[G.R. No. 10490. March 19, 1915.

]
FRANCISCO BASTIDA, Plaintiff-Appellee, v. GREGORIO PEALOSA, DefendantAppellant.
Buencamino & Lontok for Appellant.
Alfonso E. Mendoza for Appellee.
SYLLABUS
1. INSOLVENCY; JURISDICTION; MOTION TO SUSPEND ACTION AGAINST INSOLVENT.
The court having jurisdiction of a proceeding in insolvency has jurisdiction to hear and
determine motions for the suspension of an action pending against the petitioner in voluntary
insolvency proceedings or against the respondent in involuntary insolvency proceedings, at the
time of the declaration of insolvency.
2. ID.; MOTION TO SUSPEND PROCEEDINGS ON APPEAL; WHERE MADE. A motion to
suspend further proceedings on an appeal on the ground that, after the appeal was taken, the
defendant-appellant was declared an insolvent and insolvency proceedings under the
Insolvency Act are pending, should be made in the insolvency court and not in the appellate
court, even though the general rule is that upon the perfection of an appeal the appellate court
acquires jurisdiction of such appealed proceeding.
DECISION
MORELAND, J. :
This is a motion by the appellant to suspend further proceedings on this appeal on the ground
that, after the appeal was taken, the appellant was declared an insolvent and insolvency
proceedings under the Insolvency Act are now in progress.
We are of the opinion that the motion must be denied on the ground that the application to
suspend further proceedings in this case should be made to the court in insolvency.
Section 60 of Act No. 1956, known as the Insolvency Law, provides in part as
follows:jgc:chanrobles.com.ph
"No creditor whose debt is provable under this Act shall be allowed, after the commencement of
proceedings in insolvency, to prosecute to final judgment any action therefor against the debtor
until the question of the debtors discharge shall have been determined, and any such suit or
proceedings shall, upon the application of the debtor or of any creditor, or the assignee, be
stayed to await the determination of the court on the question of discharge: Provided, That if the
amount due the creditor is in dispute, the suit, by leave of the court in insolvency, may proceed
to judgment for the purpose of ascertaining the amount due, which amount, when adjudged,
may be allowed in the insolvency proceedings, but execution shall be stayed as
aforesaid."cralaw virtua1aw library
Section 18 has the following provision with respect to the effect of the order declaring the
petitioner insolvent:jgc:chanrobles.com.ph
1

"Upon the granting of said order all civil proceedings pending against the said insolvent shall be
stayed."cralaw virtua1aw library
Section 69 provides in part:jgc:chanrobles.com.ph
"A discharge, duly granted under this Act, shall, with the exceptions aforesaid, release the
debtor from all claims, debts, liabilities, and demands set forth in his schedule, or which were or
might have been proved against his estate in insolvency, and may be pleaded by a simple
averment that on the day of its date such discharge was granted to him, setting forth the same
in full, and the same shall be a complete bar to all suits brought on any such debts, claims,
liabilities, or demands, and the certificate shall be prima facie evidence in favor of such fact and
of the regularity of such discharge."cralaw virtua1aw library
From section 69 it appears with fair clearness that the court in insolvency has full charge of all
claims by and against the petitioner in insolvency. That court may determine whether an action
pending against the petitioner at the time of the declaration of insolvency shall be prosecuted to
final result or whether it shall be stayed; and to that court is confided the power of dealing
generally with the estate as well as with the debts of the insolvent. If other courts in which
actions against the insolvent might be pending at the time of the order in insolvency were
permitted to exercise their own authority and deal with the actions in the manner which to them
seemed best, the proceedings in insolvency might be halted, final action therein indefinitely
postponed, and the court in insolvency greatly hampered in the management of the insolvency
proceedings. We think it the better practice to require applications of this sort to be made
directly to the court in insolvency, that it may determine whether it desires the action stayed or
whether it wishes that it proceed for the purpose of fixing the amount of the creditors claim; and
is the practice which seems to be established by the Insolvency Act.
The motion is denied, with costs.
Arellano, C.J., Torres and Araullo, JJ., concur.
Trent, J., dissents.
Separate Opinions
CARSON, J., dissenting:chanrob1es virtual 1aw library
I think that the proceedings should be suspended by this court on the application of the
defendant, upon a showing that "proceedings in insolvency" have been commenced against
him, unless and until the plaintiff makes it appear that he has "leave of the court in insolvency"
to proceed to judgment under the provisions of section 60 of Act No. 1956.

G.R. No. 101163 January 11, 1993

STATE INVESTMENT HOUSE, INC., petitioner,
vs.
COURT OF APPEALS and NORA B. MOULIC, respondents.
2

Escober, Alon & Associates for petitioner.

Martin D. Pantaleon for private respondents.

BELLOSILLO, J.:
The liability to a holder in due course of the drawer of checks issued to another merely as
security, and the right of a real estate mortgagee after extrajudicial foreclosure to recover the
balance of the obligation, are the issues in this Petition for Review of the Decision of respondent
Court of Appeals.
Private respondent Nora B. Moulic issued to Corazon Victoriano, as security for pieces of
jewelry to be sold on commission, two (2) post-dated Equitable Banking Corporation checks in
the amount of Fifty Thousand Pesos (P50,000.00) each, one dated 30 August 1979 and the
other, 30 September 1979. Thereafter, the payee negotiated the checks to petitioner State
Investment House. Inc. (STATE).
MOULIC failed to sell the pieces of jewelry, so she returned them to the payee before maturity
of the checks. The checks, however, could no longer be retrieved as they had already been
negotiated. Consequently, before their maturity dates, MOULIC withdrew her funds from the
drawee bank.
Upon presentment for payment, the checks were dishonored for insufficiency of funds. On 20
December 1979, STATE allegedly notified MOULIC of the dishonor of the checks and requested
that it be paid in cash instead, although MOULIC avers that no such notice was given her.
On 6 October 1983, STATE sued to recover the value of the checks plus attorney's fees and
expenses of litigation.
In her Answer, MOULIC contends that she incurred no obligation on the checks because the
jewelry was never sold and the checks were negotiated without her knowledge and consent.
She also instituted a Third-Party Complaint against Corazon Victoriano, who later assumed full
responsibility for the checks.
On 26 May 1988, the trial court dismissed the Complaint as well as the Third-Party Complaint,
and ordered STATE to pay MOULIC P3,000.00 for attorney's fees.
STATE elevated the order of dismissal to the Court of Appeals, but the appellate court affirmed
the trial court on the ground that the Notice of Dishonor to MOULIC was made beyond the
period prescribed by the Negotiable Instruments Law and that even if STATE did serve such
notice on MOULIC within the reglementary period it would be of no consequence as the checks
should never have been presented for payment. The sale of the jewelry was never effected; the
checks, therefore, ceased to serve their purpose as security for the jewelry.
3

We are not persuaded.

The negotiability of the checks is not in dispute. Indubitably, they were negotiable. After all, at
the pre-trial, the parties agreed to limit the issue to whether or not STATE was a holder of the
checks in due course. 1
In this regard, Sec. 52 of the Negotiable Instruments Law provides
Sec. 52. What constitutes a holder in due course. A holder in due course is a
holder who has taken the instrument under the following conditions: (a) That it is
complete and regular upon its face; (b) That he became the holder of it before it
was overdue, and without notice that it was previously dishonored, if such was
the fact; (c) That he took it in good faith and for value; (d) That at the time it was
negotiated to him he had no notice of any infirmity in the instrument or defect in
the title of the person negotiating it.
Culled from the foregoing, a prima facie presumption exists that the holder of a negotiable
instrument is a holder in due course. 2 Consequently, the burden of proving that STATE is not a
holder in due course lies in the person who disputes the presumption. In this regard, MOULIC
failed.
The evidence clearly shows that: (a) on their faces the post-dated checks were complete and
regular: (b) petitioner bought these checks from the payee, Corazon Victoriano, before their due
dates; 3 (c) petitioner took these checks in good faith and for value, albeit at a discounted price;
and, (d) petitioner was never informed nor made aware that these checks were merely issued to
payee as security and not for value.
Consequently, STATE is indeed a holder in due course. As such, it holds the instruments free
from any defect of title of prior parties, and from defenses available to prior parties among
themselves; STATE may, therefore, enforce full payment of the checks. 4
MOULIC cannot set up against STATE the defense that there was failure or absence of
consideration. MOULIC can only invoke this defense against STATE if it was privy to the
purpose for which they were issued and therefore is not a holder in due course.
That the post-dated checks were merely issued as security is not a ground for the discharge of
the instrument as against a holder in due course. For the only grounds are those outlined in
Sec. 119 of the Negotiable Instruments Law:
Sec. 119. Instrument; how discharged. A negotiable instrument is discharged:
(a) By payment in due course by or on behalf of the principal debtor; (b) By
payment in due course by the party accommodated, where the instrument is
made or accepted for his accommodation; (c) By the intentional cancellation
thereof by the holder; (d) By any other act which will discharge a simple contract
4

