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Credit Transactions

Prof. William M. Varias


I. LOANS
a. In General (Arts 1933-1934, 1305,1306)
1. G.R. No. L-24968 April 27, 1972
SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee,
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.
Mabanag, Eliger and Associates and Saura, Magno and Associates for plaintiff-appellee.
Jesus A. Avancea and Hilario G. Orsolino for defendant-appellant.

MAKALINTAL, J.:p
In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was rendered on June 28, 1965
sentencing defendant Development Bank of the Philippines (DBP) to pay actual and consequential
damages to plaintiff Saura Import and Export Co., Inc. in the amount of P383,343.68, plus interest at the
legal rate from the date the complaint was filed and attorney's fees in the amount of P5,000.00. The
present appeal is from that judgment.
In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the Rehabilitation Finance
Corporation (RFC), before its conversion into DBP, for an industrial loan of P500,000.00, to be used as
follows: P250,000.00 for the construction of a factory building (for the manufacture of jute sacks);
P240,900.00 to pay the balance of the purchase price of the jute mill machinery and equipment; and
P9,100.00 as additional working capital.
Parenthetically, it may be mentioned that the jute mill machinery had already been purchased by Saura
on the strength of a letter of credit extended by the Prudential Bank and Trust Co., and arrived in Davao
City in July 1953; and that to secure its release without first paying the draft, Saura, Inc. executed a trust
receipt in favor of the said bank.
On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for P500,000.00, to
be secured by a first mortgage on the factory building to be constructed, the land site thereof, and the
machinery and equipment to be installed. Among the other terms spelled out in the resolution were the
following:
1. That the proceeds of the loan shall be utilized exclusively for the following purposes:
For construction of factory building P250,000.00
For payment of the balance of purchase
price of machinery and equipment 240,900.00

For working capital 9,100.00


T O T A L P500,000.00
4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and Gregoria Estabillo and
China Engineers, Ltd. shall sign the promissory notes jointly with the borrower-corporation;
5. That release shall be made at the discretion of the Rehabilitation Finance Corporation, subject to
availability of funds, and as the construction of the factory buildings progresses, to be certified to by an
appraiser of this Corporation;"
Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before, however, evidently
having otherwise been informed of its approval, Saura, Inc. wrote a letter to RFC, requesting a
modification of the terms laid down by it, namely: that in lieu of having China Engineers, Ltd. (which was
willing to assume liability only to the extent of its stock subscription with Saura, Inc.) sign as co-maker on
the corresponding promissory notes, Saura, Inc. would put up a bond for P123,500.00, an amount
equivalent to such subscription; and that Maria S. Roca would be substituted for Inocencia Arellano as
one of the other co-makers, having acquired the latter's shares in Saura, Inc.
In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating of the
members of its Board of Governors, for certain reasons stated in the resolution, "to reexamine all the
aspects of this approved loan ... with special reference as to the advisability of financing this particular
project based on present conditions obtaining in the operations of jute mills, and to submit his findings
thereon at the next meeting of the Board."
On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act as cosigner for the loan, and asked that the necessary documents be prepared in accordance with the terms
and conditions specified in Resolution No. 145. In connection with the reexamination of the project to be
financed with the loan applied for, as stated in Resolution No. 736, the parties named their respective
committees of engineers and technical men to meet with each other and undertake the necessary
studies, although in appointing its own committee Saura, Inc. made the observation that the same "should
not be taken as an acquiescence on (its) part to novate, or accept new conditions to, the agreement
already) entered into," referring to its acceptance of the terms and conditions mentioned in Resolution No.
145.
On April 13, 1954 the loan documents were executed: the promissory note, with F.R. Halling, representing
China Engineers, Ltd., as one of the co-signers; and the corresponding deed of mortgage, which was duly
registered on the following April 17.
It appears, however, that despite the formal execution of the loan agreement the reexamination
contemplated in Resolution No. 736 proceeded. In a meeting of the RFC Board of Governors on June 10,
1954, at which Ramon Saura, President of Saura, Inc., was present, it was decided to reduce the loan
from P500,000.00 to P300,000.00. Resolution No. 3989 was approved as follows:
RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc. under Resolution
No. 145, C.S., from P500,000.00 to P300,000.00. Pursuant to Bd. Res. No. 736, c.s., authorizing the reexamination of all the various aspects of the loan granted the Saura Import & Export Co. under Resolution
No. 145, c.s., for the purpose of financing the manufacture of jute sacks in Davao, with special reference
as to the advisability of financing this particular project based on present conditions obtaining in the
operation of jute mills, and after having heard Ramon E. Saura and after extensive discussion on the
subject the Board, upon recommendation of the Chairman, RESOLVED that the loan granted the Saura

Import & Export Co. be REDUCED from P500,000 to P300,000 and that releases up to P100,000 may be
authorized as may be necessary from time to time to place the factory in actual operation: PROVIDED
that all terms and conditions of Resolution No. 145, c.s., not inconsistent herewith, shall remain in full
force and effect."
On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory note for China
Engineers Ltd. jointly and severally with the other RFC that his company no longer to of the loan and
therefore considered the same as cancelled as far as it was concerned. A follow-up letter dated July 2
requested RFC that the registration of the mortgage be withdrawn.
In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be granted. The
request was denied by RFC, which added in its letter-reply that it was "constrained to consider as
cancelled the loan of P300,000.00 ... in view of a notification ... from the China Engineers Ltd., expressing
their desire to consider the loan insofar as they are concerned."
On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC that China
Engineers, Ltd. "will at any time reinstate their signature as co-signer of the note if RFC releases to us the
P500,000.00 originally approved by you.".
On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original amount of
P500,000.00, "it appearing that China Engineers, Ltd. is now willing to sign the promissory notes jointly
with the borrower-corporation," but with the following proviso:
That in view of observations made of the shortage and high cost of imported raw
materials, the Department of Agriculture and Natural Resources shall certify to the
following:
1. That the raw materials needed by the borrower-corporation to carry out its operation
are available in the immediate vicinity; and
2. That there is prospect of increased production thereof to provide adequately for the
requirements of the factory."
The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December 22, 1954,
wherein it was explained that the certification by the Department of Agriculture and Natural Resources
was required "as the intention of the original approval (of the loan) is to develop the manufacture of sacks
on the basis of locally available raw materials." This point is important, and sheds light on the subsequent
actuations of the parties. Saura, Inc. does not deny that the factory he was building in Davao was for the
manufacture of bags from local raw materials. The cover page of its brochure (Exh. M) describes the
project as a "Joint venture by and between the Mindanao Industry Corporation and the Saura Import and
Export Co., Inc. to finance, manage and operate a Kenaf mill plant, to manufacture copra and corn bags,
runners, floor mattings, carpets, draperies; out of 100% local raw materials, principal kenaf." The
explanatory note on page 1 of the same brochure states that, the venture "is the first serious attempt in
this country to use 100% locally grown raw materials notably kenaf which is presently grown commercially
in theIsland of Mindanao where the proposed jutemill is located ..."
This fact, according to defendant DBP, is what moved RFC to approve the loan application in the first
place, and to require, in its Resolution No. 9083, a certification from the Department of Agriculture and
Natural Resources as to the availability of local raw materials to provide adequately for the requirements
of the factory. Saura, Inc. itself confirmed the defendant's stand impliedly in its letter of January 21, 1955:
(1) stating that according to a special study made by the Bureau of Forestry "kenaf will not be available in

sufficient quantity this year or probably even next year;" (2) requesting "assurances (from RFC) that my
company and associates will be able to bring in sufficient jute materials as may be necessary for the full
operation of the jute mill;" and (3) asking that releases of the loan be made as follows:
a) For the payment of the receipt for jute mill
machineries with the Prudential Bank &
Trust Company P250,000.00
(For immediate release)
b) For the purchase of materials and equipment per attached list to enable the jute
mill to operate 182,413.91
c) For raw materials and labor 67,586.09
1) P25,000.00 to be released on the opening of the letter of credit for raw jute
for $25,000.00.
2) P25,000.00 to be released upon arrival
of raw jute.
3) P17,586.09 to be released as soon as the
mill is ready to operate.
On January 25, 1955 RFC sent to Saura, Inc. the following reply:
Dear Sirs:
This is with reference to your letter of January 21, 1955, regarding the
release of your loan under consideration of P500,000. As stated in our
letter of December 22, 1954, the releases of the loan, if revived, are
proposed to be made from time to time, subject to availability of funds
towards the end that the sack factory shall be placed in actual operating
status. We shall be able to act on your request for revised purpose and
manner of releases upon re-appraisal of the securities offered for the
loan.
With respect to our requirement that the Department of Agriculture and
Natural Resources certify that the raw materials needed are available in
the immediate vicinity and that there is prospect of increased production
thereof to provide adequately the requirements of the factory, we wish to
reiterate that the basis of the original approval is to develop the
manufacture of sacks on the basis of the locally available raw materials.
Your statement that you will have to rely on the importation of jute and
your request that we give you assurance that your company will be able
to bring in sufficient jute materials as may be necessary for the operation
of your factory, would not be in line with our principle in approving the
loan.

With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the matter
further. Instead, it requested RFC to cancel the mortgage, and so, on June 17, 1955 RFC executed the
corresponding deed of cancellation and delivered it to Ramon F. Saura himself as president of Saura, Inc.
It appears that the cancellation was requested to make way for the registration of a mortgage contract,
executed on August 6, 1954, over the same property in favor of the Prudential Bank and Trust Co., under
which contract Saura, Inc. had up to December 31 of the same year within which to pay its obligation on
the trust receipt heretofore mentioned. It appears further that for failure to pay the said obligation the
Prudential Bank and Trust Co. sued Saura, Inc. on May 15, 1955.
On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was cancelled at the request of
Saura, Inc., the latter commenced the present suit for damages, alleging failure of RFC (as predecessor
of the defendant DBP) to comply with its obligation to release the proceeds of the loan applied for and
approved, thereby preventing the plaintiff from completing or paying contractual commitments it had
entered into, in connection with its jute mill project.
The trial court rendered judgment for the plaintiff, ruling that there was a perfected contract between the
parties and that the defendant was guilty of breach thereof. The defendant pleaded below, and reiterates
in this appeal: (1) that the plaintiff's cause of action had prescribed, or that its claim had been waived or
abandoned; (2) that there was no perfected contract; and (3) that assuming there was, the plaintiff itself
did not comply with the terms thereof.
We hold that there was indeed a perfected consensual contract, as recognized in Article 1934 of the Civil
Code, which provides:
ART. 1954. An accepted promise to deliver something, by way of commodatum or simple
loan is binding upon the parties, but the commodatum or simple loan itself shall not be
perferted until the delivery of the object of the contract.
There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan of
P500,000.00 was approved by resolution of the defendant, and the corresponding mortgage was
executed and registered. But this fact alone falls short of resolving the basic claim that the defendant
failed to fulfill its obligation and the plaintiff is therefore entitled to recover damages.
It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption that the
factory to be constructed would utilize locally grown raw materials, principally kenaf. There is no serious
dispute about this. It was in line with such assumption that when RFC, by Resolution No. 9083 approved
on December 17, 1954, restored the loan to the original amount of P500,000.00. it imposed two
conditions, to wit: "(1) that the raw materials needed by the borrower-corporation to carry out its operation
are available in the immediate vicinity; and (2) that there is prospect of increased production thereof to
provide adequately for the requirements of the factory." The imposition of those conditions was by no
means a deviation from the terms of the agreement, but rather a step in its implementation. There was
nothing in said conditions that contradicted the terms laid down in RFC Resolution No. 145, passed on
January 7, 1954, namely "that the proceeds of the loan shall be utilized exclusively for the following
purposes: for construction of factory building P250,000.00; for payment of the balance of purchase
price of machinery and equipment P240,900.00; for working capital P9,100.00." Evidently Saura,
Inc. realized that it could not meet the conditions required by RFC, and so wrote its letter of January 21,
1955, stating that local jute "will not be able in sufficient quantity this year or probably next year," and
asking that out of the loan agreed upon the sum of P67,586.09 be released "for raw materials and labor."
This was a deviation from the terms laid down in Resolution No. 145 and embodied in the mortgage

contract, implying as it did a diversion of part of the proceeds of the loan to purposes other than those
agreed upon.
When RFC turned down the request in its letter of January 25, 1955 the negotiations which had been
going on for the implementation of the agreement reached an impasse. Saura, Inc. obviously was in no
position to comply with RFC's conditions. So instead of doing so and insisting that the loan be released as
agreed upon, Saura, Inc. asked that the mortgage be cancelled, which was done on June 15, 1955. The
action thus taken by both parties was in the nature cf mutual desistance what Manresa terms "mutuo
disenso" 1 which is a mode of extinguishing obligations. It is a concept that derives from the principle
that since mutual agreement can create a contract, mutual disagreement by the parties can cause its
extinguishment. 2
The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against any alleged
breach of contract by RFC, or even point out that the latter's stand was legally unjustified. Its request for
cancellation of the mortgage carried no reservation of whatever rights it believed it might have against
RFC for the latter's non-compliance. In 1962 it even applied with DBP for another loan to finance a rice
and corn project, which application was disapproved. It was only in 1964, nine years after the loan
agreement had been cancelled at its own request, that Saura, Inc. brought this action for damages.All
these circumstances demonstrate beyond doubt that the said agreement had been extinguished by
mutual desistance and that on the initiative of the plaintiff-appellee itself.
With this view we take of the case, we find it unnecessary to consider and resolve the other issues raised
in the respective briefs of the parties.
WHEREFORE, the judgment appealed from is reversed and the complaint dismissed, with costs against
the plaintiff-appellee.
Reyes, J.B.L., Actg. C.J., Zaldivar, Castro, Fernando, Teehankee, Barredo and Antonio, JJ., concur.
Makasiar, J., took no part.

Footnotes
1 8 Manresa, p. 294.
2 2 Castan, p. 560.
2. G.R. No. L-49101 October 24, 1983
RAOUL S.V. BONNEVIE and HONESTO V. BONNEVIE, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and THE PHILIPPINE BANK OF COMMERCE, respondents.
Edgardo I. De Leon for petitioners.
Siguion Reyna, Montecillo & Associates for private respondent.

GUERRERO, J:
Petition for review on certiorari seeking the reversal of the decision of the defunct Court of Appeals, now
Intermediate Appellate Court, in CA-G.R. No. 61193-R, entitled "Honesto Bonnevie vs. Philippine Bank of
Commerce, et al.," promulgated August 11, 1978 1 as well as the Resolution denying the motion for
reconsideration.
The complaint filed on January 26, 1971 by petitioner Honesto Bonnevie with the Court of First Instance
of Rizal against respondent Philippine Bank of Commerce sought the annulment of the Deed of Mortgage
dated December 6, 1966 executed in favor of the Philippine Bank of Commerce by the spouses Jose M.
Lozano and Josefa P. Lozano as well as the extrajudicial foreclosure made on September 4, 1968. It
alleged among others that (a) the Deed of Mortgage lacks consideration and (b) the mortgage was
executed by one who was not the owner of the mortgaged property. It further alleged that the property in
question was foreclosed pursuant to Act No. 3135 as amended, without, however, complying with the
condition imposed for a valid foreclosure. Granting the validity of the mortgage and the extrajudicial
foreclosure, it finally alleged that respondent Bank should have accepted petitioner's offer to redeem the
property under the principle of equity said justice.
On the other hand, the answer of defendant Bank, now private respondent herein, specifically denied
most of the allegations in the complaint and raised the following affirmative defenses: (a) that the
defendant has not given its consent, much less the requisite written consent, to the sale of the mortgaged
property to plaintiff and the assumption by the latter of the loan secured thereby; (b) that the demand
letters and notice of foreclosure were sent to Jose Lozano at his address; (c) that it was notified for the
first time about the alleged sale after it had foreclosed the Lozano mortgage; (d) that the law on contracts
requires defendant's consent before Jose Lozano can be released from his bilateral agreement with the
former and doubly so, before plaintiff may be substituted for Jose Lozano and Alfonso Lim; (e) that the
loan of P75,000.00 which was secured by mortgage, after two renewals remain unpaid despite countless
reminders and demands; of that the property in question remained registered in the name of Jose M.
Lozano in the land records of Rizal and there was no entry, notation or indication of the alleged sale to
plaintiff; (g) that it is an established banking practice that payments against accounts need not be
personally made by the debtor himself; and (h) that it is not true that the mortgage, at the time of its
execution and registration, was without consideration as alleged because the execution and registration
of the securing mortgage, the signing and delivery of the promissory note and the disbursement of the
proceeds of the loan are mere implementation of the basic consensual contract of loan.
After petitioner Honesto V. Bonnevie had rested his case, petitioner Raoul SV Bonnevie filed a motion for
intervention. The intervention was premised on the Deed of Assignment executed by petitioner Honesto
Bonnevie in favor of petitioner Raoul SV Bonnevie covering the rights and interests of petitioner Honesto
Bonnevie over the subject property. The intervention was ultimately granted in order that all issues be
resolved in one proceeding to avoid multiplicity of suits.
On March 29, 1976, the lower court rendered its decision, the dispositive portion of which reads as
follows:
WHEREFORE, all the foregoing premises considered, judgment is hereby rendered
dismissing the complaint with costs against the plaintiff and the intervenor.
After the motion for reconsideration of the lower court's decision was denied, petitioners appealed to
respondent Court of Appeals assigning the following errors:

1. The lower court erred in not finding that the real estate mortgage executed by Jose
Lozano was null and void;
2. The lower court erred in not finding that the auction sale decide on August 19, 1968
was null and void;
3. The lower court erred in not allowing the plaintiff and the intervenor to redeem the
property;
4. The lower court erred in not finding that the defendant acted in bad faith; and
5. The lower court erred in dismissing the complaint.
On August 11, 1978, the respondent court promulgated its decision affirming the decision of the lower
court, and on October 3. 1978 denied the motion for reconsideration. Hence, the present petition for
review.
The factual findings of respondent Court of Appeals being conclusive upon this Court, We hereby adopt
the facts found the trial court and found by the Court of Appeals to be consistent with the evidence
adduced during trial, to wit:
It is not disputed that spouses Jose M. Lozano and Josefa P. Lozano were the owners of
the property which they mortgaged on December 6, 1966, to secure the payment of the
loan in the principal amount of P75,000.00 they were about to obtain from defendantappellee Philippine Bank of Commerce; that on December 8, 1966, executed in favor of
plaintiff-appellant the Deed of Sale with Mortgage ,, for and in consideration of the sum of
P100,000.00, P25,000.00 of which amount being payable to the Lozano spouses upon
the execution of the document, and the balance of P75,000.00 being payable to
defendant- appellee; that on December 6, 1966, when the mortgage was executed by the
Lozano spouses in favor of defendant-appellee, the loan of P75,000.00 was not yet
received them, as it was on December 12, 1966 when they and their co-maker Alfonso
Lim signed the promissory note for that amount; that from April 28, 1967 to July 12, 1968,
plaintiff-appellant made payments to defendant-appellee on the mortgage in the total
amount of P18,944.22; that on May 4, 1968, plaintiff-appellant assigned all his rights
under the Deed of Sale with Assumption of Mortgage to his brother, intervenor Raoul
Bonnevie; that on June 10, 1968, defendant-appellee applied for the foreclosure of the
mortgage, and notice of sale was published in the Luzon Weekly Courier on June 30, July
7, and July 14, 1968; that auction sale was conducted on August 19, 1968, and the
property was sold to defendant-appellee for P84,387.00; and that offers from plaintiffappellant to repurchase the property failed, and on October 9, 1969, he caused an
adverse claim to be annotated on the title of the property. (Decision of the Court of
Appeals, p. 5).
Presented for resolution in this review are the following issues:
I
Whether the real estate mortgage executed by the spouses Lozano in favor of
respondent bank was validly and legally executed.
II

Whether the extrajudicial foreclosure of the said mortgage was validly and legally
effected.
III
Whether petitioners had a right to redeem the foreclosed property.
IV
Granting that petitioners had such a right, whether respondent was justified in refusing
their offers to repurchase the property.
As clearly seen from the foregoing issues raised, petitioners' course of action is three-fold. They primarily
attack the validity of the mortgage executed by the Lozano spouses in favor of respondent Bank. Next,
they attack the validity of the extrajudicial foreclosure and finally, appeal to justice and equity. In attacking
the validity of the deed of mortgage, they contended that when it was executed on December 6, 1966,
there was yet no principal obligation to secure as the loan of P75,000.00 was not received by the Lozano
spouses "So much so that in the absence of a principal obligation, there is want of consideration in the
accessory contract, which consequently impairs its validity and fatally affects its very existence."
(Petitioners' Brief, par. 1, p. 7).
This contention is patently devoid of merit. From the recitals of the mortgage deed itself, it is clearly seen
that the mortgage deed was executed for and on condition of the loan granted to the Lozano spouses.
The fact that the latter did not collect from the respondent Bank the consideration of the mortgage on the
date it was executed is immaterial. A contract of loan being a consensual contract, the herein contract of
loan was perfected at the same time the contract of mortgage was executed. The promissory note
executed on December 12, 1966 is only an evidence of indebtedness and does not indicate lack of
consideration of the mortgage at the time of its execution.
Petitioners also argued that granting the validity of the mortgage, the subsequent renewals of the original
loan, using as security the same property which the Lozano spouses had already sold to petitioners,
rendered the mortgage null and void,
This argument failed to consider the provision 2 of the contract of mortgage which prohibits the sale,
disposition of, mortgage and encumbrance of the mortgaged properties, without the written consent of the
mortgagee, as well as the additional proviso that if in spite of said stipulation, the mortgaged property is
sold, the vendee shall assume the mortgage in the terms and conditions under which it is constituted.
These provisions are expressly made part and parcel of the Deed of Sale with Assumption of Mortgage.
Petitioners admit that they did not secure the consent of respondent Bank to the sale with assumption of
mortgage. Coupled with the fact that the sale/assignment was not registered so that the title remained in
the name of the Lozano spouses, insofar as respondent Bank was concerned, the Lozano spouses could
rightfully and validly mortgage the property. Respondent Bank had every right to rely on the certificate of
title. It was not bound to go behind the same to look for flaws in the mortgagor's title, the doctrine of
innocent purchaser for value being applicable to an innocent mortgagee for value. (Roxas vs. Dinglasan,
28 SCRA 430; Mallorca vs. De Ocampo, 32 SCRA 48). Another argument for the respondent Bank is that
a mortgage follows the property whoever the possessor may be and subjects the fulfillment of the
obligation for whose security it was constituted. Finally, it can also be said that petitioners voluntarily
assumed the mortgage when they entered into the Deed of Sale with Assumption of Mortgage. They are,
therefore, estopped from impugning its validity whether on the original loan or renewals thereof.

Petitioners next assail the validity and legality of the extrajudicial foreclosure on the following grounds:
a) petitioners were never notified of the foreclosure sale.
b) The notice of auction sale was not posted for the period required by law.
c) publication of the notice of auction sale in the Luzon Weekly Courier was not in
accordance with law.
The lack of notice of the foreclosure sale on petitioners is a flimsy ground. Respondent Bank not being a
party to the Deed of Sale with Assumption of Mortgage, it can validly claim that it was not aware of the
same and hence, it may not be obliged to notify petitioners. Secondly, petitioner Honesto Bonnevie was
not entitled to any notice because as of May 14, 1968, he had transferred and assigned all his rights and
interests over the property in favor of intervenor Raoul Bonnevie and respondent Bank not likewise
informed of the same. For the same reason, Raoul Bonnevie is not entitled to notice. Most importantly, Act
No. 3135 does not require personal notice on the mortgagor. The requirement on notice is that:
Section 3. Notice shall be given by posting notices of the sale for not less than twenty
days in at least three public places of the municipality or city where the property is
situated, and if such property is worth more than four hundred pesos, such notice shall
also be published once a week for at least three consecutive weeks in a newspaper of
general circulation in the municipality or city
In the case at bar, the notice of sale was published in the Luzon Courier on June 30, July 7 and July 14,
1968 and notices of the sale were posted for not less than twenty days in at least three (3) public places
in the Municipality where the property is located. Petitioners were thus placed on constructive notice.
The case of Santiago vs. Dionisio, 92 Phil. 495, cited by petitioners is inapplicable because said case
involved a judicial foreclosure and the sale to the vendee of the mortgaged property was duly registered
making the mortgaged privy to the sale.
As regards the claim that the period of publication of the notice of auction sale was not in accordance with
law, namely: once a week for at least three consecutive weeks, the Court of Appeals ruled that the
publication of notice on June 30, July 7 and July 14, 1968 satisfies the publication requirement under Act
No. 3135 notwithstanding the fact that June 30 to July 14 is only 14 days. We agree. Act No. 3135 merely
requires that such notice shall be published once a week for at least three consecutive weeks." Such
phrase, as interpreted by this Court in Basa vs. Mercado, 61 Phil. 632, does not mean that notice should
be published for three full weeks.
The argument that the publication of the notice in the "Luzon Weekly Courier" was not in accordance with
law as said newspaper is not of general circulation must likewise be disregarded. The affidavit of
publication, executed by the Publisher, business/advertising manager of the Luzon Weekly Courier, stares
that it is "a newspaper of general circulation in ... Rizal, and that the Notice of Sheriff's sale was published
in said paper on June 30, July 7 and July 14, 1968. This constitutes prima facie evidence of compliance
with the requisite publication. Sadang vs. GSIS, 18 SCRA 491).
To be a newspaper of general circulation, it is enough that "it is published for the dissemination of local
news and general information; that it has a bona fide subscription list of paying subscribers; that it is
published at regular intervals." (Basa vs. Mercado, 61 Phil. 632). The newspaper need not have the
largest circulation so long as it is of general circulation. Banta vs. Pacheco, 74 Phil. 67). The testimony of

three witnesses that they do read the Luzon Weekly Courier is no proof that said newspaper is not a
newspaper of general circulation in the province of Rizal.
Whether or not the notice of auction sale was posted for the period required by law is a question of fact. It
can no longer be entertained by this Court. (see Reyes, et al. vs. CA, et al., 107 SCRA 126).
Nevertheless, the records show that copies of said notice were posted in three conspicuous places in the
municipality of Pasig, Rizal namely: the Hall of Justice, the Pasig Municipal Market and Pasig Municipal
Hall. In the same manner, copies of said notice were also posted in the place where the property was
located, namely: the Municipal Building of San Juan, Rizal; the Municipal Market and on Benitez Street.
The following statement of Atty. Santiago Pastor, head of the legal department of respondent bank,
namely:
Q How many days were the notices posted in these two places, if you
know?
A We posted them only once in one day. (TSN, p. 45, July 25, 1973)
is not a sufficient countervailing evidence to prove that there was no compliance with the posting
requirement in the absence of proof or even of allegation that the notices were removed before the
expiration of the twenty- day period. A single act of posting (which may even extend beyond the period
required by law) satisfies the requirement of law. The burden of proving that the posting requirement was
not complied with is now shifted to the one who alleges non-compliance.
On the question of whether or not the petitioners had a right to redeem the property, We hold that the
Court of Appeals did not err in ruling that they had no right to redeem. No consent having been secured
from respondent Bank to the sale with assumption of mortgage by petitioners, the latter were not validly
substituted as debtors. In fact, their rights were never recorded and hence, respondent Bank is charged
with the obligation to recognize the right of redemption only of the Lozano spouses. But even granting that
as purchaser or assignee of the property, as the case may be, the petitioners had acquired a right to
redeem the property, petitioners failed to exercise said right within the period granted by law. Thru
certificate of sale in favor of appellee was registered on September 2, 1968 and the one year redemption
period expired on September 3, 1969. It was not until September 29, 1969 that petitioner Honesto
Bonnevie first wrote respondent and offered to redeem the property. Moreover, on September 29, 1969,
Honesto had at that time already transferred his rights to intervenor Raoul Bonnevie.
On the question of whether or not respondent Court of Appeals erred in holding that respondent Bank did
not act in bad faith, petitioners rely on Exhibit "B" which is the letter of lose Lozano to respondent Bank
dated December 8, 1966 advising the latter that Honesto Bonnevie was authorized to make payments for
the amount secured by the mortgage on the subject property, to receive acknowledgment of payments,
obtain the Release of the Mortgage after full payment of the obligation and to take delivery of the title of
said property. On the assumption that the letter was received by respondent Bank, a careful reading of
the same shows that the plaintiff was merely authorized to do acts mentioned therein and does not
mention that petitioner is the new owner of the property nor request that all correspondence and notice
should be sent to him.
The claim of appellants that the collection of interests on the loan up to July 12, 1968 extends the maturity
of said loan up to said date and accordingly on June 10, 1968 when defendant applied for the foreclosure
of the mortgage, the loan was not yet due and demandable, is totally incorrect and misleading. The
undeniable fact is that the loan matured on December 26, 1967. On June 10, 1968, when respondent
Bank applied for foreclosure, the loan was already six months overdue. Petitioners' payment of interest on
July 12, 1968 does not thereby make the earlier act of respondent Bank inequitous nor does it ipso facto

result in the renewal of the loan. In order that a renewal of a loan may be effected, not only the payment
of the accrued interest is necessary but also the payment of interest for the proposed period of renewal as
well. Besides, whether or not a loan may be renewed does not solely depend on the debtor but more so
on the discretion of the bank. Respondent Bank may not be, therefore, charged of bad faith.
WHEREFORE, the appeal being devoid of merit, the decision of the Court of Appeals is hereby
AFFIRMED. Costs against petitioners.
SO ORDERED.
Aquino, J., concur.
Makasiar (Chairman), Abad Santos and Escolin, JJ., concurs in the result.
Concepcion J J., took no part.
De Castro, J., is on leave.
Footnotes
1 Third Division, Reyes, L.B., J., ponente; Busran and Nocon, JJ., concurring.
2 4. The MORTGAGOR shall not sell, dispose of, mortgage, nor in any manner encumber
the mortgaged properties without the written consent of MORTGAGEE. If in spite of this
stipulation, a mortgaged property is sold, the Vendee shall assume the mortgaged in the
terms and conditions under which it is constituted, it being understood that the
assumption of the Vendee (does) not release the Vendor of his obligation to the
MORTGAGEE; on the contrary, both the Vendor and the Vendee shall be jointly and
severally liable for said mortgage obligation. ...
G.R. No. 133632

February 15, 2002

3. BPI INVESTMENT CORPORATION, petitioner,


vs.
HON. COURT OF APPEALS and ALS MANAGEMENT & DEVELOPMENT
CORPORATION, respondents.
DECISION
QUISUMBING, J.:
This petition for certiorari assails the decision dated February 28, 1997, of the Court of Appeals and its
resolution dated April 21, 1998, in CA-G.R. CV No. 38887. The appellate court affirmed the judgment of
the Regional Trial Court of Pasig City, Branch 151, in (a) Civil Case No. 11831, for foreclosure of
mortgage by petitioner BPI Investment Corporation (BPIIC for brevity) against private respondents ALS
Management and Development Corporation and Antonio K. Litonjua, 1 consolidated with (b) Civil Case No.
52093, for damages with prayer for the issuance of a writ of preliminary injunction by the private
respondents against said petitioner.
The trial court had held that private respondents were not in default in the payment of their monthly
amortization, hence, the extrajudicial foreclosure conducted by BPIIC was premature and made in bad

faith. It awarded private respondents the amount of P300,000 for moral damages, P50,000 for exemplary
damages, and P50,000 for attorneys fees and expenses for litigation. It likewise dismissed the
foreclosure suit for being premature.
The facts are as follows:
Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala Investment and
Development Corporation (AIDC), the predecessor of petitioner BPIIC, for the construction of a house on
his lot in New Alabang Village, Muntinlupa. Said house and lot were mortgaged to AIDC to secure the
loan. Sometime in 1980, Roa sold the house and lot to private respondents ALS and Antonio Litonjua
for P850,000. They paid P350,000 in cash and assumed the P500,000 balance of Roas indebtedness
with AIDC. The latter, however, was not willing to extend the old interest rate to private respondents and
proposed to grant them a new loan of P500,000 to be applied to Roas debt and secured by the same
property, at an interest rate of 20% per annum and service fee of 1% per annum on the outstanding
principal balance payable within ten years in equal monthly amortization of P9,996.58 and penalty interest
at the rate of 21% per annum per day from the date the amortization became due and payable.
Consequently, in March 1981, private respondents executed a mortgage deed containing the above
stipulations with the provision that payment of the monthly amortization shall commence on May 1, 1981.
On August 13, 1982, ALS and Litonjua updated Roas arrearages by paying BPIIC the sum
of P190,601.35. This reduced Roas principal balance to P457,204.90 which, in turn, was liquidated when
BPIIC applied thereto the proceeds of private respondents loan of P500,000.
On September 13, 1982, BPIIC released to private respondents P7,146.87, purporting to be what was left
of their loan after full payment of Roas loan.
In June 1984, BPIIC instituted foreclosure proceedings against private respondents on the ground that
they failed to pay the mortgage indebtedness which from May 1, 1981 to June 30, 1984, amounted to
Four Hundred Seventy Five Thousand Five Hundred Eighty Five and 31/100 Pesos (P475,585.31). A
notice of sheriffs sale was published on August 13, 1984.
On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093 against BPIIC. They alleged, among
others, that they were not in arrears in their payment, but in fact made an overpayment as of June 30,
1984. They maintained that they should not be made to pay amortization before the actual release of
the P500,000 loan in August and September 1982. Further, out of the P500,000 loan, only the total
amount of P464,351.77 was released to private respondents. Hence, applying the effects of legal
compensation, the balance of P35,648.23 should be applied to the initial monthly amortization for the
loan.
On August 31, 1988, the trial court rendered its judgment in Civil Case Nos. 11831 and 52093, thus:
WHEREFORE, judgment is hereby rendered in favor of ALS Management and Development Corporation
and Antonio K. Litonjua and against BPI Investment Corporation, holding that the amount of loan granted
by BPI to ALS and Litonjua was only in the principal sum of P464,351.77, with interest at 20% plus
service charge of 1% per annum, payable on equal monthly and successive amortizations at P9,283.83
for ten (10) years or one hundred twenty (120) months. The amortization schedule attached as Annex "A"
to the "Deed of Mortgage" is correspondingly reformed as aforestated.
The Court further finds that ALS and Litonjua suffered compensable damages when BPI caused their
publication in a newspaper of general circulation as defaulting debtors, and therefore orders BPI to pay
ALS and Litonjua the following sums:

a) P300,000.00 for and as moral damages;


b) P50,000.00 as and for exemplary damages;
c) P50,000.00 as and for attorneys fees and expenses of litigation.
The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED for being premature.
Costs against BPI.
SO ORDERED.2
Both parties appealed to the Court of Appeals. However, private respondents appeal was dismissed for
non-payment of docket fees.
On February 28, 1997, the Court of Appeals promulgated its decision, the dispositive portion reads:
WHEREFORE, finding no error in the appealed decision the same is hereby AFFIRMED in toto.
SO ORDERED.3
In its decision, the Court of Appeals reasoned that a simple loan is perfected only upon the delivery of the
object of the contract. The contract of loan between BPIIC and ALS & Litonjua was perfected only on
September 13, 1982, the date when BPIIC released the purported balance of the P500,000 loan after
deducting therefrom the value of Roas indebtedness. Thus, payment of the monthly amortization should
commence only a month after the said date, as can be inferred from the stipulations in the contract. This,
despite the express agreement of the parties that payment shall commence on May 1, 1981. From
October 1982 to June 1984, the total amortization due was onlyP194,960.43. Evidence showed that
private respondents had an overpayment, because as of June 1984, they already paid a total amount
of P201,791.96. Therefore, there was no basis for BPIIC to extrajudicially foreclose the mortgage and
cause the publication in newspapers concerning private respondents delinquency in the payment of their
loan. This fact constituted sufficient ground for moral damages in favor of private respondents.
The motion for reconsideration filed by petitioner BPIIC was likewise denied, hence this petition, where
BPIIC submits for resolution the following issues:
I. WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL CONTRACT IN THE LIGHT
OF THE RULE LAID DOWN IN BONNEVIE VS. COURT OF APPEALS, 125 SCRA 122.
II. WHETHER OR NOT BPI SHOULD BE HELD LIABLE FOR MORAL AND EXEMPLARY
DAMAGES AND ATTORNEYS FEES IN THE FACE OF IRREGULAR PAYMENTS MADE BY
ALS AND OPPOSED TO THE RULE LAID DOWN IN SOCIAL SECURITY SYSTEM VS. COURT
OF APPEALS, 120 SCRA 707.
On the first issue, petitioner contends that the Court of Appeals erred in ruling that because a simple loan
is perfected upon the delivery of the object of the contract, the loan contract in this case was perfected
only on September 13, 1982. Petitioner claims that a contract of loan is a consensual contract, and a loan
contract is perfected at the time the contract of mortgage is executed conformably with our ruling
in Bonnevie v. Court of Appeals, 125 SCRA 122. In the present case, the loan contract was perfected on
March 31, 1981, the date when the mortgage deed was executed, hence, the amortization and interests
on the loan should be computed from said date.

Petitioner also argues that while the documents showed that the loan was released only on August 1982,
the loan was actually released on March 31, 1981, when BPIIC issued a cancellation of mortgage of
Frank Roas loan. This finds support in the registration on March 31, 1981 of the Deed of Absolute Sale
executed by Roa in favor of ALS, transferring the title of the property to ALS, and ALS executing the
Mortgage Deed in favor of BPIIC. Moreover, petitioner claims, the delay in the release of the loan should
be attributed to private respondents. As BPIIC only agreed to extend a P500,000 loan, private
respondents were required to reduce Frank Roas loan below said amount. According to petitioner, private
respondents were only able to do so in August 1982.
In their comment, private respondents assert that based on Article 1934 of the Civil Code, 4 a simple loan
is perfected upon the delivery of the object of the contract, hence a real contract. In this case, even
though the loan contract was signed on March 31, 1981, it was perfected only on September 13, 1982,
when the full loan was released to private respondents. They submit that petitioner misread Bonnevie. To
give meaning to Article 1934, according to private respondents, Bonnevie must be construed to mean that
the contract to extend the loan was perfected on March 31, 1981 but the contract of loan itself was only
perfected upon the delivery of the full loan to private respondents on September 13, 1982.
Private respondents further maintain that even granting, arguendo, that the loan contract was perfected
on March 31, 1981, and their payment did not start a month thereafter, still no default took place.
According to private respondents, a perfected loan agreement imposes reciprocal obligations, where the
obligation or promise of each party is the consideration of the other party. In this case, the consideration
for BPIIC in entering into the loan contract is the promise of private respondents to pay the monthly
amortization. For the latter, it is the promise of BPIIC to deliver the money. In reciprocal obligations,
neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with
what is incumbent upon him. Therefore, private respondents conclude, they did not incur in delay when
they did not commence paying the monthly amortization on May 1, 1981, as it was only on September 13,
1982 when petitioner fully complied with its obligation under the loan contract.
We agree with private respondents. A loan contract is not a consensual contract but a real contract. It is
perfected only upon the delivery of the object of the contract. 5 Petitioner misapplied Bonnevie. The
contract in Bonneviedeclared by this Court as a perfected consensual contract falls under the first clause
of Article 1934, Civil Code. It is an accepted promise to deliver something by way of simple loan.
In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44 SCRA 445, petitioner
applied for a loan of P500,000 with respondent bank. The latter approved the application through a board
resolution. Thereafter, the corresponding mortgage was executed and registered. However, because of
acts attributable to petitioner, the loan was not released. Later, petitioner instituted an action for damages.
We recognized in this case, a perfected consensual contract which under normal circumstances could
have made the bank liable for not releasing the loan. However, since the fault was attributable to
petitioner therein, the court did not award it damages.
A perfected consensual contract, as shown above, can give rise to an action for damages. However, said
contract does not constitute the real contract of loan which requires the delivery of the object of the
contract for its perfection and which gives rise to obligations only on the part of the borrower.6
In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on the other,
was perfected only on September 13, 1982, the date of the second release of the loan. Following the
intentions of the parties on the commencement of the monthly amortization, as found by the Court of
Appeals, private respondents obligation to pay commenced only on October 13, 1982, a month after the
perfection of the contract.7
We also agree with private respondents that a contract of loan involves a reciprocal obligation, wherein
the obligation or promise of each party is the consideration for that of the other.8 As averred by private
respondents, the promise of BPIIC to extend and deliver the loan is upon the consideration that ALS and

Litonjua shall pay the monthly amortization commencing on May 1, 1981, one month after the supposed
release of the loan. It is a basic principle in reciprocal obligations that neither party incurs in delay, if the
other does not comply or is not ready to comply in a proper manner with what is incumbent upon
him.9 Only when a party has performed his part of the contract can he demand that the other party also
fulfills his own obligation and if the latter fails, default sets in. Consequently, petitioner could only demand
for the payment of the monthly amortization after September 13, 1982 for it was only then when it
complied with its obligation under the loan contract. Therefore, in computing the amount due as of the
date when BPIIC extrajudicially caused the foreclosure of the mortgage, the starting date is October 13,
1982 and not May 1, 1981.
Other points raised by petitioner in connection with the first issue, such as the date of actual release of
the loan and whether private respondents were the cause of the delay in the release of the loan, are
factual. Since petitioner has not shown that the instant case is one of the exceptions to the basic rule that
only questions of law can be raised in a petition for review under Rule 45 of the Rules of Court, 10 factual
matters need not tarry us now. On these points we are bound by the findings of the appellate and trial
courts.
On the second issue, petitioner claims that it should not be held liable for moral and exemplary damages
for it did not act maliciously when it initiated the foreclosure proceedings. It merely exercised its right
under the mortgage contract because private respondents were irregular in their monthly
amortization.1wphi1 It invoked our ruling in Social Security System vs. Court of Appeals, 120 SCRA 707,
where we said:
Nor can the SSS be held liable for moral and temperate damages. As concluded by the Court of Appeals
"the negligence of the appellant is not so gross as to warrant moral and temperate damages," except that,
said Court reduced those damages by only P5,000.00 instead of eliminating them. Neither can we agree
with the findings of both the Trial Court and respondent Court that the SSS had acted maliciously or in
bad faith. The SSS was of the belief that it was acting in the legitimate exercise of its right under the
mortgage contract in the face of irregular payments made by private respondents and placed reliance on
the automatic acceleration clause in the contract. The filing alone of the foreclosure application should not
be a ground for an award of moral damages in the same way that a clearly unfounded civil action is not
among the grounds for moral damages.
Private respondents counter that BPIIC was guilty of bad faith and should be liable for said damages
because it insisted on the payment of amortization on the loan even before it was released. Further, it did
not make the corresponding deduction in the monthly amortization to conform to the actual amount of
loan released, and it immediately initiated foreclosure proceedings when private respondents failed to
make timely payment.
But as admitted by private respondents themselves, they were irregular in their payment of monthly
amortization. Conformably with our ruling in SSS, we can not properly declare BPIIC in bad faith.
Consequently, we should rule out the award of moral and exemplary damages. 11
However, in our view, BPIIC was negligent in relying merely on the entries found in the deed of mortgage,
without checking and correspondingly adjusting its records on the amount actually released to private
respondents and the date when it was released. Such negligence resulted in damage to private
respondents, for which an award of nominal damages should be given in recognition of their rights which
were violated by BPIIC.12 For this purpose, the amount of P25,000 is sufficient.
Lastly, as in SSS where we awarded attorneys fees because private respondents were compelled to
litigate, we sustain the award of P50,000 in favor of private respondents as attorneys fees.
WHEREFORE, the decision dated February 28, 1997, of the Court of Appeals and its resolution dated
April 21, 1998, are AFFIRMED WITH MODIFICATION as to the award of damages. The award of moral

and exemplary damages in favor of private respondents is DELETED, but the award to them of attorneys
fees in the amount ofP50,000 is UPHELD. Additionally, petitioner is ORDERED to pay private
respondents P25,000 as nominal damages. Costs against petitioner.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.

Footnotes
1

While Antonio K. Litonjua was not included in the caption of the petition before this court,
apparently, the intention of petitioner was to include Litonjua as private respondent for he was a
party in all stages of the case both before the Regional Trial Court and the Court of Appeals and it
was clearly indicated in the petition that "ALS" collectively referred to as ALS Management and
Development Corporation and Antonio K. Litonjua.
2

RTC Records, p. 278.

Rollo, p. 32.

Art. 1934. An accepted promise to deliver something by way of commodatum or simple loan is
binding upon the parties, but the commodatum or simple loan itself shall not be perfected until the
delivery of the object of the contract.
5

Art. 1934, Civil Code of the Philippines; Monte de Piedad vs. Javier, et al., 36 OG 2176; A.
Padilla, Civil Code of the Philippines Annotated, Vol. VI, pp. 474-475 (1987); E. Paras, Civil Code
of the Philippines Annotated, Vol. V, p. 885 (1995).
6

A. Tolentino, Civil Code of the Philippines, V. 5, p. 443 (1992).

Supra, note 3 at 30.

Rose Packing Co. Inc. vs. Court of Appeals, No. L-33084, 167 SCRA 309, 318-319 (1988).

Art. 1169, Civil Code:


xxx
In reciprocal obligations, neither party incurs in delay if the other does not comply or is
not ready to comply in a proper manner with what is incumbent upon him. From the
moment one of the parties fulfills his obligation, delay by the other begins.

