material portions of the record, (i.e.

, motion for leave to file demurrer to

evidence, demurrer to evidence and the opposition thereto, and the Municipal
HUN HYUNG PARK, Petitioner, versus EUNG WON CHOI, Respondent.
[sic] Trial Court's Order dismissing Criminal Case No. 294690) as would
G.R. No. 165496 support the allegations of the petition (Sec. 2, Rule 42, ibid.).

Petitioner, Hun Hyung Park, assails the Court of Appeals (CA) Resolutions dated May 3. The Decision dated September 11, 2003 of the Regional Trial Court
20, 2004[1] and September 28, 2004[2] in CA G.R. CR No. 28344 dismissing his attached to the petition is an uncertified and illegible mere machine copy of
petition and denying reconsideration thereof, respectively. the original (Sec. 2, Rule 42, ibid.).

In an Information[3] dated August 31, 2000, respondent, Eung Won Choi, was 4. Petitioners failed to implead the People of the Philippines as party-
charged for violation of Batas Pambansa Blg. 22, otherwise known as the Bouncing respondent in the petition.[10]
Checks Law, for issuing on June 28, 1999 Philippine National Bank Check No.
0077133 postdated August 28, 1999 in the amount of P1,875,000 which was
dishonored for having been drawn against insufficient funds. In his present petition, petitioner assails the above-stated reasons of the appellate
court in dismissing his petition.
Upon arraignment, respondent, with the assistance of counsel, pleaded "not guilty" to
the offense charged. Following the pre-trial conference, the prosecution presented its The manner of verification for pleadings which are required to be verified, such as a
evidence-in-chief. petition for review before the CA of an appellate judgment of the RTC,[11] is
prescribed by Section 4 of Rule 7 of the Rules of Court:
After the prosecution rested its case, respondent filed a Motion for Leave of Court to
File Demurrer to Evidence to which he attached his Demurrer, asserting that the
Sec. 4. Verification. Except when otherwise specifically required by law or
prosecution failed to prove that he received the notice of dishonor, hence, the
rule, pleadings need not be under oath, verified or accompanied by affidavit.
presumption of the element of knowledge of insufficiency of funds did not arise.[4]
A pleading is verified by an affidavit that the affiant has read the pleading and
By Order[5] of February 27, 2003, the Metropolitan Trial Court (MeTC) of Makati,
that the allegations therein are true and correct of his personal knowledge or
Branch 65 granted the Demurrer and dismissed the case. The prosecution's Motion
based on authentic records.
for Reconsideration was denied.[6]
A pleading required to be verified which contains a verification based on
Petitioner appealed the civil aspect[7] of the case to the Regional Trial Court (RTC) of
"information and belief," or upon "knowledge, information and belief," or lacks
Makati, contending that the dismissal of the criminal case should not include its civil
a proper verification shall be treated as an unsigned pleading.[12] (Emphasis
aspect.
and underscoring supplied)
By Decision of September 11, 2003, Branch 60 of the RTC held that while the
evidence presented was insufficient to prove respondent's criminal liability, it did not Petitioner argues that the word "or" is a disjunctive term signifying disassociation and
altogether extinguish his civil liability. It accordingly granted the appeal of petitioner independence, hence, he chose to affirm in his petition he filed before the court a quo
and ordered respondent to pay him the amount of P1,875,000 with legal interest.[8] that its contents are "true and correct of my own personal knowledge,"[13] and not on
the basis of authentic documents.
Upon respondent's motion for reconsideration, however, the RTC set aside its
decision and ordered the remand of the case to the MeTC "for further proceedings, so On the other hand, respondent counters that the word "or" may be interpreted in a
that the defendant [-respondent herein] may adduce evidence on the civil aspect of conjunctive sense and construed to mean as "and," or vice versa, when the context of
the case."[9] Petitioner's motion for reconsideration of the remand of the case having the law so warrants.
been denied, he elevated the case to the CA which, by the assailed resolutions,
dismissed his petition for the following reasons: A reading of the above-quoted Section 4 of Rule 7 indicates that a pleading may be
verified under either of the two given modes or under both. The veracity of the
allegations in a pleading may be affirmed based on either one's own personal
1. The verification and certification of non-forum shopping attached to the
knowledge or on authentic records, or both, as warranted. The use of the preposition
petition does not fully comply with Section 4, as amended by A.M. No. 00-2-
"or" connotes that either source qualifies as a sufficient basis for verification and,
10-SC, Rule 7, 1997 Rules of Court, because it does not give the assurance
needless to state, the concurrence of both sources is more than sufficient.[14]
that the allegations of the petition are true and correct based on authentic
Bearing both a disjunctive and conjunctive sense, this parallel legal signification
records.
avoids a construction that will exclude the combination of the alternatives or bar the
efficacy of any one of the alternatives standing alone.[15]
2. The petition is not accompanied by copies of certain pleadings and other
Contrary to petitioner's position, the range of permutation is not left to the pleader's A perusal of the petition filed before the CA shows that the only duplicate original or
liking, but is dependent on the surrounding nature of the allegations which may certified true copies attached as annexes thereto are the January 14, 2004 RTC
warrant that a verification be based either purely on personal knowledge, or entirely Order granting respondent's Motion for Reconsideration and the March 29, 2004 RTC
on authentic records, or on both sources. Order denying petitioner's Motion for Reconsideration. The copy of the September 11,
2003 RTC Decision, which petitioner prayed to be reinstated, is not a certified true
As pointed out by respondent, "authentic records" as a basis for verification bear copy and is not even legible. Petitioner later recompensed though by appending to his
significance in petitions wherein the greater portions of the allegations are based on Motion for Reconsideration a duplicate original copy.
the records of the proceedings in the court of origin and/or the court a quo, and not
solely on the personal knowledge of the petitioner. To illustrate, petitioner himself While petitioner averred before the CA in his Motion for Reconsideration that the
could not have affirmed, based on his personal knowledge, the truthfulness of the February 27, 2003 MeTC Order was already attached to his petition as Annex "G,"
statement in his petition[16] before the CA that at the pre-trial conference respondent Annex "G" bares a replicate copy of a different order, however. It was to this Court
admitted having received the letter of demand, because he (petitioner) was not that petitioner belatedly submitted an uncertified true copy of the said MeTC Order as
present during the conference.[17] Hence, petitioner needed to rely on the records to an annex to his Reply to respondent's Comment.
confirm its veracity.
This Court in fact observes that the copy of the other MeTC Order, that dated May 5,
Verification is not an empty ritual or a meaningless formality. Its import must never be 2003, which petitioner attached to his petition before the CA is similarly uncertified as
sacrificed in the name of mere expedience or sheer caprice. For what is at stake is true.
the matter of verity attested by the sanctity of an oath[18] to secure an assurance that
the allegations in the pleading have been made in good faith, or are true and correct Since both Orders of the MeTC were adverse to him even with respect to the civil
and not merely speculative.[19] aspect of the case, petitioner was mandated to submit them in the required form.[23]

This Court has strictly been enforcing the requirement of verification and certification In fine, petitioner fell short in his compliance with Section 2 (d) of Rule 42,
and enunciating that obedience to the requirements of procedural rules is needed if the mandatory tenor of which is discernible thereunder and is well settled.[24] He has
fair results are to be expected therefrom. Utter disregard of the rules cannot just be not, however, advanced any strong compelling reasons to warrant a relaxation of the
rationalized by harking on the policy of liberal construction.[20] While the requirement Rules, hence, his petition before the CA was correctly dismissed.
is not jurisdictional in nature, it does not make it less a rule. A relaxed application of
the rule can only be justified by the attending circumstances of the case.[21]
Procedural rules are tools designed to facilitate the adjudication of cases.
To sustain petitioner's explanation that the basis of verification is a matter of simple Courts and litigants alike are thus enjoined to abide strictly by the rules.
preference would trivialize the rationale and diminish the resoluteness of the rule. It And while the Court, in some instances, allows a relaxation in the application
would play on predilection and pay no heed in providing enough assurance of the of the rules, this we stress, was never intended to forge a bastion for erring
correctness of the allegations. litigants to violate the rules with impunity. The liberality in the interpretation
and application of the rules applies only in proper cases and under justifiable
On the second reason of the CA in dismissing the petition - that the petition was not causes and circumstances. While it is true that litigation is not a game of
accompanied by copies of certain pleadings and other material portions of the record technicalities, it is equally true that every case must be prosecuted in
as would support the allegations of the petition (i.e., Motion for Leave to File Demurrer accordance with the prescribed procedure to insure an orderly and speedy
to Evidence, Demurrer to Evidence and the Opposition thereto, and the MeTC administration of justice.[25] (Emphasis supplied)
February 27, 2003 Order dismissing the case) - petitioner contends that these
As to the third reason for the appellate court's dismissal of his petition - failure to
documents are immaterial to his appeal.
implead the People of the Philippines as a party in the petition - indeed, as petitioner
contends, the same is of no moment, he having appealed only the civil aspect of the
Contrary to petitioner's contention, however, the materiality of those documents is case. Passing on the dual purpose of a criminal action, this Court ruled:
very apparent since the civil aspect of the case, from which he is appealing, was
likewise dismissed by the trial court on account of the same Demurrer.
Unless the offended party waives the civil action or reserves the right to
Petitioner, nonetheless, posits that he subsequently submitted to the CA copies of the institute it separately or institutes the civil action prior to the criminal
enumerated documents, save for the MeTC February 27, 2003 Order, as attachments action, there are two actions involved in a criminal case. The first is the
to his Motion for Reconsideration. criminal action for the punishment of the offender. The parties are the People
of the Philippines as the plaintiff and the accused. In a criminal action, the
The Rules, however, require that the petition must "be accompanied by clearly legible private complainant is merely a witness for the State on the criminal aspect of
duplicate original or true copies of the judgments or final orders of both lower courts, the action. The second is the civil action arising from the delict. The private
certified correct by the clerk of court."[22] complainant is the plaintiff and the accused is the defendant. There is a
 merger of the trial of the two cases to avoid multiplicity of suits.[26] the civil aspect of the case generally proceeds. The only recognized instance when
(Underscoring supplied) an acquittal on demurrer carries with it the dismissal of the civil aspect is when there
is a finding that the act or omission from which the civil liability may arise did not exist.
Absent such determination, trial as to the civil aspect of the case must perforce
It bears recalling that the MeTC acquitted respondent.[27] As a rule, a judgment of continue. Thus this Court, in Salazar v. People,[35] held:
acquittal is immediately final and executory and the prosecution cannot appeal the
acquittal because of the constitutional prohibition against double jeopardy.
If demurrer is granted and the accused is acquitted by the court, the accused
Either the offended party or the accused may, however, appeal the civil aspect of the has the right to adduce evidence on the civil aspect of the case unless the
judgment despite the acquittal of the accused. The public prosecutor has generally no court also declares that the act or omission from which the civil liability may
interest in appealing the civil aspect of a decision acquitting the accused. The arise did not exist.[36]
acquittal ends his work. The case is terminated as far as he is concerned. The real
parties in interest in the civil aspect of a decision are the offended party and the
accused.[28] In the instant case, the MeTC granted the demurrer and dismissed the case without
any finding that the act or omission from which the civil liability may arise did not exist.
Technicality aside, the petition is devoid of merit.
Respondent did not assail the RTC order of remand. He thereby recognized that there
When a demurrer to evidence is filed without leave of court, the whole case is is basis for a remand.
submitted for judgment on the basis of the evidence for the prosecution as the
accused is deemed to have waived the right to present evidence.[29] At that juncture, Indicatively, respondent stands by his defense that he merely borrowed P1,500,000
the court is called upon to decide the case including its civil aspect, unless the with the remainder representing the interest, and that he already made a partial
enforcement of the civil liability by a separate civil action has been waived or payment of P1,590,000. Petitioner counters, however, that the payments made by
reserved.[30] respondent pertained to other transactions.[37] Given these conflicting claims which
are factual, a remand of the case would afford the fullest opportunity for the parties to
If the filing of a separate civil action has not been reserved or priorly instituted or the ventilate, and for the trial court to resolve the same.
enforcement of civil liability is not waived, the trial court should, in case of conviction,
state the civil liability or damages caused by the wrongful act or omission to be Petitioner finally posits that respondent waived his right to present evidence on the
recovered from the accused by the offended party, if there is any.[31] civil aspect of the case (1) when the grant of the demurrer was reversed on appeal,
citing Section 1 of Rule 33,[38] and (2) when respondent orally opposed petitioner's
For, in case of acquittal, the accused may still be adjudged civilly liable. The extinction motion for reconsideration pleading that proceedings with respect to the civil aspect of
of the penal action does not carry with it the extinction of the civil action where (a) the the case continue.
acquittal is based on reasonable doubt as only preponderance of evidence is
required; (b) the court declares that the liability of the accused is only civil; and (c) the Petitioner's position is tenuous.
civil liability of the accused does not arise from or is not based upon the crime of
which the accused was acquitted.[32] Petitioner's citation of Section 1 of Rule 33 is incorrect. Where a court has jurisdiction
over the subject matter and over the person of the accused, and the crime was
The civil action based on delict may, however, be deemed extinguished if there is a committed within its territorial jurisdiction, the court necessarily exercises jurisdiction
finding on the final judgment in the criminal action that the act or omission from which over all issues that the law requires it to resolve.
the civil liability may arise did not exist.[33]
One of the issues in a criminal case being the civil liability of the accused arising from
In case of a demurrer to evidence filed with leave of court, the accused may adduce the crime, the governing law is the Rules of Criminal Procedure, not the Rules of Civil
countervailing evidence if the court denies the demurrer.[34] Such denial bears no Procedure which pertains to a civil action arising from the initiatory pleading that gives
distinction as to the two aspects of the case because there is a disparity of evidentiary rise to the suit.[39]
value between the quanta of evidence in such aspects of the case. In other words, a
court may not deny the demurrer as to the criminal aspect and at the same time grant As for petitioner's attribution of waiver to respondent, it cannot be determined with
the demurrer as to the civil aspect, for if the evidence so far presented is not certainty from the records the nature of the alleged oral objections of respondent to
insufficient to prove the crime beyond reasonable doubt, then the same evidence is petitioner's motion for reconsideration of the grant of the demurrer to evidence. Any
likewise not insufficient to establish civil liability by mere preponderance of evidence. waiver of the right to present evidence must be positively demonstrated. Any
ambiguity in the voluntariness of the waiver is frowned upon,[40] hence, courts must
On the other hand, if the evidence so far presented is insufficient as proof beyond indulge every reasonable presumption against it.[41]
reasonable doubt, it does not follow that the same evidence is insufficient to establish
a preponderance of evidence. For if the court grants the demurrer, proceedings on This Court therefore upholds respondent's right to present evidence as reserved by
his filing of leave of court to file the demurrer.

WHEREFORE, the petition is, in light of the foregoing discussions, DENIED.

The case is REMANDED to the court of origin, Metropolitan Trial Court of Makati City,
Branch 65 which is DIRECTED to forthwith set Criminal Case No. 294690 for further
proceedings only for the purpose of receiving evidence on the civil aspect of the case.

Costs against petitioner.

SO ORDERED.

