G.R. No. L-48349 December 29, 1986 FRANCISCO vs. PETROPHIL CORPORATION, defendant-appellee. Paterno R.

Canlas Law Offices for plaintiff-appellant. HERRERA, plaintiff-appellant,

CRUZ, J.: This is an appeal by the plaintiff-appellant from a decision rendered by the then Court of First Instance of 1 Rizal on a pure question of law. The judgment appealed from was rendered on the pleadings, the parties having agreed during the pretrial conference on the factual antecedents. The facts are as follows: On December 5, 1969, the plaintiff-appellant and ESSO Standard Eastern. Inc., (later substituted by Petrophil Corporation) entered into a "Lease Agreement" whereby the former leased to the latter a portion of his property for a period of twenty (20) years from said date, subject inter alia to the following conditions: 3. Rental: The LESSEE shall pay the LESSOR a rental of Pl.40 sqm. per month on 400 sqm. and are to be expropriated later on (sic) or P560 per month and Fl.40 per sqm. per month on 1,693 sqm. or P2,370.21 per month or a total of P2,930.20 per month 2,093 sqm. more or less, payable yearly in advance within the 1st twenty days of each year; provided, a financial aid in the sum of P15,000 to clear the leased premises of existing improvements thereon is paid in this manner; P10,000 upon execution of this lease and P5,000 upon delivery of leased premises free and clear of improvements thereon within 30 days from the date of execution of this agreement. The portion on the side of the leased premises with an area of 365 sqrm. more or less, will be occupied by LESSEE without rental during the lifetime of this lease. PROVIDED FINALLY, that the Lessor is paid 8 years advance rental based on P2,930.70 per month discounted at 12% interest per annum or a total net amount of P130,288.47 before registration of lease. Leased premises shall 2 be delivered within 30 days after 1st partial payment of financial aid. On December 31, 1969, pursuant to the said contract, the defendant-appellee paid to the plaintfffappellant advance rentals for the first eight years, subtracting therefrom the amount of P101,010.73, the amount it computed as constituting the interest or discount for the first eight years, in the total sum P180,288.47. On August 20, 1970, the defendant-appellee, explaining that there had been a mistake in computation, paid to the appellant the additional sum of P2,182.70, thereby reducing the deducted 3 amount to only P98,828.03. On October 14, 1974, the plaintiff-appellant sued the defendant-appellee for the sum of P98,828.03, with 4 interest, claiming this had been illegally deducted from him in violation of the Usury Law. He also prayed for moral damages and attorney's fees. In its answer, the defendant-appellee admitted the factual allegations of the complaint but argued that the amount deducted was not usurious interest but a given to 5 it for paying the rentals in advance for eight years. Judgment on the pleadings was rendered for the 6 defendant. Plaintiff-appellant now prays for a reversal of that judgment, insisting that the lower court erred in the computation of the interest collected out of the rentals paid for the first eight years; that such interest was

excessive and violative of the Usury Law; and that he had neither agreed to nor accepted the defendant7 appellant's computation of the total amount to be deducted for the eight years advance rentals. The thrust of the plaintiff-appellant's position is set forth in paragraph 6 of his complaint, which read: 6. The interest collected by defendant out of the rentals for the first eight years was excessive and beyond that allowable by law, because the total interest on the said amount is only P33,755.90 at P4,219.4880 per yearly rental; and considering that the interest should be computed excluding the first year rental because at the time the amount of P281, 199.20 was paid it was already due under the lease contract hence no interest should be collected from the rental for the first year, the amount of P29,536.42 only as the total interest should have been deducted by defendant from the sum of P281,299.20. The defendant maintains that the correct amount of the discount is P98,828.03 and that the same is not excessive and above that allowed by law. As its title plainly indicates, the contract between the parties is one of lease and not of loan. It is clearly denominated a "LEASE AGREEMENT." Nowhere in the contract is there any showing that the parties intended a loan rather than a lease. The provision for the payment of rentals in advance cannot be construed as a repayment of a loan because there was no grant or forbearance of money as to constitute an indebtedness on the part of the lessor. On the contrary, the defendant-appellee was discharging its obligation in advance by paying the eight years rentals, and it was for this advance payment that it was getting a rebate or discount. The provision for a discount is not unusual in lease contracts. As to its validity, it is settled that the parties may establish such stipulations, clauses, terms and condition as they may want to include; and as long as such agreements are not contrary to law, morals, good customs, public policy or public order, they shall 8 have the force of law between them. There is no usury in this case because no money was given by the defendant-appellee to the plaintiff9 appellant, nor did it allow him to use its money already in his possession. There was neither loan nor forbearance but a mere discount which the plaintiff-appellant allowed the defendant-appellee to deduct from the total payments because they were being made in advance for eight years. The discount was in effect a reduction of the rentals which the lessor had the right to determine, and any reduction thereof, by any amount, would not contravene the Usury Law. The difference between a discount and a loan or forbearance is that the former does not have to be repaid. The loan or forbearance is subject to repayment and is therefore governed by the laws on 10 usury. To constitute usury, "there must be loan or forbearance; the loan must be of money or something circulating as money; it must be repayable absolutely and in all events; and something must be exacted 11 for the use of the money in excess of and in addition to interest allowed by law." It has been held that the elements of usury are (1) a loan, express or implied; (2) an understanding between the parties that the money lent shall or may be returned; that for such loan a greater rate or interest that is allowed by law shall be paid, or agreed to be paid, as the case may be; and (4) a corrupt intent to take more than the legal rate for the use of money loaned. Unless these four things concur in 12 every transaction, it is safe to affirm that no case of usury can be declared. Concerning the computation of the deductible discount, the trial court declared:

As above-quoted, the 'Lease Agreement' expressly provides that the lessee (defendant) shag pay the lessor (plaintiff) eight (8) years in advance rentals based on P2,930.20 per month discounted at 12% interest per annum. Thus, the total rental for one-year period is P35,162.40 (P2,930.20 multiplied by 12 months) and that the interest therefrom is P4,219.4880 (P35,162.40 multiplied by 12%). So, therefore, the total interest for the first eight (8) years should be only P33,755.90 (P4,129.4880 multiplied by eight (8) years and not P98,828.03 as the defendant claimed it to be. The afore-quoted manner of computation made by plaintiff is patently erroneous. It is most seriously misleading. He just computed the annual discount to be at P4,129.4880 and then simply multiplied it by eight (8) years. He did not take into consideration the naked fact that the rentals due on the eight year were paid in advance by seven (7) years, the rentals due on the seventh year were paid in advance by six (6) years, those due on the sixth year by five (5) years, those due on the fifth year by four (4) years, those due on the fourth year by three (3) years, those due on the third year by two (2) years, and those due on the second year by one (1) year, so much so that the total number of years by which the annual rental of P4,129.4880 was paid in advance is twenty-eight (28), resulting in a total amount of P118,145.44 (P4,129.48 multiplied by 28 years) as the discount. However, defendant was most fair to plaintiff. It did not simply multiply the annual rental discount by 28 years. It computed the total discount with the principal diminishing month to month as shown by Annex 'A' of its memorandum. This is why the total discount amount to only P 8,828.03. The allegation of plaintiff that defendant made the computation in a compounded manner is erroneous. Also after making its own computations and after examining closely defendant's Annex 'A' of its memorandum, the court finds that defendant did not charge 12% discount on the rentals due for the first year so much so that the computation conforms with the provision of the Lease Agreement to the effect that the rentals shall be 'payable yearly in advance within the 1st 20 days of each year. ' We do not agree. The above computation appears to be too much technical mumbo-jumbo and could not have been the intention of the parties to the transaction. Had it been so, then it should have been clearly stipulated in the contract. Contracts should be interpreted according to their literal meaning and should 13 not be interpreted beyond their obvious intendment. The plaintfff-appellant simply understood that for every year of advance payment there would be a deduction of 12% and this amount would be the same for each of the eight years. There is no showing that the intricate computation applied by the trial court was explained to him by the defendant-appellee or that he knowingly accepted it. The lower court, following the defendant-appellee's formula, declared that the plaintiff-appellant had actually agreed to a 12% reduction for advance rentals for all of twenty eight years. That is absurd. It is not normal for a person to agree to a reduction corresponding to twenty eight years advance rentals when all he is receiving in advance rentals is for only eight years. The deduction shall be for only eight years because that was plainly what the parties intended at the time they signed the lease agreement. "Simplistic" it may be, as the Solicitor General describes it, but that is how the lessor understood the arrangement. In fact, the Court will reject his subsequent modification that the interest should be limited to only seven years because the first year rental was not being paid in advance. The agreement was for auniform deduction for the advance rentals for each of the eight years, and neither of the parties can deviate from it now. On the annual rental of P35,168.40, the deducted 12% discount was P4,220.21; and for eight years, the total rental was P281,347.20 from which was deducted the total discount of P33,761.68, leaving a difference of P247,585.52. Subtracting from this amount, the sum of P182,471.17 already paid will leave a balance of P65,114.35 still due the plaintiff-appellant.

The above computation is based on the more reasonable interpretation of the contract as a whole rather on the single stipulation invoked by the respondent for the flat reduction of P130,288.47. WHEREFORE, the decision of the trial court is hereby modified, and the defendant-appellee Petrophil Corporation is ordered to pay plaintiff-appellant the amount of Sixty Five Thousand One Hundred Fourteen pesos and Thirty-Five Centavos (P65,114.35), with interest at the legal rate until fully paid, plus Ten Thousand Pesos (P10,000.00) as attorney's fees. Costs against the defendant-appellee. SO ORDERED.

G.R. No. L-1927

May 31, 1949 ROO, petitioner,

CRISTOBAL vs. JOSE L. GOMEZ, ET AL., respondents. Alfonso Farcon Capistrano & Azores for respondents. BENGZON, J.: for

petitioner.

This petition to review a decision of the Court of Appeals was admitted mainly because it involves one phase of the vital contemporary question: the repayment of loans given in Japanese fiat currency during the last war of the Pacific. On October 5, 1944, Cristobal Roo received as a loan four thousand pesos in Japanese fiat money from Jose L. Gomez. He informed the later that he would use the money to purchase a jitney; and he agreed to pay that debt one year after date in the currency then prevailing. He signed a promissory note of the following tenor: For value received, I promise to pay one year after date the sum of four thousand pesos (4,000) to Jose L. Gomez. It is agreed that this will not earn any interest and the payment It is agreed that this will not earn any interest and the payment prevailing by the end of the stipulated period of one year. In consideration of this generous loan, I renounce any right that may come to me by reason of any postwar arrangement, of privilege that may come to me by legislation wherein this sum may be devalued. I renounce flatly and absolutely any condition, term right or privilege which in any way will prejudice the right engendered by this agreement wherein Atty. Jose L. Gomez will receive by right his money in the amount of P4,000. I affirm the legal tender, currency or any medium of exchange, or money in this sum of P4,000 will be paid by me to Jose L. Gomez one year after this date, October 5, 1944. On October 15, 1945, i.e., after the liberation, Roo was sued for payment in the Laguna Court of First Instance. His main defense was his liability should not exceed the equivalent of 4,000 pesos "mickey mouse" money and could not be 4,000 pesos Philippine currency, because the contract would be void as contrary to law, public order and good morals. After the corresponding hearing, the Honorable Felix Bautista Angelo, Judge, ordered the defendant Roo to pay four thousand pesos in Philippine currency with legal interest from the presentation of the complaint plus costs.

On appeal the Court of Appeals in a decision written by Mr. Justice Jugo, affirmed the judgment with costs. It declared being a mechanic who knew English was not deceived into signing the promissory note, and that the contents of the same had not been misrepresented to him. It pronounced the contract valid and enforceable according to its terms and conditions. One basic principle of the law on contracts of the Civil Code is that "the contracting parties may establish any pacts, clauses and conditions they may deem advisable, provided they are not contrary to law, morals or public order." (Article 1255.) Another principle is that "obligations arising from contracts shall have the force of law between the contracting parties and must be performed in accordance with their stipulations" (Article 1091). Invoking the above proviso, Roo asserts this contract is contrary to the Usury law, because on the basis of calculations by Government experts he only received the equivalent of one hundred Philippine pesos and now he is required to disgorge four thousand pesos or interest greatly in excess of the lawful rates. But he is not paying interest. Precisely the contract says that the money received "will not earn any interest." Furthermore, he received four thousand pesos; and he is required to pay four thousand pesos exactly. The increased intrinsic value and purchasing power of the current money is consequence of an event (change of currency) which at the time of the contract neither party knew would certainly happen within the period of one year. They both elected to subject their rights and obligations to that contingency. If within one year another kind of currency became legal tender, Gomez would probably get more for his money. If the same Japanese currency continued, he would get less, the value of Japanese money being then on the downgrade. Our legislation has a word for these contracts: aleatory. The Civil Code recognizes their validity (see art. 1790 and Manresa's comment thereon) on a par with insurance policies and life annuities. The eventual gain of Gomez in this transaction is not interest within the meaning of Usury Laws. Interest is some additional money to be paid in any event, which is not the case herein, because Gomez might have gotten less if the Japanese occupation had extended to the end of 1945 or if the liberation forces had chosen to permit the circulation of the Japanese notes. Moreover, Roo argues, the deal was immoral because taking advantage of his superior knowledge of war developments Gomez imposed on him this onerous obligation. In the first place, the Court of Appeals found that he voluntary agreed to sign and signed the document without having been misled as to its contents and "in so far as knowledge of war events was concerned" both parties were on "equal footing". In the second place although on October 5, 1944 it was possible to surmise the impending American invasion, the date of victory or liberation was anybody's guess. In the third place there was the possibility that upon-re-occupation the Philippine Government would not invalidate the Japanese currency, which after all had been forced upon the people in exchange for valuable goods and property. The odds were about even when Roo and Gomez played their bargaining game. There was no overreaching, nor unfair advantage. Again Roo alleges it is immoral and against public order for a man to obtain four thousand pesos in return for an investment of forty pesos (his estimate of the value of the Japanese money he borrowed). According to his line of reasoning it would be immoral for the homeowner to recover ten thousand pesos (P10,000, when his house is burned, because he invested only about one hundred pesos for the insurance policy. And when the holder of a sweepstakes ticket who paid only four pesos luckily obtains the first prize of one hundred thousand pesos or over, the whole business is immoral or against public order. In this connection we should explain that this decision does not cover situations where borrowers of Japanese fiat currency promised to repay "the same amount" or promised to return the same number of pesos "in Philippines currency" or "in the currency prevailing after the war." There may be room for

argument when those litigations come up for adjudication. All we say here and now is that the contract in question is legal and obligatory. A minor point concerns the personality of the plaintiff, the wife of Jose L. Gomez. We opine with the Court of Appeals that the matter involve a defect in procedure which does not amount to prejudicial error. Wherefore, the appealed judgment will be affirmed with costs. So ordered. Moran, C.J., Ozaeta, Tuason, Montemayor and Reyes, JJ., concur.

