 1995, the RTC of Pasig, Branch
157, promulgated its Decision in Civil Case No. 44485, the
dispositive portion of which reads:
IN VIEW OF THE FOREGOING, judgment is hereby
rendered sentencing defendants Arturo J. Doronila,
Estrella Dumagpi and Producers Bank of the Philippines to
pay plaintiff Franklin Vives jointly and severally –
(a) the amount of ₱200,000.00, representing the money
deposited, with interest at the legal rate from the filing of
the complaint until the same is fully paid;
(b) the sum of ₱50,000.00 for moral damages and a
similar amount for exemplary damages;
(c) the amount of ₱40,000.00 for attorney’s fees; and
(d) the costs of the suit.
SO ORDERED.8
Petitioner appealed the trial court’s decision to the Court
of Appeals. In its Decision dated June 25, 1991, the
appellate court affirmed in toto the decision of the
RTC.9 It likewise denied with finality petitioner’s motion
for reconsideration in its Resolution dated May 5, 1994.10
On June 30, 1994, petitioner filed the present petition,
arguing that –
I.
THE HONORABLE COURT OF APPEALS ERRED IN
UPHOLDING THAT THE TRANSACTION BETWEEN THE
DEFENDANT DORONILLA AND RESPONDENT VIVES WAS
ONE OF SIMPLE LOAN AND NOT ACCOMMODATION;
II.
THE HONORABLE COURT OF APPEALS ERRED IN
UPHOLDING THAT PETITIONER’S BANK MANAGER, MR.
RUFO ATIENZA, CONNIVED WITH THE OTHER
DEFENDANTS IN DEFRAUDING PETITIONER (Sic. Should be
PRIVATE RESPONDENT) AND AS A CONSEQUENCE, THE
PETITIONER SHOULD BE HELD LIABLE UNDER THE
PRINCIPLE OF NATURAL JUSTICE;
III.
THE HONORABLE COURT OF APPEALS ERRED IN
ADOPTING THE ENTIRE RECORDS OF THE REGIONAL TRIAL
COURT AND AFFIRMING THE JUDGMENT APPEALED
FROM, AS THE FINDINGS OF THE REGIONAL TRIAL COURT
WERE BASED ON A MISAPPREHENSION OF FACTS;
IV.
THE HONORABLE COURT OF APPEALS ERRED IN
DECLARING THAT THE CITED DECISION IN SALUDARES VS.
MARTINEZ, 29 SCRA 745, UPHOLDING THE LIABILITY OF
AN EMPLOYER FOR ACTS COMMITTED BY AN EMPLOYEE
IS APPLICABLE;
V.
THE HONORABLE COURT OF APPEALS ERRED IN
UPHOLDING THE DECISION OF THE LOWER COURT THAT
HEREIN PETITIONER BANK IS JOINTLY AND SEVERALLY
LIABLE WITH THE OTHER DEFENDANTS FOR THE
AMOUNT OF P200,000.00 REPRESENTING THE SAVINGS
ACCOUNT DEPOSIT, P50,000.00 FOR MORAL DAMAGES,
P50,000.00 FOR EXEMPLARY DAMAGES, P40,000.00 FOR
ATTORNEY’S FEES AND THE COSTS OF SUIT.11
Private respondent filed his Comment on September 23,
1994. Petitioner filed its Reply thereto on September 25,
1995. The Court then required private respondent to
submit a rejoinder to the reply. However, said rejoinder
was filed only on April 21, 1997, due to petitioner’s delay
in furnishing private respondent with copy of the
reply12 and several substitutions of counsel on the part of
private respondent.13 On January 17, 2001, the Court
resolved to give due course to the petition and required
the parties to submit their respective
memoranda.14 Petitioner filed its memorandum on April
16, 2001 while private respondent submitted his
memorandum on March 22, 2001.
Petitioner contends that the transaction between private
respondent and Doronilla is a simple loan (mutuum) since
all the elements of a mutuum are present: first, what was
delivered by private respondent to Doronilla was money,
a consumable thing; and second, the transaction was
onerous as Doronilla was obliged to pay interest, as
evidenced by the check issued by Doronilla in the amount
of ₱212,000.00, or ₱12,000 more than what private
respondent deposited in Sterela’s bank
15
account. Moreover, the fact that private respondent
sued his good friend Sanchez for his failure to recover his
money from Doronilla shows that the transaction was not
merely gratuitous but "had a business angle" to it. Hence,
petitioner argues that it cannot be held liable for the
return of private respondent’s ₱200,000.00 because it is
not privy to the transaction between the latter and
Doronilla.16
It argues further that petitioner’s Assistant Manager, Mr.
Rufo Atienza, could not be faulted for allowing Doronilla
to withdraw from the savings account of Sterela since the
latter was the sole proprietor of said company. Petitioner
asserts that Doronilla’s May 8, 1979 letter addressed to
the bank, authorizing Mrs. Vives and Sanchez to open a
savings account for Sterela, did not contain any
authorization for these two to withdraw from said
account. Hence, the authority to withdraw therefrom
remained exclusively with Doronilla, who was the sole
proprietor of Sterela, and who alone had legal title to the
savings account.17 Petitioner points out that no evidence
other than the testimonies of private respondent and
Mrs. Vives was presented during trial to prove that
private respondent deposited his ₱200,000.00 in Sterela’s
account for purposes of its incorporation.18 Hence,
petitioner should not be held liable for allowing Doronilla
to withdraw from Sterela’s savings account.1a\^/phi1.net
Petitioner also asserts that the Court of Appeals erred in
affirming the trial court’s decision since the findings of
fact therein were not accord with the evidence presented
by petitioner during trial to prove that the transaction
between private respondent and Doronilla was a
mutuum, and that it committed no wrong in allowing
Doronilla to withdraw from Sterela’s savings account.19
Finally, petitioner claims that since there is no wrongful
act or omission on its part, it is not liable for the actual
damages suffered by private respondent, and neither
may it be held liable for moral and exemplary damages as
well as attorney’s fees.20
Private respondent, on the other hand, argues that the
transaction between him and Doronilla is not a mutuum
but an accommodation,21 since he did not actually part
with the ownership of his ₱200,000.00 and in fact asked
his wife to deposit said amount in the account of Sterela
so that a certification can be issued to the effect that
Sterela had sufficient funds for purposes of its
incorporation but at the same time, he retained some
degree of control over his money through his wife who
was made a signatory to the savings account and in whose
possession the savings account passbook was given.22
He likewise asserts that the trial court did not err in
finding that petitioner, Atienza’s employer, is liable for
the return of his money. He insists that Atienza,
petitioner’s assistant manager, connived with Doronilla in
defrauding private respondent since it was Atienza who
facilitated the opening of Sterela’s current account three
days after Mrs. Vives and Sanchez opened a savings
account with petitioner for said company, as well as the
approval of the authority to debit Sterela’s savings
account to cover any overdrawings in its current
account.23
There is no merit in the petition.
At the outset, it must be emphasized that only questions
of law may be raised in a petition for review filed with this
Court. The Court has repeatedly held that it is not its
function to analyze and weigh all over again the evidence
presented by the parties during trial.24 The Court’s
jurisdiction is in principle limited to reviewing errors of
law that might have been committed by the Court of
Appeals.25 Moreover, factual findings of courts, when
adopted and confirmed by the Court of Appeals, are final
and conclusive on this Court unless these findings are not
supported by the evidence on record.26 There is no
showing of any misapprehension of facts on the part of
the Court of Appeals in the case at bar that would require
this Court to review and overturn the factual findings of
that court, especially since the conclusions of fact of the
Court of Appeals and the trial court are not only
consistent but are also amply supported by the evidence
on record.
No error was committed by the Court of Appeals when it
ruled that the transaction between private respondent
and Doronilla was a commodatum and not a mutuum. A
circumspect examination of the records reveals that the
transaction between them was a commodatum. Article
1933 of the Civil Code distinguishes between the two
kinds of loans in this wise:
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.
The foregoing provision seems to imply that if the subject
of the contract is a consumable thing, such as money, the
contract would be a mutuum. However, there are some
instances where a commodatum may have for its object
a consumable thing. Article 1936 of the Civil Code
provides:
Consumable goods may be the subject of commodatum
if the purpose of the contract is not the consumption of
the object, as when it is merely for exhibition.
Thus, if consumable goods are loaned only for purposes
of exhibition, or when the intention of the parties is to
lend consumable goods and to have the very same goods
returned at the end of the period agreed upon, the loan
is a commodatum and not a mutuum.
The rule is that the intention of the parties thereto shall
be accorded primordial consideration in determining the
actual character of a contract.27 In case of doubt, the
contemporaneous and subsequent acts of the parties
shall be considered in such determination.28
As correctly pointed out by both the Court of Appeals and
the trial court, the evidence shows that private
respondent agreed to deposit his money in the savings
account of Sterela specifically for the purpose of making
it appear "that said firm had sufficient capitalization for
incorporation, with the promise that the amount shall be
returned within thirty (30) days."29 Private respondent
merely "accommodated" Doronilla by lending his money
without consideration, as a favor to his good friend
Sanchez. It was however clear to the parties to the
transaction that the money would not be removed from
Sterela’s savings account and would be returned to
private respondent after thirty (30) days.
Doronilla’s attempts to return to private respondent the
amount of ₱200,000.00 which the latter deposited in
Sterela’s account together with an additional ₱12,000.00,
allegedly representing interest on the mutuum, did not
convert the transaction from a commodatum into a
mutuum because such was not the intent of the parties
and because the additional ₱12,000.00 corresponds to
the fruits of the lending of the ₱200,000.00. Article 1935
of the Civil Code expressly states that "[t]he bailee in
commodatum acquires the use of the thing loaned but
not its fruits." Hence, it was only proper for Doronilla to
remit to private respondent the interest accruing to the
latter’s money deposited with petitioner.
Neither does the Court agree with petitioner’s contention
that it is not solidarily liable for the return of private
respondent’s money because it was not privy to the
transaction between Doronilla and private respondent.
The nature of said transaction, that is, whether it is a
mutuum or a commodatum, has no bearing on the
question of petitioner’s liability for the return of private
respondent’s money because the factual circumstances
of the case clearly show that petitioner, through its
employee Mr. Atienza, was partly responsible for the loss
of private respondent’s money and is liable for its
restitution.
Petitioner’s rules for savings deposits written on the
passbook it issued Mrs. Vives on behalf of Sterela for
Savings Account No. 10-1567 expressly states that—
"2. Deposits and withdrawals must be made by the
depositor personally or upon his written authority duly
authenticated, and neither a deposit nor a withdrawal will
be permitted except upon the production of the
depositor savings bank book in which will be entered by
the Bank the amount deposited or withdrawn."30
Said rule notwithstanding, Doronilla was permitted by
petitioner, through Atienza, the Assistant Branch
Manager for the Buendia Branch of petitioner, to
withdraw therefrom even without presenting the
passbook (which Atienza very well knew was in the
possession of Mrs. Vives), not just once, but several times.
Both the Court of Appeals and the trial court found that
Atienza allowed said withdrawals because he was party to
Doronilla’s "scheme" of defrauding private respondent:
XXX
But the scheme could not have been executed
successfully without the knowledge, help and
cooperation of Rufo Atienza, assistant manager and
cashier of the Makati (Buendia) branch of the defendant
bank. Indeed, the evidence indicates that Atienza had not
only facilitated the commission of the fraud but he
likewise helped in devising the means by which it can be
done in such manner as to make it appear that the
transaction was in accordance with banking procedure.
To begin with, the deposit was made in defendant’s
Buendia branch precisely because Atienza was a key
officer therein. The records show that plaintiff had
suggested that the ₱200,000.00 be deposited in his bank,
the Manila Banking Corporation, but Doronilla and
Dumagpi insisted that it must be in defendant’s branch in
Makati for "it will be easier for them to get a certification".
In fact before he was introduced to plaintiff, Doronilla had
already prepared a letter addressed to the Buendia
branch manager authorizing Angeles B. Sanchez and
company to open a savings account for Sterela in the
amount of ₱200,000.00, as "per coordination with Mr.
Rufo Atienza, Assistant Manager of the Bank x x x" (Exh.
1). This is a clear manifestation that the other defendants
had been in consultation with Atienza from the inception
of the scheme. Significantly, there were testimonies and
admission that Atienza is the brother-in-law of a certain
Romeo Mirasol, a friend and business associate of
Doronilla.1awphi1.nét
Then there is the matter of the ownership of the fund.
Because of the "coordination" between Doronilla and
Atienza, the latter knew before hand that the money
deposited did not belong to Doronilla nor to Sterela. Aside
from such foreknowledge, he was explicitly told by
Inocencia Vives that the money belonged to her and her
husband and the deposit was merely to accommodate
Doronilla. Atienza even declared that the money came
from Mrs. Vives.
Although the savings account was in the name of Sterela,
the bank records disclose that the only ones empowered
to withdraw the same were Inocencia Vives and Angeles
B. Sanchez. In the signature card pertaining to this
account (Exh. J), the authorized signatories were
Inocencia Vives &/or Angeles B. Sanchez. Atienza stated
that it is the usual banking procedure that withdrawals of
savings deposits could only be made by persons whose
authorized signatures are in the signature cards on file
with the bank. He, however, said that this procedure was
not followed here because Sterela was owned by
Doronilla. He explained that Doronilla had the full
authority to withdraw by virtue of such ownership. The
Court is not inclined to agree with Atienza. In the first
place, he was all the time aware that the money came
from Vives and did not belong to Sterela. He was also told
by Mrs. Vives that they were only accommodating
Doronilla so that a certification can be issued to the effect
that Sterela had a deposit of so much amount to be sued
in the incorporation of the firm. In the second place, the
signature of Doronilla was not authorized in so far as that
account is concerned inasmuch as he had not signed the
signature card provided by the bank whenever a deposit
is opened. In the third place, neither Mrs. Vives nor
Sanchez had given Doronilla the authority to withdraw.
Moreover, the transfer of fund was done without the
passbook having been presented. It is an accepted
practice that whenever a withdrawal is made in a savings
deposit, the bank requires the presentation of the
passbook. In this case, such recognized practice was
dispensed with. The transfer from the savings account to
the current account was without the submission of the
passbook which Atienza had given to Mrs. Vives. Instead,
it was made to appear in a certification signed by Estrella
Dumagpi that a duplicate passbook was issued to Sterela
because the original passbook had been surrendered to
the Makati branch in view of a loan accommodation
assigning the savings account (Exh. C). Atienza, who
undoubtedly had a hand in the execution of this
certification, was aware that the contents of the same are
not true. He knew that the passbook was in the hands of
Mrs. Vives for he was the one who gave it to her. Besides,
as assistant manager of the branch and the bank official
servicing the savings and current accounts in question, he
also was aware that the original passbook was never
surrendered. He was also cognizant that Estrella Dumagpi
was not among those authorized to withdraw so her
certification had no effect whatsoever.
The circumstance surrounding the opening of the current
account also demonstrate that Atienza’s active
participation in the perpetration of the fraud and
deception that caused the loss. The records indicate that
this account was opened three days later after the
₱200,000.00 was deposited. In spite of his disclaimer, the
Court believes that Atienza was mindful and posted
regarding the opening of the current account considering
that Doronilla was all the while in "coordination" with
him. That it was he who facilitated the approval of the
authority to debit the savings account to cover any
overdrawings in the current account (Exh. 2) is not hard
to comprehend.
Clearly Atienza had committed wrongful acts that had
resulted to the loss subject of this case. x x x.31
Under Article 2180 of the Civil Code, employers shall be
held primarily and solidarily liable for damages caused by
their employees acting within the scope of their assigned
tasks. To hold the employer liable under this provision, it
must be shown that an employer-employee relationship
exists, and that the employee was acting within the scope
of his assigned task when the act complained of was
committed.32 Case law in the United States of America has
it that a corporation that entrusts a general duty to its
employee is responsible to the injured party for damages
flowing from the employee’s wrongful act done in the
course of his general authority, even though in doing such
act, the employee may have failed in its duty to the
employer and disobeyed the latter’s instructions.33
There is no dispute that Atienza was an employee of
petitioner. Furthermore, petitioner did not deny that
Atienza was acting within the scope of his authority as
Assistant Branch Manager when he assisted Doronilla in
withdrawing funds from Sterela’s Savings Account No. 10-
1567, in which account private respondent’s money was
deposited, and in transferring the money withdrawn to
Sterela’s Current Account with petitioner. Atienza’s acts
of helping Doronilla, a customer of the petitioner, were
obviously done in furtherance of petitioner’s
interests34 even though in the process, Atienza violated
some of petitioner’s rules such as those stipulated in its
savings account passbook.35 It was established that the
transfer of funds from Sterela’s savings account to its
current account could not have been accomplished by
Doronilla without the invaluable assistance of Atienza,
and that it was their connivance which was the cause of
private respondent’s loss.
The foregoing shows that the Court of Appeals correctly
held that under Article 2180 of the Civil Code, petitioner
is liable for private respondent’s loss and is solidarily liable
with Doronilla and Dumagpi for the return of the
₱200,000.00 since it is clear that petitioner failed to prove
that it exercised due diligence to prevent the
unauthorized withdrawals from Sterela’s savings account,
and that it was not negligent in the selection and
supervision of Atienza. Accordingly, no error was
committed by the appellate court in the award of actual,
moral and exemplary damages, attorney’s fees and costs
of suit to private respondent.
WHEREFORE, the petition is hereby DENIED. The assailed
Decision and Resolution of the Court of Appeals are
AFFIRMED.
SO ORDERED.
G.R. No. 118375 October 3, 2003
CELESTINA T. NAGUIAT, petitioner,
vs.
COURT OF APPEALS and AURORA QUEAÑO, respondents.