ANTONIO TAN, petitioner, vs. COURT OF APPEALS and the CULTURAL
CENTER OF THE PHILIPPINES, respondents.
G.R. No. 116285 | 2001-10-19
DECISION
DE LEON, JR., J.:
Before us is a petition for review of the Decision[1] dated August 31, 1993 and
Resolution[2] dated July 13, 1994 of the Court of Appeals affirming the Decision[3]
dated May 8, 1991 of the Regional Trial Court (RTC) of Manila, Branch 27.
The facts are as follows:
On May 14, 1978 and July 6, 1978, petitioner Antonio Tan obtained two (2) loans
each in the principal amount of Two Million Pesos (P2,000,000.00), or in the total
principal amount of Four Million Pesos (P4,000,000.00) from respondent Cultural
Center of the Philippines (CCP, for brevity) evidenced by two (2) promissory notes
with maturity dates on May 14, 1979 and July 6, 1979, respectively. Petitioner
defaulted but after a few partial payments he had the loans restructured by
respondent CCP, and petitioner accordingly executed a promissory note (Exhibit "A")
on August 31, 1979 in the amount of Three Million Four Hundred Eleven Thousand
Four Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32) payable
in five (5) installments. Petitioner Tan failed to pay any installment on the said
restructured loan of Three Million Four Hundred Eleven Thousand Four Hundred
Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32), the last installment
falling due on December 31, 1980. In a letter dated January 26, 1982, petitioner
requested and proposed to respondent CCP a mode of paying the restructured loan,
i.e., (a) twenty percent (20%) of the principal amount of the loan upon the respondent
giving its conformity to his proposal; and (b) the balance on the principal obligation
payable in thirty-six (36) equal monthly installments until fully paid. On October 20,
1983, petitioner again sent a letter to respondent CCP requesting for a moratorium on
his loan obligation until the following year allegedly due to a substantial deduction in
the volume of his business and on account of the peso devaluation. No favorable
response was made to said letters. Instead, respondent CCP, through counsel, wrote
a letter dated May 30, 1984 to the petitioner demanding full payment, within ten (10)
days from receipt of said letter, of the petitioner's restructured loan which as of April
30, 1984 amounted to Six Million Eighty-Eight Thousand Seven Hundred Thirty-Five
Pesos and Three Centavos (P6,088,735.03).
On August 29, 1984, respondent CCP filed in the RTC of Manila a complaint for
collection of a sum of money, docketed as Civil Case No. 84-26363, against the
petitioner after the latter failed to settle his said restructured loan obligation. The
petitioner interposed the defense that he merely accommodated a friend, Wilson
Lucmen, who allegedly asked for his help to obtain a loan from respondent CCP.
Petitioner claimed that he has not been able to locate Wilson Lucmen. While the case
was pending in the trial court, the petitioner filed a Manifestation wherein he proposed
to settle his indebtedness to respondent CCP by proposing to make a down payment
of One Hundred Forty Thousand Pesos (P140,000.00) and to issue twelve (12)
checks every beginning of the year to cover installment payments for one year, and
every year thereafter until the balance is fully paid. However, respondent CCP did not
agree to the petitioner's proposals and so the trial of the case ensued.
On May 8, 1991, the trial court rendered a decision, the dispositive portion of which
reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against
defendant, ordering defendant to pay plaintiff, the amount of P7,996,314.67,
representing defendant's outstanding account as of August 28, 1986, with the
corresponding stipulated interest and charges thereof, until fully paid, plus attorney's
fees in an amount equivalent to 25% of said outstanding account, plus P50,000.00, as
exemplary damages, plus costs.
Defendant's counterclaims are ordered dismissed, for lack of merit.
SO ORDERED.[4]
The trial court gave five (5) reasons in ruling in favor of respondent CCP. First, it gave
little weight to the petitioner's contention that the loan was merely for the
accommodation of Wilson Lucmen for the reason that the defense propounded was
not credible in itself. Second, assuming, arguendo, that the petitioner did not
personally benefit from the said loan, he should have filed a third party complaint
against Wilson Lucmen, the alleged accommodated party but he did not. Third, for
three (3) times the petitioner offered to settle his loan obligation with respondent CCP.
Fourth, petitioner may not avoid his liability to pay his obligation under the promissory
note (Exh. "A") which he must comply with in good faith pursuant to Article 1159 of
the New Civil Code. Fifth, petitioner is estopped from denying his liability or loan
obligation to the private respondent.
The petitioner appealed the decision of the trial court to the Court of Appeals insofar
as it charged interest, surcharges, attorney's fees and exemplary damages against
the petitioner. In his appeal, the petitioner asked for the reduction of the penalties and
charges on his loan obligation. He abandoned his alleged defense in the trial court
that he merely accommodated his friend, Wilson Lucmen, in obtaining the loan, and
instead admitted the validity of the same. On August 31, 1993, the appellate court
rendered a decision, the dispositive portion of which reads:
WHEREFORE, with the foregoing modification, the judgment appealed from is hereby
AFFIRMED.
SO ORDERED.[5]
In affirming the decision of the trial court imposing surcharges and interest, the
appellate court held that:
We are unable to accept appellant's (petitioner's) claim for modification on the basis
of alleged partial or irregular performance, there being none. Appellant's offer or
tender of payment cannot be deemed as a partial or irregular performance of the
contract, not a single centavo appears to have been paid by the defendant.
However, the appellate court modified the decision of the trial court by deleting the
award for exemplary damages and reducing the amount of awarded attorney's fees to
five percent (5%), by ratiocinating as follows:
Given the circumstances of the case, plus the fact that plaintiff was represented by a
government lawyer, We believe the award of 25% as attorney's fees and P500,000.00
as exemplary damages is out of proportion to the actual damage caused by the non-
performance of the contract and is excessive, unconscionable and iniquitous.
In a Resolution dated July 13, 1994, the appellate court denied the petitioner's motion
for reconsideration of the said decision.
Hence, this petition anchored on the following assigned errors:
I For value received, I/We jointly and severally promise to pay to the CULTURAL
THE HONORABLE COURT OF APPEALS COMMITTED A MISTAKE IN GIVING ITS
IMPRIMATUR TO THE DECISION OF THE TRIAL COURT WHICH COMPOUNDED
INTEREST ON SURCHARGES.
II
THE HONORABLE COURT OF APPEALS ERRED IN NOT SUSPENDING
IMPOSITION OF INTEREST FOR THE PERIOD OF TIME THAT PRIVATE
RESPONDENT HAS FAILED TO ASSIST PETITIONER IN APPLYING FOR RELIEF
OF LIABILITY THROUGH THE COMMISSION ON AUDIT AND THE OFFICE OF
THE PRESIDENT.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT DELETING AWARD OF
ATTORNEY'S FEES AND IN REDUCING PENALTIES.
Significantly, the petitioner does not question his liability for his restructured loan
under the promissory note marked Exhibit "A". The first question to be resolved in the
case at bar is whether there are contractual and legal bases for the imposition of the
penalty, interest on the penalty and attorney's fees.
The petitioner imputes error on the part of the appellate court in not totally eliminating
the award of attorney's fees and in not reducing the penalties considering that the
petitioner, contrary to the appellate court's findings, has allegedly made partial
payments on the loan. And if penalty is to be awarded, the petitioner is asking for the
non-imposition of interest on the surcharges inasmuch as the compounding of interest
on surcharges is not provided in the promissory note marked Exhibit "A". The
petitioner takes exception to the computation of the private respondent whereby the
interest, surcharge and the principal were added together and that on the total sum
interest was imposed. Petitioner also claims that there is no basis in law for the
charging of interest on the surcharges for the reason that the New Civil Code is
devoid of any provision allowing the imposition of interest on surcharges.
We find no merit in the petitioner's contention. Article 1226 of the New Civil Code
provides that:
In obligations with a penal clause, the penalty shall substitute the indemnity for
damages and the payment of interests in case of non-compliance, if there is no
stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses
to pay the penalty or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the
provisions of this Code.
In the case at bar, the promissory note (Exhibit "A") expressly provides for the
imposition of both interest and penalties in case of default on the part of the petitioner
in the payment of the subject restructured loan. The pertinent[6] portion of the
promissory note (Exhibit "A") imposing interest and penalties provides that:
CENTER OF THE PHILIPPINES at its office in Manila, the sum of THREE MILLION
FOUR HUNDRED ELEVEN THOUSAND FOUR HUNDRED + PESOS
(P3,411,421.32) Philippine Currency, xxx.
xxx xxx xxx
With interest at the rate of FOURTEEN per cent (14%) per annum from the date
hereof until paid. PLUS THREE PERCENT (3%) SERVICE CHARGE.
In case of non-payment of this note at maturity/on demand or upon default of payment
of any portion of it when due, I/We jointly and severally agree to pay additional
penalty charges at the rate of TWO per cent (2%) per month on the total amount due
until paid, payable and computed monthly. Default of payment of this note or any
portion thereof when due shall render all other installments and all existing promissory
notes made by us in favor of the CULTURAL CENTER OF THE PHILIPPINES
immediately due and demandable. (Underscoring supplied)
xxx xxx xxx
The stipulated fourteen percent (14%) per annum interest charge until full payment of
the loan constitutes the monetary interest on the note and is allowed under Article
1956 of the New Civil Code.[7] On the other hand, the stipulated two percent (2%) per
month penalty is in the form of penalty charge which is separate and distinct from the
monetary interest on the principal of the loan.
Penalty on delinquent loans may take different forms. In Government Service
Insurance System v. Court of Appeals,[8] this Court has ruled that the New Civil Code
permits an agreement upon a penalty apart from the monetary interest. If the parties
stipulate this kind of agreement, the penalty does not include the monetary interest,
and as such the two are different and distinct from each other and may be demanded
separately. Quoting Equitable Banking Corp. v. Liwanag,[9] the GSIS case went on to
state that such a stipulation about payment of an additional interest rate partakes of
the nature of a penalty clause which is sanctioned by law, more particularly under
Article 2209 of the New Civil Code which provides that:
If the obligation consists in the payment of a sum of money, and the debtor incurs in
delay, the indemnity for damages, there being no stipulation to the contrary, shall be
the payment of the interest agreed upon, and in the absence of stipulation, the legal
interest, which is six per cent per annum.
The penalty charge of two percent (2%) per month in the case at bar began to accrue
from the time of default by the petitioner. There is no doubt that the petitioner is liable
for both the stipulated monetary interest and the stipulated penalty charge. The
penalty charge is also called penalty or compensatory interest. Having clarified the
same, the next issue to be resolved is whether interest may accrue on the penalty or
compensatory interest without violating the provisions of Article 1959 of the New Civil
Code, which provides that:
Without prejudice to the provisions of Article 2212, interest due and unpaid shall not
earn interest. However, the contracting parties may by stipulation capitalize the
interest due and unpaid, which as added principal, shall earn new interest.
According to the petitioner, there is no legal basis for the imposition of interest on the
penalty charge for the reason that the law only allows imposition of interest on
monetary interest but not the charging of interest on penalty. He claims that since
there is no law that allows imposition of interest on penalties, the penalties should not
earn interest. But as we have already explained, penalty clauses can be in the form of
penalty or compensatory interest. Thus, the compounding of the penalty or
compensatory interest is sanctioned by and allowed pursuant to the above-quoted
provision of Article 1959 of the New Civil Code considering that:
First, there is an express stipulation in the promissory note (Exhibit "A") permitting the
compounding of interest. The fifth paragraph of the said promissory note provides
that: "Any interest which may be due if not paid shall be added to the total amount
when due and shall become part thereof, the whole amount to bear interest at the
maximum rate allowed by law."[10] Therefore, any penalty interest not paid, when
due, shall earn the legal interest of twelve percent (12%) per annum,[11] in the
absence of express stipulation on the specific rate of interest, as in the case at bar.
Second, Article 2212 of the New Civil Code provides that "Interest due shall earn
legal interest from the time it is judicially demanded, although the obligation may be
silent upon this point." In the instant case, interest likewise began to run on the
penalty interest upon the filing of the complaint in court by respondent CCP on August
29, 1984. Hence, the courts a quo did not err in ruling that the petitioner is bound to
pay the interest on the total amount of the principal, the monetary interest and the
penalty interest.
The petitioner seeks the elimination of the compounded interest imposed on the total
amount based allegedly on the case of National Power Corporation v. National
Merchandising Corporation,[12] wherein we ruled that the imposition of interest on the
damages from the filing of the complaint is unjust where the litigation was prolonged
for twenty-five (25) years through no fault of the defendant. However, the ruling in the
said National Power Corporation (NPC) case is not applicable to the case at bar
inasmuch as our ruling on the issue of interest in that NPC case was based on
equitable considerations and on the fact that the said case lasted for twenty-five (25)
years "through no fault of the defendant." In the case at bar, however, equity cannot
be considered inasmuch as there is a contractual stipulation in the promissory note
whereby the petitioner expressly agreed to the compounding of interest in case of
failure on his part to pay the loan at maturity. Inasmuch as the said stipulation on the
compounding of interest has the force of law between the parties and does not
appear to be inequitable or unjust, the said written stipulation should be respected.
The private respondent's Statement of Account (marked Exhibits "C" to "C-2")[13]
shows the following breakdown of the petitioner's indebtedness as of August 28,
1986:
Principal P2,838,454.68
Interest P 576,167.89
Surcharge P4,581,692.10
P7,996,314.67
The said statement of account also shows that the above amounts stated therein are
net of the partial payments amounting to a total of Four Hundred Fifty-Two Thousand
Five Hundred Sixty-One Pesos and Forty-Three Centavos (P452,561.43) which were
made during the period from May 13, 1983 to September 30, 1983.[14] The petitioner
now seeks the reduction of the penalty due to the said partial payments. The principal
amount of the promissory note (Exhibit "A") was Three Million Four Hundred Eleven
Thousand Four Hundred Twenty-One Pesos and Thirty-Two Centavos
(P3,411,421.32) when the loan was restructured on August 31, 1979. As of August
28, 1986, the principal amount of the said restructured loan has been reduced to Two
Million Eight Hundred Thirty-Eight Thousand Four Hundred Fifty-Four Pesos and
Sixty-Eight Centavos (P2,838,454.68). Thus, petitioner contends that reduction of the
penalty is justifiable pursuant to Article 1229 of the New Civil Code which provides
that: "The judge shall equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable." Petitioner insists that the penalty should be reduced to ten percent
(10%) of the unpaid debt in accordance with Bachrach Motor Company v. Espiritu.[15]
There appears to be a justification for a reduction of the penalty charge but not
necessarily to ten percent (10%) of the unpaid balance of the loan as suggested by
petitioner. Inasmuch as petitioner has made partial payments which showed his good
faith, a reduction of the penalty charge from two percent (2%) per month on the total
amount due, compounded monthly, until paid can indeed be justified under the said
provision of Article 1229 of the New Civil Code.
In other words, we find the continued monthly accrual of the two percent (2%) penalty
charge on the total amount due to be unconscionable inasmuch as the same
appeared to have been compounded monthly.
Considering petitioner's several partial payments and the fact he is liable under the
note for the two percent (2%) penalty charge per month on the total amount due,
compounded monthly, for twenty-one (21) years since his default in 1980, we find it
fair and equitable to reduce the penalty charge to a straight twelve percent (12%) per
annum on the total amount due starting August 28, 1986, the date of the last
Statement of Account (Exhibits "C" to "C-2"). We also took into consideration the
offers of the petitioner to enter into a compromise for the settlement of his debt by
presenting proposed payment schemes to respondent CCP. The said offers at
compromise also showed his good faith despite difficulty in complying with his loan
obligation due to his financial problems. However, we are not unmindful of the
respondent's long overdue deprivation of the use of its money collectible from the
petitioner.
The petitioner also imputes error on the part of the appellate court for not declaring
the suspension of the running of the interest during that period when the respondent
allegedly failed to assist the petitioner in applying for relief from liability. In this
connection, the petitioner referred to the private respondent's letter[16] dated
September 28, 1988 addressed to petitioner which partially reads:
Dear Mr. Tan:
xxx xxx xxx
On the issue of attorney's fees, the appellate court ruled correctly and justly in
reducing the trial court's award of twenty-five percent (25%) attorney's fees to five
percent (5%) of the total amount due.
WHEREFORE, the assailed Decision of the Court of Appeals is hereby AFFIRMED
with MODIFICATION in that the penalty charge of two percent (2%) per month on the
total amount due, compounded monthly, is hereby reduced to a straight twelve
percent (12%) per annum starting from August 28, 1986. With costs against the
petitioner.
SO ORDERED.