.R. No. L-35697-99 April 15, 1988 ELADlA DE LIMA, POTENCIANO REQUIJO, NEMESIO FLORES, REYNALDO REQUIJO, DOMINADOR REQUIJO and MARIO REQUIJO, petitioners, vs. LAGUNA TAYABAS CO., CLARO SAMONTE, SANTIAGO SYJUCO, INC., (SEVEN-UP BOTTLING CO., OF THE PHILIPPINES) and PORVENIR ABAJAR BARRETO, respondents. Leon O. Ty, Gesmundo and Gesmundo and Renato B. Vasquez for petitioners. Domingo E. de Lara and Associates for respondents.

GANCAYCO, J.: Before Us is a petition for review on certiorari of the decision De Lima vs. Laguna Tayabas Co. of the 1 Court of Appeals affirming the decision of the court a quo with modification to include an award of legal interest on the amounts adjudged in favor of the petitioners from the date of the decision of the Court of Appeals to the time of actual payment. This present action arose from a collision between a passenger bus of the Laguna Tayabas Bus Co. (LTB) and a delivery truck of the Seven-up Bottling Co. of the Philippines which took place on June 3, 1958 resulting in the death of Petra de la Cruz and serious physical injuries of Eladia de Lima and Nemesio Flores, all passengers of the LTB bus. Three civil suits were filed against herein respondents which were consolidated for trial before the Court of First Instance of Laguna (San Pablo City). On December 27, 1963, the court a quo rendered its decision, the dispositive part of which reads as follows: WHEREFORE, in view of all the foregoing considerations, judgment is hereby rendered against the defendants LTB Co. Inc. and Claro Samonte, who are hereby ordered to pay jointly and severally, the resolve plaintiffs. In Civil Case No. SP-239; Plaintiff Eladia de Lima:
1

For loss of money and

P960.00

medical expenses. 2. For loss of earnings from June 3, 1958 to November 3, 1958 3. For expenses of litigation and attorney's fees TOTAL . .1,000.00 P 2,884.00 . 924.00

In Civil Case No. SP-240; Plaintiffs Requijos:

1

For the death of Petra de la Cruz including funeral expenses

P 3,883.82

For the money lost during the trip Moral damages for mental anguish (of Mercado vs. Lira, et al.)

800.00

3,000.00

For

the

loss of earning capacity for 5 years 5 For expenses of litigation and attorney's fees TOTAL 2,500.00 P18,183.82 8,000.00

In Civil Case No. SP-268: To Plaintiff Nemesio Flores:

1

For loss of earning capacity for 5 year from June 3, 1958 at the rate of P228.00 a month P 3,680.00

2.

For expenses of litigation and attorney's fees. TOTAL 1,000.00 P14,680.00

Plaintiffs in Civil Cases Nos. SP-239 and SP-240 filed a motion for reconsideration of the decision seeking an award of legal interest on the amounts adjudged in their favor from the date of the said decision but their motion was not acted upon by the court a quo. All of the plaintiffs voluntarily desisted from appealing the decision by reason of financial necessity and in the hope that the defendants LTB Co. and its driver Claro Samonte will be persuaded to make immediate

payment to them as adjudged by the court a quo. Only the said defendants appealed the decision to the Court of Appeals. In the motion of petitioners dated December 29, 1971 filed with the Court of Appeals, they sought for an immediate decision of the case with a prayer for the granting of legal interest from the date of the decision of the court a quoand for the increase to P12,000.00 of the civil indemnity of P3,000.00 awarded for the death of Petra de la Cruz. On January 31, 1972, the now disputed decision of the Court of Appeals was promulgated.
4 3 2

Petitioners moved for a reconsideration of this decision seeking its modification so that the legal interest awarded by the Appellate, Court will start to run from the date of the decision of the trial court on December 27, 1963 instead of January 31, 1972, the date of the decision of the Court of Appeals. Petitioner potenciano Requijo as heir of the deceased Petra de la Cruz further sought an increase in the civil indemnity of P3,000.00 to P 12,000.00. The Appellate Court denied the motion for reconsideration holding that since the plaintiffs did not appeal from the failure of the court a quo to award interest on the damages and that the court on its own discretion awarded such interest in view of Art. 2210 of the Civil Code, the effectivity of the interest should 5 not be rolled back to the time the decision of the court a quo was rendered. Hence this petition. The assignment of errors raised the following issues, to wit: 1) Whether or not the Court of Appeal; erred in granting legal interest on damages to start only from the date of its decision instead of from the date of the trial court's decision; 2) Whether or not the Court of Appeals erred in not increasing the indemnity for the death of Petra de La Cruz (in Civil Case No. SP-240) from P3,000 to P12,000.00. We find merit in the petition. Under the first issue, petitioners contend that the ruling of she Appellate Court departs from the consistent rulings of this court that the award of the legal rate of interest should be computed from the promulgation of the decision of the tonal court. Respondents counter that petitioners having failed to appeal from the lower court's decision they. are now precluded from questioning the ruling of the Court of Appeals. It is true that the rule is well-settled that a party cannot impugn the correctness of a judgment not appealed from by him, and while he may make counter assignment of errors, he can do so only to sustain 6 the judgment on other grounds but not to seek modification or reversal thereof, for in such case he must 7 appeal. A party who does not appeal from the decision may not obtain any affirmative relief from the appellate court other than what he has obtained from the lower court, if any, whose decision is brought up 8 on appeal. However, respondents failed to note that the legal interest was awarded by the Appellate Court in its discretion based on equitable grounds which is duly sanctioned by Art. 2210 of the Civil Code which provides Interest may, in the discretion of the court, be allowed upon damages awarded for breach of contract.

Thus, the Appellate Court pointed out A further examination of the record will also show that the plaintiffs in Civil Cases Nos. SP-239 and SP-240 moved for the reconsideration of the decision appealed from to include the award of legal interest on the amounts adjudicated from the date of the decision, but said motion was not acted upon by the court a quo. Although said plaintiffs failed to appeal on this issue, and did not file their brief to reiterate their claim for interest thereon, the plaintiff in Civil Case No. SP-268, Nemesio Flores, filed his brief and prayed for the imposition of interest from the date of the decision. We are not left without discretion to resolve this issue, considering the provision of Article 2210, New Civil Code, stating that "Interest may, in the petition of the court, be allowed upon damages awarded for breach of contract." There is no doubt that the damages awarded in these civil cases arise from the breach of a contractual obligation on the part of the defendantsappellants. But to grant the imposition of interest on the amounts awarded to and as prayed for by one of the plaintiffs and deny the same to the others considering that the cases arose from one single incident would be, to Our mind, unfair and inequitous. In the light, therefore, not only of the provision of the Civil Code above referred to, but also the facts and circumstances obtaining in these cases. We believe that on equitable grounds legal interest, should be allowed on the amounts adjudged in favor of the plaintiffs from the date of this decision up to the time of actual payment thereof. Also noteworthy is the case of Fores v. Miranda where this Court upheld the granting by the Court of Appeals of attorney's fees even if the respondent, a jeepney passenger injured in a vehicular accident, did not appeal from the decision of the trial court. The Appellate Court found the award to be justified because the respondent asked for damages in his answer and the said court considered the attorney's fees as included in the concept of damages which can be awarded whenever the court deems it just and equitable (Art. 2208, Civil Code of the Philippines). At any rate, this Court is inclined to adopt a liberal stance in this case as We have done in previous decisions where We have held that litigations should, as much as possible be decided on their merits and 10 not on technicality. We take note of the fact that petitioners are litigating as paupers. Although they may not have appealed, they had filed their motion for reconsideration with the court a quo which unfortunately did not act on it. By reason of their indigence, they failed to appeal but petitioners De Lima and Requijo had filed their manifestation making reference to the law and jurisprudence upon which they base their prayer for relief while petitioner Flores filed his brief. Pleadings as well as remedial laws should be construed liberally in order that the litigants may have ample opportunity to pursue their respective claims and that a possible denial of substantial justice due to 11 legal technicalities may be avoided. Moreover, under the circumstances of this case where the heirs of the victim in the traffic accident chose not to appeal in the hope that the transportation company will pay the damages awarded by the lower court but unfortunately said company still appealed to the Court of Appeals, which step was obviously dilatory and oppressive of the rights of the said claimants: that the case had been pending in court for about 30 years from the date of the accident in 1958 so that as an exception to the general rule aforestated, the said heirs who did not appeal the judgment, should be afforded equitable relief by the 12 courts as it must be vigilant for their protection. The claim for legal interest and increase in the indemnity should be entertained in spite of the failure of the claimants to appeal the judgment. We take exception to the ruling of the Appellate Court as to the date when the legal interest should commence to ran. In view of the consistent rulings of this Court, We hold that the legal interest of six 13 percent (6) on the amounts adjudged in favor of petitioners should start from the time of the rendition of
9

the trial court's decision on December 27, 1963 instead of January 31, 1972, the promulgation of the 14 decision of the Court of Appeals. As to the second issue, civil indemnity for the death of Petra de la Cruz was properly awarded by virtue of Art. 1764 in relation to Art. 2206 of the Civil Code of the Philippines which allows a minimum indemnity of P3,000.00 for the death of a passenger caused by the breach of contract by a common carrier. In accordance with prevailing jurisprudence the indemnity of P3,000.00 should be increased to P30,000.00 and not P12,000.00 as prayed for by petitioner. If the transportation company had only accepted the judgment of the trial court and paid its just awards instead of appealing the same to the Court of Appeals, no further delay would have been occasioned on the simple issue of interest and indemnity. To mitigate the impact of such a great delay in this case the Court finds ample justification in the aforesaid award for interest and indemnity. We hope this relief is not too late. WHEREFORE, the petition is hereby GRANTED, the subject decision is modified in that the legal interest on the damages awarded to petitioners commences from the date of the decision of the court a quo until actual payment while the civil indemnity for the death of Petra de la Cruz is increased to P 30,000.00. This judgment is immediately executory and no motion for extension of time to file motion for reconsideration shall be entertained. SO ORDERED.

G.R. No. L-47851 October 3, 1986 JUAN F. NAKPIL & SONS, and JUAN F. NAKPIL, petitioners, vs. THE COURT OF APPEALS, UNITED CONSTRUCTION COMPANY, INC., JUAN J. CARLOS, and the PHILIPPINE BAR ASSOCIATION, respondents. G.R. No. L-47863 October 3, 1986 THE UNITED CONSTRUCTION vs. COURT OF APPEALS, ET AL., respondents. G.R. No. L-47896 October 3, 1986 PHILIPPINE BAR ASSOCIATION, vs. COURT OF APPEALS, ET AL., respondents. ET AL., petitioners, CO., INC., petitioner,

PARAS, J.: These are petitions for review on certiorari of the November 28, 1977 decision of the Court of Appeals in CA-G.R. No. 51771-R modifying the decision of the Court of First Instance of Manila, Branch V, in Civil Case No. 74958 dated September 21, 1971 as modified by the Order of the lower court dated December 8, 1971. The Court of Appeals in modifying the decision of the lower court included an award of an additional amount of P200,000.00 to the Philippine Bar Association to be

paid jointly and severally by the defendant United Construction Co. and by the third-party defendants Juan F. Nakpil and Sons and Juan F. Nakpil. The dispositive portion of the modified decision of the lower court reads: WHEREFORE, judgment is hereby rendered: (a) Ordering defendant United Construction Co., Inc. and third-party defendants (except Roman Ozaeta) to pay the plaintiff, jointly and severally, the sum of P989,335.68 with interest at the legal rate from November 29, 1968, the date of the filing of the complaint until full payment; (b) Dismissing the complaint with respect to defendant Juan J. Carlos; (c) Dismissing the third-party complaint; (d) Dismissing the defendant's and third-party defendants' counterclaims for lack of merit; (e) Ordering defendant United Construction Co., Inc. and third-party defendants (except Roman Ozaeta) to pay the costs in equal shares. SO ORDERED. (Record on Appeal p. 521; Rollo, L- 47851, p. 169). The dispositive portion of the decision of the Court of Appeals reads: WHEREFORE, the judgment appealed from is modified to include an award of P200,000.00 in favor of plaintiff-appellant Philippine Bar Association, with interest at the legal rate from November 29, 1968 until full payment to be paid jointly and severally by defendant United Construction Co., Inc. and third party defendants (except Roman Ozaeta). In all other respects, the judgment dated September 21, 1971 as modified in the December 8, 1971 Order of the lower court is hereby affirmed with COSTS to be paid by the defendant and third party defendant (except Roman Ozaeta) in equal shares. SO ORDERED. Petitioners Juan F. Nakpil & Sons in L-47851 and United Construction Co., Inc. and Juan J. Carlos in L-47863 seek the reversal of the decision of the Court of Appeals, among other things, for exoneration from liability while petitioner Philippine Bar Association in L-47896 seeks the modification of aforesaid decision to obtain an award of P1,830,000.00 for the loss of the PBA building plus four (4) times such amount as damages resulting in increased cost of the building, P100,000.00 as exemplary damages; and P100,000.00 as attorney's fees. These petitions arising from the same case filed in the Court of First Instance of Manila were consolidated by this Court in the resolution of May 10, 1978 requiring the respective respondents to comment. (Rollo, L-47851, p. 172). The facts as found by the lower court (Decision, C.C. No. 74958; Record on Appeal, pp. 269-348; pp. 520-521; Rollo, L-47851, p. 169) and affirmed by the Court of Appeals are as follows: The plaintiff, Philippine Bar Association, a civic-non-profit association, incorporated under the Corporation Law, decided to construct an office building on its 840 square meters lot located at