DECISION
TINGA, J.:
Before us is a Petition for Review on Certiorari under Rule
45, assailing the decision of the Sixteenth Division of the
respondent Court of Appeals promulgated on 21
December 19941 , which affirmed in toto the decision
handed down by the Regional Trial Court (RTC) of Pasay
City.2
The case arose when on 11 August 1981, private
respondent Aurora Queaño (Queaño) filed a complaint
before the Pasay City RTC for cancellation of a Real Estate
Mortgage she had entered into with petitioner Celestina
Naguiat (Naguiat). The RTC rendered a decision, declaring
the questioned Real Estate Mortgage void, which Naguiat
appealed to the Court of Appeals. After the Court of
Appeals upheld the RTC decision, Naguiat instituted the
present petition.1ªvvphi1.nét
The operative facts follow:
Queaño applied with Naguiat for a loan in the amount of
Two Hundred Thousand Pesos (₱200,000.00), which
Naguiat granted. On 11 August 1980, Naguiat indorsed to
Queaño Associated Bank Check No. 090990 (dated 11
August 1980) for the amount of Ninety Five Thousand
Pesos (₱95,000.00), which was earlier issued to Naguiat
by the Corporate Resources Financing Corporation. She
also issued her own Filmanbank Check No. 065314, to the
order of Queaño, also dated 11 August 1980 and for the
amount of Ninety Five Thousand Pesos (₱95,000.00). The
proceeds of these checks were to constitute the loan
granted by Naguiat to Queaño.3
To secure the loan, Queaño executed a Deed of Real
Estate Mortgage dated 11 August 1980 in favor of
Naguiat, and surrendered to the latter the owner’s
duplicates of the titles covering the mortgaged
properties.4 On the same day, the mortgage deed was
notarized, and Queaño issued to Naguiat a promissory
note for the amount of TWO HUNDRED THOUSAND
PESOS (₱200,000.00), with interest at 12% per annum,
payable on 11 September 1980.5Queaño also issued a
Security Bank and Trust Company check, postdated 11
September 1980, for the amount of TWO HUNDRED
THOUSAND PESOS (₱200,000.00) and payable to the
order of Naguiat.
Upon presentment on its maturity date, the Security Bank
check was dishonored for insufficiency of funds. On the
following day, 12 September 1980, Queaño requested
Security Bank to stop payment of her postdated check,
but the bank rejected the request pursuant to its policy
not to honor such requests if the check is drawn against
insufficient funds.6
On 16 October 1980, Queaño received a letter from
Naguiat’s lawyer, demanding settlement of the loan.
Shortly thereafter, Queaño and one Ruby Ruebenfeldt
(Ruebenfeldt) met with Naguiat. At the meeting, Queaño
told Naguiat that she did not receive the proceeds of the
loan, adding that the checks were retained by
Ruebenfeldt, who purportedly was Naguiat’s agent.7
Naguiat applied for the extrajudicial foreclosure of the
mortgage with the Sheriff of Rizal Province, who then
scheduled the foreclosure sale on 14 August 1981. Three
days before the scheduled sale, Queaño filed the case
before the Pasay City RTC,8 seeking the annulment of the
mortgage deed. The trial court eventually stopped the
auction sale.9
On 8 March 1991, the RTC rendered judgment, declaring
the Deed of Real Estate Mortgage null and void, and
ordering Naguiat to return to Queaño the owner’s
duplicates of her titles to the mortgaged lots.10 Naguiat
appealed the decision before the Court of Appeals,
making no less than eleven assignments of error. The
Court of Appeals promulgated the decision now assailed
before us that affirmed in toto the RTC decision. Hence,
the present petition.
Naguiat questions the findings of facts made by the Court
of Appeals, especially on the issue of whether Queaño
had actually received the loan proceeds which were
supposed to be covered by the two checks Naguiat had
issued or indorsed. Naguiat claims that being a notarial
instrument or public document, the mortgage deed
enjoys the presumption that the recitals therein are true.
Naguiat also questions the admissibility of various
representations and pronouncements of Ruebenfeldt,
invoking the rule on the non-binding effect of the
admissions of third persons.11
The resolution of the issues presented before this Court
by Naguiat involves the determination of facts, a function
which this Court does not exercise in an appeal
by certiorari. Under Rule 45 which governs appeal by
certiorari, only questions of law may be raised12 as the
Supreme Court is not a trier of facts.13 The resolution of
factual issues is the function of lower courts, whose
findings on these matters are received with respect and
are in fact generally binding on the Supreme Court.14 A
question of law which the Court may pass upon must not
involve an examination of the probative value of the
evidence presented by the litigants.15 There is a question
of law in a given case when the doubt or difference arises
as to what the law is on a certain state of facts; there is a
question of fact when the doubt or difference arises as to
the truth or the falsehood of alleged facts.16
Surely, there are established exceptions to the rule on the
conclusiveness of the findings of facts of the lower
courts.17 But Naguiat’s case does not fall under any of the
exceptions. In any event, both the decisions of the
appellate and trial courts are supported by the evidence
on record and the applicable laws.
Against the common finding of the courts below, Naguiat
vigorously insists that Queaño received the loan
proceeds. Capitalizing on the status of the mortgage deed
as a public document, she cites the rule that a public
document enjoys the presumption of validity and
truthfulness of its contents. The Court of Appeals,
however, is correct in ruling that the presumption of
truthfulness of the recitals in a public document was
defeated by the clear and convincing evidence in this case
that pointed to the absence of consideration.18 This Court
has held that the presumption of truthfulness
engendered by notarized documents is rebuttable,
yielding as it does to clear and convincing evidence to the
contrary, as in this case.19
On the other hand, absolutely no evidence was submitted
by Naguiat that the checks she issued or endorsed were
actually encashed or deposited. The mere issuance of the
checks did not result in the perfection of the contract of
loan. For the Civil Code provides that the delivery of bills
of exchange and mercantile documents such as checks
shall produce the effect of payment only when they have
been cashed.20 It is only after the checks have produced
the effect of payment that the contract of loan may be
deemed perfected. Art. 1934 of the Civil Code provides:
"An accepted promise to deliver something by way of
commodatum or simple loan is binding upon the parties,
but the commodatum or simple loan itself shall not be
perfected until the delivery of the object of the contract."
A loan contract is a real contract, not consensual, and, as
such, is perfected only upon the delivery of the object of
the contract.21 In this case, the objects of the contract are
the loan proceeds which Queaño would enjoy only upon
the encashment of the checks signed or indorsed by
Naguiat. If indeed the checks were encashed or
deposited, Naguiat would have certainly presented the
corresponding documentary evidence, such as the
returned checks and the pertinent bank records. Since
Naguiat presented no such proof, it follows that the
checks were not encashed or credited to Queaño’s
account.1awphi1.nét
Naguiat questions the admissibility of the various written
representations made by Ruebenfeldt on the ground that
they could not bind her following the res inter alia acta
alteri nocere non debet rule. The Court of Appeals
rejected the argument, holding that since Ruebenfeldt
was an authorized representative or agent of Naguiat the
situation falls under a recognized exception to the
rule.22 Still, Naguiat insists that Ruebenfeldt was not her
agent.
Suffice to say, however, the existence of an agency
relationship between Naguiat and Ruebenfeldt is
supported by ample evidence. As correctly pointed out by
the Court of Appeals, Ruebenfeldt was not a stranger or
an unauthorized person. Naguiat instructed Ruebenfeldt
to withhold from Queaño the checks she issued or
indorsed to Queaño, pending delivery by the latter of
additional collateral. Ruebenfeldt served as agent of
Naguiat on the loan application of Queaño’s friend,
Marilou Farralese, and it was in connection with that
transaction that Queaño came to know Naguiat.23 It was
also Ruebenfeldt who accompanied Queaño in her
meeting with Naguiat and on that occasion, on her own
and without Queaño asking for it, Reubenfeldt actually
drew a check for the sum of ₱220,000.00 payable to
Naguiat, to cover for Queaño’s alleged liability to Naguiat
under the loan agreement.24
The Court of Appeals recognized the existence of an
"agency by estoppel25 citing Article 1873 of the Civil
Code.26Apparently, it considered that at the very least, as
a consequence of the interaction between Naguiat and
Ruebenfeldt, Queaño got the impression that
Ruebenfeldt was the agent of Naguiat, but Naguiat did
nothing to correct Queaño’s impression. In that situation,
the rule is clear. One who clothes another with apparent
authority as his agent, and holds him out to the public as
such, cannot be permitted to deny the authority of such
person to act as his agent, to the prejudice of innocent
third parties dealing with such person in good faith, and
in the honest belief that he is what he appears to be.27 The
Court of Appeals is correct in invoking the said rule on
agency by estoppel.1awphi1.nét
More fundamentally, whatever was the true relationship
between Naguiat and Ruebenfeldt is irrelevant in the face
of the fact that the checks issued or indorsed to Queaño
were never encashed or deposited to her account of
Naguiat.
All told, we find no compelling reason to disturb the
finding of the courts a quo that the lender did not remit
and the borrower did not receive the proceeds of the
loan. That being the case, it follows that the mortgage
which is supposed to secure the loan is null and void. The
consideration of the mortgage contract is the same as
that of the principal contract from which it receives life,
and without which it cannot exist as an independent
contract.28 A mortgage contract being a mere accessory
contract, its validity would depend on the validity of the
loan secured by it.29
WHEREFORE, the petition is denied and the assailed
decision is affirmed. Costs against petitioner.
SO ORDERED.
G.R. No. 146364 June 3, 2004
COLITO T. PAJUYO, petitioner,
vs.
COURT OF APPEALS and EDDIE GUEVARRA, respondents.
DECISION
CARPIO, J.:
The Case
Before us is a petition for review1 of the 21 June 2000
Decision2 and 14 December 2000 Resolution of the Court
of Appeals in CA-G.R. SP No. 43129. The Court of Appeals
set aside the 11 November 1996 decision3 of the Regional
Trial Court of Quezon City, Branch 81,4 affirming the 15
December 1995 decision5 of the Metropolitan Trial Court
of Quezon City, Branch 31.6
The Antecedents
In June 1979, petitioner Colito T. Pajuyo ("Pajuyo") paid
₱400 to a certain Pedro Perez for the rights over a 250-
square meter lot in Barrio Payatas, Quezon City. Pajuyo
then constructed a house made of light materials on the
lot. Pajuyo and his family lived in the house from 1979 to
7 December 1985.
On 8 December 1985, Pajuyo and private respondent
Eddie Guevarra ("Guevarra") executed a Kasunduan or
agreement. Pajuyo, as owner of the house, allowed
Guevarra to live in the house for free provided Guevarra
would maintain the cleanliness and orderliness of the
house. Guevarra promised that he would voluntarily
vacate the premises on Pajuyo’s demand.
In September 1994, Pajuyo informed Guevarra of his
need of the house and demanded that Guevarra vacate
the house. Guevarra refused.
Pajuyo filed an ejectment case against Guevarra with the
Metropolitan Trial Court of Quezon City, Branch 31
("MTC").
In his Answer, Guevarra claimed that Pajuyo had no valid
title or right of possession over the lot where the house
stands because the lot is within the 150 hectares set aside
by Proclamation No. 137 for socialized housing. Guevarra
pointed out that from December 1985 to September
1994, Pajuyo did not show up or communicate with him.
Guevarra insisted that neither he nor Pajuyo has valid title
to the lot.
On 15 December 1995, the MTC rendered its decision in
favor of Pajuyo. The dispositive portion of the MTC
decision reads:
WHEREFORE, premises considered, judgment is hereby
rendered for the plaintiff and against defendant, ordering
the latter to:
A) vacate the house and lot occupied by the defendant or
any other person or persons claiming any right under him;
B) pay unto plaintiff the sum of THREE HUNDRED PESOS
(₱300.00) monthly as reasonable compensation for the
use of the premises starting from the last demand;
C) pay plaintiff the sum of ₱3,000.00 as and by way of
attorney’s fees; and
D) pay the cost of suit.
SO ORDERED.7
Aggrieved, Guevarra appealed to the Regional Trial Court
of Quezon City, Branch 81 ("RTC").
On 11 November 1996, the RTC affirmed the MTC
decision. The dispositive portion of the RTC decision
reads:
WHEREFORE, premises considered, the Court finds no
reversible error in the decision appealed from, being in
accord with the law and evidence presented, and the
same is hereby affirmed en toto.
SO ORDERED.8
Guevarra received the RTC decision on 29 November
1996. Guevarra had only until 14 December 1996 to file
his appeal with the Court of Appeals. Instead of filing his
appeal with the Court of Appeals, Guevarra filed with the
Supreme Court a "Motion for Extension of Time to File
Appeal by Certiorari Based on Rule 42" ("motion for
extension"). Guevarra theorized that his appeal raised
pure questions of law. The Receiving Clerk of the Supreme
Court received the motion for extension on 13 December
1996 or one day before the right to appeal expired.
On 3 January 1997, Guevarra filed his petition for review
with the Supreme Court.
On 8 January 1997, the First Division of the Supreme
Court issued a Resolution9 referring the motion for
extension to the Court of Appeals which has concurrent
jurisdiction over the case. The case presented no special
and important matter for the Supreme Court to take
cognizance of at the first instance.
On 28 January 1997, the Thirteenth Division of the Court
of Appeals issued a Resolution10 granting the motion for
extension conditioned on the timeliness of the filing of
the motion.
On 27 February 1997, the Court of Appeals ordered
Pajuyo to comment on Guevara’s petition for review. On
11 April 1997, Pajuyo filed his Comment.
On 21 June 2000, the Court of Appeals issued its decision
reversing the RTC decision. The dispositive portion of the
decision reads:
WHEREFORE, premises considered, the assailed Decision
of the court a quo in Civil Case No. Q-96-26943
is REVERSED and SET ASIDE; and it is hereby declared that
the ejectment case filed against defendant-appellant is
without factual and legal basis.
SO ORDERED.11
Pajuyo filed a motion for reconsideration of the decision.
Pajuyo pointed out that the Court of Appeals should have
dismissed outright Guevarra’s petition for review because
it was filed out of time. Moreover, it was Guevarra’s
counsel and not Guevarra who signed the certification
against forum-shopping.
On 14 December 2000, the Court of Appeals issued a
resolution denying Pajuyo’s motion for reconsideration.
The dispositive portion of the resolution reads:
WHEREFORE, for lack of merit, the motion for
reconsideration is hereby DENIED. No costs.
SO ORDERED.12
The Ruling of the MTC
The MTC ruled that the subject of the agreement
between Pajuyo and Guevarra is the house and not the
lot. Pajuyo is the owner of the house, and he allowed
Guevarra to use the house only by tolerance. Thus,
Guevarra’s refusal to vacate the house on Pajuyo’s
demand made Guevarra’s continued possession of the
house illegal.
The Ruling of the RTC
The RTC upheld the Kasunduan, which established the
landlord and tenant relationship between Pajuyo and
Guevarra. The terms of the Kasunduan bound Guevarra
to return possession of the house on demand.
The RTC rejected Guevarra’s claim of a better right under
Proclamation No. 137, the Revised National Government
Center Housing Project Code of Policies and other
pertinent laws. In an ejectment suit, the RTC has no
power to decide Guevarra’s rights under these laws. The
RTC declared that in an ejectment case, the only issue for
resolution is material or physical possession, not
ownership.
The Ruling of the Court of Appeals
The Court of Appeals declared that Pajuyo and Guevarra
are squatters. Pajuyo and Guevarra illegally occupied the
contested lot which the government owned.
Perez, the person from whom Pajuyo acquired his rights,
was also a squatter. Perez had no right or title over the lot
because it is public land. The assignment of rights
between Perez and Pajuyo, and the Kasunduan between
Pajuyo and Guevarra, did not have any legal effect. Pajuyo
and Guevarra are in pari delicto or in equal fault. The
court will leave them where they are.
The Court of Appeals reversed the MTC and RTC rulings,
which held that the Kasunduan between Pajuyo and
Guevarra created a legal tie akin to that of a landlord and
tenant relationship. The Court of Appeals ruled that
the Kasunduan is not a lease contract but
a commodatum because the agreement is not for a price
certain.
Since Pajuyo admitted that he resurfaced only in 1994 to
claim the property, the appellate court held that
Guevarra has a better right over the property under
Proclamation No. 137. President Corazon C. Aquino
("President Aquino") issued Proclamation No. 137 on 7
September 1987. At that time, Guevarra was in physical
possession of the property. Under Article VI of the Code
of Policies Beneficiary Selection and Disposition of
Homelots and Structures in the National Housing Project
("the Code"), the actual occupant or caretaker of the lot
shall have first priority as beneficiary of the project. The
Court of Appeals concluded that Guevarra is first in the
hierarchy of priority.
In denying Pajuyo’s motion for reconsideration, the
appellate court debunked Pajuyo’s claim that Guevarra
filed his motion for extension beyond the period to
appeal.
The Court of Appeals pointed out that Guevarra’s motion
for extension filed before the Supreme Court was
stamped "13 December 1996 at 4:09 PM" by the Supreme
Court’s Receiving Clerk. The Court of Appeals concluded
that the motion for extension bore a date, contrary to
Pajuyo’s claim that the motion for extension was
undated. Guevarra filed the motion for extension on time
on 13 December 1996 since he filed the motion one day
before the expiration of the reglementary period on 14
December 1996. Thus, the motion for extension properly
complied with the condition imposed by the Court of
Appeals in its 28 January 1997 Resolution. The Court of
Appeals explained that the thirty-day extension to file the
petition for review was deemed granted because of such
compliance.
The Court of Appeals rejected Pajuyo’s argument that the
appellate court should have dismissed the petition for
review because it was Guevarra’s counsel and not
Guevarra who signed the certification against forum-
shopping. The Court of Appeals pointed out that Pajuyo
did not raise this issue in his Comment. The Court of
Appeals held that Pajuyo could not now seek the dismissal
of the case after he had extensively argued on the merits
of the case. This technicality, the appellate court opined,
was clearly an afterthought.
The Issues
Pajuyo raises the following issues for resolution:
WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS
AUTHORITY AND DISCRETION TANTAMOUNT TO LACK OF
JURISDICTION:
1) in GRANTING, instead of denying, Private Respondent’s
Motion for an Extension of thirty days to file petition for
review at the time when there was no more period to
extend as the decision of the Regional Trial Court had
already become final and executory.
2) in giving due course, instead of dismissing, private
respondent’s Petition for Review even though the
certification against forum-shopping was signed only by
counsel instead of by petitioner himself.
3) in ruling that the Kasunduan voluntarily entered into by
the parties was in fact a commodatum, instead of a
Contract of Lease as found by the Metropolitan Trial
Court and in holding that "the ejectment case filed against
defendant-appellant is without legal and factual basis".