With reference to your appeal for condonation of interest and surcharge, we wish to
inform you that the center will assist you in applying for relief of liability through the
Commission on Audit and Office of the President xxx.

While your application is being processed and awaiting approval, the center will be
accepting your proposed payment scheme with the downpayment of P160,000.00
and monthly remittances of P60,000.00 xxx.

xxx xxx xxx

The petitioner alleges that his obligation to pay the interest and surcharge should
have been suspended because the obligation to pay such interest and surcharge has
become conditional, that is dependent on a future and uncertain event which consists
of whether the petitioner's request for condonation of interest and surcharge would be
recommended by the Commission on Audit and the Office of the President to the
House of Representatives for approval as required under Section 36 of Presidential
Decree No. 1445. Since the condition has not happened allegedly due to the private
respondent's reneging on its promise, his liability to pay the interest and surcharge on
the loan has not arisen. This is the petitioner's contention.

It is our view, however, that the running of the interest and surcharge was not
suspended by the private respondent's promise to assist the petitioners in applying for
relief therefrom through the Commission on Audit and the Office of the President.

First, the letter dated September 28, 1988 alleged to have been sent by the
respondent CCP to the petitioner is not part of the formally offered documentary
evidence of either party in the trial court. That letter cannot be considered evidence
pursuant to Rule 132, Section 34 of the Rules of Court which provides that: "The court
shall consider no evidence which has not been formally offered xxx." Besides, the
said letter does not contain any categorical agreement on the part of respondent CCP
that the payment of the interest and surcharge on the loan is deemed suspended
while his appeal for condonation of the interest and surcharge was being processed.

Second, the private respondent correctly asserted that it was the primary
responsibility of petitioner to inform the Commission on Audit and the Office of the
President of his application for condonation of interest and surcharge. It was
incumbent upon the petitioner to bring his administrative appeal for condonation of
interest and penalty charges to the attention of the said government offices.
SPOUSES TAGUMPAY N. ALBOS AND AIDA C. ALBOS, PETITIONERS, VS.
SPOUSES NESTOR M. EMBISAN AND ILUMINADA A. EMBISAN, DEPUTY
SHERIFF MARINO V. CACHERO, AND THE REGISTER OF DEEDS OF QUEZON
CITY, RESPONDENTS.
Obviously in a bid to prevent the foreclosure of their mortgaged property, petitioners
paid respondent spouses the sum of P44,500.00 on October 2, 1987. The respondent
spouses accepted the partial payment of the principal loan amount owed to them,
which, based on the Statement of Account6 the respondent spouses prepared, by that
time, has already ballooned to P296,658.70. As extrapolated from the Statement of
Account:

G.R. No. 210831 | 2014-11-26

Month Year Loan Interest Payment Balance
THIRD DIVISION
October 1984 84,000.00 84,000.00
DECISION

VELASCO JR., J.: November 1984 4,200.00 8,000.00 80,200.00

Nature of the Case December 1984 4,200.00 84,400.00

Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of January 1985 4,200.00 4,000.00 84,600.00
Court seeking the reversal and the setting aside of the Decision1 of the Court of
Appeals (CA) dated May 29, 2013 and its Resolution dated January 13, 2014 in CA- February 1985 4,200.00 88,800.00
G.R. CV No. 93667. Said rulings upheld the validity of the extra-judicial foreclosure
sale over the property that petitioners, spouses Tagumpay and Aida Albos, March 1985 4,200.00 93,000.00
mortgaged in favor of private respondents.
April 1985 4,200.00 97,200.00
The Facts

On October 17, 1984, petitioners entered into an agreement, denominated as “Loan May 1985 4,200.00 101,400.00
with Real Estate Mortgage,2 with respondent spouses Nestor and Iluminada Embisan
(spouses Embisan) in the amount of P84,000.00 payable within 90 days with a June 1985 4,200.00 105,600.00
monthly interest rate of 5%. To secure the indebtedness, petitioners mortgaged to the
spouses Embisan a parcel of land in Project 3, Quezon City, measuring around 207.6 July 1985 4,200.00 109,800.00
square meters and registered under their name, as evidenced by Transfer Certificate
Title No. 257697.3 August 1985 4,200.00 114,000.00

For failure to settle their account upon maturity, petitioner Aida Albos requested and September 1985 4,200.00 118,200.00
was given an extension of eleven (11) months, or until December 17, 1985, within
which to pay the loan obligation. However, when the said deadline came anew,
October 1985 4,200.00 122,400.00
petitioners once again defaulted and so, on agreement of the parties, another
extension of five (5) months, or until May 17, 1986, was set.
November 1985 4,200.00 126,600.00
May 17, 1986 came and went but the obligation remained unpaid. Thus, when the
petitioners requested a third extension, as will later be alleged by the respondent December 1985 4,200.00 130,800.00
spouses, an additional eight (8) months was granted on the condition that the monthly
5% interest from then on, i.e. June 1986 onwards, will be compounded. This January 1986 4,200.00 135,000.00
stipulation, however, was not reduced in writing.
February 1986 4,200.00 139,200.00
On February 9, 1987, respondent spouses addressed a letter4 to petitioners
demanding the payment of P234,021.90, representing the unpaid balance and March 1986 4,200.00 143,400.00
interests from the loan. This was followed, on April 14, 1987, by another letter 5 of the
same tenor, but this time demanding from the petitioners the obligation due
April 1986 4,200.00 147,600.00
amounting to P258,009.15.
 The property was never redeemed, and so the respondent spouses executed an
May 1986 4,200.00 151,800.00 Affidavit of Consolidation8 over the property on November 23, 1988. The affidavit was
subsequently registered with the Registry of Deeds of Quezon City, consolidating
June 1986 7,590.00 159,390.00 ownership to the spouses Embisan. Petitioners alleged that afterwards, on February
4, 1989, they were pressured by the respondent spouses to execute a Contract of
July 1986 7,969.50 167,359.50 Lease9 over the property wherein the petitioners, as lessees, are obligated to pay the
respondent spouses, as lessors, monthly rent in the amount of P2,500.00
August 1986 8,367.98 175,727.45
On August 14, 1989, herein petitioners filed a complaint for the annulment of the Loan
with Real Estate Mortgage, Certificate of Sale, Affidavit of Consolidation, Deed of
September 1986 8,786.37 184,513.82 Final Sale, and Contract of Lease before the Regional Trial Court of Quezon City
(RTC). In their complaint, docketed as Civil Case No. 89-3246, and later raffled to
October 1986 9,225.69 192,739.50 Branch 99 of the court, petitioners alleged that the foreclosure sale is void because
respondents only released P60,000.00 out of the P84,000.00 amount loaned, which
November 1986 9,417.50 202,157.00 has already been paid. As petitioner Aida Albos testified during trial, she was able to
pay P50,000 out of the P60,000 principal loan released, and also P4,500.00 monthly
December 1986 10,107.75 212,264.75 interests, as evidenced by receipts dated December 19, 1984 and February 9,
1985.10
January 1987 10,613.25 222,878.00
In their Answer, the spouses Embisan countered that the loan was legally and validly
entered at arms length after a series of meetings and negotiations; that petitioners
February 1987 11,143.90 234,021.90
agreed to pay compounded interest in exchange for extending the payment period the
third time; that never during the life of the mortgage did petitioners pay P50,000.00;
March 1987 11,701.10 245,723.00 and, that petitioners, having defaulted, left the spouses Embisan with no other option
except to extra-judicially foreclose the property security as stipulated in the mortgage.
April 1987 12,286.15 258,009.15
Ruling of the Trial Court
May 1987 12,900.45 270,909.60
Following trial, the RTC rendered a Decision11 on December 15, 2008 dismissing the
June 1987 13,545.48 284,455.10 complaint for lack of merit, the dispositive portion of which reads:

July 1987 14,222.75 298,677.85

WHEREFORE, in view of the foregoing considerations, the complaint filed by plaintiff
is DISMISSED for lack of merit.
August 1987 14,933.90 313,611.75
Defendants’ counterclaim is denied.

September 1987 15,680.60 329,292.35 SO OREDERED.

October 1987 44,500.00 284,792.35 In so doing, the trial court did not give credence to petitioners’ claim that only
P60,000.00 of the loaned amount was released to them. It also found that between
Interest for 15 days 7,119.80 291,912.15 October 17, 1984 to October 28, 1987, petitioners only paid the total amount of
P56,000.00, which is not sufficient to cover both the principal loan and the accrued
Interest for 10 days 4,746.55 296,658.70 interest. In addition, the trial court shrugged aside petitioners’ contention that they
were forced to affix their signatures in the adverted Contract of Lease, adding that
having signed the lease agreement, they were estopped from asserting title over the
Due to petitioners’ failure to settle their indebtedness, respondent spouses proceeded
property.
to extra-judicially foreclose the mortgaged property on October 12, 1987. At the
auction sale conducted by the respondent sheriff, respondent spouses emerged as
Petitioners filed a Motion for Reconsideration, but the same was denied by the trial
the highest bidders at P330,000.00 and were later issued a Sheriff’s Certificate of
court through a Resolution dated January 13, 2014. Aggrieved, they elevated the
Sale.7
case to the CA.

Ruling of the Court of Appeals


On appeal, petitioners argued that the imposition by the respondent spouses of a 5%
compounded interest on the loan, without the petitioners’ consent or knowledge, is
fraudulent and contrary to public morals. Respondents, on the other hand, insisted
that the compounding of the interest was agreed upon as a condition for the third and
final extension of time given for the petitioners to make good their promise to pay.
On May 29, 2013, the CA promulgated the assailed Decision, affirming in toto the
ruling of the trial court. The appellate court held that, under the circumstances,
inasmuch as the request for the third extension––for another eight months––was
made after the expiration of one year and four months from when the payment first
became due, the agreement to compound the interest was just and reasonable. It
added that it was precisely the petitioners’ repeated non-compliance which prompted
the imposition of a compounded interest rate and, therefore, petitioners could no
longer feign ignorance of its imposition.
Through the challenged Resolution dated January 13, 2014, the CA denied
petitioners’ Motion for Reconsideration.
Hence, the instant petition.
The Issues
Petitioners anchor their plea for the reversal of the assailed Decision on the following
grounds:12
I.
THERE IS NO DOCUMENTARY PROOF TO SHOW THAT THE PETITIONERS
AGREED IN WRITING TO THE IMPOSITION OF THE 5% COMPOUNDED
MONTHLY INTEREST, CONTRARY TO ARTICLE 1956 OF THE CIVIL CODE
II.
THE 5% COMPOUNDED MONTHLY INTEREST UNILATERALLY IMPOSED BY
RESPONDENT EMBISAN ON THE PETITIONERS IS EXCESSIVE, EXORBITANT,
OPPRESSIVE, INIQUITOUS AND UNCONSCIONABLE, THEREFORE, THE SAME
IS VOID FOR BEING CONTRARY TO LAW AND MORALS
III.
THE FORECLOSURE PROCEEDINGS INSTITUTED BY THE RESPONDENT
SPOUSES EMBISAN SHOULD BE NULLIFIED FOR BEING BASED ON A WRONG
COMPUTATION OF THE OUTSTANDING LOAN OF THE PETITIONERS WHICH
WAS WRONGLY COMPUTED ON THE BASIS OF A 5% COMPOUNDED
MONTHLY INTEREST
Succinctly put, the pivotal issue to be resolved is whether or not the extra-judicial
foreclosure proceedings should be nullified for being based on an allegedly erroneous
computation of the loan’s interest.
Respondent spouses, in their Comment, contend that the issues raised in the petition
are questions of fact that cannot be entertained by this Court; that parole evidence
can be introduced, as was properly appreciated by the RTC and CA, to ascertain the
true intention of the parties on how the interest on the loan will accrue; and that
petitioners’ cause of action is barred by prescription, counting four (4) years from the
original due date of the loan, which was December 17, 1984.
The Court’s Ruling
The petition is meritorious.
The compounding of interest should be in writing
For academic purposes, We first determine whether or not the stipulation
compounding the interest charged should specifically be indicated in a written
agreement.
We rule in the affirmative.
Article 1956 of the New Civil Code, which refers to monetary interest, provides:
Article 1956. No interest shall be due unless it has been expressly stipulated in
writing.
As mandated by the foregoing provision, payment of monetary interest shall be due
only if: (1) there was an express stipulation for the payment of interest; and (2) the
agreement for such payment was reduced in writing. Thus, We have held that
collection of interest without any stipulation thereof in writing is prohibited by law. 13
In the case at bar, it is undisputed that the parties have agreed for the loan to earn
5% monthly interest, the stipulation to that effect put in writing. When the petitioners
defaulted, the period for payment was extended, carrying over the terms of the
original loan agreement, including the 5% simple interest. However, by the third
extension of the loan, respondent spouses decided to alter the agreement by
changing the manner of earning interest rate, compounding it beginning June 1986.
This is apparent from the Statement of Account prepared by the spouses Embisan
themselves.
Given the circumstances, We rule that the first requirement––that there be an express
stipulation for the payment of interest––is not sufficiently complied with, for purposes
of imposing compounded interest on the loan. The requirement does not only entail
reducing in writing the interest rate to be earned but also the manner of earning the
same, if it is to be compounded. Failure to specify the manner of earning interest,
however, shall not automatically render the stipulation imposing the interest rate void
since it is readily apparent from the contract itself that the parties herein agreed for
the loan to bear interest. Instead, in default of any stipulation on the manner of
earning interest, simple interest shall accrue.
Settled is the rule that ambiguities in a contract are interpreted against the party that
caused the ambiguity. Any ambiguity in a contract whose terms are susceptible of
different interpretations must be read against the party who drafted it.14 In the extant
case, respondent spouses, having imposed, unilaterally at that, the compounded
interest rate, had the correlative duty of clarifying and reducing in writing how the said
interest shall be earned. Having failed to do so, the silence of the agreement on the
manner of earning interest is a valid argument for prohibiting them from charging
interest at a compounded rate.