the comer of Aduana and Arzobispo Streets, Intramuros, Manila. The construction was undertaken by the United Construction, Inc. on an "administration" basis, on the suggestion of Juan J. Carlos, the president and general manager of said corporation. The proposal was approved by plaintiff's board of directors and signed by its president Roman Ozaeta, a third-party defendant in this case. The plans and specifications for the building were prepared by the other third-party defendants Juan F. Nakpil & Sons. The building was completed in June, 1966. In the early morning of August 2, 1968 an unusually strong earthquake hit Manila and its environs and the building in question sustained major damage. The front columns of the building buckled, causing the building to tilt forward dangerously. The tenants vacated the building in view of its precarious condition. As a temporary remedial measure, the building was shored up by United Construction, Inc. at the cost of P13,661.28. On November 29, 1968, the plaintiff commenced this action for the recovery of damages arising from the partial collapse of the building against United Construction, Inc. and its President and General Manager Juan J. Carlos as defendants. Plaintiff alleges that the collapse of the building was accused by defects in the construction, the failure of the contractors to follow plans and specifications and violations by the defendants of the terms of the contract. Defendants in turn filed a third-party complaint against the architects who prepared the plans and specifications, alleging in essence that the collapse of the building was due to the defects in the said plans and specifications. Roman Ozaeta, the then president of the plaintiff Bar Association was included as a third-party defendant for damages for having included Juan J. Carlos, President of the United Construction Co., Inc. as party defendant. On March 3, 1969, the plaintiff and third-party defendants Juan F. Nakpil & Sons and Juan F. Nakpil presented a written stipulation which reads: 1. That in relation to defendants' answer with counterclaims and third- party complaints and the third-party defendants Nakpil & Sons' answer thereto, the plaintiff need not amend its complaint by including the said Juan F. Nakpil & Sons and Juan F. Nakpil personally as parties defendant. 2. That in the event (unexpected by the undersigned) that the Court should find after the trial that the above-named defendants Juan J. Carlos and United Construction Co., Inc. are free from any blame and liability for the collapse of the PBA Building, and should further find that the collapse of said building was due to defects and/or inadequacy of the plans, designs, and specifications p by the thirdparty defendants, or in the event that the Court may find Juan F. Nakpil and Sons and/or Juan F. Nakpil contributorily negligent or in any way jointly and solidarily liable with the defendants, judgment may be rendered in whole or in part. as the case may be, against Juan F. Nakpil & Sons and/or Juan F. Nakpil in favor of the plaintiff to all intents and purposes as if plaintiff's complaint has been duly amended by including the said Juan F. Nakpil & Sons and Juan F. Nakpil as parties defendant and by alleging causes of action against them including, among others, the defects or inadequacy of the plans, designs, and specifications prepared by them and/or failure in the performance of their contract with plaintiff. 3. Both parties hereby jointly petition this Honorable Court to approve this stipulation. (Record on Appeal, pp. 274-275; Rollo, L-47851,p.169). Upon the issues being joined, a pre-trial was conducted on March 7, 1969, during which among others, the parties agreed to refer the technical issues involved in the case to a Commissioner.

Mr. Andres O. Hizon, who was ultimately appointed by the trial court, assumed his office as Commissioner, charged with the duty to try the following issues: 1. Whether the damage sustained by the PBA building during the August 2, 1968 earthquake had been caused, directly or indirectly, by: (a) The inadequacies or defects in the plans and specifications prepared by thirdparty defendants; (b) The deviations, if any, made by the defendants from said plans and specifications and how said deviations contributed to the damage sustained; (c) The alleged failure of defendants to observe the requisite quality of materials and workmanship in the construction of the building; (d) The alleged failure to exercise the requisite degree of supervision expected of the architect, the contractor and/or the owner of the building; (e) An act of God or a fortuitous event; and (f) Any other cause not herein above specified. 2. If the cause of the damage suffered by the building arose from a combination of the above-enumerated factors, the degree or proportion in which each individual factor contributed to the damage sustained; 3. Whether the building is now a total loss and should be completely demolished or whether it may still be repaired and restored to a tenantable condition. In the latter case, the determination of the cost of such restoration or repair, and the value of any remaining construction, such as the foundation, which may still be utilized or availed of (Record on Appeal, pp. 275-276; Rollo, L-47851, p. 169). Thus, the issues of this case were divided into technical issues and non-technical issues. As aforestated the technical issues were referred to the Commissioner. The non-technical issues were tried by the Court. Meanwhile, plaintiff moved twice for the demolition of the building on the ground that it may topple down in case of a strong earthquake. The motions were opposed by the defendants and the matter was referred to the Commissioner. Finally, on April 30, 1979 the building was authorized to be demolished at the expense of the plaintiff, but not another earthquake of high intensity on April 7, 1970 followed by other strong earthquakes on April 9, and 12, 1970, caused further damage to the property. The actual demolition was undertaken by the buyer of the damaged building. (Record on Appeal, pp. 278-280; Ibid.) After the protracted hearings, the Commissioner eventually submitted his report on September 25, 1970 with the findings that while the damage sustained by the PBA building was caused directly by the August 2, 1968 earthquake whose magnitude was estimated at 7.3 they were also caused by the defects in the plans and specifications prepared by the third-party defendants' architects, deviations from said plans and specifications by the defendant contractors and failure of the latter to observe the requisite workmanship in the construction of the building and of the contractors, architects and even the owners to exercise the requisite degree of supervision in the construction of subject building.

All the parties registered their objections to aforesaid findings which in turn were answered by the Commissioner. The trial court agreed with the findings of the Commissioner except as to the holding that the owner is charged with full nine supervision of the construction. The Court sees no legal or contractual basis for such conclusion. (Record on Appeal, pp. 309-328; Ibid). Thus, on September 21, 1971, the lower court rendered the assailed decision which was modified by the Intermediate Appellate Court on November 28, 1977. All the parties herein appealed from the decision of the Intermediate Appellate Court. Hence, these petitions. On May 11, 1978, the United Architects of the Philippines, the Association of Civil Engineers, and the Philippine Institute of Architects filed with the Court a motion to intervene as amicus curiae. They proposed to present a position paper on the liability of architects when a building collapses and to submit likewise a critical analysis with computations on the divergent views on the design and plans as submitted by the experts procured by the parties. The motion having been granted, the amicus curiae were granted a period of 60 days within which to submit their position. After the parties had all filed their comments, We gave due course to the petitions in Our Resolution of July 21, 1978. The position papers of the amicus curiae (submitted on November 24, 1978) were duly noted. The amicus curiae gave the opinion that the plans and specifications of the Nakpils were not defective. But the Commissioner, when asked by Us to comment, reiterated his conclusion that the defects in the plans and specifications indeed existed. Using the same authorities availed of by the amicus curiae such as the Manila Code (Ord. No. 4131) and the 1966 Asep Code, the Commissioner added that even if it can be proved that the defects in theconstruction alone (and not in the plans and design) caused the damage to the building, still the deficiency in the original design and jack of specific provisions against torsion in the original plans and the overload on the ground floor columns (found by an the experts including the original designer) certainly contributed to the damage which occurred. ( Ibid, p. 174). In their respective briefs petitioners, among others, raised the following assignments of errors: Philippine Bar Association claimed that the measure of damages should not be limited to P1,100,000.00 as estimated cost of repairs or to the period of six (6) months for loss of rentals while United Construction Co., Inc. and the Nakpils claimed that it was an act of God that caused the failure of the building which should exempt them from responsibility and not the defective construction, poor workmanship, deviations from plans and specifications and other imperfections in the case of United Construction Co., Inc. or the deficiencies in the design, plans and specifications prepared by petitioners in the case of the Nakpils. Both UCCI and the Nakpils object to the payment of the additional amount of P200,000.00 imposed by the Court of Appeals. UCCI also claimed that it should be reimbursed the expenses of shoring the building in the amount of P13,661.28 while the Nakpils opposed the payment of damages jointly and solidarity with UCCI. The pivotal issue in this case is whether or not an act of God-an unusually strong earthquakewhich caused the failure of the building, exempts from liability, parties who are otherwise liable because of their negligence.

The applicable law governing the rights and liabilities of the parties herein is Article 1723 of the New Civil Code, which provides: Art. 1723. The engineer or architect who drew up the plans and specifications for a building is liable for damages if within fifteen years from the completion of the structure the same should collapse by reason of a defect in those plans and specifications, or due to the defects in the ground. The contractor is likewise responsible for the damage if the edifice fags within the same period on account of defects in the construction or the use of materials of inferior quality furnished by him, or due to any violation of the terms of the contract. If the engineer or architect supervises the construction, he shall be solidarily liable with the contractor. Acceptance of the building, after completion, does not imply waiver of any of the causes of action by reason of any defect mentioned in the preceding paragraph. The action must be brought within ten years following the collapse of the building. On the other hand, the general rule is that no person shall be responsible for events which could not be foreseen or which though foreseen, were inevitable (Article 1174, New Civil Code). An act of God has been defined as an accident, due directly and exclusively to natural causes without human intervention, which by no amount of foresight, pains or care, reasonably to have been expected, could have been prevented. (1 Corpus Juris 1174). There is no dispute that the earthquake of August 2, 1968 is a fortuitous event or an act of God. To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of an obligation due to an "act of God," the following must concur: (a) the cause of the breach of the obligation must be independent of the will of the debtor; (b) the event must be either unforseeable or unavoidable; (c) the event must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and (d) the debtor must be free from any participation in, or aggravation of the injury to the creditor. (Vasquez v. Court of Appeals, 138 SCRA 553; Estrada v. Consolacion, 71 SCRA 423; Austria v. Court of Appeals, 39 SCRA 527; Republic of the Phil. v. Luzon Stevedoring Corp., 21 SCRA 279; Lasam v. Smith, 45 Phil. 657). Thus, if upon the happening of a fortuitous event or an act of God, there concurs a corresponding fraud, negligence, delay or violation or contravention in any manner of the tenor of the obligation as provided for in Article 1170 of the Civil Code, which results in loss or damage, the obligor cannot escape liability. The principle embodied in the act of God doctrine strictly requires that the act must be one occasioned exclusively by the violence of nature and all human agencies are to be excluded from creating or entering into the cause of the mischief. When the effect, the cause of which is to be considered, is found to be in part the result of the participation of man, whether it be from active intervention or neglect, or failure to act, the whole occurrence is thereby humanized, as it were, and removed from the rules applicable to the acts of God. (1 Corpus Juris, pp. 1174-1175). Thus it has been held that when the negligence of a person concurs with an act of God in producing a loss, such person is not exempt from liability by showing that the immediate cause of the damage was the act of God. To be exempt from liability for loss because of an act of God, he must be free from any previous negligence or misconduct by which that loss or damage may have been occasioned. (Fish & Elective Co. v. Phil. Motors, 55 Phil. 129; Tucker v. Milan, 49 O.G. 4379; Limpangco & Sons v. Yangco Steamship Co., 34 Phil. 594, 604; Lasam v. Smith, 45 Phil. 657).

The negligence of the defendant and the third-party defendants petitioners was established beyond dispute both in the lower court and in the Intermediate Appellate Court. Defendant United Construction Co., Inc. was found to have made substantial deviations from the plans and specifications. and to have failed to observe the requisite workmanship in the construction as well as to exercise the requisite degree of supervision; while the third-party defendants were found to have inadequacies or defects in the plans and specifications prepared by them. As correctly assessed by both courts, the defects in the construction and in the plans and specifications were the proximate causes that rendered the PBA building unable to withstand the earthquake of August 2, 1968. For this reason the defendant and third-party defendants cannot claim exemption from liability. (Decision, Court of Appeals, pp. 30-31). It is well settled that the findings of facts of the Court of Appeals are conclusive on the parties and on this court (cases cited in Tolentino vs. de Jesus, 56 SCRA 67; Cesar vs. Sandiganbayan, January 17, 1985, 134 SCRA 105, 121), unless (1) the conclusion is a finding grounded entirely on speculation, surmise and conjectures; (2) the inference made is manifestly mistaken; (3) there is grave abuse of discretion; (4) the judgment is based on misapprehension of facts; (5) the findings of fact are conflicting , (6) the Court of Appeals went beyond the issues of the case and its findings are contrary to the admissions of both appellant and appellees (Ramos vs. Pepsi-Cola Bottling Co., February 8, 1967, 19 SCRA 289, 291-292; Roque vs. Buan, Oct. 31, 1967, 21 SCRA 648, 651); (7) the findings of facts of the Court of Appeals are contrary to those of the trial court; (8) said findings of facts are conclusions without citation of specific evidence on which they are based; (9) the facts set forth in the petition as well as in the petitioner's main and reply briefs are not disputed by the respondents (Garcia vs. CA, June 30, 1970, 33 SCRA 622; Alsua-Bett vs. Court of Appeals, July 30, 1979, 92 SCRA 322, 366); (10) the finding of fact of the Court of Appeals is premised on the supposed absence of evidence and is contradicted by evidence on record (Salazar vs. Gutierrez, May 29, 1970, 33 SCRA 243, 247; Cited in G.R. No. 66497-98, Sacay v. Sandiganbayan, July 10, 1986). It is evident that the case at bar does not fall under any of the exceptions above-mentioned. On the contrary, the records show that the lower court spared no effort in arriving at the correct appreciation of facts by the referral of technical issues to a Commissioner chosen by the parties whose findings and conclusions remained convincingly unrebutted by the intervenors/amicus curiae who were allowed to intervene in the Supreme Court. In any event, the relevant and logical observations of the trial court as affirmed by the Court of Appeals that "while it is not possible to state with certainty that the building would not have collapsed were those defects not present, the fact remains that several buildings in the same area withstood the earthquake to which the building of the plaintiff was similarly subjected," cannot be ignored. The next issue to be resolved is the amount of damages to be awarded to the PBA for the partial collapse (and eventual complete collapse) of its building. The Court of Appeals affirmed the finding of the trial court based on the report of the Commissioner that the total amount required to repair the PBA building and to restore it to tenantable condition was P900,000.00 inasmuch as it was not initially a total loss. However, while the trial court awarded the PBA said amount as damages, plus unrealized rental income for onehalf year, the Court of Appeals modified the amount by awarding in favor of PBA an additional sum of P200,000.00 representing the damage suffered by the PBA building as a result of another earthquake that occurred on April 7, 1970 (L-47896, Vol. I, p. 92). The PBA in its brief insists that the proper award should be P1,830,000.00 representing the total value of the building (L-47896, PBA's No. 1 Assignment of Error, p. 19), while both the NAKPILS and UNITED question the additional award of P200,000.00 in favor of the PBA (L- 47851, NAKPIL's Brief as Petitioner, p. 6, UNITED's Brief as Petitioner, p. 25). The PBA further urges that the