4) in reversing and setting aside the Decision of the
Regional Trial Court in Civil Case No. Q-96-26943 and in
holding that the parties are in pari delicto being both
squatters, therefore, illegal occupants of the contested
parcel of land.
5) in deciding the unlawful detainer case based on the so-
called Code of Policies of the National Government
Center Housing Project instead of deciding the same
under the Kasunduan voluntarily executed by the parties,
the terms and conditions of which are the laws between
themselves.13
The Ruling of the Court
The procedural issues Pajuyo is raising are baseless.
However, we find merit in the substantive issues Pajuyo
is submitting for resolution.
Procedural Issues
Pajuyo insists that the Court of Appeals should have
dismissed outright Guevarra’s petition for review because
the RTC decision had already become final and executory
when the appellate court acted on Guevarra’s motion for
extension to file the petition. Pajuyo points out that
Guevarra had only one day before the expiry of his period
to appeal the RTC decision. Instead of filing the petition
for review with the Court of Appeals, Guevarra filed with
this Court an undated motion for extension of 30 days to
file a petition for review. This Court merely referred the
motion to the Court of Appeals. Pajuyo believes that the
filing of the motion for extension with this Court did not
toll the running of the period to perfect the appeal.
Hence, when the Court of Appeals received the motion,
the period to appeal had already expired.
We are not persuaded.
Decisions of the regional trial courts in the exercise of
their appellate jurisdiction are appealable to the Court of
Appeals by petition for review in cases involving questions
of fact or mixed questions of fact and law.14 Decisions of
the regional trial courts involving pure questions of law
are appealable directly to this Court by petition for
review.15These modes of appeal are now embodied in
Section 2, Rule 41 of the 1997 Rules of Civil Procedure.
Guevarra believed that his appeal of the RTC decision
involved only questions of law. Guevarra thus filed his
motion for extension to file petition for review before this
Court on 14 December 1996. On 3 January 1997,
Guevarra then filed his petition for review with this Court.
A perusal of Guevarra’s petition for review gives the
impression that the issues he raised were pure questions
of law. There is a question of law when the doubt or
difference is on what the law is on a certain state of
facts.16 There is a question of fact when the doubt or
difference is on the truth or falsity of the facts alleged.17
In his petition for review before this Court, Guevarra no
longer disputed the facts. Guevarra’s petition for review
raised these questions: (1) Do ejectment cases pertain
only to possession of a structure, and not the lot on which
the structure stands? (2) Does a suit by a squatter against
a fellow squatter constitute a valid case for ejectment? (3)
Should a Presidential Proclamation governing the lot on
which a squatter’s structure stands be considered in an
ejectment suit filed by the owner of the structure?
These questions call for the evaluation of the rights of the
parties under the law on ejectment and the Presidential
Proclamation. At first glance, the questions Guevarra
raised appeared purely legal. However, some factual
questions still have to be resolved because they have a
bearing on the legal questions raised in the petition for
review. These factual matters refer to the metes and
bounds of the disputed property and the application of
Guevarra as beneficiary of Proclamation No. 137.
The Court of Appeals has the power to grant an extension
of time to file a petition for review. In Lacsamana v.
Second Special Cases Division of the Intermediate Appellate
Court,18 we declared that the Court of Appeals could grant
extension of time in appeals by petition for review.
In Liboro v. Court of Appeals,19 we clarified that the
prohibition against granting an extension of time applies
only in a case where ordinary appeal is perfected by a
mere notice of appeal. The prohibition does not apply in
a petition for review where the pleading needs
verification. A petition for review, unlike an ordinary
appeal, requires preparation and research to present a
persuasive position.20 The drafting of the petition for
review entails more time and effort than filing a notice of
appeal.21 Hence, the Court of Appeals may allow an
extension of time to file a petition for review.
In the more recent case of Commissioner of Internal
Revenue v. Court of Appeals,22 we held
that Liboro’sclarification of Lacsamana is consistent with
the Revised Internal Rules of the Court of Appeals and
Supreme Court Circular No. 1-91. They all allow an
extension of time for filing petitions for review with the
Court of Appeals. The extension, however, should be
limited to only fifteen days save in exceptionally
meritorious cases where the Court of Appeals may grant
a longer period.
A judgment becomes "final and executory" by operation
of law. Finality of judgment becomes a fact on the lapse
of the reglementary period to appeal if no appeal is
perfected.23 The RTC decision could not have gained
finality because the Court of Appeals granted the 30-day
extension to Guevarra.
The Court of Appeals did not commit grave abuse of
discretion when it approved Guevarra’s motion for
extension. The Court of Appeals gave due course to the
motion for extension because it complied with the
condition set by the appellate court in its resolution dated
28 January 1997. The resolution stated that the Court of
Appeals would only give due course to the motion for
extension if filed on time. The motion for extension met
this condition.
The material dates to consider in determining the
timeliness of the filing of the motion for extension are (1)
the date of receipt of the judgment or final order or
resolution subject of the petition, and (2) the date of filing
of the motion for extension.24 It is the date of the filing of
the motion or pleading, and not the date of execution,
that determines the timeliness of the filing of that motion
or pleading. Thus, even if the motion for extension bears
no date, the date of filing stamped on it is the reckoning
point for determining the timeliness of its filing.
Guevarra had until 14 December 1996 to file an appeal
from the RTC decision. Guevarra filed his motion for
extension before this Court on 13 December 1996, the
date stamped by this Court’s Receiving Clerk on the
motion for extension. Clearly, Guevarra filed the motion
for extension exactly one day before the lapse of the
reglementary period to appeal.
Assuming that the Court of Appeals should have
dismissed Guevarra’s appeal on technical grounds, Pajuyo
did not ask the appellate court to deny the motion for
extension and dismiss the petition for review at the
earliest opportunity. Instead, Pajuyo vigorously discussed
the merits of the case. It was only when the Court of
Appeals ruled in Guevarra’s favor that Pajuyo raised the
procedural issues against Guevarra’s petition for review.
A party who, after voluntarily submitting a dispute for
resolution, receives an adverse decision on the merits, is
estopped from attacking the jurisdiction of the
court.25 Estoppel sets in not because the judgment of the
court is a valid and conclusive adjudication, but because
the practice of attacking the court’s jurisdiction after
voluntarily submitting to it is against public policy.26
In his Comment before the Court of Appeals, Pajuyo also
failed to discuss Guevarra’s failure to sign the certification
against forum shopping. Instead, Pajuyo harped on
Guevarra’s counsel signing the verification, claiming that
the counsel’s verification is insufficient since it is based
only on "mere information."
A party’s failure to sign the certification against forum
shopping is different from the party’s failure to sign
personally the verification. The certificate of non-forum
shopping must be signed by the party, and not by
counsel.27 The certification of counsel renders the
petition defective.28
On the other hand, the requirement on verification of a
pleading is a formal and not a jurisdictional requisite.29 It
is intended simply to secure an assurance that what are
alleged in the pleading are true and correct and not the
product of the imagination or a matter of speculation,
and that the pleading is filed in good faith.30 The party
need not sign the verification. A party’s representative,
lawyer or any person who personally knows the truth of
the facts alleged in the pleading may sign the
verification.31
We agree with the Court of Appeals that the issue on the
certificate against forum shopping was merely an
afterthought. Pajuyo did not call the Court of Appeals’
attention to this defect at the early stage of the
proceedings. Pajuyo raised this procedural issue too late
in the proceedings.
Absence of Title over the Disputed Property will not Divest
the Courts of Jurisdiction to Resolve the Issue of Possession
Settled is the rule that the defendant’s claim of ownership
of the disputed property will not divest the inferior court
of its jurisdiction over the ejectment case.32 Even if the
pleadings raise the issue of ownership, the court may pass
on such issue to determine only the question of
possession, especially if the ownership is inseparably
linked with the possession.33 The adjudication on the
issue of ownership is only provisional and will not bar an
action between the same parties involving title to the
land.34 This doctrine is a necessary consequence of the
nature of the two summary actions of ejectment, forcible
entry and unlawful detainer, where the only issue for
adjudication is the physical or material possession over
the real property.35
In this case, what Guevarra raised before the courts was
that he and Pajuyo are not the owners of the contested
property and that they are mere squatters. Will the
defense that the parties to the ejectment case are not the
owners of the disputed lot allow the courts to renounce
their jurisdiction over the case? The Court of Appeals
believed so and held that it would just leave the parties
where they are since they are in pari delicto.
We do not agree with the Court of Appeals.
Ownership or the right to possess arising from ownership
is not at issue in an action for recovery of possession. The
parties cannot present evidence to prove ownership or
right to legal possession except to prove the nature of the
possession when necessary to resolve the issue of
physical possession.36 The same is true when the
defendant asserts the absence of title over the property.
The absence of title over the contested lot is not a ground
for the courts to withhold relief from the parties in an
ejectment case.
The only question that the courts must resolve in
ejectment proceedings is - who is entitled to the physical
possession of the premises, that is, to the possession de
facto and not to the possession de jure.37 It does not even
matter if a party’s title to the property is
questionable,38 or when both parties intruded into public
land and their applications to own the land have yet to be
approved by the proper government agency.39 Regardless
of the actual condition of the title to the property, the
party in peaceable quiet possession shall not be thrown
out by a strong hand, violence or terror.40 Neither is the
unlawful withholding of property allowed. Courts will
always uphold respect for prior possession.
Thus, a party who can prove prior possession can recover
such possession even against the owner
41
himself. Whatever may be the character of his
possession, if he has in his favor prior possession in time,
he has the security that entitles him to remain on the
property until a person with a better right lawfully ejects
him.42 To repeat, the only issue that the court has to settle
in an ejectment suit is the right to physical possession.
In Pitargue v. Sorilla,43 the government owned the land in
dispute. The government did not authorize either the
plaintiff or the defendant in the case of forcible entry case
to occupy the land. The plaintiff had prior possession and
had already introduced improvements on the public land.
The plaintiff had a pending application for the land with
the Bureau of Lands when the defendant ousted him from
possession. The plaintiff filed the action of forcible entry
against the defendant. The government was not a party
in the case of forcible entry.
The defendant questioned the jurisdiction of the courts
to settle the issue of possession because while the
application of the plaintiff was still pending, title
remained with the government, and the Bureau of Public
Lands had jurisdiction over the case. We disagreed with
the defendant. We ruled that courts have jurisdiction to
entertain ejectment suits even before the resolution of
the application. The plaintiff, by priority of his application
and of his entry, acquired prior physical possession over
the public land applied for as against other private
claimants. That prior physical possession enjoys legal
protection against other private claimants because only a
court can take away such physical possession in an
ejectment case.
While the Court did not brand the plaintiff and the
defendant in Pitargue44 as squatters, strictly speaking,
their entry into the disputed land was illegal. Both the
plaintiff and defendant entered the public land without
the owner’s permission. Title to the land remained with
the government because it had not awarded to anyone
ownership of the contested public land. Both the plaintiff
and the defendant were in effect squatting on
government property. Yet, we upheld the courts’
jurisdiction to resolve the issue of possession even if the
plaintiff and the defendant in the ejectment case did not
have any title over the contested land.
Courts must not abdicate their jurisdiction to resolve the
issue of physical possession because of the public need to
preserve the basic policy behind the summary actions of
forcible entry and unlawful detainer. The underlying
philosophy behind ejectment suits is to prevent breach of
the peace and criminal disorder and to compel the party
out of possession to respect and resort to the law alone
to obtain what he claims is his.45 The party deprived of
possession must not take the law into his own
hands.46 Ejectment proceedings are summary in nature
so the authorities can settle speedily actions to recover
possession because of the overriding need to quell social
disturbances.47
We further explained in Pitargue the greater interest that
is at stake in actions for recovery of possession. We made
the following pronouncements in Pitargue:
The question that is before this Court is: Are courts
without jurisdiction to take cognizance of possessory
actions involving these public lands before final award is
made by the Lands Department, and before title is given
any of the conflicting claimants? It is one of utmost
importance, as there are public lands everywhere and
there are thousands of settlers, especially in newly
opened regions. It also involves a matter of policy, as it
requires the determination of the respective authorities
and functions of two coordinate branches of the
Government in connection with public land conflicts.
Our problem is made simple by the fact that under the
Civil Code, either in the old, which was in force in this
country before the American occupation, or in the new,
we have a possessory action, the aim and purpose of
which is the recovery of the physical possession of real
property, irrespective of the question as to who has the
title thereto. Under the Spanish Civil Code we had the
accion interdictal, a summary proceeding which could be
brought within one year from dispossession (Roman
Catholic Bishop of Cebu vs. Mangaron, 6 Phil. 286, 291);
and as early as October 1, 1901, upon the enactment of
the Code of Civil Procedure (Act No. 190 of the Philippine
Commission) we implanted the common law action of
forcible entry (section 80 of Act No. 190), the object of
which has been stated by this Court to be "to prevent
breaches of the peace and criminal disorder which would
ensue from the withdrawal of the remedy, and the
reasonable hope such withdrawal would create that some
advantage must accrue to those persons who, believing
themselves entitled to the possession of property, resort to
force to gain possession rather than to some appropriate
action in the court to assert their claims." (Supia and
Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) So
before the enactment of the first Public Land Act (Act No.
926) the action of forcible entry was already available in
the courts of the country. So the question to be resolved
is, Did the Legislature intend, when it vested the power
and authority to alienate and dispose of the public lands
in the Lands Department, to exclude the courts from
entertaining the possessory action of forcible entry
between rival claimants or occupants of any land before
award thereof to any of the parties? Did Congress intend
that the lands applied for, or all public lands for that
matter, be removed from the jurisdiction of the judicial
Branch of the Government, so that any troubles arising
therefrom, or any breaches of the peace or disorders
caused by rival claimants, could be inquired into only by
the Lands Department to the exclusion of the courts? The
answer to this question seems to us evident. The Lands
Department does not have the means to police public
lands; neither does it have the means to prevent
disorders arising therefrom, or contain breaches of the
peace among settlers; or to pass promptly upon conflicts
of possession. Then its power is clearly limited to
disposition and alienation, and while it may decide conflicts
of possession in order to make proper award, the
settlement of conflicts of possession which is recognized in
the court herein has another ultimate purpose, i.e., the
protection of actual possessors and occupants with a view
to the prevention of breaches of the peace. The power to
dispose and alienate could not have been intended to
include the power to prevent or settle disorders or breaches
of the peace among rival settlers or claimants prior to the
final award. As to this, therefore, the corresponding
branches of the Government must continue to exercise
power and jurisdiction within the limits of their respective
functions. The vesting of the Lands Department with
authority to administer, dispose, and alienate public lands,
therefore, must not be understood as depriving the other
branches of the Government of the exercise of the
respective functions or powers thereon, such as the
authority to stop disorders and quell breaches of the peace
by the police, the authority on the part of the courts to take
jurisdiction over possessory actions arising therefrom not
involving, directly or indirectly, alienation and disposition.
Our attention has been called to a principle enunciated in
American courts to the effect that courts have no
jurisdiction to determine the rights of claimants to public
lands, and that until the disposition of the land has passed
from the control of the Federal Government, the courts
will not interfere with the administration of matters
concerning the same. (50 C. J. 1093-1094.) We have no
quarrel with this principle. The determination of the
respective rights of rival claimants to public lands is
different from the determination of who has the actual
physical possession or occupation with a view to
protecting the same and preventing disorder and
breaches of the peace. A judgment of the court ordering
restitution of the possession of a parcel of land to the
actual occupant, who has been deprived thereof by
another through the use of force or in any other illegal
manner, can never be "prejudicial interference" with the
disposition or alienation of public lands. On the other
hand, if courts were deprived of jurisdiction of cases
involving conflicts of possession, that threat of judicial
action against breaches of the peace committed on public
lands would be eliminated, and a state of lawlessness
would probably be produced between applicants,
occupants or squatters, where force or might, not right or
justice, would rule.
It must be borne in mind that the action that would be
used to solve conflicts of possession between rivals or
conflicting applicants or claimants would be no other than
that of forcible entry. This action, both in England and the
United States and in our jurisdiction, is a summary and
expeditious remedy whereby one in peaceful and quiet
possession may recover the possession of which he has
been deprived by a stronger hand, by violence or terror;
its ultimate object being to prevent breach of the peace
and criminal disorder. (Supia and Batioco vs. Quintero and
Ayala, 59 Phil. 312, 314.) The basis of the remedy is mere
possession as a fact, of physical possession, not a legal
possession. (Mediran vs. Villanueva, 37 Phil. 752.) The
title or right to possession is never in issue in an action of
forcible entry; as a matter of fact, evidence thereof is
expressly banned, except to prove the nature of the
possession. (Second 4, Rule 72, Rules of Court.) With this
nature of the action in mind, by no stretch of the
imagination can conclusion be arrived at that the use of
the remedy in the courts of justice would constitute an
interference with the alienation, disposition, and control
of public lands. To limit ourselves to the case at bar can it
be pretended at all that its result would in any way
interfere with the manner of the alienation or disposition
of the land contested? On the contrary, it would facilitate
adjudication, for the question of priority of possession
having been decided in a final manner by the courts, said
question need no longer waste the time of the land
officers making the adjudication or award. (Emphasis
ours)
The Principle of Pari Delicto is not Applicable to Ejectment
Cases
The Court of Appeals erroneously applied the principle
of pari delicto to this case.
Articles 1411 and 1412 of the Civil Code48 embody the
principle of pari delicto. We explained the principle of pari
delicto in these words:
The rule of pari delicto is expressed in the maxims ‘ex dolo
malo non eritur actio’ and ‘in pari delicto potior est
conditio defedentis.’ The law will not aid either party to an
illegal agreement. It leaves the parties where it finds
them.49
The application of the pari delicto principle is not
absolute, as there are exceptions to its application. One
of these exceptions is where the application of the pari
delicto rule would violate well-established public policy.50
In Drilon v. Gaurana,51 we reiterated the basic policy
behind the summary actions of forcible entry and
unlawful detainer. We held that:
It must be stated that the purpose of an action of forcible
entry and detainer is that, regardless of the actual
condition of the title to the property, the party in
peaceable quiet possession shall not be turned out by
strong hand, violence or terror. In affording this remedy
of restitution the object of the statute is to prevent
breaches of the peace and criminal disorder which would
ensue from the withdrawal of the remedy, and the
reasonable hope such withdrawal would create that some
advantage must accrue to those persons who, believing
themselves entitled to the possession of property, resort
to force to gain possession rather than to some
appropriate action in the courts to assert their claims.