Further, by analogy, We have had the occasion to hold that, when a final money
judgment ordered the payment of “legal interest” without mention of payment of
compound interest, a judge who orders payment of compound interest does so in
excess of his authority.15 As held in Philippine American Accident Insurance v.
Flores:16
The judgment which was sought to be executed ordered the payment of simple “legal
interest” only. It said nothing about the payment of compound interest. Accordingly,
when the respondent judge ordered the payment of compound interest he went
beyond the confines of his own judgment which had been affirmed by the Court of
Appeals and which had become final. x x x
Therefore, in default of any unequivocal wording in the contract, the legal interest
stipulated by the parties should be understood to be simple, not compounded.
Imposing 5% monthly interest, whether compounded or simple, is
unconscionable
Nevertheless, even if there was such an agreement that interest will be compounded,
We agree with the petitioners that the 5% monthly rate, be it simple or compounded,
written or verbal, is void for being too exorbitant, thus running afoul of Article 1306 of
the New Civil Code, which provides:
Article 1306. The contracting parties may establish such stipulations, clauses, terms
and conditions as they may deem convenient, provided they are not contrary to
law, morals, good customs, public order, or public policy. (emphasis added)
As case law instructs, the imposition of an unconscionable rate of interest on a money
debt, even if knowingly and voluntarily assumed, is immoral and unjust. It is
tantamount to a repugnant spoliation and an iniquitous deprivation of property,
repulsive to the common sense of man. It has no support in law, in principles of
justice, or in the human conscience nor is there any reason whatsoever which may
justify such imposition as righteous and as one that may be sustained within the
sphere of public or private morals.17
Summarizing the jurisprudential trend towards this direction is the recent case of
Castro v. Tan18 in which We held:
While we agree with petitioners that parties to a loan agreement have wide latitude to
stipulate on any interest rate in view of the Central Bank Circular No. 905 s. 1982
which suspended the Usury Law ceiling on interest effective January 1, 1983, it is
also worth stressing that interest rates whenever unconscionable may still be
declared illegal. There is certainly nothing in said circular which grants lenders carte
blanche authority to raise interest rates to levels which will either enslave their
borrowers or lead to a hemorrhaging of their assets.
In several cases, we have ruled that stipulations authorizing iniquitous or
unconscionable interests are contrary to morals, if not against the law. In Medel v.
Court of Appeals,19 we annulled a stipulated 5.5% per month or 66% per annum
interest on a P500,000.00 loan and a 6% per month or 72% per annum interest on a
P60,000.00 loan, respectively, for being excessive, iniquitous, unconscionable and
exorbitant. In Ruiz v. Court of Appeals,20 we declared a 3% monthly interest imposed
on four separate loans to be excessive. In both cases, the interest rates were reduced
to 12% per annum.
In this case, the 5% monthly interest rate, or 60% per annum, compounded
monthly, stipulated in the Kasulatan is even higher than the 3% monthly
interest rate imposed in the Ruiz case. Thus, we similarly hold the 5% monthly
interest to be excessive, iniquitous, unconscionable and exorbitant, contrary to
morals, and the law. It is therefore void ab initio for being violative of Article
1306 of the Civil Code. With this, and in accord with the Medel and Ruiz cases,
we hold that the Court of Appeals correctly imposed the legal interest of 12%
per annum in place of the excessive interest stipulated in the
Kasulatan. (emphasis added)
As can be gleaned, jurisprudence on the nullity of excessive interest rates is both
clear and consistent. We find no cogent reason to deviate therefrom. As the lender in
Castro, respondent spouses herein similarly imposed a 5% monthly interest in the
loan contracted by petitioners. Following the judicial pronouncement in the said
cases, the interest rate so imposed herein is nullified for being unconscionable. In lieu
thereof, a simple interest of 12% per annum should be imposed.
The foreclosure sale should be nullified
In view of the above disquisitions, We are constrained to nullify the foreclosure
proceedings with respect to the mortgaged property in this case, following the
doctrine in Heirs of Zoilo and Primitiva Espiritu v. Landrito. 21
In Heirs of Espiritu, the spouses Maximo and Paz Landrito, sometime in 1986,
borrowed from the spouses Zoilo and Primitiva Espiritu the amount of P350,000.00,
secured by a real estate mortgage. Because of the Landritos’ continued inability to
pay the loan, the due date for payment was extended on the condition that the
interest that has already accrued shall, from then on, form part of the principal. As
such, after the third extension, the principal amounted to P874,125.00 in only two
years. Despite the extensions, however, the debt remained unpaid, prompting the
spouses Espiritu to foreclose the mortgaged property.
The foreclosure proceeding in Heirs of Espiritu, however, was eventually nullified by
this Court because the Landritos were deprived of the opportunity to settle the debt, in
view of the overstated amount demanded from them. As held:
Since the Spouses Landrito, the debtors in this case, were not given an opportunity to
settle their debt, at the correct amount and without the iniquitous interest imposed, no
foreclosure proceedings may be instituted. A judgment ordering a foreclosure sale is
conditioned upon a finding on the correct amount of the unpaid obligation and the
failure of the debtor to pay the said amount. In this case, it has not yet been shown
that the Spouses Landrito had already failed to pay the correct amount of the debt
and, therefore, a foreclosure sale cannot be conducted in order to answer for the
unpaid debt. x x x
As a result, the subsequent registration of the foreclosure sale cannot transfer any
rights over the mortgaged property to the Spouses Espiritu. The registration of the
foreclosure sale, herein declared invalid, cannot vest title over the mortgaged
property. x x x

Applying Espiritu, the extra-judicial foreclosure of the mortgaged property dated

October 12, 1987 is declared null, void, and of no legal effect.

WHEREFORE, in view of the foregoing, the petition is GRANTED. The Decision and
Resolution of the Court of Appeals, dated May 29, 2013 and January 13, 2014,
respectively, in CA-G.R. CV No. 93667 are hereby REVERSED and SET ASIDE. Let
a new Decision be entered, the dispositive portion of which reads:

1. The stipulation in the Loan with Real Estate Mortgage imposing an interest of 5%
monthly is declared void.

2. In view of the nullity of the interest imposed on the loan which affected the total
arrearages upon which foreclosure was based, the foreclosure of mortgage,
Certificate of Sale, Affidavit of Consolidation, Deed of Final Sale, and Contract of
Lease are declared void.

3. The case is remanded to the Regional Trial Court to compute the current
arrearages of petitioners taking into account the partial payments made by them and
the imposition of the simple interest rate of 12% per annum.

SO ORDERED.

SEBASTIAN SIGA-AN, Petitioner, versus ALICIA VILLANUEVA, Respondent.
G.R. No. 173227 | 2009-01-20
DECISION
CHICO-NAZARIO, J.:
Before Us is a Petition[1] for Review on Certiorari under Rule 45 of the Rules of Court
seeking to set aside the Decision,[2] dated 16 December 2005, and Resolution,[3]
dated 19 June 2006 of the Court of Appeals in CA-G.R. CV No. 71814, which affirmed
in toto the Decision,[4] dated 26 January 2001, of the Las Pinas City Regional Trial
Court, Branch 255, in Civil Case No. LP-98-0068.
The facts gathered from the records are as follows:
On 30 March 1998, respondent Alicia Villanueva filed a complaint[5] for sum of money
against petitioner Sebastian Siga-an before the Las Pinas City Regional Trial Court
(RTC), Branch 255, docketed as Civil Case No. LP-98-0068. Respondent alleged that
she was a businesswoman engaged in supplying office materials and equipments to
the Philippine Navy Office (PNO) located at Fort Bonifacio, Taguig City, while
petitioner was a military officer and comptroller of the PNO from 1991 to 1996.
Respondent claimed that sometime in 1992, petitioner approached her inside the
PNO and offered to loan her the amount of P540,000.00. Since she needed capital for
her business transactions with the PNO, she accepted petitioner's proposal. The loan
agreement was not reduced in writing. Also, there was no stipulation as to the
payment of interest for the loan.[6]
On 31 August 1993, respondent issued a check worth P500,000.00 to petitioner as
partial payment of the loan. On 31 October 1993, she issued another check in the
amount of P200,000.00 to petitioner as payment of the remaining balance of the loan.
Petitioner told her that since she paid a total amount of P700,000.00 for the
P540,000.00 worth of loan, the excess amount of P160,000.00 would be applied as
interest for the loan. Not satisfied with the amount applied as interest, petitioner
pestered her to pay additional interest. Petitioner threatened to block or disapprove
her transactions with the PNO if she would not comply with his demand. As all her
transactions with the PNO were subject to the approval of petitioner as comptroller of
the PNO, and fearing that petitioner might block or unduly influence the payment of
her vouchers in the PNO, she conceded. Thus, she paid additional amounts in cash
and checks as interests for the loan. She asked petitioner for receipt for the payments
but petitioner told her that it was not necessary as there was mutual trust and
confidence between them. According to her computation, the total amount she paid to
petitioner for the loan and interest accumulated to P1,200,000.00.[7]
Thereafter, respondent consulted a lawyer regarding the propriety of paying interest
on the loan despite absence of agreement to that effect. Her lawyer told her that
petitioner could not validly collect interest on the loan because there was no
agreement between her and petitioner regarding payment of interest. Since she paid
petitioner a total amount of P1,200,000.00 for the P540,000.00 worth of loan, and
upon being advised by her lawyer that she made overpayment to petitioner, she sent
a demand letter to petitioner asking for the return of the excess amount of
P660,000.00. Petitioner, despite receipt of the demand letter, ignored her claim for
reimbursement.[8]
Respondent prayed that the RTC render judgment ordering petitioner to pay
respondent (1) P660,000.00 plus legal interest from the time of demand; (2)
P300,000.00 as moral damages; (3) P50,000.00 as exemplary damages; and (4) an
amount equivalent to 25% of P660,000.00 as attorney's fees.[9]
In his answer[10] to the complaint, petitioner denied that he offered a loan to
respondent. He averred that in 1992, respondent approached and asked him if he
could grant her a loan, as she needed money to finance her business venture with the
PNO. At first, he was reluctant to deal with respondent, because the latter had a
spotty record as a supplier of the PNO. However, since respondent was an
acquaintance of his officemate, he agreed to grant her a loan. Respondent paid the
loan in full.[11]
Subsequently, respondent again asked him to give her a loan. As respondent had
been able to pay the previous loan in full, he agreed to grant her another loan. Later,
respondent requested him to restructure the payment of the loan because she could
not give full payment on the due date. He acceded to her request. Thereafter,
respondent pleaded for another restructuring of the payment of the loan. This time he
rejected her plea. Thus, respondent proposed to execute a promissory note wherein
she would acknowledge her obligation to him, inclusive of interest, and that she would
issue several postdated checks to guarantee the payment of her obligation. Upon his
approval of respondent's request for restructuring of the loan, respondent executed a
promissory note dated 12 September 1994 wherein she admitted having borrowed an
amount of P1,240,000.00, inclusive of interest, from petitioner and that she would pay
said amount in March 1995. Respondent also issued to him six postdated checks
amounting to P1,240,000.00 as guarantee of compliance with her obligation.
Subsequently, he presented the six checks for encashment but only one check was
honored. He demanded that respondent settle her obligation, but the latter failed to do
so. Hence, he filed criminal cases for Violation of the Bouncing Checks Law (Batas
Pambansa Blg. 22) against respondent. The cases were assigned to the Metropolitan
Trial Court of Makati City, Branch 65 (MeTC).[12]
Petitioner insisted that there was no overpayment because respondent admitted in
the latter's promissory note that her monetary obligation as of 12 September 1994
amounted to P1,240,000.00 inclusive of interests. He argued that respondent was
already estopped from complaining that she should not have paid any interest,
because she was given several times to settle her obligation but failed to do so. He
maintained that to rule in favor of respondent is tantamount to concluding that the
loan was given interest-free. Based on the foregoing averments, he asked the RTC to
dismiss respondent's complaint.
After trial, the RTC rendered a Decision on 26 January 2001 holding that respondent
made an overpayment of her loan obligation to petitioner and that the latter should
refund the excess amount to the former. It ratiocinated that respondent's obligation
was only to pay the loaned amount of P540,000.00, and that the alleged interests due
should not be included in the computation of respondent's total monetary debt
because there was no agreement between them regarding payment of interest. It
concluded that since respondent made an excess payment to petitioner in the amount
of P660,000.00 through mistake, petitioner should return the said amount to
respondent pursuant to the principle of solutio indebiti.[13]
The RTC also ruled that petitioner should pay moral damages for the sleepless nights
and wounded feelings experienced by respondent. Further, petitioner should pay
exemplary damages by way of example or correction for the public good, plus
attorney's fees and costs of suit.
The dispositive portion of the RTC Decision reads:
WHEREFORE, in view of the foregoing evidence and in the light of the provisions of
law and jurisprudence on the matter, judgment is hereby rendered in favor of the
plaintiff and against the defendant as follows:
(1) Ordering defendant to pay plaintiff the amount of P660,000.00 plus legal interest
of 12% per annum computed from 3 March 1998 until the amount is paid in full;
(2) Ordering defendant to pay plaintiff the amount of P300,000.00 as moral damages;
(3) Ordering defendant to pay plaintiff the amount of P50,000.00 as exemplary
damages;
(4) Ordering defendant to pay plaintiff the amount equivalent to 25% of P660,000.00
as attorney's fees; and
(5) Ordering defendant to pay the costs of suit.[14]
Petitioner appealed to the Court of Appeals. On 16 December 2005, the appellate
court promulgated its Decision affirming in toto the RTC Decision, thus:
WHEREFORE, the foregoing considered, the instant appeal is hereby DENIED and
the assailed decision [is] AFFIRMED in toto.[15]
Petitioner filed a motion for reconsideration of the appellate court's decision but this
was denied.[16] Hence, petitioner lodged the instant petition before us assigning the
following errors:
I. THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO
INTEREST WAS DUE TO PETITIONER;
II. THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE
PRINCIPLE OF SOLUTIO INDEBITI.[17]
Interest is a compensation fixed by the parties for the use or forbearance of money.
This is referred to as monetary interest. Interest may also be imposed by law or by
courts as penalty or indemnity for damages. This is called compensatory interest.[18]
The right to interest arises only by virtue of a contract or by virtue of damages for
delay or failure to pay the principal loan on which interest is demanded.[19]
Article 1956 of the Civil Code, which refers to monetary interest,[20] specifically
mandates that no interest shall be due unless it has been expressly stipulated in
writing. As can be gleaned from the foregoing provision, payment of monetary interest
is allowed only if: (1) there was an express stipulation for the payment of interest; and
(2) the agreement for the payment of interest was reduced in writing. The
concurrence of the two conditions is required for the payment of monetary interest.
Thus, we have held that collection of interest without any stipulation therefor in writing
is prohibited by law.[21]
It appears that petitioner and respondent did not agree on the payment of interest for
the loan. Neither was there convincing proof of written agreement between the two
regarding the payment of interest. Respondent testified that although she accepted
petitioner's offer of loan amounting to P540,000.00, there was, nonetheless, no verbal
or written agreement for her to pay interest on the loan.[22]
Petitioner presented a handwritten promissory note dated 12 September 1994[23]
wherein respondent purportedly admitted owing petitioner "capital and interest."
Respondent, however, explained that it was petitioner who made a promissory note
and she was told to copy it in her own handwriting; that all her transactions with the
PNO were subject to the approval of petitioner as comptroller of the PNO; that
petitioner threatened to disapprove her transactions with the PNO if she would not
pay interest; that being unaware of the law on interest and fearing that petitioner
would make good of his threats if she would not obey his instruction to copy the
promissory note, she copied the promissory note in her own handwriting; and that
such was the same promissory note presented by petitioner as alleged proof of their
written agreement on interest.[24] Petitioner did not rebut the foregoing testimony. It is
evident that respondent did not really consent to the payment of interest for the loan
and that she was merely tricked and coerced by petitioner to pay interest. Hence, it
cannot be gainfully said that such promissory note pertains to an express stipulation
of interest or written agreement of interest on the loan between petitioner and
respondent.
Petitioner, nevertheless, claims that both the RTC and the Court of Appeals found
that he and respondent agreed on the payment of 7% rate of interest on the loan; that
the agreed 7% rate of interest was duly admitted by respondent in her testimony in
the Batas Pambansa Blg. 22 cases he filed against respondent; that despite such
judicial admission by respondent, the RTC and the Court of Appeals, citing Article
1956 of the Civil Code, still held that no interest was due him since the agreement on
interest was not reduced in writing; that the application of Article 1956 of the Civil
Code should not be absolute, and an exception to the application of such provision
should be made when the borrower admits that a specific rate of interest was agreed
upon as in the present case; and that it would be unfair to allow respondent to pay
only the loan when the latter very well knew and even admitted in the Batas
Pambansa Blg. 22 cases that there was an agreed 7% rate of interest on the loan.[25]
We have carefully examined the RTC Decision and found that the RTC did not make
a ruling therein that petitioner and respondent agreed on the payment of interest at
the rate of 7% for the loan. The RTC clearly stated that although petitioner and
respondent entered into a valid oral contract of loan amounting to P540,000.00, they,
nonetheless, never intended the payment of interest thereon.[26] While the Court of
Appeals mentioned in its Decision that it concurred in the RTC's ruling that petitioner
and respondent agreed on a certain rate of interest as regards the loan, we consider
this as merely an inadvertence because, as earlier elucidated, both the RTC and the
Court of Appeals ruled that petitioner is not entitled to the payment of interest on the
loan. The rule is that factual findings of the trial court deserve great weight and
respect especially when affirmed by the appellate court.[27] We found no compelling
reason to disturb the ruling of both courts.
Petitioner's reliance on respondent's alleged admission in the Batas Pambansa Blg.
22 cases that they had agreed on the payment of interest at the rate of 7% deserves
scant consideration. In the said case, respondent merely testified that after paying the
total amount of loan, petitioner ordered her to pay interest.[28] Respondent did not
categorically declare in the same case that she and respondent made an express
stipulation in writing as regards payment of interest at the rate of 7%. As earlier
discussed, monetary interest is due only if there was an express stipulation in writing
for the payment of interest.
There are instances in which an interest may be imposed even in the absence of
express stipulation, verbal or written, regarding payment of interest. Article 2209 of
the Civil Code states that if the obligation consists in the payment of a sum of money,
and the debtor incurs delay, a legal interest of 12% per annum may be imposed as
indemnity for damages if no stipulation on the payment of interest was agreed upon.
Likewise, Article 2212 of the Civil Code provides that interest due shall earn legal
interest from the time it is judicially demanded, although the obligation may be silent
on this point.
All the same, the interest under these two instances may be imposed only as a
penalty or damages for breach of contractual obligations. It cannot be charged as a
compensation for the use or forbearance of money. In other words, the two instances
apply only to compensatory interest and not to monetary interest.[29] The case at bar
involves petitioner's claim for monetary interest.
Further, said compensatory interest is not chargeable in the instant case because it
was not duly proven that respondent defaulted in paying the loan. Also, as earlier
found, no interest was due on the loan because there was no written agreement as
regards payment of interest.
Apropos the second assigned error, petitioner argues that the principle of solutio
indebiti does not apply to the instant case. Thus, he cannot be compelled to return the
alleged excess amount paid by respondent as interest.[30]
Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there
has been no stipulation therefor, the provisions of the Civil Code concerning solutio
indebiti shall be applied. Article 2154 of the Civil Code explains the principle of solutio
indebiti. Said provision provides that if something is received when there is no right to
demand it, and it was unduly delivered through mistake, the obligation to return it
arises. In such a case, a creditor-debtor relationship is created under a quasi-contract
whereby the payor becomes the creditor who then has the right to demand the return
of payment made by mistake, and the person who has no right to receive such
payment becomes obligated to return the same. The quasi-contract of solutio indebiti
harks back to the ancient principle that no one shall enrich himself unjustly at the
expense of another.[31] The principle of solutio indebiti applies where (1) a payment
is made when there exists no binding relation between the payor, who has no duty to
pay, and the person who received the payment; and (2) the payment is made through
mistake, and not through liberality or some other cause.[32] We have held that the
principle of solutio indebiti applies in case of erroneous payment of undue interest.[33]
It was duly established that respondent paid interest to petitioner. Respondent was
under no duty to make such payment because there was no express stipulation in
writing to that effect. There was no binding relation between petitioner and respondent
as regards the payment of interest. The payment was clearly a mistake. Since
petitioner received something when there was no right to demand it, he has an
obligation to return it.
We shall now determine the propriety of the monetary award and damages imposed
by the RTC and the Court of Appeals.
Records show that respondent received a loan amounting to P540,000.00 from
petitioner.[34] Respondent issued two checks with a total worth of P700,000.00 in
favor of petitioner as payment of the loan.[35] These checks were subsequently
encashed by petitioner.[36] Obviously, there was an excess of P160,000.00 in the
payment for the loan. Petitioner claims that the excess of P160,000.00 serves as
interest on the loan to which he was entitled. Aside from issuing the said two checks,
respondent also paid cash in the total amount of P175,000.00 to petitioner as
interest.[37] Although no receipts reflecting the same were presented because
petitioner refused to issue such to respondent, petitioner, nonetheless, admitted in his
Reply-Affidavit[38] in the Batas Pambansa Blg. 22 cases that respondent paid him a
total amount of P175,000.00 cash in addition to the two checks. Section 26 Rule 130
of the Rules of Evidence provides that the declaration of a party as to a relevant fact
may be given in evidence against him. Aside from the amounts of P160,000.00 and
P175,000.00 paid as interest, no other proof of additional payment as interest was
presented by respondent. Since we have previously found that petitioner is not
entitled to payment of interest and that the principle of solutio indebiti applies to the
instant case, petitioner should return to respondent the excess amount of
P160,000.00 and P175,000.00 or the total amount of P335,000.00. Accordingly, the
reimbursable amount to respondent fixed by the RTC and the Court of Appeals
should be reduced from P660,000.00 to P335,000.00.
As earlier stated, petitioner filed five (5) criminal cases for violation of Batas
Pambansa Blg. 22 against respondent. In the said cases, the MeTC found respondent
guilty of violating Batas Pambansa Blg. 22 for issuing five dishonored checks to
petitioner. Nonetheless, respondent's conviction therein does not affect our ruling in
the instant case. The two checks, subject matter of this case, totaling P700,000.00
which respondent claimed as payment of the P540,000.00 worth of loan, were not
among the five checks found to be dishonored or bounced in the five criminal cases.
Further, the MeTC found that respondent made an overpayment of the loan by reason
of the interest which the latter paid to petitioner.[39]
Article 2217 of the Civil Code provides that moral damages may be recovered if the
party underwent physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation and similar
injury. Respondent testified that she experienced sleepless nights and wounded
feelings when petitioner refused to return the amount paid as interest despite her
repeated demands. Hence, the award of moral damages is justified. However, its
corresponding amount of P300,000.00, as fixed by the RTC and the Court of Appeals,
is exorbitant and should be equitably reduced. Article 2216 of the Civil Code instructs
that assessment of damages is left to the discretion of the court according to the
circumstances of each case. This discretion is limited by the principle that the amount
awarded should not be palpably excessive as to indicate that it was the result of finality of this Decision; and (4) an interest of 12% per annum is also imposed from
prejudice or corruption on the part of the trial court.[40] To our mind, the amount of the finality of this Decision up to its satisfaction. Costs against petitioner.
P150,000.00 as moral damages is fair, reasonable, and proportionate to the injury
suffered by respondent. SO ORDERED.