for the payment of money; (e) When the principal debtor becomes the holder of
the instrument at or after maturity in his own right.
Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds for the
discharge of the instrument. But, the intentional cancellation contemplated under paragraph (c)
is that cancellation effected by destroying the instrument either by tearing it up, 5 burning it, 6 or
writing the word "cancelled" on the instrument. The act of destroying the instrument must also
be made by the holder of the instrument intentionally. Since MOULIC failed to get back
possession of the post-dated checks, the intentional cancellation of the said checks is altogether
impossible.
On the other hand, the acts which will discharge a simple contract for the payment of money
under paragraph (d) are determined by other existing legislations since Sec. 119 does not
specify what these acts are, e.g., Art. 1231 of the Civil Code 7 which enumerates the modes of
extinguishing obligations. Again, none of the modes outlined therein is applicable in the instant
case as Sec. 119 contemplates of a situation where the holder of the instrument is the creditor
while its drawer is the debtor. In the present action, the payee, Corazon Victoriano, was no
longer MOULIC's creditor at the time the jewelry was returned.
Correspondingly, MOULIC may not unilaterally discharge herself from her liability by the mere
expediency of withdrawing her funds from the drawee bank. She is thus liable as she has no
legal basis to excuse herself from liability on her checks to a holder in due course.
Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of no moment.
The need for such notice is not absolute; there are exceptions under Sec. 114 of the Negotiable
Instruments Law:
Sec. 114. When notice need not be given to drawer. Notice of dishonor is not
required to be given to the drawer in the following cases: (a) Where the drawer
and the drawee are the same person; (b) When the drawee is a fictitious person
or a person not having capacity to contract; (c) When the drawer is the person to
whom the instrument is presented for payment: (d) Where the drawer has no
right to expect or require that the drawee or acceptor will honor the instrument;
(e) Where the drawer had countermanded payment.
Indeed, MOULIC'S actuations leave much to be desired. She did not retrieve the checks when
she returned the jewelry. She simply withdrew her funds from her drawee bank and transferred
them to another to protect herself. After withdrawing her funds, she could not have expected her
checks to be honored. In other words, she was responsible for the dishonor of her checks,
hence, there was no need to serve her Notice of Dishonor, which is simply bringing to the
knowledge of the drawer or indorser of the instrument, either verbally or by writing, the fact that
a specified instrument, upon proper proceedings taken, has not been accepted or has not been
paid, and that the party notified is expected to pay it. 8

In addition, the Negotiable Instruments Law was enacted for the purpose of facilitating, not
hindering or hampering transactions in commercial paper. Thus, the said statute should not be
tampered with haphazardly or lightly. Nor should it be brushed aside in order to meet the
necessities in a single case. 9
The drawing and negotiation of a check have certain effects aside from the transfer of title or the
incurring of liability in regard to the instrument by the transferor. The holder who takes the
negotiated paper makes a contract with the parties on the face of the instrument. There is an
implied representation that funds or credit are available for the payment of the instrument in the
bank upon which it is drawn. 10 Consequently, the withdrawal of the money from the drawee
bank to avoid liability on the checks cannot prejudice the rights of holders in due course. In the
instant case, such withdrawal renders the drawer, Nora B. Moulic, liable to STATE, a holder in
due course of the checks.
Under the facts of this case, STATE could not expect payment as MOULIC left no funds with the
drawee bank to meet her obligation on the checks, 11 so that Notice of Dishonor would be futile.
The Court of Appeals also held that allowing recovery on the checks would constitute unjust
enrichment on the part of STATE Investment House, Inc. This is error.
The record shows that Mr. Romelito Caoili, an Account Assistant, testified that the obligation of
Corazon Victoriano and her husband at the time their property mortgaged to STATE was
extrajudicially foreclosed amounted to P1.9 million; the bid price at public auction was only P1
million. 12 Thus, the value of the property foreclosed was not even enough to pay the debt in full.
Where the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure
of mortgage, the mortgagee is entitled to claim the deficiency from the debtor. 13 The step thus
taken by the mortgagee-bank in resorting to an extra-judicial foreclosure was merely to find a
proceeding for the sale of the property and its action cannot be taken to mean a waiver of its
right to demand payment for the whole debt. 14 For, while Act 3135, as amended, does not
discuss the mortgagee's right to recover such deficiency, it does not contain any provision
either, expressly or impliedly, prohibiting recovery. In this jurisdiction, when the legislature
intends to foreclose the right of a creditor to sue for any deficiency resulting from foreclosure of
a security given to guarantee an obligation, it so expressly provides. For instance, with respect
to pledges, Art. 2115 of the Civil Code 15 does not allow the creditor to recover the deficiency
from the sale of the thing pledged. Likewise, in the case of a chattel mortgage, or a thing sold on
installment basis, in the event of foreclosure, the vendor "shall have no further action against
the purchaser to recover any unpaid balance of the price. Any agreement to the contrary will be
void". 16
It is clear then that in the absence of a similar provision in Act No. 3135, as amended, it cannot
be concluded that the creditor loses his right recognized by the Rules of Court to take action for
the recovery of any unpaid balance on the principal obligation simply because he has chosen to
extrajudicially foreclose the real estate mortgage pursuant to a Special Power of Attorney given
him by the mortgagor in the contract of mortgage. 17
6

The filing of the Complaint and the Third-Party Complaint to enforce the checks against
MOULIC and the VICTORIANO spouses, respectively, is just another means of recovering the
unpaid balance of the debt of the VICTORIANOs.
In fine, MOULIC, as drawer, is liable for the value of the checks she issued to the holder in due
course, STATE, without prejudice to any action for recompense she may pursue against the
VICTORIANOs as Third-Party Defendants who had already been declared as in default.
WHEREFORE, the petition is GRANTED. The decision appealed from is REVERSED and a
new one entered declaring private respondent NORA B. MOULIC liable to petitioner STATE
INVESTMENT HOUSE, INC., for the value of EBC Checks Nos. 30089658 and 30089660 in the
total amount of P100,000.00, P3,000.00 as attorney's fees, and the costs of suit, without
prejudice to any action for recompense she may pursue against the VICTORIANOs as ThirdParty Defendants.
Costs against private respondent.
SO ORDERED.
Cruz and Grio-Aquino, JJ., concur.
Padilla, J., took no part.

G.R. No. 76101-02 September 30, 1991

TIO KHE CHIO, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and EASTERN ASSURANCE AND SURETY
CORPORATION,respondents.
Rodolfo M. Morelos for petitioner.
Ferrer, Mariano, Sangalang & Gatdula for private respondent.