This is the philosophy at the foundation of all these
actions of forcible entry and detainer which are designed
to compel the party out of possession to respect and
resort to the law alone to obtain what he claims is his.52
Clearly, the application of the principle of pari delicto to a
case of ejectment between squatters is fraught with
danger. To shut out relief to squatters on the ground
of pari delicto would openly invite mayhem and
lawlessness. A squatter would oust another squatter from
possession of the lot that the latter had illegally occupied,
emboldened by the knowledge that the courts would
leave them where they are. Nothing would then stand in
the way of the ousted squatter from re-claiming his prior
possession at all cost.
Petty warfare over possession of properties is precisely
what ejectment cases or actions for recovery of
possession seek to prevent.53 Even the owner who has
title over the disputed property cannot take the law into
his own hands to regain possession of his property. The
owner must go to court.
Courts must resolve the issue of possession even if the
parties to the ejectment suit are squatters. The
determination of priority and superiority of possession is
a serious and urgent matter that cannot be left to the
squatters to decide. To do so would make squatters
receive better treatment under the law. The law restrains
property owners from taking the law into their own
hands. However, the principle of pari delicto as applied by
the Court of Appeals would give squatters free rein to
dispossess fellow squatters or violently retake possession
of properties usurped from them. Courts should not leave
squatters to their own devices in cases involving recovery
of possession.
Possession is the only Issue for Resolution in an Ejectment
Case
The case for review before the Court of Appeals was a
simple case of ejectment. The Court of Appeals refused to
rule on the issue of physical possession. Nevertheless, the
appellate court held that the pivotal issue in this case is
who between Pajuyo and Guevarra has the "priority right
as beneficiary of the contested land under Proclamation
No. 137."54 According to the Court of Appeals, Guevarra
enjoys preferential right under Proclamation No. 137
because Article VI of the Code declares that the actual
occupant or caretaker is the one qualified to apply for
socialized housing.
The ruling of the Court of Appeals has no factual and legal
basis.
First. Guevarra did not present evidence to show that the
contested lot is part of a relocation site under
Proclamation No. 137. Proclamation No. 137 laid down
the metes and bounds of the land that it declared open
for disposition to bona fide residents.
The records do not show that the contested lot is within
the land specified by Proclamation No. 137. Guevarra had
the burden to prove that the disputed lot is within the
coverage of Proclamation No. 137. He failed to do so.
Second. The Court of Appeals should not have given
credence to Guevarra’s unsubstantiated claim that he is
the beneficiary of Proclamation No. 137. Guevarra merely
alleged that in the survey the project administrator
conducted, he and not Pajuyo appeared as the actual
occupant of the lot.
There is no proof that Guevarra actually availed of the
benefits of Proclamation No. 137. Pajuyo allowed
Guevarra to occupy the disputed property in 1985.
President Aquino signed Proclamation No. 137 into law
on 11 March 1986. Pajuyo made his earliest demand for
Guevarra to vacate the property in September 1994.
During the time that Guevarra temporarily held the
property up to the time that Proclamation No. 137
allegedly segregated the disputed lot, Guevarra never
applied as beneficiary of Proclamation No. 137. Even
when Guevarra already knew that Pajuyo was reclaiming
possession of the property, Guevarra did not take any
step to comply with the requirements of Proclamation
No. 137.
Third. Even assuming that the disputed lot is within the
coverage of Proclamation No. 137 and Guevarra has a
pending application over the lot, courts should still
assume jurisdiction and resolve the issue of possession.
However, the jurisdiction of the courts would be limited
to the issue of physical possession only.
In Pitargue,55 we ruled that courts have jurisdiction over
possessory actions involving public land to determine the
issue of physical possession. The determination of the
respective rights of rival claimants to public land is,
however, distinct from the determination of who has the
actual physical possession or who has a better right of
physical possession.56 The administrative disposition and
alienation of public lands should be threshed out in the
proper government agency.57
The Court of Appeals’ determination of Pajuyo and
Guevarra’s rights under Proclamation No. 137 was
premature. Pajuyo and Guevarra were at most merely
potential beneficiaries of the law. Courts should not
preempt the decision of the administrative agency
mandated by law to determine the qualifications of
applicants for the acquisition of public lands. Instead,
courts should expeditiously resolve the issue of physical
possession in ejectment cases to prevent disorder and
breaches of peace.58
Pajuyo is Entitled to Physical Possession of the Disputed
Property
Guevarra does not dispute Pajuyo’s prior possession of
the lot and ownership of the house built on it. Guevarra
expressly admitted the existence and due execution of
the Kasunduan. The Kasunduan reads:
Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo.
Payatas, Quezon City, ay nagbibigay pahintulot kay G.
Eddie Guevarra, na pansamantalang manirahan sa
nasabing bahay at lote ng "walang bayad." Kaugnay nito,
kailangang panatilihin nila ang kalinisan at kaayusan ng
bahay at lote.
Sa sandaling kailangan na namin ang bahay at lote, sila’y
kusang aalis ng walang reklamo.
Based on the Kasunduan, Pajuyo permitted Guevarra to
reside in the house and lot free of rent, but Guevarra was
under obligation to maintain the premises in good
condition. Guevarra promised to vacate the premises on
Pajuyo’s demand but Guevarra broke his promise and
refused to heed Pajuyo’s demand to vacate.
These facts make out a case for unlawful detainer.
Unlawful detainer involves the withholding by a person
from another of the possession of real property to which
the latter is entitled after the expiration or termination of
the former’s right to hold possession under a contract,
express or implied.59
Where the plaintiff allows the defendant to use his
property by tolerance without any contract, the
defendant is necessarily bound by an implied promise
that he will vacate on demand, failing which, an action for
unlawful detainer will lie.60 The defendant’s refusal to
comply with the demand makes his continued possession
of the property unlawful.61 The status of the defendant in
such a case is similar to that of a lessee or tenant whose
term of lease has expired but whose occupancy continues
by tolerance of the owner.62
This principle should apply with greater force in cases
where a contract embodies the permission or tolerance
to use the property. The Kasunduan expressly articulated
Pajuyo’s forbearance. Pajuyo did not require Guevarra to
pay any rent but only to maintain the house and lot in
good condition. Guevarra expressly vowed in
the Kasunduan that he would vacate the property on
demand. Guevarra’s refusal to comply with Pajuyo’s
demand to vacate made Guevarra’s continued possession
of the property unlawful.
We do not subscribe to the Court of Appeals’ theory that
the Kasunduan is one of commodatum.
In a contract of commodatum, one of the parties delivers
to another something not consumable so that the latter
may use the same for a certain time and return it.63 An
essential feature of commodatum is that it is gratuitous.
Another feature of commodatum is that the use of the
thing belonging to another is for a certain period.64 Thus,
the bailor cannot demand the return of the thing loaned
until after expiration of the period stipulated, or after
accomplishment of the use for which the commodatum is
constituted.65 If the bailor should have urgent need of the
thing, he may demand its return for temporary use.66 If
the use of the thing is merely tolerated by the bailor, he
can demand the return of the thing at will, in which case
the contractual relation is called a precarium.67 Under the
Civil Code, precarium is a kind of commodatum.68
The Kasunduan reveals that the accommodation
accorded by Pajuyo to Guevarra was not essentially
gratuitous. While the Kasunduan did not require
Guevarra to pay rent, it obligated him to maintain the
property in good condition. The imposition of this
obligation makes the Kasunduan a contract different
from a commodatum. The effects of the Kasunduan are
also different from that of a commodatum. Case law on
ejectment has treated relationship based on tolerance as
one that is akin to a landlord-tenant relationship where
the withdrawal of permission would result in the
termination of the lease.69 The tenant’s withholding of
the property would then be unlawful. This is settled
jurisprudence.
Even assuming that the relationship between Pajuyo and
Guevarra is one of commodatum, Guevarra as bailee
would still have the duty to turn over possession of the
property to Pajuyo, the bailor. The obligation to deliver or
to return the thing received attaches to contracts for
safekeeping, or contracts of commission, administration
and commodatum.70 These contracts certainly involve
the obligation to deliver or return the thing received.71
Guevarra turned his back on the Kasunduan on the sole
ground that like him, Pajuyo is also a squatter. Squatters,
Guevarra pointed out, cannot enter into a contract
involving the land they illegally occupy. Guevarra insists
that the contract is void.
Guevarra should know that there must be honor even
between squatters. Guevarra freely entered into
the Kasunduan. Guevarra cannot now impugn
the Kasunduan after he had benefited from it.
The Kasunduan binds Guevarra.
The Kasunduan is not void for purposes of determining
who between Pajuyo and Guevarra has a right to physical
possession of the contested property. The Kasunduan is
the undeniable evidence of Guevarra’s recognition of
Pajuyo’s better right of physical possession. Guevarra is
clearly a possessor in bad faith. The absence of a contract
would not yield a different result, as there would still be
an implied promise to vacate.
Guevarra contends that there is "a pernicious evil that is
sought to be avoided, and that is allowing an absentee
squatter who (sic) makes (sic) a profit out of his illegal
act."72 Guevarra bases his argument on the preferential
right given to the actual occupant or caretaker under
Proclamation No. 137 on socialized housing.
We are not convinced.
Pajuyo did not profit from his arrangement with Guevarra
because Guevarra stayed in the property without paying
any rent. There is also no proof that Pajuyo is a
professional squatter who rents out usurped properties
to other squatters. Moreover, it is for the proper
government agency to decide who between Pajuyo and
Guevarra qualifies for socialized housing. The only issue
that we are addressing is physical possession.
Prior possession is not always a condition sine qua non in
ejectment.73 This is one of the distinctions between
forcible entry and unlawful detainer.74 In forcible entry,
the plaintiff is deprived of physical possession of his land
or building by means of force, intimidation, threat,
strategy or stealth. Thus, he must allege and prove prior
possession.75 But in unlawful detainer, the defendant
unlawfully withholds possession after the expiration or
termination of his right to possess under any contract,
express or implied. In such a case, prior physical
possession is not required.76
Pajuyo’s withdrawal of his permission to Guevarra
terminated the Kasunduan. Guevarra’s transient right to
possess the property ended as well. Moreover, it was
Pajuyo who was in actual possession of the property
because Guevarra had to seek Pajuyo’s permission to
temporarily hold the property and Guevarra had to follow
the conditions set by Pajuyo in the Kasunduan. Control
over the property still rested with Pajuyo and this is
evidence of actual possession.
Pajuyo’s absence did not affect his actual possession of
the disputed property. Possession in the eyes of the law
does not mean that a man has to have his feet on every
square meter of the ground before he is deemed in
possession.77 One may acquire possession not only by
physical occupation, but also by the fact that a thing is
subject to the action of one’s will.78 Actual or physical
occupation is not always necessary.79
Ruling on Possession Does not Bind Title to the Land in
Dispute
We are aware of our pronouncement in cases where we
declared that "squatters and intruders who clandestinely
enter into titled government property cannot, by such
act, acquire any legal right to said property."80 We made
this declaration because the person who had title or who
had the right to legal possession over the disputed
property was a party in the ejectment suit and that party
instituted the case against squatters or usurpers.
In this case, the owner of the land, which is the
government, is not a party to the ejectment case. This
case is between squatters. Had the government
participated in this case, the courts could have evicted the
contending squatters, Pajuyo and Guevarra.
Since the party that has title or a better right over the
property is not impleaded in this case, we cannot evict on
our own the parties. Such a ruling would discourage
squatters from seeking the aid of the courts in settling the
issue of physical possession. Stripping both the plaintiff
and the defendant of possession just because they are
squatters would have the same dangerous implications as
the application of the principle of pari delicto. Squatters
would then rather settle the issue of physical possession
among themselves than seek relief from the courts if the
plaintiff and defendant in the ejectment case would both
stand to lose possession of the disputed property. This
would subvert the policy underlying actions for recovery
of possession.
Since Pajuyo has in his favor priority in time in holding the
property, he is entitled to remain on the property until a
person who has title or a better right lawfully ejects him.
Guevarra is certainly not that person. The ruling in this
case, however, does not preclude Pajuyo and Guevarra
from introducing evidence and presenting arguments
before the proper administrative agency to establish any
right to which they may be entitled under the law.81
In no way should our ruling in this case be interpreted to
condone squatting. The ruling on the issue of physical
possession does not affect title to the property nor
constitute a binding and conclusive adjudication on the
merits on the issue of ownership.82 The owner can still go
to court to recover lawfully the property from the person
who holds the property without legal title. Our ruling here
does not diminish the power of government agencies,
including local governments, to condemn, abate, remove
or demolish illegal or unauthorized structures in
accordance with existing laws.
Attorney’s Fees and Rentals
The MTC and RTC failed to justify the award of ₱3,000
attorney’s fees to Pajuyo. Attorney’s fees as part of
damages are awarded only in the instances enumerated
in Article 2208 of the Civil Code.83 Thus, the award of vs.
attorney’s fees is the exception rather than the TRANS-ASIA SHIPPING LINES, INC., Respondent.
rule.84 Attorney’s fees are not awarded every time a party x- - - - - - - - - - - - - - - - - - - - - - - - - x
prevails in a suit because of the policy that no premium G.R. No. 151991 June 20, 2006
should be placed on the right to litigate.85 We therefore TRANS-ASIA SHIPPING LINES, INC., petitioner,
delete the attorney’s fees awarded to Pajuyo. vs.
We sustain the ₱300 monthly rentals the MTC and RTC PRUDENTIAL GUARANTEE and ASSURANCE
assessed against Guevarra. Guevarra did not dispute this INC., Respondent.
factual finding of the two courts. We find the amount DECISION
reasonable compensation to Pajuyo. The ₱300 monthly CHICO-NAZARIO, J:
rental is counted from the last demand to vacate, which This is a consolidation of two separate Petitions for
was on 16 February 1995. Review on Certiorari filed by petitioner Prudential
WHEREFORE, we GRANT the petition. The Decision dated Guarantee and Assurance, Inc. (PRUDENTIAL) in G.R. No.
21 June 2000 and Resolution dated 14 December 2000 of 151890 and Trans-Asia Shipping Lines, Inc. (TRANS-ASIA)
the Court of Appeals in CA-G.R. SP No. 43129 are SET in G.R. No. 151991, assailing the Decision1 dated 6
ASIDE. The Decision dated 11 November 1996 of the November 2001 of the Court of Appeals in CA G.R. CV No.
Regional Trial Court of Quezon City, Branch 81 in Civil 68278, which reversed the Judgment2 dated 6 June 2000
Case No. Q-96-26943, affirming the Decision dated 15 of the Regional Trial Court (RTC), Branch 13, Cebu City in
December 1995 of the Metropolitan Trial Court of Civil Case No. CEB-20709. The 29 January 2002
Quezon City, Branch 31 in Civil Case No. 12432, Resolution3 of the Court of Appeals, denying
is REINSTATEDwith MODIFICATION. The award of PRUDENTIAL’s Motion for Reconsideration and TRANS-
attorney’s fees is deleted. No costs. ASIA’s Partial Motion for Reconsideration of the 6
SO ORDERED. November 2001 Decision, is likewise sought to be
annulled and set aside.

The Facts

The material antecedents as found by the court a quo and

adopted by the appellate court are as follows:
Plaintiff [TRANS-ASIA] is the owner of the vessel M/V Asia
Korea. In consideration of payment of premiums,
defendant [PRUDENTIAL] insured M/V Asia Korea for
loss/damage of the hull and machinery arising from perils,
inter alia, of fire and explosion for the sum of P40 Million,
beginning [from] the period [of] July 1, 1993 up to July 1,
1994. This is evidenced by Marine Policy No. MH93/1363
(Exhibits "A" to "A-11"). On October 25, 1993, while the
policy was in force, a fire broke out while [M/V Asia Korea
was] undergoing repairs at the port of Cebu. On October
26, 1993 plaintiff [TRANS-ASIA] filed its notice of claim for
damage sustained by the vessel. This is evidenced by a
letter/formal claim of even date (Exhibit "B"). Plaintiff
[TRANS-ASIA] reserved its right to subsequently notify
defendant [PRUDENTIAL] as to the full amount of the
claim upon final survey and determination by average
adjuster Richard Hogg International (Phil.) of the damage
sustained by reason of fire. An adjuster’s report on the
fire in question was submitted by Richard Hogg
International together with the U-Marine Surveyor
Report (Exhibits "4" to "4-115").
On May 29, 1995[,] plaintiff [TRANS-ASIA] executed a
document denominated "Loan and Trust receipt", a
portion of which read (sic):
"Received from Prudential Guarantee and Assurance,
Inc., the sum of PESOS THREE MILLION ONLY
(P3,000,000.00) as a loan without interest under Policy
No. MH 93/1353 [sic], repayable only in the event and to
the extent that any net recovery is made by Trans-Asia
Shipping Corporation, from any person or persons,
corporation or corporations, or other parties, on account
of loss by any casualty for which they may be liable
occasioned by the 25 October 1993: Fire on Board."
(Exhibit "4")
In a letter dated 21 April 1997 defendant [PRUDENTIAL]
G.R. No. 151890 June 20, 2006 denied plaintiff’s claim (Exhibit "5"). The letter reads:
PRUDENTIAL GUARANTEE and ASSURANCE "After a careful review and evaluation of your claim
INC., petitioner, arising from the above-captioned incident, it has been
ascertained that you are in breach of policy conditions,
among them "WARRANTED VESSEL CLASSED AND CLASS
MAINTAINED". Accordingly, we regret to advise that your
claim is not compensable and hereby DENIED."
This was followed by defendant’s letter dated 21 July
1997 requesting the return or payment of the
P3,000,000.00 within a period of ten (10) days from
receipt of the letter (Exhibit "6").4
Following this development, on 13 August 1997, TRANS-
ASIA filed a Complaint5 for Sum of Money against
PRUDENTIAL with the RTC of Cebu City, docketed as Civil
Case No. CEB-20709, wherein TRANS-ASIA sought the
amount of P8,395,072.26 from PRUDENTIAL, alleging that
the same represents the balance of the indemnity due
upon the insurance policy in the total amount of
P11,395,072.26. TRANS-ASIA similarly sought interest at
42% per annum citing Section 2436 of Presidential
Decreee No. 1460, otherwise known as the "Insurance
Code," as amended.