unrealized rental income awarded to it should not be limited to a period of one-half year but should be computed on a continuing basis at the rate of P178,671.76 a year until the judgment for the principal amount shall have been satisfied L- 47896, PBA's No. 11 Assignment of Errors, p. 19). The collapse of the PBA building as a result of the August 2, 1968 earthquake was only partial and it is undisputed that the building could then still be repaired and restored to its tenantable condition. The PBA, however, in view of its lack of needed funding, was unable, thru no fault of its own, to have the building repaired. UNITED, on the other hand, spent P13,661.28 to shore up the building after the August 2, 1968 earthquake (L-47896, CA Decision, p. 46). Because of the earthquake on April 7, 1970, the trial court after the needed consultations, authorized the total demolition of the building (L-47896, Vol. 1, pp. 53-54). There should be no question that the NAKPILS and UNITED are liable for the damage resulting from the partial and eventual collapse of the PBA building as a result of the earthquakes. We quote with approval the following from the erudite decision penned by Justice Hugo E. Gutierrez (now an Associate Justice of the Supreme Court) while still an Associate Justice of the Court of Appeals: There is no question that an earthquake and other forces of nature such as cyclones, drought, floods, lightning, and perils of the sea are acts of God. It does not necessarily follow, however, that specific losses and suffering resulting from the occurrence of these natural force are also acts of God. We are not convinced on the basis of the evidence on record that from the thousands of structures in Manila, God singled out the blameless PBA building in Intramuros and around six or seven other buildings in various parts of the city for collapse or severe damage and that God alone was responsible for the damages and losses thus suffered. The record is replete with evidence of defects and deficiencies in the designs and plans, defective construction, poor workmanship, deviation from plans and specifications and other imperfections. These deficiencies are attributable to negligent men and not to a perfect God. The act-of-God arguments of the defendants- appellants and third party defendants-appellants presented in their briefs are premised on legal generalizations or speculations and on theological fatalism both of which ignore the plain facts. The lengthy discussion of United on ordinary earthquakes and unusually strong earthquakes and on ordinary fortuitous events and extraordinary fortuitous events leads to its argument that the August 2, 1968 earthquake was of such an overwhelming and destructive character that by its own force and independent of the particular negligence alleged, the injury would have been produced. If we follow this line of speculative reasoning, we will be forced to conclude that under such a situation scores of buildings in the vicinity and in other parts of Manila would have toppled down. Following the same line of reasoning, Nakpil and Sons alleges that the designs were adequate in accordance with preAugust 2, 1968 knowledge and appear inadequate only in the light of engineering information acquired after the earthquake. If this were so, hundreds of ancient buildings which survived the earthquake better than the two-year old PBA building must have been designed and constructed by architects and contractors whose knowledge and foresight were unexplainably auspicious and prophetic. Fortunately, the facts on record allow a more down to earth explanation of the collapse. The failure of the PBA building, as a unique and distinct construction with no reference or comparison to other buildings, to weather the severe earthquake forces was traced to design deficiencies and defective construction,

factors which are neither mysterious nor esoteric. The theological allusion of appellant United that God acts in mysterious ways His wonders to perform impresses us to be inappropriate. The evidence reveals defects and deficiencies in design and construction. There is no mystery about these acts of negligence. The collapse of the PBA building was no wonder performed by God. It was a result of the imperfections in the work of the architects and the people in the construction company. More relevant to our mind is the lesson from the parable of the wise man in the Sermon on the Mount "which built his house upon a rock; and the rain descended and the floods came and the winds blew and beat upon that house; and it fen not; for it was founded upon a rock" and of the "foolish upon the sand. And the rain descended and man which built his house the floods came, and the winds blew, and beat upon that house; and it fell and great was the fall of it. (St. Matthew 7: 24-27)." The requirement that a building should withstand rains, floods, winds, earthquakes, and natural forces is precisely the reason why we have professional experts like architects, and engineers. Designs and constructions vary under varying circumstances and conditions but the requirement to design and build well does not change. The findings of the lower Court on the cause of the collapse are more rational and accurate. Instead of laying the blame solely on the motions and forces generated by the earthquake, it also examined the ability of the PBA building, as designed and constructed, to withstand and successfully weather those forces. The evidence sufficiently supports a conclusion that the negligence and fault of both United and Nakpil and Sons, not a mysterious act of an inscrutable God, were responsible for the damages. The Report of the Commissioner, Plaintiff's Objections to the Report, Third Party Defendants' Objections to the Report, Defendants' Objections to the Report, Commissioner's Answer to the various Objections, Plaintiffs' Reply to the Commissioner's Answer, Defendants' Reply to the Commissioner's Answer, Counter-Reply to Defendants' Reply, and Third-Party Defendants' Reply to the Commissioner's Report not to mention the exhibits and the testimonies show that the main arguments raised on appeal were already raised during the trial and fully considered by the lower Court. A reiteration of these same arguments on appeal fails to convince us that we should reverse or disturb the lower Court's factual findings and its conclusions drawn from the facts, among them: The Commissioner also found merit in the allegations of the defendants as to the physical evidence before and after the earthquake showing the inadequacy of design, to wit: Physical evidence before the earthquake providing (sic) inadequacy of design; 1. inadequate design was the cause of the failure of the building. 2. Sun-baffles on the two sides and in front of the building; a. Increase the inertia forces that move the building laterally toward the Manila Fire Department. b. Create another stiffness imbalance. 3. The embedded 4" diameter cast iron down spout on all exterior columns reduces the cross-sectional area of each of the columns and the strength thereof.

4. Two front corners, A7 and D7 columns were very much less reinforced. Physical Evidence After the Earthquake, Proving Inadequacy of design; 1. Column A7 suffered the severest fracture and maximum sagging. Also D7. 2. There are more damages in the front part of the building than towards the rear, not only in columns but also in slabs. 3. Building leaned and sagged more on the front part of the building. 4. Floors showed maximum sagging on the sides and toward the front corner parts of the building. 5. There was a lateral displacement of the building of about 8", Maximum sagging occurs at the column A7 where the floor is lower by 80 cm. than the highest slab level. 6. Slab at the corner column D7 sagged by 38 cm. The Commissioner concluded that there were deficiencies or defects in the design, plans and specifications of the PBA building which involved appreciable risks with respect to the accidental forces which may result from earthquake shocks. He conceded, however, that the fact that those deficiencies or defects may have arisen from an obsolete or not too conservative code or even a code that does not require a design for earthquake forces mitigates in a large measure the responsibility or liability of the architect and engineer designer. The Third-party defendants, who are the most concerned with this portion of the Commissioner's report, voiced opposition to the same on the grounds that (a) the finding is based on a basic erroneous conception as to the design concept of the building, to wit, that the design is essentially that of a heavy rectangular box on stilts with shear wan at one end; (b) the finding that there were defects and a deficiency in the design of the building would at best be based on an approximation and, therefore, rightly belonged to the realm of speculation, rather than of certainty and could very possibly be outright error; (c) the Commissioner has failed to back up or support his finding with extensive, complex and highly specialized computations and analyzes which he himself emphasizes are necessary in the determination of such a highly technical question; and (d) the Commissioner has analyzed the design of the PBA building not in the light of existing and available earthquake engineering knowledge at the time of the preparation of the design, but in the light of recent and current standards. The Commissioner answered the said objections alleging that third-party defendants' objections were based on estimates or exhibits not presented during the hearing that the resort to engineering references posterior to the date of the preparation of the plans was induced by the third-party defendants themselves who submitted computations of the third-party defendants are erroneous. The issue presently considered is admittedly a technical one of the highest degree. It involves questions not within the ordinary competence of the bench and the bar to resolve by themselves. Counsel for the third-party defendants has aptly remarked that "engineering, although dealing in mathematics, is not an exact

science and that the present knowledge as to the nature of earthquakes and the behaviour of forces generated by them still leaves much to be desired; so much so "that the experts of the different parties, who are all engineers, cannot agree on what equation to use, as to what earthquake co-efficients are, on the codes to be used and even as to the type of structure that the PBA building (is) was (p. 29, Memo, of third- party defendants before the Commissioner). The difficulty expected by the Court if tills technical matter were to be tried and inquired into by the Court itself, coupled with the intrinsic nature of the questions involved therein, constituted the reason for the reference of the said issues to a Commissioner whose qualifications and experience have eminently qualified him for the task, and whose competence had not been questioned by the parties until he submitted his report. Within the pardonable limit of the Court's ability to comprehend the meaning of the Commissioner's report on this issue, and the objections voiced to the same, the Court sees no compelling reasons to disturb the findings of the Commissioner that there were defects and deficiencies in the design, plans and specifications prepared by third-party defendants, and that said defects and deficiencies involved appreciable risks with respect to the accidental forces which may result from earthquake shocks. (2) (a) The deviations, if any, made by the defendants from the plans and specifications, and how said deviations contributed to the damage sustained by the building. (b) The alleged failure of defendants to observe the requisite quality of materials and workmanship in the construction of the building. These two issues, being interrelated with each other, will be discussed together. The findings of the Commissioner on these issues were as follows: We now turn to the construction of the PBA Building and the alleged deficiencies or defects in the construction and violations or deviations from the plans and specifications. All these may be summarized as follows: a. Summary of alleged defects as reported by Engineer Mario M. Bundalian. (1) Wrongful and defective placing of reinforcing bars. (2) Absence of effective and desirable integration of the 3 bars in the cluster. (3) Oversize coarse aggregates: 1-1/4 to 2" were used. Specification requires no larger than 1 inch. (4) Reinforcement assembly is not concentric with the column, eccentricity being 3" off when on one face the main bars are only 1 1/2' from the surface. (5) Prevalence of honeycombs, (6) Contraband construction joints, (7) Absence, or omission, or over spacing of spiral hoops,

(8) Deliberate severance of spirals into semi-circles in noted on Col. A-5, ground floor, (9) Defective construction joints in Columns A-3, C-7, D-7 and D-4, ground floor, (10) Undergraduate concrete is evident, (11) Big cavity in core of Column 2A-4, second floor, (12) Columns buckled at different planes. Columns buckled worst where there are no spirals or where spirals are cut. Columns suffered worst displacement where the eccentricity of the columnar reinforcement assembly is more acute. b. Summary of alleged defects as reported by Engr. Antonio Avecilla. Columns are first (or ground) floor, unless otherwise stated. (1) Column D4 Spacing of spiral is changed from 2" to 5" on centers, (2) Column D5 No spiral up to a height of 22" from the ground floor, (3) Column D6 Spacing of spiral over 4 l/2, (4) Column D7 Lack of lateral ties, (5) Column C7 Absence of spiral to a height of 20" from the ground level, Spirals are at 2" from the exterior column face and 6" from the inner column face, (6) Column B6 Lack of spiral on 2 feet below the floor beams, (7) Column B5 Lack of spirals at a distance of 26' below the beam, (8) Column B7 Spirals not tied to vertical reinforcing bars, Spirals are uneven 2" to 4", (9) Column A3 Lack of lateral ties, (10) Column A4 Spirals cut off and welded to two separate clustered vertical bars, (11) Column A4 (second floor Column is completely hollow to a height of 30" (12) Column A5 Spirals were cut from the floor level to the bottom of the spandrel beam to a height of 6 feet, (13) Column A6 No spirals up to a height of 30' above the ground floor level, (14) Column A7 Lack of lateralties or spirals, c. Summary of alleged defects as reported by the experts of the Third-Party defendants.