FERNAN, C.J.:p
The issue in this petition for certiorari and prohibition is the legal rate of interest to be imposed in
actions for damages arising from unpaid insurance claims. Petitioner Tio Khe Chio claims that it
should be twelve (12%) per cent pursuant to Articles 243 and 244 of the Insurance Code while
private respondent Eastern Assurance and Surety Corporation (EASCO) claims that it should be
six (6%) per cent under Article 2209 of the Civil Code.
7

The facts are as follows: On December 18, 1978, petitioner Tio Khe Chio imported one
thousand (1,000) bags of fishmeal valued at $36,000.30 from Agro Impex, U.S.A. Dallas, Texas,
U.S.A. The goods were insured with respondent EASCO and shipped on board the M/V Peskov,
a vessel owned by Far Eastern Shipping Company. When the goods reached Manila on
January 28, 1979, they were found to have been damaged by sea water which rendered the
fishmeal useless. Petitioner filed a claim with EASCO and Far Eastern Shipping. Both refused to
pay. Whereupon, petitioner sued them before the then Court of First Instance of Cebu, Branch II
for damages. EASCO, as the insurer, filed a counterclaim against the petitioner for the recovery
of P18,387.86 representing the unpaid insurance premiums.
On June 30, 1982, the trial court rendered judgment ordering EASCO and Far Eastern Shipping
to pay petitioner solidarily the sum of P105,986.68 less the amount of P18,387.86 for unpaid
premiums with interest at the legal rate from the filing of the complaint, the sum of P15,000.00
as attorney's fees and the costs. 1
The judgment became final as to EASCO but the shipping company appealed to the Court of
Appeals and was absolved from liability by the said court in AC-G.R. No. 00161, entitled "Tio
Khe Chio vs. Eastern Assurance and Surety Corporation."
The trial court, upon motion by petitioner, issued a writ of execution against EASCO. The sheriff
enforcing the writ reportedly fixed the legal rate of interest at twelve (12%). Respondent EASCO
moved to quash the writ alleging that the legal interest to be computed should be six (6%) per
cent per annum in accordance with Article 2209 of the Civil Code and not twelve (12%) per cent
as insisted upon by petitioner's counsel. In its order of July 30, 1986, the trial court denied
EASCO's motion. EASCO then filed a petition for certiorari and prohibition before the Court of
Appeals.
On July 30, 1986, the Appellate Court rendered the assailed judgment, the dispositive part of
which states:
WHEREFORE, the order dated July 30, 1986 is hereby SET ASIDE in so far as it fixes the
interest at 12% on the principal amount of P87,598.82 from the date of filing of the complaint
until the full payment of the amount, and the interest that the private respondent is entitled to
collect from the petitioner is hereby reduced to 6% per annum.
No pronouncement as to costs. 2
In disputing the aforesaid decision of the Court of Appeals, petitioner maintains that not only is it
unjust and unfair but it is also contrary to the correct interpretation of the fixing of interest rates
under Sections 243 and 244 of the Insurance Code. And since petitioner's claims is based on an
insurance contract, then it is the Insurance Code which must govern and not the Civil Code.
We rule for respondent EASCO. The legal rate of interest in the case at bar is six (6%) per
annum as correctly held by the Appellate Court.
8

Section 243 of the Insurance Code provides:

The amount of any loss or damage for which an insurer may be liable, under any policy
other than life insurance policy, shall be paid within thirty days after proof of loss is received by
the insurer and ascertainment of the loss or damage is made either by agreement between the
insured and the insurer or by arbitration; but if such ascertainment is not had or made within
sixty days after such receipt by the insurer of the proof of loss, then the loss or damage shall be
paid within ninety days after such receipt. Refusal or failure to pay the loss or damage within the
time prescribed herein will entitle the assured to collect interest on the proceeds of the policy for
the duration of the delay at the rate of twice the ceiling prescribed by the Monetary Board,
unless such failure or refusal to pay is based on the ground that the claim is fraudulent.
Section 244 of the aforementioned Code also provides:
In case of any litigation for the enforcement of any policy or contract of insurance, it shall
be the duty of the Commissioner or the Court, as the case may be, to make a finding as to
whether the payment of the claim of the insured has been unreasonably denied or withheld; and
in the affirmative case, the insurance company shall be adjudged to pay damages which shall
consist of attorney's fees and other expenses incurred by the insured person by reason of such
undeniable denial or withholding of payment plus interest of twice the ceiling prescribed by the
Monetary Board of the amount of the claim due the insured, from the date following the time
prescribed in section two hundred forty-two or in section two hundred forty-three, as the case
may be, until the claim is fully satisfied; Provided, That the failure to pay any such claim within
the time prescribed in said sections shall be considered prima facie evidence of unreasonable
delay in payment.
In the case at bar, the Court of Appeals made no finding that there was an unjustified refusal or
withholding of payment on petitioner's claim. In fact, respondent court had this to say on
EASCO's refusal to settle the claim of petitioner:
... EASCO's refusal to settle the claim to Tio Khe Chio was based on some ground
which, while not sufficient to free it from liability under its policy, nevertheless is sufficient to
negate any assertion that in refusing to pay, it acted unjustifiably.
xxx xxx xxx
The case posed some genuine issues of interpretation of the terms of the policy as to
which persons may honestly differ. This is the reason the trial court did not say EASCO's refusal
was unjustified. 3
Simply put, the aforecited sections of the Insurance Code are not pertinent to the instant case.
They apply only when the court finds an unreasonable delay or refusal in the payment of the
claims.

Neither does Circular No. 416 of the Central Bank which took effect on July 29, 1974 pursuant
to Presidential Decree No. 116 (Usury Law) which raised the legal rate of interest from six (6%)
to twelve (12%) per cent apply to the case at bar as by the petitioner. The adjusted rate
mentioned in the circular refers only to loans or forbearances of money, goods or credits and
court judgments thereon but not to court judgments for damages arising from injury to persons
and loss of property which does not involve a loan. 4
In the case of Philippine Rabbit Bus Lines, Inc. vs. Cruz, G.R. No. 71017, July 28, 1986, 143
SCRA 158, the Court declared that the legal rate of interest is six (6%) per cent per annum, and
not twelve (12%) per cent, where a judgment award is based on an action for damages for
personal injury, not use or forbearance of money, goods or credit. In the same vein, the Court
held in GSIS vs. Court of Appeals, G.R. No. 52478, October 30, 1986, 145 SCRA 311, that the
rates under the Usury Law (amended by P.D. 116) are applicable only to interest by way of
compensation for the use or forbearance of money, interest by way of damages is governed by
Article 2209 of the Civil Code.
Clearly, the applicable law is Article 2209 of the Civil Code which reads:
If the obligation consists in the payment of a sum of money and the debtor incurs in
delay, the indemnity for damages, there being no stipulation to the contrary, shall be the
payment of interest agreed upon, and in the absence of stipulation, the legal interest which is six
per cent per annum.
And in the light of the fact that the contending parties did not allege the rate of interest stipulated
in the insurance contract, the legal interest was properly pegged by the Appellate Court at six
(6%) per cent.
WHEREFORE, in view of the foregoing, the petition is DENIED for lack of merit.
SO ORDERED.
Gutierrez, Jr., Feliciano, Bidin and Davide, Jr., JJ., concur.

10

G.R. No. 97412 July 12, 1994

EASTERN SHIPPING LINES, INC., petitioner,
vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents.
Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.
Zapa Law Office for private respondent.

VITUG, J.:
The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on
a shipment of goods can be a solidary, or joint and several, liability of the common carrier, the
arrastre operator and the customs broker; (b) whether the payment of legal interest on an award
for loss or damage is to be computed from the time the complaint is filed or from the date the
decision appealed from is rendered; and (c) whether the applicable rate of interest, referred to
above, is twelve percent (12%) or six percent (6%).
The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and
undisputed facts that have led to the controversy are hereunder reproduced:
This is an action against defendants shipping company, arrastre operator and broker-forwarder
for damages sustained by a shipment while in defendants' custody, filed by the insurer-subrogee
who paid the consignee the value of such losses/damages.
On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for
delivery vessel "SS EASTERN COMET" owned by defendant Eastern Shipping Lines under Bill
of Lading
No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance Policy No.
81/01177 for P36,382,466.38.
Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the
custody of defendant Metro Port Service, Inc. The latter excepted to one drum, said to be in bad
order, which damage was unknown to plaintiff.
On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from
defendant Metro Port Service, Inc., one drum opened and without seal (per "Request for Bad
Order Survey." Exh. D).
On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of the
shipment to the consignee's warehouse. The latter excepted to one drum which contained