10

American President Lines, Ltd. vs. Court of Appeals, G.R. No. 110853, 336 SCRA 582, 586
(2000).
11

Art. 2234, Civil Code: While the amount of the exemplary damages need not be proved, the
plaintiff must show that he is entitled to moral, temperate or compensatory damages before the
court may consider the question of whether or not exemplary damages should be awarded. In
case liquidated damages have been agreed upon, although no proof of loss is necessary in order

that such liquidated damages may be recovered, nevertheless, before the court may consider the
question of granting exemplary in addition to the liquidated damages, the plaintiff must show that
he would be entitled to moral, temperate or compensatory damages were it not for the stipulation
for liquidated damages.
12

Art. 2221, Civil Code: Nominal damages are adjudicated in order that a right of the plaintiff,
which has been violated or invaded by the defendant, may be vindicated or recognized, and not
for the purpose of indemnifying the plaintiff for any loss suffered by him.
G.R. No. 118375

October 3, 2003

4. CELESTINA T. NAGUIAT, petitioner,


vs.
COURT OF APPEALS and AURORA QUEAO, respondents.
DECISION
TINGA, J.:
Before us is a Petition for Review on Certiorari under Rule 45, assailing the decision of the Sixteenth
Division of the respondent Court of Appeals promulgated on 21 December 1994 1, which affirmed in toto
the decision handed down by the Regional Trial Court (RTC) of Pasay City.2
The case arose when on 11 August 1981, private respondent Aurora Queao (Queao) filed a complaint
before the Pasay City RTC for cancellation of a Real Estate Mortgage she had entered into with petitioner
Celestina Naguiat (Naguiat). The RTC rendered a decision, declaring the questioned Real Estate
Mortgage void, which Naguiat appealed to the Court of Appeals. After the Court of Appeals upheld the
RTC decision, Naguiat instituted the present petition.1vvphi1.nt
The operative facts follow:
Queao applied with Naguiat for a loan in the amount of Two Hundred Thousand Pesos (P200,000.00),
which Naguiat granted. On 11 August 1980, Naguiat indorsed to Queao Associated Bank Check No.
090990 (dated 11 August 1980) for the amount of Ninety Five Thousand Pesos (P95,000.00), which was
earlier issued to Naguiat by the Corporate Resources Financing Corporation. She also issued her own
Filmanbank Check No. 065314, to the order of Queao, also dated 11 August 1980 and for the amount of
Ninety Five Thousand Pesos (P95,000.00). The proceeds of these checks were to constitute the loan
granted by Naguiat to Queao.3
To secure the loan, Queao executed a Deed of Real Estate Mortgage dated 11 August 1980 in favor of
Naguiat, and surrendered to the latter the owners duplicates of the titles covering the mortgaged
properties.4 On the same day, the mortgage deed was notarized, and Queao issued to Naguiat a
promissory note for the amount of TWO HUNDRED THOUSAND PESOS (P200,000.00), with interest at
12% per annum, payable on 11 September 1980.5Queao also issued a Security Bank and Trust
Company check, postdated 11 September 1980, for the amount of TWO HUNDRED THOUSAND PESOS
(P200,000.00) and payable to the order of Naguiat.
Upon presentment on its maturity date, the Security Bank check was dishonored for insufficiency of funds.
On the following day, 12 September 1980, Queao requested Security Bank to stop payment of her
postdated check, but the bank rejected the request pursuant to its policy not to honor such requests if the
check is drawn against insufficient funds.6

On 16 October 1980, Queao received a letter from Naguiats lawyer, demanding settlement of the loan.
Shortly thereafter, Queao and one Ruby Ruebenfeldt (Ruebenfeldt) met with Naguiat. At the meeting,
Queao told Naguiat that she did not receive the proceeds of the loan, adding that the checks were
retained by Ruebenfeldt, who purportedly was Naguiats agent. 7
Naguiat applied for the extrajudicial foreclosure of the mortgage with the Sheriff of Rizal Province, who
then scheduled the foreclosure sale on 14 August 1981. Three days before the scheduled sale, Queao
filed the case before the Pasay City RTC,8 seeking the annulment of the mortgage deed. The trial court
eventually stopped the auction sale.9
On 8 March 1991, the RTC rendered judgment, declaring the Deed of Real Estate Mortgage null and
void, and ordering Naguiat to return to Queao the owners duplicates of her titles to the mortgaged
lots.10 Naguiat appealed the decision before the Court of Appeals, making no less than eleven
assignments of error. The Court of Appeals promulgated the decision now assailed before us that affirmed
in toto the RTC decision. Hence, the present petition.
Naguiat questions the findings of facts made by the Court of Appeals, especially on the issue of whether
Queao had actually received the loan proceeds which were supposed to be covered by the two checks
Naguiat had issued or indorsed. Naguiat claims that being a notarial instrument or public document, the
mortgage deed enjoys the presumption that the recitals therein are true. Naguiat also questions the
admissibility of various representations and pronouncements of Ruebenfeldt, invoking the rule on the nonbinding effect of the admissions of third persons.11
The resolution of the issues presented before this Court by Naguiat involves the determination of facts, a
function which this Court does not exercise in an appeal by certiorari. Under Rule 45 which governs
appeal by certiorari, only questions of law may be raised 12 as the Supreme Court is not a trier of
facts.13 The resolution of factual issues is the function of lower courts, whose findings on these matters
are received with respect and are in fact generally binding on the Supreme Court. 14 A question of law
which the Court may pass upon must not involve an examination of the probative value of the evidence
presented by the litigants.15 There is a question of law in a given case when the doubt or difference arises
as to what the law is on a certain state of facts; there is a question of fact when the doubt or difference
arises as to the truth or the falsehood of alleged facts. 16
Surely, there are established exceptions to the rule on the conclusiveness of the findings of facts of the
lower courts.17 But Naguiats case does not fall under any of the exceptions. In any event, both the
decisions of the appellate and trial courts are supported by the evidence on record and the applicable
laws.
Against the common finding of the courts below, Naguiat vigorously insists that Queao received the loan
proceeds. Capitalizing on the status of the mortgage deed as a public document, she cites the rule that a
public document enjoys the presumption of validity and truthfulness of its contents. The Court of Appeals,
however, is correct in ruling that the presumption of truthfulness of the recitals in a public document was
defeated by the clear and convincing evidence in this case that pointed to the absence of
consideration.18 This Court has held that the presumption of truthfulness engendered by notarized
documents is rebuttable, yielding as it does to clear and convincing evidence to the contrary, as in this
case.19
On the other hand, absolutely no evidence was submitted by Naguiat that the checks she issued or
endorsed were actually encashed or deposited. The mere issuance of the checks did not result in the
perfection of the contract of loan. For the Civil Code provides that the delivery of bills of exchange and
mercantile documents such as checks shall produce the effect of payment only when they have been
cashed.20 It is only after the checks have produced the effect of payment that the contract of loan may be
deemed perfected. Art. 1934 of the Civil Code provides:

"An accepted promise to deliver something by way of commodatum or simple loan is binding upon the
parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of
the contract."
A loan contract is a real contract, not consensual, and, as such, is perfected only upon the delivery of the
object of the contract.21 In this case, the objects of the contract are the loan proceeds which Queao
would enjoy only upon the encashment of the checks signed or indorsed by Naguiat. If indeed the checks
were encashed or deposited, Naguiat would have certainly presented the corresponding documentary
evidence, such as the returned checks and the pertinent bank records. Since Naguiat presented no such
proof, it follows that the checks were not encashed or credited to Queaos account.1awphi1.nt
Naguiat questions the admissibility of the various written representations made by Ruebenfeldt on the
ground that they could not bind her following the res inter alia acta alteri nocere non debet rule. The Court
of Appeals rejected the argument, holding that since Ruebenfeldt was an authorized representative or
agent of Naguiat the situation falls under a recognized exception to the rule. 22 Still, Naguiat insists that
Ruebenfeldt was not her agent.
Suffice to say, however, the existence of an agency relationship between Naguiat and Ruebenfeldt is
supported by ample evidence. As correctly pointed out by the Court of Appeals, Ruebenfeldt was not a
stranger or an unauthorized person. Naguiat instructed Ruebenfeldt to withhold from Queao the checks
she issued or indorsed to Queao, pending delivery by the latter of additional collateral. Ruebenfeldt
served as agent of Naguiat on the loan application of Queaos friend, Marilou Farralese, and it was in
connection with that transaction that Queao came to know Naguiat. 23 It was also Ruebenfeldt who
accompanied Queao in her meeting with Naguiat and on that occasion, on her own and without Queao
asking for it, Reubenfeldt actually drew a check for the sum ofP220,000.00 payable to Naguiat, to cover
for Queaos alleged liability to Naguiat under the loan agreement. 24
The Court of Appeals recognized the existence of an "agency by estoppel 25 citing Article 1873 of the Civil
Code.26Apparently, it considered that at the very least, as a consequence of the interaction between
Naguiat and Ruebenfeldt, Queao got the impression that Ruebenfeldt was the agent of Naguiat, but
Naguiat did nothing to correct Queaos impression. In that situation, the rule is clear. One who clothes
another with apparent authority as his agent, and holds him out to the public as such, cannot be permitted
to deny the authority of such person to act as his agent, to the prejudice of innocent third parties dealing
with such person in good faith, and in the honest belief that he is what he appears to be. 27 The Court of
Appeals is correct in invoking the said rule on agency by estoppel.1awphi1.nt
More fundamentally, whatever was the true relationship between Naguiat and Ruebenfeldt is irrelevant in
the face of the fact that the checks issued or indorsed to Queao were never encashed or deposited to
her account of Naguiat.
All told, we find no compelling reason to disturb the finding of the courts a quo that the lender did not remit
and the borrower did not receive the proceeds of the loan. That being the case, it follows that the
mortgage which is supposed to secure the loan is null and void. The consideration of the mortgage
contract is the same as that of the principal contract from which it receives life, and without which it
cannot exist as an independent contract.28 A mortgage contract being a mere accessory contract, its
validity would depend on the validity of the loan secured by it. 29
WHEREFORE, the petition is denied and the assailed decision is affirmed. Costs against petitioner.
SO ORDERED.
Bellosillo, (Chairman), Quisumbing, Austria-Martinez, and Callejo, Sr., JJ., concur.

Footnotes
1

Justice Corona Ibay-Somera wrote the ponencia, with Justices Asaali S. Isnani and Celia
Lipana-Reyes, concurring.
2

Promulgated on 8 March 1991 by Judge Manuel P. Dumatol.

According to Naguiat, she further delivered to Queao the amount of Ten Thousand Pesos
(P10,000.00), thus rounding off the amount she allegedly gave to Queao to Two Hundred
Thousand Pesos (See Petition for Certiorari, p. 3). Queao, however, claims that the amount of
Ten Thousand (P10,000.00) was deducted as the stipulated 5% interest. Records, p. 342.
4

Transfer Certificates of Title Nos. 28631 and 28632, issued by the Register of Deeds for District
IV (Pasay City) of Metro Manila, with a total area of Six Hundred Thirty One (631) Square Meters.
Rollo, p. 97.
5

Rollo, p. 98. According to Queao, the true agreement between the parties was an interest rate
of 5% per month.
6

Id., p. 99. Queao alleged that she made the "stop payment" request because she was
withdrawing her loan application as she failed to receive the loan proceeds which were supposed
to be covered by Naguiats checks that were turned not to her but to Ruby Ruebenfeldt, who
purportedly was an agent of Naguiat. Queao claimed further that Naguiat demanded additional
collaterals and instructed Ruebenfeldt to surrender the checks to Queao only upon receipt of the
additional security.
7

Id., p. 99. Queao claimed further that Naguiat demanded additional collaterals and instructed
Ruebenfeldt to surrender the checks to Queao only upon receipt of the additional security.
8

Docketed as Civil Case No. 9330-P.

Rollo, p. 5.

10

Id., p. 37.

11

Sec. 28, Rule 130. See Rule 130, Sec. 28. "Section 28. Admission by third party. The rights
of a party cannot be prejudiced by an act, declaration, or omission of another, except as
hereinafter provided."
12

Sec. 1, Rule 45 states: "A party desiring to appeal by certiorari from a judgment or final order or
resolution of the Court of Appeals, the Sandiganbayan, the Regional Trial Court or other courts
whenever authorized by law, may file with the Supreme Court a verified petition for review
on certiorari. The petition shall raise only questions of law which must be distinctly set forth." See
also Metro Transit Organization Inc. v. CA, G.R. No. 142133, 19 November 2002.
13

W-Red Construction v. CA, G.R. No. 122648, 17 August 2000.

14

Engreso v. De La Cruz, G.R. No. 148727, 9 April 2003.

15

Western Shipyard Services, Inc. v. CA, G.R. No. 110340, 28 May 2001.

16

Bagunu v. Piedad, G.R. No. 140975, 8 December 2000.

17

Exceptional circumstances that would compel the Supreme Court to review the findings of fact
of the lower courts are: (1) when the conclusion is a finding grounded entirely on speculations,
surmises or conjectures; (2) when the inference made is manifestly absurd, mistaken or
impossible; (3) when there is grave abuse of discretion in the appreciation of facts; (4) when the
judgment is premised on a misapprehension of facts; (5) when the findings of fact are conflicting;
(6) when the Court of Appeals in making its findings, went beyond the issues of the case and the
same is contrary to the admissions of both appellant and appellee; (7) when the Court of Appeals
manifestly overlooked certain relevant facts not disputed by the parties and which, if properly
considered, would justify a different conclusion; and (8) when the findings of fact of the Court of
Appeals are contrary to those of the trial court, or are mere conclusions without citation of specific
evidence, or where the facts set forth by the petitioner are not disputed by the respondent, or
where the findings of fact of the Court of Appeals are premised on absence of evidence but are
contradicted by the evidence of record. See Sacay v. Sandiganbayan, 226 Phil. 496, 510 (1986).
18

Rollo, p. 43.

19

See Gerales v. Court of Appeals, G.R. No. 85909, 218 SCRA 638, 648, 9 February 1993, and
Agdeppa vs. Ibe, G.R. No. 96770, 220 SCRA 584, 594, 30 March 1993.
20

Art. 1249, New Civil Code. ". . . The delivery of promissory notes payable to order, or bills of
exchange or other mercantile documents shall produce the effect of payment only when they
have been cashed, or when through the fault of the creditor they have been impaired."
21

BPI Investment Corporation v. Court of Appeals, G.R. No. 133632, 377 SCRA 117, 124, 15
February 2002. The Court therein clarified the previous ruling in Bonnevie v. Court of Appeals,
210 Phil. 104, 108 (1983) which apparently suggested that a contract of loan was a consensual
contract, by noting that the contract in Bonnevie fell under the first clause of Art. 1934 of the Civil
Code, it being an accepted promise to deliver something by way of simple loan.
22

See Sec. 29, Rule 130. "Section 29. Admission by co-partner or agent. The act or declaration
of a partner or agent of the party within the scope of his authority and during the existence of the
partnership or agency, may be given in evidence against such party after the partnership or
agency is shown by evidence other than such act or declaration. The same rule applies to the act
or declaration of a joint owner, joint debtor or other person jointly interested with the party."
23

Rollo, p. 49.

24

Security Bank & Trust Company Check No. 017399, drawn by Ruebenfeldt payable to Naguiat,
and postdated to November 15, 1980. Naguiat accepted the check, allegedly because she
wanted to be assured of repayment. However, when Naguiat deposited this new check on 15
November 1980, the same was dishonored for being drawn against a closed account. On account
of the dishonor of Ruebenfeldts check, Naguiat filed a criminal complaint for violation of B.P. Blg.
22 with the City Prosecutorss Office of Caloocan. However, the City Prosecutor dismissed the
said action on the ground that Ruebenfeldts liability was civil and not criminal. See Rollo, p. 5 to
6.
25

Rollo, p. 50.

26

Art. 1873. "If a person specifically informs another or states by public advertisement that he has
given a power of attorney to a third person, the latter thereby becomes a duly authorized agent, in
the former case with respect to the person who received the special information, and in the latter
case with regard to any person."
27

Cuison v. Court of Appeals, G.R. No. 88531, 26 October 1993.

28

China Banking Corporation v. Lichauco, 46 Phil. 460 (1926).

29

Filipinas Marble Corp. v. Intermediate Appellate Court, 226 Phil. 109, 119 (1986).

G.R. No. 154878

March 16, 2007

5. CAROLYN M. GARCIA, Petitioner,


vs.
RICA MARIE S. THIO, Respondent.
DECISION
CORONA, J.:
Assailed in this petition for review on certiorari 1 are the June 19, 2002 decision2 and August 20, 2002
resolution3of the Court of Appeals (CA) in CA-G.R. CV No. 56577 which set aside the February 28, 1997
decision of the Regional Trial Court (RTC) of Makati City, Branch 58.
Sometime in February 1995, respondent Rica Marie S. Thio received from petitioner Carolyn M. Garcia a
crossed check4 dated February 24, 1995 in the amount of US$100,000 payable to the order of a certain
Marilou Santiago.5 Thereafter, petitioner received from respondent every month (specifically, on March 24,
April 26, June 26 and July 26, all in 1995) the amount of US$3,000 6 and P76,5007 on July 26,8 August 26,
September 26 and October 26, 1995.
In June 1995, respondent received from petitioner another crossed check 9 dated June 29, 1995 in the
amount ofP500,000, also payable to the order of Marilou Santiago. 10 Consequently, petitioner received
from respondent the amount of P20,000 every month on August 5, September 5, October 5 and
November 5, 1995.11
According to petitioner, respondent failed to pay the principal amounts of the loans (US$100,000
and P500,000) when they fell due. Thus, on February 22, 1996, petitioner filed a complaint for sum of
money and damages in the RTC of Makati City, Branch 58 against respondent, seeking to collect the
sums of US$100,000, with interest thereon at 3% a month from October 26, 1995 and P500,000, with
interest thereon at 4% a month from November 5, 1995, plus attorneys fees and actual damages. 12
Petitioner alleged that on February 24, 1995, respondent borrowed from her the amount of US$100,000
with interest thereon at the rate of 3% per month, which loan would mature on October 26, 1995. 13 The
amount of this loan was covered by the first check. On June 29, 1995, respondent again borrowed the
amount of P500,000 at an agreed monthly interest of 4%, the maturity date of which was on November 5,
1995.14 The amount of this loan was covered by the second check. For both loans, no promissory note
was executed since petitioner and respondent were close friends at the time. 15 Respondent paid the
stipulated monthly interest for both loans but on their maturity dates, she failed to pay the principal
amounts despite repeated demands.161awphi1.nt
Respondent denied that she contracted the two loans with petitioner and countered that it was Marilou
Santiago to whom petitioner lent the money. She claimed she was merely asked by petitioner to give the

crossed checks to Santiago.17 She issued the checks for P76,000 and P20,000 not as payment of interest
but to accommodate petitioners request that respondent use her own checks instead of Santiagos. 18
In a decision dated February 28, 1997, the RTC ruled in favor of petitioner.19 It found that respondent
borrowed from petitioner the amounts of US$100,000 with monthly interest of 3% and P500,000 at a
monthly interest of 4%:20
WHEREFORE, finding preponderance of evidence to sustain the instant complaint, judgment is hereby
rendered in favor of [petitioner], sentencing [respondent] to pay the former the amount of:
1. [US$100,000.00] or its peso equivalent with interest thereon at 3% per month from October 26,
1995 until fully paid;
2. P500,000.00 with interest thereon at 4% per month from November 5, 1995 until fully paid.
3. P100,000.00 as and for attorneys fees; and
4. P50,000.00 as and for actual damages.
For lack of merit, [respondents] counterclaim is perforce dismissed.
With costs against [respondent].
IT IS SO ORDERED.21
On appeal, the CA reversed the decision of the RTC and ruled that there was no contract of loan between
the parties:
A perusal of the record of the case shows that [petitioner] failed to substantiate her claim that [respondent]
indeed borrowed money from her. There is nothing in the record that shows that [respondent]
received money from [petitioner]. What is evident is the fact that [respondent] received a MetroBank
[crossed] check dated February 24, 1995 in the sum of US$100,000.00, payable to the order of Marilou
Santiago and a CityTrust [crossed] check dated June 29, 1995 in the amount of P500,000.00, again
payable to the order of Marilou Santiago, both of which were issued by [petitioner]. The checks received
by [respondent], being crossed, may not be encashed but only deposited in the bank by the payee
thereof, that is, by Marilou Santiago herself.
It must be noted that crossing a check has the following effects: (a) the check may not be encashed but
only deposited in the bank; (b) the check may be negotiated only onceto one who has an account with
the bank; (c) and the act of crossing the check serves as warning to the holder that the check has been
issued for a definite purpose so that he must inquire if he has received the check pursuant to that
purpose, otherwise, he is not a holder in due course.
Consequently, the receipt of the [crossed] check by [respondent] is not the issuance and delivery to the
payee in contemplation of law since the latter is not the person who could take the checks as a holder,
i.e., as a payee or indorsee thereof, with intent to transfer title thereto. Neither could she be deemed as
an agent of Marilou Santiago with respect to the checks because she was merely facilitating the
transactions between the former and [petitioner].
With the foregoing circumstances, it may be fairly inferred that there were really no contracts of loan that
existed between the parties. x x x (emphasis supplied)22
Hence this petition.23

As a rule, only questions of law may be raised in a petition for review on certiorari under Rule 45 of the
Rules of Court. However, this case falls under one of the exceptions, i.e., when the factual findings of the
CA (which held that there were no contracts of loan between petitioner and respondent) and the RTC
(which held that there werecontracts of loan) are contradictory.24
The petition is impressed with merit.
A loan is a real contract, not consensual, and as such is perfected only upon the delivery of the object of
the contract.25 This is evident in Art. 1934 of the Civil Code which provides:
An accepted promise to deliver something by way of commodatum or simple loan is binding upon the
parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the
object of the contract. (Emphasis supplied)
Upon delivery of the object of the contract of loan (in this case the money received by the debtor when the
checks were encashed) the debtor acquires ownership of such money or loan proceeds and is bound to
pay the creditor an equal amount.26
It is undisputed that the checks were delivered to respondent. However, these checks were crossed and
payable not to the order of respondent but to the order of a certain Marilou Santiago. Thus the main
question to be answered is: who borrowed money from petitioner respondent or Santiago?
Petitioner insists that it was upon respondents instruction that both checks were made payable to
Santiago.27She maintains that it was also upon respondents instruction that both checks were delivered
to her (respondent) so that she could, in turn, deliver the same to Santiago. 28 Furthermore, she argues
that once respondent received the checks, the latter had possession and control of them such that she
had the choice to either forward them to Santiago (who was already her debtor), to retain them or to
return them to petitioner.29
We agree with petitioner. Delivery is the act by which the res or substance thereof is placed within the
actual or constructive possession or control of another.30 Although respondent did not physically receive
the proceeds of the checks, these instruments were placed in her control and possession under an
arrangement whereby she actually re-lent the amounts to Santiago.
Several factors support this conclusion.
First, respondent admitted that petitioner did not personally know Santiago. 31 It was highly improbable that
petitioner would grant two loans to a complete stranger without requiring as much as promissory notes or
any written acknowledgment of the debt considering that the amounts involved were quite big.
Respondent, on the other hand, already had transactions with Santiago at that time. 32
Second, Leticia Ruiz, a friend of both petitioner and respondent (and whose name appeared in both
parties list of witnesses) testified that respondents plan was for petitioner to lend her money at a monthly
interest rate of 3%, after which respondent would lend the same amount to Santiago at a higher rate of
5% and realize a profit of 2%.33 This explained why respondent instructed petitioner to make the checks
payable to Santiago. Respondent has not shown any reason why Ruiz testimony should not be believed.
Third, for the US$100,000 loan, respondent admitted issuing her own checks in the amount of P76,000
each (peso equivalent of US$3,000) for eight months to cover the monthly interest. For the P500,000
loan, she also issued her own checks in the amount of P20,000 each for four months.34 According to
respondent, she merely accommodated petitioners request for her to issue her own checks to cover the
interest payments since petitioner was not personally acquainted with Santiago. 35 She claimed, however,
that Santiago would replace the checks with cash.36 Her explanation is simply incredible. It is difficult to

believe that respondent would put herself in a position where she would be compelled to pay interest,
from her own funds, for loans she allegedly did not contract. We declared in one case that:
In the assessment of the testimonies of witnesses, this Court is guided by the rule that for evidence to be
believed, it must not only proceed from the mouth of a credible witness, but must be credible in itself such
as the common experience of mankind can approve as probable under the circumstances. We have no
test of the truth of human testimony except its conformity to our knowledge, observation, and experience.
Whatever is repugnant to these belongs to the miraculous, and is outside of juridical cognizance. 37
Fourth, in the petition for insolvency sworn to and filed by Santiago, it was respondent, not petitioner, who
was listed as one of her (Santiagos) creditors.38
Last, respondent inexplicably never presented Santiago as a witness to corroborate her story.39 The
presumption is that "evidence willfully suppressed would be adverse if produced." 40 Respondent was not
able to overturn this presumption.
We hold that the CA committed reversible error when it ruled that respondent did not borrow the amounts
of US$100,000 and P500,000 from petitioner. We instead agree with the ruling of the RTC making
respondent liable for the principal amounts of the loans.
We do not, however, agree that respondent is liable for the 3% and 4% monthly interest for the
US$100,000 andP500,000 loans respectively. There was no written proof of the interest payable except
for the verbal agreement that the loans would earn 3% and 4% interest per month. Article 1956 of the Civil
Code provides that "[n]o interest shall be due unless it has been expressly stipulated in writing."
Be that as it may, while there can be no stipulated interest, there can be legal interest pursuant to Article
2209 of the Civil Code. It is well-settled that:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. 41
Hence, respondent is liable for the payment of legal interest per annum to be computed from November
21, 1995, the date when she received petitioners demand letter.42 From the finality of the decision until it
is fully paid, the amount due shall earn interest at 12% per annum, the interim period being deemed
equivalent to a forbearance of credit.43
The award of actual damages in the amount of P50,000 and P100,000 attorneys fees is deleted since the
RTC decision did not explain the factual bases for these damages.
WHEREFORE, the petition is hereby GRANTED and the June 19, 2002 decision and August 20, 2002
resolution of the Court of Appeals in CA-G.R. CV No. 56577 are REVERSED and SET ASIDE. The
February 28, 1997 decision of the Regional Trial Court in Civil Case No. 96-266 is AFFIRMED with
the MODIFICATION that respondent is directed to pay petitioner the amounts of US$100,000
and P500,000 at 12% per annum interest from November 21, 1995 until the finality of the decision. The
total amount due as of the date of finality will earn interest of 12% per annum until fully paid. The award of
actual damages and attorneys fees is deleted.
SO ORDERED.

RENATO C. CORONA
Associate Justice
WE CONCUR:
REYNATO S. PUNO
Chief Justice
Chairperson
ANGELINA SANDOVAL-GUTIERREZ
Associate Justice

ADOLFO S. AZCUNA
Asscociate Justice

CANCIO C. GARCIA
Associate Justice
C E R TI F I CATI O N
Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above decision
had been reached in consultation before the case was assigned to the writer of the opinion of the Courts
Division.
REYNATO S. PUNO
Chief Justice

Footnotes
1

Under Rule 45 of the Rules of Court.

Penned by former Associate Justice Eubulo G. Verzola (deceased) and concurred in by


Associate Justices Bernardo P. Abesamis (retired) and Josefina Guevara-Salonga of the Third
Division of the Court of Appeals; rollo, pp. 98-102.
3

Id., pp. 104-105.

This was Metrobank check no. 26910; id., pp. 70, 224 and 368.

Id., pp. 60, 100-101, 224.

Id., pp. 60-61. According to respondent, she originally issued four postdated checks each in the
amount of P76,000 on the same dates mentioned but these were not encashed and instead each
check was replaced by Santiago with US$3,000 in cash given by respondent to petitioner; id., p.
224.
7

This was the peso equivalent of US$3,000 computed at the exchange rate of P25.50 to $1.00;
id., pp. 17 and 88. These postdated checks were deposited on their respective due dates and
honored by the drawee bank; id., p. 225.
8

According to respondent, this check was replaced by Santiago with cash in the amount of
US$3,000.

This was City Trust check no. 467257; rollo, pp. 90 and 327.

10

Id., pp. 60, 101 and 225.

11

Id., p. 109.

12

Docketed as Civil Case No. 96-266; rollo, pp. 15, 60 and 364.

13

Id., p. 109.

14

Id., p. 110.

15

Id., p. 16.

16

Id., p. 110.

17

Id., p. 224.

18

Id.

19

Id., pp. 60-95.

20

Id., pp. 79 and 89.

21

Id., pp. 94-95.

22

Id., pp. 100-101, citation omitted.

23

The issues submitted for resolution are the following:


(A) Is actual and physical delivery of the money loaned directly from the lender to the
borrower the only way to perfect a contract of loan?
(B) Does the respondents admission that she paid interests to the petitioner on the
amounts represented by the two checks given to her by said petitioner render said
respondent in estoppel to question that there was no loan transaction between her and
the petitioner?
(C) Is respondents written manifestation in the trial court, through counsel, that she
interposes no objection to the admission of petitioners documentary exhibits for the
multiple purposes specified in the latters Formal Offer of Documentary Exhibits a judicial
admission governed by Rule 129, Section 4, Rules of Court?
(D) Is this Honorable Court bound by the conclusions of fact relied upon by the [CA] in
issuing its disputed Decision?
(E) Have the [RTCs] findings of fact on the lone issue on which respondent litigated in
the [RTC], viz.existence of privity of contract between petitioner and respondent, been
overturned or set aside by the [CA]?
(F) May the respondent validly change the theory of her case from one of privity of
contract between her and the petitioner in the [RTC], to one of not being a holder in due

course of the crossed checks payable to a third party in the [CA] and before this
Honorable Court?
(G) Is the petitioners entitlement to interest, despite absence of a written stipulation on
the payment thereof, justified?
(H) Is the deletion by the [CA] of the [RTCs] award of attorneys fees and actual
damages in favor pf the petitioner justified? Id., pp. 401-402.
24

Philippine National Bank v. Andrada Electric & Engineering Co., G.R. No. 142936, 17 April
2002, 381 SCRA 244, 253, citing Fuentes v. CA, 335 Phil. 1163, 1167-1169 (1997).
25

Naguiat v. Court of Appeals, G.R. No. 118375, 3 October 2003, 412 SCRA 591, 597.

26

Article 1953 of the Civil Code states:


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

27

Rollo, p. 39.

28

Id.

29

Id., pp. 39-40.

30

Buenaflor v. Court of Appeals, G.R. No. 142021, 29 November 2000, 346 SCRA 563, 569,
citing Black's Law Dictionary, 5th ed.
31

Rollo, p. 64.

32

Id., p. 70.

33

Id., pp. 76 and 85.

34

Id., pp. 16-17, 224-225, 411.

35

Id., p. 224.

36

Id., p. 70.

37

People v. Mala, G.R. No. 152351, 18 September 2003, 411 SCRA 327, 337, citing People v.
Dayag, 155 Phil. 421, 431 (1974).
38

Rollo, pp. 88 and 94.

39

Id., p. 93.

40

Sec. 3 (e), Rule 131, Rules of Court.

41

Eusebio-Calderon v. People, G.R. No. 158495, 21 October 2004, 441 SCRA 137, 148-149,
citingEastern Shipping Lines, Inc. v. Court of Appeals, G.R. No. 97412, 12 July 1994, 234 SCRA
78, 95; Cabrera v. People, G.R. No. 150618, 24 July 2003, 407 SCRA 247, 261.
42

Rollo, p. 65.

43

Cabrera v. People, supra.

6. G.R. No. 174269

May 8, 2009

POLO S. PANTALEON, Petitioner,


vs.
AMERICAN EXPRESS INTERNATIONAL, INC., Respondent.
DECISION
TINGA, J.:
The petitioner, lawyer Polo Pantaleon, his wife Julialinda, daughter Anna Regina and son Adrian Roberto,
joined an escorted tour of Western Europe organized by Trafalgar Tours of Europe, Ltd., in October of
1991. The tour group arrived in Amsterdam in the afternoon of 25 October 1991, the second to the last
day of the tour. As the group had arrived late in the city, they failed to engage in any sight-seeing. Instead,
it was agreed upon that they would start early the next day to see the entire city before ending the tour.
The following day, the last day of the tour, the group arrived at the Coster Diamond House in Amsterdam
around 10 minutes before 9:00 a.m. The group had agreed that the visit to Coster should end by 9:30
a.m. to allow enough time to take in a guided city tour of Amsterdam. The group was ushered into Coster
shortly before 9:00 a.m., and listened to a lecture on the art of diamond polishing that lasted for around
ten minutes.1 Afterwards, the group was led to the stores showroom to allow them to select items for
purchase. Mrs. Pantaleon had already planned to purchase even before the tour began a 2.5 karat
diamond brilliant cut, and she found a diamond close enough in approximation that she decided to
buy.2 Mrs. Pantaleon also selected for purchase a pendant and a chain, 3 all of which totaled U.S.
$13,826.00.
To pay for these purchases, Pantaleon presented his American Express credit card together with his
passport to the Coster sales clerk. This occurred at around 9:15 a.m., or 15 minutes before the tour group
was slated to depart from the store. The sales clerk took the cards imprint, and asked Pantaleon to sign
the charge slip. The charge purchase was then referred electronically to respondents Amsterdam office at
9:20 a.m.
Ten minutes later, the store clerk informed Pantaleon that his AmexCard had not yet been approved. His
son, who had already boarded the tour bus, soon returned to Coster and informed the other members of
the Pantaleon family that the entire tour group was waiting for them. As it was already 9:40 a.m., and he
was already worried about further inconveniencing the tour group, Pantaleon asked the store clerk to
cancel the sale. The store manager though asked plaintiff to wait a few more minutes. After 15 minutes,
the store manager informed Pantaleon that respondent had demanded bank references. Pantaleon
supplied the names of his depositary banks, then instructed his daughter to return to the bus and
apologize to the tour group for the delay.
At around 10:00 a.m, or around 45 minutes after Pantaleon had presented his AmexCard, and 30 minutes
after the tour group was supposed to have left the store, Coster decided to release the items even without
respondents approval of the purchase. The spouses Pantaleon returned to the bus. It is alleged that their
offers of apology were met by their tourmates with stony silence. 4 The tour groups visible irritation was

aggravated when the tour guide announced that the city tour of Amsterdam was to be canceled due to
lack of remaining time, as they had to catch a 3:00 p.m. ferry at Calais, Belgium to London. 5 Mrs.
Pantaleon ended up weeping, while her husband had to take a tranquilizer to calm his nerves.
It later emerged that Pantaleons purchase was first transmitted for approval to respondents Amsterdam
office at 9:20 a.m., Amsterdam time, then referred to respondents Manila office at 9:33 a.m, then finally
approved at 10:19 a.m., Amsterdam time.6 The Approval Code was transmitted to respondents
Amsterdam office at 10:38 a.m., several minutes after petitioner had already left Coster, and 78 minutes
from the time the purchases were electronically transmitted by the jewelry store to respondents
Amsterdam office.
After the star-crossed tour had ended, the Pantaleon family proceeded to the United States before
returning to Manila on 12 November 1992. While in the United States, Pantaleon continued to use his
AmEx card, several times without hassle or delay, but with two other incidents similar to the Amsterdam
brouhaha. On 30 October 1991, Pantaleon purchased golf equipment amounting to US $1,475.00 using
his AmEx card, but he cancelled his credit card purchase and borrowed money instead from a friend, after
more than 30 minutes had transpired without the purchase having been approved. On 3 November 1991,
Pantaleon used the card to purchase childrens shoes worth $87.00 at a store in Boston, and it took 20
minutes before this transaction was approved by respondent.
On 4 March 1992, after coming back to Manila, Pantaleon sent a letter 7 through counsel to the
respondent, demanding an apology for the "inconvenience, humiliation and embarrassment he and his
family thereby suffered" for respondents refusal to provide credit authorization for the aforementioned
purchases.8 In response, respondent sent a letter dated 24 March 1992, 9 stating among others that the
delay in authorizing the purchase from Coster was attributable to the circumstance that the charged
purchase of US $13,826.00 "was out of the usual charge purchase pattern established." 10 Since
respondent refused to accede to Pantaleons demand for an apology, the aggrieved cardholder instituted
an action for damages with the Regional Trial Court (RTC) of Makati City, Branch 145. 11 Pantaleon prayed
that he be awarded P2,000,000.00, as moral damages; P500,000.00, as exemplary
damages; P100,000.00, as attorneys fees; and P50,000.00 as litigation expenses.12
On 5 August 1996, the Makati City RTC rendered a decision 13 in favor of Pantaleon, awarding
him P500,000.00 as moral damages, P300,000.00 as exemplary damages, P100,000.00 as attorneys
fees, and P85,233.01 as expenses of litigation. Respondent filed a Notice of Appeal, while Pantaleon
moved for partial reconsideration, praying that the trial court award the increased amount of moral and
exemplary damages he had prayed for.14The RTC denied Pantaleons motion for partial reconsideration,
and thereafter gave due course to respondents Notice of Appeal. 15
On 18 August 2006, the Court of Appeals rendered a decision 16 reversing the award of damages in favor
of Pantaleon, holding that respondent had not breached its obligations to petitioner. Hence, this petition.
The key question is whether respondent, in connection with the aforementioned transactions, had
committed a breach of its obligations to Pantaleon. In addition, Pantaleon submits that even assuming
that respondent had not been in breach of its obligations, it still remained liable for damages under Article
21 of the Civil Code.
The RTC had concluded, based on the testimonial representations of Pantaleon and respondents credit
authorizer, Edgardo Jaurigue, that the normal approval time for purchases was "a matter of seconds."
Based on that standard, respondent had been in clear delay with respect to the three subject
transactions. As it appears, the Court of Appeals conceded that there had been delay on the part of
respondent in approving the purchases. However, it made two critical conclusions in favor of respondent.
First, the appellate court ruled that the delay was not attended by bad faith, malice, or gross negligence.
Second, it ruled that respondent "had exercised diligent efforts to effect the approval" of the purchases,
which were "not in accordance with the charge pattern" petitioner had established for himself, as

exemplified by the fact that at Coster, he was "making his very first single charge purchase of
US$13,826," and "the record of [petitioner]s past spending with [respondent] at the time does not
favorably support his ability to pay for such purchase." 17
On the premise that there was an obligation on the part of respondent "to approve or disapprove with
dispatch the charge purchase," petitioner argues that the failure to timely approve or disapprove the
purchase constituted mora solvendi on the part of respondent in the performance of its obligation. For its
part, respondent characterizes the depiction by petitioner of its obligation to him as "to approve purchases
instantaneously or in a matter of seconds."
Petitioner correctly cites that under mora solvendi, the three requisites for a finding of default are that the
obligation is demandable and liquidated; the debtor delays performance; and the creditor judicially or
extrajudicially requires the debtors performance.18 Petitioner asserts that the Court of Appeals had
wrongly applied the principle of mora accipiendi, which relates to delay on the part of the obligee in
accepting the performance of the obligation by the obligor. The requisites of mora accipiendi are: an offer
of performance by the debtor who has the required capacity; the offer must be to comply with the
prestation as it should be performed; and the creditor refuses the performance without just cause. 19 The
error of the appellate court, argues petitioner, is in relying on the invocation by respondent of "just cause"
for the delay, since while just cause is determinative of mora accipiendi, it is not so with the case of mora
solvendi.
We can see the possible source of confusion as to which type of mora to appreciate. Generally, the
relationship between a credit card provider and its card holders is that of creditor-debtor, 20 with the card
company as the creditor extending loans and credit to the card holder, who as debtor is obliged to repay
the creditor. This relationship already takes exception to the general rule that as between a bank and its
depositors, the bank is deemed as the debtor while the depositor is considered as the creditor.21 Petitioner
is asking us, not baselessly, to again shift perspectives and again see the credit card company as the
debtor/obligor, insofar as it has the obligation to the customer as creditor/obligee to act promptly on its
purchases on credit.
Ultimately, petitioners perspective appears more sensible than if we were to still regard respondent as the
creditor in the context of this cause of action. If there was delay on the part of respondent in its normal
role as creditor to the cardholder, such delay would not have been in the acceptance of the performance
of the debtors obligation (i.e., the repayment of the debt), but it would be delay in the extension of the
credit in the first place. Such delay would not fall under mora accipiendi, which contemplates that the
obligation of the debtor, such as the actual purchases on credit, has already been constituted. Herein, the
establishment of the debt itself (purchases on credit of the jewelry) had not yet been perfected, as it
remained pending the approval or consent of the respondent credit card company.
Still, in order for us to appreciate that respondent was in mora solvendi, we will have to first recognize that
there was indeed an obligation on the part of respondent to act on petitioners purchases with "timely
dispatch," or for the purposes of this case, within a period significantly less than the one hour it apparently
took before the purchase at Coster was finally approved.
The findings of the trial court, to our mind, amply established that the tardiness on the part of respondent
in acting on petitioners purchase at Coster did constitute culpable delay on its part in complying with its
obligation to act promptly on its customers purchase request, whether such action be favorable or
unfavorable. We quote the trial court, thus:
As to the first issue, both parties have testified that normal approval time for purchases was a matter of
seconds.

Plaintiff testified that his personal experience with the use of the card was that except for the three charge
purchases subject of this case, approvals of his charge purchases were always obtained in a matter of
seconds.
Defendants credit authorizer Edgardo Jaurique likewise testified:
Q. You also testified that on normal occasions, the normal approval time for charges would be 3
to 4 seconds?
A. Yes, Maam.
Both parties likewise presented evidence that the processing and approval of plaintiffs charge purchase
at the Coster Diamond House was way beyond the normal approval time of a "matter of seconds".
Plaintiff testified that he presented his AmexCard to the sales clerk at Coster, at 9:15 a.m. and by the time
he had to leave the store at 10:05 a.m., no approval had yet been received. In fact, the Credit
Authorization System (CAS) record of defendant at Phoenix Amex shows that defendants Amsterdam
office received the request to approve plaintiffs charge purchase at 9:20 a.m., Amsterdam time or 01:20,
Phoenix time, and that the defendant relayed its approval to Coster at 10:38 a.m., Amsterdam time, or
2:38, Phoenix time, or a total time lapse of one hour and [18] minutes. And even then, the approval was
conditional as it directed in computerese [sic] "Positive Identification of Card holder necessary further
charges require bank information due to high exposure. By Jack Manila."
The delay in the processing is apparent to be undue as shown from the frantic successive queries of
Amexco Amsterdam which reads: "US$13,826. Cardmember buying jewels. ID seen. Advise how long will
this take?" They were sent at 01:33, 01:37, 01:40, 01:45, 01:52 and 02:08, all times Phoenix. Manila
Amexco could be unaware of the need for speed in resolving the charge purchase referred to it, yet it sat
on its hand, unconcerned.
xxx
To repeat, the Credit Authorization System (CAS) record on the Amsterdam transaction shows how
Amexco Netherlands viewed the delay as unusually frustrating. In sequence expressed in Phoenix time
from 01:20 when the charge purchased was referred for authorization, defendants own record shows:
01:22 the authorization is referred to Manila Amexco
01:32 Netherlands gives information that the identification of the cardmember has been
presented and he is buying jewelries worth US $13,826.
01:33 Netherlands asks "How long will this take?"
02:08 Netherlands is still asking "How long will this take?"
The Court is convinced that defendants delay constitute[s] breach of its contractual obligation to act on his
use of the card abroad "with special handling." 22 (Citations omitted)
xxx
Notwithstanding the popular notion that credit card purchases are approved "within seconds," there really
is no strict, legally determinative point of demarcation on how long must it take for a credit card company
to approve or disapprove a customers purchase, much less one specifically contracted upon by the
parties. Yet this is one of those instances when "youd know it when youd see it," and one hour appears

to be an awfully long, patently unreasonable length of time to approve or disapprove a credit card
purchase. It is long enough time for the customer to walk to a bank a kilometer away, withdraw money
over the counter, and return to the store.
Notably, petitioner frames the obligation of respondent as "to approve or disapprove" the purchase "in
timely dispatch," and not "to approve the purchase instantaneously or within seconds." Certainly, had
respondent disapproved petitioners purchase "within seconds" or within a timely manner, this particular
action would have never seen the light of day. Petitioner and his family would have returned to the bus
without delay internally humiliated perhaps over the rejection of his card yet spared the shame of
being held accountable by newly-made friends for making them miss the chance to tour the city of
Amsterdam.
We do not wish do dispute that respondent has the right, if not the obligation, to verify whether the credit it
is extending upon on a particular purchase was indeed contracted by the cardholder, and that the
cardholder is within his means to make such transaction. The culpable failure of respondent herein is not
the failure to timely approve petitioners purchase, but the more elemental failure to timely act on the
same, whether favorably or unfavorably. Even assuming that respondents credit authorizers did not have
sufficient basis on hand to make a judgment, we see no reason why respondent could not have promptly
informed petitioner the reason for the delay, and duly advised him that resolving the same could take
some time. In that way, petitioner would have had informed basis on whether or not to pursue the
transaction at Coster, given the attending circumstances. Instead, petitioner was left uncomfortably
dangling in the chilly autumn winds in a foreign land and soon forced to confront the wrath of foreign folk.
Moral damages avail in cases of breach of contract where the defendant acted fraudulently or in bad faith,
and the court should find that under the circumstances, such damages are due. The findings of the trial
court are ample in establishing the bad faith and unjustified neglect of respondent, attributable in
particular to the "dilly-dallying" of respondents Manila credit authorizer, Edgardo Jaurique. 23 Wrote the
trial court:
While it is true that the Cardmembership Agreement, which defendant prepared, is silent as to the amount
of time it should take defendant to grant authorization for a charge purchase, defendant acknowledged
that the normal time for approval should only be three to four seconds. Specially so with cards used
abroad which requires "special handling", meaning with priority. Otherwise, the object of credit or charge
cards would be lost; it would be so inconvenient to use that buyers and consumers would be better off
carrying bundles of currency or travellers checks, which can be delivered and accepted quickly. Such
right was not accorded to plaintiff in the instances complained off for reasons known only to defendant at
that time. This, to the Courts mind, amounts to a wanton and deliberate refusal to comply with its
contractual obligations, or at least abuse of its rights, under the contract. 24
xxx
The delay committed by defendant was clearly attended by unjustified neglect and bad faith, since it
alleges to have consumed more than one hour to simply go over plaintiffs past credit history with
defendant, his payment record and his credit and bank references, when all such data are already stored
and readily available from its computer. This Court also takes note of the fact that there is nothing in
plaintiffs billing history that would warrant the imprudent suspension of action by defendant in processing
the purchase. Defendants witness Jaurique admits:
Q. But did you discover that he did not have any outstanding account?
A. Nothing in arrears at that time.
Q. You were well aware of this fact on this very date?

A. Yes, sir.
Mr. Jaurique further testified that there were no "delinquencies" in plaintiffs account. 25
It should be emphasized that the reason why petitioner is entitled to damages is not simply because
respondent incurred delay, but because the delay, for which culpability lies under Article 1170, led to the
particular injuries under Article 2217 of the Civil Code for which moral damages are remunerative. 26 Moral
damages do not avail to soothe the plaints of the simply impatient, so this decision should not be cause
for relief for those who time the length of their credit card transactions with a stopwatch. The somewhat
unusual attending circumstances to the purchase at Coster that there was a deadline for the completion
of that purchase by petitioner before any delay would redound to the injury of his several traveling
companions gave rise to the moral shock, mental anguish, serious anxiety, wounded feelings and social
humiliation sustained by the petitioner, as concluded by the RTC. 27Those circumstances are fairly
unusual, and should not give rise to a general entitlement for damages under a more mundane set of
facts.
We sustain the amount of moral damages awarded to petitioner by the RTC. There is no hard-and-fast
rule in determining what would be a fair and reasonable amount of moral damages, since each case must
be governed by its own peculiar facts, however, it must be commensurate to the loss or injury
suffered.28 Petitioners original prayer for P5,000,000.00 for moral damages is excessive under the
circumstances, and the amount awarded by the trial court of P500,000.00 in moral damages more
seemly.1avvphi1
Likewise, we deem exemplary damages available under the circumstances, and the amount
of P300,000.00 appropriate. There is similarly no cause though to disturb the determined award
of P100,000.00 as attorneys fees, and P85,233.01 as expenses of litigation.
WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of Appeals is REVERSED
and SET ASIDE. The Decision of the Regional Trial Court of Makati, Branch 145 in Civil Case No. 921665 is hereby REINSTATED. Costs against respondent.
SO ORDERED.
DANTE O. TINGA
Associate Justice
<p
WE CONCUR:
CONCHITA CARPIO MORALES*
Associate Justice
Acting Chairperson
PRESBITERO J. VELASCO, JR.
Associate Justice

TERESITA LEONARDO DE CASTRO**


Associate Justice

ARTURO D. BRION
Associate Justice
ATTE S TATI O N

I attest that the conclusions in the above Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Courts Division.
CONCHITA CARPIO MORALES
Associate Justice
Acting Chairperson, Second Division
C E R TI F I CATI O N
Pursuant to Section 13, Article VIII of the Constitution, and the Division Acting Chairpersons Attestation, it
is hereby certified that the conclusions in the above Decision had been reached in consultation before the
case was assigned to the writer of the opinion of the Courts Division.
REYNATO S. PUNO
Chief Justice

Footnotes
*

Acting Chairperson.