Ground floor columns. (1) Column A4 Spirals are cut, (2) Column A5 Spirals are cut, (3) Column A6 At lower 18" spirals are absent, (4) Column A7 Ties are too far apart, (5) Column B5 At upper fourth of column spirals are either absent or improperly spliced, (6) Column B6 At upper 2 feet spirals are absent, (7) Column B7 At upper fourth of column spirals missing or improperly spliced. (8) Column C7 Spirals are absent at lowest 18" (9) Column D5 At lowest 2 feet spirals are absent, (10) Column D6 Spirals are too far apart and apparently improperly spliced, (11) Column D7 Lateral ties are too far apart, spaced 16" on centers. There is merit in many of these allegations. The explanations given by the engineering experts for the defendants are either contrary to general principles of engineering design for reinforced concrete or not applicable to the requirements for ductility and strength of reinforced concrete in earthquake-resistant design and construction. We shall first classify and consider defects which may have appreciable bearing or relation to' the earthquake-resistant property of the building. As heretofore mentioned, details which insure ductility at or near the connections between columns and girders are desirable in earthquake resistant design and construction. The omission of spirals and ties or hoops at the bottom and/or tops of columns contributed greatly to the loss of earthquake-resistant strength. The plans and specifications required that these spirals and ties be carried from the floor level to the bottom reinforcement of the deeper beam (p. 1, Specifications, p. 970, Reference 11). There were several clear evidences where this was not done especially in some of the ground floor columns which failed. There were also unmistakable evidences that the spacings of the spirals and ties in the columns were in many cases greater than those called for in the plans and specifications resulting again in loss of earthquake-resistant strength. The assertion of the engineering experts for the defendants that the improper spacings and the cutting of the spirals did not result in loss of strength in the column cannot be maintained and is certainly contrary to the general principles of column design and construction. And even granting that there be no loss in strength at the yield point (an assumption which is very doubtful) the cutting or improper spacings of spirals will certainly result in the loss of the plastic range or ductility in the column

and it is precisely this plastic range or ductility which is desirable and needed for earthquake-resistant strength. There is no excuse for the cavity or hollow portion in the column A4, second floor, and although this column did not fail, this is certainly an evidence on the part of the contractor of poor construction. The effect of eccentricities in the columns which were measured at about 2 1/2 inches maximum may be approximated in relation to column loads and column and beam moments. The main effect of eccentricity is to change the beam or girder span. The effect on the measured eccentricity of 2 inches, therefore, is to increase or diminish the column load by a maximum of about 1% and to increase or diminish the column or beam movements by about a maximum of 2%. While these can certainly be absorbed within the factor of safety, they nevertheless diminish said factor of safety. The cutting of the spirals in column A5, ground floor is the subject of great contention between the parties and deserves special consideration. The proper placing of the main reinforcements and spirals in column A5, ground floor, is the responsibility of the general contractor which is the UCCI. The burden of proof, therefore, that this cutting was done by others is upon the defendants. Other than a strong allegation and assertion that it is the plumber or his men who may have done the cutting (and this was flatly denied by the plumber) no conclusive proof was presented. The engineering experts for the defendants asserted that they could have no motivation for cutting the bar because they can simply replace the spirals by wrapping around a new set of spirals. This is not quite correct. There is evidence to show that the pouring of concrete for columns was sometimes done through the beam and girder reinforcements which were already in place as in the case of column A4 second floor. If the reinforcement for the girder and column is to subsequently wrap around the spirals, this would not do for the elasticity of steel would prevent the making of tight column spirals and loose or improper spirals would result. The proper way is to produce correct spirals down from the top of the main column bars, a procedure which can not be done if either the beam or girder reinforcement is already in place. The engineering experts for the defendants strongly assert and apparently believe that the cutting of the spirals did not materially diminish the strength of the column. This belief together with the difficulty of slipping the spirals on the top of the column once the beam reinforcement is in place may be a sufficient motivation for the cutting of the spirals themselves. The defendants, therefore, should be held responsible for the consequences arising from the loss of strength or ductility in column A5 which may have contributed to the damages sustained by the building. The lack of proper length of splicing of spirals was also proven in the visible spirals of the columns where spalling of the concrete cover had taken place. This lack of proper splicing contributed in a small measure to the loss of strength. The effects of all the other proven and visible defects although nor can certainly be accumulated so that they can contribute to an appreciable loss in earthquakeresistant strength. The engineering experts for the defendants submitted an estimate on some of these defects in the amount of a few percent. If accumulated, therefore, including the effect of eccentricity in the column the loss in strength due to these minor defects may run to as much as ten percent.

To recapitulate: the omission or lack of spirals and ties at the bottom and/or at the top of some of the ground floor columns contributed greatly to the collapse of the PBA building since it is at these points where the greater part of the failure occurred. The liability for the cutting of the spirals in column A5, ground floor, in the considered opinion of the Commissioner rests on the shoulders of the defendants and the loss of strength in this column contributed to the damage which occurred. It is reasonable to conclude, therefore, that the proven defects, deficiencies and violations of the plans and specifications of the PBA building contributed to the damages which resulted during the earthquake of August 2, 1968 and the vice of these defects and deficiencies is that they not only increase but also aggravate the weakness mentioned in the design of the structure. In other words, these defects and deficiencies not only tend to add but also to multiply the effects of the shortcomings in the design of the building. We may say, therefore, that the defects and deficiencies in the construction contributed greatly to the damage which occurred. Since the execution and supervision of the construction work in the hands of the contractor is direct and positive, the presence of existence of all the major defects and deficiencies noted and proven manifests an element of negligence which may amount to imprudence in the construction work. (pp. 42-49, Commissioners Report). As the parties most directly concerned with this portion of the Commissioner's report, the defendants voiced their objections to the same on the grounds that the Commissioner should have specified the defects found by him to be "meritorious"; that the Commissioner failed to indicate the number of cases where the spirals and ties were not carried from the floor level to the bottom reinforcement of the deeper beam, or where the spacing of the spirals and ties in the columns were greater than that called for in the specifications; that the hollow in column A4, second floor, the eccentricities in the columns, the lack of proper length of splicing of spirals, and the cut in the spirals in column A5, ground floor, did not aggravate or contribute to the damage suffered by the building; that the defects in the construction were within the tolerable margin of safety; and that the cutting of the spirals in column A5, ground floor, was done by the plumber or his men, and not by the defendants. Answering the said objections, the Commissioner stated that, since many of the defects were minor only the totality of the defects was considered. As regards the objection as to failure to state the number of cases where the spirals and ties were not carried from the floor level to the bottom reinforcement, the Commissioner specified groundfloor columns B-6 and C-5 the first one without spirals for 03 inches at the top, and in the latter, there were no spirals for 10 inches at the bottom. The Commissioner likewise specified the first storey columns where the spacings were greater than that called for in the specifications to be columns B-5, B-6, C-7, C-6, C-5, D-5 and B-7. The objection to the failure of the Commissioner to specify the number of columns where there was lack of proper length of splicing of spirals, the Commissioner mentioned groundfloor columns B-6 and B-5 where all the splices were less than 1-1/2 turns and were not welded, resulting in some loss of strength which could be critical near the ends of the columns. He answered the supposition of the defendants that the spirals and the ties must have been looted, by calling attention to the fact that the missing spirals and ties were only in two out of the 25 columns, which rendered said supposition to be improbable. The Commissioner conceded that the hollow in column A-4, second floor, did not aggravate or contribute to the damage, but averred that it is "evidence of poor construction." On the claim that the eccentricity could be absorbed within the factor of safety, the Commissioner answered that,

while the same may be true, it also contributed to or aggravated the damage suffered by the building. The objection regarding the cutting of the spirals in Column A-5, groundfloor, was answered by the Commissioner by reiterating the observation in his report that irrespective of who did the cutting of the spirals, the defendants should be held liable for the same as the general contractor of the building. The Commissioner further stated that the loss of strength of the cut spirals and inelastic deflections of the supposed lattice work defeated the purpose of the spiral containment in the column and resulted in the loss of strength, as evidenced by the actual failure of this column. Again, the Court concurs in the findings of the Commissioner on these issues and fails to find any sufficient cause to disregard or modify the same. As found by the Commissioner, the "deviations made by the defendants from the plans and specifications caused indirectly the damage sustained and that those deviations not only added but also aggravated the damage caused by the defects in the plans and specifications prepared by third-party defendants. (Rollo, Vol. I, pp. 128-142) The afore-mentioned facts clearly indicate the wanton negligence of both the defendant and the third-party defendants in effecting the plans, designs, specifications, and construction of the PBA building and We hold such negligence as equivalent to bad faith in the performance of their respective tasks. Relative thereto, the ruling of the Supreme Court in Tucker v. Milan (49 O.G. 4379, 4380) which may be in point in this case reads: One who negligently creates a dangerous condition cannot escape liability for the natural and probable consequences thereof, although the act of a third person, or an act of God for which he is not responsible, intervenes to precipitate the loss. As already discussed, the destruction was not purely an act of God. Truth to tell hundreds of ancient buildings in the vicinity were hardly affected by the earthquake. Only one thing spells out the fatal difference; gross negligence and evident bad faith, without which the damage would not have occurred. WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and environmental circumstances of this case, We deem it reasonable to render a decision imposing, as We do hereby impose, upon the defendant and the third-party defendants (with the exception of Roman Ozaeta) asolidary (Art. 1723, Civil Code, Supra, p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to cover all damages (with the exception of attorney's fees) occasioned by the loss of the building (including interest charges and lost rentals) and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for attorney's fees, the total sum being payable upon the finality of this decision. Upon failure to pay on such finality, twelve (12%) per cent interest per annum shall be imposed upon afore-mentioned amounts from finality until paid. Solidary costs against the defendant and third-party defendants (except Roman Ozaeta). SO ORDERED.

G.R. No. 79552 November 29, 1988

EVELYN J. SANGRADOR, joined by her husband RODRIGO SANGRADOR, SR., petitioners, vs. SPOUSES FRANCISCO VALDERRAMA and TERESITA M. VALDERRAMA, respondents. Enrique G. Arguelles for petitioners. Rex Suiza Castillon for respondents.

PADILLA, J.: This is a petition for review on certiorari of the decision of the Court of Appeals in CA-G.R. CV No. 2 08813, dated 13 August 1987, which modified the decision of the Regional Trial Court of Iloilo City, Branch XXIII, in Civil Case No. 16210, entitled "Evelyn J. Sangrador, joined by her husband, Rodrigo Sangrador, Plaintiffs, versus Spouses Francisco Valderrama and Teresita Valderrama, Defendants." The factual background of the case is narrated in the decision of the Court of Appeals as follows: On April 11, 1983 the defendants-spouses Francisco and Teresita Valderrama obtained a P500,000 loan from Manuel Asencio payable on or before April 12, 1984, and secured by a real estate mortgage on their house and lot (actually 3 lots) in front of the Jaro Plaza in Iloilo City (Exh. 9). Foreseeing that they would not be able to pay the loan and redeem their property upon maturity of the loan, the defendants scouted around for money-lenders who would be willing to lend them money with which to pay off their mortgage to Asencio. Through the help of a loan broker, Wilson Jesena, they were able to obtain on April 6, 1984 a P1,000,000 loan from the plaintiff Teresita Sangrador, who is an aunt of Jesena, on the security of the same property which they redeemed from Asencio. The loan is evidenced by the following promissory note (Exh. B) dated April 6, 1 984 providing for the payment of P1,400,000 to the creditor eight months after date'. FOR VALUE RECEIVED, we jointly and severally promise to pay EVELYN J. SANGRADOR, or order, at her address at No. 2 Locsin Street, Molo, Iloilo City, Philippines, the sum of ONE MILLION FOUR HUNDRED THOUSAND PESOS (P1,400,000.00) Philippine Currency, EIGHT (8) MONTHS after date without need of demand. Should we default in the payment of the obligation or in the manner of performance thereof and it shall become necessary to enforce and collect on this note by or through an attorney, the makers shall jointly and severally pay TWENTY (20) PER CENTUM of the amount due, principal and interest and charges then unpaid, which in no case shall be less than P1,000.00. The makers hereby submit to the jurisdiction of the Municipal Trial Court of Iloilo or the Regional Trial Court of Iloilo, Sixth Judicial Region, Iloilo City, as the case may be, in the event of litigation arising from this note. The makers of this note, jointly and severally undertake that in the event that an extraordinary inflation of the Philippine Peso should supervene between now and eight (8) months after date, then the value of the Philippine Peso at the time of the
1

establishment of this obligation, shall be the basis of payment pursuant to Art. 1250 of the Civil Code of the Philippines, and for this purpose, we hereby acknowledge the official exchange rate of the Philippine Peso to the US Dollar at P14.002 to $1. The corresponding adjustment in the value of the Philippine Peso shall be made in the event that at the time of the maturity of this obligation, the rate of exchange will have changed as a result of the supervening inflation. We further agree that the official rate of exchange as set by the Central Bank of the Philippines for private transactions, shall be the basis of this adjustment. This note is secured by a Real Estate Mortgage over three (3) parcels of residential land, Lots 700, 701 and 750, of the Cadastral Survey of Jaro, covered by TCT Nos. T-41719, T41721 and T-41720, respectively, of the Registry of Deeds for the City of Iloilo, together with the improvements thereon. In case of judicial execution of this obligation or any part thereof, the debtors waive all their rights under the provisions of Rule 39, Sec. 12, of the Rules of Court. EXECUTED in the City of Iloilo, Philippines, on this 6th day of April 1984. (SGD) Maker (SGD) Maker Signed in the presence of. (illegible) (Exh. B) (illegible) TERESITA MONTINOLA-VALDERRAMA

FRANCISCO

VALDERRAMA

The debtors allege that the amount actually received by them was only P1,000,000 the disposition of which was itemized by the broker, Wilson Jesena a, on a memo pad of "Jesena Realty" as follows: From the desk of: REALTOR WILSON President & Gen. Manager EXPENSES P625,000.00Manuel 50,000.00Commission 4,000.00Atty. 13,398.69Transfer Register of Deeds and B.I.R. P692,398.69 P1,000,000.00 P307,601.40 Balance (Exh. 1) Asencio Boy Arguelles fees G. Jesena, Jr.

692,398.69

Accordingly, a Prudential Bank Cashier's check for P625,000 was issued by Sangrador to Asencio to redeem the defendants' property from him. A receipt for that check was issued by the Valderramas to the plaintiff as follows: RECEIPT Date April 6, 1984 Received from EVELYN JESENA SANGRADOR the amount of SIX HUNDRED TWENTY FIVE THOUSAND PESOS (625,000.00) Bank Prudential Bank Cashier's Check No. 14937 . The balance of THREE HUNDRED SEVENTY FIVE THOUSAND PESOS (P375,000.00) is to be paid to the undersigned after deducting all expenses incurred in payment of real estate taxes, attorney's fees, commission, Bureau of Internal Revenue fees and Register of Deeds fees. All expenses are to be supported by receipts. (SGD) FRANCISCO (SGD) TERESITA MONTINOLA- VALDERRAMA VALDERRAMA (Exh. 2) Plaintiff Evelyn Sangrador made a list of the expenses chargeable to the debtors (Exh. 5) and submitted it to them (22 t.s.n., May 7, 1985). Payment of Atty. Arguelles' attorney's fees was duly acknowledged by him (Exh. 8). Jesena issued the following receipt to the defendants for his 5% commission in procuring the loan for them; RECEIPT Received from Spouses Francisco Valderrama and Teresita Montinola Valderrama the amount of FIFTY THOUSAND PESOS (P50,000.00) representing commission for my efforts and expertise in effecting the procurement of a loan from a financier for the amount of ONE MILLION PESOS (P1,000,000.00). (SGD) REALTOR REB License No. 3441-R (Exh. 3) The balance of P307,601.40 was paid to the defendants by means of another Prudential Bank check for which the corresponding receipt (Exh. 4) was also signed by the mortgagors: RECEIPT April 7, 1984 Received from EVELYN J. SANGRADOR the amount of THREE HUNDRED SEVEN THOUSAND SIX HUNDRED ONE PESOS AND FORTY CENTAVOS (P307,601.40) representing full payment per Promissory Note dated April 6,1984. (SGD) FRANCISCO (SGD) TERESITA MONTINOLA- VALDERRAMA VALDERRAMA WILSON JESENA, JR.