11

spillages, while the rest of the contents was adulterated/fake (per "Bad Order Waybill" No.
10649, Exh. E).
Plaintiff contended that due to the losses/damage sustained by said drum, the consignee
suffered losses totaling P19,032.95, due to the fault and negligence of defendants. Claims were
presented against defendants who failed and refused to pay the same (Exhs. H, I, J, K, L).
As a consequence of the losses sustained, plaintiff was compelled to pay the consignee
P19,032.95 under the aforestated marine insurance policy, so that it became subrogated to all
the rights of action of said consignee against defendants (per "Form of Subrogation", "Release"
and Philbanking check, Exhs. M, N, and O). (pp. 85-86, Rollo.)
There were, to be sure, other factual issues that confronted both courts. Here, the appellate
court said:
Defendants filed their respective answers, traversing the material allegations of the complaint
contending that: As for defendant Eastern Shipping it alleged that the shipment was discharged
in good order from the vessel unto the custody of Metro Port Service so that any damage/losses
incurred after the shipment was incurred after the shipment was turned over to the latter, is no
longer its liability (p. 17, Record); Metroport averred that although subject shipment was
discharged unto its custody, portion of the same was already in bad order (p. 11, Record); Allied
Brokerage alleged that plaintiff has no cause of action against it, not having negligent or at fault
for the shipment was already in damage and bad order condition when received by it, but
nonetheless, it still exercised extra ordinary care and diligence in the handling/delivery of the
cargo to consignee in the same condition shipment was received by it.
From the evidence the court found the following:
The issues are:
1. Whether or not the shipment sustained losses/damages;
2. Whether or not these losses/damages were sustained while in the custody of defendants (in
whose respective custody, if determinable);
3. Whether or not defendant(s) should be held liable for the losses/damages (see plaintiff's preTrial Brief, Records, p. 34; Allied's pre-Trial Brief, adopting plaintiff's Records, p. 38).
As to the first issue, there can be no doubt that the shipment sustained losses/damages. The
two drums were shipped in good order and condition, as clearly shown by the Bill of Lading and
Commercial Invoice which do not indicate any damages drum that was shipped (Exhs. B and
C). But when on December 12, 1981 the shipment was delivered to defendant Metro Port
Service, Inc., it excepted to one drum in bad order.

12

Correspondingly, as to the second issue, it follows that the losses/damages were sustained
while in the respective and/or successive custody and possession of defendants carrier
(Eastern), arrastre operator (Metro Port) and broker (Allied Brokerage). This becomes evident
when the Marine Cargo Survey Report (Exh. G), with its "Additional Survey Notes", are
considered. In the latter notes, it is stated that when the shipment was "landed on vessel" to
dock of Pier # 15, South Harbor, Manila on December 12, 1981, it was observed that "one (1)
fiber drum (was) in damaged condition, covered by the vessel's Agent's Bad Order Tally Sheet
No. 86427." The report further states that when defendant Allied Brokerage withdrew the
shipment from defendant arrastre operator's custody on January 7, 1982, one drum was found
opened without seal, cello bag partly torn but contents intact. Net unrecovered spillages was
15 kgs. The report went on to state that when the drums reached the consignee, one drum was
found with adulterated/faked contents. It is obvious, therefore, that these losses/damages
occurred before the shipment reached the consignee while under the successive custodies of
defendants. Under Art. 1737 of the New Civil Code, the common carrier's duty to observe
extraordinary diligence in the vigilance of goods remains in full force and effect even if the
goods are temporarily unloaded and stored in transit in the warehouse of the carrier at the place
of destination, until the consignee has been advised and has had reasonable opportunity to
remove or dispose of the goods (Art. 1738, NCC). Defendant Eastern Shipping's own exhibit,
the "Turn-Over Survey of Bad Order Cargoes" (Exhs. 3-Eastern) states that on December 12,
1981 one drum was found "open".
and thus held:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:
A. Ordering defendants to pay plaintiff, jointly and severally:
1. The amount of P19,032.95, with the present legal interest of 12% per annum from October 1,
1982, the date of filing of this complaints, until fully paid (the liability of defendant Eastern
Shipping, Inc. shall not exceed US$500 per case or the CIF value of the loss, whichever is
lesser, while the liability of defendant Metro Port Service, Inc. shall be to the extent of the actual
invoice value of each package, crate box or container in no case to exceed P5,000.00 each,
pursuant to Section 6.01 of the Management Contract);
2. P3,000.00 as attorney's fees, and
3. Costs.
B. Dismissing the counterclaims and crossclaim of defendant/cross-claimant Allied Brokerage
Corporation.
SO ORDERED. (p. 207, Record).
Dissatisfied, defendant's recourse to US.
13

The appeal is devoid of merit.

After a careful scrutiny of the evidence on record. We find that the conclusion drawn therefrom
is correct. As there is sufficient evidence that the shipment sustained damage while in the
successive possession of appellants, and therefore they are liable to the appellee, as subrogee
for the amount it paid to the consignee. (pp. 87-89, Rollo.)
The Court of Appeals thus affirmed in toto the judgment of the court
a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave
abuse of discretion on the part of the appellate court when
I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH
THE ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF
PRIVATE RESPONDENT AS GRANTED IN THE QUESTIONED DECISION;
II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE
RESPONDENT SHOULD COMMENCE FROM THE DATE OF THE FILING OF
THE COMPLAINT AT THE RATE OF TWELVE PERCENT PER
ANNUM INSTEAD OF FROM THE DATE OF THE DECISION OF THE TRIAL
COURT AND ONLY AT THE RATE OF SIX PERCENT PER ANNUM, PRIVATE
RESPONDENT'S CLAIM BEING INDISPUTABLY UNLIQUIDATED.
The petition is, in part, granted.
In this decision, we have begun by saying that the questions raised by petitioner carrier are not
all that novel. Indeed, we do have a fairly good number of previous decisions this Court can
merely tack to.
The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from
the time the articles are surrendered to or unconditionally placed in the possession of, and
received by, the carrier for transportation until delivered to, or until the lapse of a reasonable
time for their acceptance by, the person entitled to receive them (Arts. 1736-1738, Civil Code;
Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863).
When the goods shipped either are lost or arrive in damaged condition, a presumption arises
against the carrier of its failure to observe that diligence, and there need not be an express
finding of negligence to hold it liable (Art. 1735, Civil Code; Philippine National Railways vs.
Court of Appeals, 139 SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA 365).
There are, of course, exceptional cases when such presumption of fault is not observed but
these cases, enumerated in Article 1734 1 of the Civil Code, are exclusive, not one of which can
be applied to this case.
The question of charging both the carrier and the arrastre operator with the obligation of
properly delivering the goods to the consignee has, too, been passed upon by the Court.
14

In Fireman's Fund Insurance vs. Metro Port Services (182 SCRA 455), we have explained, in
holding the carrier and the arrastre operator liable in solidum,thus:
The legal relationship between the consignee and the arrastre operator is akin to that of
a depositor and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5 [1967]. The
relationship between the consignee and the common carrier is similar to that of the consignee
and the arrastre operator (Northern Motors, Inc. v. Prince Line, et al., 107 Phil. 253 [1960]).
Since it is the duty of the ARRASTRE to take good care of the goods that are in its custody and
to deliver them in good condition to the consignee, such responsibility also devolves upon the
CARRIER. Both the ARRASTRE and the CARRIER are therefore charged with the obligation to
deliver the goods in good condition to the consignee.
We do not, of course, imply by the above pronouncement that the arrastre operator and the
customs broker are themselves always and necessarily liable solidarily with the carrier, or viceversa, nor that attendant facts in a given case may not vary the rule. The instant petition has
been brought solely by Eastern Shipping Lines, which, being the carrier and not having been
able to rebut the presumption of fault, is, in any event, to be held liable in this particular case. A
factual finding of both the court a quo and the appellate court, we take note, is that "there is
sufficient evidence that the shipment sustained damage while in the successive possession of
appellants" (the herein petitioner among them). Accordingly, the liability imposed on Eastern
Shipping Lines, Inc., the sole petitioner in this case, is inevitable regardless of whether there are
others solidarily liable with it.
It is over the issue of legal interest adjudged by the appellate court that deserves more than just
a passing remark.
Let us first see a chronological recitation of the major rulings of this Court:
The early case of Malayan Insurance Co., Inc., vs. Manila Port
Service, 2 decided 3 on 15 May 1969, involved a suit for recovery of money arising out of short
deliveries and pilferage of goods. In this case, appellee Malayan Insurance (the plaintiff in the
lower court) averred in its complaint that the total amount of its claim for the value of the
undelivered goods amounted to P3,947.20. This demand, however, was neither established in
its totality nor definitely ascertained. In the stipulation of facts later entered into by the parties, in
lieu of proof, the amount of P1,447.51 was agreed upon. The trial court rendered judgment
ordering the appellants (defendants) Manila Port Service and Manila Railroad Company to pay
appellee Malayan Insurance the sum of P1,447.51 with legal interest thereon from the date the
complaint was filed on 28 December 1962 until full payment thereof. The appellants then
assailed, inter alia, the award of legal interest. In sustaining the appellants, this Court ruled:
Interest upon an obligation which calls for the payment of money, absent a stipulation, is
the legal rate. Such interest normally is allowable from the date of demand, judicial or
extrajudicial. The trial court opted for judicial demand as the starting point.