**

Per Special Order No. 619, Justice Teresita J. Leonardo-De Castro is hereby designated as
additional member of the Second Division in lieu of Justice Leonardo A. Quisumbing, who is on
official leave
1

Id. at 747.

Id. at 748-749.

Id. at 750.

Id. at 20.

Id. at 20-21.

Id. at 21-22; citing defendants Exhibit "9-G," "9-H" and "9-I."

Id. at 330-331.

Id. at 331.

Id. at 332-333.

10

Id. at 332.

11

Docketed as Civil Case No. 92-1665. Id. at 335-340.

12

Id. at 339.

13

Penned by Judge Francisco Donato Villanueva; id. at 92-110.

14

Id. at 348-351.

15

Id. at 360-362.

16

Decision penned by Court of Appeals Associate Justice E.J. Asuncion, , concurred by Associate
Justices J. Mendoza and A. Tayag.
17

Rollo, p. 80.

18

See, e.g., Selegna Management v. UCPB, G.R. No. 165662, 3 May 2006.

19

A. Tolentino, IV Civil Code of the Philippines (1991 ed.), at 108.

20

See, e.g., Pacific Banking Corp. v. IAC, G.R. No. 72275, 13 November 1991, 203 SCRA 496;
Molino v. Security Diners International Corp., G.R. No. 136780, 16 August 2001, 358 SCRA 363.
21

See, e.g., Citibank, N.A. v. Cabamongan, G.R. No. 146918, 2 May 2006, 488 SCRA 517.

22

Rollo, pp. 97-99.

23

Id. at 101.

24

Id. at 105-106.

25

Id. at 104.

26

"Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shocks, social humiliation, and similar injury. Though
incapable of pecuniary computation, moral damages may be recovered if they are the proximate
result of the defendant's wrongful act or omission."
27

See rollo, p. 107.

28

Mercury Drug v. Baking, G.R. No. 156037, May 25, 2007, 523 SCRA 184, 191.

b. Commodatum (Arts. 1935-1952)


G.R. No. L-8321

October 14, 1913

ALEJANDRA MINA, ET AL., plaintiffs-appellants,


vs.
RUPERTA PASCUAL, ET AL., defendants-appellees.
N. Segundo for appellants.
Iigo Bitanga for appellees.

ARELLANO, C.J.:

Francisco Fontanilla and Andres Fontanilla were brothers. Francisco Fontanilla acquired during his
lifetime, on March 12, 1874, a lot in the center of the town of Laoag, the capital of the Province of Ilocos
Norte, the property having been awarded to him through its purchase at a public auction held by
the alcalde mayor of that province. The lot has a frontage of 120 meters and a depth of 15.
Andres Fontanilla, with the consent of his brother Francisco, erected a warehouse on a part of the said
lot, embracing 14 meters of its frontage by 11 meters of its depth.
Francisco Fontanilla, the former owner of the lot, being dead, the herein plaintiffs, Alejandro Mina, et al.,
were recognized without discussion as his heirs.
Andres Fontanilla, the former owner of the warehouse, also having died, the children of Ruperta Pascual
were recognized likes without discussion, though it is not said how, and consequently are entitled to the
said building, or rather, as Ruperta Pascual herself stated, to only six-sevenths of one-half of it, the other
half belonging, as it appears, to the plaintiffs themselves, and the remaining one-seventh of the first onehalf to the children of one of the plaintiffs, Elena de Villanueva. The fact is that the plaintiffs and the
defendants are virtually, to all appearance, the owners of the warehouse; while the plaintiffs are
undoubtedly, the owners of the part of the lot occupied by that building, as well as of the remainder
thereof.
This was the state of affairs, when, on May 6, 1909, Ruperta Pascual, as the guardian of her minor
children, the herein defendants, petitioned the Curt of First Instance of Ilocos Norte for authorization to
sell "the six-sevenths of the one-half of the warehouse, of 14 by 11 meters, together with its lot." The
plaintiffs that is Alejandra Mina, et al. opposed the petition of Ruperta Pascual for the reason that
the latter had included therein the lot occupied by the warehouse, which they claimed was their exclusive
property. All this action was taken in a special proceeding in re guardianship.
The plaintiffs did more than oppose Pascual's petition; they requested the court, through motion, to decide
the question of the ownership of the lot before it pass upon the petition for the sale of the warehouse. But
the court before determining the matter of the ownership of the lot occupied by the warehouse, ordered
the sale of this building, saying:
While the trial continues with respect to the ownership of the lot, the court orders the sale at
public auction of the said warehouse and of the lot on which it is built, with the present boundaries
of the land and condition of the building, at a price of not less than P2,890 Philippine currency . . .
.
So, the warehouse, together with the lot on which it stands, was sold to Cu Joco, the other defendant in
this case, for the price mentioned.
The plaintiffs insisted upon a decision of the question of the ownership of the lot, and the court decided it
by holding that this land belonged to the owner of the warehouse which had been built thereon thirty
years before.
The plaintiffs appealed and this court reversed the judgment of the lower court and held that the
appellants were the owners of the lot in question. 1
When the judgment became final and executory, a writ of execution issued and the plaintiffs were given
possession of the lot; but soon thereafter the trial court annulled this possession for the reason that it
affected Cu Joco, who had not been a party to the suit in which that writ was served.

It was then that the plaintiffs commenced the present action for the purpose of having the sale of the said
lot declared null and void and of no force and effect.
An agreement was had ad to the facts, the ninth paragraph of which is as follows:
9. That the herein plaintiffs excepted to the judgment and appealed therefrom to the Supreme
Court which found for them by holding that they are the owners of the lot in question, although
there existed and still exists a commodatum by virtue of which the guardianship (meaning
the defendants) had and has the use, and the plaintiffs the ownership, of the property, with no
finding concerning the decree of the lower court that ordered the sale.
The obvious purport of the cause "although there existed and still exists a commodatum," etc., appears to
be that it is a part of the decision of the Supreme Court and that, while finding the plaintiffs to be the
owners of the lot, we recognized in principle the existence of a commodatum under which the defendants
held the lot. Nothing could be more inexact. Possibly, also, the meaning of that clause is that,
notwithstanding the finding made by the Supreme Court that the plaintiffs were the owners, these former
and the defendants agree that there existed, and still exists, a commodatum, etc. But such an agreement
would not affect the truth of the contents of the decision of this court, and the opinions held by the litigants
in regard to this point could have no bearing whatever on the present decision.
Nor did the decree of the lower court that ordered the sale have the least influence in our previous
decision to require our making any finding in regard thereto, for, with or without that decree, the Supreme
Court had to decide the ownership of the lot consistently with its titles and not in accordance with the
judicial acts or proceedings had prior to the setting up of the issue in respect to the ownership of the
property that was the subject of the judicial decree.
What is essentially pertinent to the case is the fact that the defendant agree that the plaintiffs have the
ownership, and they themselves only the use, of the said lot.
On this premise, the nullity of the sale of the lot is in all respects quite evident, whatsoever be the manner
in which the sale was effected, whether judicially or extrajudicially.
He who has only the use of a thing cannot validly sell the thing itself. The effect of the sale being a
transfer of the ownership of the thing, it is evident that he who has only the mere use of the thing cannot
transfer its ownership. The sale of a thing effected by one who is not its owner is null and void. The
defendants never were the owners of the lot sold. The sale of it by them is necessarily null and void. On
cannot convey to another what he has never had himself.
The returns of the auction contain the following statements:
I, Ruperta Pascual, the guardian of the minors, etc., by virtue of the authorization conferred upon
me on the 31st of July, 1909, by the Court of First Instance of Ilocos Norte, proceeded with the
sale at public auction of the six-sevenths part of the one-half of the warehouse constructed of
rubble stone, etc.
Whereas I, Ruperta Pascual, the guardian of the minors, etc., sold at public auction all the land
and all the rights title, interest, and ownership in the said property to Cu Joco, who was the
highest bidder, etc.

Therefore, . . . I cede and deliver forever to the said purchaser, Cu Joco, his heirs and assigns, all
the interest, ownership and inheritance rights and others that, as the guardian of the said minors,
I have and may have in the said property, etc.
The purchaser could not acquire anything more than the interest that might be held by a person to whom
realty in possession of the vendor might be sold, for at a judicial auction nothing else is disposed of. What
the minor children of Ruperta Pascual had in their possession was the ownership of the six-sevenths part
of one-half of the warehouse and the use of the lot occupied by his building. This, and nothing more,
could the Chinaman Cu Joco acquire at that sale: not the ownership of the lot; neither the other half, nor
the remaining one-seventh of the said first half, of the warehouse. Consequently, the sale made to him of
this one-seventh of one-half and the entire other half of the building was null and void, and likewise with
still more reason the sale of the lot the building occupies.
The purchaser could and should have known what it was that was offered for sale and what it was that he
purchased. There is nothing that can justify the acquisition by the purchaser of the warehouse of the
ownership of the lot that this building occupies, since the minors represented by Ruperta Pascual never
were the owners of the said lot, nor were they ever considered to be such.
The trial court, in the judgment rendered, held that there were no grounds for the requested annulment of
the sale, and that the plaintiffs were entitled to the P600 deposited with the clerk of the court as the value
of the lot in question. The defendants, Ruperta Pascual and the Chinaman Cu Joco, were absolved from
the complaint, without express finding as to costs.
The plaintiffs cannot be obliged to acquiesce in or allow the sale made and be compelled to accept the
price set on the lot by expert appraisers, not even though the plaintiffs be considered as coowner of the
warehouse. It would be much indeed that, on the ground of coownership, they should have to abide by
and tolerate the sale of the said building, which point this court does not decide as it is not a question
submitted to us for decision, but, as regards the sale of the lot, it is in all respects impossible to hold that
the plaintiffs must abide by it and tolerate, it, and this conclusion is based on the fact that they did not give
their consent (art. 1261, Civil Code), and only the contracting parties who have given it are obliged to
comply (art. 1091, idem).
The sole purpose of the action in the beginning was to obtain an annulment of the sale of the lot; but
subsequently the plaintiffs, through motion, asked for an amendment by their complaint in the sense that
the action should be deemed to be one for the recovery of possession of a lot and for the annulment of its
sale. The plaintiff's petition was opposed by the defendant's attorney, but was allowed by the court;
therefore the complaint seeks, after the judicial annulment of the sale of the lot, to have the defendants
sentenced immediately to deliver the same to the plaintiffs.
Such a finding appears to be in harmony with the decision rendered by the Supreme Court in previous
suit, wherein it was held that the ownership of the lot lay in the plaintiffs, and for this reason steps were
taken to give possession thereof to the defendants; but, as the purchaser Cu Joco was not a party to that
suit, the present action is strictly one for recover against Cu Joco to compel him, once the sale has been
annulled, to deliver the lot to its lawful owners, the plaintiffs.
As respects this action for recovery, this Supreme Court finds:
1. That it is a fact admitted by the litigating parties, both in this and in the previous suit, that
Andres Fontanilla, the defendants' predecessor in interest, erected the warehouse on the lot,
some thirty years ago, with the explicit consent of his brother Francisco Fontanilla, the plaintiff's
predecessor in interest.

2. That it also appears to be an admitted fact that the plaintiffs and the defendants are the
coowners of the warehouse.
3. That it is a fact explicitly admitted in the agreement, that neither Andres Fontanilla nor his
successors paid any consideration or price whatever for the use of the lot occupied by the said
building; whence it is, perhaps, that both parties have denominated that use a commodatum.
Upon the premise of these facts, or even merely upon that of the first of them, the sentencing of the
defendants to deliver the lot to the plaintiffs does not follow as a necessary corollary of the judicial
declaration of ownership made in the previous suit, nor of that of the nullity of the sale of the lot, made in
the present case.
The defendants do not hold lawful possession of the lot in question.1awphil.net
But, although both litigating parties may have agreed in their idea of the commodatum, on account of its
not being, as indeed it is not, a question of fact but of law, yet that denomination given by them to the use
of the lot granted by Francisco Fontanilla to his brother, Andres Fontanilla, is not acceptable. Contracts
are not to be interpreted in conformity with the name that the parties thereto agree to give them, but must
be construed, duly considering their constitutive elements, as they are defined and denominated by law.
By the contract of loan, one of the parties delivers to the other, either anything not perishable, in
order that the latter may use it during the certain period and return it to the former, in which case it
is calledcommodatum . . . (art. 1740, Civil Code).
It is, therefore, an essential feature of the commodatum that the use of the thing belonging to another
shall for a certain period. Francisco Fontanilla did not fix any definite period or time during which Andres
Fontanilla could have the use of the lot whereon the latter was to erect a stone warehouse of
considerable value, and so it is that for the past thirty years of the lot has been used by both Andres and
his successors in interest. The present contention of the plaintiffs that Cu Joco, now in possession of the
lot, should pay rent for it at the rate of P5 a month, would destroy the theory of the commodatum
sustained by them, since, according to the second paragraph of the aforecited article 1740,
"commodatum is essentially gratuitous," and, if what the plaintiffs themselves aver on page 7 of their brief
is to be believed, it never entered Francisco's mind to limit the period during which his brother Andres was
to have the use of the lot, because he expected that the warehouse would eventually fall into the hands of
his son, Fructuoso Fontanilla, called the adopted son of Andres, which did not come to pass for the
reason that Fructuoso died before his uncle Andres. With that expectation in view, it appears more likely
that Francisco intended to allow his brother Andres a surface right; but this right supposes the payment of
an annual rent, and Andres had the gratuitous use of the lot.
Hence, as the facts aforestated only show that a building was erected on another's ground, the question
should be decided in accordance with the statutes that, thirty years ago, governed accessions to real
estate, and which were Laws 41 and 42, title 28, of the third Partida, nearly identical with the provisions of
articles 361 and 362 of the Civil Code. So, then, pursuant to article 361, the owner of the land on which a
building is erected in good faith has a right to appropriate such edifice to himself, after payment of the
indemnity prescribed in articles 453 and 454, or to oblige the builder to pay him the value of the land.
Such, and no other, is the right to which the plaintiff are entitled.
For the foregoing reasons, it is only necessary to annul the sale of the said lot which was made by
Ruperta Pascual, in representation of her minor children, to Cu Joco, and to maintain the latter in the use
of the lot until the plaintiffs shall choose one or the other of the two rights granted them by article 361 of
the Civil Code.1awphil.net

The judgment appealed from is reversed and the sale of the lot in question is held to be null and void and
of no force or effect. No special finding is made as to the costs of both instances.
Torres, Johnson, Carson, Moreland and Trent, JJ., concur.

Footnotes
1

Pascual vs. Mina, 20 Phil. Rep., 202.

G.R. No. L-46240

November 3, 1939

MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants,


vs.
BECK, defendant-appellee.
Mauricio Carlos for appellants.
Felipe Buencamino, Jr. for appellee.

IMPERIAL, J.:
The plaintiff brought this action to compel the defendant to return her certain furniture which she lent him
for his use. She appealed from the judgment of the Court of First Instance of Manila which ordered that
the defendant return to her the three has heaters and the four electric lamps found in the possession of
the Sheriff of said city, that she call for the other furniture from the said sheriff of Manila at her own
expense, and that the fees which the Sheriff may charge for the deposit of the furniture be paid pro
rata by both parties, without pronouncement as to the costs.
The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H. del Pilar
street, No. 1175. On January 14, 1936, upon the novation of the contract of lease between the plaintiff
and the defendant, the former gratuitously granted to the latter the use of the furniture described in the
third paragraph of the stipulation of facts, subject to the condition that the defendant would return them to
the plaintiff upon the latter's demand. The plaintiff sold the property to Maria Lopez and Rosario Lopez
and on September 14, 1936, these three notified the defendant of the conveyance, giving him sixty days
to vacate the premises under one of the clauses of the contract of lease. There after the plaintiff required
the defendant to return all the furniture transferred to him for them in the house where they were found.
On
November 5, 1936, the defendant, through another person, wrote to the plaintiff reiterating that
she may call for the furniture in the ground floor of the house. On the 7th of the same month, the
defendant wrote another letter to the plaintiff informing her that he could not give up the three gas heaters
and the four electric lamps because he would use them until the 15th of the same month when the lease
in due to expire. The plaintiff refused to get the furniture in view of the fact that the defendant had declined
to make delivery of all of them. On
November 15th, before vacating the house, the defendant
deposited with the Sheriff all the furniture belonging to the plaintiff and they are now on deposit in the
warehouse situated at No. 1521, Rizal Avenue, in the custody of the said sheriff.
In their seven assigned errors the plaintiffs contend that the trial court incorrectly applied the law: in
holding that they violated the contract by not calling for all the furniture on November 5, 1936, when the
defendant placed them at their disposal; in not ordering the defendant to pay them the value of the

furniture in case they are not delivered; in holding that they should get all the furniture from the Sheriff at
their expenses; in ordering them to pay-half of the expenses claimed by the Sheriff for the deposit of the
furniture; in ruling that both parties should pay their respective legal expenses or the costs; and in denying
pay their respective legal expenses or the costs; and in denying the motions for reconsideration and new
trial. To dispose of the case, it is only necessary to decide whether the defendant complied with his
obligation to return the furniture upon the plaintiff's demand; whether the latter is bound to bear the
deposit fees thereof, and whether she is entitled to the costs of litigation.lawphi1.net
The contract entered into between the parties is one of commadatum, because under it the plaintiff
gratuitously granted the use of the furniture to the defendant, reserving for herself the ownership thereof;
by this contract the defendant bound himself to return the furniture to the plaintiff, upon the latters demand
(clause 7 of the contract, Exhibit A; articles 1740, paragraph 1, and 1741 of the Civil Code). The obligation
voluntarily assumed by the defendant to return the furniture upon the plaintiff's demand, means that he
should return all of them to the plaintiff at the latter's residence or house. The defendant did not comply
with this obligation when he merely placed them at the disposal of the plaintiff, retaining for his benefit the
three gas heaters and the four eletric lamps. The provisions of article 1169 of the Civil Code cited by
counsel for the parties are not squarely applicable. The trial court, therefore, erred when it came to the
legal conclusion that the plaintiff failed to comply with her obligation to get the furniture when they were
offered to her.
As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the latter's
demand, the Court could not legally compel her to bear the expenses occasioned by the deposit of the
furniture at the defendant's behest. The latter, as bailee, was not entitled to place the furniture on deposit;
nor was the plaintiff under a duty to accept the offer to return the furniture, because the defendant wanted
to retain the three gas heaters and the four electric lamps.
As to the value of the furniture, we do not believe that the plaintiff is entitled to the payment thereof by the
defendant in case of his inability to return some of the furniture because under paragraph 6 of the
stipulation of facts, the defendant has neither agreed to nor admitted the correctness of the said value.
Should the defendant fail to deliver some of the furniture, the value thereof should be latter determined by
the trial Court through evidence which the parties may desire to present.
The costs in both instances should be borne by the defendant because the plaintiff is the prevailing party
(section 487 of the Code of Civil Procedure). The defendant was the one who breached the contract
of commodatum, and without any reason he refused to return and deliver all the furniture upon the
plaintiff's demand. In these circumstances, it is just and equitable that he pay the legal expenses and
other judicial costs which the plaintiff would not have otherwise defrayed.
The appealed judgment is modified and the defendant is ordered to return and deliver to the plaintiff, in
the residence to return and deliver to the plaintiff, in the residence or house of the latter, all the furniture
described in paragraph 3 of the stipulation of facts Exhibit A. The expenses which may be occasioned by
the delivery to and deposit of the furniture with the Sheriff shall be for the account of the defendant. the
defendant shall pay the costs in both instances. So ordered.
Avancea, C.J., Villa-Real, Laurel, Concepcion and Moran, JJ., concur.
G.R. No. L-46145 November 26, 1986
REPUBLIC OF THE PHILIPPINES (BUREAU OF LANDS), petitioner,
vs.

THE HON. COURT OF APPEALS, HEIRS OF DOMINGO P. BALOY, represented by RICARDO


BALOY, ET AL.,respondents.
Pelaez, Jalondoni, Adriano and Associates for respondents.

PARAS, J.:p
This case originally emanated from a decision of the then Court of First Instance of Zambales in LRC
Case No. 11-0, LRC Record No. N-29355, denying respondents' application for registration. From said
order of denial the applicants, heirs of Domingo Baloy, represented by Ricardo P. Baloy, (herein private
respondents) interposed on appeal to the Court of Appeals which was docketed as CA-G.R. No. 52039-R.
The appellate court, thru its Fifth Division with the Hon. Justice Magno Gatmaitan as ponente, rendered a
decision dated February 3, 1977 reversing the decision appealed from and thus approving the application
for registration. Oppositors (petitioners herein) filed their Motion for Reconsideration alleging among other
things that applicants' possessory information title can no longer be invoked and that they were not able
to prove a registerable title over the land. Said Motion for Reconsideration was denied, hence this petition
for review on certiorari.
Applicants' claim is anchored on their possessory information title (Exhibit F which had been translated in
Exhibit F-1) coupled with their continuous, adverse and public possession over the land in question. An
examination of the possessory information title shows that the description and the area of the land stated
therein substantially coincides with the land applied for and that said possessory information title had
been regularly issued having been acquired by applicants' predecessor, Domingo Baloy, under the
provisions of the Spanish Mortgage Law. Applicants presented their tax declaration on said lands on April
8, 1965.
The Director of Lands opposed the registration alleging that this land had become public land thru the
operation of Act 627 of the Philippine Commission. On November 26, 1902 pursuant to the executive
order of the President of the U.S., the area was declared within the U.S. Naval Reservation. Under Act
627 as amended by Act 1138, a period was fixed within which persons affected thereby could file their
application, (that is within 6 months from July 8, 1905) otherwise "the said lands or interest therein will be
conclusively adjudged to be public lands and all claims on the part of private individuals for such lands or
interests therein not to presented will be forever barred." Petitioner argues that since Domingo Baloy
failed to file his claim within the prescribed period, the land had become irrevocably public and could not
be the subject of a valid registration for private ownership.
Considering the foregoing facts respondents Court of Appeals ruled as follows:
... perhaps, the consequence was that upon failure of Domingo Baloy to have filed his
application within that period the land had become irrevocably public; but perhaps also,
for the reason that warning was from the Clerk of the Court of Land Registration, named
J.R. Wilson and there has not been presented a formal order or decision of the said Court
of Land Registration so declaring the land public because of that failure, it can with
plausibility be said that after all, there was no judicial declaration to that effect, it is true
that the U.S. Navy did occupy it apparently for some time, as a recreation area, as this
Court understands from the communication of the Department of Foreign Affairs to the
U.S. Embassy exhibited in the record, but the very tenor of the communication apparently
seeks to justify the title of herein applicants, in other words, what this Court has taken
from the occupation by the U.S. Navy is that during the interim, the title of applicants was

in a state of suspended animation so to speak but it had not died either; and the fact
being that this land was really originally private from and after the issuance and
inscription of the possessory information Exh. F during the Spanish times, it would be
most difficult to sustain position of Director of Lands that it was land of no private owner;
open to public disposition, and over which he has control; and since immediately after
U.S. Navy had abandoned the area, applicant came in and asserted title once again, only
to be troubled by first Crispiniano Blanco who however in due time, quitclaimed in favor of
applicants, and then by private oppositors now, apparently originally tenants of Blanco,
but that entry of private oppositors sought to be given color of ownership when they
sought to and did file tax declaration in 1965, should not prejudice the original rights of
applicants thru their possessory information secured regularly so long ago, the
conclusion must have to be that after all, applicants had succeeded in bringing
themselves within the provisions of Sec. 19 of Act 496, the land should be registered in
their favor;
IN VIEW WHEREOF, this Court is constrained to reverse, as it now reverses, judgment
appealed from the application is approved, and once this decision shall have become
final, if ever it would be, let decree issue in favor of applicants with the personal
circumstances outlined in the application, costs against private oppositors.
Petitioner now comes to Us with the following:
ASSIGNMENT OF ERRORS:
1. Respondent court erred in holding that to bar private respondents from asserting any
right under their possessory information title there is need for a court order to that effect.
2. Respondent court erred in not holding that private respondents' rights by virtue of their
possessory information title was lost by prescription.
3. Respondent court erred in concluding that applicants have registerable title.
A cursory reading of Sec. 3, Act 627 reveals that several steps are to be followed before any affected land
can "be conclusively adjudged to be public land." Sec. 3, Act 627 reads as follows:
SEC. 3. Immediately upon receipt of the notice from the civil Governor in the preceeding
section mentioned it shall be the duty of the judge of the Court of Land Registration to
issue a notice, stating that the lands within the limits aforesaid have been reserved for
military purposes, and announced and declared to be military reservations, and that
claims for all private lands, buildings, and interests therein, within the limits aforesaid,
must be presented for registration under the Land Registration Act within six calendar
months from the date of issuing the notice, and that all lands, buildings, and interests
therein within the limits aforesaid not so presented within the time therein limited will be
conclusively adjudged to be public lands and all claims on the part of private individuals
for such lands, buildings, or an interest therein not so presented will be forever barred.
The clerk of the Court of Land Registration shall immediately upon the issuing of such
notice by the judge cause the same to be published once a week for three successive
weeks in two newspapers, one of which newspapers shall be in the English Language,
and one in the Spanish language in the city or province where the land lies, if there be no
such Spanish or English newspapers having a general circulation in the city or province
wherein the land lies, then it shall be a sufficient compliance with this section if the notice

be published as herein provided, in a daily newspaper in the Spanish language and one
in the English language, in the City of Manila, having a general circulation. The clerk shall
also cause a duly attested copy of the notice in the Spanish language to be posted in
conspicuous place at each angle formed by the lines of the limits of the land reserved.
The clerk shall also issue and cause to be personally served the notice in the Spanish
language upon every person living upon or in visible possession of any part of the military
reservation. If the person in possession is the head of the family living upon the hand, it
shall be sufficient to serve the notice upon him, and if he is absent it shall be sufficient to
leave a copy at his usual place of residence. The clerk shall certify the manner in which
the notices have been published, posted, and served, and his certificate shall be
conclusive proof of such publication, posting, and service, but the court shall have the
power to cause such further notice to be given as in its opinion may be necessary.
Clearly under said provisions, private land could be deemed to have become public land only by virtue of
a judicial declaration after due notice and hearing. It runs contrary therefore to the contention of
petitioners that failure to present claims set forth under Sec. 2 of Act 627 made the land ipso facto public
without any deed of judicial pronouncement. Petitioner in making such declaration relied on Sec. 4 of Act
627 alone. But in construing a statute the entire provisions of the law must be considered in order to
establish the correct interpretation as intended by the law-making body. Act 627 by its terms is not selfexecutory and requires implementation by the Court of Land Registration. Act 627, to the extent that it
creates a forfeiture, is a penal statute in derogation of private rights, so it must be strictly construed so as
to safeguard private respondents' rights. Significantly, petitioner does not even allege the existence of any
judgment of the Land Registration court with respect to the land in question. Without a judgment or order
declaring the land to be public, its private character and the possessory information title over it must be
respected. Since no such order has been rendered by the Land Registration Court it necessarily follows
that it never became public land thru the operation of Act 627. To assume otherwise is to deprive private
respondents of their property without due process of law. In fact it can be presumed that the notice
required by law to be given by publication and by personal service did not include the name of Domingo
Baloy and the subject land, and hence he and his lane were never brought within the operation of Act 627
as amended. The procedure laid down in Sec. 3 is a requirement of due process. "Due process requires
that the statutes which under it is attempted to deprive a citizen of private property without or against his
consent must, as in expropriation cases, be strictly complied with, because such statutes are in
derogation of general rights." (Arriete vs. Director of Public Works, 58 Phil. 507, 508, 511).
We also find with favor private respondents' views that court judgments are not to be presumed. It would
be absurd to speak of a judgment by presumption. If it could be contended that such a judgment may be
presumed, it could equally be contended that applicants' predecessor Domingo Baloy presumably
seasonably filed a claim, in accordance with the legal presumption that a person takes ordinary care of
his concerns, and that a judgment in his favor was rendered.
The finding of respondent court that during the interim of 57 years from November 26, 1902 to December
17, 1959 (when the U.S. Navy possessed the area) the possessory rights of Baloy or heirs were merely
suspended and not lost by prescription, is supported by Exhibit "U," a communication or letter No. 110863, dated June 24, 1963, which contains an official statement of the position of the Republic of the
Philippines with regard to the status of the land in question. Said letter recognizes the fact that Domingo
Baloy and/or his heirs have been in continuous possession of said land since 1894 as attested by an
"Informacion Possessoria" Title, which was granted by the Spanish Government. Hence, the disputed
property is private land and this possession was interrupted only by the occupation of the land by the U.S.
Navy in 1945 for recreational purposes. The U.S. Navy eventually abandoned the premises. The heirs of
the late Domingo P. Baloy, are now in actual possession, and this has been so since the abandonment by
the U.S. Navy. A new recreation area is now being used by the U.S. Navy personnel and this place is
remote from the land in question.

Clearly, the occupancy of the U.S. Navy was not in the concept of owner. It partakes of the character of
acommodatum. It cannot therefore militate against the title of Domingo Baloy and his successors-ininterest. One's ownership of a thing may be lost by prescription by reason of another's possession if such
possession be under claim of ownership, not where the possession is only intended to be transient, as in
the case of the U.S. Navy's occupation of the land concerned, in which case the owner is not divested of
his title, although it cannot be exercised in the meantime.
WHEREFORE, premises considered, finding no merit in the petition the appealed decision is hereby
AFFIRMED.
SO ORDERED.
Feria (Chairman), Alampay and Feliciano, * JJ., concur.
Gutierrez, Jr., J., concurs in the results.
Fernan J., took no part.

Footnotes
* Feliciano was designated in lieu of J. Fernan.
G.R. No. 115324

February 19, 2003

PRODUCERS BANK OF THE PHILIPPINES (now FIRST INTERNATIONAL BANK), petitioner,


vs.
HON. COURT OF APPEALS AND FRANKLIN VIVES, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision1 of the Court of Appeals dated June 25, 1991 in
CA-G.R. CV No. 11791 and of its Resolution2 dated May 5, 1994, denying the motion for reconsideration
of said decision filed by petitioner Producers Bank of the Philippines.
Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and friend Angeles
Sanchez to help her friend and townmate, Col. Arturo Doronilla, in incorporating his business, the Sterela
Marketing and Services ("Sterela" for brevity). Specifically, Sanchez asked private respondent to deposit
in a bank a certain amount of money in the bank account of Sterela for purposes of its incorporation. She
assured private respondent that he could withdraw his money from said account within a months time.
Private respondent asked Sanchez to bring Doronilla to their house so that they could discuss Sanchezs
request.3
On May 9, 1979, private respondent, Sanchez, Doronilla and a certain Estrella Dumagpi, Doronillas
private secretary, met and discussed the matter. Thereafter, relying on the assurances and
representations of Sanchez and Doronilla, private respondent issued a check in the amount of Two
Hundred Thousand Pesos (P200,000.00) in favor of Sterela. Private respondent instructed his wife, Mrs.
Inocencia Vives, to accompany Doronilla and Sanchez in opening a savings account in the name of
Sterela in the Buendia, Makati branch of Producers Bank of the Philippines. However, only Sanchez, Mrs.

Vives and Dumagpi went to the bank to deposit the check. They had with them an authorization letter
from Doronilla authorizing Sanchez and her companions, "in coordination with Mr. Rufo Atienza," to open
an account for Sterela Marketing Services in the amount of P200,000.00. In opening the account, the
authorized signatories were Inocencia Vives and/or Angeles Sanchez. A passbook for Savings Account
No. 10-1567 was thereafter issued to Mrs. Vives.4
Subsequently, private respondent learned that Sterela was no longer holding office in the address
previously given to him. Alarmed, he and his wife went to the Bank to verify if their money was still intact.
The bank manager referred them to Mr. Rufo Atienza, the assistant manager, who informed them that part
of the money in Savings Account No. 10-1567 had been withdrawn by Doronilla, and that only P90,000.00
remained therein. He likewise told them that Mrs. Vives could not withdraw said remaining amount
because it had to answer for some postdated checks issued by Doronilla. According to Atienza, after Mrs.
Vives and Sanchez opened Savings Account No. 10-1567, Doronilla opened Current Account No. 100320 for Sterela and authorized the Bank to debit Savings Account No. 10-1567 for the amounts
necessary to cover overdrawings in Current Account No. 10-0320. In opening said current account,
Sterela, through Doronilla, obtained a loan of P175,000.00 from the Bank. To cover payment thereof,
Doronilla issued three postdated checks, all of which were dishonored. Atienza also said that Doronilla
could assign or withdraw the money in Savings Account No. 10-1567 because he was the sole proprietor
of Sterela.5
Private respondent tried to get in touch with Doronilla through Sanchez. On June 29, 1979, he received a
letter from Doronilla, assuring him that his money was intact and would be returned to him. On August 13,
1979, Doronilla issued a postdated check for Two Hundred Twelve Thousand Pesos (P212,000.00) in
favor of private respondent. However, upon presentment thereof by private respondent to the drawee
bank, the check was dishonored. Doronilla requested private respondent to present the same check on
September 15, 1979 but when the latter presented the check, it was again dishonored. 6
Private respondent referred the matter to a lawyer, who made a written demand upon Doronilla for the
return of his clients money. Doronilla issued another check for P212,000.00 in private respondents favor
but the check was again dishonored for insufficiency of funds. 7
Private respondent instituted an action for recovery of sum of money in the Regional Trial Court (RTC) in
Pasig, Metro Manila against Doronilla, Sanchez, Dumagpi and petitioner. The case was docketed as Civil
Case No. 44485. He also filed criminal actions against Doronilla, Sanchez and Dumagpi in the RTC.
However, Sanchez passed away on March 16, 1985 while the case was pending before the trial court. On
October 3, 1995, the RTC of Pasig, Branch 157, promulgated its Decision in Civil Case No. 44485, the
dispositive portion of which reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered sentencing defendants Arturo J. Doronila,
Estrella Dumagpi and Producers Bank of the Philippines to pay plaintiff Franklin Vives jointly and
severally
(a) the amount of P200,000.00, representing the money deposited, with interest at the legal rate
from the filing of the complaint until the same is fully paid;
(b) the sum of P50,000.00 for moral damages and a similar amount for exemplary damages;
(c) the amount of P40,000.00 for attorneys fees; and
(d) the costs of the suit.
SO ORDERED.8

Petitioner appealed the trial courts decision to the Court of Appeals. In its Decision dated June 25, 1991,
the appellate court affirmed in toto the decision of the RTC. 9 It likewise denied with finality petitioners
motion for reconsideration in its Resolution dated May 5, 1994. 10
On June 30, 1994, petitioner filed the present petition, arguing that
I.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT THE TRANSACTION
BETWEEN THE DEFENDANT DORONILLA AND RESPONDENT VIVES WAS ONE OF SIMPLE LOAN
AND NOT ACCOMMODATION;
II.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT PETITIONERS BANK
MANAGER, MR. RUFO ATIENZA, CONNIVED WITH THE OTHER DEFENDANTS IN DEFRAUDING
PETITIONER (Sic. Should be PRIVATE RESPONDENT) AND AS A CONSEQUENCE, THE PETITIONER
SHOULD BE HELD LIABLE UNDER THE PRINCIPLE OF NATURAL JUSTICE;
III.
THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING THE ENTIRE RECORDS OF THE
REGIONAL TRIAL COURT AND AFFIRMING THE JUDGMENT APPEALED FROM, AS THE FINDINGS
OF THE REGIONAL TRIAL COURT WERE BASED ON A MISAPPREHENSION OF FACTS;
IV.
THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT THE CITED DECISION IN
SALUDARES VS. MARTINEZ, 29 SCRA 745, UPHOLDING THE LIABILITY OF AN EMPLOYER FOR
ACTS COMMITTED BY AN EMPLOYEE IS APPLICABLE;
V.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE DECISION OF THE LOWER
COURT THAT HEREIN PETITIONER BANK IS JOINTLY AND SEVERALLY LIABLE WITH THE OTHER
DEFENDANTS FOR THE AMOUNT OF P200,000.00 REPRESENTING THE SAVINGS ACCOUNT
DEPOSIT, P50,000.00 FOR MORAL DAMAGES, P50,000.00 FOR EXEMPLARY DAMAGES, P40,000.00
FOR ATTORNEYS FEES AND THE COSTS OF SUIT.11
Private respondent filed his Comment on September 23, 1994. Petitioner filed its Reply thereto on
September 25, 1995. The Court then required private respondent to submit a rejoinder to the reply.
However, said rejoinder was filed only on April 21, 1997, due to petitioners delay in furnishing private
respondent with copy of the reply12 and several substitutions of counsel on the part of private
respondent.13 On January 17, 2001, the Court resolved to give due course to the petition and required the
parties to submit their respective memoranda.14 Petitioner filed its memorandum on April 16, 2001 while
private respondent submitted his memorandum on March 22, 2001.
Petitioner contends that the transaction between private respondent and Doronilla is a simple loan
(mutuum) since all the elements of a mutuum are present: first, what was delivered by private respondent
to Doronilla was money, a consumable thing; and second, the transaction was onerous as Doronilla was
obliged to pay interest, as evidenced by the check issued by Doronilla in the amount of P212,000.00,
or P12,000 more than what private respondent deposited in Sterelas bank account. 15 Moreover, the fact
that private respondent sued his good friend Sanchez for his failure to recover his money from Doronilla

shows that the transaction was not merely gratuitous but "had a business angle" to it. Hence, petitioner
argues that it cannot be held liable for the return of private respondentsP200,000.00 because it is not
privy to the transaction between the latter and Doronilla. 16
It argues further that petitioners Assistant Manager, Mr. Rufo Atienza, could not be faulted for allowing
Doronilla to withdraw from the savings account of Sterela since the latter was the sole proprietor of said
company. Petitioner asserts that Doronillas May 8, 1979 letter addressed to the bank, authorizing Mrs.
Vives and Sanchez to open a savings account for Sterela, did not contain any authorization for these two
to withdraw from said account. Hence, the authority to withdraw therefrom remained exclusively with
Doronilla, who was the sole proprietor of Sterela, and who alone had legal title to the savings
account.17 Petitioner points out that no evidence other than the testimonies of private respondent and Mrs.
Vives was presented during trial to prove that private respondent deposited hisP200,000.00 in Sterelas
account for purposes of its incorporation.18 Hence, petitioner should not be held liable for allowing
Doronilla to withdraw from Sterelas savings account.1a\^/phi1.net
Petitioner also asserts that the Court of Appeals erred in affirming the trial courts decision since the
findings of fact therein were not accord with the evidence presented by petitioner during trial to prove that
the transaction between private respondent and Doronilla was a mutuum, and that it committed no wrong
in allowing Doronilla to withdraw from Sterelas savings account. 19
Finally, petitioner claims that since there is no wrongful act or omission on its part, it is not liable for the
actual damages suffered by private respondent, and neither may it be held liable for moral and exemplary
damages as well as attorneys fees.20
Private respondent, on the other hand, argues that the transaction between him and Doronilla is not a
mutuum but an accommodation,21 since he did not actually part with the ownership of his P200,000.00
and in fact asked his wife to deposit said amount in the account of Sterela so that a certification can be
issued to the effect that Sterela had sufficient funds for purposes of its incorporation but at the same time,
he retained some degree of control over his money through his wife who was made a signatory to the
savings account and in whose possession the savings account passbook was given. 22
He likewise asserts that the trial court did not err in finding that petitioner, Atienzas employer, is liable for
the return of his money. He insists that Atienza, petitioners assistant manager, connived with Doronilla in
defrauding private respondent since it was Atienza who facilitated the opening of Sterelas current
account three days after Mrs. Vives and Sanchez opened a savings account with petitioner for said
company, as well as the approval of the authority to debit Sterelas savings account to cover any
overdrawings in its current account.23
There is no merit in the petition.
At the outset, it must be emphasized that only questions of law may be raised in a petition for review filed
with this Court. The Court has repeatedly held that it is not its function to analyze and weigh all over again
the evidence presented by the parties during trial. 24 The Courts jurisdiction is in principle limited to
reviewing errors of law that might have been committed by the Court of Appeals. 25 Moreover, factual
findings of courts, when adopted and confirmed by the Court of Appeals, are final and conclusive on this
Court unless these findings are not supported by the evidence on record. 26 There is no showing of any
misapprehension of facts on the part of the Court of Appeals in the case at bar that would require this
Court to review and overturn the factual findings of that court, especially since the conclusions of fact of
the Court of Appeals and the trial court are not only consistent but are also amply supported by the
evidence on record.
No error was committed by the Court of Appeals when it ruled that the transaction between private
respondent and Doronilla was a commodatum and not a mutuum. A circumspect examination of the

records reveals that the transaction between them was a commodatum. Article 1933 of the Civil Code
distinguishes between the two kinds of loans in this wise:
By the contract of loan, one of the parties delivers to another, either something not consumable so that
the latter may use the same for a certain time and return it, in which case the contract is called a
commodatum; or money or other consumable thing, upon the condition that the same amount of the same
kind and quality shall be paid, in which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan, ownership
passes to the borrower.
The foregoing provision seems to imply that if the subject of the contract is a consumable thing, such as
money, the contract would be a mutuum. However, there are some instances where a commodatum may
have for its object a consumable thing. Article 1936 of the Civil Code provides:
Consumable goods may be the subject of commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for exhibition.
Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of the parties
is to lend consumable goods and to have the very same goods returned at the end of the period agreed
upon, the loan is a commodatum and not a mutuum.
The rule is that the intention of the parties thereto shall be accorded primordial consideration in
determining the actual character of a contract.27 In case of doubt, the contemporaneous and subsequent
acts of the parties shall be considered in such determination. 28
As correctly pointed out by both the Court of Appeals and the trial court, the evidence shows that private
respondent agreed to deposit his money in the savings account of Sterela specifically for the purpose of
making it appear "that said firm had sufficient capitalization for incorporation, with the promise that the
amount shall be returned within thirty (30) days." 29 Private respondent merely "accommodated" Doronilla
by lending his money without consideration, as a favor to his good friend Sanchez. It was however clear
to the parties to the transaction that the money would not be removed from Sterelas savings account and
would be returned to private respondent after thirty (30) days.
Doronillas attempts to return to private respondent the amount of P200,000.00 which the latter deposited
in Sterelas account together with an additional P12,000.00, allegedly representing interest on the
mutuum, did not convert the transaction from a commodatum into a mutuum because such was not the
intent of the parties and because the additional P12,000.00 corresponds to the fruits of the lending of
the P200,000.00. Article 1935 of the Civil Code expressly states that "[t]he bailee in commodatum
acquires the use of the thing loaned but not its fruits." Hence, it was only proper for Doronilla to remit to
private respondent the interest accruing to the latters money deposited with petitioner.
Neither does the Court agree with petitioners contention that it is not solidarily liable for the return of
private respondents money because it was not privy to the transaction between Doronilla and private
respondent. The nature of said transaction, that is, whether it is a mutuum or a commodatum, has no
bearing on the question of petitioners liability for the return of private respondents money because the
factual circumstances of the case clearly show that petitioner, through its employee Mr. Atienza, was
partly responsible for the loss of private respondents money and is liable for its restitution.

Petitioners rules for savings deposits written on the passbook it issued Mrs. Vives on behalf of Sterela for
Savings Account No. 10-1567 expressly states that
"2. Deposits and withdrawals must be made by the depositor personally or upon his written authority duly
authenticated, and neither a deposit nor a withdrawal will be permitted except upon the production of the
depositor savings bank book in which will be entered by the Bank the amount deposited or withdrawn." 30
Said rule notwithstanding, Doronilla was permitted by petitioner, through Atienza, the Assistant Branch
Manager for the Buendia Branch of petitioner, to withdraw therefrom even without presenting the
passbook (which Atienza very well knew was in the possession of Mrs. Vives), not just once, but several
times. Both the Court of Appeals and the trial court found that Atienza allowed said withdrawals because
he was party to Doronillas "scheme" of defrauding private respondent:
XXX
But the scheme could not have been executed successfully without the knowledge, help and cooperation
of Rufo Atienza, assistant manager and cashier of the Makati (Buendia) branch of the defendant bank.
Indeed, the evidence indicates that Atienza had not only facilitated the commission of the fraud but he
likewise helped in devising the means by which it can be done in such manner as to make it appear that
the transaction was in accordance with banking procedure.
To begin with, the deposit was made in defendants Buendia branch precisely because Atienza was a key
officer therein. The records show that plaintiff had suggested that the P200,000.00 be deposited in his
bank, the Manila Banking Corporation, but Doronilla and Dumagpi insisted that it must be in defendants
branch in Makati for "it will be easier for them to get a certification". In fact before he was introduced to
plaintiff, Doronilla had already prepared a letter addressed to the Buendia branch manager authorizing
Angeles B. Sanchez and company to open a savings account for Sterela in the amount of P200,000.00,
as "per coordination with Mr. Rufo Atienza, Assistant Manager of the Bank x x x" (Exh. 1). This is a clear
manifestation that the other defendants had been in consultation with Atienza from the inception of the
scheme. Significantly, there were testimonies and admission that Atienza is the brother-in-law of a certain
Romeo Mirasol, a friend and business associate of Doronilla.1awphi1.nt
Then there is the matter of the ownership of the fund. Because of the "coordination" between Doronilla
and Atienza, the latter knew before hand that the money deposited did not belong to Doronilla nor to
Sterela. Aside from such foreknowledge, he was explicitly told by Inocencia Vives that the money
belonged to her and her husband and the deposit was merely to accommodate Doronilla. Atienza even
declared that the money came from Mrs. Vives.
Although the savings account was in the name of Sterela, the bank records disclose that the only ones
empowered to withdraw the same were Inocencia Vives and Angeles B. Sanchez. In the signature card
pertaining to this account (Exh. J), the authorized signatories were Inocencia Vives &/or Angeles B.
Sanchez. Atienza stated that it is the usual banking procedure that withdrawals of savings deposits could
only be made by persons whose authorized signatures are in the signature cards on file with the bank.
He, however, said that this procedure was not followed here because Sterela was owned by Doronilla. He
explained that Doronilla had the full authority to withdraw by virtue of such ownership. The Court is not
inclined to agree with Atienza. In the first place, he was all the time aware that the money came from
Vives and did not belong to Sterela. He was also told by Mrs. Vives that they were only accommodating
Doronilla so that a certification can be issued to the effect that Sterela had a deposit of so much amount
to be sued in the incorporation of the firm. In the second place, the signature of Doronilla was not
authorized in so far as that account is concerned inasmuch as he had not signed the signature card
provided by the bank whenever a deposit is opened. In the third place, neither Mrs. Vives nor Sanchez
had given Doronilla the authority to withdraw.