Paid byPrudential #144358-2April 7, c/o #0033-00022-0 paid byEvelyn J. Sangrador (Exh. 4)

Bank 1984

Chk. P307,601.40

Evelyn Sangrador admitted that the receipts (Exhs. 2 and 4) were issued to her by the defendants (14, 21 t.s.n., May 7, 1985). When the defendants failed to pay the sum of P1,400,000 stated in the promissory note on December 6, 1984 despite the plaintiffs' written demands (Exhs. C and D) a complaint for judicial foreclosure of the real estate mortgage was filed against them on December 21, 1984. (Exh. G). The defendants in their answer denied that the loan was P1,400,000. They alleged that it was only P1,000,000.00 and that the additional P400,000 represented usurious interest. At the trial, the plaintiff testified that the sum of P1,400,000 was received by the defendants. She alleged that besides the expenses of P67,398.69 itemized in Jesena's and her lists (Exhs. 1 and 5), the check of P625,000 for Asencio and the check of P307,601.40 which she issued to the defendants for the balance of the loan, she gave to the defendants the amount of P400,000 in cash for which no receipt was issued by them. On the other hand Francisco Valderrama testified that he thought all along that the promissory note (Exh. B) and deed of real estate mortgage (Exh. A) provided for a loan of only P1 million since that was the amount which they borrowed and received from the plaintiffs. He allegedly did not notice that both documents provided for a loan of P1,400,000. After the trial, the court rendered judgment on November 7, 1985 binding the debtors to 3 the terms of the promissory note and mortgage deed. The dispositive part of the trial court's judgment reads as follows: WHEREFORE, in the light of the foregoing, considerations and findings of this Court, judgment is hereby rendered: 1) Directing the foreclosure of the Deeds of Real Estate Mortgage (Exh. 'A'); 2) Ordering the defendants to pay the mortgage obligation in the amount of P1,400,000.00 plus the sum of P569,718.61 pursuant to the escalation clause contained in paragraph 14 of the Deed of Real Estate Mortgage; to pay attorney's fees equivalent to twenty (20%) percentum of the total indebtedness including costs, plus 12% interest per annum from December 18,1984 until fully paid, all of which shall be paid into Court within 90 days from date of the service of the order; 3) In default of such payment, ordering the mortgaged properties to be sold at public auction to realize the mortgage debt and costs. SO ORDERED.
4

Private respondents, defendants in the trial court, appealed to the Court of Appeals, where the appeal was docketed as CA G.R. CV No. 08813. On 12 August 1987, respondent Court of Appeals promulgated 5 its decision modifying the decision of the trial court, the dispositive part of which reads, as follows: WHEREFORE, the appealed decision is hereby modified by ordering the defendants, within (90) days from date of service of this decision, to pay to the plaintiffs the principal loan of P1,000,000 with 12% interest per annum from April 6,1984 until fully paid, P50,000 as attorney's fees, and the costs of this suit. In default of such payment, the mortgaged property shall be sold at public auction to realize the sums due to plaintiffs under this judgment. SO ORDERED.
6

Hence, the present petition for review on certiorari of the decision of the Court of Appeals. Petitioners present the following ASSIGNMENT OF ERRORS 1. FIRST ASSIGNED ERROR: THE HONORABLE COURT OF APPEALS ERRED IN NULLIFYING THE ESCALATION CLAUSE AS FOUND BY THE TRIAL COURT ORDERING THE PAYMENT BY RESPONDENTS OF THE SUM OF P569,718.61. 2. SECOND ASSIGNED ERROR: THE HONORABLE COURT OF APPEALS ERRED IN FINDING THE PRINCIPAL LOAN TO BE IN THE SUM OF P1,000,000.00 INSTEAD OF P1,400,000.00 AS FOUND BY THE LOWER COURT. 3. THIRD ASSIGNED ERROR: THE HONORABLE COURT OF APPEALS ERRED IN REDUCING PETITIONER'S AWARD OF ATTORNEY'S FEES TO P50,000.00 INSTEAD OF 20% OF THE TOTAL INDEBTEDNESS AS FOUND BY 7 THE TRIAL COURT. The pivotal issue to be resolved in this case is whether or not the loan obtained by private respondents from petitioners was in the amount of P1,400,000.00 or P1,000,000.00 only. In resolving this issue, the Court of Appeals in its decision under review, held: After carefully reviewing the evidence, We are convinced that the trial court erred in finding that the loan was P1,400,000 as stated in the promissory note (Exh. B) and deed of mortgage. Like the trial court, We do not believe defendant Valderrama's allegation that he did not notice that the amount stated in the promissory note was P1,400,000, instead of only P1,000,000, until demands for payment were sent to him by the plaintiffs' counsel. But neither do We believe the plaintiff Evelyn Sangrador's allegation that besides the sum of P1,000,000 admittedly received by the defendants and evidenced by checks and receipts, she also gave them P400,000.00 in cash without receipt. This is a case, therefore, where both parties prevaricated.

The documentary evidence preponderantly proves that the loan was only P1,000,000, not P1,400,000. The checks and receipts and the broker's computations found in Exhibit 'l' show clearly that the loan was only P1,000,000. Even the broker's P50,000 commission was computed on the basis of 5% of P1 million. The circumstance that the alleged payment of P400,000 in cash to the debtors is not evidenced by a receipt, is conclusive proof that it was not a part of the loan. The loan was only P1 million. Obviously, the P400,000 that was added to the principal represents a hidden interest charge for the promissory note contains no express provision fixing the rate of interest on 8 the loan. Petitioners assail the foregoing findings and conclusions of the Court of Appeals, contending that the 9 amount of the loan as clearly and expressly stated in the Deed of Real Estate Mortgage and the 10 Promissory Note, is P1,400,000.00 and not P1,000,000.00 only. Because the findings of the trial court and the Court of Appeals differ on this crucial factual issue, we have carefully reviewed and examined the evidence. The finding of the Court of Appeals that the loan is in the amount of P1,000,000.00 only is supported by substantial evidence. The Promissory Note (Exh- B) and the Deed of Real Estate Mortgage (Exh. A) executed by the respondents in favor of the petitioners indeed state that the loan is in the amount of P1,400,000.00. However, the other documents executed by the parties contemporaneously with said Promissory Note and Deed of Real Estate Mortgage clearly show that the actual loan, i.e. the amount received by respondents, was only P1,000,000.00. Thus, for the payment made by the petitioners for the account of the respondents to Manuel Asencio, thereby releasing the mortgage on the property, so that it could in turn be mortgaged to the petitioners, the respondents signed a receipt in favor of the petitioners in the amount of P625,000.00 (Exh. 2). The respondents executed another receipt in favor of the petitioners for the amount of P307,601.40," representing full payment per promissory note dated 6 April 1984" (Exh. 4). The broker who arranged for the loan signed a receipt in favor of the respondents for the amount of P50,000.00 representing his commission in effecting the loan "for the amount of P1,000,000.00" (Exh. 3).<re||an1w> The attorney who assisted in the transaction was paid attorney's fees in the amount of P4,000.00 (Exh. 8). The petitioners submitted a list of expenses chargeable to the respondents, totalling P13,398.69 covering transfer fees, expenses in the Register of Deeds and payments to the BIR (Exh. 5). All told, the loan of P1,000,000.00 obtained by the respondents from the petitioners was applied or used in the following manner at the time the loan was obtained: P625,00.00 to pay Manuel Asencio (first creditor) 50,000.00 to pay Wilson Jesena (for broker's commission) 4,000.00 to pay Atty. Enrique Arguelles (for attorney's fees) 13,398.69 to pay transfer fees and other expenses in Register of Deeds and BIR 307,601.40 to P1,000,000.09 TOTAL pay respondents as balance of the loan

The above itemization tallies with the breakdown of the proceeds of the loan, made by the loan broker Wilson Jesena (Exh. 1). Petitioners contend that over and above the P1,000,000.00, the amount of P400,000.00 was delivered by them to the respondents in cash and that this delivery was not evidenced by a receipt because, anyway, said amount (P400,000.00) is already included in the statement of the loan amount in the promissory note and the deed of real estate mortgage, which is P1,400,000.00. We find this contention to be quite incredible, to say the least. It is contrary to ordinary human experience. Normally, in delivering a hefty sum like P400,000.00 in cash, one would require some sort of receipt or acknowledgment from the recipient.

Moreover, if petitioners were careful enough to require from the respondents the separate receipts abovementioned, there was no reason why they would not require another receipt from the respondents for said amount of P400,000.00. And if, as petitioners now allege, they did not anymore require a receipt for the P400,000.00 allegedly delivered by them in cash to the respondents because the loan amount stated in the promissory note and the real estate mortgage already included said amount of P400,000.00, then, by the same reasoning, there was no need for requiring the other separate receipts abovementioned as the amounts they referred to were already a part of the loan amount stated in the promissory note and real estate mortgageand yet, said separate receipts were required by petitioners of the respondents. In short, we agree with the finding of the Court of Appeals that the disputed amount of P400,000.00 was a hidden interest that the petitioners had required the respondents to pay at the maturity of the loan, but said amount of P400,000.00 was not received by or delivered to the respondents. This conclusion is strengthened by the fact that the promissory note and the deed of real estate mortgage (Exhs. B and A), strangely enough, do not contain any express stipulation on interest, or rate of interest, when the loan involved therein is in the substantial amount of allegedly P1,400,000.00. Petitioners may conceivably argue that, granting that the disputed amount of P400,000.00 is interest on the loan of P1,000,000.00, yet, in line with this Court's decision in Liam Law vs. Oriental Sawmill Co., et 11 al., there is no longer any ceiling on interest or interest rates on loans. This may be so in a situation where the parties openly and expressly agree on a specific rate of interest to accrue on the loan but, as the Court of Appeals in its decision under review correctly pointed out, in the case at bar, no interest rate is expressly stipulated in the promissory note and deed of real estate mortgage. Circular No. 905 of the Central Bank dated 10 December 1982 provides: Section 1. The rate of interest, including commissions, premiums, fees and other charges on a loan or forbearance of any money, goods, or credits, regardless of maturity and whether secured or unsecured, that may be charged or collected by any person , whether natural or juridical, shall not be subject to any ceiling prescribed under or pursuant to the Usury law, as amended. Section 2. The rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall continue to be twelve per cent (1 2%) per annum. (Emphasis supplied) The rate of interest for loans or forbearance of money, in the absence of express contract as to such rate 12 of interest, shall continue therefore to be twelve per cent (12%) per annum. Accordingly, the loan of P1,000,000.00 in the instant case should earn a twelve per cent (12%) interest per annum computed from 6 April 1984 when the loan was obtained by the respondents from the petitioners until paid. Petitioners also impugn the Court of Appeals in nullifying the escalation clause in the Deed of Real Estate Mortgage and Promissory Note. Under such escalation clause, sustained by the trial court, the amount of P569,718.61 was awarded to herein petitioners by way of adjustment of the loan of P1,400,000.00 after 13 the eight (8) month period of the loan. The Deed of Real Estate Mortgage provides, among others, as follows: 14. That in the event that an extra-ordinary inflation of the Philippine peso should supervene, it is hereby stipulated that the value of the currency at the time of the establishment of the obligation shall be the basis of payment pursuant to Art. 1250 of the New Civil Code of the Philippines. For this purpose, MORTGAGORS hereby recognize the official exchange rate of the Philippine Peso to the US dollar at 14.002 to one. The corresponding adjustment in the value of the Philippine Peso shall be made should at the

time of the maturity of this obligation, the rate of exchange will have changed as a result of the supervening inflation. It is further agreed that the official rate of exchange as set by the Central Bank for private transactions shall be the basis of this adjustment. (Emphasis supplied). A cursory reading of the aforequoted provision of the Deed of Real Estate Mortgage (similar stipulation is contained in the Promissory Note) shows that the escalation clause takes effect "in the event that an extraordinary inflation of the Philippine Peso should supervene," between the date the loan was granted and the date of its maturity, in which case, the value of the (peso) currency at the time of the establishment of the obligation shall be the basis of payment. To give meaning to the "value of the currency at the time of the establishment of the obligation," the parties agreed that on 6 April 1984 (date of loan), the exchange rate of the peso to the US dollar was 14.002 to one. Consequently, under the aforesaid escalation clause, "(t)he corresponding adjustment in the value of the Philippine Peso" at the maturity of the obligation crucially depends upon the supervening of an 14 extraordinary inflation in the sense contemplated in Article 1250 of the Civil Code of the Philippines. In Filipino Pipe and Foundry Corporation vs. National Waterworks and Sewerage Authority , held:
15

this Court

Extraordinary inflation exists 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 decrease or increase could not have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of the obligation. (Tolentino Commentaries and Jurisprudence on the Civil Code Vol. IV, p. 284.) An example of extraordinary inflation is the following description of what happened to the deutschmark in 1920: More recently, in the 1920's Germany experience 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 Baloon" New York; Simon and Schuster, 1975, p. 19, cited in Economics, An Introduction by Villegas & Abola, 3rd Ed.) While appellant's voluminous records and statistics proved that there has been a decline in the purchasing power of the Philippine peso, this downward fall of the currency cannot be considered "extraordinary." It is simply a universal trend that has not spared our 16 country. Since petitioners failed to prove the supervening of extraordinary inflation between 6 April 1984 and 7 December 1984no proofs were presented on how much, for instance, the price index of goods and services had risen during the intervening period an extraordinary inflation cannot be assumed;

consequently, there is no reason or basis, legal or factual, for adjusting the value of the Philippine Peso in the settlement of respondents' obligation. Finally, the Court of Appeals did not commit any error in reducing the award of attorney's fees to P50,000.00. The contractual provision for attorney's fees may be modified by the courts in the exercise of 17 their sound judicial discretion. WHEREFORE, the petition is DENIED. The decision of the Court of Appeals dated 12 August 1987 is AFFIRMED. With costs against petitioners. SO ORDERED.