15

But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be
recovered upon unliquidated claims or damages, except when the demand can be established
with reasonable certainty." And as was held by this Court in Rivera vs. Perez, 4 L-6998, February
29, 1956, if the suit were for damages, "unliquidated and not known until definitely ascertained,
assessed and determined by the courts after proof (Montilla c. Corporacion de P.P. Agustinos,
25 Phil. 447; Lichauco v. Guzman,
38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis supplied)
The case of Reformina vs. Tomol, 5 rendered on 11 October 1985, was for "Recovery of
Damages for Injury to Person and Loss of Property." After trial, the lower court decreed:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party
defendants and against the defendants and third party plaintiffs as follows:
Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay
jointly and severally the following persons:
xxx xxx xxx
(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00
which is the value of the boat F B Pacita III together with its accessories, fishing gear and
equipment minus P80,000.00 which is the value of the insurance recovered and the amount of
P10,000.00 a month as the estimated monthly loss suffered by them as a result of the fire of
May 6, 1969 up to the time they are actually paid or already the total sum of P370,000.00 as of
June 4, 1972 with legal interest from the filing of the complaint until paid and to pay attorney's
fees of P5,000.00 with costs against defendants and third party plaintiffs. (Emphasis supplied.)
On appeal to the Court of Appeals, the latter modified the amount of damages awarded
but sustained the trial court in adjudging legal interest from the filing of the complaint until fully
paid. When the appellate court's decision became final, the case was remanded to the lower
court for execution, and this was when the trial court issued its assailed resolution which applied
the 6% interest per annum prescribed in Article 2209 of the Civil Code. In their petition for
review on certiorari, the petitioners contended that Central Bank Circular
No. 416, providing thus
By virtue of the authority granted to it under Section 1 of Act 2655, as amended,
Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of
interest for the loan, or forbearance of any money, goods, or credits and the rate allowed in
judgments, in the absence of express contract as to such rate of interest, shall be twelve (12%)
percent per annum. This Circular shall take effect immediately. (Emphasis found in the text)
should have, instead, been applied. This Court 6 ruled:
The judgments spoken of and referred to are judgments in litigations involving loans or
forbearance of any money, goods or credits. Any other kind of monetary judgment which has
16

nothing to do with, nor involving loans or forbearance of any money, goods or credits does not
fall within the coverage of the said law for it is not within the ambit of the authority granted to the
Central Bank.
xxx xxx xxx
Coming to the case at bar, the decision herein sought to be executed is one rendered in an
Action for Damages for injury to persons and loss of property and does not involve any loan,
much less forbearances of any money, goods or credits. As correctly argued by the private
respondents, the law applicable to the said case is Article 2209 of the New Civil Code which
reads
Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be
the payment of interest agreed upon, and in the absence of stipulation, the legal interest which
is six percent per annum.
The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz, 7 promulgated
on 28 July 1986. The case was for damages occasioned by an injury to person and loss of
property. The trial court awarded private respondent Pedro Manabat actual and compensatory
damages in the amount of P72,500.00 with legal interest thereon from the filing of the complaint
until fully paid. Relying on the Reformina v. Tomol case, this Court 8 modified the interest award
from 12% to 6% interest per annum but sustained the time computation thereof, i.e., from the
filing of the complaint until fully paid.
In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an action for the recovery of
damages arising from the collapse of a building, ordered,
inter alia, the "defendant United Construction Co., Inc. (one of the petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from
November 29, 1968, the date of the filing of the complaint until full payment . . . ." Save from the
modification of the amount granted by the lower court, the Court of Appeals sustained the trial
court's decision. When taken to this Court for review, the case, on 03 October 1986, was
decided, thus:
WHEREFORE, the decision appealed from is hereby MODIFIED and considering the
special and environmental circumstances of this case, we deem it reasonable to render a
decision imposing, as We do hereby impose, upon the defendant and the third-party defendants
(with the exception of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra.
p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00)
Pesos to cover all damages (with the exception to attorney's fees) occasioned by the loss of the
building (including interest charges and lost rentals) and an additional ONE HUNDRED
THOUSAND (P100,000.00) Pesos as and for attorney's fees, the total sum being payable upon
the finality of this decision. Upon failure to pay on such finality, twelve (12%) per cent interest
per annum shall be imposed upon aforementioned amounts from finality until paid. Solidary
17

costs against the defendant and third-party defendants (Except Roman Ozaeta). (Emphasis
supplied)
A motion for reconsideration was filed by United Construction, contending that "the interest of
twelve (12%) per cent per annum imposed on the total amount of the monetary award was in
contravention of law." The Court 10 ruled out the applicability of the Reformina and Philippine
Rabbit Bus Lines cases and, in its resolution of 15 April 1988, it explained:
There should be no dispute that the imposition of 12% interest pursuant to Central Bank Circular
No. 416 . . . is applicable only in the following: (1) loans; (2) forbearance of any money, goods or
credit; and
(3) rate allowed in judgments (judgments spoken of refer to judgments involving loans or
forbearance of any money, goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143
SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260 [1985]). It is true that in the
instant case, there is neither a loan or a forbearance, but then no interest is actually imposed
provided the sums referred to in the judgment are paid upon the finality of the judgment. It is
delay in the payment of such final judgment, that will cause the imposition of the interest.
It will be noted that in the cases already adverted to, the rate of interest is imposed on
the total sum, from the filing of the complaint until paid; in other words, as part of the judgment
for damages. Clearly, they are not applicable to the instant case. (Emphasis supplied.)
The subsequent case of American Express International, Inc., vs. Intermediate Appellate
Court 11 was a petition for review on certiorari from the decision, dated 27 February 1985, of the
then Intermediate Appellate Court reducing the amount of moral and exemplary damages
awarded by the trial court, to P240,000.00 and P100,000.00, respectively, and its resolution,
dated 29 April 1985, restoring the amount of damages awarded by the trial court, i.e.,
P2,000,000.00 as moral damages and P400,000.00 as exemplary damages with interest
thereon at 12% per annum from notice of judgment, plus costs of suit. In a decision of 09
November 1988, this Court, while recognizing the right of the private respondent to recover
damages, held the award, however, for moral damages by the trial court, later sustained by the
IAC, to be inconceivably large. The Court 12 thus set aside the decision of the appellate court
and rendered a new one, "ordering the petitioner to pay private respondent the sum of One
Hundred Thousand (P100,000.00) Pesos as moral damages, with
six (6%) percent interest thereon computed from the finality of this decision until paid.
(Emphasis supplied)
Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz 13 which arose
from a breach of employment contract. For having been illegally dismissed, the petitioner was
awarded by the trial court moral and exemplary damages without, however, providing any legal
interest thereon. When the decision was appealed to the Court of Appeals, the latter held:
WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental
dated October 31, 1972 is affirmed in all respects, with the modification that defendantsappellants, except defendant-appellant Merton Munn, are ordered to pay, jointly and severally,
18