Moreover, the transfer of fund was done without the passbook having been presented. It is an accepted
practice that whenever a withdrawal is made in a savings deposit, the bank requires the presentation of
the passbook. In this case, such recognized practice was dispensed with. The transfer from the savings
account to the current account was without the submission of the passbook which Atienza had given to
Mrs. Vives. Instead, it was made to appear in a certification signed by Estrella Dumagpi that a duplicate
passbook was issued to Sterela because the original passbook had been surrendered to the Makati
branch in view of a loan accommodation assigning the savings account (Exh. C). Atienza, who
undoubtedly had a hand in the execution of this certification, was aware that the contents of the same are
not true. He knew that the passbook was in the hands of Mrs. Vives for he was the one who gave it to her.
Besides, as assistant manager of the branch and the bank official servicing the savings and current
accounts in question, he also was aware that the original passbook was never surrendered. He was also
cognizant that Estrella Dumagpi was not among those authorized to withdraw so her certification had no
effect whatsoever.
The circumstance surrounding the opening of the current account also demonstrate that Atienzas active
participation in the perpetration of the fraud and deception that caused the loss. The records indicate that
this account was opened three days later after the P200,000.00 was deposited. In spite of his disclaimer,
the Court believes that Atienza was mindful and posted regarding the opening of the current account
considering that Doronilla was all the while in "coordination" with him. That it was he who facilitated the
approval of the authority to debit the savings account to cover any overdrawings in the current account
(Exh. 2) is not hard to comprehend.
Clearly Atienza had committed wrongful acts that had resulted to the loss subject of this case. x x x. 31
Under Article 2180 of the Civil Code, employers shall be held primarily and solidarily liable for damages
caused by their employees acting within the scope of their assigned tasks. To hold the employer liable
under this provision, it must be shown that an employer-employee relationship exists, and that the
employee was acting within the scope of his assigned task when the act complained of was
committed.32 Case law in the United States of America has it that a corporation that entrusts a general
duty to its employee is responsible to the injured party for damages flowing from the employees wrongful
act done in the course of his general authority, even though in doing such act, the employee may have
failed in its duty to the employer and disobeyed the latters instructions. 33
There is no dispute that Atienza was an employee of petitioner. Furthermore, petitioner did not deny that
Atienza was acting within the scope of his authority as Assistant Branch Manager when he assisted
Doronilla in withdrawing funds from Sterelas Savings Account No. 10-1567, in which account private
respondents money was deposited, and in transferring the money withdrawn to Sterelas Current Account
with petitioner. Atienzas acts of helping Doronilla, a customer of the petitioner, were obviously done in
furtherance of petitioners interests34 even though in the process, Atienza violated some of petitioners
rules such as those stipulated in its savings account passbook. 35It was established that the transfer of
funds from Sterelas savings account to its current account could not have been accomplished by
Doronilla without the invaluable assistance of Atienza, and that it was their connivance which was the
cause of private respondents loss.
The foregoing shows that the Court of Appeals correctly held that under Article 2180 of the Civil Code,
petitioner is liable for private respondents loss and is solidarily liable with Doronilla and Dumagpi for the
return of theP200,000.00 since it is clear that petitioner failed to prove that it exercised due diligence to
prevent the unauthorized withdrawals from Sterelas savings account, and that it was not negligent in the
selection and supervision of Atienza. Accordingly, no error was committed by the appellate court in the
award of actual, moral and exemplary damages, attorneys fees and costs of suit to private respondent.
WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution of the Court of
Appeals are AFFIRMED.

SO ORDERED.
Bellosillo, (Chairman), Mendoza, Quisumbing and Austria-Martinez, JJ., concur.

Footnotes
1

Justice Asaali S. Isnani, Ponente, with Justices Rodolfo A. Nocon, Presiding Justice, and
Antonio M. Martinez, concurring.
2

Rollo, pp. 54-55.

Id. at 37.

Ibid.

Id. at 37-38.

Id. at 38.

Id.

Id. at 63.

Id. at 35-47.

10

Id. at 54-55.

11

Id. at 18-19.

12

Id. at 148, 181.

13

Id. at 176, 199.

14

Id. at 227.

15

Id. at 21.

16

Id. at 22.

17

Id. at 24-27.

18

Id. at 23.

19

Id. at 28.

20

Rollo, Petitioners Memorandum, pp. 13-14.

21

Id. at 11-12.

22

Rollo, p. 75; Private respondents Memorandum, pp. 8-9.

23

Id. at 75-77; Id. at 12-16.

24

Flores v. Uy, G.R. No. 121492, October 26, 2001; Lim v. People, G.R. No. 143231, October 26,
2001.
25

Section 1, Rule 45, Revised Rules of Civil Procedure.

26

Baas, Jr. v. Court of Appeals, 325 SCRA 259 (2000); Philippine National Construction
Corporation v. Mars Construction Enterprises, Inc., 325 SCRA 624 (2000).
27

Tanguilig v. Court of Appeals, 266 SCRA 78, 83-84 (1997), citing Kasilag v. Rodriguez, 69 Phil.
217; 17A Am Jur 2d 27 Contracts, 5, citing Wallace Bank & Trust Co. v. First National Bank, 40
Idaho 712, 237 P 284, 50 ALR 316.
28

Tanguilig v. Court of Appeals, supra, p. 84.

29

Rollo, pp. 40-41, 60.

30

Exhibit "B," Folder of Exhibits, p. 3, emphasis supplied.

31

Rollo, pp. 43-47, citing the Decision of the Regional Trial Court, pp. 5-8.

32

Castilex Industrial Corporation v. Vasquez, Jr., 321 SCRA 393 (1999).

33

18B Am Jur 2d, p. 947, Corporations 2125, citing Pittsburgh, C.C. & S.L.R. Co. v. Sullivan, 40
NE 138.

c.

34

See note 31.

35

Exhibit "B," Folder of Exhibits, p. 3.

Obligations of the bailee (Arts. 1941-1945)

G.R. No. L-4150

February 10, 1910

FELIX DE LOS SANTOS, plaintiff-appelle,


vs.
AGUSTINA JARRA, administratrix of the estate of Magdaleno Jimenea, deceased, defendantappellant.
Matias Hilado, for appellant.
Jose Felix Martinez, for appellee.
TORRES, J.:
On the 1st of September, 1906, Felix de los Santos brought suit against Agustina Jarra, the administratrix
of the estate of Magdaleno Jimenea, alleging that in the latter part of 1901 Jimenea borrowed and
obtained from the plaintiff ten first-class carabaos, to be used at the animal-power mill of his hacienda

during the season of 1901-2, without recompense or remuneration whatever for the use thereof, under the
sole condition that they should be returned to the owner as soon as the work at the mill was terminated;
that Magdaleno Jimenea, however, did not return the carabaos, notwithstanding the fact that the plaintiff
claimed their return after the work at the mill was finished; that Magdaleno Jimenea died on the 28th of
October, 1904, and the defendant herein was appointed by the Court of First Instance of Occidental
Negros administratrix of his estate and she took over the administration of the same and is still performing
her duties as such administratrix; that the plaintiff presented his claim to the commissioners of the estate
of Jimenea, within the legal term, for the return of the said ten carabaos, but the said commissioners
rejected his claim as appears in their report; therefore, the plaintiff prayed that judgment be entered
against the defendant as administratrix of the estate of the deceased, ordering her to return the ten firstclass carabaos loaned to the late Jimenea, or their present value, and to pay the costs.
The defendant was duly summoned, and on the 25th of September, 1906, she demurred in writing to the
complaint on the ground that it was vague; but on the 2d of October of the same year, in answer to the
complaint, she said that it was true that the late Magdaleno Jimenea asked the plaintiff to loan him ten
carabaos, but that he only obtained three second-class animals, which were afterwards transferred by
sale by the plaintiff to the said Jimenea; that she denied the allegations contained in paragraph 3 of the
complaint; for all of which she asked the court to absolve her of the complaint with the cost against the
plaintiff.
By a writing dated the 11th of December, 1906, Attorney Jose Felix Martinez notified the defendant and
her counsel, Matias Hilado, that he had made an agreement with the plaintiff to the effect that the latter
would not compromise the controversy without his consent, and that as fees for his professional services
he was to receive one half of the amount allowed in the judgment if the same were entered in favor of the
plaintiff.
The case came up for trial, evidence was adduced by both parties, and either exhibits were made of
record. On the 10th of January, 1907, the court below entered judgment sentencing Agustina Jarra, as
administratrix of the estate of Magdaleno Jimenea, to return to the plaintiff, Felix de los Santos, the
remaining six second and third class carabaos, or the value thereof at the rate of P120 each, or a total of
P720 with the costs.
Counsel for the defendant excepted to the foregoing judgment, and, by a writing dated January 19,
moved for anew trial on the ground that the findings of fact were openly and manifestly contrary to the
weight of the evidence. The motion was overruled, the defendant duly excepted, and in due course
submitted the corresponding bill of exceptions, which was approved and submitted to this court.
The defendant has admitted that Magdaleno Jimenea asked the plaintiff for the loan of ten carabaos
which are now claimed by the latter, as shown by two letters addressed by the said Jimenea to Felix de
los Santos; but in her answer the said defendant alleged that the late Jimenea only obtained three
second-class carabaos, which were subsequently sold to him by the owner, Santos; therefore, in order to
decide this litigation it is indispensable that proof be forthcoming that Jimenea only received three
carabaos from his son-in-law Santos, and that they were sold by the latter to him.
The record discloses that it has been fully proven from the testimony of a sufficient number of witnesses
that the plaintiff, Santos, sent in charge of various persons the ten carabaos requested by his father-inlaw, Magdaleno Jimenea, in the two letters produced at the trial by the plaintiff, and that Jimenea received
them in the presence of some of said persons, one being a brother of said Jimenea, who saw the animals
arrive at the hacienda where it was proposed to employ them. Four died of rinderpest, and it is for this
reason that the judgment appealed from only deals with six surviving carabaos.

The alleged purchase of three carabaos by Jimenea from his son-in-law Santos is not evidenced by any
trustworthy documents such as those of transfer, nor were the declarations of the witnesses presented by
the defendant affirming it satisfactory; for said reason it can not be considered that Jimenea only received
three carabaos on loan from his son-in-law, and that he afterwards kept them definitely by virtue of the
purchase.
By the laws in force the transfer of large cattle was and is still made by means of official documents
issued by the local authorities; these documents constitute the title of ownership of the carabao or horse
so acquired. Furthermore, not only should the purchaser be provided with a new certificate or credential,
a document which has not been produced in evidence by the defendant, nor has the loss of the same
been shown in the case, but the old documents ought to be on file in the municipality, or they should have
been delivered to the new purchaser, and in the case at bar neither did the defendant present the old
credential on which should be stated the name of the previous owner of each of the three carabaos said
to have been sold by the plaintiff.
From the foregoing it may be logically inferred that the carabaos loaned or given on commodatum to the
now deceased Magdaleno Jimenea were ten in number; that they, or at any rate the six surviving ones,
have not been returned to the owner thereof, Felix de los Santos, and that it is not true that the latter sold
to the former three carabaos that the purchaser was already using; therefore, as the said six carabaos
were not the property of the deceased nor of any of his descendants, it is the duty of the administratrix of
the estate to return them or indemnify the owner for their value.
The Civil Code, in dealing with loans in general, from which generic denomination the specific one of
commodatum is derived, establishes prescriptions in relation to the last-mentioned contract by the
following articles:
ART. 1740. By the contract of loan, one of the parties delivers to the other, either anything not
perishable, in order that the latter may use it during a certain period and return it to the former, in
which case it is called commodatum, or money or any other perishable thing, under the condition
to return an equal amount of the same kind and quality, in which case it is merely called a loan.
Commodatum is essentially gratuitous.
A simple loan may be gratuitous, or made under a stipulation to pay interest.
ART. 1741. The bailee acquires retains the ownership of the thing loaned. The bailee acquires the
use thereof, but not its fruits; if any compensation is involved, to be paid by the person requiring
the use, the agreement ceases to be a commodatum.
ART. 1742. The obligations and rights which arise from the commodatum pass to the heirs of both
contracting parties, unless the loan has been in consideration for the person of the bailee, in
which case his heirs shall not have the right to continue using the thing loaned.
The carabaos delivered to be used not being returned by the defendant upon demand, there is no doubt
that she is under obligation to indemnify the owner thereof by paying him their value.
Article 1101 of said code reads:
Those who in fulfilling their obligations are guilty of fraud, negligence, or delay, and those who in
any manner whatsoever act in contravention of the stipulations of the same, shall be subjected to
indemnify for the losses and damages caused thereby.

The obligation of the bailee or of his successors to return either the thing loaned or its value, is sustained
by the supreme tribunal of Sapin. In its decision of March 21, 1895, it sets out with precision the legal
doctrine touching commodatum as follows:
Although it is true that in a contract of commodatum the bailor retains the ownership of the thing
loaned, and at the expiration of the period, or after the use for which it was loaned has been
accomplished, it is the imperative duty of the bailee to return the thing itself to its owner, or to pay
him damages if through the fault of the bailee the thing should have been lost or injured, it is clear
that where public securities are involved, the trial court, in deferring to the claim of the bailor that
the amount loaned be returned him by the bailee in bonds of the same class as those which
constituted the contract, thereby properly applies law 9 of title 11 of partida5.
With regard to the third assignment of error, based on the fact that the plaintiff Santos had not appealed
from the decision of the commissioners rejecting his claim for the recovery of his carabaos, it is sufficient
to estate that we are not dealing with a claim for the payment of a certain sum, the collection of a debt
from the estate, or payment for losses and damages (sec. 119, Code of Civil Procedure), but with the
exclusion from the inventory of the property of the late Jimenea, or from his capital, of six carabaos which
did not belong to him, and which formed no part of the inheritance.
The demand for the exclusion of the said carabaos belonging to a third party and which did not form part
of the property of the deceased, must be the subject of a direct decision of the court in an ordinary action,
wherein the right of the third party to the property which he seeks to have excluded from the inheritance
and the right of the deceased has been discussed, and rendered in view of the result of the evidence
adduced by the administrator of the estate and of the claimant, since it is so provided by the second part
of section 699 and by section 703 of the Code of Civil Procedure; the refusal of the commissioners before
whom the plaintiff unnecessarily appeared can not affect nor reduce the unquestionable right of
ownership of the latter, inasmuch as there is no law nor principle of justice authorizing the successors of
the late Jimenea to enrich themselves at the cost and to the prejudice of Felix de los Santos.
For the reasons above set forth, by which the errors assigned to the judgment appealed from have been
refuted, and considering that the same is in accordance with the law and the merits of the case, it is our
opinion that it should be affirmed and we do hereby affirm it with the costs against the appellant. So
ordered.
Arellano, C.J., Johnson, Moreland and Elliott, JJ., concur.
Carson, J., reserves his vote.
G.R. No. 80294-95 September 21, 1988
CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, petitioner,
vs.
COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN VALDEZ, respondents.
Valdez, Ereso, Polido & Associates for petitioner.
Claustro, Claustro, Claustro Law Office collaborating counsel for petitioner.
Jaime G. de Leon for the Heirs of Egmidio Octaviano.
Cotabato Law Office for the Heirs of Juan Valdez.

GANCAYCO, J.:
The principal issue in this case is whether or not a decision of the Court of Appeals promulgated a long
time ago can properly be considered res judicata by respondent Court of Appeals in the present two
cases between petitioner and two private respondents.
Petitioner questions as allegedly erroneous the Decision dated August 31, 1987 of the Ninth Division of
Respondent Court of Appeals 1 in CA-G.R. No. 05148 [Civil Case No. 3607 (419)] and CA-G.R. No.
05149 [Civil Case No. 3655 (429)], both for Recovery of Possession, which affirmed the Decision of the
Honorable Nicodemo T. Ferrer, Judge of the Regional Trial Court of Baguio and Benguet in Civil Case No.
3607 (419) and Civil Case No. 3655 (429), with the dispositive portion as follows:
WHEREFORE, Judgment is hereby rendered ordering the defendant, Catholic Vicar
Apostolic of the Mountain Province to return and surrender Lot 2 of Plan Psu-194357 to
the plaintiffs. Heirs of Juan Valdez, and Lot 3 of the same Plan to the other set of
plaintiffs, the Heirs of Egmidio Octaviano (Leonardo Valdez, et al.). For lack or
insufficiency of evidence, the plaintiffs' claim or damages is hereby denied. Said
defendant is ordered to pay costs. (p. 36, Rollo)
Respondent Court of Appeals, in affirming the trial court's decision, sustained the trial court's conclusions
that the Decision of the Court of Appeals, dated May 4,1977 in CA-G.R. No. 38830-R, in the two cases
affirmed by the Supreme Court, touched on the ownership of lots 2 and 3 in question; that the two lots
were possessed by the predecessors-in-interest of private respondents under claim of ownership in good
faith from 1906 to 1951; that petitioner had been in possession of the same lots as bailee in commodatum
up to 1951, when petitioner repudiated the trust and when it applied for registration in 1962; that petitioner
had just been in possession as owner for eleven years, hence there is no possibility of acquisitive
prescription which requires 10 years possession with just title and 30 years of possession without; that the
principle of res judicata on these findings by the Court of Appeals will bar a reopening of these questions
of facts; and that those facts may no longer be altered.
Petitioner's motion for reconsideation of the respondent appellate court's Decision in the two
aforementioned cases (CA G.R. No. CV-05418 and 05419) was denied.
The facts and background of these cases as narrated by the trail court are as follows
... The documents and records presented reveal that the whole
controversy started when the defendant Catholic Vicar Apostolic of the
Mountain Province (VICAR for brevity) filed with the Court of First
Instance of Baguio Benguet on September 5, 1962 an application for
registration of title over Lots 1, 2, 3, and 4 in Psu-194357, situated at
Poblacion Central, La Trinidad, Benguet, docketed as LRC N-91, said
Lots being the sites of the Catholic Church building, convents, high
school building, school gymnasium, school dormitories, social hall,
stonewalls, etc. On March 22, 1963 the Heirs of Juan Valdez and the
Heirs of Egmidio Octaviano filed their Answer/Opposition on Lots Nos. 2
and 3, respectively, asserting ownership and title thereto. After trial on
the merits, the land registration court promulgated its Decision, dated
November 17, 1965, confirming the registrable title of VICAR to Lots 1, 2,
3, and 4.

The Heirs of Juan Valdez (plaintiffs in the herein Civil Case No. 3655)
and the Heirs of Egmidio Octaviano (plaintiffs in the herein Civil Case No.
3607) appealed the decision of the land registration court to the then
Court of Appeals, docketed as CA-G.R. No. 38830-R. The Court of
Appeals rendered its decision, dated May 9, 1977, reversing the decision
of the land registration court and dismissing the VICAR's application as
to Lots 2 and 3, the lots claimed by the two sets of oppositors in the land
registration case (and two sets of plaintiffs in the two cases now at bar),
the first lot being presently occupied by the convent and the second by
the women's dormitory and the sister's convent.
On May 9, 1977, the Heirs of Octaviano filed a motion for reconsideration
praying the Court of Appeals to order the registration of Lot 3 in the
names of the Heirs of Egmidio Octaviano, and on May 17, 1977, the
Heirs of Juan Valdez and Pacita Valdez filed their motion for
reconsideration praying that both Lots 2 and 3 be ordered registered in
the names of the Heirs of Juan Valdez and Pacita Valdez. On August
12,1977, the Court of Appeals denied the motion for reconsideration filed
by the Heirs of Juan Valdez on the ground that there was "no sufficient
merit to justify reconsideration one way or the other ...," and likewise
denied that of the Heirs of Egmidio Octaviano.
Thereupon, the VICAR filed with the Supreme Court a petition for review
on certiorari of the decision of the Court of Appeals dismissing his (its)
application for registration of Lots 2 and 3, docketed as G.R. No. L46832, entitled 'Catholic Vicar Apostolic of the Mountain Province vs.
Court of Appeals and Heirs of Egmidio Octaviano.'
From the denial by the Court of Appeals of their motion for
reconsideration the Heirs of Juan Valdez and Pacita Valdez, on
September 8, 1977, filed with the Supreme Court a petition for review,
docketed as G.R. No. L-46872, entitled, Heirs of Juan Valdez and Pacita
Valdez vs. Court of Appeals, Vicar, Heirs of Egmidio Octaviano and
Annable O. Valdez.
On January 13, 1978, the Supreme Court denied in a minute resolution
both petitions (of VICAR on the one hand and the Heirs of Juan Valdez
and Pacita Valdez on the other) for lack of merit. Upon the finality of both
Supreme Court resolutions in G.R. No. L-46832 and G.R. No. L- 46872,
the Heirs of Octaviano filed with the then Court of First Instance of
Baguio, Branch II, a Motion For Execution of Judgment praying that the
Heirs of Octaviano be placed in possession of Lot 3. The Court, presided
over by Hon. Salvador J. Valdez, on December 7, 1978, denied the
motion on the ground that the Court of Appeals decision in CA-G.R. No.
38870 did not grant the Heirs of Octaviano any affirmative relief.
On February 7, 1979, the Heirs of Octaviano filed with the Court of
Appeals a petitioner for certiorari and mandamus, docketed as CA-G.R.
No. 08890-R, entitled Heirs of Egmidio Octaviano vs. Hon. Salvador J.
Valdez, Jr. and Vicar. In its decision dated May 16, 1979, the Court of
Appeals dismissed the petition.

It was at that stage that the instant cases were filed. The Heirs of
Egmidio Octaviano filed Civil Case No. 3607 (419) on July 24, 1979, for
recovery of possession of Lot 3; and the Heirs of Juan Valdez filed Civil
Case No. 3655 (429) on September 24, 1979, likewise for recovery of
possession of Lot 2 (Decision, pp. 199-201, Orig. Rec.).
In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of Egmidio Octaviano
presented one (1) witness, Fructuoso Valdez, who testified on the alleged ownership of
the land in question (Lot 3) by their predecessor-in-interest, Egmidio Octaviano (Exh. C );
his written demand (Exh. BB-4 ) to defendant Vicar for the return of the land to them;
and the reasonable rentals for the use of the land at P10,000.00 per month. On the other
hand, defendant Vicar presented the Register of Deeds for the Province of Benguet, Atty.
Nicanor Sison, who testified that the land in question is not covered by any title in the
name of Egmidio Octaviano or any of the plaintiffs (Exh. 8). The defendant dispensed
with the testimony of Mons.William Brasseur when the plaintiffs admitted that the witness
if called to the witness stand, would testify that defendant Vicar has been in possession of
Lot 3, for seventy-five (75) years continuously and peacefully and has constructed
permanent structures thereon.
In Civil Case No. 3655, the parties admitting that the material facts are not in dispute,
submitted the case on the sole issue of whether or not the decisions of the Court of
Appeals and the Supreme Court touching on the ownership of Lot 2, which in effect
declared the plaintiffs the owners of the land constitute res judicata.
In these two cases , the plaintiffs arque that the defendant Vicar is barred from setting up
the defense of ownership and/or long and continuous possession of the two lots in
question since this is barred by prior judgment of the Court of Appeals in CA-G.R. No.
038830-R under the principle of res judicata. Plaintiffs contend that the question of
possession and ownership have already been determined by the Court of Appeals (Exh.
C, Decision, CA-G.R. No. 038830-R) and affirmed by the Supreme Court (Exh. 1, Minute
Resolution of the Supreme Court). On his part, defendant Vicar maintains that the
principle ofres judicata would not prevent them from litigating the issues of long
possession and ownership because the dispositive portion of the prior judgment in CAG.R. No. 038830-R merely dismissed their application for registration and titling of lots 2
and 3. Defendant Vicar contends that only the dispositive portion of the decision, and not
its body, is the controlling pronouncement of the Court of Appeals. 2
The alleged errors committed by respondent Court of Appeals according to petitioner are as follows:
1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA;
2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2 AND 3 WERE ACQUIRED BY
PURCHASE BUT WITHOUT DOCUMENTARY EVIDENCE PRESENTED;
3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT PURCHASED LOTS 2 AND 3 FROM VALDEZ
AND OCTAVIANO WAS AN IMPLIED ADMISSION THAT THE FORMER OWNERS WERE VALDEZ AND
OCTAVIANO;
4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE RESPONDENTS WHO WERE IN
POSSESSION OF LOTS 2 AND 3 AT LEAST FROM 1906, AND NOT PETITIONER;

5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE PATENT APPLICATIONS AND
THE PREDECESSORS OF PRIVATE RESPONDENTS ALREADY HAD FREE PATENT APPLICATIONS
SINCE 1906;
6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3 ONLY IN 1951 AND JUST
TITLE IS A PRIME NECESSITY UNDER ARTICLE 1134 IN RELATION TO ART. 1129 OF THE CIVIL
CODE FOR ORDINARY ACQUISITIVE PRESCRIPTION OF 10 YEARS;
7. ERROR IN FINDING THAT THE DECISION OF THE COURT OF APPEALS IN CA G.R. NO. 038830
WAS AFFIRMED BY THE SUPREME COURT;
8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830 TOUCHED ON OWNERSHIP OF
LOTS 2 AND 3 AND THAT PRIVATE RESPONDENTS AND THEIR PREDECESSORS WERE IN
POSSESSION OF LOTS 2 AND 3 UNDER A CLAIM OF OWNERSHIP IN GOOD FAITH FROM 1906 TO
1951;
9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN POSSESSION OF LOTS 2 AND 3 MERELY
AS BAILEE BOR ROWER) IN COMMODATUM, A GRATUITOUS LOAN FOR USE;
10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND BUILDER IN GOOD FAITH
WITHOUT RIGHTS OF RETENTION AND REIMBURSEMENT AND IS BARRED BY THE FINALITY AND
CONCLUSIVENESS OF THE DECISION IN CA G.R. NO. 038830. 3
The petition is bereft of merit.
Petitioner questions the ruling of respondent Court of Appeals in CA-G.R. Nos. 05148 and 05149, when it
clearly held that it was in agreement with the findings of the trial court that the Decision of the Court of
Appeals dated May 4,1977 in CA-G.R. No. 38830-R, on the question of ownership of Lots 2 and 3,
declared that the said Court of Appeals Decision CA-G.R. No. 38830-R) did not positively declare private
respondents as owners of the land, neither was it declared that they were not owners of the land, but it
held that the predecessors of private respondents were possessors of Lots 2 and 3, with claim of
ownership in good faith from 1906 to 1951. Petitioner was in possession as borrower in commodatum up
to 1951, when it repudiated the trust by declaring the properties in its name for taxation purposes. When
petitioner applied for registration of Lots 2 and 3 in 1962, it had been in possession in concept of owner
only for eleven years. Ordinary acquisitive prescription requires possession for ten years, but always with
just title. Extraordinary acquisitive prescription requires 30 years. 4
On the above findings of facts supported by evidence and evaluated by the Court of Appeals in CA-G.R.
No. 38830-R, affirmed by this Court, We see no error in respondent appellate court's ruling that said
findings are res judicatabetween the parties. They can no longer be altered by presentation of evidence
because those issues were resolved with finality a long time ago. To ignore the principle of res
judicata would be to open the door to endless litigations by continuous determination of issues without
end.
An examination of the Court of Appeals Decision dated May 4, 1977, First Division 5 in CA-G.R. No.
38830-R, shows that it reversed the trial court's Decision 6 finding petitioner to be entitled to register the
lands in question under its ownership, on its evaluation of evidence and conclusion of facts.
The Court of Appeals found that petitioner did not meet the requirement of 30 years possession for
acquisitive prescription over Lots 2 and 3. Neither did it satisfy the requirement of 10 years possession for
ordinary acquisitive prescription because of the absence of just title. The appellate court did not believe

the findings of the trial court that Lot 2 was acquired from Juan Valdez by purchase and Lot 3 was
acquired also by purchase from Egmidio Octaviano by petitioner Vicar because there was absolutely no
documentary evidence to support the same and the alleged purchases were never mentioned in the
application for registration.
By the very admission of petitioner Vicar, Lots 2 and 3 were owned by Valdez and Octaviano. Both Valdez
and Octaviano had Free Patent Application for those lots since 1906. The predecessors of private
respondents, not petitioner Vicar, were in possession of the questioned lots since 1906.
There is evidence that petitioner Vicar occupied Lots 1 and 4, which are not in question, but not Lots 2
and 3, because the buildings standing thereon were only constructed after liberation in 1945. Petitioner
Vicar only declared Lots 2 and 3 for taxation purposes in 1951. The improvements oil Lots 1, 2, 3, 4 were
paid for by the Bishop but said Bishop was appointed only in 1947, the church was constructed only in
1951 and the new convent only 2 years before the trial in 1963.
When petitioner Vicar was notified of the oppositor's claims, the parish priest offered to buy the lot from
Fructuoso Valdez. Lots 2 and 3 were surveyed by request of petitioner Vicar only in 1962.
Private respondents were able to prove that their predecessors' house was borrowed by petitioner Vicar
after the church and the convent were destroyed. They never asked for the return of the house, but when
they allowed its free use, they became bailors in commodatum and the petitioner the bailee. The bailees'
failure to return the subject matter of commodatum to the bailor did not mean adverse possession on the
part of the borrower. The bailee held in trust the property subject matter of commodatum. The adverse
claim of petitioner came only in 1951 when it declared the lots for taxation purposes. The action of
petitioner Vicar by such adverse claim could not ripen into title by way of ordinary acquisitive prescription
because of the absence of just title.
The Court of Appeals found that the predecessors-in-interest and private respondents were possessors
under claim of ownership in good faith from 1906; that petitioner Vicar was only a bailee in commodatum;
and that the adverse claim and repudiation of trust came only in 1951.
We find no reason to disregard or reverse the ruling of the Court of Appeals in CA-G.R. No. 38830-R. Its
findings of fact have become incontestible. This Court declined to review said decision, thereby in effect,
affirming it. It has become final and executory a long time ago.
Respondent appellate court did not commit any reversible error, much less grave abuse of discretion,
when it held that the Decision of the Court of Appeals in CA-G.R. No. 38830-R is governing, under the
principle of res judicata, hence the rule, in the present cases CA-G.R. No. 05148 and CA-G.R. No. 05149.
The facts as supported by evidence established in that decision may no longer be altered.
WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED for lack of merit, the
Decision dated Aug. 31, 1987 in CA-G.R. Nos. 05148 and 05149, by respondent Court of Appeals is
AFFIRMED, with costs against petitioner.
SO ORDERED.
Narvasa, Cruz, Grio-Aquino and Medialdea, JJ., concur.

Footnotes

1 Associate Justices Conrado T. Limcaoco, Jose C. Campos, Jr. and Gloria C. Paras.
2 Decision in CA-G.R. No. CV Nos. 05148 and 05149 dated August 31, 1987; pp. 11 2117, Rollo.
3 Pp. 5-15, Petition; pp. 6-17, Rollo.
4 Arts. 1134 and 1129, Civil Code.
5 Presiding Justice Magno S. Gatmaitan, Associate Justices Pacifico P. de Castro and
Samuel Reyes.
6 Land Reg. No. N-91, LRC Rec. No. N-22991 of the then C.F.I. of Baguio City.
G.R. No. 146364

June 3, 2004

COLITO T. PAJUYO, petitioner,


vs.
COURT OF APPEALS and EDDIE GUEVARRA, respondents.
DECISION
CARPIO, J.:
The Case
Before us is a petition for review1 of the 21 June 2000 Decision2 and 14 December 2000 Resolution of the
Court of Appeals in CA-G.R. SP No. 43129. The Court of Appeals set aside the 11 November 1996
decision3 of the Regional Trial Court of Quezon City, Branch 81, 4 affirming the 15 December 1995
decision5 of the Metropolitan Trial Court of Quezon City, Branch 31. 6
The Antecedents
In June 1979, petitioner Colito T. Pajuyo ("Pajuyo") paid P400 to a certain Pedro Perez for the rights over
a 250-square meter lot in Barrio Payatas, Quezon City. Pajuyo then constructed a house made of light
materials on the lot. Pajuyo and his family lived in the house from 1979 to 7 December 1985.
On 8 December 1985, Pajuyo and private respondent Eddie Guevarra ("Guevarra") executed
a Kasunduan or agreement. Pajuyo, as owner of the house, allowed Guevarra to live in the house for free
provided Guevarra would maintain the cleanliness and orderliness of the house. Guevarra promised that
he would voluntarily vacate the premises on Pajuyos demand.
In September 1994, Pajuyo informed Guevarra of his need of the house and demanded that Guevarra
vacate the house. Guevarra refused.
Pajuyo filed an ejectment case against Guevarra with the Metropolitan Trial Court of Quezon City, Branch
31 ("MTC").
In his Answer, Guevarra claimed that Pajuyo had no valid title or right of possession over the lot where the
house stands because the lot is within the 150 hectares set aside by Proclamation No. 137 for socialized
housing. Guevarra pointed out that from December 1985 to September 1994, Pajuyo did not show up or
communicate with him. Guevarra insisted that neither he nor Pajuyo has valid title to the lot.

On 15 December 1995, the MTC rendered its decision in favor of Pajuyo. The dispositive portion of the
MTC decision reads:
WHEREFORE, premises considered, judgment is hereby rendered for the plaintiff and against
defendant, ordering the latter to:
A) vacate the house and lot occupied by the defendant or any other person or persons
claiming any right under him;
B) pay unto plaintiff the sum of THREE HUNDRED PESOS (P300.00) monthly as
reasonable compensation for the use of the premises starting from the last demand;
C) pay plaintiff the sum of P3,000.00 as and by way of attorneys fees; and
D) pay the cost of suit.
SO ORDERED.7
Aggrieved, Guevarra appealed to the Regional Trial Court of Quezon City, Branch 81 ("RTC").
On 11 November 1996, the RTC affirmed the MTC decision. The dispositive portion of the RTC decision
reads:
WHEREFORE, premises considered, the Court finds no reversible error in the decision appealed
from, being in accord with the law and evidence presented, and the same is hereby affirmed en
toto.
SO ORDERED.8
Guevarra received the RTC decision on 29 November 1996. Guevarra had only until 14 December 1996
to file his appeal with the Court of Appeals. Instead of filing his appeal with the Court of Appeals,
Guevarra filed with the Supreme Court a "Motion for Extension of Time to File Appeal by Certiorari Based
on Rule 42" ("motion for extension"). Guevarra theorized that his appeal raised pure questions of law. The
Receiving Clerk of the Supreme Court received the motion for extension on 13 December 1996 or one
day before the right to appeal expired.
On 3 January 1997, Guevarra filed his petition for review with the Supreme Court.
On 8 January 1997, the First Division of the Supreme Court issued a Resolution 9 referring the motion for
extension to the Court of Appeals which has concurrent jurisdiction over the case. The case presented no
special and important matter for the Supreme Court to take cognizance of at the first instance.
On 28 January 1997, the Thirteenth Division of the Court of Appeals issued a Resolution 10 granting the
motion for extension conditioned on the timeliness of the filing of the motion.
On 27 February 1997, the Court of Appeals ordered Pajuyo to comment on Guevaras petition for review.
On 11 April 1997, Pajuyo filed his Comment.
On 21 June 2000, the Court of Appeals issued its decision reversing the RTC decision. The dispositive
portion of the decision reads:

WHEREFORE, premises considered, the assailed Decision of the court a quo in Civil Case No.
Q-96-26943 is REVERSED and SET ASIDE; and it is hereby declared that the ejectment case
filed against defendant-appellant is without factual and legal basis.
SO ORDERED.11
Pajuyo filed a motion for reconsideration of the decision. Pajuyo pointed out that the Court of Appeals
should have dismissed outright Guevarras petition for review because it was filed out of time. Moreover, it
was Guevarras counsel and not Guevarra who signed the certification against forum-shopping.
On 14 December 2000, the Court of Appeals issued a resolution denying Pajuyos motion for
reconsideration. The dispositive portion of the resolution reads:
WHEREFORE, for lack of merit, the motion for reconsideration is hereby DENIED. No costs.
SO ORDERED.12
The Ruling of the MTC
The MTC ruled that the subject of the agreement between Pajuyo and Guevarra is the house and not the
lot. Pajuyo is the owner of the house, and he allowed Guevarra to use the house only by tolerance. Thus,
Guevarras refusal to vacate the house on Pajuyos demand made Guevarras continued possession of
the house illegal.
The Ruling of the RTC
The RTC upheld the Kasunduan, which established the landlord and tenant relationship between Pajuyo
and Guevarra. The terms of the Kasunduan bound Guevarra to return possession of the house on
demand.
The RTC rejected Guevarras claim of a better right under Proclamation No. 137, the Revised National
Government Center Housing Project Code of Policies and other pertinent laws. In an ejectment suit, the
RTC has no power to decide Guevarras rights under these laws. The RTC declared that in an ejectment
case, the only issue for resolution is material or physical possession, not ownership.
The Ruling of the Court of Appeals
The Court of Appeals declared that Pajuyo and Guevarra are squatters. Pajuyo and Guevarra illegally
occupied the contested lot which the government owned.
Perez, the person from whom Pajuyo acquired his rights, was also a squatter. Perez had no right or title
over the lot because it is public land. The assignment of rights between Perez and Pajuyo, and
the Kasunduan between Pajuyo and Guevarra, did not have any legal effect. Pajuyo and Guevarra are
in pari delicto or in equal fault. The court will leave them where they are.
The Court of Appeals reversed the MTC and RTC rulings, which held that the Kasunduan between Pajuyo
and Guevarra created a legal tie akin to that of a landlord and tenant relationship. The Court of Appeals
ruled that theKasunduan is not a lease contract but a commodatum because the agreement is not for a
price certain.
Since Pajuyo admitted that he resurfaced only in 1994 to claim the property, the appellate court held that
Guevarra has a better right over the property under Proclamation No. 137. President Corazon C. Aquino
("President Aquino") issued Proclamation No. 137 on 7 September 1987. At that time, Guevarra was in

physical possession of the property. Under Article VI of the Code of Policies Beneficiary Selection and
Disposition of Homelots and Structures in the National Housing Project ("the Code"), the actual occupant
or caretaker of the lot shall have first priority as beneficiary of the project. The Court of Appeals concluded
that Guevarra is first in the hierarchy of priority.
In denying Pajuyos motion for reconsideration, the appellate court debunked Pajuyos claim that
Guevarra filed his motion for extension beyond the period to appeal.
The Court of Appeals pointed out that Guevarras motion for extension filed before the Supreme Court
was stamped "13 December 1996 at 4:09 PM" by the Supreme Courts Receiving Clerk. The Court of
Appeals concluded that the motion for extension bore a date, contrary to Pajuyos claim that the motion
for extension was undated. Guevarra filed the motion for extension on time on 13 December 1996 since
he filed the motion one day before the expiration of the reglementary period on 14 December 1996. Thus,
the motion for extension properly complied with the condition imposed by the Court of Appeals in its 28
January 1997 Resolution. The Court of Appeals explained that the thirty-day extension to file the petition
for review was deemed granted because of such compliance.
The Court of Appeals rejected Pajuyos argument that the appellate court should have dismissed the
petition for review because it was Guevarras counsel and not Guevarra who signed the certification
against forum-shopping. The Court of Appeals pointed out that Pajuyo did not raise this issue in his
Comment. The Court of Appeals held that Pajuyo could not now seek the dismissal of the case after he
had extensively argued on the merits of the case. This technicality, the appellate court opined, was clearly
an afterthought.
The Issues
Pajuyo raises the following issues for resolution:
WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS AUTHORITY AND
DISCRETION TANTAMOUNT TO LACK OF JURISDICTION:
1) in GRANTING, instead of denying, Private Respondents Motion for an Extension of
thirty days to file petition for review at the time when there was no more period to extend
as the decision of the Regional Trial Court had already become final and executory.
2) in giving due course, instead of dismissing, private respondents Petition for Review
even though the certification against forum-shopping was signed only by counsel instead
of by petitioner himself.
3) in ruling that the Kasunduan voluntarily entered into by the parties was in fact
a commodatum, instead of a Contract of Lease as found by the Metropolitan Trial Court
and in holding that "the ejectment case filed against defendant-appellant is without legal
and factual basis".
4) in reversing and setting aside the Decision of the Regional Trial Court in Civil Case No.
Q-96-26943 and in holding that the parties are in pari delicto being both squatters,
therefore, illegal occupants of the contested parcel of land.
5) in deciding the unlawful detainer case based on the so-called Code of Policies of the
National Government Center Housing Project instead of deciding the same under
the Kasunduan voluntarily executed by the parties, the terms and conditions of which are
the laws between themselves.13

The Ruling of the Court


The procedural issues Pajuyo is raising are baseless. However, we find merit in the substantive issues
Pajuyo is submitting for resolution.
Procedural Issues
Pajuyo insists that the Court of Appeals should have dismissed outright Guevarras petition for review
because the RTC decision had already become final and executory when the appellate court acted on
Guevarras motion for extension to file the petition. Pajuyo points out that Guevarra had only one day
before the expiry of his period to appeal the RTC decision. Instead of filing the petition for review with the
Court of Appeals, Guevarra filed with this Court an undated motion for extension of 30 days to file a
petition for review. This Court merely referred the motion to the Court of Appeals. Pajuyo believes that the
filing of the motion for extension with this Court did not toll the running of the period to perfect the appeal.
Hence, when the Court of Appeals received the motion, the period to appeal had already expired.
We are not persuaded.
Decisions of the regional trial courts in the exercise of their appellate jurisdiction are appealable to the
Court of Appeals by petition for review in cases involving questions of fact or mixed questions of fact and
law.14 Decisions of the regional trial courts involving pure questions of law are appealable directly to this
Court by petition for review.15 These modes of appeal are now embodied in Section 2, Rule 41 of the 1997
Rules of Civil Procedure.
Guevarra believed that his appeal of the RTC decision involved only questions of law. Guevarra thus filed
his motion for extension to file petition for review before this Court on 14 December 1996. On 3 January
1997, Guevarra then filed his petition for review with this Court. A perusal of Guevarras petition for review
gives the impression that the issues he raised were pure questions of law. There is a question of law
when the doubt or difference is on what the law is on a certain state of facts. 16 There is a question of fact
when the doubt or difference is on the truth or falsity of the facts alleged. 17
In his petition for review before this Court, Guevarra no longer disputed the facts. Guevarras petition for
review raised these questions: (1) Do ejectment cases pertain only to possession of a structure, and not
the lot on which the structure stands? (2) Does a suit by a squatter against a fellow squatter constitute a
valid case for ejectment? (3) Should a Presidential Proclamation governing the lot on which a squatters
structure stands be considered in an ejectment suit filed by the owner of the structure?
These questions call for the evaluation of the rights of the parties under the law on ejectment and the
Presidential Proclamation. At first glance, the questions Guevarra raised appeared purely legal. However,
some factual questions still have to be resolved because they have a bearing on the legal questions
raised in the petition for review. These factual matters refer to the metes and bounds of the disputed
property and the application of Guevarra as beneficiary of Proclamation No. 137.
The Court of Appeals has the power to grant an extension of time to file a petition for review.
In Lacsamana v. Second Special Cases Division of the Intermediate Appellate Court,18 we declared
that the Court of Appeals could grant extension of time in appeals by petition for review. In Liboro v.
Court of Appeals,19 we clarified that the prohibition against granting an extension of time applies only in a
case where ordinary appeal is perfected by a mere notice of appeal. The prohibition does not apply in a
petition for review where the pleading needs verification. A petition for review, unlike an ordinary appeal,
requires preparation and research to present a persuasive position. 20 The drafting of the petition for
review entails more time and effort than filing a notice of appeal. 21 Hence, the Court of Appeals may allow
an extension of time to file a petition for review.