In its Answer,7 PRUDENTIAL denied the material
allegations of the Complaint and interposed the defense
that TRANS-ASIA breached insurance policy conditions, in
particular: "WARRANTED VESSEL CLASSED AND CLASS
MAINTAINED." PRUDENTIAL further alleged that it acted
as facts and law require and incurred no liability to
TRANS-ASIA; that TRANS-ASIA has no cause of action; and,
that its claim has been effectively waived and/or
abandoned, or it is estopped from pursuing the same. By
way of a counterclaim, PRUDENTIAL sought a refund of
P3,000,000.00, which it allegedly advanced to TRANS-
ASIA by way of a loan without interest and without
prejudice to the final evaluation of the claim, including
the amounts of P500,000.00, for survey fees and
P200,000.00, representing attorney’s fees.
The Ruling of the Trial Court
On 6 June 2000, the court a quo rendered
Judgment8 finding for (therein defendant) PRUDENTIAL. It
ruled that a determination of the parties’ liabilities hinged
on whether TRANS-ASIA violated and breached the policy
conditions on WARRANTED VESSEL CLASSED AND CLASS
MAINTAINED. It interpreted the provision to mean that
TRANS-ASIA is required to maintain the vessel at a certain
class at all times pertinent during the life of the policy.
According to the court a quo, TRANS-ASIA failed to prove
compliance of the terms of the warranty, the violation
thereof entitled PRUDENTIAL, the insured party, to
rescind the contract.9
Further, citing Section 10710 of the Insurance Code, the
court a quo ratiocinated that the concealment made by
TRANS-ASIA that the vessel was not adequately
maintained to preserve its class was a material
concealment sufficient to avoid the policy and, thus,
entitled the injured party to rescind the contract. The
court a quo found merit in PRUDENTIAL’s contention that
there was nothing in the adjustment of the particular
average submitted by the adjuster that would show that
TRANS-ASIA was not in breach of the policy. Ruling on the
denominated loan and trust receipt, the court a quo said
that in substance and in form, the same is a receipt for a
loan. It held that if TRANS-ASIA intended to receive the
amount of P3,000,000.00 as advance payment, it should
have so clearly stated as such.
The court a quo did not award PRUDENTIAL’s claim for
P500,000.00, representing expert survey fees on the
ground of lack of sufficient basis in support thereof.
Neither did it award attorney’s fees on the rationalization
that the instant case does not fall under the exceptions
stated in Article 220811 of the Civil Code. However, the
court a quo granted PRUDENTIAL’s counterclaim stating
that there is factual and legal basis for TRANS-ASIA to
return the amount of P3,000,000.00 by way of loan
without interest.
The decretal portion of the Judgment of the RTC reads:
WHEREFORE, judgment is hereby rendered DISMISSING
the complaint for its failure to prove a cause of action.
On defendant’s counterclaim, plaintiff is directed to
return the sum of P3,000,000.00 representing the loan
extended to it by the defendant, within a period of ten
(10) days from and after this judgment shall have become
final and executory.12
The Ruling of the Court of Appeals
On appeal by TRANS-ASIA, the Court of Appeals, in its
assailed Decision of 6 November 2001, reversed the 6
June 2000 Judgment of the RTC.
On the issue of TRANS-ASIA’s alleged breach of warranty
of the policy condition CLASSED AND CLASS MAINTAINED,
the Court of Appeals ruled that PRUDENTIAL, as the party
asserting the non-compensability of the loss had the
burden of proof to show that TRANS-ASIA breached the
warranty, which burden it failed to discharge.
PRUDENTIAL cannot rely on the lack of certification to the
effect that TRANS-ASIA was CLASSED AND CLASS
MAINTAINED as its sole basis for reaching the conclusion
that the warranty was breached. The Court of Appeals
opined that the lack of a certification does not necessarily
mean that the warranty was breached by TRANS-ASIA.
Instead, the Court of Appeals considered PRUDENTIAL’s
admission that at the time the insurance contract was
entered into between the parties, the vessel was properly
classed by Bureau Veritas, a classification society
recognized by the industry. The Court of Appeals similarly
gave weight to the fact that it was the responsibility of
Richards Hogg International (Phils.) Inc., the average
adjuster hired by PRUDENTIAL, to secure a copy of such
certification to support its conclusion that mere absence
of a certification does not warrant denial of TRANS-ASIA’s
claim under the insurance policy.
In the same token, the Court of Appeals found the subject
warranty allegedly breached by TRANS-ASIA to be a rider
which, while contained in the policy, was inserted by
PRUDENTIAL without the intervention of TRANS-ASIA. As
such, it partakes of a nature of a contract d’adhesion
which should be construed against PRUDENTIAL, the
party which drafted the contract. Likewise, according to
the Court of Appeals, PRUDENTIAL’s renewal of the
insurance policy from noon of 1 July 1994 to noon of 1
July 1995, and then again, until noon of 1 July 1996 must
be deemed a waiver by PRUDENTIAL of any breach of
warranty committed by TRANS-ASIA.
Further, the Court of Appeals, contrary to the ruling of the
court a quo, interpreted the transaction between
PRUDENTIAL and TRANS-ASIA as one of subrogation,
instead of a loan. The Court of Appeals concluded that
TRANS-ASIA has no obligation to pay back the amount of
P3,000.000.00 to PRUDENTIAL based on its finding that
the aforesaid amount was PRUDENTIAL’s partial payment
to TRANS-ASIA’s claim under the policy. Finally, the Court
of Appeals denied TRANS-ASIA’s prayer for attorney’s
fees, but held TRANS-ASIA entitled to double interest on
the policy for the duration of the delay of payment of the
unpaid balance, citing Section 24413 of the Insurance
Code.
Finding for therein appellant TRANS-ASIA, the Court of
Appeals ruled in this wise:
WHEREFORE, the foregoing consideration, We find for
Appellant. The instant appeal is ALLOWED and the
Judgment appealed from REVERSED. The P3,000,000.00
initially paid by appellee Prudential Guarantee Assurance
Incorporated to appellant Trans-Asia and covered by a
"Loan and Trust Receipt" dated 29 May 1995 is HELD to
be in partial settlement of the loss suffered by appellant
and covered by Marine Policy No. MH93/1363 issued by
appellee. Further, appellee is hereby ORDERED to pay
appellant the additional amount of P8,395,072.26
representing the balance of the loss suffered by the latter
as recommended by the average adjuster Richard Hogg
International (Philippines) in its Report, with double
interest starting from the time Richard Hogg’s Survey
Report was completed, or on 13 August 1996, until the
same is fully paid.
All other claims and counterclaims are hereby DISMISSED.
All costs against appellee.14
Not satisfied with the judgment, PRUDENTIAL and TRANS-
ASIA filed a Motion for Reconsideration and Partial
Motion for Reconsideration thereon, respectively, which
motions were denied by the Court of Appeals in the
Resolution dated 29 January 2002.
The Issues
Aggrieved, PRUDENTIAL filed before this Court a Petition
for Review, docketed as G.R. No. 151890, relying on the
following grounds, viz:
I.
THE AWARD IS GROSSLY UNCONSCIONABLE.
II.
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE
WAS NO VIOLATION BY TRANS-ASIA OF A MATERIAL
WARRANTY, NAMELY, WARRANTY CLAUSE NO. 5, OF THE
INSURANCE POLICY.
III.
THE COURT OF APPEALS ERRED IN HOLDING THAT
PRUDENTIAL, AS INSURER HAD THE BURDEN OF PROVING
THAT THE ASSURED, TRANS-ASIA, VIOLATED A MATERIAL
WARRANTY.
IV.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE
WARRANTY CLAUSE EMBODIED IN THE INSURANCE
POLICY CONTRACT WAS A MERE RIDER.
V.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE
ALLEGED RENEWALS OF THE POLICY CONSTITUTED A
WAIVER ON THE PART OF PRUDENTIAL OF THE BREACH
OF THE WARRANTY BY TRANS-ASIA.
VI.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE
"LOAN AND TRUST RECEIPT" EXECUTED BY TRANS-ASIA IS
AN ADVANCE ON THE POLICY, THUS CONSTITUTING
PARTIAL PAYMENT THEREOF.
VII.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE
ACCEPTANCE BY PRUDENTIAL OF THE FINDINGS OF
RICHARDS HOGG IS INDICATIVE OF A WAIVER ON THE
PART OF PRUDENTIAL OF ANY VIOLATION BY TRANS-ASIA
OF THE WARRANTY.
VIII.
THE COURT OF APPEALS ERRRED (sic) IN REVERSING THE
TRIAL COURT, IN FINDING THAT PRUDENTIAL
"UNJUSTIFIABLY REFUSED" TO PAY THE CLAIM AND IN
ORDERING PRUDENTIAL TO PAY TRANS-ASIA
P8,395,072.26 PLUS DOUBLE INTEREST FROM 13 AUGUST
1996, UNTIL [THE] SAME IS FULLY PAID.15
Similarly, TRANS-ASIA, disagreeing in the ruling of the
Court of Appeals filed a Petition for Review docketed as
G.R. No. 151991, raising the following grounds for the
allowance of the petition, to wit:
I.
THE HONORABLE COURT OF APPEALS ERRED IN NOT
AWARDING ATTORNEY’S FEES TO PETITIONER TRANS-
ASIA ON THE GROUND THAT SUCH CAN ONLY BE
AWARDED IN THE CASES ENUMERATED IN ARTICLE 2208
OF THE CIVIL CODE, AND THERE BEING NO BAD FAITH ON
THE PART OF RESPONDENT PRUDENTIAL IN DENYING
HEREIN PETITIONER TRANS-ASIA’S INSURANCE CLAIM.
II.
THE "DOUBLE INTEREST" REFERRED TO IN THE DECISION
DATED 06 NOVEMBER 2001 SHOULD BE CONSTRUED TO
MEAN DOUBLE INTEREST BASED ON THE LEGAL INTEREST
OF 12%, OR INTEREST AT THE RATE OF 24% PER
ANNUM.16
In our Resolution of 2 December 2002, we granted
TRANS-ASIA’s Motion for Consolidation17 of G.R. Nos.
151890 and 151991;18 hence, the instant consolidated
petitions.
In sum, for our main resolution are: (1) the liability, if any,
of PRUDENTIAL to TRANS-ASIA arising from the subject
insurance contract; (2) the liability, if any, of TRANS-ASIA
to PRUDENTIAL arising from the transaction between the
parties as evidenced by a document denominated as
"Loan and Trust Receipt," dated 29 May 1995; and (3) the
amount of interest to be imposed on the liability, if any,
of either or both parties.
Ruling of the Court
Prefatorily, it must be emphasized that in a petition for
review, only questions of law, and not questions of fact,
may be raised.19 This rule may be disregarded only when
the findings of fact of the Court of Appeals are contrary to
the findings and conclusions of the trial court, or are not
supported by the evidence on record.20 In the case at bar,
we find an incongruence between the findings of fact of
the Court of Appeals and the court a quo, thus, in our
determination of the issues, we are constrained to assess
the evidence adduced by the parties to make appropriate
findings of facts as are necessary.
I.
A. PRUDENTIAL failed to establish that TRANS-ASIA
violated and breached the policy condition on
WARRANTED VESSEL CLASSED AND CLASS MAINTAINED,
as contained in the subject insurance contract.
In resisting the claim of TRANS-ASIA, PRUDENTIAL posits
that TRANS-ASIA violated an express and material
warranty in the subject insurance contract, i.e., Marine
Insurance Policy No. MH93/1363, specifically Warranty
Clause No. 5 thereof, which stipulates that the insured
vessel, "M/V ASIA KOREA" is required to be CLASSED AND
CLASS MAINTAINED. According to PRUDENTIAL, on 25
October 1993, or at the time of the occurrence of the fire,
"M/V ASIA KOREA" was in violation of the warranty as it
was not CLASSED AND CLASS MAINTAINED. PRUDENTIAL
submits that Warranty Clause No. 5 was a condition
precedent to the recovery of TRANS-ASIA under the
policy, the violation of which entitled PRUDENTIAL to
rescind the contract under Sec. 7421 of the Insurance
Code.
The warranty condition CLASSED AND CLASS
MAINTAINED was explained by PRUDENTIAL’s Senior
Manager of the Marine and Aviation Division, Lucio
Fernandez. The pertinent portions of his testimony on
direct examination is reproduced hereunder, viz:
ATTY. LIM
Q Please tell the court, Mr. Witness, the result of the
evaluation of this claim, what final action was taken?
A It was eventually determined that there was a breach of
the policy condition, and basically there is a breach of
policy warranty condition and on that basis the claim was
denied.
Q To refer you (sic) the "policy warranty condition," I am
showing to you a policy here marked as Exhibits "1", "1-
A" series, please point to the warranty in the policy which
you said was breached or violated by the plaintiff which
constituted your basis for denying the claim as you
testified.
A Warranted Vessel Classed and Class Maintained.
ATTY. LIM
Witness pointing, Your Honor, to that portion in Exhibit
"1-A" which is the second page of the policy below the
printed words: "Clauses, Endorsements, Special
Conditions and Warranties," below this are several
typewritten clauses and the witness pointed out in
particular the clause reading: "Warranted Vessel Classed
and Class Maintained."
COURT
Q Will you explain that particular phrase?
A Yes, a warranty is a condition that has to be complied
with by the insured. When we say a class warranty, it must
be entered in the classification society.
COURT
Slowly.
WITNESS
(continued)
A A classification society is an organization which sets
certain standards for a vessel to maintain in order to
maintain their membership in the classification society.
So, if they failed to meet that standard, they are
considered not members of that class, and thus breaching
the warranty, that requires them to maintain
membership or to maintain their class on that
classification society. And it is not sufficient that the
member of this classification society at the time of a loss,
their membership must be continuous for the whole
length of the policy such that during the effectivity of the
policy, their classification is suspended, and then
thereafter, they get reinstated, that again still a breach of
the warranty that they maintained their class (sic). Our
maintaining team membership in the classification
society thereby maintaining the standards of the vessel
(sic).
ATTY. LIM
Q Can you mention some classification societies that you
know?
A Well we have the Bureau Veritas, American Bureau of
Shipping, D&V Local Classification Society, The Philippine
Registration of Ships Society, China Classification, NKK
and Company Classification Society, and many others, we
have among others, there are over 20 worldwide. 22
At the outset, it must be emphasized that the party which
alleges a fact as a matter of defense has the burden of
proving it. PRUDENTIAL, as the party which asserted the
claim that TRANS-ASIA breached the warranty in the
policy, has the burden of evidence to establish the same.
Hence, on the part of PRUDENTIAL lies the initiative to
show proof in support of its defense; otherwise, failing to
establish the same, it remains self-serving. Clearly, if no
evidence on the alleged breach of TRANS-ASIA of the
subject warranty is shown, a fortiori, TRANS-ASIA would
be successful in claiming on the policy. It follows that
PRUDENTIAL bears the burden of evidence to establish
the fact of breach.
In our rule on evidence, TRANS-ASIA, as the plaintiff
below, necessarily has the burden of proof to show proof
of loss, and the coverage thereof, in the subject insurance
policy. However, in the course of trial in a civil case, once
plaintiff makes out a prima facie case in his favor, the duty
or the burden of evidence shifts to defendant to
controvert plaintiff’s prima facie case, otherwise, a
verdict must be returned in favor of plaintiff.23 TRANS-
ASIA was able to establish proof of loss and the coverage
of the loss, i.e., 25 October 1993: Fire on Board.
Thereafter, the burden of evidence shifted to
PRUDENTIAL to counter TRANS-ASIA’s case, and to prove
its special and affirmative defense that TRANS-ASIA was
in violation of the particular condition on CLASSED AND
CLASS MAINTAINED.
We sustain the findings of the Court of Appeals that
PRUDENTIAL was not successful in discharging the burden
of evidence that TRANS-ASIA breached the subject policy
condition on CLASSED AND CLASS MAINTAINED.
Foremost, PRUDENTIAL, through the Senior Manager of
its Marine and Aviation Division, Lucio Fernandez, made a
categorical admission that at the time of the procurement
of the insurance contract in July 1993, TRANS-ASIA’s
vessel, "M/V Asia Korea" was properly classed by Bureau
Veritas, thus:
Q Kindly examine the records particularly the policy,
please tell us if you know whether M/V Asia Korea was
classed at the time (sic) policy was procured perthe (sic)
insurance was procured that Exhibit "1" on 1st July 1993
(sic).
WITNESS
A I recall that they were classed.
ATTY. LIM
Q With what classification society?
A I believe with Bureau Veritas.24
As found by the Court of Appeals and as supported by the
records, Bureau Veritas is a classification society
recognized in the marine industry. As it is undisputed that
TRANS-ASIA was properly classed at the time the contract
of insurance was entered into, thus, it becomes
incumbent upon PRUDENTIAL to show evidence that the
status of TRANS-ASIA as being properly CLASSED by
Bureau Veritas had shifted in violation of the warranty.
Unfortunately, PRUDENTIAL failed to support the
allegation.
We are in accord with the ruling of the Court of Appeals
that the lack of a certification in PRUDENTIAL’s records to
the effect that TRANS-ASIA’s "M/V Asia Korea" was
CLASSED AND CLASS MAINTAINED at the time of the
occurrence of the fire cannot be tantamount to the
conclusion that TRANS-ASIA in fact breached the
warranty contained in the policy. With more reason must
we sustain the findings of the Court of Appeals on the
ground that as admitted by PRUDENTIAL, it was likewise
the responsibility of the average adjuster, Richards Hogg
International (Phils.), Inc., to secure a copy of such
certification, and the alleged breach of TRANS-ASIA
cannot be gleaned from the average adjuster’s survey
report, or adjustment of particular average per "M/V Asia
Korea" of the 25 October 1993 fire on board.