G.R. No. 82082 March 25, 1988 INSULAR BANK OF ASIA AND AMERICA, plaintiff-appellant, vs. SPOUSES EPIFANIA SALAZAR and RICARDO SALAZAR, defendants-appellees.

GUTIERREZ, JR., J.: This is an appeal by the Insular Bank of Asia and America (IBAA) from the judgment of the Regional Trial Court of Leyte in Civil Case No. 6932 for collection of a sum of money with preliminary attachment. The appeal was originally brought to the Court of Appeals but was certified to us by that tribunal because it raises only a question of law. The facts are not disputed. On November 22, 1978, defendants-appellees Epifania Salazar and Ricardo Salazar obtained a loan from the plaintiff-appellant in the amount of Forty Two Thousand and Fifty Pesos ( P42,050.00 ) payable on or before December 12, 1980. This loan transaction was evidenced by a promissory note where the defendants-appellees bound themselves jointly and severally to pay the amount with interest at 19% per annum and with the express authority to increase without notice the rate of interest up to the maximum allowed by law and subject further to penalty charges or liquidated damages upon default equivalent to 2% per month on any amount due and unpaid. In the event the account was referred to an attorney for collection, the defendants-appellees were also bound to pay 25% of any amount due as attorney's fees plus expenses of litigation and costs. In accordance with the agreement, the plaintiff-appellant increased the rate of interest to 21% pursuant to Central Bank Circular No. 705 dated December 1, 1979. The promissory note matured but the defendants-appellees failed to pay their account. It was only after several demands that the defendants-appellees were able to make partial payment. As of November 25, 1983, they were able to pay a total of P68,676.75 which payments were applied to partially satisfy the penalty and interest charges. On September 12, 1984, the plaintiff-appellant filed a complaint with the Regional Trial Court alleging that the defendants-appellees were indebted to IBAA in the amount of P87,647.19 as of September 15, 1984. including interest at 21% per annum penalty charges, and attorney's fees.

At the pre-trial on October 31, 1984, the parties and their counsels appeared. The defendant-spouses admitted the execution of the promissory note in consideration of P48,050.00. The trial court then rendered a summary judgment the dispositive portion of which reads: WHEREFORE, judgment is hereby ordered in favor of the plaintiff ordering the defendant spouses Ricardo Salazar and Epifania Salazar to pay Insular Bank of Asia and America (IBAA) the sum of Eleven Thousand Two Hundred Fifty Three Pesos and Twenty Five Centavos ( P11,253.25 ), with interest thereon at the rate of 19% per annum from the filing of the complaint on September 12, 1984 until fully paid. The defendants are further ordered to pay the plaintiff-attorney's fees in the amount of one Thousand Pesos ( P1,000.00 ) and to pay the costs. (p. 4, Plaintiff- Appellant's Brief). Plaintiff-appellant now raises the following assigned errors: I THE LOWER COURT ERRED IN NOT AWARDING TO PLAINTIFF-APPELLANT PENALTY CHARGES OR LIQUIDATED DAMAGES IN THE AMOUNT OF 2% PER MONTH ON ALL AMOUNTS DUE AND UNPAID; II THE LOWER COURT ERRED IN NOT AWARDING INTEREST ON THE LOAN AT 21 % PER ANNUM. III THE LOWER COURT ERRED IN THE COMPUTATION OF THE AMOUNT OF OBLIGATION DUE FROM DEFENDANTS-APPELLEES APPELLEES IN FAVOR OF PLAINTIFF-APPELLANT III THE LOWER COURT ERRED IN NOT AWARDING PLAINTIFF- APPELLANT ATTORNEY'S FEES EQUIVALENT TO 25% OF THE AMOUNT DUE AND EXPENSES OF LITIGATION; and IV THE LOWER COURT ERRED IN NOT ORDERING DEFENDANTS-APELLEES TO JOINTLY AND SEVERALLY PAY THE OBLIGATION. (pp. 4-5, Plaintiff-Appellant's Brief) The Escalation Clause provided in the promissory note reads: The interest herein charged shall be subject to in , without notice, depending on whatever policy IBAA may in the future adopt conformable to law, especially to compensate for any in Central Bank interests or rediscounting rates. Finding strength in the argument that the promissory note is the contract between the parties and, under the law, obligations arising from contracts have the force of law between the parties, the plaintiff-appellant increased the interest rate to 21% per annum effective December 1, 1979 pursuant to Central Bank Circular No. 705. In line with the Court's ruling in the case of Banco Filipino v. Navarro (G.R. No. L-46591, July 28,1987), the interest rate may not be increased by the plaintiff-appellant in the instant case. It is the nile that escalation clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term contracts. However, the enforceability of such stipulations are subject to certain conditions. In the Banco Filipino case, the borrower questioned the additional interest charges on the loan of P41,300.00 she obtained when the interest rates were increased from 12% to 17% per Central Bank Circular No. 494, issued on January 2, 1976. In a letter written by the Central Bank to the borrower, some clarifications were made. Pertinent portions of the letter read: In this connection, please be advised that the Monetary Board, in its Resolution No. 1155 dated June 11, 1976 adopted the following guidelines to govern interest rate adjustments

by banks and non-banks performing quasi- banking functions on loans already existing as of January 3, 1976, in the light of Central Rank Circulars Nos. 492-498: 1 Only banks and non-bank financial intermediaries performing quasi-banking functions may interest rates on I already existing as of January 2,1976, provided that: a. The pertinent loan contracts/documents contain escalation clauses expressly authorizing lending bank or non-bank performing quasibanking functions to increase the rate of interest stipulated in the contract, in the event that any law or Central Bank regulation is promulgated increasing the maximum interest rate for loans; and b. Said loans were directly granted by them and the remaining maturities thereof were more than 730 days as of January 2, 1976, and 2. The increase in the rate of interest can be effective only as of January 2, 1976 or on a later date. (Emphasis supplied) Moreover, in its comment and supplemental comment submit, ted upon orders of this Court, the Central Bank took the position that the issuance of its circulars is a valid exercise of its authority to prescribe maximum rates of interest and based on the general principles of contract, the Escalation Clause is a valid provision in the loan agreement provided that- 41) the increased rate imposed or charged by petitioner does not exceed the ceiling fixed by law or the Monetary Board; (2) the increase is made effective not earlier than the effectivity of the law or regulation authorizing such an increase and (3) the remaining maturities of the loans are more than 730 days as of the effectivity of the law or regulation authorizing such an increase. (Emphasis supplied) In the case at bar, the loan was obtained on November 21, 1978 and was payable on or before November 12, 1980. Central Bank Circular No. 705, authorizing the increase from 19% to 21% was issued on December 1, 1979. Obviously, as of this date, December 1, 1979, the remaining maturity of the loan was less than 730 days. Hence, the plaintiff-appellant's second assignment of error is without merit. With respect to the penalty clause, we have upheld the validity of such agreements in several cases. As the Court stated in the case of Government Service Insurance System v. Court of appeals (145 SCRA 311, 321): In the Bachrach case (supra) the Supreme Court ruled that the Civil Code permits the agreement upon a penalty apart from the interest. Should there be such an agreement, the penalty does not include the interest, and as such the two are different and distinct things which may be demanded separately. Reiterating the same principle in the later case of Equitable Banking Corp. (supra), where this Court held that the stipulation about payment of such additional rate partakes of the nature of a penalty clause, winch is sanctioned by law. In the case of Equitable Banking Corporation v. Liwanag (32 SCRA 293, 297), the Court explained: xxx xxx xxx ... We have not overlooked the 14% interest that appellant has been sentenced to pay. This may appear to be usurious, but it is not so. The rate stipulated was 9%, subject, however, to an additional rate of 5%, in the event of default. The stipulation about payment of such additional rate partakes of the nature of a penalty clause, which is sanctioned by law, (Art. 1226, Civil Code of the Philippines), although, the penalty may

also be reduced by the courts if it is iniquitous or unconscionable. (Art 1229, Civil Code of the Philippines). ... Admittedly, the defendants-appellees in the instant case failed to pay the loan on the due date. However, with earnest efforts, they tried to pay the loan little by little so that as of November 25, 1983, a total of P68,676.75 had been paid. The plaintiff-appellant, on the other hand, merely applied this amount to satisfy the penalty and interest charges which it additionally imposed. We do not find any evidence of bad faith on the part of the defendants-appellees in their failure to pay the loan on time. Efforts were indeed made to make good their promise. We note the trial court's observation that the plaintiff-appellant did not even state in the complaint that the defendants-appellees had made partial payments, making it appear that the spouses Salazars refused to pay the loan. In their answer with counterclaim, the defendantsappellees alleged that the bank neglected to credit said payments in the defendant's account folio and subjected it as it did to the additional charges. Furthermore, we agree with the trial court that the bank has already profited considerably from the loan. In a span of about six (6) years, the bank was enriched by P 26,626.75 (p. 17, Records). The penalty charges of 2% a month are, therefore, out of proportion to the damage incurred by the bank. In accordance with Article 1229 of the Civil Code, the Court is constrained to reduce the penalty for being highly iniquitous With respect to the attorney's fees, the court is likewise empowered to reduce the same if they are unreasonable or unconscionable notwithstanding the express contract for attorney's fees. The award of one thousand ( P1,000.00 ) pesos by the trial court appears to be enough. The promissory note signed by the defendants-appellants states that the loan of P42,050.00 shall bear interest at the rate of 19% per annum. This would yield interest of P7,989.50 per annum or a total of P 46,339.10 from November 22, 1978 to September 12, 1984, the date of filing the complaint. Penalty interest of 1% a month or 12% per annum is reasonable so that from December 12, 1980 up to September 12, 1984, penalty charges should be P19,202.83. Considering that the defendants-appellees have paid the amount of P68,676.75, they, therefore, owed the bank the amount of P38,915.18 when the complaint was filed. There is no indication in the records as to the fluctuation of actual interest rates from 1984 and, therefore, we order interest at the legal rate of 12% per annum on the unpaid amount. WHEREFORE, the decision of the lower court is MODIFIED. The defendants-appellants Ricardo Salazar and Epifania Salazar are ordered to pay Insular Bank of Asia and America (IBAA) the sum of THIRTYEIGHT THOUSAND NINE HUNDRED PESOS and EIGHTEEN CENTAVOS (P38,915.18 ) with interest thereon at the rate of Twelve Percent (12%) per annum from the filing of the complaint until fully paid. SO ORDERED.

G.R. No. 82082 March 25, 1988 INSULAR BANK OF ASIA AND AMERICA,plaintiff-appellant, vs. SPOUSES EPIFANIA SALAZAR and RICARDO SALAZAR, defendantsappellees.

GUTIERREZ, JR., J.:

This is an appeal by the Insular Bank of Asia and America (IBAA) from the judgment of the Regional Trial Court of Leyte in Civil Case No. 6932 for collection of a sum of money with preliminary attachment. The appeal was originally brought to the Court of Appeals but was certified to us by that tribunal because it raises only a question of law. The facts are not disputed. On November 22, 1978, defendants-appellees Epifania Salazar and Ricardo Salazar obtained a loan from the plaintiff-appellant in the amount of Forty Two Thousand and Fifty Pesos ( P42,050.00 ) payable on or before December 12, 1980. This loan transaction was evidenced by a promissory note where the defendants-appellees bound themselves jointly and severally to pay the amount with interest at 19% per annum and with the express authority to increase without notice the rate of interest up to the maximum allowed by law and subject further to penalty charges or liquidated damages upon default equivalent to 2% per month on any amount due and unpaid. In the event the account was referred to an attorney for collection, the defendants-appellees were also bound to pay 25% of any amount due as attorney's fees plus expenses of litigation and costs. In accordance with the agreement, the plaintiff-appellant increased the rate of interest to 21% pursuant to Central Bank Circular No. 705 dated December 1, 1979. The promissory note matured but the defendants-appellees failed to pay their account. It was only after several demands that the defendants-appellees were able to make partial payment. As of November 25, 1983, they were able to pay a total of P68,676.75 which payments were applied to partially satisfy the penalty and interest charges. On September 12, 1984, the plaintiff-appellant filed a complaint with the Regional Trial Court alleging that the defendants-appellees were indebted to IBAA in the amount of P87,647.19 as of September 15, 1984. including interest at 21% per annum penalty charges, and attorney's fees. At the pre-trial on October 31, 1984, the parties and their counsels appeared. The defendant-spouses admitted the execution of the promissory note in consideration of P48,050.00. The trial court then rendered a summary judgment the dispositive portion of which reads: WHEREFORE, judgment is hereby ordered in favor of the plaintiff ordering the defendant spouses Ricardo Salazar and Epifania Salazar to pay Insular Bank of Asia and America (IBAA) the sum of