In the more recent case of Commissioner of Internal Revenue v. Court of Appeals,22 we held
that Liborosclarification of Lacsamana is consistent with the Revised Internal Rules of the Court of
Appeals and Supreme Court Circular No. 1-91. They all allow an extension of time for filing petitions for
review with the Court of Appeals. The extension, however, should be limited to only fifteen days save in
exceptionally meritorious cases where the Court of Appeals may grant a longer period.
A judgment becomes "final and executory" by operation of law. Finality of judgment becomes a fact on the
lapse of the reglementary period to appeal if no appeal is perfected. 23 The RTC decision could not have
gained finality because the Court of Appeals granted the 30-day extension to Guevarra.
The Court of Appeals did not commit grave abuse of discretion when it approved Guevarras motion for
extension. The Court of Appeals gave due course to the motion for extension because it complied with the
condition set by the appellate court in its resolution dated 28 January 1997. The resolution stated that the
Court of Appeals would only give due course to the motion for extension if filed on time. The motion for
extension met this condition.
The material dates to consider in determining the timeliness of the filing of the motion for extension are (1)
the date of receipt of the judgment or final order or resolution subject of the petition, and (2) the date of
filing of the motion for extension.24 It is the date of the filing of the motion or pleading, and not the date of
execution, that determines the timeliness of the filing of that motion or pleading. Thus, even if the motion
for extension bears no date, the date of filing stamped on it is the reckoning point for determining the
timeliness of its filing.
Guevarra had until 14 December 1996 to file an appeal from the RTC decision. Guevarra filed his motion
for extension before this Court on 13 December 1996, the date stamped by this Courts Receiving Clerk
on the motion for extension. Clearly, Guevarra filed the motion for extension exactly one day before the
lapse of the reglementary period to appeal.
Assuming that the Court of Appeals should have dismissed Guevarras appeal on technical grounds,
Pajuyo did not ask the appellate court to deny the motion for extension and dismiss the petition for review
at the earliest opportunity. Instead, Pajuyo vigorously discussed the merits of the case. It was only when
the Court of Appeals ruled in Guevarras favor that Pajuyo raised the procedural issues against
Guevarras petition for review.
A party who, after voluntarily submitting a dispute for resolution, receives an adverse decision on the
merits, is estopped from attacking the jurisdiction of the court. 25 Estoppel sets in not because the
judgment of the court is a valid and conclusive adjudication, but because the practice of attacking the
courts jurisdiction after voluntarily submitting to it is against public policy.26
In his Comment before the Court of Appeals, Pajuyo also failed to discuss Guevarras failure to sign the
certification against forum shopping. Instead, Pajuyo harped on Guevarras counsel signing the
verification, claiming that the counsels verification is insufficient since it is based only on "mere
information."
A partys failure to sign the certification against forum shopping is different from the partys failure to sign
personally the verification. The certificate of non-forum shopping must be signed by the party, and not by
counsel.27 The certification of counsel renders the petition defective. 28
On the other hand, the requirement on verification of a pleading is a formal and not a jurisdictional
requisite.29 It is intended simply to secure an assurance that what are alleged in the pleading are true and
correct and not the product of the imagination or a matter of speculation, and that the pleading is filed in
good faith.30 The party need not sign the verification. A partys representative, lawyer or any person who
personally knows the truth of the facts alleged in the pleading may sign the verification. 31

We agree with the Court of Appeals that the issue on the certificate against forum shopping was merely
an afterthought. Pajuyo did not call the Court of Appeals attention to this defect at the early stage of the
proceedings. Pajuyo raised this procedural issue too late in the proceedings.
Absence of Title over the Disputed Property will not Divest the Courts of Jurisdiction to Resolve
the Issue of Possession
Settled is the rule that the defendants claim of ownership of the disputed property will not divest the
inferior court of its jurisdiction over the ejectment case. 32 Even if the pleadings raise the issue of
ownership, the court may pass on such issue to determine only the question of possession, especially if
the ownership is inseparably linked with the possession.33 The adjudication on the issue of ownership is
only provisional and will not bar an action between the same parties involving title to the land. 34 This
doctrine is a necessary consequence of the nature of the two summary actions of ejectment, forcible entry
and unlawful detainer, where the only issue for adjudication is the physical or material possession over
the real property.35
In this case, what Guevarra raised before the courts was that he and Pajuyo are not the owners of the
contested property and that they are mere squatters. Will the defense that the parties to the ejectment
case are not the owners of the disputed lot allow the courts to renounce their jurisdiction over the case?
The Court of Appeals believed so and held that it would just leave the parties where they are since they
are in pari delicto.
We do not agree with the Court of Appeals.
Ownership or the right to possess arising from ownership is not at issue in an action for recovery of
possession. The parties cannot present evidence to prove ownership or right to legal possession except
to prove the nature of the possession when necessary to resolve the issue of physical possession. 36 The
same is true when the defendant asserts the absence of title over the property. The absence of title over
the contested lot is not a ground for the courts to withhold relief from the parties in an ejectment case.
The only question that the courts must resolve in ejectment proceedings is - who is entitled to the physical
possession of the premises, that is, to the possession de facto and not to the possession de jure.37 It does
not even matter if a partys title to the property is questionable, 38 or when both parties intruded into public
land and their applications to own the land have yet to be approved by the proper government
agency.39 Regardless of the actual condition of the title to the property, the party in peaceable quiet
possession shall not be thrown out by a strong hand, violence or terror.40 Neither is the unlawful
withholding of property allowed. Courts will always uphold respect for prior possession.
Thus, a party who can prove prior possession can recover such possession even against the owner
himself.41Whatever may be the character of his possession, if he has in his favor prior possession in time,
he has the security that entitles him to remain on the property until a person with a better right lawfully
ejects him.42 To repeat, the only issue that the court has to settle in an ejectment suit is the right to
physical possession.
In Pitargue v. Sorilla,43 the government owned the land in dispute. The government did not authorize
either the plaintiff or the defendant in the case of forcible entry case to occupy the land. The plaintiff had
prior possession and had already introduced improvements on the public land. The plaintiff had a pending
application for the land with the Bureau of Lands when the defendant ousted him from possession. The
plaintiff filed the action of forcible entry against the defendant. The government was not a party in the
case of forcible entry.
The defendant questioned the jurisdiction of the courts to settle the issue of possession because while the
application of the plaintiff was still pending, title remained with the government, and the Bureau of Public
Lands had jurisdiction over the case. We disagreed with the defendant. We ruled that courts have

jurisdiction to entertain ejectment suits even before the resolution of the application. The plaintiff, by
priority of his application and of his entry, acquired prior physical possession over the public land applied
for as against other private claimants. That prior physical possession enjoys legal protection against other
private claimants because only a court can take away such physical possession in an ejectment case.
While the Court did not brand the plaintiff and the defendant in Pitargue44 as squatters, strictly speaking,
their entry into the disputed land was illegal. Both the plaintiff and defendant entered the public land
without the owners permission. Title to the land remained with the government because it had not
awarded to anyone ownership of the contested public land. Both the plaintiff and the defendant were in
effect squatting on government property. Yet, we upheld the courts jurisdiction to resolve the issue of
possession even if the plaintiff and the defendant in the ejectment case did not have any title over the
contested land.
Courts must not abdicate their jurisdiction to resolve the issue of physical possession because of the
public need to preserve the basic policy behind the summary actions of forcible entry and unlawful
detainer. The underlying philosophy behind ejectment suits is to prevent breach of the peace and criminal
disorder and to compel the party out of possession to respect and resort to the law alone to obtain what
he claims is his.45 The party deprived of possession must not take the law into his own hands. 46 Ejectment
proceedings are summary in nature so the authorities can settle speedily actions to recover possession
because of the overriding need to quell social disturbances. 47
We further explained in Pitargue the greater interest that is at stake in actions for recovery of possession.
We made the following pronouncements in Pitargue:
The question that is before this Court is: Are courts without jurisdiction to take cognizance of
possessory actions involving these public lands before final award is made by the Lands
Department, and before title is given any of the conflicting claimants? It is one of utmost
importance, as there are public lands everywhere and there are thousands of settlers, especially
in newly opened regions. It also involves a matter of policy, as it requires the determination of the
respective authorities and functions of two coordinate branches of the Government in connection
with public land conflicts.
Our problem is made simple by the fact that under the Civil Code, either in the old, which was in
force in this country before the American occupation, or in the new, we have a possessory action,
the aim and purpose of which is the recovery of the physical possession of real property,
irrespective of the question as to who has the title thereto. Under the Spanish Civil Code we had
the accion interdictal, a summary proceeding which could be brought within one year from
dispossession (Roman Catholic Bishop of Cebu vs. Mangaron, 6 Phil. 286, 291); and as early as
October 1, 1901, upon the enactment of the Code of Civil Procedure (Act No. 190 of the
Philippine Commission) we implanted the common law action of forcible entry (section 80 of Act
No. 190), the object of which has been stated by this Court to be "to prevent breaches of the
peace and criminal disorder which would ensue from the withdrawal of the remedy, and
the reasonable hope such withdrawal would create that some advantage must accrue to
those persons who, believing themselves entitled to the possession of property, resort to
force to gain possession rather than to some appropriate action in the court to assert their
claims." (Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) So before the enactment
of the first Public Land Act (Act No. 926) the action of forcible entry was already available in the
courts of the country. So the question to be resolved is, Did the Legislature intend, when it vested
the power and authority to alienate and dispose of the public lands in the Lands Department, to
exclude the courts from entertaining the possessory action of forcible entry between rival
claimants or occupants of any land before award thereof to any of the parties? Did Congress
intend that the lands applied for, or all public lands for that matter, be removed from the
jurisdiction of the judicial Branch of the Government, so that any troubles arising therefrom, or
any breaches of the peace or disorders caused by rival claimants, could be inquired into only by
the Lands Department to the exclusion of the courts? The answer to this question seems to us

evident. The Lands Department does not have the means to police public lands; neither does it
have the means to prevent disorders arising therefrom, or contain breaches of the peace among
settlers; or to pass promptly upon conflicts of possession. Then its power is clearly limited to
disposition and alienation, and while it may decide conflicts of possession in order to
make proper award, the settlement of conflicts of possession which is recognized in the
court herein has another ultimate purpose, i.e., the protection of actual possessors and
occupants with a view to the prevention of breaches of the peace. The power to dispose
and alienate could not have been intended to include the power to prevent or settle
disorders or breaches of the peace among rival settlers or claimants prior to the final
award. As to this, therefore, the corresponding branches of the Government must continue to
exercise power and jurisdiction within the limits of their respective functions. The vesting of the
Lands Department with authority to administer, dispose, and alienate public lands,
therefore, must not be understood as depriving the other branches of the Government of
the exercise of the respective functions or powers thereon, such as the authority to stop
disorders and quell breaches of the peace by the police, the authority on the part of the
courts to take jurisdiction over possessory actions arising therefrom not involving,
directly or indirectly, alienation and disposition.
Our attention has been called to a principle enunciated in American courts to the effect that courts
have no jurisdiction to determine the rights of claimants to public lands, and that until the
disposition of the land has passed from the control of the Federal Government, the courts will not
interfere with the administration of matters concerning the same. (50 C. J. 1093-1094.) We have
no quarrel with this principle. The determination of the respective rights of rival claimants to public
lands is different from the determination of who has the actual physical possession or occupation
with a view to protecting the same and preventing disorder and breaches of the peace. A
judgment of the court ordering restitution of the possession of a parcel of land to the actual
occupant, who has been deprived thereof by another through the use of force or in any other
illegal manner, can never be "prejudicial interference" with the disposition or alienation of public
lands. On the other hand, if courts were deprived of jurisdiction of cases involving
conflicts of possession, that threat of judicial action against breaches of the peace
committed on public lands would be eliminated, and a state of lawlessness would
probably be produced between applicants, occupants or squatters, where force or might,
not right or justice, would rule.
It must be borne in mind that the action that would be used to solve conflicts of possession
between rivals or conflicting applicants or claimants would be no other than that of forcible entry.
This action, both in England and the United States and in our jurisdiction, is a summary and
expeditious remedy whereby one in peaceful and quiet possession may recover the possession
of which he has been deprived by a stronger hand, by violence or terror; its ultimate object being
to prevent breach of the peace and criminal disorder. (Supia and Batioco vs. Quintero and Ayala,
59 Phil. 312, 314.) The basis of the remedy is mere possession as a fact, of physical possession,
not a legal possession. (Mediran vs. Villanueva, 37 Phil. 752.) The title or right to possession is
never in issue in an action of forcible entry; as a matter of fact, evidence thereof is expressly
banned, except to prove the nature of the possession. (Second 4, Rule 72, Rules of Court.) With
this nature of the action in mind, by no stretch of the imagination can conclusion be arrived at that
the use of the remedy in the courts of justice would constitute an interference with the alienation,
disposition, and control of public lands. To limit ourselves to the case at bar can it be pretended at
all that its result would in any way interfere with the manner of the alienation or disposition of the
land contested? On the contrary, it would facilitate adjudication, for the question of priority of
possession having been decided in a final manner by the courts, said question need no longer
waste the time of the land officers making the adjudication or award. (Emphasis ours)
The Principle of Pari Delicto is not Applicable to Ejectment Cases
The Court of Appeals erroneously applied the principle of pari delicto to this case.

Articles 1411 and 1412 of the Civil Code48 embody the principle of pari delicto. We explained the principle
of pari delicto in these words:
The rule of pari delicto is expressed in the maxims ex dolo malo non eritur actio and in pari
delicto potior est conditio defedentis. The law will not aid either party to an illegal agreement. It
leaves the parties where it finds them.49
The application of the pari delicto principle is not absolute, as there are exceptions to its application. One
of these exceptions is where the application of the pari delicto rule would violate well-established public
policy.50
In Drilon v. Gaurana,51 we reiterated the basic policy behind the summary actions of forcible entry and
unlawful detainer. We held that:
It must be stated that the purpose of an action of forcible entry and detainer is that, regardless of
the actual condition of the title to the property, the party in peaceable quiet possession shall not
be turned out by strong hand, violence or terror. In affording this remedy of restitution the object
of the statute is to prevent breaches of the peace and criminal disorder which would ensue from
the withdrawal of the remedy, and the reasonable hope such withdrawal would create that some
advantage must accrue to those persons who, believing themselves entitled to the possession of
property, resort to force to gain possession rather than to some appropriate action in the courts to
assert their claims. This is the philosophy at the foundation of all these actions of forcible entry
and detainer which are designed to compel the party out of possession to respect and resort to
the law alone to obtain what he claims is his.52
Clearly, the application of the principle of pari delicto to a case of ejectment between squatters is fraught
with danger. To shut out relief to squatters on the ground of pari delicto would openly invite mayhem and
lawlessness. A squatter would oust another squatter from possession of the lot that the latter had illegally
occupied, emboldened by the knowledge that the courts would leave them where they are. Nothing would
then stand in the way of the ousted squatter from re-claiming his prior possession at all cost.
Petty warfare over possession of properties is precisely what ejectment cases or actions for recovery of
possession seek to prevent.53 Even the owner who has title over the disputed property cannot take the
law into his own hands to regain possession of his property. The owner must go to court.
Courts must resolve the issue of possession even if the parties to the ejectment suit are squatters. The
determination of priority and superiority of possession is a serious and urgent matter that cannot be left to
the squatters to decide. To do so would make squatters receive better treatment under the law. The law
restrains property owners from taking the law into their own hands. However, the principle of pari
delicto as applied by the Court of Appeals would give squatters free rein to dispossess fellow squatters or
violently retake possession of properties usurped from them. Courts should not leave squatters to their
own devices in cases involving recovery of possession.
Possession is the only Issue for Resolution in an Ejectment Case
The case for review before the Court of Appeals was a simple case of ejectment. The Court of Appeals
refused to rule on the issue of physical possession. Nevertheless, the appellate court held that the pivotal
issue in this case is who between Pajuyo and Guevarra has the "priority right as beneficiary of the
contested land under Proclamation No. 137."54 According to the Court of Appeals, Guevarra enjoys
preferential right under Proclamation No. 137 because Article VI of the Code declares that the actual
occupant or caretaker is the one qualified to apply for socialized housing.
The ruling of the Court of Appeals has no factual and legal basis.

First. Guevarra did not present evidence to show that the contested lot is part of a relocation site under
Proclamation No. 137. Proclamation No. 137 laid down the metes and bounds of the land that it declared
open for disposition to bona fide residents.
The records do not show that the contested lot is within the land specified by Proclamation No. 137.
Guevarra had the burden to prove that the disputed lot is within the coverage of Proclamation No. 137. He
failed to do so.
Second. The Court of Appeals should not have given credence to Guevarras unsubstantiated claim that
he is the beneficiary of Proclamation No. 137. Guevarra merely alleged that in the survey the project
administrator conducted, he and not Pajuyo appeared as the actual occupant of the lot.
There is no proof that Guevarra actually availed of the benefits of Proclamation No. 137. Pajuyo allowed
Guevarra to occupy the disputed property in 1985. President Aquino signed Proclamation No. 137 into
law on 11 March 1986. Pajuyo made his earliest demand for Guevarra to vacate the property in
September 1994.
During the time that Guevarra temporarily held the property up to the time that Proclamation No. 137
allegedly segregated the disputed lot, Guevarra never applied as beneficiary of Proclamation No. 137.
Even when Guevarra already knew that Pajuyo was reclaiming possession of the property, Guevarra did
not take any step to comply with the requirements of Proclamation No. 137.
Third. Even assuming that the disputed lot is within the coverage of Proclamation No. 137 and Guevarra
has a pending application over the lot, courts should still assume jurisdiction and resolve the issue of
possession. However, the jurisdiction of the courts would be limited to the issue of physical possession
only.
In Pitargue,55 we ruled that courts have jurisdiction over possessory actions involving public land to
determine the issue of physical possession. The determination of the respective rights of rival claimants to
public land is, however, distinct from the determination of who has the actual physical possession or who
has a better right of physical possession.56 The administrative disposition and alienation of public lands
should be threshed out in the proper government agency.57
The Court of Appeals determination of Pajuyo and Guevarras rights under Proclamation No. 137 was
premature. Pajuyo and Guevarra were at most merely potential beneficiaries of the law. Courts should not
preempt the decision of the administrative agency mandated by law to determine the qualifications of
applicants for the acquisition of public lands. Instead, courts should expeditiously resolve the issue of
physical possession in ejectment cases to prevent disorder and breaches of peace. 58
Pajuyo is Entitled to Physical Possession of the Disputed Property
Guevarra does not dispute Pajuyos prior possession of the lot and ownership of the house built on it.
Guevarra expressly admitted the existence and due execution of the Kasunduan. The Kasunduan reads:
Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas, Quezon City, ay nagbibigay
pahintulot kay G. Eddie Guevarra, na pansamantalang manirahan sa nasabing bahay at lote ng "walang
bayad." Kaugnay nito, kailangang panatilihin nila ang kalinisan at kaayusan ng bahay at lote.
Sa sandaling kailangan na namin ang bahay at lote, silay kusang aalis ng walang reklamo.
Based on the Kasunduan, Pajuyo permitted Guevarra to reside in the house and lot free of rent, but
Guevarra was under obligation to maintain the premises in good condition. Guevarra promised to vacate

the premises on Pajuyos demand but Guevarra broke his promise and refused to heed Pajuyos demand
to vacate.
These facts make out a case for unlawful detainer. Unlawful detainer involves the withholding by a person
from another of the possession of real property to which the latter is entitled after the expiration or
termination of the formers right to hold possession under a contract, express or implied.59
Where the plaintiff allows the defendant to use his property by tolerance without any contract, the
defendant is necessarily bound by an implied promise that he will vacate on demand, failing which, an
action for unlawful detainer will lie.60 The defendants refusal to comply with the demand makes his
continued possession of the property unlawful.61 The status of the defendant in such a case is similar to
that of a lessee or tenant whose term of lease has expired but whose occupancy continues by tolerance
of the owner.62
This principle should apply with greater force in cases where a contract embodies the permission or
tolerance to use the property. The Kasunduan expressly articulated Pajuyos forbearance. Pajuyo did not
require Guevarra to pay any rent but only to maintain the house and lot in good condition. Guevarra
expressly vowed in theKasunduan that he would vacate the property on demand. Guevarras refusal to
comply with Pajuyos demand to vacate made Guevarras continued possession of the property unlawful.
We do not subscribe to the Court of Appeals theory that the Kasunduan is one of commodatum.
In a contract of commodatum, one of the parties delivers to another something not consumable so that
the latter may use the same for a certain time and return it. 63 An essential feature of commodatum is that
it is gratuitous. Another feature of commodatum is that the use of the thing belonging to another is for a
certain period.64 Thus, the bailor cannot demand the return of the thing loaned until after expiration of the
period stipulated, or after accomplishment of the use for which the commodatum is constituted.65 If the
bailor should have urgent need of the thing, he may demand its return for temporary use. 66 If the use of
the thing is merely tolerated by the bailor, he can demand the return of the thing at will, in which case the
contractual relation is called a precarium.67 Under the Civil Code, precarium is a kind of commodatum.68
The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not essentially
gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated him to maintain the
property in good condition. The imposition of this obligation makes the Kasunduan a contract different
from a commodatum. The effects of the Kasunduan are also different from that of a commodatum. Case
law on ejectment has treated relationship based on tolerance as one that is akin to a landlord-tenant
relationship where the withdrawal of permission would result in the termination of the lease. 69 The tenants
withholding of the property would then be unlawful. This is settled jurisprudence.
Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum, Guevarra as
bailee would still have the duty to turn over possession of the property to Pajuyo, the bailor. The obligation
to deliver or to return the thing received attaches to contracts for safekeeping, or contracts of commission,
administration and commodatum.70 These contracts certainly involve the obligation to deliver or return the
thing received.71
Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also a squatter.
Squatters, Guevarra pointed out, cannot enter into a contract involving the land they illegally occupy.
Guevarra insists that the contract is void.
Guevarra should know that there must be honor even between squatters. Guevarra freely entered into
theKasunduan. Guevarra cannot now impugn the Kasunduan after he had benefited from it.
The Kasunduan binds Guevarra.

The Kasunduan is not void for purposes of determining who between Pajuyo and Guevarra has a right to
physical possession of the contested property. The Kasunduan is the undeniable evidence of Guevarras
recognition of Pajuyos better right of physical possession. Guevarra is clearly a possessor in bad faith.
The absence of a contract would not yield a different result, as there would still be an implied promise to
vacate.
Guevarra contends that there is "a pernicious evil that is sought to be avoided, and that is allowing an
absentee squatter who (sic) makes (sic) a profit out of his illegal act." 72 Guevarra bases his argument on
the preferential right given to the actual occupant or caretaker under Proclamation No. 137 on socialized
housing.
We are not convinced.
Pajuyo did not profit from his arrangement with Guevarra because Guevarra stayed in the property
without paying any rent. There is also no proof that Pajuyo is a professional squatter who rents out
usurped properties to other squatters. Moreover, it is for the proper government agency to decide who
between Pajuyo and Guevarra qualifies for socialized housing. The only issue that we are addressing is
physical possession.
Prior possession is not always a condition sine qua non in ejectment.73 This is one of the distinctions
between forcible entry and unlawful detainer.74 In forcible entry, the plaintiff is deprived of physical
possession of his land or building by means of force, intimidation, threat, strategy or stealth. Thus, he
must allege and prove prior possession.75 But in unlawful detainer, the defendant unlawfully withholds
possession after the expiration or termination of his right to possess under any contract, express or
implied. In such a case, prior physical possession is not required. 76
Pajuyos withdrawal of his permission to Guevarra terminated the Kasunduan. Guevarras transient right
to possess the property ended as well. Moreover, it was Pajuyo who was in actual possession of the
property because Guevarra had to seek Pajuyos permission to temporarily hold the property and
Guevarra had to follow the conditions set by Pajuyo in the Kasunduan. Control over the property still
rested with Pajuyo and this is evidence of actual possession.
Pajuyos absence did not affect his actual possession of the disputed property. Possession in the eyes of
the law does not mean that a man has to have his feet on every square meter of the ground before he is
deemed in possession.77 One may acquire possession not only by physical occupation, but also by the
fact that a thing is subject to the action of ones will. 78 Actual or physical occupation is not always
necessary.79
Ruling on Possession Does not Bind Title to the Land in Dispute
We are aware of our pronouncement in cases where we declared that "squatters and intruders who
clandestinely enter into titled government property cannot, by such act, acquire any legal right to said
property."80 We made this declaration because the person who had title or who had the right to legal
possession over the disputed property was a party in the ejectment suit and that party instituted the case
against squatters or usurpers.
In this case, the owner of the land, which is the government, is not a party to the ejectment case. This
case is between squatters. Had the government participated in this case, the courts could have evicted
the contending squatters, Pajuyo and Guevarra.
Since the party that has title or a better right over the property is not impleaded in this case, we cannot
evict on our own the parties. Such a ruling would discourage squatters from seeking the aid of the courts
in settling the issue of physical possession. Stripping both the plaintiff and the defendant of possession
just because they are squatters would have the same dangerous implications as the application of the

principle of pari delicto. Squatters would then rather settle the issue of physical possession among
themselves than seek relief from the courts if the plaintiff and defendant in the ejectment case would both
stand to lose possession of the disputed property. This would subvert the policy underlying actions for
recovery of possession.
Since Pajuyo has in his favor priority in time in holding the property, he is entitled to remain on the
property until a person who has title or a better right lawfully ejects him. Guevarra is certainly not that
person. The ruling in this case, however, does not preclude Pajuyo and Guevarra from introducing
evidence and presenting arguments before the proper administrative agency to establish any right to
which they may be entitled under the law.81
In no way should our ruling in this case be interpreted to condone squatting. The ruling on the issue of
physical possession does not affect title to the property nor constitute a binding and conclusive
adjudication on the merits on the issue of ownership. 82 The owner can still go to court to recover lawfully
the property from the person who holds the property without legal title. Our ruling here does not diminish
the power of government agencies, including local governments, to condemn, abate, remove or demolish
illegal or unauthorized structures in accordance with existing laws.
Attorneys Fees and Rentals
The MTC and RTC failed to justify the award of P3,000 attorneys fees to Pajuyo. Attorneys fees as part
of damages are awarded only in the instances enumerated in Article 2208 of the Civil Code. 83 Thus, the
award of attorneys fees is the exception rather than the rule. 84 Attorneys fees are not awarded every time
a party prevails in a suit because of the policy that no premium should be placed on the right to
litigate.85 We therefore delete the attorneys fees awarded to Pajuyo.
We sustain the P300 monthly rentals the MTC and RTC assessed against Guevarra. Guevarra did not
dispute this factual finding of the two courts. We find the amount reasonable compensation to Pajuyo.
The P300 monthly rental is counted from the last demand to vacate, which was on 16 February 1995.
WHEREFORE, we GRANT the petition. The Decision dated 21 June 2000 and Resolution dated 14
December 2000 of the Court of Appeals in CA-G.R. SP No. 43129 are SET ASIDE. The Decision dated
11 November 1996 of the Regional Trial Court of Quezon City, Branch 81 in Civil Case No. Q-96-26943,
affirming the Decision dated 15 December 1995 of the Metropolitan Trial Court of Quezon City, Branch 31
in Civil Case No. 12432, isREINSTATED with MODIFICATION. The award of attorneys fees is deleted.
No costs.
SO ORDERED.
Davide, Jr., Panganiban, Ynares-Santiago, and Azcuna, JJ., concur.

Footnotes
1

Under Rule 45 of the 1997 Rules of Court.

Penned by Associate Justice Andres B. Reyes, Jr. with Associate Justices Quirino D. Abad
Santos, Jr. and Romeo A. Brawner, concurring.
3

Penned by Judge Wenceslao I. Agnir.

Docketed as Civil Case No. Q-96-26943.

Penned by Judge Mariano M. Singzon, Jr.

Docketed as Civil Case No. 12432.

Rollo, p. 41.

Ibid., p. 49.

Ibid., p. 221.

10

Ibid., p. 224.

11

Ibid., p. 60.

12

Ibid., p. 73.

13

Rollo, p. 134.

14

Macawiwili Gold Mining and Development Co., Inc. v. Court of Appeals, 358 Phil. 245 (1998).

15

Ibid.

16

Ibid.

17

Ibid.

18

227 Phil. 606 (1986).

19

G.R. No. 101132, 29 January 1993, 218 SCRA 193.

20

Ibid.

21

Ibid.

22

Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 110003, 9 February 2001, 351
SCRA 436.
23

City of Manila v. Court of Appeals, G.R. No. 100626, 29 November 1991, 204 SCRA 362.

24

Castilex Industrial Corporation v. Vasquez, Jr., 378 Phil. 1009 (1999).

25

Refugia v. Court of Appeals, 327 Phil. 982 (1996).

26

Ibid.

27

Far Eastern Shipping Company v. Court of Appeals, 357 Phil. 703 (1998).

28

Ibid.

29

Buenaventura v. Uy, G.R. No. L-28156, 31 March 1987, 149 SCRA 220.

30

Ibid.

31

FLORENZ D. REGALADO, REMEDIAL LAW COMPENDIUM, VOL.I, SIXTH REV. ED.,143.

32

Dizon v. Court of Appeals, 332 Phil. 429 (1996).

33

Ibid.

34

De Luna v. Court of Appeals, G.R. No. 94490, 6 August 1992, 212 SCRA 276.

35

Ibid.

36

Pitargue v. Sorilla, 92 Phil. 5 (1952); Dizon v. Court of Appeals, supra note 32; Section 16, Rule
70 of the 1997 Rules of Court.
37

Ibid.; Fige v. Court of Appeals, G.R. No. 107951, 30 June 1994, 233 SCRA 586; Oblea v. Court
of Appeals, 313 Phil. 804 (1995).
38

Dizon v. Court of Appeals, supra note 32.

39

Supra note 36.

40

Drilon v. Gaurana, G.R. No. L-35482, 30 April 1987, 149 SCRA 342.

41

Rubio v. The Hon. Municipal Trial Court in Cities, 322 Phil. 179 (1996).

42

Ibid.

43

92 Phil. 5 (1952).

44

Ibid.

45

Ibid.; Reynoso v. Court of Appeals, G.R. No. 49344, 23 February 1989, 170 SCRA 546; Aguilon
v. Bohol, G.R. No. L-27169, 20 October 1977, 79 SCRA 482.
46

Ibid.

47

Ibid.

48

Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract,
and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no
action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal
Code relative to the disposal of effects or instruments of a crime shall be applicable to the things
or the price of the contract.
This rule shall be applicable when only one of the parties is guilty; but the innocent one
may claim what he has given, and shall not be bound to comply with his promise.

Art.1412. If the act in which the unlawful or forbidden cause consists does not constitute
a criminal offense, the following rule shall be observed:
(1) When the fault is on the part of both contracting parties, neither may recover
what he has given by virtue of the contract, or demand the performance of the
others undertaking;
(2) When only one of the contracting parties is at fault, he cannot recover what
he has given by reason of the contract, or ask for the fulfillment of what has been
promised to him. The other who is not at fault, may demand the return of what he
has given without any obligation to comply with his promise.
49

Top-Weld Manufacturing, Inc. v. ECED S.A., G.R. No. L-44944, 9 August 1985, 138 SCRA 118.

50

Silagan v. Intermediate Appellate Court, 274 Phil. 182 (1991).

51

Supra note 40.

52

Ibid.

53

Dizon v. Concina, 141 Phil. 589 (1969); Cine Ligaya v. Labrador, 66 Phil. 659 (1938).

54

Rollo, p. 54.

55

Supra note 43.

56

Ibid.; Aguilon v. Bohol, supra note 45; Reynoso v. Court of Appeals, supra note 45.

57

Reynoso v. Court of Appeals, supra note 45.

58

Aguilon v. Bohol, supra note 45.

59

Section 1, Rule 70 of the 1964 Rules of Court.

60

Arcal v. Court of Appeals, 348 Phil. 813 (1998).

61

Ibid.

62

Ibid.

63

Art. 1933. By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it, in which case the
contract is called a commodatum; or money or other consumable thing, upon the condition that
the same amount of the same kind and quality shall be paid, in which case the contract is simply
called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while in simple loan,
ownership passes to the borrower.

64

Pascual v. Mina, 20 Phil. 202 (1911).

65

Art. 1946. The bailor cannot demand the return of the thing loaned till after the expiration of the
period stipulated, or after the accomplishment of the use for which the commodatum has been
constituted. However, if in the meantime, he should have urgent need of the thing, he may
demand its return or temporary use.
In case of temporary use by the bailor, the contract of commodatum is suspended while
the thing is in the possession of the bailor.
66

Ibid.

67

Art.1947. The bailor may demand the thing at will, and the contractual relation is called a
precarium, in the following cases:
(1) If neither the duration of the contract nor the use to which the thing loaned should be
devoted, has been stipulated; or
(2) If the use of the thing is merely tolerated by the owner.
68

ARTURO M. TOLENTINO, COMMENTARIES AND JURISPRUDENCE ON THE CIVIL CODE


OF THE PHILIPPINES, Vol. V, 448.
69

Arcal v. Court of Appeals, supra note 60; Dakudao v. Consolacion, 207 Phil. 750 (1983);
Calubayan v. Pascual, 128 Phil. 160 (1967).
70

United States v. Camara, 28 Phil. 238 (1914).

71

Ibid.

72

Rollo, p. 87.

73

Benitez v. Court of Appeals, G.R. No. 104828, 16 January 1997, 266 SCRA 242.

74

Ibid.

75

Ibid.

76

Ibid.

77

Dela Rosa v. Carlos, G.R. No. 147549, 23 October 2003.

78

Benitez v. Court of Appeals, supra note 73.

79

Ibid.

80

Caballero v. Court of Appeals, G.R. No. 59888, 29 January 1993, 218 SCRA 56; Florendo, Jr. v.
Coloma, G.R. No. L-60544, 19 May 1984, 214 SCRA 268.
81

Florendo, Jr. v. Coloma, supra note 80.

82

Dizon v. Court of Appeals, supra note 32; Section 7, Rule 70 of the 1964 Rules of Court.

83

Padillo v. Court of Appeals, 442 Phil. 344 (2001).

84

Ibid.

85

Ibid.

d. Obligations of the bailor (arts. 1946-1952)

G.R. No. L-17474

October 25, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,


vs.
JOSE V. BAGTAS, defendant,
FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by the late Jose V.
Bagtas, petitioner-appellant.
D. T. Reyes, Liaison and Associates for petitioner-appellant.
Office of the Solicitor General for plaintiff-appellee.
PADILLA, J.:
The Court of Appeals certified this case to this Court because only questions of law are raised.
On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau of
Animal Industry three bulls: a Red Sindhi with a book value of P1,176.46, a Bhagnari, of P1,320.56 and a
Sahiniwal, of P744.46, for a period of one year from 8 May 1948 to 7 May 1949 for breeding purposes
subject to a government charge of breeding fee of 10% of the book value of the bulls. Upon the expiration
on 7 May 1949 of the contract, the borrower asked for a renewal for another period of one year. However,
the Secretary of Agriculture and Natural Resources approved a renewal thereof of only one bull for
another year from 8 May 1949 to 7 May 1950 and requested the return of the other two. On 25 March
1950 Jose V. Bagtas wrote to the Director of Animal Industry that he would pay the value of the three
bulls. On 17 October 1950 he reiterated his desire to buy them at a value with a deduction of yearly
depreciation to be approved by the Auditor General. On 19 October 1950 the Director of Animal Industry
advised him that the book value of the three bulls could not be reduced and that they either be returned or
their book value paid not later than 31 October 1950. Jose V. Bagtas failed to pay the book value of the
three bulls or to return them. So, on 20 December 1950 in the Court of First Instance of Manila the
Republic of the Philippines commenced an action against him praying that he be ordered to return the
three bulls loaned to him or to pay their book value in the total sum of P3,241.45 and the unpaid breeding
fee in the sum of P199.62, both with interests, and costs; and that other just and equitable relief be
granted in (civil No. 12818).
On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that because of
the bad peace and order situation in Cagayan Valley, particularly in the barrio of Baggao, and of the
pending appeal he had taken to the Secretary of Agriculture and Natural Resources and the President of
the Philippines from the refusal by the Director of Animal Industry to deduct from the book value of the
bulls corresponding yearly depreciation of 8% from the date of acquisition, to which depreciation the
Auditor General did not object, he could not return the animals nor pay their value and prayed for the
dismissal of the complaint.
After hearing, on 30 July 1956 the trial court render judgment

. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value of the three bulls
plus the breeding fees in the amount of P626.17 with interest on both sums of (at) the legal rate
from the filing of this complaint and costs.
On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court granted on 18
October and issued on 11 November 1958. On 2 December 1958 granted an ex-parte motion filed by the
plaintiff on November 1958 for the appointment of a special sheriff to serve the writ outside Manila. Of this
order appointing a special sheriff, on 6 December 1958, Felicidad M. Bagtas, the surviving spouse of the
defendant Jose Bagtas who died on 23 October 1951 and as administratrix of his estate, was notified. On
7 January 1959 she file a motion alleging that on 26 June 1952 the two bull Sindhi and Bhagnari were
returned to the Bureau Animal of Industry and that sometime in November 1958 the third bull, the
Sahiniwal, died from gunshot wound inflicted during a Huk raid on Hacienda Felicidad Intal, and praying
that the writ of execution be quashed and that a writ of preliminary injunction be issued. On 31 January
1959 the plaintiff objected to her motion. On 6 February 1959 she filed a reply thereto. On the same day,
6 February, the Court denied her motion. Hence, this appeal certified by the Court of Appeals to this Court
as stated at the beginning of this opinion.
It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late defendant, returned
the Sindhi and Bhagnari bulls to Roman Remorin, Superintendent of the NVB Station, Bureau of Animal
Industry, Bayombong, Nueva Vizcaya, as evidenced by a memorandum receipt signed by the latter
(Exhibit 2). That is why in its objection of 31 January 1959 to the appellant's motion to quash the writ of
execution the appellee prays "that another writ of execution in the sum of P859.53 be issued against the
estate of defendant deceased Jose V. Bagtas." She cannot be held liable for the two bulls which already
had been returned to and received by the appellee.
The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huk in
November 1953 upon the surrounding barrios of Hacienda Felicidad Intal, Baggao, Cagayan, where the
animal was kept, and that as such death was due to force majeure she is relieved from the duty of
returning the bull or paying its value to the appellee. The contention is without merit. The loan by the
appellee to the late defendant Jose V. Bagtas of the three bulls for breeding purposes for a period of one
year from 8 May 1948 to 7 May 1949, later on renewed for another year as regards one bull, was subject
to the payment by the borrower of breeding fee of 10% of the book value of the bulls. The appellant
contends that the contract was commodatum and that, for that reason, as the appellee retained
ownership or title to the bull it should suffer its loss due to force majeure. A contract of commodatum is
essentially gratuitous.1 If the breeding fee be considered a compensation, then the contract would be a
lease of the bull. Under article 1671 of the Civil Code the lessee would be subject to the responsibilities of
a possessor in bad faith, because she had continued possession of the bull after the expiry of the
contract. And even if the contract becommodatum, still the appellant is liable, because article 1942 of the
Civil Code provides that a bailee in a contract of commodatum
. . . is liable for loss of the things, even if it should be through a fortuitous event:
(2) If he keeps it longer than the period stipulated . . .
(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation
exempting the bailee from responsibility in case of a fortuitous event;
The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was renewed for
another period of one year to end on 8 May 1950. But the appellant kept and used the bull until November
1953 when during a Huk raid it was killed by stray bullets. Furthermore, when lent and delivered to the
deceased husband of the appellant the bulls had each an appraised book value, to with: the Sindhi, at
P1,176.46, the Bhagnari at P1,320.56 and the Sahiniwal at P744.46. It was not stipulated that in case of
loss of the bull due to fortuitous event the late husband of the appellant would be exempt from liability.

The appellant's contention that the demand or prayer by the appellee for the return of the bull or the
payment of its value being a money claim should be presented or filed in the intestate proceedings of the
defendant who died on 23 October 1951, is not altogether without merit. However, the claim that his civil
personality having ceased to exist the trial court lost jurisdiction over the case against him, is untenable,
because section 17 of Rule 3 of the Rules of Court provides that
After a party dies and the claim is not thereby extinguished, the court shall order, upon proper
notice, the legal representative of the deceased to appear and to be substituted for the deceased,
within a period of thirty (30) days, or within such time as may be granted. . . .
and after the defendant's death on 23 October 1951 his counsel failed to comply with section 16 of Rule 3
which provides that
Whenever a party to a pending case dies . . . it shall be the duty of his attorney to inform the court
promptly of such death . . . and to give the name and residence of the executory administrator,
guardian, or other legal representative of the deceased . . . .
The notice by the probate court and its publication in the Voz de Manila that Felicidad M. Bagtas had
been issue letters of administration of the estate of the late Jose Bagtas and that "all persons having
claims for monopoly against the deceased Jose V. Bagtas, arising from contract express or implied,
whether the same be due, not due, or contingent, for funeral expenses and expenses of the last sickness
of the said decedent, and judgment for monopoly against him, to file said claims with the Clerk of this
Court at the City Hall Bldg., Highway 54, Quezon City, within six (6) months from the date of the first
publication of this order, serving a copy thereof upon the aforementioned Felicidad M. Bagtas, the
appointed administratrix of the estate of the said deceased," is not a notice to the court and the appellee
who were to be notified of the defendant's death in accordance with the above-quoted rule, and there was
no reason for such failure to notify, because the attorney who appeared for the defendant was the same
who represented the administratrix in the special proceedings instituted for the administration and
settlement of his estate. The appellee or its attorney or representative could not be expected to know of
the death of the defendant or of the administration proceedings of his estate instituted in another court
that if the attorney for the deceased defendant did not notify the plaintiff or its attorney of such death as
required by the rule.
As the appellant already had returned the two bulls to the appellee, the estate of the late defendant is only
liable for the sum of P859.63, the value of the bull which has not been returned to the appellee, because it
was killed while in the custody of the administratrix of his estate. This is the amount prayed for by the
appellee in its objection on 31 January 1959 to the motion filed on 7 January 1959 by the appellant for the
quashing of the writ of execution.
Special proceedings for the administration and settlement of the estate of the deceased Jose V. Bagtas
having been instituted in the Court of First Instance of Rizal (Q-200), the money judgment rendered in
favor of the appellee cannot be enforced by means of a writ of execution but must be presented to the
probate court for payment by the appellant, the administratrix appointed by the court.
ACCORDINGLY, the writ of execution appealed from is set aside, without pronouncement as to costs.
Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala and
Makalintal, JJ.,concur.
Barrera, J., concurs in the result.

Footnotes

Article 1933 of the Civil Code.

e. Simple loan or mutuum (Arts 1953-1955, 1980)

G.R. Nos. 173654-765

August 28, 2008

PEOPLE OF THE PHILIPPINES, petitioner,


vs.
TERESITA PUIG and ROMEO PORRAS, respondents.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review under Rule 45 of the Revised Rules of Court with petitioner People of the
Philippines, represented by the Office of the Solicitor General, praying for the reversal of the Orders dated
30 January 2006 and 9 June 2006 of the Regional Trial Court (RTC) of the 6 th Judicial Region, Branch 68,
Dumangas, Iloilo, dismissing the 112 cases of Qualified Theft filed against respondents Teresita Puig and
Romeo Porras, and denying petitioners Motion for Reconsideration, in Criminal Cases No. 05-3054 to
05-3165.
The following are the factual antecedents:
On 7 November 2005, the Iloilo Provincial Prosecutors Office filed before Branch 68 of the RTC in
Dumangas, Iloilo, 112 cases of Qualified Theft against respondents Teresita Puig (Puig) and Romeo
Porras (Porras) who were the Cashier and Bookkeeper, respectively, of private complainant Rural Bank of
Pototan, Inc. The cases were docketed as Criminal Cases No. 05-3054 to 05-3165.
The allegations in the Informations1 filed before the RTC were uniform and pro-forma, except for the
amounts, date and time of commission, to wit:
INFORMATION
That on or about the 1st day of August, 2002, in the Municipality of Pototan, Province of Iloilo,
Philippines, and within the jurisdiction of this Honorable Court, above-named [respondents],
conspiring, confederating, and helping one another, with grave abuse of confidence, being
the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc., Pototan, Iloilo, without the
knowledge and/or consent of the management of the Bank and with intent of gain, did then and
there willfully, unlawfully and feloniously take, steal and carry away the sum of FIFTEEN
THOUSAND PESOS (P15,000.00), Philippine Currency, to the damage and prejudice of the said
bank in the aforesaid amount.
After perusing the Informations in these cases, the trial court did not find the existence of probable cause
that would have necessitated the issuance of a warrant of arrest based on the following grounds:
(1) the element of taking without the consent of the owners was missing on the ground that it
is the depositors-clients, and not the Bank, which filed the complaint in these cases, who are the
owners of the money allegedly taken by respondents and hence, are the real parties-in-interest;
and

(2) the Informations are bereft of the phrase alleging "dependence, guardianship or vigilance
between the respondents and the offended party that would have created a high degree of
confidence between them which the respondents could have abused."
It added that allowing the 112 cases for Qualified Theft filed against the respondents to push through
would be violative of the right of the respondents under Section 14(2), Article III of the 1987 Constitution
which states that in all criminal prosecutions, the accused shall enjoy the right to be informed of the
nature and cause of the accusation against him. Following Section 6, Rule 112 of the Revised Rules of
Criminal Procedure, the RTC dismissed the cases on 30 January 2006 and refused to issue a warrant of
arrest against Puig and Porras.
A Motion for Reconsideration2 was filed on 17 April 2006, by the petitioner.
On 9 June 2006, an Order3 denying petitioners Motion for Reconsideration was issued by the RTC,
finding as follows:
Accordingly, the prosecutions Motion for Reconsideration should be, as it hereby, DENIED. The
Order dated January 30, 2006 STANDS in all respects.
Petitioner went directly to this Court via Petition for Review on Certiorari under Rule 45, raising the sole
legal issue of:
WHETHER OR NOT THE 112 INFORMATIONS FOR QUALIFIED THEFT SUFFICIENTLY
ALLEGE THE ELEMENT OF TAKING WITHOUT THE CONSENT OF THE OWNER, AND THE
QUALIFYING CIRCUMSTANCE OF GRAVE ABUSE OF CONFIDENCE.
Petitioner prays that judgment be rendered annulling and setting aside the Orders dated 30 January 2006
and 9 June 2006 issued by the trial court, and that it be directed to proceed with Criminal Cases No. 053054 to 05-3165.
Petitioner explains that under Article 1980 of the New Civil Code, "fixed, savings, and current deposits of
money in banks and similar institutions shall be governed by the provisions concerning simple loans."
Corollary thereto, Article 1953 of the same Code provides that "a person who receives a loan of money or
any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal
amount of the same kind and quality." Thus, it posits that the depositors who place their money with the
bank are considered creditors of the bank. The bank acquires ownership of the money deposited by its
clients, making the money taken by respondents as belonging to the bank.
Petitioner also insists that the Informations sufficiently allege all the elements of the crime of qualified
theft, citing that a perusal of the Informations will show that they specifically allege that the respondents
were the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc., respectively, and that they took
various amounts of money with grave abuse of confidence, and without the knowledge and consent of the
bank, to the damage and prejudice of the bank.
Parenthetically, respondents raise procedural issues. They challenge the petition on the ground that a
Petition for Review on Certiorari via Rule 45 is the wrong mode of appeal because a finding of probable
cause for the issuance of a warrant of arrest presupposes evaluation of facts and circumstances, which is
not proper under said Rule.
Respondents further claim that the Department of Justice (DOJ), through the Secretary of Justice, is the
principal party to file a Petition for Review on Certiorari, considering that the incident was indorsed by the
DOJ.

We find merit in the petition.


The dismissal by the RTC of the criminal cases was allegedly due to insufficiency of the Informations and,
therefore, because of this defect, there is no basis for the existence of probable cause which will justify
the issuance of the warrant of arrest. Petitioner assails the dismissal contending that the Informations for
Qualified Theft sufficiently state facts which constitute (a) the qualifying circumstance of grave abuse of
confidence; and (b) the element of taking, with intent to gain and without the consent of the owner, which
is the Bank.
In determining the existence of probable cause to issue a warrant of arrest, the RTC judge found the
allegations in the Information inadequate. He ruled that the Information failed to state facts constituting
the qualifying circumstance of grave abuse of confidence and the element of taking without the consent of
the owner, since the owner of the money is not the Bank, but the depositors therein. He also cites People
v. Koc Song,4 in which this Court held:
There must be allegation in the information and proof of a relation, by reason of dependence,
guardianship or vigilance, between the respondents and the offended party that has created a
high degree of confidence between them, which the respondents abused.
At this point, it needs stressing that the RTC Judge based his conclusion that there was no probable
cause simply on the insufficiency of the allegations in the Informations concerning the facts constitutive of
the elements of the offense charged. This, therefore, makes the issue of sufficiency of the allegations in
the Informations the focal point of discussion.
Qualified Theft, as defined and punished under Article 310 of the Revised Penal Code, is committed as
follows, viz:
ART. 310. Qualified Theft. The crime of theft shall be punished by the penalties next higher by
two degrees than those respectively specified in the next preceding article, if committed by a
domestic servant, or with grave abuse of confidence, or if the property stolen is motor vehicle,
mail matter or large cattle or consists of coconuts taken from the premises of a plantation, fish
taken from a fishpond or fishery or if property is taken on the occasion of fire, earthquake,
typhoon, volcanic eruption, or any other calamity, vehicular accident or civil disturbance.
(Emphasis supplied.)
Theft, as defined in Article 308 of the Revised Penal Code, requires the physical taking of anothers
property without violence or intimidation against persons or force upon things. The elements of the crime
under this Article are:
1. Intent to gain;
2. Unlawful taking;
3. Personal property belonging to another;
4. Absence of violence or intimidation against persons or force upon things.
To fall under the crime of Qualified Theft, the following elements must concur:
1. Taking of personal property;
2. That the said property belongs to another;

3. That the said taking be done with intent to gain;


4. That it be done without the owners consent;
5. That it be accomplished without the use of violence or intimidation against persons, nor of force
upon things;
6. That it be done with grave abuse of confidence.
On the sufficiency of the Information, Section 6, Rule 110 of the Rules of Court requires, inter alia, that the
information must state the acts or omissions complained of as constitutive of the offense.
On the manner of how the Information should be worded, Section 9, Rule 110 of the Rules of Court, is
enlightening:
Section 9. Cause of the accusation. The acts or omissions complained of as constituting the
offense and the qualifying and aggravating circumstances must be stated in ordinary and concise
language and not necessarily in the language used in the statute but in terms sufficient to enable
a person of common understanding to know what offense is being charged as well as its
qualifying and aggravating circumstances and for the court to pronounce judgment.
It is evident that the Information need not use the exact language of the statute in alleging the acts or
omissions complained of as constituting the offense. The test is whether it enables a person of common
understanding to know the charge against him, and the court to render judgment properly.5
The portion of the Information relevant to this discussion reads:
A]bove-named [respondents], conspiring, confederating, and helping one another, with grave abuse of confidence, being the Cashier and Bookkeeper of the Rural
Bank of Pototan, Inc., Pototan, Iloilo, without the knowledge and/or consent of the management of the Bank x x x.