Article 2232 of the Civil Code states that in a quasi-contract, such as solutio indebiti,
exemplary damages may be imposed if the defendant acted in an oppressive manner.
Petitioner acted oppressively when he pestered respondent to pay interest and
threatened to block her transactions with the PNO if she would not pay interest. This
forced respondent to pay interest despite lack of agreement thereto. Thus, the award
of exemplary damages is appropriate. The amount of P50,000.00 imposed as
exemplary damages by the RTC and the Court is fitting so as to deter petitioner and
other lenders from committing similar and other serious wrongdoings.[41]

Jurisprudence instructs that in awarding attorney's fees, the trial court must state the
factual, legal or equitable justification for awarding the same.[42] In the case under
consideration, the RTC stated in its Decision that the award of attorney's fees
equivalent to 25% of the amount paid as interest by respondent to petitioner is
reasonable and moderate considering the extent of work rendered by respondent's
lawyer in the instant case and the fact that it dragged on for several years.[43]
Further, respondent testified that she agreed to compensate her lawyer handling the
instant case such amount.[44] The award, therefore, of attorney's fees and its amount
equivalent to 25% of the amount paid as interest by respondent to petitioner is proper.

Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest on the
amount refundable to respondent computed from 3 March 1998 until its full payment.
This is erroneous.

We held in Eastern Shipping Lines, Inc. v. Court of Appeals,[45] that 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 rate of 6% per annum. We
further declared that when the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether it is a
loan/forbearance of money or not, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed equivalent to a forbearance of credit.

In the present case, petitioner's obligation arose from a quasi-contract of solutio

indebiti and not from a loan or forbearance of money. Thus, an interest of 6% per
annum should be imposed on the amount to be refunded as well as on the damages
awarded and on the attorney's fees, to be computed from the time of the extra-judicial
demand on 3 March 1998,[46] up to the finality of this Decision. In addition, the
interest shall become 12% per annum from the finality of this Decision up to its
satisfaction.

WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 71814, dated
16 December 2005, is hereby AFFIRMED with the following MODIFICATIONS: (1)
the amount of P660,000.00 as refundable amount of interest is reduced to THREE
HUNDRED THIRTY FIVE THOUSAND PESOS (P335,000.00); (2) the amount of
P300,000.00 imposed as moral damages is reduced to ONE HUNDRED FIFTY
THOUSAND PESOS (P150,000.00); (3) an interest of 6% per annum is imposed on
the P335,000.00, on the damages awarded and on the attorney's fees to be
computed from the time of the extra-judicial demand on 3 March 1998 up to the

BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. THE INTERMEDIATE
APPELLATE COURT and RIZALDY T. ZSHORNACK respondents.
G.R. No. L-66826 | 1988-08-19
DECISION
CORTES, J.:
The original parties to this case were Rizaldy T. Zshornack and the Commercial Bank
and Trust Company of the Philippines [hereafter referred to as "COMTRUST."] In
1980, the Bank of the Philippine Islands (hereafter referred to as "BPI") absorbed
COMTRUST through a corporate merger, and was substituted as party to the case.
Rizaldy Zshornack initiated proceedings on June 28, 1976 by filing in the Court of
First Instance of Rizal ---- Caloocan City a complaint against COMTRUST alleging
four causes of action. Except for the third cause of action, the CFI ruled in favor of
Zshornack. The bank appealed to the Intermediate Appellate Court which modified
the CFI decision absolving the bank from liability on the fourth cause of action. The
pertinent portions of the judgment, as modified, read:
IN VIEW OF THE FOREGOING, the Court renders judgment as follows:
1. Ordering the defendant COMTRUST to restore to the dollar savings account of
plaintiff (No. 25-4109) the amount of U.S $1,000.00 as of October 27, 1975 to earn
interest together with the remaining balance of the said account at the rate fixed by
the bank for dollar deposits under Central Bank Circular 343;
2. Ordering defendant COMTRUST to return to the plaintiff the amount of U.S.
$3,000.00 immediately upon the finality of this decision, without interest for the reason
that the said amount was merely held in custody for safekeeping, but was not actually
deposited with the defendant COMTRUST because being cash currency, it cannot by
law be deposited with plaintiffs dollar account and defendant's only obligation is to
return the same to plaintiff upon demand;
xxx xxx xxx
5. Ordering defendant COMTRUST to pay plaintiff in the amount of P8,000.00 as
damages in the concept of litigation expenses and attorney's fees suffered by plaintiff
as a result of the failure of the defendant bank to restore to his (plaintiff's) account the
amount of U.S. $1,000.00 and to return to him (plaintiff) the U.S. $3,000.00 cash left
for safekeeping.
Costs against defendant COMTRUST.
SO ORDERED. [Rollo, pp. 47-48.]
Undaunted, the bank comes to this Court praying that it be totally absolved from any
liability to Zshornack. The latter not having appealed the Court of Appeals decision,
the issues facing this Court are limited to the bank's liability with regard to the first and
second causes of action and its liability for damages.
1. We first consider the first cause of action.
On the dates material to this case, Rizaldy Zshornack and his wife, Shirley Gorospe,
maintained in COMTRUST, Quezon City Branch, a dollar savings account and a peso
current account.
On October 27, 1975, an application for a dollar draft was accomplished by Virgilio V.
Garcia, Assistant Branch Manager of COMTRUST Quezon City, payable to a certain
Leovigilda D. Dizon in the amount of $1,000.00. In the application, Garcia indicated
that the amount was to be charged to Dollar Savings Acct. No. 25-4109, the savings
account of the Zshornacks; the charges for commission, documentary stamp tax and
others totalling P17.46 were to be charged to Current Acct. No. 210-465-29, again,
the current account of the Zshornacks. There was no indication of the name of the
purchaser of the dollar draft.
On the same date, October 27, 1975, COMTRUST, under the signature of Virgilio V.
Garcia, issued a check payable to the order of Leovigilda D. Dizon in the sum of
US$1,000 drawn on the Chase Manhattan Bank, New York, with an indication that it
was to be charged to Dollar Savings Acct. No. 25-4109.
When Zshornack noticed the withdrawal of US$1,000.00 from his account, he
demanded an explanation from the bank. In answer, COMTRUST claimed that the
peso value of the withdrawal was given to Atty. Ernesto Zshornack, Jr., brother of
Rizaldy, on October 27,1975 when he (Ernesto) encashed with COMTRUST a
cashier's check for P8,450.00 issued by the Manila Banking Corporation payable to
Ernesto.
Upon consideration of the foregoing facts, this Court finds no reason to disturb the
ruling of both the trial court and the Appellate Court on the first cause of action.
Petitioner must be held liable for the unauthorized withdrawal of US$1,000.00 from
private respondent's dollar account.
In its desperate attempt to justify its act of withdrawing from its depositor's savings
account, the bank has adopted inconsistent theories. First, it still maintains that the
peso value of the amount withdrawn was given to Atty. Ernesto Zshornack, Jr. when
the latter encashed the Manilabank Cashier's Check. At the same time, the bank
claims that the withdrawal was made pursuant to an agreement where Zshornack
allegedly authorized the bank to withdraw from his dollar savings account such
amount which, when converted to pesos, would be needed to fund his peso current
account. If indeed the peso equivalent of the amount withdrawn from the dollar
account was credited to the peso current account, why did the bank still have to pay
Ernesto?
At any rate, both explanations are unavailing. With regard to the first explanation,
petitioner bank has not shown how the transaction involving the cashier's check is
related to the transaction involving the dollar draft in favor of Dizon financed by the
withdrawal from Rizaldy's dollar account. The two transactions appear entirely
independent of each other. Moreover, Ernesto Zshornack, Jr., possesses a
personality distinct and separate from Rizaldy Zshornack. Payment made to Ernesto
cannot be considered payment to Rizaldy.