We are not unmindful of the clear language of Sec. 74 of
the Insurance Code which provides that, "the violation of
a material warranty, or other material provision of a
policy on the part of either party thereto, entitles the
other to rescind." It is generally accepted that "[a]
warranty is a statement or promise set forth in the policy,
or by reference incorporated therein, the untruth or non-
fulfillment of which in any respect, and without reference
to whether the insurer was in fact prejudiced by such
untruth or non-fulfillment, renders the policy voidable by
the insurer."25However, it is similarly indubitable that for
the breach of a warranty to avoid a policy, the same must
be duly shown by the party alleging the same. We cannot
sustain an allegation that is unfounded. Consequently,
PRUDENTIAL, not having shown that TRANS-ASIA
breached the warranty condition, CLASSED AND CLASS
MAINTAINED, it remains that TRANS-ASIA must be
allowed to recover its rightful claims on the policy.
B. Assuming arguendo that TRANS-ASIA violated the
policy condition on WARRANTED VESSEL CLASSED AND
CLASS MAINTAINED, PRUDENTIAL made a valid waiver of
the same.
The Court of Appeals, in reversing the Judgment of the
RTC which held that TRANS-ASIA breached the warranty
provision on CLASSED AND CLASS MAINTAINED,
underscored that PRUDENTIAL can be deemed to have
made a valid waiver of TRANS-ASIA’s breach of warranty
as alleged, ratiocinating, thus:
Third, after the loss, Prudential renewed the insurance
policy of Trans-Asia for two (2) consecutive years, from
noon of 01 July 1994 to noon of 01 July 1995, and then
again until noon of 01 July 1996. This renewal is deemed
a waiver of any breach of warranty.26
PRUDENTIAL finds fault with the ruling of the appellate
court when it ruled that the renewal policies are deemed
a waiver of TRANS-ASIA’s alleged breach, averring herein
that the subsequent policies, designated as MH94/1595
and MH95/1788 show that they were issued only on 1
July 1994 and 3 July 1995, respectively, prior to the time
it made a request to TRANS-ASIA that it be furnished a
copy of the certification specifying that the insured vessel
"M/V Asia Korea" was CLASSED AND CLASS MAINTAINED.
PRUDENTIAL posits that it came to know of the breach by
TRANS-ASIA of the subject warranty clause only on 21
April 1997. On even date, PRUDENTIAL sent TRANS-ASIA
a letter of denial, advising the latter that their claim is not
compensable. In fine, PRUDENTIAL would have this Court
believe that the issuance of the renewal policies cannot
be a waiver because they were issued without knowledge
of the alleged breach of warranty committed by TRANS-
ASIA.27
We are not impressed. We do not find that the Court of
Appeals was in error when it held that PRUDENTIAL, in
renewing TRANS-ASIA’s insurance policy for two
consecutive years after the loss covered by Policy No.
MH93/1363, was considered to have waived TRANS-
ASIA’s breach of the subject warranty, if any. Breach of a
warranty or of a condition renders the contract defeasible
at the option of the insurer; but if he so elects, he may
waive his privilege and power to rescind by the mere
expression of an intention so to do. In that event his
liability under the policy continues as before.28 There can
be no clearer intention of the waiver of the alleged breach
than the renewal of the policy insurance granted by
PRUDENTIAL to TRANS-ASIA in MH94/1595 and
MH95/1788, issued in the years 1994 and 1995,
respectively.
To our mind, the argument is made even more credulous
by PRUDENTIAL’s lack of proof to support its allegation
that the renewals of the policies were taken only after a
request was made to TRANS-ASIA to furnish them a copy
of the certificate attesting that "M/V Asia Korea" was
CLASSED AND CLASS MAINTAINED. Notwithstanding
PRUDENTIAL’s claim that no certification was issued to
that effect, it renewed the policy, thereby, evidencing an
intention to waive TRANS-ASIA’s alleged breach. Clearly,
by granting the renewal policies twice and successively
after the loss, the intent was to benefit the insured,
TRANS-ASIA, as well as to waive compliance of the
warranty.
The foregoing finding renders a determination of whether
the subject warranty is a rider, moot, as raised by the
PRUDENTIAL in its assignment of errors. Whether it is a
rider will not effectively alter the result for the reasons
that: (1) PRUDENTIAL was not able to discharge the
burden of evidence to show that TRANS-ASIA committed
a breach, thereof; and (2) assuming arguendo the
commission of a breach by TRANS-ASIA, the same was
shown to have been waived by PRUDENTIAL.
II.
A. The amount of P3,000,000.00 granted by PRUDENTIAL
to TRANS- ASIA via a transaction between the parties
evidenced by a document denominated as "Loan and
Trust Receipt," dated 29 May 1995 constituted partial
payment on the policy.
It is undisputed that TRANS-ASIA received from
PRUDENTIAL the amount of P3,000,000.00. The same was
evidenced by a transaction receipt denominated as a
"Loan and Trust Receipt," dated 29 May 1995,
reproduced hereunder:
LOAN AND TRUST RECEIPT
Claim File No. MH-93-025 May 29, 1995
P3,000,000.00
Check No. PCIB066755
Received FROM PRUDENTIAL GUARANTEE AND
ASSURANCE INC., the sum of PESOS THREE MILLION ONLY
(P3,000,000.00) as a loan without interest, under Policy
No. MH93/1353, repayable only in the event and to the
extent that any net recovery is made by TRANS ASIA
SHIPPING CORP., from any person or persons,
corporation or corporations, or other parties, on account
of loss by any casualty for which they may be liable,
occasioned by the 25 October 1993: Fire on Board.
As security for such repayment, we hereby pledge to
PRUDENTIAL GUARANTEE AND ASSURANCE INC.
whatever recovery we may make and deliver to it all
documents necessary to prove our interest in said
property. We also hereby agree to promptly prosecute
suit against such persons, corporation or corporations
through whose negligence the aforesaid loss was caused
or who may otherwise be responsible therefore, with all
due diligence, in our own name, but at the expense of and
under the exclusive direction and control of PRUDENTIAL
GUARANTEE AND ASSURANCE INC.
TRANS-ASIA SHIPPING CORPORATION29
PRUDENTIAL largely contends that the "Loan and Trust
Receipt" executed by the parties evidenced a loan of
P3,000,000.00 which it granted to TRANS-ASIA, and not
an advance payment on the policy or a partial payment
for the loss. It further submits that it is a customary
practice for insurance companies in this country to
extend loans gratuitously as part of good business dealing
with their assured, in order to afford their assured the
chance to continue business without embarrassment
while awaiting outcome of the settlement of their
claims.30 According to PRUDENTIAL, the "Trust and Loan
Agreement" did not subrogate to it whatever rights
and/or actions TRANS-ASIA may have against third
persons, and it cannot by no means be taken that by
virtue thereof, PRUDENTIAL was granted irrevocable
power of attorney by TRANS-ASIA, as the sole power to
prosecute lies solely with the latter.
The Court of Appeals held that the real character of the
transaction between the parties as evidenced by the
"Loan and Trust Receipt" is that of an advance payment
by PRUDENTIAL of TRANS-ASIA’s claim on the insurance,
thus:
The Philippine Insurance Code (PD 1460 as amended) was
derived from the old Insurance Law Act No. 2427 of the
Philippine Legislature during the American Regime. The
Insurance Act was lifted verbatim from the law of
California, except Chapter V thereof, which was taken
largely from the insurance law of New York. Therefore,
ruling case law in that jurisdiction is to Us persuasive in
interpreting provisions of our own Insurance Code. In
addition, the application of the adopted statute should
correspond in fundamental points with the application in
its country of origin x x x.
xxxx
Likewise, it is settled in that jurisdiction that the (sic)
notwithstanding recitals in the Loan Receipt that the
money was intended as a loan does not detract from its
real character as payment of claim, thus:
"The receipt of money by the insured employers from a
surety company for losses on account of forgery of drafts
by an employee where no provision or repayment of the
money was made except upon condition that it be
recovered from other parties and neither interest nor
security for the asserted debts was provided for, the
money constituted the payment of a liability and not a
mere loan, notwithstanding recitals in the written receipt
that the money was intended as a mere loan."
What is clear from the wordings of the so-called "Loan
and Trust Receipt Agreement" is that appellant is
obligated to hand over to appellee "whatever recovery
(Trans Asia) may make and deliver to (Prudential) all
documents necessary to prove its interest in the said
property." For all intents and purposes therefore, the
money receipted is payment under the policy, with
Prudential having the right of subrogation to whatever
net recovery Trans-Asia may obtain from third parties
resulting from the fire. In the law on insurance,
subrogation is an equitable assignment to the insurer of
all remedies which the insured may have against third
person whose negligence or wrongful act caused the loss
covered by the insurance policy, which is created as the
legal effect of payment by the insurer as an assignee in
equity. The loss in the first instance is that of the insured
but after reimbursement or compensation, it becomes
the loss of the insurer. It has been referred to as the
doctrine of substitution and rests on the principle that
substantial justice should be attained regardless of form,
that is, its basis is the doing of complete, essential, and
perfect justice between all the parties without regard to
form.31
We agree. Notwithstanding its designation, the tenor of
the "Loan and Trust Receipt" evidences that the real
nature of the transaction between the parties was that
the amount of P3,000,000.00 was not intended as a loan
whereby TRANS-ASIA is obligated to pay PRUDENTIAL, but
rather, the same was a partial payment or an advance on
the policy of the claims due to TRANS-ASIA.
First, the amount of P3,000,000.00 constitutes an
advance payment to TRANS-ASIA by PRUDENTIAL,
subrogating the former to the extent of "any net recovery
made by TRANS ASIA SHIPPING CORP., from any person
or persons, corporation or corporations, or other parties,
on account of loss by any casualty for which they may be
liable, occasioned by the 25 October 1993: Fire on
Board."32
Second, we find that per the "Loan and Trust Receipt,"
even as TRANS-ASIA agreed to "promptly prosecute suit
against such persons, corporation or corporations
through whose negligence the aforesaid loss was caused
or who may otherwise be responsible therefore, with all
due diligence" in its name, the prosecution of the claims
against such third persons are to be carried on "at the
expense of and under the exclusive direction and control
of PRUDENTIAL GUARANTEE AND ASSURANCE INC."33 The
clear import of the phrase "at the expense of and under
the exclusive direction and control" as used in the "Loan
and Trust Receipt" grants solely to PRUDENTIAL the
power to prosecute, even as the same is carried in the
name of TRANS-ASIA, thereby making TRANS-ASIA merely
an agent of PRUDENTIAL, the principal, in the prosecution
of the suit against parties who may have occasioned the
loss.
Third, per the subject "Loan and Trust Receipt," the
obligation of TRANS-ASIA to repay PRUDENTIAL is highly
speculative and contingent, i.e., only in the event and to
the extent that any net recovery is made by TRANS-ASIA
from any person on account of loss occasioned by the fire
of 25 October 1993. The transaction, therefore, was
made to benefit TRANS-ASIA, such that, if no recovery
from third parties is made, PRUDENTIAL cannot be repaid
the amount. Verily, we do not think that this is
constitutive of a loan.34 The liberality in the tenor of the
"Loan and Trust Receipt" in favor of TRANS-ASIA leads to
the conclusion that the amount of P3,000,000.00 was a
form of an advance payment on TRANS-ASIA’s claim on
MH93/1353.
III.
A. PRUDENTIAL is directed to pay TRANS-ASIA the amount
of P8,395,072.26, representing the balance of the loss
suffered by TRANS-ASIA and covered by Marine Policy No.
MH93/1363.
Our foregoing discussion supports the conclusion that
TRANS-ASIA is entitled to the unpaid claims covered by
Marine Policy No. MH93/1363, or a total amount of
P8,395,072.26.
B. Likewise, PRUDENTIAL is directed to pay TRANS-ASIA,
damages in the form of attorney’s fees equivalent to 10%
of P8,395,072.26.
The Court of Appeals denied the grant of attorney’s fees.
It held that attorney’s fees cannot be awarded absent a
showing of bad faith on the part of PRUDENTIAL in
rejecting TRANS-ASIA’s claim, notwithstanding that the
rejection was erroneous. According to the Court of
Appeals, attorney’s fees can be awarded only in the cases
enumerated in Article 2208 of the Civil Code which finds
no application in the instant case.
We disagree. Sec. 244 of the Insurance Code grants
damages consisting of attorney’s fees and other expenses
incurred by the insured after a finding by the Insurance
Commissioner or the Court, as the case may be, of an
unreasonable denial or withholding of the payment of the
claims due. Moreover, the law imposes an interest of
twice the ceiling prescribed by the Monetary Board on
the amount of the claim due the insured from the date
following the time prescribed in Section 24235 or in
Section 243,36 as the case may be, until the claim is fully
satisfied. Finally, Section 244 considers the failure to pay
the claims within the time prescribed in Sections 242 or
243, when applicable, as prima facie evidence of
unreasonable delay in payment.
To the mind of this Court, Section 244 does not require a
showing of bad faith in order that attorney’s fees be
granted. As earlier stated, under Section 244, a prima
facie evidence of unreasonable delay in payment of the
claim is created by failure of the insurer to pay the claim
within the time fixed in both Sections 242 and 243 of the
Insurance Code. As established in Section 244, by reason
of the delay and the consequent filing of the suit by the
insured, the insurers shall be adjudged to pay damages
which shall consist of attorney’s fees and other expenses
incurred by the insured.37
Section 244 reads:
In case of any litigation for the enforcement of any policy
or contract of insurance, it shall be the duty of the
Commissioner or the Court, as the case may be, to make
a finding as to whether the payment of the claim of the
insured has been unreasonably denied or withheld; and
in the affirmative case, the insurance company shall be
adjudged to pay damages which shall consist of attorney’s
fees and other expenses incurred by the insured person
by reason of such unreasonable denial or withholding of
payment plus interest of twice the ceiling prescribed by
the Monetary Board of the amount of the claim due the
insured, from the date following the time prescribed in
section two hundred forty-two or in section two hundred
forty-three, as the case may be, until the claim is fully
satisfied; Provided, That the failure to pay any such claim
within the time prescribed in said sections shall be
considered prima facie evidence of unreasonable delay in
payment.
Sections 243 and 244 of the Insurance Code apply when
the court finds an unreasonable delay or refusal in the
payment of the insurance claims.
In the case at bar, the facts as found by the Court of
Appeals, and confirmed by the records show that there
was an unreasonable delay by PRUDENTIAL in the
payment of the unpaid balance of P8,395,072.26 to
TRANS-ASIA. On 26 October 1993, a day after the
occurrence of the fire in "M/V Asia Korea", TRANS-ASIA
filed its notice of claim. On 13 August 1996, the adjuster,
Richards Hogg International (Phils.), Inc., completed its
survey report recommending the amount of
P11,395,072.26 as the total indemnity due to TRANS-
ASIA.38 On 21 April 1997, PRUDENTIAL, in a
letter39 addressed to TRANS-ASIA denied the latter’s
claim for the amount of P8,395,072.26 representing the
balance of the total indemnity. On 21 July 1997,
PRUDENTIAL sent a second letter40 to TRANS-ASIA
seeking a return of the amount of P3,000,000.00. On 13
August 1997, TRANS-ASIA was constrained to file a
complaint for sum of money against PRUDENTIAL praying,
inter alia, for the sum of P8,395,072.26 representing the
balance of the proceeds of the insurance claim.
As can be gleaned from the foregoing, there was an
unreasonable delay on the part of PRUDENTIAL to pay
TRANS-ASIA, as in fact, it refuted the latter’s right to the
insurance claims, from the time proof of loss was shown
and the ascertainment of the loss was made by the
insurance adjuster. Evidently, PRUDENTIAL’s
unreasonable delay in satisfying TRANS-ASIA’s unpaid
claims compelled the latter to file a suit for collection.
Succinctly, an award equivalent to ten percent (10%) of
the unpaid proceeds of the policy as attorney’s fees to
TRANS-ASIA is reasonable under the circumstances, or
otherwise stated, ten percent (10%) of P8,395,072.26. In
the case of Cathay Insurance, Co., Inc. v. Court of
Appeals,41 where a finding of an unreasonable delay
under Section 244 of the Insurance Code was made by
this Court, we grant an award of attorney’s fees
equivalent to ten percent (10%) of the total proceeds. We
find no reason to deviate from this judicial precedent in
the case at bar.
C. Further, the aggregate amount (P8,395,072.26 plus
10% thereof as attorney’s fees) shall be imposed double
interest in accordance with Section 244 of the Insurance
Code.
Section 244 of the Insurance Code is categorical in
imposing an interest twice the ceiling prescribed by the
Monetary Board due the insured, from the date following
the time prescribed in Section 242 or in Section 243, as
the case may be, until the claim is fully satisfied. In the
case at bar, we find Section 243 to be applicable as what
is involved herein is a marine insurance, clearly, a policy
other than life insurance.
Section 243 is hereunder reproduced:
SEC. 243. The amount of any loss or damage for which an
insurer may be liable, under any policy other than life
insurance policy, shall be paid within thirty days after
proof of loss is received by the insurer and ascertainment
of the loss or damage is made either by agreement
between the insured and the insurer or by arbitration; but
if such ascertainment is not had or made within sixty days
after such receipt by the insurer of the proof of loss, then
the loss or damage shall be paid within ninety days after
such receipt. Refusal or failure to pay the loss or damage
within the time prescribed herein will entitle the assured
to collect interest on the proceeds of the policy for the
duration of the delay at the rate of twice the ceiling
prescribed by the Monetary Board, unless such failure or
refusal to pay is based on the ground that the claim is
fraudulent.
As specified, the assured is entitled to interest on the
proceeds for the duration of the delay at the rate of twice
the ceiling prescribed by the Monetary Board except
when the failure or refusal of the insurer to pay was
founded on the ground that the claim is fraudulent.
D. The term "double interest" as used in the Decision of
the Court of Appeals must be interpreted to mean 24%
per annum.