It is beyond doubt that tellers, Cashiers, Bookkeepers and other employees of a Bank who come into
possession of the monies deposited therein enjoy the confidence reposed in them by their employer.
Banks, on the other hand, where monies are deposited, are considered the owners thereof. This is very
clear not only from the express provisions of the law, but from established jurisprudence. The relationship
between banks and depositors has been held to be that of creditor and debtor. Articles 1953 and 1980 of
the New Civil Code, as appropriately pointed out by petitioner, provide as follows:
Article 1953. A person who receives a loan of money or any other fungible thing acquires the
ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and
quality.
Article 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall
be governed by the provisions concerning loan.
In a long line of cases involving Qualified Theft, this Court has firmly established the nature of possession
by the Bank of the money deposits therein, and the duties being performed by its employees who have
custody of the money or have come into possession of it. The Court has consistently considered the
allegations in the Information that such employees acted with grave abuse of confidence, to the damage
and prejudice of the Bank, without particularly referring to it as owner of the money deposits, as sufficient
to make out a case of Qualified Theft. For a graphic illustration, we cite Roque v. People,6 where the
accused teller was convicted for Qualified Theft based on this Information:

That on or about the 16th day of November, 1989, in the municipality of Floridablanca, province of
Pampanga, Philippines and within the jurisdiction of his Honorable Court, the above-named
accused ASUNCION GALANG ROQUE, being then employed as teller of the Basa Air Base
Savings and Loan Association Inc. (BABSLA) with office address at Basa Air Base, Floridablanca,
Pampanga, and as such was authorized and reposed with the responsibility to receive and collect
capital contributions from its member/contributors of said corporation, and having collected and
received in her capacity as teller of the BABSLA the sum of TEN THOUSAND PESOS
(P10,000.00), said accused, with intent of gain, with grave abuse of confidence and without
the knowledge and consent of said corporation, did then and there willfully, unlawfully and
feloniously take, steal and carry away the amount of P10,000.00, Philippine currency, by making
it appear that a certain depositor by the name of Antonio Salazar withdrew from his Savings
Account No. 1359, when in truth and in fact said Antonio Salazar did not withdr[a]w the said
amount of P10,000.00 to the damage and prejudice of BABSLA in the total amount
of P10,000.00, Philippine currency.
In convicting the therein appellant, the Court held that:
[S]ince the teller occupies a position of confidence, and the bank places money in the tellers
possession due to the confidence reposed on the teller, the felony of qualified theft would be
committed.7
Also in People v. Sison,8 the Branch Operations Officer was convicted of the crime of Qualified Theft
based on the Information as herein cited:
That in or about and during the period compressed between January 24, 1992 and February 13,
1992, both dates inclusive, in the City of Manila, Philippines, the said accused did then and there
wilfully, unlawfully and feloniously, with intent of gain and without the knowledge and consent of
the owner thereof, take, steal and carry away the following, to wit:
Cash money amounting to P6,000,000.00 in different denominations belonging to the
PHILIPPINE COMMERCIAL INTERNATIONAL BANK (PCIBank for brevity), Luneta Branch,
Manila represented by its Branch Manager, HELEN U. FARGAS, to the damage and prejudice of
the said owner in the aforesaid amount of P6,000,000.00, Philippine Currency.
That in the commission of the said offense, herein accused acted with grave abuse of confidence
and unfaithfulness, he being the Branch Operation Officer of the said complainant and as such he
had free access to the place where the said amount of money was kept.
The judgment of conviction elaborated thus:
The crime perpetuated by appellant against his employer, the Philippine Commercial and
Industrial Bank (PCIB), is Qualified Theft. Appellant could not have committed the crime had he
not been holding the position of Luneta Branch Operation Officer which gave him not only sole
access to the bank vault xxx. The management of the PCIB reposed its trust and confidence in
the appellant as its Luneta Branch Operation Officer, and it was this trust and confidence which
he exploited to enrich himself to the damage and prejudice of PCIB x x x. 9
From another end, People v. Locson,10 in addition to People v. Sison, described the nature of
possession by the Bank. The money in this case was in the possession of the defendant as receiving
teller of the bank, and the possession of the defendant was the possession of the Bank. The Court held
therein that when the defendant, with grave abuse of confidence, removed the money and appropriated it
to his own use without the consent of the Bank, there was taking as contemplated in the crime of
Qualified Theft.11

Conspicuously, in all of the foregoing cases, where the Informations merely alleged the positions of the
respondents; that the crime was committed with grave abuse of confidence, with intent to gain and
without the knowledge and consent of the Bank, without necessarily stating the phrase being assiduously
insisted upon by respondents, "of a relation by reason of dependence, guardianship or vigilance,
between the respondents and the offended party that has created a high degree of confidence
between them, which respondents abused,"12 and without employing the word "owner" in lieu of the
"Bank" were considered to have satisfied the test of sufficiency of allegations.
As regards the respondents who were employed as Cashier and Bookkeeper of the Bank in this case,
there is even no reason to quibble on the allegation in the Informations that they acted with grave abuse
of confidence. In fact, the Information which alleged grave abuse of confidence by accused herein is even
more precise, as this is exactly the requirement of the law in qualifying the crime of Theft.
In summary, the Bank acquires ownership of the money deposited by its clients; and the employees of the
Bank, who are entrusted with the possession of money of the Bank due to the confidence reposed in
them, occupy positions of confidence. The Informations, therefore, sufficiently allege all the essential
elements constituting the crime of Qualified Theft.
On the theory of the defense that the DOJ is the principal party who may file the instant petition, the ruling
in Mobilia Products, Inc. v. Hajime Umezawa13 is instructive. The Court thus enunciated:
In a criminal case in which the offended party is the State, the interest of the private complainant
or the offended party is limited to the civil liability arising therefrom. Hence, if a criminal case is
dismissed by the trial court or if there is an acquittal, a reconsideration of the order of dismissal or
acquittal may be undertaken, whenever legally feasible, insofar as the criminal aspect thereof is
concerned and may be made only by the public prosecutor; or in the case of an appeal, by the
State only, through the OSG. x x x.
On the alleged wrong mode of appeal by petitioner, suffice it to state that the rule is well-settled that in
appeals by certiorari under Rule 45 of the Rules of Court, only errors of law may be raised, 14 and herein
petitioner certainly raised a question of law.
As an aside, even if we go beyond the allegations of the Informations in these cases, a closer look at the
records of the preliminary investigation conducted will show that, indeed, probable cause exists for the
indictment of herein respondents. Pursuant to Section 6, Rule 112 of the Rules of Court, the judge shall
issue a warrant of arrest only upon a finding of probable cause after personally evaluating the resolution
of the prosecutor and its supporting evidence. Soliven v. Makasiar,15 as reiterated inAllado v.
Driokno,16 explained that probable cause for the issuance of a warrant of arrest is the existence of such
facts and circumstances that would lead a reasonably discreet and prudent person to believe that an
offense has been committed by the person sought to be arrested. 17 The records reasonably indicate that
the respondents may have, indeed, committed the offense charged.
Before closing, let it be stated that while it is truly imperative upon the fiscal or the judge, as the case may
be, to relieve the respondents from the pain of going through a trial once it is ascertained that no probable
cause exists to form a sufficient belief as to the guilt of the respondents, conversely, it is also equally
imperative upon the judge to proceed with the case upon a showing that there is a prima facie case
against the respondents.
WHEREFORE, premises considered, the Petition for Review on Certiorari is hereby GRANTED. The
Orders dated 30 January 2006 and 9 June 2006 of the RTC dismissing Criminal Cases No. 05-3054 to
05-3165 are REVERSED and SET ASIDE. Let the corresponding Warrants of Arrest issue against herein
respondents TERESITA PUIG and ROMEO PORRAS. The RTC Judge of Branch 68, in Dumangas, Iloilo,
is directed to proceed with the trial of Criminal Cases No. 05-3054 to 05-3165, inclusive, with reasonable
dispatch. No pronouncement as to costs.

SO ORDERED.
Ynares-Santiago, Chairperson, Austria-Martinez, Reyes, Leonardo-de Castro *, JJ., concur.

Footnotes
*

Justice Teresita J. Leonardo-De Castro was designated to sit as additional member replacing
Justice Antonio Eduardo B. Nachura per Raffle dated 16 January 2008.
1

Records, pp. 1, 170-391.

Records, pp. 490-495.

Id. at 469-470.

63 Phil. 369, 371 (1936).

People v. Lab-eo, 424 Phil. 482, 495 (2002).

G.R. No. 138954, 25 November 2004, 444 SCRA 98, 100-101.

Id. at 119.

379 Phil. 363, 366-367 (2000).

Id. at 385.

10

57 Phil. 325 (1932).

11

Id.

12

Rollo, p. 158.

13

G.R. No. 149357, 4 March 2005, 452 SCRA 736, 757.

14

Reas v. Bonife, G.R. Nos. 54348-49, 17 October 1990, 190 SCRA 493, 501.

15

G.R. No. L-82585, 14 November 1988, 167 SCRA 394.

16

G.R. No. 113630, 5 May 1994, 32 SCRA 192, 201.

17

Id.

BPI FAMILY BANK,

G.R. No. 123498


Petitioner,
Present:
YNARES-SANTIAGO, J.,

Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.

- versus -

AMADO FRANCO and COURT OF APPEALS,


Respondents.

Promulgated:
November 23, 2007

x------------------------------------------------------------------------------------x
DECISION
NACHURA, J.:

Banks are exhorted to treat the accounts of their depositors with meticulous care and utmost fidelity. We
reiterate this exhortation in the case at bench.
Before us is a Petition for Review on Certiorari seeking the reversal of the Court of Appeals (CA)
Decision[1] in CA-G.R. CV No. 43424 which affirmed with modification the judgment [2] of the Regional Trial
Court, Branch 55, Manila (Manila RTC), in Civil Case No. 90-53295.
This case has its genesis in an ostensible fraud perpetrated on the petitioner BPI Family Bank (BPI-FB)
allegedly by respondent Amado Franco (Franco) in conspiracy with other individuals, [3] some of whom
opened and maintained separate accounts with BPI-FB, San Francisco del Monte (SFDM) branch, in a
series of transactions.
On August 15, 1989, Tevesteco Arrastre-Stevedoring Co., Inc. (Tevesteco) opened a savings and current
account with BPI-FB. Soon thereafter, or on August 25, 1989, First Metro Investment Corporation (FMIC)
also opened a time deposit account with the same branch of BPI-FB with a deposit of P100,000,000.00,
to mature one year thence.
Subsequently, on August 31, 1989, Franco opened three accounts, namely, a current, [4] savings,[5] and
time deposit,[6] with BPI-FB. The current and savings accounts were respectively funded with an initial
deposit of P500,000.00 each, while the time deposit account had P1,000,000.00 with a maturity date
of August 31, 1990. The total amount of P2,000,000.00 used to open these accounts is traceable to a
check issued by Tevesteco allegedly in consideration of Francos introduction of Eladio Teves, [7] who was

looking for a conduit bank to facilitate Tevestecos business transactions, to Jaime Sebastian, who was
then BPI-FB SFDMs Branch Manager. In turn, the funding for the P2,000,000.00 check was part of
the P80,000,000.00 debited by BPI-FB from FMICs time deposit account and credited to Tevestecos
current account pursuant to an Authority to Debit purportedly signed by FMICs officers.
It appears, however, that the signatures of FMICs officers on the Authority to Debit were forged.
[8]

On September 4, 1989, Antonio Ong,[9] upon being shown the Authority to Debit, personally declared his

signature therein to be a forgery. Unfortunately, Tevesteco had already effected several withdrawals from
its current account (to which had been credited theP80,000,000.00 covered by the forged Authority to
Debit) amounting to P37,455,410.54, including the P2,000,000.00 paid to Franco.
On September 8, 1989, impelled by the need to protect its interests in light of FMICs forgery
claim, BPI-FB, thru its Senior Vice-President, Severino Coronacion, instructed Jesus Arangorin [10] to debit
Francos savings and current accounts for the amounts remaining therein. [11] However, Francos time
deposit account could not be debited due to the capacity limitations of BPI-FBs computer.[12]
In the meantime, two checks[13] drawn by Franco against his BPI-FB current account were dishonored
upon presentment for payment, and stamped with a notation account under garnishment. Apparently,
Francos current account was garnished by virtue of an Order of Attachment issued by the Regional Trial
Court of Makati (Makati RTC) in Civil Case No. 89-4996 (Makati Case), which had been filed by BPI-FB
against Franco et al.,[14] to recover the P37,455,410.54 representing Tevestecos total withdrawals from its
account.
Notably, the dishonored checks were issued by Franco and presented for payment at BPI-FB
prior to Francos receipt of notice that his accounts were under garnishment. [15] In fact, at the time the
Notice of Garnishment dated September 27, 1989 was served on BPI-FB, Franco had yet to be
impleaded in the Makati case where the writ of attachment was issued.
It was only on May 15, 1990, through the service of a copy of the Second Amended Complaint in Civil
Case No. 89-4996, that Franco was impleaded in the Makati case.[16] Immediately, upon receipt of such
copy, Franco filed a Motion to Discharge Attachment which the Makati RTC granted on May 16,
1990. The Order Lifting the Order of Attachment was served on BPI-FB on even date, with Franco
demanding the release to him of the funds in his savings and current accounts. Jesus Arangorin, BPI-FBs
new manager, could not forthwith comply with the demand as the funds, as previously stated, had already
been debited because of FMICs forgery claim. As such, BPI-FBs computer at the SFDM Branch indicated
that the current account record was not on file.
With respect to Francos savings account, it appears that Franco agreed to an arrangement, as a favor to
Sebastian, whereby P400,000.00 from his savings account was temporarily transferred to Domingo
Quiaoits savings account, subject to its immediate return upon issuance of a certificate of deposit which

Quiaoit needed in connection with his visa application at the Taiwan Embassy. As part of the
arrangement, Sebastian retained custody of Quiaoits savings account passbook to ensure that no
withdrawal would be effected therefrom, and to preserve Francos deposits.
On May 17, 1990, Franco pre-terminated his time deposit account. BPI-FB deducted the amount
of P63,189.00 from the remaining balance of the time deposit account representing advance interest paid
to him.
These transactions spawned a number of cases, some of which we had already resolved.
FMIC filed a complaint against BPI-FB for the recovery of the amount of P80,000,000.00 debited from its
account.[17] The case eventually reached this Court, and in BPI Family Savings Bank, Inc. v. First Metro
Investment Corporation,[18] we upheld the finding of the courts below that BPI-FB failed to exercise the
degree of diligence required by the nature of its obligation to treat the accounts of its depositors with
meticulous care. Thus, BPI-FB was found liable to FMIC for the debited amount in its time deposit. It was
ordered to payP65,332,321.99 plus interest at 17% per annum from August 29, 1989 until fully
restored. In turn, the 17% shall itself earn interest at 12% from October 4, 1989 until fully paid.
In a related case, Edgardo Buenaventura, Myrna Lizardo and Yolanda Tica (Buenaventura, et al.),
recipients of a P500,000.00 check proceeding from the P80,000,000.00 mistakenly credited to
Tevesteco, likewise filed suit. Buenaventura et al., as in the case of Franco, were also prevented from
effecting withdrawals[20] from their current account with BPI-FB, Bonifacio Market, Edsa, Caloocan City
Branch. Likewise, when the case was elevated to this Court docketed as BPI Family Bank v.
Buenaventura,[21] we ruled that BPI-FB had no right to freeze Buenaventura, et al.s accounts and
adjudged BPI-FB liable therefor, in addition to damages.
[19]

Meanwhile, BPI-FB filed separate civil and criminal cases against those believed to be the perpetrators of
the multi-million peso scam.[22] In the criminal case, Franco, along with the other accused, except for
Manuel Bienvenida who was still at large, were acquitted of the crime of Estafa as defined and penalized
under Article 351, par. 2(a) of the Revised Penal Code. [23] However, the civil case[24] remains under
litigation and the respective rights and liabilities of the parties have yet to be adjudicated.
Consequently, in light of BPI-FBs refusal to heed Francos demands to unfreeze his accounts and release
his deposits therein, the latter filed on June 4, 1990 with the Manila RTC the subject suit. In his complaint,
Franco prayed for the following reliefs: (1) the interest on the remaining balance [25] of his current account
which was eventually released to him on October 31, 1991; (2) the balance [26] on his savings account,
plus interest thereon; (3) the advance interest [27] paid to him which had been deducted when he preterminated his time deposit account; and (4) the payment of actual, moral and exemplary damages, as
well as attorneys fees.
BPI-FB traversed this complaint, insisting that it was correct in freezing the accounts of Franco and
refusing to release his deposits, claiming that it had a better right to the amounts which consisted of part
of the money allegedly fraudulently withdrawn from it by Tevesteco and ending up in Francos accounts.

BPI-FB asseverated that the claimed consideration ofP2,000,000.00 for the introduction facilitated by
Franco between George Daantos and Eladio Teves, on the one hand, and Jaime Sebastian, on the other,
spoke volumes of Francos participation in the fraudulent transaction.
On August 4, 1993, the Manila RTC rendered judgment, the dispositive portion of which reads as follows:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of
[Franco] and against [BPI-FB], ordering the latter to pay to the former the following sums:
1. P76,500.00 representing the legal rate of interest on the amount of P450,000.00
from May 18, 1990 to October 31, 1991;
2. P498,973.23 representing the balance on [Francos] savings account as of May 18,
1990, together with the interest thereon in accordance with the banks guidelines on the
payment therefor;
3. P30,000.00 by way of attorneys fees; and
4. P10,000.00 as nominal damages.
The counterclaim of the defendant is DISMISSED for lack of factual and legal anchor.
Costs against [BPI-FB].
SO ORDERED.[28]

Unsatisfied with the decision, both parties filed their respective appeals before the CA. Franco confined
his appeal to the Manila RTCs denial of his claim for moral and exemplary damages, and the diminutive
award of attorneys fees. In affirming with modification the lower courts decision, the appellate court
decreed, to wit:
WHEREFORE, foregoing considered, the appealed decision is hereby AFFIRMED with
modification ordering [BPI-FB] to pay [Franco] P63,189.00 representing the interest
deducted from the time deposit of plaintiff-appellant. P200,000.00 as moral damages
and P100,000.00 as exemplary damages, deleting the award of nominal damages (in
view of the award of moral and exemplary damages) and increasing the award of
attorneys fees from P30,000.00 to P75,000.00.
Cost against [BPI-FB].
SO ORDERED.[29]

In this recourse, BPI-FB ascribes error to the CA when it ruled that: (1) Franco had a better right to the
deposits in the subject accounts which are part of the proceeds of a forged Authority to Debit; (2) Franco
is entitled to interest on his current account; (3) Franco can recover the P400,000.00 deposit in Quiaoits
savings account; (4) the dishonor of Francos checks was not legally in order; (5) BPI-FB is liable for
interest on Francos time deposit, and for moral and exemplary damages; and (6) BPI-FBs counter-claim
has no factual and legal anchor.

The petition is partly meritorious.


We are in full accord with the common ruling of the lower courts that BPI-FB cannot unilaterally freeze
Francos accounts and preclude him from withdrawing his deposits. However, contrary to the appellate
courts ruling, we hold that Franco is not entitled to unearned interest on the time deposit as well as to
moral and exemplary damages.
First. On the issue of who has a better right to the deposits in Francos accounts, BPI-FB urges us that the
legal consequence of FMICs forgery claim is that the money transferred by BPI-FB to Tevesteco is its
own, and considering that it was able to recover possession of the same when the money was
redeposited by Franco, it had the right to set up its ownership thereon and freeze Francos accounts.
BPI-FB contends that its position is not unlike that of an owner of personal property who regains
possession after it is stolen, and to illustrate this point, BPI-FB gives the following example: where Xs
television set is stolen by Y who thereafter sells it to Z, and where Z unwittingly entrusts possession of the
TV set to X, the latter would have the right to keep possession of the property and preclude Z from
recovering possession thereof. To bolster its position, BPI-FB cites Article 559 of the Civil Code, which
provides:
Article 559. The possession of movable property acquired in good faith is equivalent to a
title. Nevertheless, one who has lost any movable or has been unlawfully deprived
thereof, may recover it from the person in possession of the same.
If the possessor of a movable lost or of which the owner has been unlawfully deprived,
has acquired it in good faith at a public sale, the owner cannot obtain its return without
reimbursing the price paid therefor.

BPI-FBs argument is unsound. To begin with, the movable property mentioned in Article 559 of the Civil
Code pertains to a specific or determinate thing. [30] A determinate or specific thing is one that is
individualized and can be identified or distinguished from others of the same kind. [31]
In this case, the deposit in Francos accounts consists of money which, albeit characterized as a
movable, is generic and fungible. [32] The quality of being fungible depends upon the possibility of the
property, because of its nature or the will of the parties, being substituted by others of the same kind, not
having a distinct individuality.[33]

Significantly, while Article 559 permits an owner who has lost or has been unlawfully deprived of a
movable to recover the exact same thing from the current possessor, BPI-FB simply claims ownership of
the equivalent amount of money, i.e., the value thereof, which it had mistakenly debited from FMICs
account and credited to Tevestecos, and subsequently traced to Francos account. In fact, this is what
BPI-FB did in filing the Makati Case against Franco, et al. It staked its claim on the money itself which
passed from one account to another, commencing with the forged Authority to Debit.
It bears emphasizing that money bears no earmarks of peculiar ownership, [34] and this
characteristic is all the more manifest in the instant case which involves money in a banking transaction
gone awry. Its primary function is to pass from hand to hand as a medium of exchange, without other
evidence of its title.[35] Money, which had passed through various transactions in the general course of
banking business, even if of traceable origin, is no exception.
Thus, inasmuch as what is involved is not a specific or determinate personal property, BPI-FBs
illustrative example, ostensibly based on Article 559, is inapplicable to the instant case.
There is no doubt that BPI-FB owns the deposited monies in the accounts of Franco, but not as a
legal consequence of its unauthorized transfer of FMICs deposits to Tevestecos account. BPI-FB
conveniently forgets that the deposit of money in banks is governed by the Civil Code provisions on
simple loan or mutuum.[36] As there is a debtor-creditor relationship between a bank and its depositor, BPIFB ultimately acquired ownership of Francos deposits, but such ownership is coupled with a
corresponding obligation to pay him an equal amount on demand. [37] Although BPI-FB owns the deposits
in Francos accounts, it cannot prevent him from demanding payment of BPI-FBs obligation by drawing
checks against his current account, or asking for the release of the funds in his savings account. Thus,
when Franco issued checks drawn against his current account, he had every right as creditor to expect
that those checks would be honored by BPI-FB as debtor.
More importantly, BPI-FB does not have a unilateral right to freeze the accounts of Franco based
on its mere suspicion that the funds therein were proceeds of the multi-million peso scam Franco was
allegedly involved in. To grant BPI-FB, or any bank for that matter, the right to take whatever action it
pleases on deposits which it supposes are derived from shady transactions, would open the floodgates of
public distrust in the banking industry.
Our pronouncement in Simex International (Manila), Inc. v. Court of Appeals [38] continues to
resonate, thus:

The banking system is an indispensable institution in the modern world and plays a vital
role in the economic life of every civilized nation. Whether as mere passive entities for the
safekeeping and saving of money or as active instruments of business and commerce,
banks have become an ubiquitous presence among the people, who have come to
regard them with respect and even gratitude and, most of all, confidence. Thus, even the
humble wage-earner has not hesitated to entrust his lifes savings to the bank of his
choice, knowing that they will be safe in its custody and will even earn some interest for
him. The ordinary person, with equal faith, usually maintains a modest checking account
for security and convenience in the settling of his monthly bills and the payment of
ordinary expenses. x x x.
In every case, the depositor expects the bank to treat his account with the utmost fidelity,
whether such account consists only of a few hundred pesos or of millions. The bank must
record every single transaction accurately, down to the last centavo, and as promptly as
possible. This has to be done if the account is to reflect at any given time the amount of
money the depositor can dispose of as he sees fit, confident that the bank will deliver it
as and to whomever directs. A blunder on the part of the bank, such as the dishonor of
the check without good reason, can cause the depositor not a little embarrassment if not
also financial loss and perhaps even civil and criminal litigation.
The point is that as a business affected with public interest and because of the nature of
its functions, the bank is under obligation to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary nature of their relationship. x x x.

Ineluctably, BPI-FB, as the trustee in the fiduciary relationship, is duty bound to know the signatures of its
customers. Having failed to detect the forgery in the Authority to Debit and in the process inadvertently
facilitate the FMIC-Tevesteco transfer, BPI-FB cannot now shift liability thereon to Franco and the other
payees of checks issued by Tevesteco, or prevent withdrawals from their respective accounts without the
appropriate court writ or a favorable final judgment.
Further, it boggles the mind why BPI-FB, even without delving into the authenticity of the
signature in the Authority to Debit, effected the transfer of P80,000,000.00 from FMICs to Tevestecos
account, when FMICs account was a time deposit and it had already paid advance interest to FMIC.
Considering that there is as yet no indubitable evidence establishing Francos participation in the forgery,
he remains an innocent party. As between him and BPI-FB, the latter, which made possible the present
predicament, must bear the resulting loss or inconvenience.
Second. With respect to its liability for interest on Francos current account, BPI-FB argues that its
non-compliance with the Makati RTCs Order Lifting the Order of Attachment and the legal consequences
thereof, is a matter that ought to be taken up in that court.
The argument is tenuous. We agree with the succinct holding of the appellate court in this
respect. The Manila RTCs order to pay interests on Francos current account arose from BPI-FBs
unjustified refusal to comply with its obligation to pay Franco pursuant to their contract of mutuum. In

other words, from the time BPI-FB refused Francos demand for the release of the deposits in his current
account, specifically, from May 17, 1990, interest at the rate of 12% began to accrue thereon. [39]
Undeniably, the Makati RTC is vested with the authority to determine the legal consequences of
BPI-FBs non-compliance with the Order Lifting the Order of Attachment. However, such authority does not
preclude the Manila RTC from ruling on BPI-FBs liability to Franco for payment of interest based on its
continued and unjustified refusal to perform a contractual obligation upon demand. After all, this was the
core issue raised by Franco in his complaint before the Manila RTC.
Third. As to the award to Franco of the deposits in Quiaoits account, we find no reason to depart
from the factual findings of both the Manila RTC and the CA.
Noteworthy is the fact that Quiaoit himself testified that the deposits in his account are actually
owned

by

Franco

who

simply

accommodated

Jaime

Sebastians

request

to

temporarily

transfer P400,000.00 from Francos savings account to Quiaoits account. [40] His testimony cannot be
characterized as hearsay as the records reveal that he had personal knowledge of the arrangement made
between Franco, Sebastian and himself.[41]
BPI-FB makes capital of Francos belated allegation relative to this particular arrangement. It
insists that the transaction with Quiaoit was not specifically alleged in Francos complaint before the
Manila RTC. However, it appears that BPI-FB had impliedly consented to the trial of this issue given its
extensive cross-examination of Quiaoit.
Section 5, Rule 10 of the Rules of Court provides:
Section 5. Amendment to conform to or authorize presentation of evidence. When
issues not raised by the pleadings are tried with the express or implied consent of
the parties, they shall be treated in all respects as if they had been raised in the
pleadings. Such amendment of the pleadings as may be necessary to cause them
to conform to the evidence and to raise these issues may be made upon motion of
any party at any time, even after judgment; but failure to amend does not affect the
result of the trial of these issues. If evidence is objected to at the trial on the ground
that it is now within the issues made by the pleadings, the court may allow the pleadings
to be amended and shall do so with liberality if the presentation of the merits of the action
and the ends of substantial justice will be subserved thereby. The court may grant a
continuance to enable the amendment to be made. (Emphasis supplied)

In all, BPI-FBs argument that this case is not the right forum for Franco to recover the P400,000.00 begs
the issue. To reiterate, Quiaoit, testifying during the trial, unequivocally disclaimed ownership of the funds

in his account, and pointed to Franco as the actual owner thereof. Clearly, Francos action for the recovery
of his deposits appropriately covers the deposits in Quiaoits account.
Fourth. Notwithstanding all the foregoing, BPI-FB continues to insist that the dishonor of Francos checks
respectively dated September 11 and 18, 1989 was legally in order in view of the Makati RTCs
supplemental writ of attachment issued on September 14, 1989. It posits that as the party that applied for
the writ of attachment before the Makati RTC, it need not be served with the Notice of Garnishment
before it could place Francos accounts under garnishment.
The argument is specious. In this argument, we perceive BPI-FBs clever but transparent ploy to
circumvent Section 4,[42] Rule 13 of the Rules of Court. It should be noted that the strict requirement on
service of court papers upon the parties affected is designed to comply with the elementary requisites of
due process. Franco was entitled, as a matter of right, to notice, if the requirements of due process are to
be observed. Yet, he received a copy of the Notice of Garnishment only on September 27, 1989, several
days after the two checks he issued were dishonored by BPI-FB on September 20 and 21, 1989. Verily, it
was premature for BPI-FB to freeze Francos accounts without even awaiting service of the Makati RTCs
Notice of Garnishment on Franco.
Additionally, it should be remembered that the enforcement of a writ of attachment cannot be made
without including in the main suit the owner of the property attached by virtue thereof.Section 5, Rule 13
of the Rules of Court specifically provides that no levy or attachment pursuant to the writ issued x x x shall
be enforced unless it is preceded, or contemporaneously accompanied, by service of summons, together
with a copy of the complaint, the application for attachment, on the defendant within the Philippines.
Franco was impleaded as party-defendant only on May 15, 1990. The Makati RTC had yet to acquire
jurisdiction over the person of Franco when BPI-FB garnished his accounts. [43]Effectively, therefore, the
Makati RTC had no authority yet to bind the deposits of Franco through the writ of attachment, and
consequently, there was no legal basis for BPI-FB to dishonor the checks issued by Franco.
Fifth. Anent the CAs finding that BPI-FB was in bad faith and as such liable for the advance interest it
deducted from Francos time deposit account, and for moral as well as exemplary damages, we find it
proper to reinstate the ruling of the trial court, and allow only the recovery of nominal damages in the
amount of P10,000.00. However, we retain the CAs award ofP75,000.00 as attorneys fees.
In granting Francos prayer for interest on his time deposit account and for moral and exemplary damages,
the CA attributed bad faith to BPI-FB because it (1) completely disregarded its obligation to Franco; (2)
misleadingly claimed that Francos deposits were under garnishment; (3) misrepresented that Francos

current account was not on file; and (4) refused to return theP400,000.00 despite the fact that the
ostensible owner, Quiaoit, wanted the amount returned to Franco.
In this regard, we are guided by Article 2201 of the Civil Code which provides:
Article 2201. In contracts and quasi-contracts, the damages for which the obligor who
acted in good faith is liable shall be those that are the natural and probable
consequences of the breach of the obligation, and which the parties have foreseen or
could have reasonable foreseen at the time the obligation was constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be
responsible for all damages which may be reasonably attributed to the nonperformance of the obligation. (Emphasis supplied.)

We find, as the trial court did, that BPI-FB acted out of the impetus of self-protection and not out of
malevolence or ill will. BPI-FB was not in the corrupt state of mind contemplated in Article 2201 and
should not be held liable for all damages now being imputed to it for its breach of obligation. For the same
reason, it is not liable for the unearned interest on the time deposit.
Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some
moral obliquity and conscious doing of wrong; it partakes of the nature of fraud. [44]We have held that it is a
breach of a known duty through some motive of interest or ill will. [45] In the instant case, we cannot
attribute to BPI-FB fraud or even a motive of self-enrichment. As the trial court found, there was no denial
whatsoever by BPI-FB of the existence of the accounts. The computer-generated document which
indicated that the current account was not on file resulted from the prior debit by BPI-FB of the deposits.
The remedy of freezing the account, or the garnishment, or even the outright refusal to honor any
transaction thereon was resorted to solely for the purpose of holding on to the funds as a security for its
intended court action,[46] and with no other goal but to ensure the integrity of the accounts.
We have had occasion to hold that in the absence of fraud or bad faith, [47] moral damages cannot be
awarded; and that the adverse result of an action does not per se make the action wrongful, or the party
liable for it. One may err, but error alone is not a ground for granting such damages. [48]
An award of moral damages contemplates the existence of the following requisites: (1) there must be an
injury clearly sustained by the claimant, whether physical, mental or psychological; (2) there must be a
culpable act or omission factually established; (3) the wrongful act or omission of the defendant is the
proximate cause of the injury sustained by the claimant; and (4) the award for damages is predicated on
any of the cases stated in Article 2219 of the Civil Code. [49]

Franco could not point to, or identify any particular circumstance in Article 2219 of the Civil Code, [50] upon
which to base his claim for moral damages.
Thus, not having acted in bad faith, BPI-FB cannot be held liable for moral damages under Article 2220 of
the Civil Code for breach of contract.[51]
We also deny the claim for exemplary damages. Franco should show that he is entitled to moral,
temperate, or compensatory damages before the court may even consider the question of whether
exemplary damages should be awarded to him. [52] As there is no basis for the award of moral damages,
neither can exemplary damages be granted.
While it is a sound policy not to set a premium on the right to litigate, [53] we, however, find that Franco is
entitled to reasonable attorneys fees for having been compelled to go to court in order to assert his
right. Thus, we affirm the CAs grant of P75,000.00 as attorneys fees.
Attorneys fees may be awarded when a party is compelled to litigate or incur expenses to protect his
interest,[54] or when the court deems it just and equitable. [55] In the case at bench, BPI-FB refused to
unfreeze the deposits of Franco despite the Makati RTCs Order Lifting the Order of Attachment and
Quiaoits unwavering assertion that the P400,000.00 was part of Francos savings account. This refusal
constrained Franco to incur expenses and litigate for almost two (2) decades in order to protect his
interests and recover his deposits. Therefore, this Court deems it just and equitable to grant
Franco P75,000.00 as attorneys fees. The award is reasonable in view of the complexity of the issues
and the time it has taken for this case to be resolved. [56]
Sixth. As for the dismissal of BPI-FBs counter-claim, we uphold the Manila RTCs ruling, as affirmed by
the CA, that BPI-FB is not entitled to recover P3,800,000.00 as actual damages. BPI-FBs alleged loss of
profit as a result of Francos suit is, as already pointed out, of its own making. Accordingly, the denial of its
counter-claim is in order.
WHEREFORE, the petition is PARTIALLY GRANTED. The Court of Appeals Decision dated November
29, 1995 is AFFIRMED with the MODIFICATION that the award of unearned interest on the time deposit
and of moral and exemplary damages is DELETED.
No pronouncement as to costs.
SO ORDERED.

ANTONIO EDUARDO B. NACHURA


Associate Justice
WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson

MA. ALICIA AUSTRIA-MARTINEZ


Associate Justice

MINITA V. CHICO-NAZARIO
Associate Justice

RUBEN T. REYES
Associate Justice
ATTESTATION
I attest that the conclusions in the above Decision were reached in consultation before the case was
assigned to the writer of the opinion of the Courts Division.

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Third Division

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify
that the conclusions in the above Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice

[1]

Penned by Associate Justice Eugenio S. Labitoria, with Associate Justices Cancio C. Garcia (retired
Associate Justice of the Supreme Court) and Portia Alino Hormachuelos, concurring; rollo, pp. 40-55.
[2]
CA rollo, pp. 70-79.
[3]
Antonio T. Ong, Manuel Bienvenida, Jr., Milagros Nayve, Jaime Sebastian, Ador de Asis, and Eladio
Teves. Rollo, pp. 160-207. RTC, Quezon City, Branch 85, Decision in Crim. Case No. Q91-22386.
[4]
Account No. 840-107483-7.
[5]
Account No. 1668238-1.
[6]
Account No. 08523412.
[7]
President of Tevesteco.
[8]

BPI-FBs Memorandum, rollo, pp. 104-105.


Executive Vice-President of FMIC.
[10]
The new BPI-FB SFDM branch manager who replaced Jaime Sebastian.
[11]
BPI-FBs Memorandum, rollo, p. 105.
[12]
Id.
[13]
Respectively dated September 11 and 18, 1989. The first check dated August 31, 1989 Franco issued
in the amount of P50,000.00 was honored by BPI-FB.
[14]
Supra note 3. The names of other defendants in Crim. Case No. Q91-22386.
[15]
Franco received the Notice of Garnishment on September 27, 1989, but the 2 checks he had issued
were presented for payment at BPI-FB on September 20 & 21, 1989, respectively.
[16]
Francos Memorandum, rollo, p. 137.
[17]
Docketed as Civil Case No. 89-5280 and entitled First Metro Investment Corporation v. BPI Family
Bank.
[18]
G.R. No. 132390, May 21, 2004, 429 SCRA 30.
[19]
Officers
of
the International Baptist Church and International Baptist Academy in
Malabon,
Metro Manila.
[20]
The checks issued by Buenaventura et al. were dishonored upon presentment for payment.
[21]
G.R. No. 148196, September 30, 2005, 471 SCRA 431.
[22]
Supra note 3.
[23]
Rollo, pp. 160-208.
[24]
The Makati Case for recovery of the P37,455,410.54 representing Tevestecos total withdrawals
wherein Franco was belatedly impleaded, and a Writ of Garnishment was issued on Francos accounts.
[25]
P450,000.00.
[26]
The reflected amount of P98,973.23 plus P400,000.00 representing what was transferred to Quiaoits
account under their arrangement
[27]
P63,189.00.
[9]

[28]
[29]

CA rollo, p. 79.
Rollo, p. 54.

[30]

See Article 1460, paragraph 1 of the Civil Code. A thing is determinate when it is particularly
designated or physically segregated from all others of the same class.
[31]
Tolentino, Civil Code of the Philippines Commentaries and Jurisprudence, Vol. IV, 1985, p. 90.
[32]
See Article 418 of the Civil Code, taken from Article 337 of the Old Civil Code which used the words
fungible or non-fungible.
[33]
Tolentino, Civil Code of the Philippines Commentaries and Jurisprudence, Vol. II, 1983, p. 26.
[34]
United States v. Sotelo, 28 Phil. 147, 158 (1914).
[35]
Id.
[36]
Article 1980 of the Civil Code: Fixed, savings, and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning loan. See Article 1933 of the Civil Code.
[37]
Article 1953 of the Civil Code: A person who receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay the creditor an equal amount of the same kind and
quality.
[38]

G.R. No. 88013, March 19, 1990, 183 SCRA 360, 366-367.
See Eastern Shipping Lines, Inc. v. Court of Appeals, G.R. No. 97412, July 12, 1994, 234 SCRA 78,
95.
[40]
TSN, July 30, 1991, p. 5.
[41]
Id. at 5-11.
[42]
SEC. 4. Papers required to be filed and served. Every judgment, resolution, order, pleading
subsequent to the complaint, written motion, notice, appearance, demand, offer of judgment or similar
papers shall be filed with the court, and served upon the parties affected.
[43]
See Sievert v. Court of Appeals, G.R. No. L-84034, December 22, 1988, 168 SCRA 692, 696.
[44]
Board of Liquidators v. Heirs of Maximo Kalaw, et al., 127 Phil. 399, 421 (1967).
[45]
Lopez, et al. v. Pan American World Airways, 123 Phil. 256, 264-265 (1966).
[46]
CA rollo, p. 74.
[47]
Suario v. Bank of the Philippine Islands, G.R. No. 50459, August 25, 1989, 176 SCRA 688, 696;
citing Guita v. Court of Appeals, 139 SCRA 576, 580 (1985).
[48]
Bank of the Philippine Islands v. Casa Montessori Internationale, G.R. No. 149454, May 28, 2004, 430
SCRA 261, 293-294.
[49]
United Coconut Planters Bank v. Ramos, 461 Phil. 277, 298 (2003); citing Cathay Pacific Airways, Ltd.
v. Spouses Vazquez, 447 Phil. 306 (2003).
[39]

[50]

Art. 2219. Moral damages may be recovered in the following and analogous cases:
(1) A criminal offense resulting in physical injuries;
(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
The parents of the female seduced, abducted, raped, or abused, referred to in No. 3 of this article, may
also recover moral damages.
The spouse, descendants, ascendants, and brother and sisters may bring the action mentioned in No. 9
of this article, in the order named.
[51]
Art. 2220. Willful injury to property may be a legal ground for awarding moral damages if the court
should find that, under the circumstances, such damages are justly due. The same rule applies to
breaches of contract where the defendant acted fraudulently or in bad faith.
[52]
Article 2234 of the Civil Code.
Art. 2234. While the amount of the exemplary damages need not be proved, the plaintiff must show that
he is entitled to moral, temperate or compensatory damages before the court may consider the question
of whether or not exemplary damages should be awarded. In case liquidated damages have been agreed
upon, although no proof of loss is necessary in order that such liquidated damages may be recovered,

nevertheless, before the court may consider the question of granting exemplary in addition to the
liquidated damages, the plaintiff must show that he would be entitled to moral, temperate or
compensatory damages were it not for the stipulation for liquidated damages.
[53]
Bank of the Philippine Islands v. Casa Montessori Internationale, supra note 48, at 296.
[54]
CIVIL CODE, Art. 2208, par. (2).
[55]
CIVIL CODE, Art. 2208, par. (11).
[56]
Ching Sen Ben v. Court of Appeals, 373 Phil. 544, 555 (1999).

G.R. No. 123031 October 12, 1999


CEBU INTERNATIONAL FINANCE CORPORATION, petitioner,
vs.
COURT OF APPEALS, VICENTE ALEGRE, respondents.
QUISUMBING, J.:
This petition for review on certiorari assails respondent appellate court's Decision, 1 dated December 8,
1995, in CA G.R. CV No. 44085, which affirmed the ruling of the Regional Trial Court of Makati, Branch
132. The dispositive portion of the trial court's decision reads:
WHEREFORE, judgment is hereby rendered ordering defendant [herein petitioner] to pay
plaintiff [herein private respondent]:
(1) the principal sum of P514,390.94 with legal interest thereon
computed from August 6, 1991 until fully paid; and
(2) the costs of suit.
SO ORDERED. 2
Based on the records, the following are the pertinent facts of the case:
Cebu International Finance Corporation (CIFC), a quasi-banking institution, is engaged in money market
operations.
On April 25, 1991, private respondent, Vicente Alegre, invested with CIFC, five hundred thousand
(P500,000.00) pesos, in cash. Petitioner issued a promissory note to mature on May 27, 1991. The note
for five hundred sixteen thousand, two hundred thirty-eight pesos and sixty-seven centavos
(P516,238.67) covered private respondent's placement plus interest at twenty and a half (20.5%) percent
for thirty-two (32) days.
On May 27, 1991, CIFC issued BPI Check No. 513397 (hereinafter the CHECK) for five hundred fourteen
thousand, three hundred ninety pesos and ninety-four centavos (P514,390.94) in favor of the private
respondent as proceeds of his matured investment plus interest. The CHECK was drawn from petitioner's
current account number 0011-0803-59, maintained with the Bank of the Philippine Islands (BPI), main
branch at Makati City.1wphi1.nt
On June 17, 1991, private respondent's wife deposited the CHECK with Rizal Commercial Banking Corp.
(RCBC), in Puerto Princesa, Palawan. BPI dishonored the CHECK with the annotation, that the "Check
(is) Subject of an Investigation." BPI took custody of the CHECK pending an investigation of several
counterfeit checks drawn against CIFC's aforestated checking account. BPI used the check to trace the
perpetrators of the forgery.