the amounts stated in the dispositive portion of the decision, including the sum of P1,400.00 in
concept of compensatory damages, with interest at the legal rate from the date of the filing of
the complaint until fully paid(Emphasis supplied.)
The petition for review to this Court was denied. The records were thereupon transmitted to the
trial court, and an entry of judgment was made. The writ of execution issued by the trial court
directed that only compensatory damages should earn interest at 6% per annum from the date
of the filing of the complaint. Ascribing grave abuse of discretion on the part of the trial judge, a
petition for certiorari assailed the said order. This Court said:
. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the legal
rate" from the time of the filing of the complaint. . . Said circular [Central Bank Circular No. 416]
does not apply to actions based on a breach of employment contract like the case at bar.
(Emphasis supplied)
The Court reiterated that the 6% interest per annum on the damages should be
computed from the time the complaint was filed until the amount is fully paid.
Quite recently, the Court had another occasion to rule on the matter. National Power
Corporation vs. Angas, 14decided on 08 May 1992, involved the expropriation of certain parcels
of land. After conducting a hearing on the complaints for eminent domain, the trial court ordered
the petitioner to pay the private respondents certain sums of money as just compensation for
their lands so expropriated "with legal interest thereon . . . until fully paid." Again, in applying the
6% legal interest per annum under the Civil Code, the Court 15 declared:
. . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods or credits
but expropriation of certain parcels of land for a public purpose, the payment of which is without
stipulation regarding interest, and the interest adjudged by the trial court is in the nature of
indemnity for damages. The legal interest required to be paid on the amount of just
compensation for the properties expropriated is manifestly in the form of indemnity for damages
for the delay in the payment thereof. Therefore, since the kind of interest involved in the joint
judgment of the lower court sought to be enforced in this case is interest by way of damages,
and not by way of earnings from loans, etc. Art. 2209 of the Civil Code shall apply.
Concededly, there have been seeming variances in the above holdings. The cases can perhaps
be classified into two groups according to the similarity of the issues involved and the
corresponding rulings rendered by the court. The "first group" would consist of the cases
of Reformina v. Tomol (1985), Philippine Rabbit Bus Lines v. Cruz(1986), Florendo
v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second group" would be Malayan
Insurance Company v.Manila Port Service (1969), Nakpil and Sons v. Court of
Appeals (1988), and American Express International v.Intermediate Appellate Court (1988).
In the "first group", the basic issue focuses on the application of either the 6% (under the Civil
Code) or 12% (under the Central Bank Circular) interest per annum. It is easily discernible in
19

these cases that there has been a consistent holding that the Central Bank Circular imposing
the 12% interest per annum applies only to loans or forbearance 16 of money, goods or credits,
as well as to judgments involving such loan or forbearance of money, goods or credits, and that
the 6% interest under the Civil Code governs when the transaction involves the payment of
indemnities in the concept of damage arising from the breach or a delay in the performance of
obligations in general. Observe, too, that in these cases, a common time frame in the
computation of the 6% interest per annum has been applied, i.e., from the time the complaint is
filed until the adjudged amount is fully paid.
The "second group", did not alter the pronounced rule on the application of the 6% or 12%
interest per annum, 17depending on whether or not the amount involved is a loan or forbearance,
on the one hand, or one of indemnity for damage, on the other hand. Unlike, however, the "first
group" which remained consistent in holding that the running of the legal interest should be from
the time of the filing of the complaint until fully paid, the "second group" varied on the
commencement of the running of the legal interest.
Malayan held that the amount awarded should bear legal interest from the date of the decision
of the court a quo,explaining that "if the suit were for damages, 'unliquidated and not known until
definitely ascertained, assessed and determined by the courts after proof,' then, interest 'should
be from the date of the decision.'" American Express International v. IAC, introduced a different
time frame for reckoning the 6% interest by ordering it to be "computed from the finality of (the)
decision until paid." The Nakpil and Sons case ruled that 12% interest per annum should be
imposed from the finality of the decision until the judgment amount is paid.
The ostensible discord is not difficult to explain. The factual circumstances may have called for
different applications, guided by the rule that the courts are vested with discretion, depending on
the equities of each case, on the award of interest. Nonetheless, it may not be unwise, by way
of clarification and reconciliation, to suggest the following rules of thumb for future guidance.
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts 18 is breached, the contravenor can be held liable for damages. 19 The provisions
under Title XVIII on "Damages" of the Civil Code govern in determining the measure of
recoverable damages. 20
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been stipulated
in writing. 21 Furthermore, the interest due shall itself earn legal interest from the time it is
judicially demanded. 22 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 23 of the Civil Code.

20

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

on the amount of damages awarded may be imposed at the discretion of the court 24 at the rate
of 6% per annum. 25 No interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable certainty. 26 Accordingly,
where the demand is established with reasonable certainty, the interest shall begin to run from
the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual
base for the computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit.
WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the
MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due
computed from the decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX
PERCENT (6%), shall be imposed on such amount upon finality of this decision until the
payment thereof.
SO ORDERED.
Narvasa, C.J., Cruz, Feliciano, Padilla, Bidin, Regalado, Davide, Jr., Romero, Bellosillo,
Melo, Quiason, Puno and Kapunan, JJ., concur.
Mendoza, J., took no part.

G.R. No. 79552 November 29, 1988

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

21

PADILLA, J.:
This is a petition for review on certiorari of the decision 1 of the Court of Appeals in CA-G.R. CV
No. 08813, dated 13 August 1987, which modified the decision 2 of the Regional Trial Court of
Iloilo City, Branch XXIII, in Civil Case No. 16210, entitled "Evelyn J. Sangrador, joined by her
husband, Rodrigo Sangrador, Plaintiffs, versus Spouses Francisco Valderrama and Teresita
Valderrama, Defendants."
The factual background of the case is narrated in the decision of the Court of Appeals as
follows:
On April 11, 1983 the defendants-spouses Francisco and Teresita Valderrama
obtained a P500,000 loan from Manuel Asencio payable on or before April 12,
1984, and secured by a real estate mortgage on their house and lot (actually 3
lots) in front of the Jaro Plaza in Iloilo City (Exh. 9).
Foreseeing that they would not be able to pay the loan and redeem their property
upon maturity of the loan, the defendants scouted around for money-lenders who
would be willing to lend them money with which to pay off their mortgage to
Asencio.
Through the help of a loan broker, Wilson Jesena, they were able to obtain on
April 6, 1984 a P1,000,000 loan from the plaintiff Teresita Sangrador, who is an
aunt of Jesena, on the security of the same property which they redeemed from
Asencio. The loan is evidenced by the following promissory note (Exh. B) dated
April 6, 1 984 providing for the payment of P1,400,000 to the creditor eight
months after date'.
FOR VALUE RECEIVED, we jointly and severally promise to pay
EVELYN J. SANGRADOR, or order, at her address at No. 2
Locsin Street, Molo, Iloilo City, Philippines, the sum of ONE
MILLION FOUR HUNDRED THOUSAND PESOS (P1,400,000.00)
Philippine Currency, EIGHT (8) MONTHS after date without need
of demand.
Should we default in the payment of the obligation or in the manner of
performance thereof and it shall become necessary to enforce and collect on this
note by or through an attorney, the makers shall jointly and severally pay
TWENTY (20) PER CENTUM of the amount due, principal and interest and
charges then unpaid, which in no case shall be less than P1,000.00.
The makers hereby submit to the jurisdiction of the Municipal Trial Court of Iloilo
or the Regional Trial Court of Iloilo, Sixth Judicial Region, Iloilo City, as the case
may be, in the event of litigation arising from this note.
22