PRUDENTIAL assails the award of interest, granted by the
Court of Appeals, in favor of TRANS-ASIA in the assailed
Decision of 6 November 2001. It is PRUDENTIAL’s stance
that the award is extortionate and grossly
unsconscionable. In support thereto, PRUDENTIAL makes
a reference to TRANS-ASIA’s prayer in the Complaint filed
with the court a quo wherein the latter sought, "interest
double the prevailing rate of interest of 21% per annum
now obtaining in the banking business or plus 42% per
annum pursuant to Article 243 of the Insurance Code x x
x."42
The contention fails to persuade. It is settled that an
award of double interest is lawful and justified under
Sections 243 and 244 of the Insurance Code.43 In Finman
General Assurance Corporation v. Court of Appeals,44 this
Court held that the payment of 24% interest per annum
is authorized by the Insurance Code.45 There is no
gainsaying that the term "double interest" as used in
Sections 243 and 244 can only be interpreted to mean
twice 12% per annum or 24% per annum interest, thus:
The term "ceiling prescribed by the Monetary Board"
means the legal rate of interest of twelve per centum per
annum (12%) as prescribed by the Monetary Board in C.B.
Circular No. 416, pursuant to P.D. No. 116, amending the
Usury Law; so that when Sections 242, 243 and 244 of the
Insurance Code provide that the insurer shall be liable to
pay interest "twice the ceiling prescribed by the Monetary
Board", it means twice 12% per annum or 24% per annum
interest on the proceeds of the insurance.46
E. The payment of double interest should be counted
from 13 September 1996.
The Court of Appeals, in imposing double interest for the
duration of the delay of the payment of the unpaid
balance due TRANS-ASIA, computed the same from 13
August 1996 until such time when the amount is fully
paid. Although not raised by the parties, we find the
computation of the duration of the delay made by the
appellate court to be patently erroneous.
To be sure, Section 243 imposes interest on the proceeds
of the policy for the duration of the delay at the rate of
twice the ceiling prescribed by the Monetary Board.
Significantly, Section 243 mandates the payment of any
loss or damage for which an insurer may be liable, under
any policy other than life insurance policy, within thirty
days after proof of loss is received by the insurer and
ascertainment of the loss or damage is made either by
agreement between the insured and the insurer or by
arbitration. It is clear that under Section 243, the insurer
has until the 30th day after proof of loss and
ascertainment of the loss or damage to pay its liability
under the insurance, and only after such time can the
insurer be held to be in delay, thereby necessitating the
imposition of double interest.
In the case at bar, it was not disputed that the survey
report on the ascertainment of the loss was completed by
the adjuster, Richard Hoggs International (Phils.), Inc. on
13 August 1996. PRUDENTIAL had thirty days from 13
August 1996 within which to pay its liability to TRANS-
ASIA under the insurance policy, or until 13 September
1996. Therefore, the double interest can begin to run
from 13 September 1996 only.
IV.
A. An interest of 12% per annum is similarly imposed on
the TOTAL amount of liability adjudged in section III
herein, computed from the time of finality of judgment
until the full satisfaction thereof in conformity with this
Court’s ruling in Eastern Shipping Lines, Inc. v. Court of
Appeals.
This Court in Eastern Shipping Lines, Inc. v. Court of
Appeals,47 inscribed the rule of thumb48 in the application
of interest to be imposed on obligations, regardless of
their source. Eastern emphasized beyond cavil that when
the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest,
regardless of whether the obligation involves a loan or
forbearance of money, shall be 12% per annum from such
finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance49 of
credit.
We find application of the rule in the case at bar proper,
thus, a rate of 12% per annum from the finality of
judgment until the full satisfaction thereof must be
imposed on the total amount of liability adjudged to
PRUDENTIAL. It is clear that the interim period from the
finality of judgment until the satisfaction of the same is
deemed equivalent to a forbearance of credit, hence, the
imposition of the aforesaid interest.
Fallo
WHEREFORE, the Petition in G.R. No. 151890 is DENIED.
However, the Petition in G.R. No. 151991 is GRANTED,
thus, we award the grant of attorney’s fees and make a
clarification that the term "double interest" as used in the
6 November 2001 Decision of the Court of Appeals in CA
GR CV No. 68278 should be construed to mean interest at
the rate of 24% per annum, with a further clarification,
that the same should be computed from 13 September
1996 until fully paid. The Decision and Resolution of the
Court of Appeals, in CA-G.R. CV No. 68278, dated 6
November 2001 and 29 January 2002, respectively, are,
thus, MODIFIED in the following manner, to wit:
1. PRUDENTIAL is DIRECTED to PAY TRANS-ASIA the
amount of P8,395,072.26, representing the balance of
the loss suffered by TRANS-ASIA and covered by Marine
Policy No. MH93/1363;
2. PRUDENTIAL is DIRECTED further to PAY TRANS-ASIA
damages in the form of attorney’s fees equivalent to 10%
of the amount of P8,395,072.26;
3. The aggregate amount (P8,395,072.26 plus 10%
thereof as attorney’s fees) shall be imposed double
interest at the rate of 24% per annum to be computed
from 13 September 1996 until fully paid; and
4. An interest of 12% per annum is similarly imposed on
the TOTAL amount of liability adjudged as abovestated in
paragraphs (1), (2), and (3) herein, computed from the
time of finality of judgment until the full satisfaction
thereof.
No costs.SO ORDERED.
[G.R. No. 137798. October 4, 2000]
LUCIA R. SINGSON, petitioner, vs. CALTEX (PHILIPPINES),
INC. respondent.
DECISION
GONZAGA-REYES, J.:
Petitioner seeks a review on certiorari of the decision of
the former Special Second Division of the Court of
Appeals dated November 27, 1998,[1] affirming the
decision of the Regional Trial Court of Manila, Branch
25[2] which dismissed petitioner's action for reformation
of contract and adjustment of rentals.
The facts of the case are undisputed ---
Petitioner and respondent entered into a contract of
lease on July 16, 1968 over a parcel of land in Cubao,
Quezon City. The land, which had an area of 1,400 square
meters and was covered by Transfer Certificates of Title
No. 43329 and 81636 issued by the Register of Deeds of
Quezon City, was to be used by respondent as a gasoline
service station.
The contract of lease provides that the lease shall run for
a period of twenty (20) years and shall abide by the
following rental rates:
xxx xxx xxx xxx
Rental. --- The LESSEE agrees to pay the following rental
for said premises:
P2.50/sq.m. per month from the 1st to 10th years and
P3.00/sq.m. per month from the 11th to 20th years,
payable monthly in advance within the 1st 15 days of each
month; provided that the rentals for the 1st 5 years less a
discount of eleven (11) percent per annum computed on
a monthly diminishing balance, shall be paid to LESSOR
upon compliance of the three (3) conditions provided in
clause (2) above.
LESSEE also agrees to pay lessor, the sum of Six Thousand
Pesos (P6,000.00) as demolition expenses, upon
effectivity of this lease.
The rental herein provided for is in any event the
maximum rental which LESSOR may collect during the
term of this lease or any renewal or extension
thereof. LESSEE further agrees for thirty (30) days after
written notice of such default has actually been delivered
to the General Manager of Caltex (Philippines), Inc.
LESSOR shall then have the right to terminate this lease
on thirty (30) days written notice to LESSEE. xxx xxx xxx [3]
Thus, based on the foregoing provisions of the lease
contract, the monthly rental was fixed at P3,500.00 for
the first ten years, and at P4,200.00 for the succeeding
ten years of the lease.
On June 23, 1983, or five years before the expiration of
the lease contract, petitioner asked respondent to adjust
or increase the amount of rentals citing that the country
was experiencing extraordinary inflation. In a letter dated
August 3, 1983, respondent refused petitioner's request
and declared that the terms of the lease contract are clear
as to the rental amounts therein provided being "the
maximum rental which the lessor may collect during the
term of the lease."[4]
On September 21, 1983, petitioner instituted a complaint
before the RTC praying for, among other things, the
payment by respondent of adjusted rentals based on the
value of the Philippine peso at the time the contract of
lease was executed. The complaint invoked Article 1250
of the Civil Code, stating that since the execution of the
contract of lease in 1968 an extraordinary inflation had
supervened resulting from the deterioration of
worldwide economic conditions, a circumstance that was
not foreseen and could not have been reasonably
foreseen by the parties at the time they entered into
contract.
To substantiate its allegation of extraordinary inflation,
petitioner presented as witness Mr. Narciso Uy, Assistant
Director of the Supervising and Examining Sector of the
Central Bank, who attested that the inflation rate
increased abruptly during the period 1982 to 1985,
caused mainly by the devaluation of the
peso.[5] Petitioner also submitted into evidence a
certification of the official inflation rates from 1966 to
1986 prepared by the National Economic Development
Authority ("NEDA") based on consumer price index, which
reflected that at the time the parties entered into the
subject contract, the inflation rate was only 2.06%; then,
it soared to 34.51% in 1974, and in 1984, reached a high
of 50.34%.[6]
In a decision rendered on July 15, 1991, the RTC dismissed
the complaint for lack of merit. This judgment was
affirmed by the Court of Appeals. Both courts found that
petitioner was unable to prove the existence of
extraordinary inflation from 1968 to 1983 (or from the
year of the execution of the contract up to the year of the
filing of the complaint before the RTC) as to justify an
adjustment or increase in the rentals based upon the
provisions of Article 1250 of the Civil Code.
The Court of Appeals declared that although, admittedly,
there was an economic inflation during the period in
question, it was not such as to call for the application of
Article 1250 which is made to apply only to "violent and
sudden changes in the price level or uncommon or
unusual decrease of the value of the currency. (It) does
not contemplate of a normal or ordinary decline in the
purchasing power of the peso."[7]
The Court of Appeals also found similarly with the trial
court that the terms of rental in the contract of lease
dated July 16, 1968 are clear and unequivocal as to the
specific amount of the rental rates and the fact that the
rentals therein provided shall be the "maximum rental"
which petitioner as lessor may collect. Absent any
showing that such contractual provisions are contrary to
law, morals, good customs, public order or public policy,
the Court of Appeals held that there was no basis for not
acknowledging their binding effect upon the parties. It
also upheld the application by the trial court of the ruling
in Filipino Pipe and Foundry Corporation vs. National
Waterworks and Sewerage Authority, 161 SCRA 32, where
the Court held that although there has been a decline in
the purchasing power of the Philippine peso during the
period 1961 to 1971, such downward fall of the currency
could not be considered "extraordinary" and was simply a
universal trend that has not spared the Philippines.
Thus, the dispositive portion of the decision of the Court
of Appeals reads:
WHEREFORE, in view of the foregoing, the appeal is
hereby DISMISSED and the decision appealed from is
hereby AFFIRMED.
SO ORDERED.[8]
Petitioner's motion for reconsideration of the above
decision was denied by the Court of Appeals in a
resolution dated March 10, 1999.
Aggrieved, petitioner filed this petition for review
on certiorari where she assails as erroneous the decision
of the Court of Appeals, specifically, (1) in ruling that
Article 1250 of the Civil Code is inapplicable to the instant
case, (2) in not recognizing the applicability of the
principle of rebus sic stantibus, and (3) in applying the
ruling in Filipino Pipe and Foundry Corporation vs.
NAWASA.
Petitioner contends that the monthly rental of P3.00 per
square meter is patently inequitable. Based on the
inflation rates supplied by NEDA, there was an unusual
increase in inflation that could not have been foreseen by
the parties; otherwise, they would not have entered into
a relatively long-term contract of lease. She argued that
the rentals in this case should not be regarded by their
quantitative or nominal value, but as "debts of value",
that is, the rental rates should be adjusted to reflect the
value of the peso at the time the lease was contracted.[9]
Petitioner also insists that the factual milieu of the
present case is distinct from that in Filipino Pipe and
Foundry Corporation vs. NAWASA. She pointed out that
the inflation experienced by the country during the
period 1961 to 1971 (the pertinent time period in
the Filipino Pipe case) had a lowest of 1.35% in 1969 and
a highest of 15.03% in 1971, whereas in the instant case,
involving the period 1968 to 1983, there had been highly
abnormal inflation rates like 34.51% in 1974 (triggered by
the OPEC oil price increases in 1973) and 50.34% in 1984
(caused by the assassination of Benigno Aquino, Jr. in
1983). Petitioner argues that the placing of the country
under martial rule in 1972, the OPEC oil price increases in
1973, and the Aquino assassination which triggered the
EDSA revolution, were fortuitous events that drastically
affected the Philippine economy and were beyond the
reasonable contemplation of the parties.
To further bolster her arguments, petitioner invokes by
analogy the principle of rebus sic stantibus in public
international law, under which a vital change of
circumstances justifies a state's unilateral withdrawal
from a treaty. In the herein case, petitioner posits that in
pegging the monthly rental rates of P2.50 and P3.00 per
square meter, respectively, the parties were guided by
the economic conditions prevalent in 1968, when the
Philippines faced robust economic prospects. Petitioner
contends that between her and respondent, a
corporation engaged in high stakes business and
employing economic and business experts, it is the latter
who had the unmistakable advantage to analyze the
feasibility of entering into a 20-year lease contract at such
meager rates.
The only issue crucial to the present appeal is whether
there existed an extraordinary inflation during the period
1968 to 1983 that would call for the application of Article
1250 of the Civil Code and justify an adjustment or
increase of the rentals between the parties.
Article 1250 of the Civil Code states:
In case an extraordinary inflation or deflation of the
currency stipulated should supervene, the value of the
currency at the time of the establishment of the
obligation shall be the basis of payment, unless there is
an agreement to the contrary.
Article 1250 was inserted in the Civil Code of 1950 to
abate the uncertainty and confusion that affected
contracts entered into or payments made during World
War II, and to help provide a just solution to future
cases.[10] The Court has, in more than one occasion, been
asked to interpret the provisions of Article 1250, and to
expound on the scope and limits of "extraordinary
inflation".
We have held extraordinary inflation to exist when there
is a decrease or increase in the purchasing power of the
Philippine currency which is unusual or beyond the
common fluctuation in the value of said currency, and
such increase or decrease could not have been
reasonably foreseen or was manifestly beyond the
contemplation of the parties at the time of the
establishment of the obligation.[11]
An example of extraordinary inflation, as cited by the
Court in Filipino Pipe and Foundry Corporation vs.
NAWASA, supra, is that which happened to the
deutschmark in 1920. Thus:
"More recently, in the 1920s, Germany experienced a
case of hyperinflation. In early 1921, the value of the
German mark was 4.2 to the U.S. dollar. By May of the
same year, it had stumbled to 62 to the U.S. dollar. And
as prices went up rapidly, so that by October 1923, it had
reached 4.2 trillion to the U.S. dollar!" (Bernardo M.
Villegas & Victor R. Abola, Economics, An Introduction
[Third Edition]).
As reported, "prices were going up every week, then
every day, then every hour. Women were paid several
times a day so that they could rush out and exchange their
money for something of value before what little
purchasing power was left dissolved in their hands. Some
workers tried to beat the constantly rising prices by
throwing their money out of the windows to their waiting
wives, who would rush to unload the nearly worthless
paper. A postage stamp cost millions of marks and a loaf
of bread, billions." (Sidney Rutberg, "The Money Balloon",
New York: Simon and Schuster, 1975, p. 19, cited in
"Economics, An Introduction" by Villegas & Abola, 3rd Ed.)
The supervening of extraordinary inflation is never
assumed.[12] The party alleging it must lay down the
factual basis for the application of Article 1250.
Thus, in the Filipino Pipe case, the Court acknowledged
that the voluminous records and statistics submitted by
plaintiff-appellant proved that there has been a decline in
the purchasing power of the Philippine peso, but this
downward fall cannot be considered "extraordinary" but
was simply a universal trend that has not spared our
country.[13] Similarly, in Huibonhoa vs. Court of
Appeals,[14] the Court dismissed plaintiff-appellant's
unsubstantiated allegation that the Aquino assassination
in 1983 caused building and construction costs to double
during the period July 1983 to February 1984. In Serra vs.
Court of Appeals,[15] the Court again did not consider the
decline in the peso's purchasing power from 1983 to 1985
to be so great as to result in an extraordinary inflation.
Like the Serra and Huibonhoa cases, the instant case also
raises as basis for the application of Article 1250 the
Philippine economic crisis in the early 1980s --- when,
based on petitioner's evidence, the inflation rate rose to
50.34% in 1984. We hold that there is no legal or factual
basis to support petitioner's allegation of the existence of
extraordinary inflation during this period, or, for that
matter, the entire time frame of 1968 to 1983, to merit
the adjustment of the rentals in the lease contract dated
July 16, 1968. Although by petitioner's evidence there
was a decided decline in the purchasing power of the
Philippine peso throughout this period, we are hard put
to treat this as an "extraordinary inflation" within the
meaning and intent of Article 1250. Rather, we adopt
with approval the following observations of the Court of
Appeals on petitioner's evidence, especially the NEDA
certification of inflation rates based on consumer price
index:
xxx (a) from the period 1966 to 1986, the official inflation
rate never exceeded 100% in any single year; (b) the
highest official inflation rate recorded was in 1984 which
reached only 50.34%; (c) over a twenty one (21) year
period, the Philippines experienced a single-digit inflation
in ten (10) years (i.e., 1966, 1967, 1968, 1969, 1975, 1976,
1977, 1978, 1983 and 1986); (d) in other years (i.e., 1970,
1971, 1972, 1973, 1974, 1979, 1980, 1981, 1982, 1984
and 1989) when the Philippines experienced double-digit
inflation rates, the average of those rates was only
20.88%; (e) while there was a decline in the purchasing
power of the Philippine currency from the period 1966 to
1986, such cannot be considered as extraordinary; rather,
it is a normal erosion of the value of the Philippine peso
which is a characteristic of most currencies.[16]
"Erosion" is indeed an accurate description of the trend
of decline in the value of the peso in the past three to four
decades. Unfortunate as this trend may be, it is certainly
distinct from the phenomenon contemplated by Article
1250.
Moreover, this Court has held that the effects of
extraordinary inflation are not to be applied without an
official declaration thereof by competent authorities.[17]
Lastly, the provisions on rentals in the lease contract
dated July 16, 1968 between petitioner and respondent
are clear and categorical, and we have no reason to
suppose that such lease contract does not reflect or
express their true intention and agreement. The contract
is the law between the parties and if there is indeed
reason to adjust the rent, the parties could have by
themselves negotiated the amendment of the
contract.[18]
WHEREFORE, the petition seeking the reversal of the
decision of the Court of Appeals in CA-G.R. CV No. 54115
is DENIED.
SO ORDERED.