Immediately, private respondent notified CIFC of the dishonored CHECK and demanded, on several
occasions, that he be paid in cash. CIFC refused the request, and instead instructed private respondent
to wait for its ongoing bank reconciliation with BPI. Thereafter, private respondent, through counsel, made
a formal demand for the payment of his money market placement. In turn, CIFC promised to replace the
CHECK but required an impossible condition that the original must first be surrendered.
On February 25, 1992, private respondent Alegre filed a complaint 3 for recovery of a sum of money
against the petitioner with the Regional Trial Court of Makati (RTC-Makati), Branch 132.
On July 13, 1992, CIFC sought to recover its lost funds and formally filed against BPI, a separate civil
action 4 for collection of a sum of money with the RTC-Makati, Branch 147. The collection suit alleged that
BPI unlawfully deducted from CIFC's checking account, counterfeit checks amounting to one million,
seven hundred twenty-four thousand, three hundred sixty-four pesos and fifty-eight centavos
(P1,724,364.58). The action included the prayer to collect the amount of the CHECK paid to Vicente
Alegre but dishonored by BPI.
Meanwhile, in response to Alegre's complaint with RTC-Makati, Branch 132, CIFC filed a motion for leave
of court to file a third-party complaint against BPI. BPI was impleaded by CIFC to enforce a right, for
contribution and indemnity, with respect to Alegre's claim. CIFC asserted that the CHECK it issued in
favor of Alegre was genuine, valid and sufficiently funded.
On July 23, 1992, the trial court granted CIFC's motion. However, BPI moved to dismiss the third-party
complaint on the ground of pendency of another action with RTC-Makati, Branch 147. Acting on the
motion, the trial court dismissed the third-party complaint on November 4, 1992, after finding that the third
party complaint filed by CIFC against BPI is similar to its ancillary claim against the bank, filed with RTCMakati Branch 147.
Thereafter, during the hearing by RTC-Makati, Branch 132, held on May 27, and June 22, 1993, Vito
Arieta, Bank Manager of BPI, testified that the bank, indeed, dishonored the CHECK, retained the original
copy and forwarded only a certified true copy to RCBC. When Arieta was recalled on July 20, 1993, he
testified that on July 16, 1993, BPI encashed and deducted the said amount from the account of CIFC,
but the proceeds, as well as the CHECK remained in BPI's custody. The bank's move was in accordance
with the Compromise Agreement 5 it entered with CIFC to end the litigation in RTC-Makati, Branch 147.
The compromise agreement, which was submitted for the approval of the said court, provided that:
1. Defendant [BPI] shall pay to the plaintiff [CIFC] the amount of
P1,724,364.58 plus P20,000 litigation expenses as full and final
settlement of all of plaintiff's claims as contained in the Amended
Complaint dated September 10, 1992. The aforementioned amount shall
be credited to plaintiff's current account No. 0011-0803-59 maintained at
defendant's Main Branch upon execution of this Compromise Agreement.
2. Thereupon, defendant shall debit the sum of P514,390.94 from the
aforesaid current account representing payment/discharge of BPI Check
No. 513397 payable to Vicente Alegre.
3. In case plaintiff is adjudged liable to Vicente Alegre in Civil Case No.
92-515 arising from the alleged dishonor of BPI Check No. 513397,
plaintiff cannot go after the defendant: otherwise stated, the defendant
shall not be liable to the plaintiff. Plaintiff [CIFC] may however set-up the
defense of payment/discharge stipulated in par. 2 above. 6
On July 27, 1993, BPI filed a separate collection suit 7 against Vicente Alegre with the RTC-Makati,
Branch 62. The complaint alleged that Vicente Alegre connived with certain Lina A. Pena and Lita A. Anda

and forged several checks of BPI's client, CIFC. The total amount of counterfeit checks was
P1,724,364.58. BPI prevented the encashment of some checks amounting to two hundred ninety five
thousand, seven hundred seventy-five pesos and seven centavos (P295,775.07). BPI admitted that the
CHECK, payable to Vicente Alegre for P514,390.94, was deducted from BPI's claim, hence, the balance
of the loss incurred by BPI was nine hundred fourteen thousand, one hundred ninety-eight pesos and
fifty-seven centavos (P914,198.57), plus costs of suit for twenty thousand (P20,000.00) pesos. The
records are silent on the outcome of this case.
On September 27, 1993, RTC-Makati, Branch 132, rendered judgment in favor of Vicente Alegre.
CIFC appealed from the adverse decision of the trial court. The respondent court affirmed the decision of
the trial court.
Hence this appeal, 8 in which petitioner interposes the following assignments of errors:
1. The Honorable Court of Appeals erred in affirming the finding of the
Honorable Trial Court holding that petitioner was not discharged from the
liability of paying the value of the subject check to private respondent
after BPI has debited the value thereof against petitioner's current
account.
2. The Honorable Court of Appeals erred in applying the provisions of
paragraph 2 of Article 1249 of the Civil Code in the instant case. The
applicable law being the Negotiable Instruments Law.
3. The Honorable Court of Appeals erred in affirming the Honorable Trial
Court's findings that the petitioner was guilty of negligence and delay in
the performance of its obligation to the private respondent.
4. The Honorable Court of Appeals erred in affirming the Honorable Trial
Court's decision ordering petitioner to pay legal interest and the cost of
suit.
5. The Honorable Court of Appeals erred in affirming the Honorable Trial
Court's dismissal of petitioner's third-party complaint against BPI.
These issues may be synthesized into three:
1. WHETHER OR NOT ARTICLE 1249 OF THE NEW CIVIL CODE
APPLIES IN THE PRESENT CASE;
2. WHETHER OR NOT "BPI CHECK NO. 513397" WAS VALIDLY
DISCHARGED; and
3. WHETHER OR NOT THE DISMISSAL OF THE THIRD PARTY
COMPLAINT OF PETITIONER AGAINST BPI BY REASON OF LIS
PENDENS WAS PROPER?
On the first issue, petitioner contends that the provisions of the Negotiable Instruments Law (NIL) are the
pertinent laws to govern its money market transaction with private respondent, and not paragraph 2 of
Article 1249 of the Civil Code. Petitioner stresses that it had already been discharged from the liability of
paying the value of the CHECK due to the following circumstances:

1) There was "ACCEPTANCE" of the subject check by BPI, the drawee


bank, as defined under the Negotiable Instruments Law, and therefore,
BPI, the drawee bank, became primarily liable for the payment of the
check, and consequently, the drawer, herein petitioner, was discharged
from its liability thereon;
2) Moreover, BPI, the drawee bank, has not validly DISHONORED the
subject check; and,
3) The act of BPI, the drawee bank of debiting/deducting the value of the
check from petitioner's account amounted to and/or constituted a
discharge of the drawer's (petitioner's) liability under the
instrument/subject check. 9
Petitioner cites Section 137 of the Negotiable Instruments Law, which states:
Liability of drawee retaining or destroying bill Where a drawee to whom a bill is
delivered for acceptance destroys the same, or refuses within twenty-four hours
after such delivery or such other period as the holder may allow, to return the bill
accepted or non-accepted to the Holder, he will be deemed to have accepted the
same.
Petitioner asserts that since BPI accepted the instrument, the bank became primarily liable for the
payment of the CHECK. Consequently, when BPI offset the value of CHECK against the losses from the
forged checks allegedly committed by the private respondent, the check was deemed paid.
Art. 1249 of the New Civil Code deals with a mode of extinction of an obligation and expressly provides
for the medium in the "payment of debts." It provides that:
The payment of debts in money shall be made in the currency stipulated, and if it
is not possible to deliver such currency, then in the currency, which is legal tender
in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they have
been cashed, or when through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in
abeyance.
Considering the nature of a money market transaction, the above-quoted provision should be applied in
the present controversy. As held in Perez vs. Court of Appeals, 10 a "money market is a market dealing in
standardized short-term credit instruments (involving large amounts) where lenders and borrowers do not
deal directly with each other but through a middle man or dealer in open market. In a money market
transaction, the investor is a lender who loans his money to a borrower through a middleman or dealer. 11
In the case at bar, the money market transaction between the petitioner and the private respondent is in
the nature of a loan. The private respondent accepted the CHECK, instead of requiring payment in
money. Yet, when he presented it to RCBC for encashment, as early as June 17, 1991, the same was
dishonored by non-acceptance, with BPI's annotation: "Check (is) subject of an investigation." These facts
were testified to by BPI's manager. Under these circumstances, and after the notice of dishonor, 12 the
holder has an immediate right of recourse against the drawer, 13 and consequently could immediately file
an action for the recovery of the value of the check.

In a loan transaction, the obligation to pay a sum certain in money may be paid in money, which is the
legal tender or, by the use of a check. A check is not a legal tender, and therefore cannot constitute valid
tender of payment. In the case of Philippine Airlines, Inc. vs. Court of Appeals, 14 this Court held:
Since a negotiable instrument is only a substitute for money and not money, the delivery
of such an instrument does not, by itself, operate as payment (citation omitted). A check,
whether a manager's check or ordinary check, is not legal tender, and an offer of a check
in payment of a debt is not a valid tender of payment and may be refused receipt by the
obligee or creditor. Mere delivery of checks does not discharge the obligation under a
judgment. The obligation is not extinguished and remains suspended until the payment
by commercial document is actually realized (Art. 1249, Civil Code, par. 3.) 15
Turning now to the second issue, when the bank deducted the amount of the CHECK from CIFC's current
account, this did not ipso facto operate as a discharge or payment of the instrument. Although the value of
the CHECK was deducted from the funds of CIFC, it was not delivered to the payee, Vicente Alegre.
Instead, BPI offset the amount against the losses it incurred from forgeries of CIFC checks, allegedly
committed by Alegre. The confiscation of the value of the check was agreed upon by CIFC and BPI. The
parties intended to amicably settle the collection suit filed by CIFC with the RTC-Makati, Branch 147, by
entering into a compromise agreement, which reads:
xxx xxx xxx
2. Thereupon, defendant shall debit the sum of P514,390.94 from the
aforesaid current account representing payment/discharge of BPI Check
No. 513397 payable to Vicente Alegre.
3. In case plaintiff is adjudged liable to Vicente Alegre in Civil Case No.
92-515 arising from the alleged dishonor of BPI Check No. 513397,
plaintiff cannot go after the defendant; otherwise stated, the defendant
shall not be liable to the plaintiff. Plaintiff however (sic) set-up the
defense of payment/discharge stipulated in par. 2
above. 16
A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or
put an end to one already commenced. 17 It is an agreement between two or more persons who, for
preventing or putting an end to a lawsuit, adjust their difficulties by mutual consent in the manner which
they agree on, and which everyone of them prefers in the hope of gaining, balanced by the danger of
losing. 18 The compromise agreement could not bind a party who did not sign the compromise agreement
nor avail of its benefits. 19 Thus, the stipulations in the compromise agreement is unenforceable against
Vicente Alegre, not a party thereto. His money could not be the subject of an agreement between CIFC
and BPI. Although Alegre's money was in custody of the bank, the bank's possession of it was not in the
concept of an owner. BPI cannot validly appropriate the money as its own. The codal admonition on this
issue is clear:
Art. 1317
No one may contract in the name of another without being authorized by the latter, or
unless he has by law a right to represent him.
A Contract entered into in the name of another by one who has no authority or legal
representation, or who has acted beyond his powers, shall be unenforceable, unless it is
ratified, expressly or impliedly, by the person on whose behalf it has been executed,
before it is revoked by the other contracting party.20

BPI's confiscation of Alegre's money constitutes garnishment without the parties going through a valid
proceeding in court. Garnishment is an attachment by means of which the plaintiff seeks to subject to his
claim the property of the defendant in the hands of a third person or money owed to such third person or
a garnishee to the defendant. 21 The garnishment procedure must be upon proper order of RTC-Makati,
Branch 62, the court who had jurisdiction over the collection suit filed by BPI against Alegre. In effect,
CIFC has not yet tendered a valid payment of its obligation to the private respondent. Tender of payment
involves a positive and unconditional act by the obligor of offering legal tender currency as payment to the
obligee for the former's obligation and demanding that the latter accept the same. 22 Tender of payment
cannot be presumed by a mere inference from surrounding circumstances.
With regard to the third issue, for litis pendentia to be a ground for the dismissal of an action, the following
requisites must concur: (a) identity of parties or at least such as to represent the same interest in both
actions; (b) identity of rights asserted and relief prayed for, the relief being founded on the same acts; and
(c) the identity in the two cases should be such that the judgment which may be rendered in one would,
regardless of which party is successful, amount to res judicata in the other. 23
The trial court's ruling as adopted by the respondent court states, thus:
A perusal of the complaint in Civil Case No. 92-1940, entitled Cebu International Finance
Corporation vs. Bank of the Philippine Islands now pending before Branch 147 of this
Court and the Third Party Complaint in the instant case would readily show that the
parties are not only identical but also the cause of action being asserted, which is the
recovery of the value of BPI Check No. 513397 is the same. In Civil Case No. 92-1940
and in the Third Party Complaint the rights asserted and relief prayed for, the reliefs being
founded on the facts, are identical.
xxx xxx xxx
WHEREFORE, the motion to dismiss is granted and consequently, the Third Party
Complaint is hereby ordered dismissed on ground of lis pendens. 24
We agree with the observation of the respondent court that, as between the third party claim filed by the
petitioner against BPI in Civil Case No. 92-515 and petitioner's ancillary claim against the bank in Civil
Case No. 92-1940, there is identity of parties as well as identity of rights asserted, and that any judgment
that may be rendered in one case will amount to res judicata in another.
The compromise agreement between CIFC and BPI, categorically provided that "In case plaintiff is
adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from the alleged dishonor of BPI Check
No. 513397, plaintiff (CIFC) cannot go after the defendant (BPI); otherwise stated, the defendant shall not
be liable to the plaintiff." 25Clearly, this stipulation expressed that CIFC had already abandoned any further
claim against BPI with respect to the value of BPI Check No. 513397. To ask this Court to allow BPI to be
a party in the case at bar, would amount to res judicata and would violate terms of the compromise
agreement between CIFC and BPI. The general rule is that a compromise has upon the parties the effect
and authority of res judicata, with respect to the matter definitely stated therein, or which by implication
from its terms should be deemed to have been included therein. 26 This holds true even if the agreement
has not been judicially approved. 27
WHEREFORE, the instant petition is hereby DENIED. The Decision of the Court of Appeals in CA-G.R.
CV No. 44085 is AFFIRMED. Costs against petitioner.1wphi1.nt
SO ORDERED.
Mendoza and Buena, JJ., concur.

Bellosillo, J., on official leave.


Footnotes
1 Rollo, pp. 46-52.
2 Court of Appeals Rollo, p. 65.
3 Vicente Alegre vs. Cebu International Finance, Corporation, Civil Case No. 92-515;
Record, Regional Trial Court, pp. 1-12.
4 Cebu International Finance Corporation vs. Bank of the Philippine Islands, Civil Case
No. 92-1940; Court of Appeals, Rollo pp. 67-77.
5 Rollo, pp. 71-72.
6 Id. at 71.
7 Id. at 100-103; Bank of the Philippine Island, vs. Vicente A. Alegre, Civil Case No. 932550.
8 Id. at 7-43.
9 Id. at 143.
10 127 SCRA 636 (1984).
11 Sesbreo vs. Court of Appeals, 240 SCRA 606, 614 (1995).
12 Negotiable Instruments Law, Section 89.
13 Id., Section 151.
14 181 SCRA 557 (1990).
15 Id. at 568.
16 Supra, note 5.
17 Del Rosario vs. Madayag, 247 SCRA 767, 770 (1995).
18 Id., citing David vs. Court of Appeals, 214 SCRA 644, 650 (1992), citing Rovero vs.
Amparo, 91 Phil. 228, 235 (1952); Arcenas vs. Cinco, 74 SCRA 118, 123 (1976).
19 Jag and Haggar Jeans and Sportswear Corp. vs. NLRC, 241 SCRA 635, 642 (1995).
20 Civil Code of the Philippines, Article 1317.
21 Manila Remnant Co., Inc. vs. CA, 231 SCRA 281, 289 (1994).

22 Roman Catholic Bishop of Malolos, Inc. vs. Intermediate Appellate Court, 191 SCRA
411, 419 (1990).
23 Ramos vs. Peralta, 203 SCRA 412, 416-417 (1991); Yu vs. CA, 232 SCRA 594, at 598
(1994).
24 Court of Appeals Rollo, p. 61.
25 Supra, note 5.
26 Del Rosario vs. Madayag, 247 SCRA 767, 771 (1995); citing Nieves vs. Court of
Appeals, 198 SCRA 63, 69 (1991); World Machine Enterprises vs. Intermediate Appellate
Court, 192 SCRA 459, 465 (1990).
27 Id., 771; citing Mayuga vs. Court of Appeals, 154 SCRA 309 (1987) citing Meneses vs.
De la Rosa, 77 Phil. 34 (1946); Vda. de Guilas vs. David, 23 SCRA 762 (1968);
Cochingyan vs. Cloribel, 76 SCRA 361.
G.R. No. L-36752-53 December 18, 1979
THE COMMISSIONER OF PUBLIC HIGHWAYS and THE DISTRICT ENGINEER OF THE FIRST
ENGINEERING DISTRICT OF CEBU, petitioners,
vs.
HON. FRANCISCO P. BURGOS, in his capacity as Judge of the Court of First Instance of Cebu;
Branch II; THE PROVINCE OF CEBU; THE PROVINCIAL AUDITOR OF CEBU; THE PROVINCIAL
TREASURER OF CEBU; and BUENAVENTURA BRAGAS, CRESCENCIO CAETE, ANDRES
CAETE, TEOFILO CACANOG, PLACIDO CUIZON, CERILO DONAYRE, CAMIA HERMOSA,
VIRGINIO LAVELLES, JUAN MAGHANOY, LUCIO MARAMARA, BRIGIDO NEMIL, FRANCISCO
NOVAL, ILUMINADO ORTIZ, CESAR PAARES, LUCAS PARADIANG, JESUS PEPITO, CARLOS
QUINAPONDAN, EUTIQUIO RACAZA, ROSARIO SEN, RICARDO TAGALOG and AURELIO
ZABALA, respondents.

FERNANDO, C.J.:
On June 14, 1979, this Court received a pleading entitled Compromise Agreement. It reads as follows: "
[Come Now] the parties in the above-captioned subject case through their respective duly authorized
incumbent officials and attorney-in-fact, assisted by their respective counsels, and to this Honorable
Supreme Court respectfully submit the following Compromise Agreement; [Whereas], respondents former
Governor Rene Espina, former Vice-Governor and Governor Osmundo G. Rama, and former Provincial
Board Members Pablo P. Garcia, Valeriano Carillo and Reynaldo M. Mendiola, who were sued in their
official capacities, have long ceased to hold office; [Whereas], Gov. Eduardo R. Gullas, incumbent
Provincial Governor of Cebu, has been authorized by the Sangguniang Panlalawigan to negotiate and
conclude an amicable settlement of this case; [Whereas], after a series of conferences the latest of which
was called upon the initiative of Honorable Eduardo R. Gullas, Provincial Governor of the respondent
Province of Cebu, during which Gov. Gullas pointed out the desirability of settling this case in the interest
of all parties concerned; [Whereas], the private respondents-employees who were duly represented by
their respective counsels duly subscribe with Gov. Gullas' views of the desirability of settling this case
noting that the deplorable conditions of some roads and bridges in the Province of Cebu await muchneeded funds for their immediate repair and/or improvement, and considering, on the other hand, the sad
plight of the private respondents-employees who have been out of job since July 1, 1968 up to the

present date; [Whereas], the parties after conferring together have agreed on all the terms and conditions
of the final and complete settlement of this case. [Now Therefore], for and in consideration of the
foregoing, the parties agree, as they hereby agree, to enter into a Compromise Agreement in the abovecaptioned case under the following terms and conditions: 1. The respondent Province of Cebu
represented in this act by Gov. Eduardo R. Gullas, duly authorized by proper resolution of the
Sangguniang Panlalawigan, hereby agrees to immediately appropriate and pay full back wages and
salaries as awarded by the trial Court in its decision to all the private respondents-employees from and
after July 1, 1968, the date of their termination, up to the date of the approval of the herein Compromise
Agreement by the Honorable Supreme Court, except for those who are qualified for compulsory
retirement whose back salaries and wages shall be limited up to the effective date of their retirement; 2.
That the private respondents-employees waive, as they hereby waive, their demand for reinstatement; 3.
That private respondents-employees who are qualified for compulsory retirement as of the date of
approval of this Compromise Agreement shall be allowed to retire in accordance with the existing
retirement laws with the private respondent Province of Cebu appropriating and paying the Government's
share of the GSIS retirement and insurance premiums. For purposes of this Compromise Agreement, the
services of the private respondents-employees from July 1, 1968 shall be considered continuous and
uninterrupted; 4. That the respondent Province of Cebu agrees to pay gratuity pay and/or optional
retirement benefits to private respondents-employees qualified for optional retirement as of the date of the
approval of this Compromise Agreement, under R.A. 660, as amended, and whose services shall likewise
be deemed continuous and uninterrupted for purposes of this Compromise Agreement provided that
where the law grants an employee the option to choose under what law he should retire, such option shall
be recognized in respect to the herein private respondents-employees; and provided that the decision of
the GSIS relative to any question of retirement shall be final and binding; 5. That private respondentsemployees shall be entitled to collect their accumulated sick leave and vacation leave pay which shall be
paid from JJ funds to be held in trust for the purpose as well as benefits under the Medicare and
Workmens Compensation Act; 6. Those private respondents-employees who have died shall be paid
back salaries and wages and retirement benefits through their heirs up to the time of their death upon
presentation of the corresponding death certificate or other satisfactory proof. 7. That the petitioner
Commissioner of Public Highways (now Minister of Public Highways) and his subordinates, as well as
respondent officials and/or former officials of the Province of Cebu, are absolved of any and all personal
and other civil liabilities of whatsoever nature; 8. That upon approval by this Honorable Supreme Court of
the herein Compromise Agreement the writ of preliminary injunction issued by the lower Court is deemed
automatically vacated and lifted but the amounts covering the salaries and back wages as well as those
covering the retirement and insurance premiums of respondent Province of Cebu payable to the GSIS
pertaining to the retirement of private respondents-employees qualified to retire under paragraphs 3 and 4
hereof shall be earmarked for the payment of said obligations and shall be held in trust by the Province
for said purposes; 9. That the amounts payable to the employees concerned represented by Atty. Ramon
B. Ceniza subject to said lawyer's charging and retaining liens. [Whereas], the Honorable Supreme Court
is most respectfully prayed to approve the foregoing Compromise Agreement and to render judgment
which shall be immediately executory in accordance therewith, without costs. Cebu City (for Manila)." 1 It
was signed by Provincial Governor Eduardo R. Gullas for the Province of Cebu, Atty. Justino K.
Hermosisima, counsel for respondents Cebu Province and its present and former officials, by Atty. Ramon
B. Ceniza, as counsel for private respondents-employees as well as their attorney-in-fact. Minister
Baltazar Aquino expressed his conformity. He was assisted by Assistant Solicitor General Vicente V.
Mendoza.
In a supplemental manifestation and motion filed on June 28, 1979 by the Commissioner of Public
Highways and the Provincial Government and officials of Cebu, it was alleged that in such compromise
agreement, Case No. L-49076 was included involving as it did "former laborers in the Cebu Public
Highways who were in the same and Identical situation" [and that] as such compromise agreement was
signed not only in Manila but in Cebu, what was submitted to this Court was undated. It reiterated the
prayer for its approval.

While at first, there was an opposition to its approval by counsel for respondents, Raul H. Sesbreo, on
October 31, 1979, he filed this urgent ex parte manifestation, which insofar as pertinent, stated: "That
they [respondents] are, therefore, withdrawing whatever objections they have against the approval of the
compromise agreement submitted by the Commissioner of Public Highways, thru the Honorable Solicitor
General. It may be noted that the compromise agreement of similar substance submitted in G.R. No. L34843 with which these cases were ordered consolidated, was already approved by this Superiority per
its judgment dated July 5, 1979." 2 As he made clear, he "joins the Honorable Solicitor General in seeking
the approval of the [Compromise Agreement] by this Superiority." 3
WHEREFORE, the objection to the compromise agreement having been withdrawn, it is approved by this
Court. Let the parties observe strictly the terms thereof. That is the judgment of this Court. No costs.
Teehankee, Barredo, Makasiar, Antonio, Aquino, Santos, Fernandez, Guerrero, Abad Santos, De Castro
and Melencio-Herrera, JJ., concur.
Concepcion Jr., J., took no part.

#Footnotes
1 Compromise Agreement, 1-5.
2 Urgent Ex Parte Manifestation.
3 Ibid.
G.R. No. 132284

February 28, 2006

TELENGTAN BROTHERS & SONS, INC., Petitioner,


vs.
UNITED STATES LINES, INC. and the COURT OF APPEALS, Respondents.
DECISION
GARCIA, J.:
Thru this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Telengtan
Brothers & Sons, Inc. (Telengtan) seeks the reversal and setting aside of the decision 1 dated January 8,
1998 of the Court of Appeals (CA) in CA-G.R. CV No. 18349 which affirmed in toto the decision dated
January 10, 19852 of the Regional Trial Court of Manila, Branch 38, finding petitioner liable to respondent
United States Lines, Inc. (U.S. Lines) for demurrage and damages.
Petitioner Telengtan is a domestic corporation doing business under the name and style La Suerte Cigar
& Cigarette Factory, while respondent U.S. Lines is a foreign corporation engaged in the business of
overseas shipping. During the period material, the provisions of the Far East Conference Tariff No. 12
were specifically made applicable to Philippine containerized cargo from the U.S. and Gulf Ports, effective
with vessels arriving at Philippine ports on and after December 15, 1978. After that date, consignees who
fail to take delivery of their containerized cargo within the 10-day free period are liable to pay demurrage
charges.

As recited in the decision under review, the factual antecedents may be summarized as follows:
On June 22, 1981, respondent U.S. Lines filed a suit against petitioner Telengtan seeking payment of
demurrage charges plus interest and damages. Docketed as Civil Case No. R-81-1196 of the Regional
Trial Court of Manila and raffled to Branch 38 thereof, the complaint alleged that between the years 1979
and 1980, goods belonging to petitioner loaded on containers aboard its (respondents) vessels arrived in
Manila from U.S. ports. After the 10-day free period, petitioner still failed to withdraw its goods from the
containers wherein the goods had been shipped. Continuing, respondent U.S. Lines alleged that
petitioner incurred on all those shipments a demurrage in the total amount of P94,000.00 which the latter
refused to pay despite repeated demands.
In its amended answer with compulsory counterclaim, petitioner Telengtan, as defendant a quo, disclaims
liability for the demanded demurrage, alleging that it has never entered into a contract nor signed an
agreement to be bound by any rule on demurrage. It likewise maintains that, absent an obligation to pay
respondent who made no proper or legal demands in the first place, there is justifiable reason to refuse
payment of the latters unwarranted claims. By way of counterclaim, petitioner states that, upon arrival of
the conveying vessels, it presented the Bills of Lading (B/Ls) and all other pertinent documents covering
seven (7) shipments and demanded from respondent delivery of all the goods covered by the aforesaid
B/Ls, only to be informed that respondent had already unloaded the goods from the container vans,
stripped them of their contents which contents were then stored in warehouses. Petitioner further states
that respondent had refused to deliver the goods covered by the B/Ls and required petitioner to pay the
amount of P123,738.04 before the goods can be released. It thus prays that respondent be ordered to
pay the aforestated amount with interest.
After due proceedings, the trial court found for respondent U.S. Lines, as plaintiff therein, and accordingly
rendered judgment, as follows:
WHEREFORE, in view of all the foregoing, the Court finds [petitioner] liable to [respondent] for demurrage
incurred in the amount of P99,408.00 which sum will bear interest at the legal rate from the date of the
filing of the complaint till full payment thereof plus attorneys fees in the amount of 20% of the total sum
due, all of which shall be recomputed as of the date of payment in accordance with the provisions of
Article 1250 of the Civil Code. Exemplary damages in the amount of P80,000.00 are also granted. The
counterclaim is dismissed. Costs against [petitioner]. (Words in bracket ours) 3
Party explains the trial court in its decision:4
In other words, contrary to [petitioners] contentions, both the provisions of the contract between the
parties, in this case the bill of lading, and the interpretation given by the higher courts to these provisions
are to the effect that demurrage may be lawfully collected. As a matter of fact, [respondent U.S. Lines]
has submitted official receipts showing that on many other and previous occasions, [petitioner] paid
demurrage to [respondent] (Exhibits "F", "F-1" to "F-4", "G", "G-1" to "G-4", "H", "H-1" to "H-4", and "I", "I1" to "I-3"). [Petitioner] is, therefore, in estoppel to claim that it did not know of demurrage being charged
by [respondent] and that it had not agreed to it since these exhibits show that [petitioner] knew of this
demurrage and by paying for the same, it in effect, agreed to the collection of demurrage.
xxxxxxxxx
On the other hand, [petitioner] claims that [respondent] company owes them the far larger sum of
P123,738.04 by way of damages allegedly suffered by their goods when [respondent] company removed
these goods from its cargo vans and deposited them in bonded warehouses without its consent. It is not
disputed that [respondent] company did not [sic] in fact remove these goods belonging to [petitioner] from
its vans and deposited them in warehouses. However, this was done by authority of the Bureau of
Customs and for that purpose, [respondent] addressed a letter-request to the Collector of Customs, for
permission to remove the goods of defendant from its vans (Exhibit "L"). xxx.

xxxxxxxxx
The Court finds that the charges for warehousing were necessary expenses covered by the terms of the
bill of lading which the consignee was responsible for. There is therefore now no necessity of discussing
whether or not the counterclaim of [petitioner] had prescribed or not. Neither is there any question of bad
faith on the part of [respondent]. When it requested for authority to remove [petitioners] consigned goods
from its vans and deposited them in warehouses, [respondent] had already given consignee sufficient
time to take delivery of the shipment. This, [petitioner] chose not to do. Instead, it sat pat by the telephone
calling without making any positive effort to check up on the shipment or arrange for its delivery to its
factory. Once arrived at the port, the shipment was available to consignee for its proper delivery and
receipt and the carrier discharged of its responsibility therefor. Rather, by its inaction, [petitioner] was
guilty of bad faith. Once it had received the notice of arrival of the carrier in port, it was incumbent on
consignee to put wheels in motion in order that the shipment could be delivered to it. The inaction of
[petitioner] would only indicate that it had no intention of taking delivery except at its own convenience
thus preventing carrier from taking on other shipments and from leaving port. Such unexplained and
unbusiness-like delay smacks highly of bad faith on the part of [petitioner] rather than of the [respondent].
(Words in bracket, added).
Appealing to the CA, whereat its recourse was docketed as CA-G.R. CV No. 18349, petitioner contended
that the trial court erred in (1) holding it liable for demurrage, (2) dismissing its counterclaim, and (3)
awarding exemplary damages and attorneys fees to respondent.
As stated at the outset, however, the CA, in its assailed Decision dated January 8, 1998,5 affirmed in
toto the judgment of the trial court.
Undaunted, petitioner is now with this Court via the present recourse, imputing to the CA the following
errors:
A. xxx in concluding that it [petitioner] was the one at fault in not withdrawing its cargo from the container
vans in which the goods were originally shipped despite documentary evidence and written admissions of
private respondent to the contrary.
B. xxx in affirming the trial courts order for the recomputation of the judgment award in accordance with
Article 1250 of the Civil Code contrary to existing jurisprudence and without any evidence at all to support
it.6
The petition is partly meritorious.1avvphil.net
It is undisputed that the goods subject of petitioners counterclaim and covered by seven (7) B/Ls with
Shippers Reference Nos. S-16844, S-16846, S-16848, S-17748, S-17750, S-17749 and S-17751 7 were
loaded for shipment to Manila on respondents vessels in container vans on a "House/House ContainersShippers Load, Stowage and Count" basis. This shipping arrangement means that the shipping
companys container vans are to be brought to the shipper for loading of its goods; that from the shippers
warehouse, the goods in container vans are brought to the shipping company for shipment; that the
shipping company, upon arrival of its ship at the port of destination, is to deliver the container vans to the
consignees compound or warehouse; and that the shipper (consignee) is supposed to load, stow and
count the goods from the container van.8 Likewise undisputed is the fact that the container vans
containing the goods covered by three (3) of the aforesaid B/Ls, particularly those with Shippers
Reference Nos. S-17748, S-17750 and S-17751,9 were delivered to a warehouse, stripped of their
contents and the contents deposited thereat.10
On the argument that the respondent, upon the foregoing undisputed facts, violated its contractual
obligation to deliver when, instead of delivering the goods to the petitioner as consignee thereof, it
deposited the same in bonded warehouse/s, petitioner would now score the CA for finding it at fault for

non-withdrawal of its cargo from the container vans within the 10-day free demurrage period. Pressing the
point, petitioner argues that, since the CA drew an erroneous conclusion from an undisputed set of facts,
petitioner now asserts that the matter of who is at fault - its first assigned error - could be treated as a
legal issue and not a question of fact.
After careful consideration, the Court sustain the CAs stance faulting the petitioner for not taking delivery
of its cargo from the container vans within the 10-day free period, an inaction which led respondent to
deposit the same in warehouse/s.
It may be that, when the relevant facts are undisputed, the question of whether or not the conclusion
deduced therefrom by the CA is correct is a question of law properly cognizable by this Court. 11 However,
it has also been held that all doubts as to the correctness of such conclusions will be resolved in favor of
the disposing court.12 So it must be in this case.
At any rate, the Court finds that petitioners first contention raises a question of fact rather than of law. And
settled is the rule that factual findings of the CA, particularly those confirmatory of that of the trial court, as
here, are binding on this Court,13 save for the most compelling of reasons, like when they are reached
arbitrarily.14
As it were, however, the conclusion of the CA on who contextually is the erring party was not exactly
drawn from a vacuum, supported as such conclusion is by the records of the case. What the CA wrote
with some measure of logic commends itself for concurrence:
However, ... We find that [petitioner] was the one at fault in not withdrawing its cargo from the containers
wherein the goods were shipped within the ten (10)-day free period. Had it done so, then there would not
have been any need of depositing the cargo in a warehouse.
It is incumbent upon the carrier to immediately advise the consignee of the arrival of the goods for if it
does not, it continues to be liable for the same until the consignee has had reasonable opportunity to
remove them.
Sound business practice dictates that the consignee, upon notification of the arrival of the goods, should
immediately get the cargo from the carrier especially since it has need of it. xxx.
Appellant tries to shift the blame on the [respondent] by stating that it was not informed beforehand of the
latters intention to deliver the goods to a warehouse. It likewise alleges that it does not know where to
contact [respondent] for it argues that the person manning the latters office would only hold office for a
few hours, if not always out. But had it taken the necessary steps of inquiring for the address of
[respondent] from the proper government offices, then it would have succeeded in finding the latters
address.
Judging from the [petitioners] way of conducting business in the past, We come to the conclusion that it is
used to paying demurrage charges. Exhibits "H" and "I" are certainly proofs of appellants practice of not
getting its cargo from the carrier immediately upon notification of the goods arrival. 15 (Words in bracket
added.)
It cannot be over-emphasized that the container vans were stripped of their cargo with the prior
authorization of the Bureau of Customs. The trial court said as much, thus:
It is not disputed that [respondent] company did not [sic] in fact remove these goods belonging to
[petitioner] from its vans and deposited them in warehouses. However, this was done by authority of the
Bureau of Customs and for that purpose, [respondent] addressed a letter-request to the Collector of
Customs, for permission to remove the goods of [petitioner] from its vans (Exhibit "L"). The corresponding

authority was granted by the Bureau of Customs to do so as evidenced by a van permit (Exhibit "M").
In other words, while [respondent] admits that it removed the goods of [petitioner] from its vans and
deposited them in various warehouses, there is no question that this was done by authority of the Bureau
of Customs which is the proper agency of the government charged with the supervision and regulation of
maritime commerce.
Verily, the authority secured from the Bureau of Customs is indicative of the bona fides of respondents
intention. And as held below, the authority thus acquired relieved respondent of its obligations under the
B/Ls when it caused the containers to be stripped and the goods stored in bonded warehouses.
Not lost on this Court is the fact that the B/Ls under which petitioner anchors its counterclaim allow the
goods carried to be delivered to bonded warehouses for the shippers and/or consignees account if it
does not take possession or delivery thereof as soon as they are at its disposal for removal. Section 17 of
the Regular Long Form Inward B/L of the respondent 16 which is incorporated by reference to the Short
Form of B/L17 provides:
17. The carrier shall not be required to give any notification whatsoever of arrival, discharge or any
disposition of or action taken with respect to the goods, even though the goods are consigned to order
with provision for notice to a named person.
The carrier or master may appoint a stevedore or any other persons to unload and take delivery of the
goods and such delivery from ship's tackle shall be considered complete and all responsibility of the
carrier shall then terminate.
It is agreed that when possession of the goods is received or taken by the customs or other authorities or
by any operator of any lighter, craft, or other facilities whether selected by the carrier or master, shipper
of consignee, whether public or private, such authority or person shall be considered as having received
possession and delivery of the goods solely as agent of and on behalf of the shipper and consignee,
. Also if the consignee does not take possession or delivery of the goods as soon as the goods
are at the disposal of the consignee for removal, the goods shall be at their own risk and expense,
delivery shall be considered complete and the carrier may, subject to carrier's liens, send the
goods to store, warehouse, put them on lighters or other craft, put them in possession of
authorities, dump, permit to lie where landed or otherwise dispose of them, always at the risk and
expense of the goods, and the shipper and consignee shall pay and indemnify the carrier for any loss,
damage, fine, charge or expense whatsoever suffered or incurred in so dealing with or disposing of the
goods, or by reason of the consignee's failure or delay in taking possession and delivery as provided
herein. (Emphasis Ours)
On the second issue raised, the Court finds as erroneous the trial courts decision, as affirmed by the CA,
for the recomputation of the judgment award as of the date of payment in accordance with Article 1250 of
the Civil Code.
In calling for the application of the aforementioned provision, respondent urged that judicial notice be
taken of the succeeding devaluations of the peso vis--vis the US dollar since the time the proceedings
began in 1981. According to respondent, the computation of the amount thus due from the petitioner
should factor in such peso devaluations.18
Article 1250 of the Civil Code states:
In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the
currency at the time of the establishment of the obligation shall be the basis of payment, unless there is
an agreement to the contrary.

Extraordinary inflation or deflation, as the case may be, exists when there is an unusual increase or
decrease in the purchasing power of the Philippine peso which is beyond the common fluctuation in the
value of said currency, and such increase or decrease could not have been reasonably foreseen or was
manifestly beyond the contemplation of the parties at the time of the establishment of the
obligation.19 Extraordinary inflation can never be assumed; he who alleges the existence of such
phenomenon must prove the same.20
The Court holds that there has been no extraordinary inflation within the meaning of Article 1250 of the
Civil Code. Accordingly, there is no plausible reason for ordering the payment of an obligation in an
amount different from what has been agreed upon because of the purported supervention of extraordinary
inflation.
As it were, respondent was unable to prove the occurrence of extraordinary inflation since it filed its
complaint in 1981. Indeed, the record is bereft of any evidence, documentary or testimonial, that inflation,
nay, an extraordinary one, existed. Even if the price index of goods and services may have risen during
the intervening period,21 this increase, without more, cannot be considered as resulting to "extraordinary
inflation" as to justify the application of Article 1250. The erosion of the value of the Philippine peso in the
past three or four decades, starting in the mid-sixties, is, as the Court observed in Singson vs. Caltex
(Phil), Inc., 22 characteristics of most currencies. And while the Court may take judicial notice of the
decline in the purchasing power of the Philippine currency in that span of time, such downward trend of
the peso cannot be considered as the extraordinary phenomenon contemplated by Article 1250 of the
Civil Code. Furthermore, absent an official pronouncement or declaration by competent authorities of the
existence of extraordinary inflation during a given period, as here, the effects of extraordinary inflation, if
that be the case, are not to be applied.
Lest it be overlooked, Article 1250 of the Code, as couched, clearly provides that the value of the peso at
the time of the establishment of the obligation shall control and be the basis of payment of the contractual
obligation, unless there is "agreement to the contrary." It is only when there is a contrary agreement that
extraordinary inflation will make the value of the currency at the time of payment, not at the time of the
establishment of obligation, the basis for payment. 23 The Court, in Mobil Oil Philippines, Inc. vs. Court of
Appeals and Fernando A. Pedrosa,[24formulated the same rule in the following wise:
In other words, an agreement is needed for the effects of an extraordinary inflation to be taken into
account to alter the value of the currency at the time of the establishment of the obligation which, as a
rule, is always the determinative element, to be varied by agreement that would find reason only in the
supervention of extraordinary inflation or deflation.
To be sure, neither the trial court, the CA nor respondent has pointed to any provision of the covering B/Ls
whence respondent sourced its contractual right under the premises where the defining "agreement to the
contrary" is set forth. Needless to stress, the Court sees no need to speculate as to the existence of such
agreement, the burden of proof on this regard being on respondent.
WHEREFORE, the assailed decision of the Court of Appeals is AFFIRMED with the MODIFICATION that
the order for recomputation as of the date of payment in accordance with the provisions of Article 1250 of
the Civil Code is deleted.
Costs against petitioner.
SO ORDERED.
CANCIO C. GARCIA
Associate Justice
WE CONCUR:

REYNATO S. PUNO
Associate Justice
Chairperson
ANGELINA SANDOVAL-GUTIERREZ
Associate Justice

(On leave)
RENATO C. CORONA*
Asscociate Justice

ADOLFO S. AZCUNA
Associate Justice
ATTE S TATI O N
I attest that the conclusions in the above decision were reached in consultation before the case was
assigned to the writer of the opinion of the Courts Division.
REYNATO S. PUNO
Associate Justice
Chairperson, Second Division
C E R TI F I CATI O N
Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairman's Attestation, it is
hereby certified that the conclusions in the above decision were reached in consultation before the case
was assigned to the writer of the opinion of the Court.
ARTEMIO V. PANGANIBAN
Chief Justice

Footnotes
*

On leave.

Penned by Associate Justice Arturo B. Buena, later appointed member of this Court (ret.), and
concurred in by Associate Justices Buenaventura J. Guerrero (ret.) and Portia AlinoHormachuelos; Rollo, pp. 30-36.
2

Rollo, pp. 59-68.

CA Decision; Rollo, pp. 30-31.

RTC Decision; Rollo, pp. 64-68.

See Note #1, supra.

Petition; Rollo, pp. 7-8.

Folder of Exhibits, Defendant Exhs. "1" - "7."

Petition; Rollo, p. 22.

Ibid., Exhs. "4," "5" & "7."

10

See paragraphs f, g & i of Respondents Reply to Paragraph 17 of the Amended Answer with
Compulsory Counterclaim filed with the RTC; Records, pp. 148-149.
11

Regalado, REMEDIAL LAW COMPENDIUM, Vol. 1, 1999 ed, p. 541, citing Com. of
Immigration vs. Garcia, L-28082, June 28, 1974.
12

Ibid., citing Pilar Dev. Corp. vs. IAC, et al., G.R. No. 72283, Dec. 12, 1986.

13

Salvador vs. Montecillo, 426 SCRA 433, 443 (2004).

14

Sunshine Finance & Investment Corp. vs. IAC, 203 SCRA 210 (1991).

15

Supra, pp. 34-35.

16

Plaintiff-Exh. "K."

17

Folder of Exhibits, Exh. "J"-Plaintiff.

18

Petitioners Manifestation before the trial court; Records, pp. 327-329.

19

Singson vs. Caltex (Phils.), Inc., 342 SCRA 91, 97 (2000); Huibonhoa vs. CA, 320 SCRA 625,
653 (1999);Hahn vs. CA, 173 SCRA 675, 680 (1989); Filipino Pipe & Foundry Corp. vs.
NAWASA, 161 SCRA 32, 35 (1988).
20

Ibid., p. 98; Sangrador vs. Valderrama, 168 SCRA 215, 229 (1988).

21

Sangrador vs. Valderrama, 168 SCRA 215, 228 (1998).

22

342 SCRA 91, 99 (2000); Lantion vs. NLRC, 181 SCRA 513, (1990); C.F. Sharp & Co., Inc. vs.
Northwest Airlines, Inc., 381 SCRA 314, 320 (2002), Mobil Oil Phils., Inc. vs. CA, 180 SCRA 651,
667 (1989).
23

Commissioner of Public Highways vs. Burgos, 96 SCRA 831, 837 (1980).

24

180 SCRA 651, 667 (1989).

G.R. No. 171545

December 19, 2007

EQUITABLE PCI BANK,* AIMEE YU and BEJAN LIONEL APAS, Petitioners,


vs.
NG SHEUNG NGOR** doing business under the name and style "KEN MARKETING," KEN
APPLIANCE DIVISION, INC. and BENJAMIN E. GO, Respondents.
DECISION
CORONA, J.:

This petition for review on certiorari1 seeks to set aside the decision2 of the Court of Appeals (CA) in CAG.R. SP No. 83112 and its resolution3 denying reconsideration.
On October 7, 2001, respondents Ng Sheung Ngor,4 Ken Appliance Division, Inc. and Benjamin E. Go
filed an action for annulment and/or reformation of documents and contracts 5 against petitioner Equitable
PCI Bank (Equitable) and its employees, Aimee Yu and Bejan Lionel Apas, in the Regional Trial Court
(RTC), Branch 16 of Cebu City.6 They claimed that Equitable induced them to avail of its peso and dollar
credit facilities by offering low interest rates7 so they accepted Equitable's proposal and signed the bank's
pre-printed promissory notes on various dates beginning 1996. They, however, were unaware that the
documents contained identical escalation clauses granting Equitable authority to increase interest rates
without their consent.8
Equitable, in its answer, asserted that respondents knowingly accepted all the terms and conditions
contained in the promissory notes.9 In fact, they continuously availed of and benefited from Equitable's
credit facilities for five years.10
After trial, the RTC upheld the validity of the promissory notes. It found that, in 2001 alone, Equitable
restructured respondents' loans amounting to US$228,200 and P1,000,000.11 The trial court, however,
invalidated the escalation clause contained therein because it violated the principle of mutuality of
contracts.12 Nevertheless, it took judicial notice of the steep depreciation of the peso during the
intervening period13 and declared the existence of extraordinary deflation. 14 Consequently, the RTC
ordered the use of the 1996 dollar exchange rate in computing respondents' dollar-denominated
loans.15 Lastly, because the business reputation of respondents was (allegedly) severely damaged when
Equitable froze their accounts,16 the trial court awarded moral and exemplary damages to them. 17
The dispositive portion of the February 5, 2004 RTC decision 18 provided:
WHEREFORE, premises considered, judgment is hereby rendered:
A) Ordering [Equitable] to reinstate and return the amount of [respondents'] deposit placed on
hold status;
B) Ordering [Equitable] to pay [respondents] the sum of P12 [m]illion [p]esos as moral damages;
C) Ordering [Equitable] to pay [respondents] the sum of P10 [m]illion [p]esos as exemplary
damages;
D) Ordering defendants Aimee Yu and Bejan [Lionel] Apas to pay [respondents], jointly and
severally, the sum of [t]wo [m]illion [p]esos as moral and exemplary damages;
E) Ordering [Equitable, Aimee Yu and Bejan Lionel Apas], jointly and severally, to pay
[respondents'] attorney's fees in the sum of P300,000; litigation expenses in the sum of P50,000
and the cost of suit;
F) Directing plaintiffs Ng Sheung Ngor and Ken Marketing to pay [Equitable] the unpaid principal
obligation for the peso loan as well as the unpaid obligation for the dollar denominated loan;
G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to pay [Equitable] interest as follows:
1) 12% per annum for the peso loans;

2) 8% per annum for the dollar loans. The basis for the payment of the dollar obligation is
the conversion rate of P26.50 per dollar availed of at the time of incurring of the obligation
in accordance with Article 1250 of the Civil Code of the Philippines;
H) Dismissing [Equitable's] counterclaim except the payment of the aforestated unpaid principal
loan obligations and interest.
SO ORDERED.19
Equitable and respondents filed their respective notices of appeal. 20
In the March 1, 2004 order of the RTC, both notices were denied due course because Equitable and
respondents "failed to submit proof that they paid their respective appeal fees." 21
WHEREFORE, premises considered, the appeal interposed by defendants from the Decision in the
above-entitled case is DENIED due course. As of February 27, 2004, the Decision dated February 5,
2004, is considered final and executory in so far as [Equitable, Aimee Yu and Bejan Lionel
Apas] are concerned.22 (emphasis supplied)
Equitable moved for the reconsideration of the March 1, 2004 order of the RTC 23 on the ground that it did
in fact pay the appeal fees. Respondents, on the other hand, prayed for the issuance of a writ of
execution.24
On March 24, 2004, the RTC issued an omnibus order denying Equitable's motion for reconsideration for
lack of merit25 and ordered the issuance of a writ of execution in favor of respondents. 26 According to the
RTC, because respondents did not move for the reconsideration of the previous order (denying due
course to the parties notices of appeal),27 the February 5, 2004 decision became final and executory as to
both parties and a writ of execution against Equitable was in order.28
A writ of execution was thereafter issued29 and three real properties of Equitable were levied upon. 30
On March 26, 2004, Equitable filed a petition for relief in the RTC from the March 1, 2004 order.31 It,
however, withdrew that petition on March 30, 2004 32 and instead filed a petition for certiorari with an
application for an injunction in the CA to enjoin the implementation and execution of the March 24, 2004
omnibus order.33
On June 16, 2004, the CA granted Equitable's application for injunction. A writ of preliminary injunction
was correspondingly issued.34
Notwithstanding the writ of injunction, the properties of Equitable previously levied upon were sold in a
public auction on July 1, 2004. Respondents were the highest bidders and certificates of sale were issued
to them.35
On August 10, 2004, Equitable moved to annul the July 1, 2004 auction sale and to cite the sheriffs who
conducted the sale in contempt for proceeding with the auction despite the injunction order of the CA. 36
On October 28, 2005, the CA dismissed the petition for certiorari. 37 It found Equitable guilty of forum
shopping because the bank filed its petition for certiorari in the CA several hours before withdrawing its
petition for relief in the RTC.38 Moreover, Equitable failed to disclose, both in the statement of material
dates and certificate of non-forum shopping (attached to its petition for certiorari in the CA), that it had a
pending petition for relief in the RTC.39
Equitable moved for reconsideration40 but it was denied.41 Thus, this petition.