The makers of this note, jointly and severally undertake that in the event that an
extraordinary inflation of the Philippine Peso should supervene between now and
eight (8) months after date, then the value of the Philippine Peso at the time of
the establishment of this obligation, shall be the basis of payment pursuant to Art.
1250 of the Civil Code of the Philippines, and for this purpose, we hereby
acknowledge the official exchange rate of the Philippine Peso to the US Dollar at
P14.002 to $1. The corresponding adjustment in the value of the Philippine Peso
shall be made in the event that at the time of the maturity of this obligation, the
rate of exchange will have changed as a result of the supervening inflation. We
further agree that the official rate of exchange as set by the Central Bank of the
Philippines for private transactions, shall be the basis of this adjustment.
This note is secured by a Real Estate Mortgage over three (3) parcels of
residential land, Lots 700, 701 and 750, of the Cadastral Survey of Jaro, covered
by TCT Nos. T-41719, T41721 and T-41720, respectively, of the Registry of
Deeds for the City of Iloilo, together with the improvements thereon.
In case of judicial execution of this obligation or any part thereof, the debtors
waive all their rights under the provisions of Rule 39, Sec. 12, of the Rules of
Court.
EXECUTED in the City of Iloilo, Philippines, on this 6th day of April 1984.
(SGD) TERESITA MONTINOLA-VALDERRAMA
Maker
(SGD) FRANCISCO VALDERRAMA
Maker
Signed in the presence of.
(illegible) (illegible)
(Exh. B)
The debtors allege that the amount actually received by them was only
P1,000,000 the disposition of which was itemized by the broker, Wilson Jesena
a, on a memo pad of "Jesena Realty" as follows:
From the desk of:
REALTOR WILSON G. Jesena, Jr.
President & Gen. Manager
EXPENSES

23

P625,000.00Manuel Asencio
50,000.00Commission Boy
4,000.00Atty. Arguelles
13,398.69Transfer fees
Register of Deeds and B.I.R.
P692,398.69
P1,000,000.00
692,398.69
P307,601.40 Balance (Exh. 1)
Accordingly, a Prudential Bank Cashier's check for P625,000 was issued by
Sangrador to Asencio to redeem the defendants' property from him. A receipt for
that check was issued by the Valderramas to the plaintiff as follows:
RECEIPT
Date April 6, 1984
Received from EVELYN JESENA SANGRADOR the amount of
SIX HUNDRED TWENTY FIVE THOUSAND PESOS (625,000.00)
Bank Prudential Bank Cashier's Check No. 14937. The balance of
THREE HUNDRED SEVENTY FIVE THOUSAND PESOS
(P375,000.00) is to be paid to the undersigned after deducting all
expenses incurred in payment of real estate taxes, attorney's fees,
commission, Bureau of Internal Revenue fees and Register of
Deeds fees. All expenses are to be supported by receipts.
(SGD) FRANCISCO (SGD) TERESITA MONTINOLA- VALDERRAMA
VALDERRAMA
(Exh. 2)
Plaintiff Evelyn Sangrador made a list of the expenses chargeable to the debtors
(Exh. 5) and submitted it to them (22 t.s.n., May 7, 1985). Payment of Atty.
Arguelles' attorney's fees was duly acknowledged by him (Exh. 8). Jesena issued
the following receipt to the defendants for his 5% commission in procuring the
loan for them;
RECEIPT
Received from Spouses Francisco Valderrama and Teresita
Montinola Valderrama the amount of FIFTY THOUSAND PESOS
(P50,000.00) representing commission for my efforts and
24

expertise in effecting the procurement of a loan from a financier for

the amount of ONE MILLION PESOS (P1,000,000.00).
(SGD) REALTOR WILSON JESENA, JR.
REB License No. 3441-R
(Exh. 3)
The balance of P307,601.40 was paid to the defendants by means of another
Prudential Bank check for which the corresponding receipt (Exh. 4) was also
signed by the mortgagors:
RECEIPT
April 7, 1984
Received from EVELYN J. SANGRADOR the amount of THREE HUNDRED
SEVEN THOUSAND SIX HUNDRED ONE PESOS AND FORTY CENTAVOS
(P307,601.40) representing full payment per Promissory Note dated April 6,1984.
(SGD) FRANCISCO (SGD) TERESITA MONTINOLA- VALDERRAMA
VALDERRAMA
Paid byPrudential Bank Chk.
#144358-2April 7, 1984 P307,601.40
c/o #0033-00022-0 paid byEvelyn J. Sangrador
(Exh. 4)
Evelyn Sangrador admitted that the receipts (Exhs. 2 and 4) were issued to her
by the defendants (14, 21 t.s.n., May 7, 1985).
When the defendants failed to pay the sum of P1,400,000 stated in the
promissory note on December 6, 1984 despite the plaintiffs' written demands
(Exhs. C and D) a complaint for judicial foreclosure of the real estate mortgage
was filed against them on December 21, 1984.
(Exh. G).
The defendants in their answer denied that the loan was P1,400,000. They
alleged that it was only P1,000,000.00 and that the additional P400,000
represented usurious interest.
At the trial, the plaintiff testified that the sum of P1,400,000 was received by the
defendants. She alleged that besides the expenses of P67,398.69 itemized in
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Jesena's and her lists (Exhs. 1 and 5), the check of P625,000 for Asencio and the
check of P307,601.40 which she issued to the defendants for the balance of the
loan, she gave to the defendants the amount of P400,000 in cash for which no
receipt was issued by them.
On the other hand Francisco Valderrama testified that he thought all along that
the promissory note (Exh. B) and deed of real estate mortgage (Exh. A) provided
for a loan of only P1 million since that was the amount which they borrowed and
received from the plaintiffs. He allegedly did not notice that both documents
provided for a loan of P1,400,000.
After the trial, the court rendered judgment on November 7, 1985 binding the
debtors to the terms of the promissory note and mortgage deed. 3
The dispositive part of the trial court's judgment reads as follows:
WHEREFORE, in the light of the foregoing, considerations and findings of this
Court, judgment is hereby rendered:
1) Directing the foreclosure of the Deeds of Real Estate Mortgage (Exh. 'A');
2) Ordering the defendants to pay the mortgage obligation in the amount of
P1,400,000.00 plus the sum of P569,718.61 pursuant to the escalation clause
contained in paragraph 14 of the Deed of Real Estate Mortgage; to pay attorney's
fees equivalent to twenty (20%) percentum of the total indebtedness including
costs, plus 12% interest per annum from December 18,1984 until fully paid, all of
which shall be paid into Court within 90 days from date of the service of the
order;
3) In default of such payment, ordering the mortgaged properties to be sold at
public auction to realize the mortgage debt and costs.
SO ORDERED. 4
Private respondents, defendants in the trial court, appealed to the Court of Appeals, where the
appeal was docketed as CA G.R. CV No. 08813. On 12 August 1987, respondent Court of
Appeals promulgated its decision 5modifying the decision of the trial court, the dispositive part of
which reads, as follows:
WHEREFORE, the appealed decision is hereby modified by ordering the
defendants, within (90) days from date of service of this decision, to pay to the
plaintiffs the principal loan of P1,000,000 with 12% interest per annum from April
6,1984 until fully paid, P50,000 as attorney's fees, and the costs of this suit. In
default of such payment, the mortgaged property shall be sold at public auction
to realize the sums due to plaintiffs under this judgment.
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SO ORDERED. 6
Hence, the present petition for review on certiorari of the decision of the Court of Appeals.
Petitioners present the following
ASSIGNMENT OF ERRORS
1. FIRST ASSIGNED ERROR:
THE HONORABLE COURT OF APPEALS ERRED IN
NULLIFYING THE ESCALATION CLAUSE AS FOUND BY THE
TRIAL COURT ORDERING THE PAYMENT BY RESPONDENTS
OF THE SUM OF P569,718.61.
2. SECOND ASSIGNED ERROR:
THE HONORABLE COURT OF APPEALS ERRED IN FINDING
THE PRINCIPAL LOAN TO BE IN THE SUM OF P1,000,000.00
INSTEAD OF P1,400,000.00 AS FOUND BY THE LOWER
COURT.
3. THIRD ASSIGNED ERROR:
THE HONORABLE COURT OF APPEALS ERRED IN
REDUCING PETITIONER'S AWARD OF ATTORNEY'S FEES TO
P50,000.00 INSTEAD OF 20% OF THE TOTAL INDEBTEDNESS
AS FOUND BY THE TRIAL COURT. 7
The pivotal issue to be resolved in this case is whether or not the loan obtained by private
respondents from petitioners was in the amount of P1,400,000.00 or P1,000,000.00 only.
In resolving this issue, the Court of Appeals in its decision under review, held:
After carefully reviewing the evidence, We are convinced that the trial court erred
in finding that the loan was P1,400,000 as stated in the promissory note (Exh. B)
and deed of mortgage. Like the trial court, We do not believe defendant
Valderrama's allegation that he did not notice that the amount stated in the
promissory note was P1,400,000, instead of only P1,000,000, until demands for
payment were sent to him by the plaintiffs' counsel. But neither do We believe the
plaintiff Evelyn Sangrador's allegation that besides the sum of P1,000,000
admittedly received by the defendants and evidenced by checks and receipts,
she also gave them P400,000.00 in cash without receipt. This is a case,
therefore, where both parties prevaricated.