Eleven Thousand Two Hundred Fifty Three Pesos and Twenty Five Centavos ( P11,253.25 ), with interest thereon at the rate of 19% per annum from the filing of the complaint on September 12, 1984 until fully paid. The defendants are further ordered to pay the plaintiffattorney's fees in the amount of one Thousand Pesos ( P1,000.00 ) and to pay the costs. (p. 4, Plaintiff- Appellant's Brief). Plaintiff-appellant now raises the following assigned errors: I THE LOWER COURT ERRED IN NOT AWARDING TO PLAINTIFFAPPELLANT PENALTY CHARGES OR LIQUIDATED DAMAGES IN THE AMOUNT OF 2% PER MONTH ON ALL AMOUNTS DUE AND UNPAID; II THE LOWER COURT ERRED IN NOT AWARDING INTEREST ON THE LOAN AT 21 % PER ANNUM. III THE LOWER COURT ERRED IN THE COMPUTATION OF THE AMOUNT OF OBLIGATION DUE FROM DEFENDANTS-APPELLEES APPELLEES IN FAVOR OF PLAINTIFF-APPELLANT III THE LOWER COURT ERRED IN NOT AWARDING PLAINTIFF- APPELLANT ATTORNEY'S FEES EQUIVALENT TO 25% OF THE AMOUNT DUE AND EXPENSES OF LITIGATION; and IV THE LOWER COURT ERRED IN NOT ORDERING DEFENDANTSAPELLEES TO JOINTLY AND SEVERALLY PAY THE OBLIGATION. (pp. 4-5, Plaintiff-Appellant's Brief) The Escalation Clause provided in the promissory note reads: The interest herein charged shall be subject to in , without notice, depending on whatever policy IBAA may in the future adopt conformable to law, especially to compensate for any in Central Bank interests or rediscounting rates. Finding strength in the argument that the promissory note is the contract between the parties and, under the law, obligations arising from contracts have the force of law between the parties, the plaintiff-appellant increased the interest rate to 21% per annum effective December 1, 1979 pursuant to Central Bank Circular No. 705. In line with the Court's ruling in the case of Banco Filipino v. Navarro (G.R. No. L46591, July 28,1987), the interest rate may not be increased by the plaintiff-

appellant in the instant case. It is the nile that escalation clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term contracts. However, the enforceability of such stipulations are subject to certain conditions. In the Banco Filipino case, the borrower questioned the additional interest charges on the loan of P41,300.00 she obtained when the interest rates were increased from 12% to 17% per Central Bank Circular No. 494, issued on January 2, 1976. In a letter written by the Central Bank to the borrower, some clarifications were made. Pertinent portions of the letter read: In this connection, please be advised that the Monetary Board, in its Resolution No. 1155 dated June 11, 1976 adopted the following guidelines to govern interest rate adjustments by banks and nonbanks performing quasi- banking functions on loans already existing as of January 3, 1976, in the light of Central Rank Circulars Nos. 492-498: 1 Only banks and non-bank financial intermediaries performing quasi-banking functions may interest rates on I already existing as of January 2,1976, provided that: a. The pertinent loan contracts/documents contain escalation clauses expressly authorizing lending bank or non-bank performing quasi-banking functions to increase the rate of interest stipulated in the contract, in the event that any law or Central Bank regulation is promulgated increasing the maximum interest rate for loans; and b. Said loans were directly granted by them and the remaining maturities thereof were more than 730 days as of January 2, 1976, and 2. The increase in the rate of interest can be effective only as of January 2, 1976 or on a later date. (Emphasis supplied) Moreover, in its comment and supplemental comment submit, ted upon orders of this Court, the Central Bank took the position that the issuance of its circulars is a valid exercise of its authority to prescribe maximum rates of interest and based on the general principles of contract, the Escalation Clause is a valid provision in the loan agreement provided that- 41) the increased rate imposed or charged by petitioner does not exceed the ceiling fixed by law or the Monetary Board; (2) the

increase is made effective not earlier than the effectivity of the law or regulation authorizing such an increase and (3) the remaining maturities of the loans are more than 730 days as of the effectivity of the law or regulation authorizing such an increase. (Emphasis supplied) In the case at bar, the loan was obtained on November 21, 1978 and was payable on or before November 12, 1980. Central Bank Circular No. 705, authorizing the increase from 19% to 21% was issued on December 1, 1979. Obviously, as of this date, December 1, 1979, the remaining maturity of the loan was less than 730 days. Hence, the plaintiff-appellant's second assignment of error is without merit. With respect to the penalty clause, we have upheld the validity of such agreements in several cases. As the Court stated in the case of Government Service Insurance System v. Court of appeals (145 SCRA 311, 321): In the Bachrach case (supra) the Supreme Court ruled that the Civil Code permits the agreement upon a penalty apart from the interest. Should there be such an agreement, the penalty does not include the interest, and as such the two are different and distinct things which may be demanded separately. Reiterating the same principle in the later case of Equitable Banking Corp. (supra), where this Court held that the stipulation about payment of such additional rate partakes of the nature of a penalty clause, winch is sanctioned by law. In the case of Equitable Banking Corporation v. Liwanag (32 SCRA 293, 297), the Court explained: xxx xxx xxx ... We have not overlooked the 14% interest that appellant has been sentenced to pay. This may appear to be usurious, but it is not so. The rate stipulated was 9%, subject, however, to an additional rate of 5%, in the event of default. The stipulation about payment of such additional rate partakes of the nature of a penalty clause, which is sanctioned by law, (Art. 1226, Civil Code of the Philippines), although, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. (Art 1229, Civil Code of the Philippines). ... Admittedly, the defendants-appellees in the instant case failed to pay the loan on the due date. However, with earnest efforts, they tried to pay the loan little by

little so that as of November 25, 1983, a total of P68,676.75 had been paid. The plaintiff-appellant, on the other hand, merely applied this amount to satisfy the penalty and interest charges which it additionally imposed. We do not find any evidence of bad faith on the part of the defendants-appellees in their failure to pay the loan on time. Efforts were indeed made to make good their promise. We note the trial court's observation that the plaintiff-appellant did not even state in the complaint that the defendants-appellees had made partial payments, making it appear that the spouses Salazars refused to pay the loan. In their answer with counterclaim, the defendants-appellees alleged that the bank neglected to credit said payments in the defendant's account folio and subjected it as it did to the additional charges. Furthermore, we agree with the trial court that the bank has already profited considerably from the loan. In a span of about six (6) years, the bank was enriched by P 26,626.75 (p. 17, Records). The penalty charges of 2% a month are, therefore, out of proportion to the damage incurred by the bank. In accordance with Article 1229 of the Civil Code, the Court is constrained to reduce the penalty for being highly iniquitous With respect to the attorney's fees, the court is likewise empowered to reduce the same if they are unreasonable or unconscionable notwithstanding the express contract for attorney's fees. The award of one thousand ( P1,000.00 ) pesos by the trial court appears to be enough. The promissory note signed by the defendants-appellants states that the loan of P42,050.00 shall bear interest at the rate of 19% per annum. This would yield interest of P7,989.50 per annum or a total of P 46,339.10 from November 22, 1978 to September 12, 1984, the date of filing the complaint. Penalty interest of 1% a month or 12% per annum is reasonable so that from December 12, 1980 up to September 12, 1984, penalty charges should be P19,202.83. Considering that the defendants-appellees have paid the amount of P68,676.75, they, therefore, owed the bank the amount of P38,915.18 when the complaint was filed. There is no indication in the records as to the fluctuation of actual interest rates from 1984 and, therefore, we order interest at the legal rate of 12% per annum on the unpaid amount. WHEREFORE, the decision of the lower court is MODIFIED. The defendantsappellants Ricardo Salazar and Epifania Salazar are ordered to pay Insular Bank of Asia and America (IBAA) the sum of THIRTY-EIGHT THOUSAND NINE HUNDRED PESOS and EIGHTEEN CENTAVOS (P38,915.18 ) with interest thereon at the rate of Twelve Percent (12%) per annum from the filing of the complaint until fully paid. SO ORDERED.

G.R. No. L-28335 March 30, 1970 EQUITABLE BANKING CORPORATION, plaintiff-appellee, vs. FELIPE LIWANAG AND MICHAEL PARSONS, defendants. Carreon and Taada for defendant-appellant. Paredes, Poblador, Nazareno and Azada for plaintiff-appellee.

CONCEPCION, C.J.: Direct appeal, on questions purely of law, taken by defendant Felipe Liwanag, from a decision of the Court of First Instance of Manila, sentencing him to pay the plaintiff, Equitable Banking Corporation, "the sum of P27,346.66 with accrued interest thereon in the sum of P321.74 as of April 11, 1967 plus interest on said sum of P27,346.66 at 14% per annum from April 12, 1967 or P10.6348, daily until the obligation is fully paid, together with 10% of the whole amount due as attorney's fees and the cost of the suit." In the complaint filed, on April 26, 1967, against appellant Felipe Liwanag and one Michael Parsons, it is alleged that, on November 4, 1963, said defendants obtained a loan of P80,000.00, evidenced by a promissory note executed by them, stipulating that they would pay, jointly and severally, said amount, with interest thereon, at the rate of 9% per annum, within 120 days; that, in case of non-payment at maturity, they would similarly pay an additional interest of 5% per annum, on the total amount due until paid, which shall be compounded monthly, and together with the principal shall bear interest at the rate of 12% per annum, until fully paid; that, in case the matter is referred to an attorney for collection, the defendants would pay the equivalent of 10% of the amount due, for attorney's fees, in addition to the costs; and that the defendants had failed and refused to pay the outstanding balance of said obligation in the sum of P27,346.66, for which judgment was prayed, with interest, attorney's fees and costs. Upon service of summons, appellant Liwanag filed an answer admitting that he and his co-defendant had obtained said loan of P80,000.00 and denying the rest of the averments in the complaint "for lack of knowledge sufficient to form a belief as to the truth thereof." By way of special defenses, appellant further alleged that plaintiff "has no cause of action" and that its "claim for interest and attorney's fees is exhorbitant." Appellant further incorporated in his answer a cross-claim against his co-defendant Michael Parsons who, appellant alleged, "is liable for

reimbursement or contribution of the amounts paid and which shall be paid" by him "by reason of plaintiff's claim." Alleging that appellant's answer failed to tender any issue, plaintiff moved, on July 5, 1967, for judgment on the pleadings. Although his counsel was served copy of this motion, appellant did not object thereto. On July 8, 1967, the lower court rendered the judgment prayed for. Hence, this appeal in which appellant has limited himself to assailing the propriety of said judgment, upon the ground "that specific denials and affirmative defenses" had allegedly been interposed in his answer. This pretense is manifestly devoid of merit. Although the Rules of Court permit a litigant to file an answer alleging lack of knowledge to form a belief as to the truth of certain allegations in the complaint, his form of denial "must be availed of with sincerity and in good faith, certainly neither for the purpose of confusing the adverse party as to what allegations of the complaint are really put in issue nor for the purpose of delay."1 Indeed, it had been held that said mode of denial is unavailing "where the fact as to which want of knowledge is asserted is to the knowledge of the court as plainly and necessarily within the defendant's knowledge that his averment of ignorance must be palpably untrue."2 Thus, under conditions almost identical to those obtaining in the case at bar, this Court, speaking through Mr. Justice Villamor, upheld a judgment on the pleadings in Capitol Motors vs. Nemesio I. Yabut,3 from which we quote: We agree with defendant-appellant that one of the modes of specific denial contemplated in Section 10, Rule 8, is a denial by stating that the defendant is without knowledge or information sufficient to form a belief as to the truth of a material averment in the complaint. The question, however, is whether paragraph 2 of defendant-appellant's answer constitutes a specific denial under the said rule. We do not think so. In Warner Barnes & Co. Ltd. vs. Reyes, et al., G.R. No. L9531, May 14, 1958 (103 Phil., 662), this Court said that the rule authorizing an answer to the effect that the defendant has no knowledge or information sufficient to form a belief as to the truth of an averment and giving such answer the effect of a denial, does not apply where the fact as to which want of knowledge is asserted, is so plainly and necessarily within the defendant's knowledge that his averment of ignorance must be palpably untrue. In said case the suit was one for foreclosure of mortgage, and a copy of the deed of mortgage was attached to the complaint; thus, according to this Court, it would have been easy for the defendants to specifically allege in their answer whether or not they had executed the alleged mortgage. The same thing can be said in the present case, where a

copy of the promissory note sued upon was attached to the complaint. The doctrine in Warner Barnes & Co., Ltd. was reiterated in J.P. Juan & Sons, Inc. vs. Lianga Industries, Inc. G.R. No. L25137, July 28, 1969 (28 SCRA 807). And inSy-quia vs. Marsman, G.R. No. L-23426, March 1, 1968 (22 SCRA 927), this Court said: 'With regard to the plea of lack of knowledge or information set up in paragraph 3 of the answer, this Court's decision in Warner Barnes vs. Reyes, 103 Phil. 662, 665, is authority for the proposition that this form of denial must be availed of with sincerity and good faith, not for the purpose of confusing the other party, nor for purposes of delay. Yet, so lacking in sincerity and good faith is this part of the answer that defendantsappellants go to the limit of denying knowledge or information as to whether they (defendants) were in the premises (Marsman Bldg.) on January 4, 1961, as averred in paragraph 4 of the complaint. Yet whether such a fact was or was not true could not be unknown to these defendants. In the case at bar, plaintiff's case is even stronger, for, in addition to annexing to the complaint a copy of the promissory note executed by appellant and his codefendant, Michael Parsons, plaintiff attached to said copy a statement of their account, with specification of the partial payments made on account of the defendants' obligation and the dates of said partial payments, apart from the sum due from them at the end of each month, beginning from March 16, 1964. Moreover, appellant has, not only failed to deny specifically, under oath, the authenticity and due execution of said note, but, also, admitted expressly having contracted the obligation therein set forth. Obviously, he should know whether the partial payments abovementioned or any payment at all, had been made. Hence, he cannot avail of the provision allowing a denial "for lack of knowledge sufficient to form a belief." Neither did his special or affirmative defenses tender any real issue. Aside from the bare affirmation that plaintiff has "no cause of action" and that "plaintiff's claim for interest and attorney's fees is exhorbitant", there is nothing in appellant's answer to give any semblance of seriousness to or merit in these defenses. In fact, his own brief has not even tried to prove the contrary. We have not overlooked the 14% interest that appellant has been sentenced to pay. This may appear to be usurious, but it is not so. The rate stipulated was 9%, subject, however, to an additional rate of 5%, in the event of default. The stipulation about payment of such additional rate partakes of the nature of a penalty clause, which

is sanctioned by law,4 although "the penalty may also be reduced by the courts if it is iniquitous or unconscionable."5 Appellant has not even attempted to show that it is so. It is, accordingly, obvious that this appeal has been interposed for the sole purpose of delay, in view of which the decision appealed from should be, as it is hereby affirmed, with treble costs, to be paid, jointly and severally, by appellant Felipe Liwanag and his counsel of record.6 It is so ordered. Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee and Villamor, JJ., concur. Barredo, J., took no part.