Equitable asserts that it was not guilty of forum shopping because the petition for relief was withdrawn on
the same day the petition for certiorari was filed.42 It likewise avers that its petition for certiorari was
meritorious because the RTC committed grave abuse of discretion in issuing the March 24, 2004 omnibus
order which was based on an erroneous assumption. The March 1, 2004 order denying its notice of
appeal for non payment of appeal fees was erroneous because it had in fact paid the required
fees.43 Thus, the RTC, by issuing its March 24, 2004 omnibus order, effectively prevented Equitable from
appealing the patently wrong February 5, 2004 decision.44
This petition is meritorious.
Equitable Was Not Guilty Of Forum shopping
Forum shopping exists when two or more actions involving the same transactions, essential facts and
circumstances are filed and those actions raise identical issues, subject matter and causes of
action.45 The test is whether, in two or more pending cases, there is identity of parties, rights or causes of
actions and reliefs.46
Equitable's petition for relief in the RTC and its petition for certiorari in the CA did not have identical
causes of action. The petition for relief from the denial of its notice of appeal was based on the RTCs
judgment or final order preventing it from taking an appeal by "fraud, accident, mistake or excusable
negligence."47 On the other hand, its petition for certiorari in the CA, a special civil action, sought to
correct the grave abuse of discretion amounting to lack of jurisdiction committed by the RTC. 48
In a petition for relief, the judgment or final order is rendered by a court with competent jurisdiction. In a
petition for certiorari, the order is rendered by a court without or in excess of its jurisdiction.
Moreover, Equitable substantially complied with the rule on non-forum shopping when it moved to
withdraw its petition for relief in the RTC on the same day (in fact just four hours and forty minutes after) it
filed the petition for certiorari in the CA. Even if Equitable failed to disclose that it had a pending petition
for relief in the RTC, it rectified what was doubtlessly a careless oversight by withdrawing the petition for
relief just a few hours after it filed its petition for certiorari in the CA a clear indication that it had no
intention of maintaining the two actions at the same time.
The Trial Court Committed Grave Abuse of Discretion In Issuing Its March 1, 2004 and March 24,
2004 Orders
Section 1, Rule 65 of the Rules of Court provides:
Section 1. Petition for Certiorari. When any tribunal, board or officer exercising judicial or quasijudicial function has acted without or in excess of its or his jurisdiction, or with grave abuse of
discretion amounting to lack or excess of jurisdiction, and there is no appeal, nor any plain,
speedy or adequate remedy in the ordinary course of law, a person aggrieved thereby may file a
verified petition in the proper court, alleging the facts with certainty and praying that judgment be rendered
annulling or modifying the proceedings of such tribunal, board or officer, and granting such incidental
reliefs as law and justice may require.
The petition shall be accompanied by a certified true copy of the judgment, order or resolution subject
thereof, copies of all pleadings and documents relevant and pertinent thereto, and a sworn certificate of
non-forum shopping as provided in the third paragraph of Section 3, Rule 46.
There are two substantial requirements in a petition for certiorari. These are:

1. that the tribunal, board or officer exercising judicial or quasi-judicial functions acted without or
in excess of his or its jurisdiction or with grave abuse of discretion amounting to lack or excess of
jurisdiction; and
2. that there is no appeal or any plain, speedy and adequate remedy in the ordinary course of
law.
For a petition for certiorari premised on grave abuse of discretion to prosper, petitioner must show that the
public respondent patently and grossly abused his discretion and that abuse amounted to an evasion of
positive duty or a virtual refusal to perform a duty enjoined by law or to act at all in contemplation of law,
as where the power was exercised in an arbitrary and despotic manner by reason of passion or hostility.49
The March 1, 2004 order denied due course to the notices of appeal of both Equitable and respondents.
However, it declared that the February 5, 2004 decision was final and executory only with respect to
Equitable.50 As expected, the March 24, 2004 omnibus order denied Equitable's motion for
reconsideration and granted respondents' motion for the issuance of a writ of execution.51
The March 1, 2004 and March 24, 2004 orders of the RTC were obviously intended to prevent Equitable,
et al. from appealing the February 5, 2004 decision. Not only that. The execution of the decision was
undertaken with indecent haste, effectively obviating or defeating Equitable's right to avail of possible
legal remedies. No matter how we look at it, the RTC committed grave abuse of discretion in rendering
those orders.
With regard to whether Equitable had a plain, speedy and adequate remedy in the ordinary course of law,
we hold that there was none. The RTC denied due course to its notice of appeal in the March 1, 2004
order. It affirmed that denial in the March 24, 2004 omnibus order. Hence, there was no way Equitable
could have possibly appealed the February 5, 2004 decision. 52
Although Equitable filed a petition for relief from the March 24, 2004 order, that petition was not a plain,
speedy and adequate remedy in the ordinary course of law.53 A petition for relief under Rule 38 is an
equitable remedy allowed only in exceptional circumstances or where there is no other available or
adequate remedy.54
Thus, we grant Equitable's petition for certiorari and consequently give due course to its appeal.
Equitable Raised Pure Questions of Law in Its Petition For Review
The jurisdiction of this Court in Rule 45 petitions is limited to questions of law.55 There is a question of law
"when the doubt or controversy concerns the correct application of law or jurisprudence to a certain set of
facts; or when the issue does not call for the probative value of the evidence presented, the truth or
falsehood of facts being admitted."56
Equitable does not assail the factual findings of the trial court. Its arguments essentially focus on the
nullity of the RTCs February 5, 2004 decision. Equitable points out that that decision was patently
erroneous, specially the exorbitant award of damages, as it was inconsistent with existing law and
jurisprudence.57
The Promissory Notes Were Valid
The RTC upheld the validity of the promissory notes despite respondents assertion that those documents
were contracts of adhesion.

A contract of adhesion is a contract whereby almost all of its provisions are drafted by one party.58 The
participation of the other party is limited to affixing his signature or his "adhesion" to the contract. 59 For this
reason, contracts of adhesion are strictly construed against the party who drafted it. 60
It is erroneous, however, to conclude that contracts of adhesion are invalid per se. They are, on the
contrary, as binding as ordinary contracts. A party is in reality free to accept or reject it. A contract of
adhesion becomes void only when the dominant party takes advantage of the weakness of the other
party, completely depriving the latter of the opportunity to bargain on equal footing. 61
That was not the case here. As the trial court noted, if the terms and conditions offered by Equitable had
been truly prejudicial to respondents, they would have walked out and negotiated with another bank at the
first available instance. But they did not. Instead, they continuously availed of Equitable's credit facilities
for five long years.
While the RTC categorically found that respondents had outstanding dollar- and peso-denominated loans
with Equitable, it, however, failed to ascertain the total amount due (principal, interest and penalties, if
any) as of July 9, 2001. The trial court did not explain how it arrived at the amounts of US$228,200
and P1,000,000.62 In Metro Manila Transit Corporation v. D.M. Consunji, 63 we reiterated that this Court is
not a trier of facts and it shall pass upon them only for compelling reasons which unfortunately are not
present in this case.64 Hence, we ordered the partial remand of the case for the sole purpose of
determining the amount of actual damages.65
Escalation Clause Violated The Principle Of Mutuality Of Contracts
Escalation clauses are not void per se. However, one "which grants the creditor an unbridled right to
adjust the interest independently and upwardly, completely depriving the debtor of the right to assent to
an important modification in the agreement" is void. Clauses of that nature violate the principle of
mutuality of contracts.66 Article 130867 of the Civil Code holds that a contract must bind both contracting
parties; its validity or compliance cannot be left to the will of one of them. 68
For this reason, we have consistently held that a valid escalation clause provides:
1. that the rate of interest will only be increased if the applicable maximum rate of interest is increased by
law or by the Monetary Board; and
2. that the stipulated rate of interest will be reduced if the applicable maximum rate of interest is reduced
by law or by the Monetary Board (de-escalation clause).69
The RTC found that Equitable's promissory notes uniformly stated:
If subject promissory note is extended, the interest for subsequent extensions shall be at such rate as
shall be determined by the bank.70
Equitable dictated the interest rates if the term (or period for repayment) of the loan was extended.
Respondents had no choice but to accept them. This was a violation of Article 1308 of the Civil Code.
Furthermore, the assailed escalation clause did not contain the necessary provisions for validity, that is, it
neither provided that the rate of interest would be increased only if allowed by law or the Monetary Board,
nor allowed de-escalation. For these reasons, the escalation clause was void.
With regard to the proper rate of interest, in New Sampaguita Builders v. Philippine National Bank71 we
held that, because the escalation clause was annulled, the principal amount of the loan was subject to the
original or stipulated rate of interest. Upon maturity, the amount due was subject to legal interest at the
rate of 12% per annum.72

Consequently, respondents should pay Equitable the interest rates of 12.66% p.a. for their dollardenominated loans and 20% p.a. for their peso-denominated loans from January 10, 2001 to July 9,
2001. Thereafter, Equitable was entitled to legal interest of 12% p.a. on all amounts due.
There Was No Extraordinary Deflation
Extraordinary inflation exists when there is an unusual decrease in the purchasing power of currency (that
is, beyond the common fluctuation in the value of currency) and such decrease could not be reasonably
foreseen or was manifestly beyond the contemplation of the parties at the time of the obligation.
Extraordinary deflation, on the other hand, involves an inverse situation. 73
Article 1250 of the Civil Code provides:
Article 1250. In case an extraordinary inflation or deflation of the currency stipulated should intervene, the
value of the currency at the time of the establishment of the obligation shall be the basis of payment,
unless there is an agreement to the contrary.
For extraordinary inflation (or deflation) to affect an obligation, the following requisites must be proven:
1. that there was an official declaration of extraordinary inflation or deflation from the Bangko
Sentral ng Pilipinas (BSP);74
2. that the obligation was contractual in nature; 75 and
3. that the parties expressly agreed to consider the effects of the extraordinary inflation or
deflation.76
Despite the devaluation of the peso, the BSP never declared a situation of extraordinary inflation.
Moreover, although the obligation in this instance arose out of a contract, the parties did not agree to
recognize the effects of extraordinary inflation (or deflation). 77 The RTC never mentioned that there was a
such stipulation either in the promissory note or loan agreement. Therefore, respondents should pay their
dollar-denominated loans at the exchange rate fixed by the BSP on the date of maturity.78
The Award Of Moral And Exemplary Damages Lacked Basis
Moral damages are in the category of an award designed to compensate the claimant for actual injury
suffered, not to impose a penalty to the wrongdoer.79 To be entitled to moral damages, a claimant must
prove:
1. That he or she suffered besmirched reputation, or physical, mental or psychological suffering
sustained by the claimant;
2. That the defendant committed a wrongful act or omission;
3. That the wrongful act or omission was the proximate cause of the damages the claimant
sustained;
4. The case is predicated on any of the instances expressed or envisioned by Article 2219 80 and
222081 . 82

In culpa contractual or breach of contract, moral damages are recoverable only if the defendant acted
fraudulently or in bad faith or in wanton disregard of his contractual obligations. 83 The breach must be
wanton, reckless, malicious or in bad faith, and oppressive or abusive. 84
The RTC found that respondents did not pay Equitable the interest due on February 9, 2001 (or any
month thereafter prior to the maturity of the loan) 85 or the amount due (principal plus interest) due on July
9, 2001.86Consequently, Equitable applied respondents' deposits to their loans upon maturity.
The relationship between a bank and its depositor is that of creditor and debtor.87 For this reason, a bank
has the right to set-off the deposits in its hands for the payment of a depositor's indebtedness. 88
Respondents indeed defaulted on their obligation. For this reason, Equitable had the option to exercise its
legal right to set-off or compensation. However, the RTC mistakenly (or, as it now appears, deliberately)
concluded that Equitable acted "fraudulently or in bad faith or in wanton disregard" of its contractual
obligations despite the absence of proof. The undeniable fact was that, whatever damage respondents
sustained was purely the consequence of their failure to pay their loans. There was therefore
absolutely no basis for the award of moral damages to them.
Neither was there reason to award exemplary damages. Since respondents were not entitled to moral
damages, neither should they be awarded exemplary damages. 89 And if respondents were not entitled to
moral and exemplary damages, neither could they be awarded attorney's fees and litigation expenses. 90
ACCORDINGLY, the petition is hereby GRANTED.
The October 28, 2005 decision and February 3, 2006 resolution of the Court of Appeals in CA-G.R. SP
No. 83112 are hereby REVERSED and SET ASIDE.
The March 24, 2004 omnibus order of the Regional Trial Court, Branch 16, Cebu City in Civil Case No.
CEB-26983 is hereby ANNULLED for being rendered with grave abuse of discretion amounting to lack or
excess of jurisdiction. All proceedings undertaken pursuant thereto are likewise declared null and void.
The March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu City in Civil Case No. CEB26983 is herebySET ASIDE. The appeal of petitioners Equitable PCI Bank, Aimee Yu and Bejan Lionel
Apas is therefore given due course.1avvphi1
The February 5, 2004 decision of the Regional Trial Court, Branch 16 of Cebu City in Civil Case No. CEB26983 is accordingly SET ASIDE. New judgment is hereby entered:
1. ordering respondents Ng Sheung Ngor, doing business under the name and style of "Ken
Marketing," Ken Appliance Division, Inc. and Benjamin E. Go to pay petitioner Equitable PCI Bank
the principal amount of their dollar- and peso-denominated loans;
2. ordering respondents Ng Sheung Ngor, doing business under the name and style of "Ken
Marketing," Ken Appliance Division, Inc. and Benjamin E. Go to pay petitioner Equitable PCI Bank
interest at:
a) 12.66% p.a. with respect to their dollar-denominated loans from January 10, 2001 to
July 9, 2001;
b) 20% p.a. with respect to their peso-denominated loans from January 10, 2001 to July
9, 2001;91

c) pursuant to our ruling in Eastern Shipping Lines v. Court of Appeals,92 the total amount
due on July 9, 2001 shall earn legal interest at 12% p.a. from the time petitioner Equitable
PCI Bank demanded payment, whether judicially or extra-judicially; and
d) after this Decision becomes final and executory, the applicable rate shall be 12%
p.a. until full satisfaction;
3. all other claims and counterclaims are dismissed.
As a starting point, the Regional Trial Court, Branch 16 of Cebu City shall compute the exact amounts due
on the respective dollar-denominated and peso-denominated loans, as of July 9, 2001, of respondents Ng
Sheung Ngor, doing business under the name and style of "Ken Marketing," Ken Appliance Division and
Benjamin E. Go.
SO ORDERED.
RENATO C. CORONA
Associate Justice
WE CONCUR:
REYNATO S. PUNO
Chief Justice
Chairperson
ANGELINA SANDOVAL-GUTIERREZ
Associate Justice

ADOLFO S. AZCUNA
Associate Justice

TERESITA J. LEONARDO-DE CASTRO


Associate Justice
C E R TI F I CATI O N
Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above decision
had been reached in consultation before the case was assigned to the writer of the opinion of the Courts
Division.
REYNATO S. PUNO
Chief Justice

Footnotes
*

Now, Banco De Oro Unibank.

**

Also referred to as Ng Seung Ngor in the records.

Under Rule 45 of the Rules of Court.

Penned by Associate Justice Mercedes Gozo-Dadole (retired) and concurred in by Associate


Justices Pampio A. Abarintos and Enrico A. Lanzanas of the Eighteenth Division of the Court of
Appeals. Dated October 28, 2005. Rollo, pp. 88-111.
3

Penned by Associate Justice Enrico A. Lanzanas and concurred in by Associate Justices Isaias
P. Dicdican and Pampio A. Abarintos of the Special Former Eighteenth Division of the Court of
Appeals. Dated February 3, 2006. Id., pp. 112-115.
4

Doing business in the name and style of "Ken Marketing."

Docketed as Civil Case No. CEB-26983. Rollo, pp. 115-143.

Id., pp. 116-117, 177.

The interest rate initially offered by Equitable was 12.75% p.a. for dollar-denominated loans. Id.,
p. 187.
8

Id., p. 118.

Id., pp. 155-175.

10

Id.

11

Id., pp. 180, 183. SCHEDULE OF LOANS:


Respondents' submission
Principal Interest Date Availed Date of Maturity Amount Due
US$223,000 12.66%, p.a. 10 January 2001 9 July 2001 (total=)
36,700 12.66%, p.a. 10 January 2001 9 July 2001 US$232,248.00
P995,000 20%, p.a. 10 January 2001 9 July 2001 P1,081,703.14
Equitable's submission
Principal Interest Date Availed Date of Maturity Amount due
US$184,000 12.66%, p.a. 10 January 2001 9 July 2001 US$207,771.78
37,700 12.66%, p.a. 10 January 2001 9 July 2001 41,441.44
P1,050,000 20%, p.a. 10 January 2001 9 July 2001 P1,166,193.34
Note:
1. Equitable and respondents agreed neither as to the amount of the principal nor
as to the amount due.

2. The RTC concluded that the rates of interest stated in the promissory notes
were only applicable for 30 days (or from January 10, 2001 to February 9, 2001).
Thereafter(or every 30 days until the loan matures), Equitable may change the
rates if it so desired without the prior notice to respondents.
3. Interest due must be paid every month beginning February 9, 2001 until
maturity.
4. The findings of the trial court, with regard to the amount of respondents'
obligation to Equitable, agreed neither with the submission of Equitable nor with
that of respondents. The RTC made its own finding as to the amount of
respondent's obligation to Equitable but did not explain how it arrived at the
figures. It merely stated:
"The evidence adduced during trial show [respondents] received the proceeds of peso
and dollar loans from defendant bank as follows: (a) US$228,200 in four (4) different
availments and the (b) principal amount of P1,000,000. xxx"
12

Id., pp. 185-186.

13

Id. The RTC took judicial notice of the fact that the exchange rate in 1996 was US$1 = P26.50
while in 2001, it was US$1 = P55. Because the cost of purchasing dollar increased by 200% over
the relatively short period of six years, it concluded that there was extraordinary inflation.
14

Id.

15

Id., p. 190.

16

Id., pp. 188-189.

17

Id.

18

Penned by Judge Agapito L. Hontanosas, Jr. (dismissed from the service per resolution in J.
King and Sons Company, Inc. v. Judge Agapito L. Hontanosas, Jr., A.M. No. RTJ-03-1802, 21
September 2004, 438 SCRA 525). Id., pp. 177-190.
19

Id., pp. 189-190.

20

Id., pp. 191-193.

21

Id., p. 194.

22

Id.

23

Id., pp. 195-202. Equitable attached proof that it paid the appeal fees.

24

Id., pp. 203-204.

25

Id., p. 206.

26

Id., pp. 205-207.

27

Id., p. 205.

28

Id., p. 207.

29

Id., pp. 208-210.

30

Id., p. 218. Covered by TCT No. 124096, TCT No. 118031 and tax declarations GR2K-06-03800391 and GRK-06-038-00392.
31

Id., pp. 272-276.


See Rules of Court, Rule 38, Sec. 2. The section provides:
Sec. 2. Petition for relief from denial of appeal.-- When a judgment or final order is
rendered by any court in a case, and a party thereto, by fraud, accident, mistake or
excusable negligence, has been prevented from taking an appeal, he may file a petition
in such court and in the same case praying that the appeal be given due course.

32

Id., pp. 279-281.

33

Docketed as CA-G.R. SP No. 83112. Id., p. 221.

34

Penned by Associate Justice Estela M. Perlas-Bernabe and concurred in by Associate Justices


Monina Arevalo-Zenarosa and Vicente I. Yap (retired) of the Special Eighteenth Division of the
Court of Appeals. Dated June 16, 2004. Id., pp. 221-223.
35

Id., pp. 226-231.

36

Id., pp. 232-240.

37

Supra note 2.

38

Id., pp. 106-110. The petition for certiorari was filed in the CA on March 30, 2004 at 9 a.m.
while the motion to withdraw the petition for relief in the RTC was filed also on March 30,
2004 at 1:40 p.m.
39

Id.

40

Id., pp. 248-271.

41

Supra note 3.

42

Id., p. 38.

43

Id., p. 55.

44

Id., pp. 62-68.

45

Ligon v. Court of Appeals, G.R. No. 127683, 7 August 1998, 294 SCRA 73, 88.

46

Id.

47

Supra note 31.

48

Florenz B. Regalado, 2 Remedial Law Compendium 18th ed., 716 citing Matute v. Macadaeg,
et al., 99 Phil. 340 (1956) and de Gala-Sison v. Maddela, et al., 160-B Phil. 626 (1975).
49

See Aggabao v. Commission on Elections, G.R. No. 163756, 26 January 2005, 449 SCRA
400. See also Zarate v. Maybank, G.R. No. 160976, 8 June 2005, 459 SCRA 785. See also
Agustin v. Court of Appeals,G.R. No. 162571, 15 June 2005, 460 SCRA 315.
50

Rollo, p. 194.

51

Id., pp. 225-231.

52

See Rules of Court, Rule 41, Sec. 2. The section provides:


Section 2. Modes of appeal.-(a) Ordinary appeal.-- The appeal to the Court of Appeals in cases decided by the
Regional Trial Court in the exercise of its original jurisdiction shall be taken by
filing a notice of appeal with the court which rendered the judgment or final order
appealed from and serving a copy thereof upon the adverse party. No record on
appeal shall be required except in special proceedings and other cases of multiple or
separate appeals where the law or these Rules so require. In such cases, the record on
appeal shall be filed and served in the like manner.
(b) Petition for review.-- The appeal to the Court of Appeals in cases decided by the
Regional Trial Court in exercise of its appellate jurisdiction shall be by petition for review
in accordance with Rule 42.
(c) Appeal by certiorari.-- In all cases where only questions of law are raised or involved
the appeal shall be to the Supreme Court by petition for review on certiorari in
accordance with Rule 45. (emphasis supplied)

53

Supra note 48 at 400 citing Palmares, et al. v. Jimenez, et al., 90 Phil. 773. (1952).

54

Tuason v. Court of Appeals, G.R. No. 116607, 10 April 1996, 256 SCRA 158, 167. See also
Cerezo v. Tuazon, G.R. No. 141538, 23 March 2004, 426 SCRA 167, 183. See also Azucena v.
Foreign Manpower Services, G.R. No. 147955, 25 October 2004, 441 SCRA 346, 354-355.
55

Supra note 52 and Usero v. Court of Appeals, G.R. Nos. 152112 and 155055, 26 January 2005,
449 SCRA 352, 358.
56

Bukidnon Doctor's Hospital v. Metropolitan Bank and Trust Company, G.R. No. 161882, 8 July
2005, 463 SCRA 222, 233.
57

Rollo, pp. 46-50.

58

Citibank, N.A. v. Sabeniano, G.R. No. 156132, 6 February 2007.

59

Id.

60

Id.

61

Perez v. Development Bank of the Philippines, G.R. No. 148541, 11 November 2004, 442
SCRA 238, 249-250 citing Rizal Commercial Banking Corporation v. Court of Appeals, G.R. No.
127139, 19 February 1999, 303 SCRA 449, 454.
62

Supra note 11.

63

G.R. No. 147594, 7 March 2007.

64

Id.

65

Id.

66

See New Sampaguita Builders Construction, Inc. v. Philippine National Bank, G.R. No. 148753,
30 July 2004, 435 SCRA 565, 581 citing Philippine National Bank v. Court of Appeals, 328 Phil.
54, 62-63 (1996).
67

Art. 1308. The contracts must bind both contracting parties; its validity or compliance cannot be
left to the will of one of them.
68

Jose B.L. Reyes and Ricardo C. Puno, 4 An Outline of Philippine Civil Law 1957 ed., p. 178.

69

Llorin v. Court of Appeals, G.R. No. 103592, 4 February 1993, 218 SCRA 438, 442.

70

Rollo, p. 147.

71

Supra note 66.

72

Id., pp. 608-609.

73

Sangrador v. Valderrama, G.R. No. 58122, 29 December 1989, 168 SCRA 215, 228 citing
Filipino Pipe and Foundry Corporation v. National Waterworks and Sewage Authority, G.R. No. L43446, 3 May 1988.
74

Citibank v. Sabeniano, supra note 58. See also Mobil Oil Philippines v. Court of Appeals, G.R.
No. 58122, 29 December 1989, 180 SCRA 651, 667.
75

Extraordinary inflation or deflation does not affect obligations which arise from sources other
than contracts. See Velasco v. Manila Electric Company, 149 Phil. 657 (1971).
See Civil Code, Art. 1157. The article provides:
Art. 1157. Obligations arise from:
1. Law;
2. Contracts;
3. Quasi-contracts;
4. Acts or omission punished by law; and

5. Quasi-delicts.
76

Commissioner of Public Highway v. Burgos, G.R. No. L-36706, 31 March 1980, 96 SCRA 831,
837.
77

The requisites for Article 1250 apply to both extraordinary inflation and deflation. This case
involved extraordinary inflation because, as RTC Judge Hontanosas noted, the peso substantially
depreciated during the intervening period.
For Article 1250 to apply, not only must the obligation be contractual, the parties must
more importantly agree to recognize the effects of extraordinary inflation (or deflation, as
the case may be). Here, despite the fact that the obligation was contractual (i.e., a loan),
neither the loan agreement nor the promissory notes contained a provision stating that
the parties agreed to recognize the effects of extraordinary inflation or deflation. For this
reason, Article 1250 was inapplicable.
78

Bank of the Philippine Islands v. Leobrera, G.R. Nos. 137147-48, 18 November 2003, 416
SCRA 15, 19citing C.F. Sharp & Co. v. Northwest Airlines, Inc., G.R. No. 133498, 18 April 2002,
381 SCRA 314. See also Jammang v. Takahashi, G.R. No. 149429, 9 October 2006, 504 SCRA
31, 36. Note that Equitable did not present proof that respondents agreed to pay their dollardenominated loans in US dollars.
79

Supercars Management & Development Corporation v. Flores, G.R. No. 148173, 10 December
2004, 446 SCRA 34, 44.
See Civil Code, Art. 2217. The article provides:
Art. 2217. Moral damages include physical suffering, mental anguish, fright, serious
anxiety,besmirched reputation, wounded feelings, moral shock, social humiliation,
and similar injury.Though incapable of pecuniary estimation, moral damages may be
recovered if they are the proximate result of the defendant's wrongful act or
omission. (emphasis supplied)
80

Art. 2219. Moral damages may be recovered in the following and analogous cases:
1. A criminal offense resulting in physical injury;
2. Quasi-delict causing physical injuries;
3. Seduction, abduction, rape or other lascivious acts;
4. Adultery or concubinage;
5. Illegal or arbitrary detention or arrest;
6. Illegal search;
7. Libel, slander or any other form of defamation;
8. Malicious prosecution;
9. Acts mentioned in Art. 309;

10. Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
The parents of the female seduced, abducted, raped or abused, referred to in No. 3 of
this article, may also recover moral damages.
The spouse, descendants, ascendants, brothers and sisters may bring the action
mentioned in No. 9 of this article, in the order named.
81

Art. 2220. Willful injury to property may be a legal ground for awarding moral damages if the
court should find that, under the circumstances, such damages are justly due. The same rule
applies to breaches of contract where the defendant acted fraudulently or in bad
faith. (emphasis supplied)
82

Philippine National Bank v. Pike, G.R. No. 157845, 20 September 2005, 470 SCRA 328, 349350 citing Philippine Telegraph & Telephone Corporation v. Court of Appeals, G.R. No. 139268, 3
September 2002, 388 SCRA 270.
83

Id.

84

Id. citing Herbosa v. Court of Appeals, G.R. No. 119086, 25 January 2002, 374 SCRA 578. See
also Salvador v. Court of Appeals, G.R. No. 124899, 30 March 2004, 426 SCRA 433.
85

Supra note 11.

86

Id.

87

Gullas v. National Bank, 62 Phil. 519, 521 (1935) citing Fulton Iron Works Co. v. China Banking
Corporation, 55 Phil. 208 (1930) and San Carlos Milling Co. v. Bank of the Philippine Islands and
China Banking Corporation, 59 Phil. 59 (1933).
88

Id., pp. 521-522.

89

Mahinay v. Velasquez, Jr., G.R. No. 152753, 13 January 2004, 419 SCRA 118, 122.

90

Supercars Management & Development Corporation v. Flores, supra note 79 at 44.

91

While this case involved extraordinary inflation because of the substantial depreciation of the
peso during the intervening period, Article 1250 of the Civil Code was inapplicable. For Article
1250 to apply, not only must the obligation be contractual, the parties must, more importantly,
agree to recognize the effects of extraordinary inflation (or deflation, as the case may be). Here,
despite the contractual obligation (i.e., a loan), neither the loan agreement nor the promissory
notes contained a provision stating that the parties agreed to recognize the effects of
extraordinary inflation or deflation. (See note 77.)
92

G.R. No. 97412, 12 July 1994, 234 SCRA 74, 95.

G.R. No. 150806

January 28, 2008

EUFEMIA ALMEDA and ROMEL ALMEDA, petitioners,


vs.
BATHALA MARKETING INDUSTRIES, INC., respondent.

DECISION
NACHURA, J.:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, of the Decision 1 of the
Court of Appeals (CA), dated September 3, 2001, in CA-G.R. CV No. 67784, and its Resolution 2 dated
November 19, 2001. The assailed Decision affirmed with modification the Decision 3 of the Regional Trial
Court (RTC), Makati City, Branch 136, dated May 9, 2000 in Civil Case No. 98-411.
Sometime in May 1997, respondent Bathala Marketing Industries, Inc., as lessee, represented by its
president Ramon H. Garcia, renewed its Contract of Lease 4 with Ponciano L. Almeda (Ponciano), as
lessor, husband of petitioner Eufemia and father of petitioner Romel Almeda. Under the said contract,
Ponciano agreed to lease a portion of the Almeda Compound, located at 2208 Pasong Tamo Street,
Makati City, consisting of 7,348.25 square meters, for a monthly rental of P1,107,348.69, for a term of four
(4) years from May 1, 1997 unless sooner terminated as provided in the contract. 5 The contract of lease
contained the following pertinent provisions which gave rise to the instant case:
SIXTH - It is expressly understood by the parties hereto that the rental rate stipulated is based on
the present rate of assessment on the property, and that in case the assessment should hereafter
be increased or any new tax, charge or burden be imposed by authorities on the lot and building
where the leased premises are located, LESSEE shall pay, when the rental herein provided
becomes due, the additional rental or charge corresponding to the portion hereby leased;
provided, however, that in the event that the present assessment or tax on said property should
be reduced, LESSEE shall be entitled to reduction in the stipulated rental, likewise in proportion
to the portion leased by him;
SEVENTH - In case an extraordinary inflation or devaluation of Philippine Currency should
supervene, the value of Philippine peso at the time of the establishment of the obligation shall be
the basis of payment;6
During the effectivity of the contract, Ponciano died. Thereafter, respondent dealt with petitioners. In a
letter7 dated December 29, 1997, petitioners advised respondent that the former shall assess and collect
Value Added Tax (VAT) on its monthly rentals. In response, respondent contended that VAT may not be
imposed as the rentals fixed in the contract of lease were supposed to include the VAT therein,
considering that their contract was executed on May 1, 1997 when the VAT law had long been in effect. 8
On January 26, 1998, respondent received another letter from petitioners informing the former that its
monthly rental should be increased by 73% pursuant to condition No. 7 of the contract and Article 1250 of
the Civil Code. Respondent opposed petitioners' demand and insisted that there was no extraordinary
inflation to warrant the application of Article 1250 in light of the pronouncement of this Court in various
cases.9
Respondent refused to pay the VAT and adjusted rentals as demanded by petitioners but continued to
pay the stipulated amount set forth in their contract.
On February 18, 1998, respondent instituted an action for declaratory relief for purposes of determining
the correct interpretation of condition Nos. 6 and 7 of the lease contract to prevent damage and
prejudice.10 The case was docketed as Civil Case No. 98-411 before the RTC of Makati.
On March 10, 1998, petitioners in turn filed an action for ejectment, rescission and damages against
respondent for failure of the latter to vacate the premises after the demand made by the former. 11 Before
respondent could file an answer, petitioners filed a Notice of Dismissal. 12 They subsequently refiled the
complaint before the Metropolitan Trial Court of Makati; the case was raffled to Branch 139 and was
docketed as Civil Case No. 53596.

Petitioners later moved for the dismissal of the declaratory relief case for being an improper remedy
considering that respondent was already in breach of the obligation and that the case would not end the
litigation and settle the rights of the parties. The trial court, however, was not persuaded, and
consequently, denied the motion.
After trial on the merits, on May 9, 2000, the RTC ruled in favor of respondent and against petitioners.
The pertinent portion of the decision reads:
WHEREFORE, premises considered, this Court renders judgment on the case as follows:
1) declaring that plaintiff is not liable for the payment of Value-Added Tax (VAT) of 10% of the rent
for [the] use of the leased premises;
2) declaring that plaintiff is not liable for the payment of any rental adjustment, there being no
[extraordinary] inflation or devaluation, as provided in the Seventh Condition of the lease contract,
to justify the same;
3) holding defendants liable to plaintiff for the total amount of P1,119,102.19, said amount
representing payments erroneously made by plaintiff as VAT charges and rental adjustment for
the months of January, February and March, 1999; and
4) holding defendants liable to plaintiff for the amount of P1,107,348.69, said amount
representing the balance of plaintiff's rental deposit still with defendants.
SO ORDERED.13
The trial court denied petitioners their right to pass on to respondent the burden of paying the VAT since it
was not a new tax that would call for the application of the sixth clause of the contract. The court, likewise,
denied their right to collect the demanded increase in rental, there being no extraordinary inflation or
devaluation as provided for in the seventh clause of the contract. Because of the payment made by
respondent of the rental adjustment demanded by petitioners, the court ordered the restitution by the
latter to the former of the amounts paid, notwithstanding the well-established rule that in an action for
declaratory relief, other than a declaration of rights and obligations, affirmative reliefs are not sought by or
awarded to the parties.
Petitioners elevated the aforesaid case to the Court of Appeals which affirmed with modification the RTC
decision. The fallo reads:
WHEREFORE, premises considered, the present appeal is DISMISSED and the appealed
decision in Civil Case No. 98-411 is hereby AFFIRMED with MODIFICATION in that the order for
the return of the balance of the rental deposits and of the amounts representing the 10% VAT and
rental adjustment, is hereby DELETED.
No pronouncement as to costs.
SO ORDERED.14
The appellate court agreed with the conclusions of law and the application of the decisional rules on the
matter made by the RTC. However, it found that the trial court exceeded its jurisdiction in granting
affirmative relief to the respondent, particularly the restitution of its excess payment.
Petitioners now come before this Court raising the following issues:

I.
WHETHER OR NOT ARTICLE 1250 OF THE NEW CIVIL CODE IS APPLICABLE TO THE CASE
AT BAR.
II.
WHETHER OR NOT THE DOCTRINE ENUNCIATED IN FILIPINO PIPE AND FOUNDRY CORP.
VS. NAWASA CASE, 161 SCRA 32 AND COMPANION CASES ARE (sic) APPLICABLE IN THE
CASE AT BAR.
III.
WHETHER OR NOT IN NOT APPLYING THE DOCTRINE IN THE CASE OF DEL ROSARIO VS.
THE SHELL COMPANY OF THE PHILIPPINES, 164 SCRA 562, THE HONORABLE COURT OF
APPEALS SERIOUSLY ERRED ON A QUESTION OF LAW.
IV.
WHETHER OR NOT THE FINDING OF THE HONORABLE COURT OF APPEALS THAT
RESPONDENT IS NOT LIABLE TO PAY THE 10% VALUE ADDED TAX IS IN ACCORDANCE
WITH THE MANDATE OF RA 7716.
V.
WHETHER OR NOT DECLARATORY RELIEF IS PROPER SINCE PLAINTIFF-APPELLEE WAS
IN BREACH WHEN THE PETITION FOR DECLARATORY RELIEF WAS FILED BEFORE THE
TRIAL COURT.
In fine, the issues for our resolution are as follows: 1) whether the action for declaratory relief is proper; 2)
whether respondent is liable to pay 10% VAT pursuant to Republic Act (RA) 7716; and 3) whether the
amount of rentals due the petitioners should be adjusted by reason of extraordinary inflation or
devaluation.
Declaratory relief is defined as an action by any person interested in a deed, will, contract or other written
instrument, executive order or resolution, to determine any question of construction or validity arising from
the instrument, executive order or regulation, or statute, and for a declaration of his rights and duties
thereunder. The only issue that may be raised in such a petition is the question of construction or validity
of provisions in an instrument or statute. Corollary is the general rule that such an action must be justified,
as no other adequate relief or remedy is available under the circumstances. 15
Decisional law enumerates the requisites of an action for declaratory relief, as follows: 1) the subject
matter of the controversy must be a deed, will, contract or other written instrument, statute, executive
order or regulation, or ordinance; 2) the terms of said documents and the validity thereof are doubtful and
require judicial construction; 3) there must have been no breach of the documents in question; 4) there
must be an actual justiciable controversy or the "ripening seeds" of one between persons whose interests
are adverse; 5) the issue must be ripe for judicial determination; and 6) adequate relief is not available
through other means or other forms of action or proceeding. 16
It is beyond cavil that the foregoing requisites are present in the instant case, except that petitioners insist
that respondent was already in breach of the contract when the petition was filed.
We do not agree.

After petitioners demanded payment of adjusted rentals and in the months that followed, respondent
complied with the terms and conditions set forth in their contract of lease by paying the rentals stipulated
therein. Respondent religiously fulfilled its obligations to petitioners even during the pendency of the
present suit. There is no showing that respondent committed an act constituting a breach of the subject
contract of lease. Thus, respondent is not barred from instituting before the trial court the petition for
declaratory relief.
Petitioners claim that the instant petition is not proper because a separate action for rescission, ejectment
and damages had been commenced before another court; thus, the construction of the subject
contractual provisions should be ventilated in the same forum.
We are not convinced.
It is true that in Panganiban v. Pilipinas Shell Petroleum Corporation17 we held that the petition for
declaratory relief should be dismissed in view of the pendency of a separate action for unlawful detainer.
However, we cannot apply the same ruling to the instant case. In Panganiban, the unlawful detainer case
had already been resolved by the trial court before the dismissal of the declaratory relief case; and it was
petitioner in that case who insisted that the action for declaratory relief be preferred over the action for
unlawful detainer. Conversely, in the case at bench, the trial court had not yet resolved the
rescission/ejectment case during the pendency of the declaratory relief petition. In fact, the trial court,
where the rescission case was on appeal, itself initiated the suspension of the proceedings pending the
resolution of the action for declaratory relief.
We are not unmindful of the doctrine enunciated in Teodoro, Jr. v. Mirasol18 where the declaratory relief
action was dismissed because the issue therein could be threshed out in the unlawful detainer suit. Yet,
again, in that case, there was already a breach of contract at the time of the filing of the declaratory relief
petition. This dissimilar factual milieu proscribes the Court from applying Teodoro to the instant case.
Given all these attendant circumstances, the Court is disposed to entertain the instant declaratory relief
action instead of dismissing it, notwithstanding the pendency of the ejectment/rescission case before the
trial court. The resolution of the present petition would write finis to the parties' dispute, as it would settle
once and for all the question of the proper interpretation of the two contractual stipulations subject of this
controversy.
Now, on the substantive law issues.
Petitioners repeatedly made a demand on respondent for the payment of VAT and for rental adjustment
allegedly brought about by extraordinary inflation or devaluation. Both the trial court and the appellate
court found no merit in petitioners' claim. We see no reason to depart from such findings.
As to the liability of respondent for the payment of VAT, we cite with approval the ratiocination of the
appellate court, viz.:
Clearly, the person primarily liable for the payment of VAT is the lessor who may choose to pass it
on to the lessee or absorb the same. Beginning January 1, 1996, the lease of real property in the
ordinary course of business, whether for commercial or residential use, when the gross annual
receipts exceed P500,000.00, is subject to 10% VAT. Notwithstanding the mandatory payment of
the 10% VAT by the lessor, the actual shifting of the said tax burden upon the lessee is clearly
optional on the part of the lessor, under the terms of the statute. The word "may" in the statute,
generally speaking, denotes that it is directory in nature. It is generally permissive only and
operates to confer discretion. In this case, despite the applicability of the rule under Sec. 99 of the
NIRC, as amended by R.A. 7716, granting the lessor the option to pass on to the lessee the 10%
VAT, to existing contracts of lease as of January 1, 1996, the original lessor, Ponciano L. Almeda
did not charge the lessee-appellee the 10% VAT nor provided for its additional imposition when

they renewed the contract of lease in May 1997. More significantly, said lessor did not actually
collect a 10% VAT on the monthly rental due from the lessee-appellee after the execution of the
May 1997 contract of lease. The inevitable implication is that the lessor intended not to avail of
the option granted him by law to shift the 10% VAT upon the lessee-appellee. x x x. 19
In short, petitioners are estopped from shifting to respondent the burden of paying the VAT.
Petitioners' reliance on the sixth condition of the contract is, likewise, unavailing. This provision clearly
states that respondent can only be held liable for new taxes imposed after the effectivity of the contract of
lease, that is, after May 1997, and only if they pertain to the lot and the building where the leased
premises are located. Considering that RA 7716 took effect in 1994, the VAT cannot be considered as a
"new tax" in May 1997, as to fall within the coverage of the sixth stipulation.
Neither can petitioners legitimately demand rental adjustment because of extraordinary inflation or
devaluation.
Petitioners contend that Article 1250 of the Civil Code does not apply to this case because the contract
stipulation speaks of extraordinary inflation or devaluation while the Code speaks of extraordinary inflation
or deflation. They insist that the doctrine pronounced in Del Rosario v. The Shell Company, Phils.
Limited20 should apply.
Essential to contract construction is the ascertainment of the intention of the contracting parties, and such
determination must take into account the contemporaneous and subsequent acts of the parties. This
intention, once ascertained, is deemed an integral part of the contract. 21
While, indeed, condition No. 7 of the contract speaks of "extraordinary inflation or devaluation" as
compared to Article 1250's "extraordinary inflation or deflation," we find that when the parties used the
term "devaluation," they really did not intend to depart from Article 1250 of the Civil Code. Condition No. 7
of the contract should, thus, be read in harmony with the Civil Code provision.
That this is the intention of the parties is evident from petitioners' letter 22 dated January 26, 1998, where,
in demanding rental adjustment ostensibly based on condition No. 7, petitioners made explicit reference
to Article 1250 of the Civil Code, even quoting the law verbatim. Thus, the application of Del Rosario is
not warranted. Rather, jurisprudential rules on the application of Article 1250 should be considered.
Article 1250 of the Civil Code states:
In case an extraordinary inflation or deflation of the currency stipulated should supervene, the
value of the currency at the time of the establishment of the obligation shall be the basis of
payment, unless there is an agreement to the contrary.
Inflation has been defined as the sharp increase of money or credit, or both, without a corresponding
increase in business transaction. There is inflation when there is an increase in the volume of money and
credit relative to available goods, resulting in a substantial and continuing rise in the general price
level.23 In a number of cases, this Court had provided a discourse on what constitutes extraordinary
inflation, thus:
[E]xtraordinary 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 increase or decrease could not have been reasonably foreseen or was
manifestly beyond the contemplation of the parties at the time of the establishment of the
obligation.24

The factual circumstances obtaining in the present case do not make out a case of extraordinary inflation
or devaluation as would justify the application of Article 1250 of the Civil Code. We would like to stress
that the erosion of the value of the Philippine peso in the past three or four decades, starting in the midsixties, is characteristic of most currencies. And while the Court may take judicial notice of the decline in
the purchasing power of the Philippine currency in that span of time, such downward trend of the peso
cannot be considered as the extraordinary phenomenon contemplated by Article 1250 of the Civil Code.
Furthermore, absent an official pronouncement or declaration by competent authorities of the existence of
extraordinary inflation during a given period, the effects of extraordinary inflation are not to be applied. 25
WHEREFORE, premises considered, the petition is DENIED. The Decision of the Court of Appeals in CAG.R. CV No. 67784, dated September 3, 2001, and its Resolution dated November 19, 2001,
are AFFIRMED.
SO ORDERED.
ANTONIO EDUARDO B. NACHURA
Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson

MA. ALICIA AUSTRIA-MARTINEZ


Associate Justice

RENATO C. CORONA
Associate Justice

RUBEN T. REYES
Associate Justice

ATTESTATION
I attest that the conclusions in the above Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Court's Division.
CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify
that the conclusions in the above Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Court's Division.
REYNATO S. PUNO
Chief Justice

Footnotes
*

In lieu of Associate Justice Minita V. Chico-Nazario per Special Order No. 484, dated January
11, 2008.
1

Penned by Associate Justice Martin S. Villarama, Jr., with Associate Justices Conrado M.
Vasquez, Jr. and Eliezer R. de los Santos, concurring; rollo, pp. 129-138.
2

Rollo, p. 185.

Penned by Judge Jose R. Bautista; records, pp. 260-268.

Records, pp. 6-11.

Id. at 6-7.

Id. at 7.

Id. at 202.

Embodied in a letter dated January 12, 1998; id. at 203.

Records, p. 33.

10

Id. at 1-5.

11

Id. at 80-84.

12

Id. at 98-100.

13

Id. at 267-268.

14

Rollo, p. 138.

15

Atlas Consolidated Mining & Development Corporation v. Court of Appeals, G.R. No. 54305,
February 14, 1990, 182 SCRA 166, 177.

16

Jumamil v. Caf, G.R. No. 144570, September 21, 2005, 470 SCRA 475, 486-487.

17

443 Phil. 753 (2003).

18

99 Phil. 150 (1956).

19

Rollo, p. 134.

20

No. L-28776, August 19, 1988, 164 SCRA 556.

21

Lorenzo Shipping Corp. v. BJ Marthel International, Inc., G.R. No. 145483, November 19, 2004,
443 SCRA 163, 175.
22

Records, p. 29.

23

Citibank, N.A. v. Sabeniano, G.R. No. 156132, February 6, 2007, 514 SCRA 441, 468.

24

Citibank, N.A. v. Sabeniano, supra, at 468; Telengtan Brothers & Sons, Inc. v. United States
Lines, Inc., G.R. No. 132284, February 28, 2006, 483 SCRA 458, 469-470; Filipino Pipe and
Foundry Corp. v. NAWASA, No. L-43446, May 3, 1988, 161 SCRA 32, 35.
25

Telengtan Brothers & Sons, Inc. v. United States Lines, Inc. supra, at 470-471.