G.R. No. 164549 September 18, 2009
PHILIPPINE NATIONAL BANK, Petitioner,
vs.
SPOUSES AGUSTIN and PILAR ROCAMORA, Respondents.
DECISION
BRION, J.:
We resolve in this petition for review on certiorari1 the
legal propriety of the deficiency judgment that the
petitioner Philippine National Bank (PNB) seeks against
the respondents – the spouses Agustin and Pilar
Rocamora (spouses Rocamora).
THE FACTUAL ANTECEDENTS
On September 25, 1981, the spouses Rocamora obtained
a loan from PNB in the aggregate amount of
₱100,000.00 under the Cottage Industry Guarantee and
Loan Fund (CIGLF). The loan was payable in five years,
under the following terms: ₱35,000 payable semi-
annually and ₱65,000 payable annually. In addition to the
principal amount, the spouses Rocamora agreed to pay
interest at the rate of 12% per annum, plus a penalty fee
of 5% per annum in case of delayed payments. The
spouses Rocamora signed two promissory
2
notes evidencing the loan.
To secure their loan obligations, the spouses Rocamora
executed two mortgages: a real estate mortgage3 over a
property covered by Transfer Certificate of Title No. 7160
in the amount of ₱10,000, and a chattel mortgage4 over
various machineries in the amount of ₱25,000. Payment
of the remaining ₱65,000 was under the CIGLF guarantee,
with the spouses Rocamora paying the required
guarantee fee.
Both the promissory note and the real estate mortgage
deed contained an escalation clause that allowed PNB to
increase the 12% interest rate at anytime without notice,
within the limits allowed by law. The pertinent portion of
the promissory note stated:
For value received, we, jointly and severally, promise to
pay to the ORDER of the PHILIPPINE NATIONAL BANK, at
its office in Pto. Princesa City, Philippines, the sum of xxx
together with interest thereon at the rate of 12% per
annum until paid, which interest rate the Bank may at any
time, without notice, raise within the limits allowed by
law, and I/we also agree to pay jointly and severally, 5%
per annum penalty charge, by way of liquidated damages,
should this note be unpaid or is not renewed on due date.
[Emphasis supplied.]
While paragraph (k) of the real estate mortgage deed
provided:
(k) INCREASE OF INTEREST RATE
The MORTGAGEE reserves the right to increase the
interest rate charged on the obligation secured by this
mortgage including any amount which it may have
advanced 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 the
accommodation/s secured by the mortgage shall be
correspondingly decreased in the event that the
applicable maximum interest rate 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 that
maximum interest rate. [Emphasis supplied.]
The spouses Rocamora only paid a total of
₱32,383.655 on the loan. Hence, the PNB commenced
foreclosure proceedings in August and October 1990. The
foreclosure of the mortgaged properties yielded
₱75,500.00 as total proceeds.
After the foreclosure, PNB found that the recovered
proceeds and the amounts the spouses Rocamora
previously paid were not sufficient to satisfy the loan
obligations. PNB thus filed, on January 18, 1994,
a complaint for deficiency judgment6 before the Regional
Trial Court (RTC) of Puerto Princesa City, Branch 48. The
PNB alleged that as of January 7, 1994, the outstanding
balance of the spouses Rocamora’s loan (including
interests and penalties) was ₱206,297.47, broken down as
follows:
Principal………………………………………............. P 79,484.65
Total interest due up to 01-07-
94…………………….. 51,229.35
Total penalty due up to 01-07- 75,583.47
94……………………..
P 206,297.477
TOTAL AMOUNT DUE AND PAYABLE
The PNB claimed that the outstanding principal balance
as of foreclosure date (September 19, 1990) was
₱79,484.65, plus interest and penalties, for a total due
and demandable obligation of ₱250,812.10. Allegedly,
after deducting the ₱75,500 proceeds of the foreclosure
sale, the spouses Rocamora still owed the bank
₱206,297.47.
The spouses Rocamora refused to pay the amount
claimed as deficiency. They alleged that the PNB
"practically created" the deficiency by (a) increasing the
interest rates from 12% to 42% per annum, and (b) failing
to immediately foreclose the mortgage pursuant to
Presidential Decree No. 385 (PD 385 or the Mandatory
Foreclosure Law) to prevent the interest and penalty
charges from accruing.
The RTC dismissed PNB’s complaint in its decision dated
November 10, 1999.8 The trial court invalidated the
escalation clause in the promissory note and the resulting
increased interest rates. The court also rejected PNB’s
reason for the delay in commencing foreclosure
proceedings, ruling that the delay was contrary to the
immediate and mandatory foreclosure that PD 385
required. The finding that the bank’s actions were
contrary to law, justice, and morals justified the award of
actual, moral, and exemplary damages to the spouses
Rocamora. Attorney’s fees and costs of suit were also
ordered paid.9
Except for modifications in the awarded damages, the
Court of Appeals (CA) decision of March 23, 2004
affirmed the RTC ruling.10 The CA held that the PNB
effectively negated the principle of mutuality of contracts
when it increased the interest rates without the spouses
Rocamora’s conformity. The CA also found the long delay
in the foreclosure of the mortgage, apparently a
management lapse, prejudicial to the spouses
Rocamora’s interests and contrary as well to law and
justice. More importantly, the CA found insufficient
evidence to support the ₱206,297.47 deficiency claim;
the bank’s testimonial and documentary evidence did not
support the deficiency claim that, moreover, was
computed based on bloated interest rates. The CA
maintained these rulings despite the motion for
reconsideration PNB filed;11 hence, PNB’s present
recourse to this Court.
THE PETITION
In insisting that it is entitled to a deficiency judgment of
₱206,297.47, PNB argues that the RTC and the CA erred
in invalidating the escalation clause in the parties’
agreement because it fully complied with the
requirements for a valid escalation clause under this
Court’s following pronouncement in Banco Filipino
Savings and Mortgage Bank v. Navarro:12]
It is now clear that from March 17, 1980 [the effectivity
date of Presidential Decree No. 1684 allowing the
increase in the stipulated rate of interest], 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." [Emphasis supplied.]
The PNB posits that the presence of a "de-escalation
clause" (referring to the second of the above
requirements, which was designed to prevent a resulting
one-sided situation on the part of the lender-bank) in the
real estate mortgage deed rules out any violation of the
principle of mutuality of contracts.
The PNB also contends that it did not unreasonably delay
the institution of foreclosure proceedings by acting three
years after the spouses Rocamora defaulted on their
obligation. Under Article 1142 of the Civil Code, a
mortgage action prescribes in 10 years; the same 10-year
period is provided in Article 1144 (1) for actions based on
written contracts. Thus, the PNB alleges that it had 10
years from 1987 (the time when the spouses Rocamora
allegedly defaulted from paying their loan obligation) to
institute the foreclosure proceedings. Its decision to
foreclose in 1990 – three years after the default – should
not be taken against it, especially since the delay was
prompted by the bank’s sincere desire to assist the
spouses Rocamora.
Additionally, the PNB claims that the decision to foreclose
is entirely the bank’s prerogative. The provisions of PD
385 should not be read as a limitation affecting the right
of banks to foreclose within the 10-year period granted
under the Civil Code. While PD 385 requires government
banks to immediately foreclose mortgages under
specified conditions, the provision does not limit the
period within which the bank can foreclose; to hold
otherwise would be contrary to the stated objectives of
PD 385 to enhance the resources of government financial
institutions and to facilitate the financing of essential
development programs and projects.
On the basis of these arguments, the PNB contests the
damages awarded to the spouses Rocamora, as the PNB
had no malice, nor any furtive design: when it increased
the interest rates pursuant to the escalation clause; when
it decided to foreclose the mortgages only in 1990; and
when it sought to claim the deficiency. PNB claimed all
these to be proper acts made in the exercise of its rights.
Opposing the PNB’s arguments, the spouses Rocamora
allege the following:
a. The PNB failed to sufficiently and satisfactorily prove
the amount of ₱250,812.10, claimed to be the total
obligation due at the time of foreclosure, against which
the proceeds of the foreclosure sale (₱75,500.00) were
deducted and which became the basis of the bank’s
deficiency claim (₱206,297.47);
b. The "ballooning" of the spouses Rocamora’s loan
obligation was the PNB’s own doing when it increased the
interest rates and failed to immediately foreclose the
mortgages;
c. The PNB’s unilateral increase of interest rates violated
the principle of mutuality of contracts;
d. The PNB failed to comply with the immediate and
mandatory foreclosure required under PD 385; and
e. The PNB failed to call on the CIGLF which secured the
payment of ₱65,000.00 of the loan.
THE COURT’S RULING
We find no basis to reverse the CA’s decision and,
consequently, deny the petition.
Proof of Deficiency Claim Necessary
The foreclosure of chattel and real estate mortgages is
governed by Act Nos. 1508 and 3135, respectively.
Although both laws do not contain a provision expressly
or impliedly authorizing the mortgagee to recover the
deficiency resulting after the foreclosure proceeds are
deducted from the principal obligation, the Court has
construed the laws’ silence as a grant to the mortgagee
of the right to maintain an action for the deficiency; the
mortgages are given merely as security, not as settlement
or satisfaction of the indebtedness.13
As in any claim for payment of money, a mortgagee must
be able to prove the basis for the deficiency judgment it
seeks. The right of the mortgagee to pursue the debtor
arises only when the proceeds of the foreclosure sale are
ascertained to be insufficient to cover the obligation and
the other costs at the time of the sale.14 Thus, the amount
of the obligation prior to foreclosure and the proceeds of
the foreclosure are material in a claim for deficiency.
In this case, both the RTC and the CA found that PNB
failed to prove the claimed deficiency; its own testimonial
and documentary evidence in fact contradicted one
another. The PNB alleged that the spouses Rocamora’s
obligation at the time of foreclosure (September 19,
1990) amounted to ₱250,812.10, yet its own
documentary evidence15showed that, as of that date, the
total obligation was only ₱206,664.34; the PNB’s own
witness, Mr. Reynaldo Caso, testified that the amount
due from the spouses Rocamora was only ₱206,664.34.
At any rate, whether the total obligation due at the time
of foreclosure was ₱250,812.10 as PNB insisted or
₱206,664.34 as its own record disclosed, our own
computation of the amounts involved does not add up to
the ₱206,297.47 PNB claimed as deficiency.16 We find it
significant that PNB has been consistently unable to
provide a detailed and credible accounting of the claimed
deficiency. What appears clear is that after adding up the
spouses Rocamora’s partial payments and the proceeds
of the foreclosure, the PNB has already received a total of
₱107,883.68 as payment for the spouses Rocamora’s
₱100,000.00 loan; the claimed ₱206,297.47 deficiency
consisted mainly of interests and penalty charges (or
about 61.5% of the amount claimed). The spouses
Rocamora posit that their loan would not have bloated to
more than double the original amount if PNB had not
increased the interest rates and had it immediately
foreclosed the mortgages.
Escalation clauses do not authorize the unilateral increase
of interest rates
Escalation clauses are valid and do not contravene public
policy.17 These clauses are common in credit agreements
as means of maintaining fiscal stability and retaining the
value of money on long-term contracts. To avoid any
resulting one-sided situation that escalation clauses may
bring, we required in Banco Filipino18] the inclusion in the
parties’ agreement of a de-escalation clause that would
authorize a reduction in the interest rates corresponding
to downward changes made by law or by the Monetary
Board.
The validity of escalation clauses notwithstanding, we
cautioned that these clauses do not give creditors the
unbridled right to adjust interest rates unilaterally.19 As
we said in the same Banco Filipino case, any increase in
the rate of interest made pursuant to an escalation clause
must be the result of an agreement between the
parties.20 The minds of all the parties must meet on the
proposed modification as this modification affects an
important aspect of the agreement. There can be no
contract in the true sense in the absence of the element
of an agreement, i.e., the parties’ mutual consent.
Thus, any change must be mutually agreed upon,
otherwise, the change carries no binding effect.21 A
stipulation on the validity or compliance with the contract
that is left solely to the will of one of the parties is void;
the stipulation goes against the principle of mutuality of
contract under Article 1308 of the Civil Code.22 As
correctly found by the appellate court, even with a de-
escalation clause, no matter how elaborately worded, an
unconsented increase in interest rates is ineffective if it
transgresses the principle of mutuality of contracts.
Precisely for this reason, we struck down in several cases
– many of them involving PNB – the increase of interest
rates unilaterally imposed by creditors. In the 1991 case
of PNB v. CA and Ambrosio Padilla,23 we declared:
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. Hence, even assuming that the ₱1.8 million loan
agreement between the PNB and 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." Such a contract is a veritable trap for
the weaker party whom the courts of justice must protect
against abuse and imposition.
We repeated this rule in the 1994 case of PNB v. CA and
Jayme-Fernandez24 and the 1996 case of PNB v. CA and
Spouses Basco. 25 Taking no heed of these rulings, the
escalation clause PNB used in the present case to justify
the increased interest rates is no different from the
escalation clause assailed in the 1996 PNB case;26 in both,
the interest rates were increased from the agreed 12%
per annum rate to 42%. We held:
PNB successively increased the stipulated interest so that
what was originally 12% per annum became, after only
two years, 42%. In declaring the increases invalid, we
held:
We cannot countenance petitioner bank's posturing that
the escalation clause at bench gives it unbridled right
to unilaterally upwardly adjust the interest on private
respondents' loan. That would completely take away from
private respondents the right to assent to an important
modification in their agreement, and would negate the
element of mutuality in contracts.
xxxx
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.27 [Emphasis supplied.]
On the strength of this ruling, PNB’s argument – that the
spouses Rocamora’s failure to contest the increased
interest rates that were purportedly reflected in the
statements of account and the demand letters sent by the
bank amounted to their implied acceptance of the
increase – should likewise fail.
Evidently, PNB’s failure to secure the spouses Rocamora’s
consent to the increased interest rates prompted the
lower courts to declare excessive and illegal the interest
rates imposed. To go around this lower court finding, PNB
alleges that the ₱206,297.47 deficiency claim was
computed using only the original 12% per annum interest
rate. We find this unlikely. Our examination of PNB’s own
ledgers, included in the records of the case, clearly
indicates that PNB imposed interest rates higher than the
agreed 12% per annum rate.28 This confirmatory finding,
albeit based solely on ledgers found in the records,
reinforces the application in this case of the rule that
findings of the RTC, when affirmed by the CA, are binding
upon this Court.1avvphi1
PD 385 mandates immediate foreclosure of collaterals and
securities when the arrearages amount to at least 20% of
the total outstanding obligation
Another reason that militates against the deficiency claim
is PNB’s own admitted delay in instituting the foreclosure
proceedings.29
Section 1 of PD 385 states:
Section 1. It shall be mandatory for government financial
institutions, after the lapse of sixty (60) days from the
issuance of this Decree, to foreclose the collaterals and/or
securities for any loan, credit, accommodation, and/or
guarantees granted by them whenever the arrearages on
such account, including accrued interest and other
charges, amount to at least twenty percent (20%) of the
total outstanding obligations, including interest and other
charges, as appearing in the books of account and/or
related records of the financial institution concerned. This
shall be without prejudice to the exercise by the
government financial institutions of such rights and/or
remedies available to them under their respective fees and litigation expense.34 These awards are
contracts with their debtors, including the right to accordingly deleted.
foreclose on loans, credits, accommodations and/or
guarantees on which the arrearages are less than twenty WHEREFORE, we DENY the petitioner’s petition for
percent (20%). [Emphasis supplied.] review on certiorari, and MODIFY the March 23, 2004
decision of the Court of Appeals in CA-G.R. CV No. 66088
Under PD 385, government financial institutions – which by DELETING the moral and exemplary damages,
was PNB’s status prior to its full privatization in 1996 – attorney’s fees, and litigation costs awarded to the
are mandated to immediately foreclose the respondents. All other aspects of the assailed decision
securities given for any loan when the arrearages amount are AFFIRMED. Costs against the petitioner.
to at least 20% of the total outstanding obligation.30 SO ORDERED.
As stated in the narrated facts, PNB commenced
foreclosure proceedings in 1990 or three years after the
spouses defaulted on their obligation in 1987. On this
factual premise, the PNB now insists as a legal argument
that its right to foreclose should not be affected by the
mandatory tenor of PD 385, since it exercised its right still
within the 10-year prescription period allowed under
Articles 1142 and 1144 (1) of the Civil Code.

PNB’s argument completely misses the point. The issue

before us is the effect of the delay in commencing
foreclosure proceedings on PNB’s right to recover the
deficiency, not on its right to foreclose. The delay in
commencing foreclosure proceedings bears a significant
function in the deficiency amount being claimed, as the
amount undoubtedly includes interest and penalty
charges which accrued during the period covered by the
delay. The depreciation of the mortgaged properties
during the period of delay must also be factored in, as this
affects the proceeds that the mortgagee can recover in
the foreclosure sale, which in turn affects its deficiency
claim. There was also, in this case, the four-year gap
between the foreclosure proceedings and the filing of the
complaint for deficiency judgment – during which time
interest, whether at the 12% per annum rate or higher,
and penalty charges also accrued. For the Court to grant
the PNB’s deficiency claim would be to award it for its
delay and its undisputed disregard of PD 385.

The Award for Damages

Moral damages are not recoverable simply because a
contract has been breached. They are recoverable only if
the defendant acted fraudulently or in bad faith or in
wanton disregard of his contractual obligations.31 The
breach must be wanton, reckless, malicious or in bad
faith, and oppressive or abusive. Likewise, a breach of
contract may give rise to exemplary damages only if the
guilty party acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner.32

We are not sufficiently convinced that PNB acted

fraudulently, in bad faith, or in wanton disregard of its
contractual obligations, simply because it increased the
interest rates and delayed the foreclosure of the
mortgages. Bad faith cannot be imputed simply because
the defendant acted with bad judgment or with attendant
negligence. Bad faith is more than these; it pertains to a
dishonest purpose, to some moral obliquity, or to the
conscious doing of a wrong, a breach of a known duty
attributable to a motive, interest or ill will that partakes
of the nature of fraud.33 Proof of actions of this character
is undisputably lacking in this case. Consequently, we do
not find the spouses Rocamora entitled to an award of
moral and exemplary damages. Under these
circumstances, neither should they recover attorney’s