As to the second explanation, even if we assume that there was such an agreement,
the evidence do not show that the withdrawal was made pursuant to it. Instead, the
record reveals that the amount withdrawn was used to finance a dollar draft in favor of
Leovigilda D. Dizon, and not to fund the current account of the Zshornacks. There is
no proof whatsoever that peso Current Account No. 210-465-29 was ever credited
with the peso equivalent of the US$1,000.00 withdrawn on October 27, 1975 from
Dollar Savings Account No. 25-4109.
2. As for the second cause of action, the complaint filed with the trial court alleged
that on December 8, 1975, Zshornack entrusted to COMTRUST, thru Garcia,
US$3,000.00 cash (popularly known as greenbacks) for safekeeping, and that the
agreement was embodied in a document, a copy of which was attached to and made
part of the complaint. The document reads:
Makati----Cable Address:
Philippines----"COMTRUST"
COMMERCIAL BANK AND TRUST COMPANY
of the Philippines
Quezon City Branch
December 8, 1975
MR. RIZALDY T. ZSHORNACK
&/OR MRS. SHIRLEY E. ZSHORNACK
Sir/Madam:
We acknowledged (sic) having received from you today the sum of US DOLLARS:
THREE THOUSAND ONLY (US$3,000.00) for safekeeping.
Received by:(Sgd.)
VIRGILIO V. GARCIA
It was also alleged in the complaint that despite demands, the bank refused to return
the money.
In its answer, COMTRUST averred that the US$3,000 was credited to Zshornack's
peso current account at prevailing conversion rates.
It must be emphasized that COMTRUST did not deny specifically under oath the
authenticity and due execution of the above instrument.
During trial, it was established that on December 8, 1975 Zshornack indeed delivered
to the bank US$3,000 for safekeeping. When he requested the return of the money
on May 10, 1976, COMTRUST explained that the sum was disposed of in this
manner: US$2,000.00 was sold on December 29, 1975 and the peso proceeds
amounting to P14,920.00 were deposited to Zshornack's current account per deposit
slip accomplished by Garcia; the remaining US$1,000. 00 was sold on February 3,
1976 and the peso proceeds amounting to P8,350.00 were deposited to his current
account per deposit slip also accomplished by Garcia.
Aside from asserting that the US$3,000.00 was properly credited to Zshornack's
current account at prevailing conversion rates, BPI now posits another ground to
defeat private respondent's claim. It now argues that the contract embodied in the
document is the contract of depositum (as defined in Article 1962, New Civil Code),
which banks do not enter into. The bank alleges that Garcia exceeded his powers
when he entered into the transaction. Hence, it is claimed, the bank cannot be liable
under the contract, and the obligation is purely personal to Garcia.
Before we go into the nature of the contract entered into, an important point which
arises on the pleadings, must be considered.
The second cause of action is based on a document purporting to be signed by
COMTRUST, a copy of which document was attached to the complaint. In short, the
second cause of action was based on an actionable document. It was therefore
incumbent upon the bank to specifically deny under oath the due execution of the
document, as prescribed under Rule 8, Section 8, if it desired: (1) to question the
authority of Garcia to bind the corporation; and (2) to deny its capacity to enter into
such contract. [See, E.B. Merchant v. International Banking Corporation, 6 Phil. 314
(1906).] No sworn answer denying the due execution of the document in question, or
questioning the authority of Garcia to bind the bank, or denying the bank's capacity to
enter into the contract, was ever filed. Hence, the bank is deemed to have admitted
not only Garcia's authority, but also the bank's power, to enter into the contract in
question.
In the past, this Court had occasion to explain the reason behind this procedural
requirement.
The reason for the rule enunciated in the foregoing authorities will, we think, be
readily appreciated. In dealing with corporations the public at large is bound to rely to
a large extent upon outward appearances. If a man is found acting for a corporation
with the external indicia of authority, any person, not having notice of want of
authority, may usually rely upon those appearances; and if it be found that the
directors had permitted the agent to exercise that authority and thereby held him out
as a person competent to bind the corporation, or had acquiesced in a contract and
retained the benefit supposed to have been conferred by it, the corporation will be
bound notwithstanding the actual authority may never have been granted . . . Whether
a particular officer actually possesses the authority which he assumes to exercise is
frequently known to very few, and the proof of it usually is not readily accessible to the
stranger who deals with the corporation on the faith of the ostensible authority
exercised by some of the corporate officers. It is therefore reasonable in a case where
an officer of a corporation has made a contract in its name, that the corporation
should be required, if it denies his authority, to state such defense in its answer. By
this means the plaintiffs apprised of the fact that the agent's authority is contested;
and he is given an opportunity to adduce evidence showing either that the authority
existed or that the contract was ratified and approved [Ramirez v. Orientalist Co. and
Fernandez, 38 Phil. 634, 645-646 (1918).]
Petitioner's argument must also be rejected for another reason. The practical effect of
absolving a corporation from liability every time an officer enters into a contract which
is beyond corporate powers, even without the proper allegation or proof that the
corporation has not authorized nor ratified the officer's act, is to cast corporations in
so perfect a mold that transgressions and wrongs by such artificial beings become
impossible [Bissell v. Michigan Southern and N.I.R Cos, 22 N.Y 258 (1860).] "To say
that a corporation has no right to do unauthorized acts is only to put forth a very plain
truism; but to say that such bodies have no power or capacity to err is to impute to
them an excellence which does not belong to any created existence with which we
are acquainted. The distinction between power and right is no more to be lost sight of
in respect to artificial than in respect to natural persons." [Ibid.]
Having determined that Garcia's act of entering into the contract binds the
corporation, we now determine the correct nature of the contract, and its legal
consequences, including its enforceability.
The document which embodies the contract states that the US$3,000.00 was
received by the bank for safekeeping. The subsequent acts of the parties also show
that the intent of the parties was really for the bank to safely keep the dollars and to
return it to Zshornack at a later time. Thus, Zshornack demanded the return of the
money on May 10, 1976, or over five months later.
The above arrangement is that contract defined under Article 1962, New Civil Code,
which reads:
Art. 1962. A deposit is constituted from the moment a person receives a thing
belonging to another, with the obligation of safely keeping it and of returning the
same. If the safekeeping of the thing delivered is not the principal purpose of the
contract, there is no deposit but some other contract.
Note that the object of the contract between Zshornack and COMTRUST was foreign
exchange. Hence, the transaction was covered by Central Bank Circular No. 20,
Restrictions on Gold and Foreign Exchange Transactions, promulgated on December
9, 1949, which was in force at the time the parties entered into the transaction
involved in this case. The circular provides:
xxx xxx xxx
2. Transactions in the assets described below and all dealings in them of whatever
nature, including, where applicable their exportation and importation, shall NOT be
effected, except with respect to deposit accounts included in sub-paragraphs (b) and
(c) of this paragraph, when such deposit accounts are owned by and in the name of
banks.
(a) Any and all assets, provided they are held through, in, or with banks or banking
institutions located in the Philippines, including money, checks, drafts, bullions, bank
drafts deposit accounts (demand, time and savings), all debts, indebtedness or
obligations, financial brokers and investment houses notes, debentures, stocks,
bonds, coupons, bank acceptances, mortgages, pledges, liens or other rights in the
nature of security, expressed in foreign currencies, or if payable abroad, irrespective
of the currency in which they are expressed, and belonging to any person, firm,
partnership, association, branch office, agency, company or other unincorporated
body or corporation residing or located within the Philippines;
(b) Any and all assets of the kinds included and or described in subparagraph (a)
above, whether or not held through, in, or with banks or banking institutions, and
existent within the Philippines, which belong to any person, film, partnership,
association, branch office, agency, company or other unincorporated body or
corporation not residing or located within the Philippines;
(c ) Any and all assets existent within the Philippines including money, checks, drafts,
bullions, bank drafts, all debts, indebtedness or obligations, financial securities
commonly dealt in by bankers, brokers and investment houses, notes, debentures,
stock, bonds, coupons, bank acceptances, mortgages, pledges, liens or other rights in
the nature of security expressed in foreign currencies, or if payable abroad,
irrespective of the currency in which they are expressed, and belonging to any
person, firm, partnership, association, branch office, agency, company or other
unincorporated body or corporation residing or located within the Philippines.
xxx xxx xxx
4. (a) All receipts of foreign exchange shall be sold daily to the Central Bank by those
authorized to deal in foreign exchange. All receipts of foreign exchange by any
person, firm, partnership, association, branch office, agency, company or other
unincorporated body or corporation shall be sold to the authorized agents of the
Central Bank by the recipients within one business day following the receipt of such
foreign exchange. Any person, firm, partnership, association, branch office, agency,
company or other unincorporated body or corporation, residing or located within the
Philippines, who acquires on and after the date of this Circular foreign exchange shall
not unless licensed by the Central Bank, dispose of such foreign exchange in whole
or in part, nor receive less than its full value, nor delay taking ownership thereof
except as such delay is customary; Provided, further, That within one day upon taking
ownership, or receiving payment, of foreign exchange the aforementioned persons
and entities shall sell such foreign exchange to designated agents of the Central
Bank.
xxx xxx xxx
8. Strict observance of the provisions of this Circular is enjoined; and any person, firm
or corporation, foreign or domestic, who being bound to the observance thereof, or of
such other rules, regulations or directives as may hereafter be issued in
implementation of this Circular, shall fail or refuse to comply with, or abide by, or shall
violate the same, shall be subject to the penal sanctions provided in the Central Bank
Act.
Xxx xxx xxx
Paragraph 4 (a) above was modified by Section 6 of Central Bank Circular No. 281,
Regulations on Foreign Exchange, promulgated on November 26, 1969 by limiting its
coverage to Philippine residents only Section 6 provides:
SEC. 6. All receipts of foreign exchange by any resident person, firm, company or
corporation shall be sold to authorized agents of the Central Bank by the recipients
within one business day following the receipt of such foreign exchange. Any resident
person, firm, company or corporation residing or located within the Philippines, who
acquires foreign exchange shall not, unless authorized by the Central Bank, dispose
of such foreign exchange in whole or in part, nor receive less than Its full value, nor
delay taking ownership thereof except as such delay is customary; Provided, That,
within one business day upon taking ownership or receiving payment of foreign
exchange the aforementioned persons and entities shall sell such foreign exchange to
the authorized agents of the Central Bank.

As earlier stated, the document and the subsequent acts of the parties show that they
intended the bank to safekeep the foreign exchange, and return it later to Zshornack,
who alleged in his complaint that he is a Philippine resident. The parties did not
intended to sell the US dollars to the Central Bank within one business day from
receipt. Otherwise, the contract of depositum would never have been entered into at
all.

Since the mere safekeeping of the greenbacks, without selling them to the Central
Bank within one business day from receipt, is a transaction which is not authorized by
CB Circular No. 20, it must be considered as one which falls under the general class
of prohibited transactions. Hence, pursuant to Article 5 of the Civil Code, it is void,
having been executed against the provisions of a mandatory/prohibitory law. More
importantly, it affords neither of the parties a cause of action against the other. "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
cause of action against each other . . . " [Art. 1411, New Civil Code.] The only remedy
is one on behalf of the State to prosecute the parties for violating the law.

We thus rule that Zshornack cannot recover under the second cause of action.

3. Lastly, we find the P8,000.00 awarded by the courts a quo as damages in the
concept of litigation expenses and attorney's fees to be reasonable. The award is
sustained.

WHEREFORE, the decision appealed from is hereby MODIFIED. Petitioner is

ordered to restore to the dollar savings account of private respondent the amount of
US$1,000.00 as of October 27, 1975 to earn interest at the rate fixed by the bank for
dollar savings deposits. Petitioner is further ordered to pay private respondent the
amount of P8,000.00 as damages. The other causes of action of private respondent
are ordered dismissed.

SO ORDERED.