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

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13,398.69 to pay transfer fees and other expenses in Register of Deeds and
BIR
307,601.40 to pay respondents as balance of the loan
P1,000,000.09 TOTAL
The above itemization tallies with the breakdown of the proceeds of the loan, made by the loan
broker Wilson Jesena (Exh. 1).
Petitioners contend that over and above the P1,000,000.00, the amount of P400,000.00 was
delivered by them to the respondents in cash and that this delivery was not evidenced by a
receipt because, anyway, said amount (P400,000.00) is already included in the statement of the
loan amount in the promissory note and the deed of real estate mortgage, which is
P1,400,000.00. We find this contention to be quite incredible, to say the least. It is contrary to
ordinary human experience. Normally, in delivering a hefty sum like P400,000.00 in cash, one
would require some sort of receipt or acknowledgment from the recipient.
Moreover, if petitioners were careful enough to require from the respondents the separate
receipts above-mentioned, there was no reason why they would not require another receipt from
the respondents for said amount of P400,000.00. And if, as petitioners now allege, they did not
anymore require a receipt for the P400,000.00 allegedly delivered by them in cash to the
respondents because the loan amount stated in the promissory note and the real estate
mortgage already included said amount of P400,000.00, then, by the same reasoning, there
was no need for requiring the other separate receipts abovementionedas the amounts they
referred to were already a part of the loan amount stated in the promissory note and real estate
mortgageand yet, said separate receipts were required by petitioners of the respondents.
In short, we agree with the finding of the Court of Appeals that the disputed amount of
P400,000.00 was a hidden interest that the petitioners had required the respondents to pay at
the maturity of the loan, but said amount of P400,000.00 was not received by or delivered to the
respondents. This conclusion is strengthened by the fact that the promissory note and the deed
of real estate mortgage (Exhs. B and A), strangely enough, do not contain any express
stipulation on interest, or rate of interest, when the loan involved therein is in the substantial
amount of allegedly P1,400,000.00.
Petitioners may conceivably argue that, granting that the disputed amount of P400,000.00 is
interest on the loan of P1,000,000.00, yet, in line with this Court's decision in Liam Law vs.
Oriental Sawmill Co., et al., 11 there is no longer any ceiling on interest or interest rates on loans.
This may be so in a situation where the parties openly and expressly agree on a specific rate of
interest to accrue on the loan but, as the Court of Appeals in its decision under review correctly
pointed out, in the case at bar, no interest rate is expressly stipulated in the promissory note and
deed of real estate mortgage. Circular No. 905 of the Central Bank dated 10 December 1982
provides:

29

Section 1. The rate of interest, including commissions, premiums, fees and other
charges on a loan or forbearance of any money, goods, or credits, regardless of
maturity and whether secured or unsecured, that may be charged or collected by
any person, whether natural or juridical, shall not be subject to any
ceiling prescribed under or pursuant to the Usury law, as amended.
Section 2. The rate of interest for the loan or forbearance of any money, goods or
credits and the rate allowed in judgments, in the absence of express contract as
to such rate of interest, shall continue to be twelve per cent (1 2%) per annum.
(Emphasis supplied)
The rate of interest for loans or forbearance of money, in the absence of express contract as to
such rate of interest, shall continue therefore to be twelve per cent (12%) per annum. 12
Accordingly, the loan of P1,000,000.00 in the instant case should earn a twelve per cent (12%)
interest per annum computed from 6 April 1984 when the loan was obtained by the respondents
from the petitioners until paid.
Petitioners also impugn the Court of Appeals in nullifying the escalation clause in the Deed of
Real Estate Mortgage and Promissory Note. Under such escalation clause, sustained by the
trial court, the amount of P569,718.61 was awarded to herein petitioners by way of adjustment
of the loan of P1,400,000.00 after the eight (8) month period of the loan. 13
The Deed of Real Estate Mortgage provides, among others, as follows:
14. That in the event that an extra-ordinary inflation of the Philippine peso should
supervene, it is hereby stipulated that the value of the currency at the time of the
establishment of the obligation shall be the basis of payment pursuant to Art.
1250 of the New Civil Code of the Philippines. For this purpose, MORTGAGORS
hereby recognize the official exchange rate of the Philippine Peso to the US
dollar at 14.002 to one. The corresponding adjustment in the value of the
Philippine Peso shall be made should at the time of the maturity of this
obligation, the rate of exchange will have changed as a result of the supervening
inflation. It is further agreed that the official rate of exchange as set by the
Central Bank for private transactions shall be the basis of this adjustment.
(Emphasis supplied).
A cursory reading of the aforequoted provision of the Deed of Real Estate Mortgage (similar
stipulation is contained in the Promissory Note) shows that the escalation clause takes effect "in
the event that an extraordinary inflation of the Philippine Peso should supervene," between the
date the loan was granted and the date of its maturity, in which case, the value of the (peso)
currency at the time of the establishment of the obligation shall be the basis of payment. To give
meaning to the "value of the currency at the time of the establishment of the obligation," the
parties agreed that on 6 April 1984 (date of loan), the exchange rate of the peso to the US dollar
was 14.002 to one.
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Consequently, under the aforesaid escalation clause, "(t)he corresponding adjustment in the
value of the Philippine Peso" at the maturity of the obligation crucially depends upon the
supervening of an extraordinary inflation in the sense contemplated in Article 1250 of the Civil
Code of the Philippines. 14
In Filipino Pipe and Foundry Corporation vs. National Waterworks and Sewerage
Authority, 15 this Court held:
Extraordinary inflation exists when 'there is a decrease or increase in the
purchasing power of the Philippine currency which is unusual or beyond the
common fluctuation in the value of said currency, and such decrease or increase
could not have been reasonably foreseen or was manifestly beyond the
contemplation of the parties at the time of the establishment of the obligation.
(Tolentino Commentaries and Jurisprudence on the Civil Code Vol. IV, p. 284.)
An example of extraordinary inflation is the following description of what
happened to the deutschmark in 1920:
More recently, in the 1920's Germany experience a case of hyperinflation. In early 1921, the value of the German mark was 4.2 to
the U.S. dollar. By May of the same year, it had stumbled to 62 to
the U.S. dollar. And as prices went up rapidly, so that by October
1923, it had reached 4.2 trillion to the U.S. dollar! (Bernardo M.
Villegas & Victor R. Abola, Economics, An Introduction [Third
Edition].
As reported, "prices were going up every week, then every day, then every hour.
Women were paid several times a day so that they could rush out and exchange
their money for something of value before what little purchasing power was left
dissolved in their hands. Some workers tried to beat the constantly rising prices
by throwing their money out of the windows to their waiting wives, who would
rush to unload the nearly worthless paper. A postage stamp cost millions of
marks and a loaf of bread, billions," (Sidney Rutberg, "The Money Baloon" New
York; Simon and Schuster, 1975, p. 19, cited in Economics, An Introduction by
Villegas & Abola, 3rd Ed.)
While appellant's voluminous records and statistics proved that there has been a
decline in the purchasing power of the Philippine peso, this downward fall of the
currency cannot be considered "extraordinary." It is simply a universal trend that
has not spared our country. 16
Since petitioners failed to prove the supervening of extraordinary inflation between 6 April 1984
and 7 December 1984no proofs were presented on how much, for instance, the price index of
goods and services had risen during the intervening periodan extraordinary inflation cannot
31

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

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