JOSEPH CHAN, WILSON CHAN and LILY CHAN, petitioners, vs. BONIFACIO S.
MACEDA,· JR., respondent.
G.R. No. 142591 | 2003-04-30
DECISION
SANDOVAL-GUTIERREZ, J.:
A judgment of default does not automatically imply admission by the defendant of the
facts and causes of action of the plaintiff. The Rules of Court require the latter to
adduce evidence in support of his allegations as an indispensable condition before
final judgment could be given in his favor.[1] The trial judge has to evaluate the
allegations with the highest degree of objectivity and certainty. He may sustain an
allegation for which the plaintiff has adduced sufficient evidence, otherwise, he has to
reject it. In the case at bar, judicial review is imperative to avert the award of damages
that is unreasonable and without evidentiary support.
Assailed in this petition for review under Rule 45 of the 1997 Rules of Civil Procedure,
as amended, is the Decision[2] dated June 17, 1999 of the Court of Appeals in CA-
G.R. CV No. 57323, entitled "Bonifacio S. Maceda, Jr. versus Joseph Chan, et. al.,"
affirming in toto the Decision[3] dated December 26, 1996 of the Regional Trial Court,
Branch 160, Pasig City, in Civil Case No. 53044.
The essential antecedents are as follows:
On July 28, 1976, Bonifacio S. Maceda, Jr., herein respondent, obtained a P7.3
million loan from the Development Bank of the Philippines for the construction of his
New Gran Hotel Project in Tacloban City.
Thereafter, on September 29, 1976, respondent entered into a building construction
contract with Moreman Builders Co., Inc., (Moreman). They agreed that the
construction would be finished not later than December 22, 1977.
Respondent purchased various construction materials and equipment in Manila.
Moreman, in turn, deposited them in the warehouse of Wilson and Lily Chan, herein
petitioners. The deposit was free of charge.
Unfortunately, Moreman failed to finish the construction of the hotel at the stipulated
time. Hence, on February 1, 1978, respondent filed with the then Court of First
Instance (CFI, now Regional Trial Court), Branch 39, Manila, an action for rescission
and damages against Moreman, docketed as Civil Case No. 113498.
On November 28, 1978, the CFI rendered its Decision[4] rescinding the contract
between Moreman and respondent and awarding to the latter P 445,000.00 as actual,
moral and liquidated damages; P20,000.00 representing the increase in the
construction materials; and P35,000.00 as attorney's fees. Moreman interposed an
appeal to the Court of Appeals but the same was dismissed on March 7, 1989 for
being dilatory. He elevated the case to this Court via a petition for review on certiorari.
In a Decision[5] dated February 21, 1990, we denied the petition. On April 23,
1990,[6] an Entry of Judgment was issued.
Meanwhile, during the pendency of the case, respondent ordered petitioners to return
to him the construction materials and equipment which Moreman deposited in their
warehouse. Petitioners, however, told them that Moreman withdrew those
construction materials in 1977.
Hence, on December 11, 1985, respondent filed with the Regional Trial Court, Branch
160, Pasig City, an action for damages with an application for a writ of preliminary
attachment against petitioners,[7] docketed as Civil Case No. 53044.
In the meantime, on October 30, 1986, respondent was appointed Judge of the
Regional Trial Court, Branch 12, San Jose Antique.[8]
On August 25, 1989, or after almost four (4) years, the trial court dismissed
respondent's complaint for his failure to prosecute and for lack of interest."[9] On
September 6, 1994, or five years thereafter, respondent filed a motion for
reconsideration, but the same was denied in the Order dated September 9, 1994
because of the failure of respondent and his counsel to appear on the scheduled
hearing.[10]
On October 14, 1994, respondent filed a second motion for reconsideration. This
time, the motion was granted and the case was ordered reinstated on January 10,
1995, or ten (10) years from the time the action was originally filed.[11] Thereafter,
summons, together with the copies of the complaint and its annexes, were served on
petitioners.
On March 2, 1995, counsel for petitioners filed a motion to dismiss on several
grounds.[12] Respondent, on the other hand, moved to declare petitioners in default
on the ground that their motion to dismiss was filed out of time and that it did not
contain any notice of hearing.[13]
On April 27, 1995, the trial court issued an order declaring petitioners in default.[14]
Petitioners filed with the Court of Appeals a petition for certiorari[15] to annul the trial
court's order of default, but the same was dismissed in its Order[16] dated August 31,
1995. The case reached this Court, and in a Resolution dated October 25, 1995,[17]
we affirmed the assailed order of the Court of Appeals. On November 29, 1995,[18]
the corresponding Entry of Judgment was issued.
Thus, upon the return of the records to the RTC, Branch 160, Pasig City, respondent
was allowed to present his evidence ex-parte.
Upon motion of respondent, which was granted by the trial court in its Order dated
April 29, 1996,[19] the depositions of his witnesses, namely, Leonardo Conge, Alfredo
Maceda and Engr. Damiano Nadera were taken in the Metropolitan Trial Court in
Cities, Branch 2, Tacloban City.[20] Deponent Leonardo Conge, a labor contractor,
testified that on December 14 up to December 24, 1977, he was contracted by
petitioner Lily Chan to get bags of cement from the New Gran Hotel construction site
and to store the same into the latter's warehouse in Tacloban City. Aside from those
bags of cement, deponent also hauled about 400 bundles of steel bars from the same
construction site, upon order of petitioners. Corresponding delivery receipts were
presented and marked as Exhibits "A", "A-1","A-2","A-3" and "A-4".[21]
Deponent Alfredo Maceda testified that he was respondent's Disbursement and
Payroll Officer who supervised the construction and kept inventory of the properties of
the New Gran Hotel. While conducting the inventory on November 23, 1977, he found
that the approximate total value of the materials stored in petitioners' warehouse was
P214,310.00. This amount was accordingly reflected in the certification signed by
Mario Ramos, store clerk and representative of Moreman who was present during the
inventory.[22]
Deponent Damiano Nadera testified on the current cost of the architectural and
structural requirements needed to complete the construction of the New Gran
Hotel.[23]
On December 26, 1996, the trial court rendered a decision in favor of respondent,
thus:
"WHEREFORE, foregoing considered, judgment is hereby rendered ordering
defendants to jointly and severally pay plaintiff:
1) P1,930,000.00 as actual damages;
2) P2,549,000.00 as actual damages;
3) Moral damages of P150,000.00; exemplary damages of P50,000.00 and attorney's
fees of P50,000.00 and to pay the costs.
"SO ORDERED."
The trial court ratiocinated as follows:
"The inventory of other materials, aside from the steel bars and cement is found
highly reliable based on first, the affidavit of Arthur Edralin dated September 15, 1979,
personnel officer of Moreman Builders that he was assigned with others to guard the
warehouse; (Exhs. "M" & "O"); secondly, the inventory (Exh. "C") dated November 23,
1977 shows (sic) deposit of assorted materials; thirdly, that there were items in the
warehouse as of February 3, 1978 as shown in the balance sheet of Moreman's stock
clerk Jose Cedilla.
"Plaintiff is entitled to payment of damages for the overhauling of materials from the
construction site by Lily Chan without the knowledge and consent of its owner. Article
20 of the Civil Code provides:
'Art. 20. Every person who contrary to law, willfully or negligently caused damage to
another, shall indemnify the latter for the same.'
"As to the materials stored inside the bodega of defendant Wilson Chan, the inventory
(Exh. "C") show (sic), that the same were owned by the New Gran Hotel. Said
materials were stored by Moreman Builders Co., Inc. since it was attested to by the
warehouseman as without any lien or encumbrances, the defendants are duty bound
to release it. Article 21 of the Civil Code provides:
'Art. 21. Any person who willfully caused loss or injury to another in a manner that is
contrary to morals, good customs or public policy shall compensate the latter for the
damage.'
"Plaintiff is entitled to payment of actual damages based on the inventory as of
November 23, 1977 amounting to P1,930,080.00 (Exhs. "Q" & "Q-1"). The inventory
was signed by the agent Moreman Builders Corporation and defendants.
"Plaintiff is likewise entitled to payment of 12,500 bags of cement and 400 bundles of
steel bars totaling P2,549,000.00 (Exhs. "S" & "S-1"; Exhs. "B" & "B-3").
"Defendants should pay plaintiff moral damages of P150,000.00; exemplary damages
of P50,000.00 and attorney's fees of P50,000.00 and to pay the costs.
"The claim of defendant for payment of damages with respect to the materials
appearing in the balance sheets as of February 3, 1978 in the amount of
P3,286,690.00, not having been established with enough preponderance of evidence
cannot be given weight."[24]
Petitioners then elevated the case to the Court of Appeals, docketed as CA-G.R. CV
No. 57323. On June 17, 1999, the Appellate Court rendered the assailed Decision[25]
affirming in toto the trial court's judgment, ratiocinating as follows:
"Moreover, although the prayer in the complaint did not specify the amount of
damages sought, the same was satisfactorily proved during the trial. For damages to
be awarded, it is essential that the claimant satisfactorily prove during the trial the
existence of the factual basis thereof and its causal connection with the adverse
party's act (PAL, Inc. vs. NLRC, 259 SCRA 459. In sustaining appellee's claim for
damages, the court a quo held as follows:
'The Court finds the contention of plaintiff that materials and equipment of plaintiff
were stored in the warehouse of defendants and admitted by defendants in the
certification issued to Sheriff Borja. x x x
'Evidence further revealed that assorted materials owned by the New Gran Hotel
(Exh. "C") were deposited in the bodega of defendant Wilson Chan with a total market
value of P1,930,000.00, current price.
'The inventory of other materials, aside from the steel bars and cement, is highly
reliable based on first, the affidavit of Arthur Edralin dated September 15, 1979,
personnel officer of Moreman Builders; that he was assigned, with others to guard the
warehouse (Exhs. M & O); secondly, the inventory (Exh. C) November 23, 1977
shows deposit of assorted materials; thirdly, that there were items in the warehouse
as of February 3, 1978, as shown in the balance sheet of Moreman's stock clerk,
Jose Cedilla (pp. 60-61, Rollo).'
"The Court affirms the above findings.
"Well settled is the rule that 'absent any proper reason to depart from the rule, factual
conclusions reached by the trial court are not to be disturbed (People vs. Dupali, 230
SCRA 62).' Hence, in the absence of any showing that serious and substantial errors
were committed by the lower court in the appraisal of the evidence, the trial judge's
assessment of the credibility of the witnesses is accorded great weight and respect
(People vs. Jain, 254 SCRA 686). And, there being absolutely nothing on record to
show that the court a quo overlooked, disregarded, or misinterpreted facts of weight
and significance, its factual findings and conclusions must be given great weight and
should not be disturbed on appeal.
"WHEREFORE, being in accord with law and evidence, the appealed decision is
hereby AFFIRMED in toto."
Hence, this petition for review on certiorari anchored on the following grounds:
"I
The Court of Appeals acted with grave abuse of discretion and under a
misapprehension of the law and the facts when it affirmed in toto the award of actual
damages made by the trial court in favor of respondent in this case.
II
The awards of moral and exemplary damages of the trial court to respondent in this
case and affirmed in toto by the Court of Appeals are unwarranted by the evidence
presented by respondent at the ex parte hearing of this case and should, therefore,
be eliminated or at least reduced.
III
The award of attorney's fees by the trial court to respondent in this case and affirmed
by the Court of Appeals should be deleted because of the failure of the trial court to
state the legal and factual basis of such award."
Petitioners contend inter alia that the actual damages claimed by respondent in the
present case were already awarded to him in Civil Case No. 113498[26] and hence,
cannot be recovered by him again. Even assuming that respondent is entitled to
damages, he can not recover P4,479,000.00 which is eleven (11) times more than the
total actual damages of P365,000.00 awarded to him in Civil Case No. 113498.[27]
In his comment on the petition, respondent maintains that petitioners, as depositaries
under the law, have both the fiduciary and extraordinary obligations not only to safely
keep the construction material deposited, but also to return them with all their
products, accessories and accessions, pursuant to Articles 1972,[28] 1979,[29]
1983,[30] and 1988[31] of the Civil Code. Considering that petitioners' duty to return
the construction materials in question has already become impossible, it is only
proper that the prices of those construction materials in 1996 should be the basis of
the award of actual damages. This is the only way to fulfill the "duty to return"
contemplated in the applicable laws.[32] Respondent further claims that petitioners
must bear the increase in market prices from 1977 to 1996 because liability for fraud
includes "all damages which may be reasonably attributed to the non-performance of
the obligation." Lastly, respondent insists that there can be no double recovery
because in Civil Case No. 113498,[33] the parties were respondent himself and
Moreman and the cause of action was the rescission of their building contract. In the
present case, however, the parties are respondent and petitioners and the cause of
action between them is for recovery of damages arising from petitioners' failure to
return the construction materials and equipment.
Obviously, petitioners' assigned errors call for a review of the lower court's findings of
fact.
Succinct is the rule that this Court is not a trier of facts and does not normally
undertake the re-examination of the evidence submitted by the contending parties
during the trial of the case considering that findings of fact of the Court of Appeals are
generally binding and conclusive on this Court.[34] The jurisdiction of this Court in a
petition for review on certiorari is limited to reviewing only errors of law,[35] not of fact,
unless it is shown, inter alia, that: (1) the conclusion is a finding grounded on
speculations, surmises or conjectures; (2) the inference is manifestly mistaken,
absurd and impossible; (3) there is grave abuse of discretion; (4) the judgment is
based on misapprehension of facts; (5) the findings of fact are conflicting; and (6) the
Court of Appeals, in making its findings went beyond the issues of the case and the
same is contrary to the admission of both parties.[36]
Petitioners submit that this case is an exception to the general rule since both the trial
court and the Court of Appeals based their judgments on misapprehension of facts.
We agree.
At the outset, the case should have been dismissed outright by the trial court because
of patent procedural infirmities. It bears stressing that the case was originally filed on
December 11, 1985. Four (4) years thereafter, or on August 25, 1989, the case was
dismissed for respondent's failure to prosecute. Five (5) years after, or on September
6, 1994, respondent filed his motion for reconsideration. From here, the trial court
already erred in its ruling because it should have dismissed the motion for
reconsideration outright as it was filed far beyond the fifteen-day reglementary
period.[37] Worse, when respondent filed his second motion for reconsideration on
October 14, 1994, a prohibited pleading,[38] the trial court still granted the same and
reinstated the case on January 10, 1995. This is a glaring gross procedural error
committed by both the trial court and the Court of Appeals.
Even without such serious procedural flaw, the case should also be dismissed for
utter lack of merit.
It must be stressed that respondent's claim for damages is based on petitioners'
failure to return or to release to him the construction materials and equipment
deposited by Moreman to their warehouse. Hence, the essential issues to be resolved
are: (1) Has respondent presented proof that the construction materials and
equipment were actually in petitioners' warehouse when he asked that the same be
turned over to him? (2) If so, does respondent have the right to demand the release of
the said materials and equipment or claim for damages?
Under Article 1311 of the Civil Code, contracts are binding upon the parties (and their
assigns and heirs) who execute them. When there is no privity of contract, there is
likewise no obligation or liability to speak about and thus no cause of action arises.
Specifically, in an action against the depositary, the burden is on the plaintiff to prove SO ORDERED.
the bailment or deposit and the performance of conditions precedent to the right of
action.[39] A depositary is obliged to return the thing to the depositor, or to his heirs or
successors, or to the person who may have been designated in the contract. [40]

In the present case, the record is bereft of any contract of deposit, oral or written,
between petitioners and respondent. If at all, it was only between petitioners and
Moreman. And granting arguendo that there was indeed a contract of deposit
between petitioners and Moreman, it is still incumbent upon respondent to prove its
existence and that it was executed in his favor. However, respondent miserably failed
to do so. The only pieces of evidence respondent presented to prove the contract of
deposit were the delivery receipts.[41] Significantly, they are unsigned and not duly
received or authenticated by either Moreman, petitioners or respondent or any of their
authorized representatives. Hence, those delivery receipts have no probative value at
all. While our laws grant a person the remedial right to prosecute or institute a civil
action against another for the enforcement or protection of a right, or the prevention or
redress of a wrong,[42] every cause of action ex-contractu must be founded upon a
contract, oral or written, express or implied.

Moreover, respondent also failed to prove that there were construction materials and
equipment in petitioners' warehouse at the time he made a demand for their return.

Considering that respondent failed to prove (1) the existence of any contract of
deposit between him and petitioners, nor between the latter and Moreman in his
favor, and (2) that there were construction materials in petitioners' warehouse at the
time of respondent's demand to return the same, we hold that petitioners have no
corresponding obligation or liability to respondent with respect to those construction
materials.

Anent the issue of damages, petitioners are still not liable because, as expressly
provided for in Article 2199 of the Civil Code,[43] actual or compensatory damages
cannot be presumed, but must be proved with reasonable degree of certainty. A court
cannot rely on speculations, conjectures, or guesswork as to the fact and amount of
damages, but must depend upon competent proof that they have been suffered by
the injured party and on the best obtainable evidence of the actual amount thereof. It
must point out specific facts which could afford a basis for measuring whatever
compensatory or actual damages are borne.[44]

Considering our findings that there was no contract of deposit between petitioners
and respondent or Moreman and that actually there were no more construction
materials or equipment in petitioners' warehouse when respondent made a demand
for their return, we hold that he has no right whatsoever to claim for damages.

As we stressed in the beginning, a judgment of default does not automatically imply

admission by the defendant of plaintiff's causes of action. Here, the trial court merely
adopted respondent's allegations in his complaint and evidence without evaluating
them with the highest degree of objectivity and certainty.

WHEREFORE, the petition is GRANTED. The challenged Decision of the Court of

Appeals dated June 17, 1999 is REVERSED and SET ASIDE. Costs against
respondent.

CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner, vs. THE
HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST
COMPANY, respondents.
G.R. No. 90027 | 1993-03-03
Is the contractual relation between a commercial bank and another party in a contract
of rent of a safety deposit box with respect to its contents placed by the latter one of
bailor and bailee or one of lessor and lessee?
This is the crux of the present controversy.
On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses
Ramon and Paula Pugao entered into an agreement whereby the former purchased
from the latter two (2) parcels of land for a consideration of P350,625.00. Of this
amount, P75,725.00 was paid as downpayment while the balance was covered by
three (3) postdated checks. Among the terms and conditions of the agreement
embodied in a Memorandum of True and Actual Agreement of Sale of Land were that
the titles to the lots shall be transferred to the petitioner upon full payment of the
purchase price and that the owner's copies of the certificates of titles thereto, Transfer
Certificates of Title (TCT) Nos. 284655 and 292434, shall be deposited in a safety
deposit box of any bank. The same could be withdrawn only upon the joint signatures
of a representative of the petitioner and the Pugaos upon full payment of the
purchase price .Petitioner, through Sergio Aguirre, and the Pugaos then rented Safety
Deposit Box No. 1448 of private respondent Security Bank and Trust Company, a
domestic banking corporation hereinafter referred to as the respondent Bank. For this
purpose, both signed a contract of lease (Exhibit "2") which contains, inter alia, the
following conditions:
"13. The bank is not a depositary of the contents of the safe and it has neither the
possession nor control of the same.
14. The bank has no interest whatsoever in said contents, except herein expressly
provided, and it assumes absolutely no liability in connection therewith." 1
After the execution of the contract, two (2) renter's keys were given to the renters -
one to Aguirre (for the petitioner) and the other to the Pugaos. A guard key remained
in the possession of the respondent Bank. The safety deposit box has two (2)
keyholes, one for the guard key and the other for the renter's key, and can be opened
only with the use of both keys. Petitioner claims that the certificates of title were
placed inside the said box.
Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two
(2) lots at a price of P225.00 per square meter which, as petitioner alleged in its
complaint, translates to a profit of P100.00 per square meter or a total of P280,500.00
for the entire property. Mrs. Ramos demanded the execution of a deed of sale which
necessarily entailed the production of the certificates of title. In view thereof, Aguirre,
accompanied by the Pugaos, then proceeded to the respondent Bank on 4 October
1979 to open the safety deposit box and get the certificates of title. However, when
opened in the presence of the Bank's representative, the box yielded no such
certificates. Because of the delay in the reconstitution of the title, Mrs. Ramos
withdrew her earlier offer to purchase the lots; as a consequence thereof, the
petitioner allegedly failed to realize the expected profit of P280,500.00. Hence, the
latter filed on 1 September 1980 a complaint 2 for damages against the respondent
Bank with the Court of First Instance (now Regional Trial Court) of Pasig, Metro
Manila which docketed the same as Civil Case No. 38382.
In its Answer with Counterclaim, 3 respondent Bank alleged that the petitioner has no
cause of action because of paragraphs 13 and 14 of the contract of lease (Exhibit
"2"); corollarily, loss of any of the items or articles contained in the box could not give
rise to an action against it. It then interposed a counterclaim for exemplary damages
as well as attorney's fees in the amount of P20,000.00. Petitioner subsequently filed
an answer to the counterclaim. 4
In due course, the trial court. now designated as Branch 161 of the Regional Trial
Court (RTC) of Pasig, Metro Manila, rendered a decision 5 adverse to the petitioner
on 8 December 1986, the dispositive portion of which reads:
"WHEREFORE, premises considered, judgment is hereby rendered dismissing
plaintiff's complaint.
On defendant's counterclaim, judgment is hereby rendered ordering plaintiff to pay
defendant the amount of FIVE THOUSAND (P5,000.00) PESOS as attorney's fees.
With costs against plaintiff." 6
The unfavorable verdict is based on the trial court's conclusion that under paragraphs
13 and 14 of the contract of lease, the Bank has no liability for the loss of the
certificates of title. The court declared that the said provisions are binding on the
parties.
Its motion for reconsideration 7 having been denied, petitioner appealed from the
adverse decision to the respondent Court of Appeals which docketed the appeal as
CA-G.R. CV No. 15150. Petitioner urged the respondent Court to reverse the
challenged decision because the trial court erred in (a) absolving the respondent
Bank from liability from the loss, (b) not declaring as null and void, for being contrary
to law, public order and public policy, the provisions in the contract for lease of the
safety deposit box absolving the Bank from any liability for loss, (c) not concluding
that in this jurisdiction, as well as under American jurisprudence, the liability of the
Bank is settled and (d) awarding attorney's fees to the Bank and denying the
petitioner's prayer for nominal and exemplary damages and attorney's fees. 8
In its Decision promulgated on 4 July 1989, 9 respondent Court affirmed the appealed
decision principally on the theory that the contract (Exhibit "2") executed by the
petitioner and respondent Bank is in the nature of a contract of lease by virtue of
which the petitioner and its co-renter were given control over the safety deposit box
and its contents while the Bank retained no right to open the said box because it had
neither the possession nor control over it and its contents. As such, the contract is
governed by Article 1643 of the Civil Code 10 which provides:
"ART. 1643. In the lease of things, one of the parties binds himself to give to another
the enjoyment or use of a thing for a price certain, and for a period which may be
definite or indefinite. However, no lease for more than ninety-nine years shall be
valid."
It invoked Tolentino vs. Gonzales 11 - which held that the owner of the property loses
his control over the property leased during the period of the contract - and Article
1975 of the Civil Code which provides:
"ART. 1975. The depositary holding certificates, bonds, securities or instruments
which earn interest shall be bound to collect the latter when it becomes due, and to
take such steps as may be necessary in order that the securities may preserve their
value and the rights corresponding to them according to law.
The above provision shall not apply to contracts for the rent of safety deposit boxes."
and then concluded that "[c]learly, the defendant-appellee is not under any duty to
maintain the contents of the box. The stipulation absolving the defendant-appellee
from liability is in accordance with the nature of the contract of lease and cannot be
regarded as contrary to law, public order and public policy." 12 The appellate court
was quick to add, however, that under the contract of lease of the safety deposit box,
respondent Bank is not completely free from liability as it may still be made
answerable in case unauthorized persons enter into the vault area or when the rented
box is forced open. Thus, as expressly provided for in stipulation number 8 of the
contract in question:
"8. The Bank shall use due diligence that no unauthorized person shall be admitted to
any rented safe and beyond this, the Bank will not be responsible for the contents of
any safe rented from it." 13
Its motion for reconsideration 14 having been denied in the respondent Court's
Resolution of 28 August 1989, 15 petitioner took this recourse under Rule 45 of the
Rules of Court and urges Us to review and set aside the respondent Court's ruling.
Petitioner avers that both the respondent Court and the trial court (a) did not properly
and legally apply the correct law in this case, (b) acted with grave abuse of discretion
or in excess of jurisdiction amounting to lack thereof and (c) set a precedent that is
contrary to, or is a departure from precedents adhered to and affirmed by decisions of
this Court and precepts in American jurisprudence adopted in the Philippines. It
reiterates the arguments it had raised in its motion to reconsider the trial court's
decision, the brief submitted to the respondent Court and the motion to reconsider the
latter's decision. In a nutshell, petitioner maintains that regardless of nomenclature,
the contract for the rent of the safety deposit box (Exhibit "2") is actually a contract of
deposit governed by Title XII, Book IV of the Civil Code of the Philippines. 16
Accordingly, it is claimed that the respondent Bank is liable for the loss of the
certificates of title pursuant to Article 1972 of the said Code which provides:
"ART. 1972. The depositary is obliged to keep the thing safely and to return it, when
required, to the depositor, or to his heirs and successors, or to the person who may
have been designated in the contract. His responsibility, with regard to the
safekeeping and the loss of the thing, shall be governed by the provisions of Title I of
this Book.
If the deposit is gratuitous, this fact shall be taken into account in determining the
degree of care that the depositary must observe."
Petitioner then quotes a passage from American Jurisprudence 17 which is supposed
to expound on the prevailing rule in the United States, to wit:
"The prevailing rule appears to be that where a safe-deposit company leases a safe-
deposit box or safe and the lessee takes possession of the box or safe and places
therein his securities or other valuables, the relation of bailee and bailor is created
between the parties to the transaction as to such securities or other valuables; the
fact that the safe-deposit company does not know, and that it is not expected that it
shall know, the character or description of the property which is deposited in such
safe-deposit box or safe does not change that relation. That access to the contents of
the safe-deposit box can be had only by the use of a key retained by the lessee
(whether it is the sole key or one to be used in connection with one retained by the
lessor) does not operate to alter the foregoing rule. The argument that there is not, in
such a case, a delivery of exclusive possession and control to the deposit company,
and that therefore the situation is entirely different from that of ordinary bailment, has
been generally rejected by the courts, usually on the ground that as possession must
be either in the depositor or in the company, it should reasonably be considered as in
the latter rather than in the former, since the company is, by the nature of the
contract, given absolute control of access to the property, and the depositor cannot
gain access thereto without the consent and active participation of the company. . . ."
(citations omitted).
and a segment from Words and Phrases 18 which states that a contract for the rental
of a bank safety deposit box in consideration of a fixed amount at stated periods is a
bailment for hire.
Petitioner further argues that conditions 13 and 14 of the questioned contract are
contrary to law and public policy and should be declared null and void. In support
thereof, it cites Article 1306 of the Civil Code which provides that parties to a contract
may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order
or public policy.
After the respondent Bank filed its comment, this Court gave due course to the
petition and required the parties to simultaneously submit their respective
Memoranda.
The petition is partly meritorious.
We agree with the petitioner's contention that the contract for the rent of the safety
deposit box is not an ordinary contract of lease as defined in Article 1643 of the Civil
Code. However, We do not fully subscribe to its view that the same is a contract of
deposit that is to be strictly governed by the provisions in the Civil Code on deposit;
19 the contract in the case at bar is a special kind of deposit. It cannot be
characterized as an ordinary contract of lease under Article 1643 because the full and
absolute possession and control of the safety deposit box was not given to the renters
- the petitioner and the Pugaos. The guard key of the box remained with the
respondent Bank; without this key, neither of the renters could open the box. On the
other hand, the respondent Bank could not likewise open the box without the renter's
key. In this case, the said key had a duplicate which was made so that both renters
could have access to the box.

Hence, the authorities cited by the respondent Court 20 on this point do not apply.
Neither could Article 1975, also relied upon by the respondent Court, be invoked as
an argument against the deposit theory. Obviously, the first paragraph of such
provision cannot apply to a depositary of certificates, bonds, securities or instruments
which earn interest if such documents are kept in a rented safety deposit box. It is
clear that the depositary cannot open the box without the renter being present.
We observe, however, that the deposit theory itself does not altogether find
unanimous support even in American jurisprudence. We agree with the petitioner that
under the latter, the prevailing rule is that the relation between a bank renting out
safe-deposit boxes and its customer with respect to the contents of the box is that of a
bailor and bailee, the bailment being for hire and mutual benefit. 21 This is just the
prevailing view because:
"There is, however, some support for the view that the relationship in question might
be more properly characterized as that of landlord and tenant, or lessor and lessee. It
has also been suggest that should be characterized as that of licensor and licensee.
The relation between a bank, safe-deposit company, or storage company, and the
renter of a safe-deposit box therein, is often described as contractual, express or
implied, oral or written, in whole or in part. But there is apparently no jurisdiction in
which any rule other than that applicable to bailments governs questions of the liability
and rights of the parties in respect of loss of the contents of safe-deposit boxes." 22
(citations omitted).
In the context of our laws which authorize banking institutions to rent out safety
deposit boxes, it is clear that in this jurisdiction, the prevailing rule in the United States
has been adopted. Section 72 of the General Banking Act 23 pertinently provides:
"SEC. 72. In addition to the operations specifically authorized elsewhere in this Act,
banking institutions other than building and loan associations may perform the
following services:
(a) Receive in custody funds, documents, and valuable objects, and rent safety
deposit boxes for the safeguarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted under subsections (a), (b) and (c) of
this section as depositories or as agents. . . . " 24 (emphasis supplied).
Note that the primary function is still found within the parameters of a contract of
deposit, i.e., the receiving in custody of funds, documents and other valuable objects
for safekeeping. The renting out of the safety deposit boxes is not independent from,
but related to or in conjunction with, this principal function. A contract of deposit may
be entered into orally or in writing 25 and, pursuant to Article 1306 of the Civil Code,
the parties thereto may establish such stipulations, clauses, terms and conditions as
they may deem convenient, provided they are not contrary to law, morals, good
customs, public order or public policy. The depositary's responsibility for the
safekeeping of the objects deposited in the case at bar is governed by Title I, Book IV
of the Civil Code. Accordingly, the depositary would be liable if, in performing its
obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of
the agreement. 26 In the absence of any stipulation prescribing the degree of
diligence required, that of a good father of a family is to be observed. 27 Hence, any
stipulation exempting the depositary from any liability arising from the loss of the thing
deposited on account of fraud, negligence or delay would be void for being contrary to
law and public policy. In the instant case, petitioner maintains that conditions 13 and
14 of the questioned contract of lease of the safety deposit box, which read:
"13. The bank is not a depositary of the contents of the safe and it has neither the
possession nor control of the same.
14. The bank has no interest whatsoever in said contents, except herein expressly
provided, and it assumes absolutely no liability in connection therewith." 28
are void as they are contrary to law and public policy. We find Ourselves in
agreement with this proposition for indeed, said provisions are inconsistent with the
respondent Bank's responsibility as a depositary under Section 72(a) of the General
Banking Act. Both exempt the latter from any liability except as contemplated in
condition 8 thereof which limits its duty to exercise reasonable diligence only with
respect to who shall be admitted to any rented safe, to wit:
"8. The Bank shall use due diligence that no unauthorized person shall be admitted to
any rented safe and beyond this, the Bank will not be responsible for the contents of
any safe rented from it." 29
Furthermore, condition 13 stands on a wrong premise and is contrary to the actual
practice of the Bank. It is not correct to assert that the Bank has neither the
possession nor control of the contents of the box since in fact, the safety deposit box
itself is located in its premises and is under its absolute control; moreover, the
respondent Bank keeps the guard key to the said box. As stated earlier, renters
cannot open their respective boxes unless the Bank cooperates by presenting and
using this guard key. Clearly then, to the extent above stated, the foregoing conditions
in the contract in question are void and ineffective. It has been said:
"With respect to property deposited in a safe-deposit box by a customer of a safe-
deposit company, the parties, since the relation is a contractual one may by special
contract define their respective duties or provide for increasing or limiting the liability
of the deposit company, provided such contract is not in violation of law or public
policy. It must clearly appear that there actually was such a special contract, however,
in order to vary the ordinary obligations implied by law from the relationship of the
parties; liability of the deposit company will not be enlarged or restricted by words of
doubtful meaning. The company, in renting safe-deposit boxes, cannot exempt itself
from liability for loss of the contents by its own fraud or negligence or that of its agents
or servants, and if a provision of the contract may be construed as an attempt to do
so, it will be held ineffective for the purpose. Although it has been held that the lessor
of a safe-deposit box cannot limit its liability for loss of the contents thereof through its
own negligence, the view has been taken that such a lessor may limit its liability to
some extent by agreement or stipulation." 30 (citations omitted).
Thus, we reach the same conclusion which the Court of Appeals arrived at, that is,
that the petition should be dismissed, but on grounds quite different from those relied
upon by the Court of Appeals. In the instant case, the respondent Bank's exoneration
cannot, contrary to the holding of the Court of Appeals, be based on or proceed from
a characterization of the impugned contract as a contract of lease, but rather on the
fact that no competent proof was presented to show that respondent Bank was aware
of the agreement between the petitioner and the Pugaos to the effect that the
certificates of title were withdrawable from the safety deposit box only upon both
parties' joint signatures, and that no evidence was submitted to reveal that the loss of
the certificates of title was due to the fraud or negligence of the respondent Bank.
This in turn flows from this Court's determination that the contract involved was one of
deposit. Since both the petitioner and the Pugaos agreed that each should have one
(1) renter's key, it was obvious that either of them could ask the Bank for access to
the safety deposit box and, with the use of such key and the Bank's own guard key,
could open the said box, without the other renter being present.

Since, however, the petitioner cannot be blamed for the filing of the complaint and no
bad faith on its part had been established, the trial court erred in condemning the
petitioner to pay the respondent Bank attorney's fees. To this extent, the Decision
(dispositive portion) of public respondent Court of Appeals must be modified.

WHEREFORE, the Petition for Review is partially GRANTED by deleting the award
for attorney's fees from the 4 July 1989 Decision of the respondent Court of Appeals
in CA-G.R. CV No. 15150. As modified, and subject to the pronouncement We made
above on the nature of the relationship between the parties in a contract of lease of
safety deposit boxes, the dispositive portion of the said Decision is hereby
AFFIRMED and the instant Petition for Review is otherwise DENIED for lack of merit.

No pronouncement as to costs.

SO ORDERED.
 on the basis of the 'Rules and Regulations Governing the Lease of Safe Deposit
LUZAN SIA, petitioner, vs. COURT OF APPEALS and SECURITY BANK AND Boxes' (Exhs. "A-1", "1-A"), particularly paragraphs 9 and 13, which reads (sic):
TRUST COMPANY, respondents. '9. The liability of the Bank, by reason of the lease, is limited to the exercise of the
G.R. No. 102970 | 1993-05-13 diligence to prevent the opening of the safe by any person other than the Renter, his
authorized agent or legal representative;
The Decision of public respondent Court of Appeals in CA-G.R. CV No. 26737,
promulgated on 21 August 1991, 1 reversing and setting aside the Decision, dated 19 xxx xxx xxx
February 1990, 2 of Branch 47 of the Regional Trial Court (RTC) of Manila in Civil
Case No. 87-42601, entitled "LUZAN SIA vs. SECURITY BANK and TRUST CO.," is 13. The Bank is not a depository of the contents of the safe and it has neither the
challenged in this petition for review on certiorari under Rule 45 of the Rules of Court. possession nor the control of the same. The Bank has no interest whatsoever in said
contents, except as herein provided, and it assumes absolutely no liability in
Civil Case No. 87-42601 is an action for damages arising out of the destruction or connection therewith.'
loss of the stamp collection of the plaintiff (petitioner herein) contained in Safety
Deposit Box No. 54 which had been rented from the defendant pursuant to a contract The defendant bank also contended that its contract with the plaintiff over safety
denominated as a Lease Agreement.3 Judgment therein was rendered in favor of the deposit box No. 54 was one of lease and not of deposit and, therefore, governed by
plaintiff, the dispositive portion of which reads: the lease agreement (Exhs. "A", "L") which should be the applicable law; that the
destruction of the plaintiff's stamps collection was due to a calamity beyond its
"WHEREFORE, premises considered, judgment is hereby rendered in favor of the control; and that there was no obligation on its part to notify the plaintiff about the
plaintiff and against the defendant, Security Bank & Trust Company, ordering the floodwaters that inundated its premises at Binondo branch which allegedly seeped
defendant bank to pay the plaintiff the sum of -- into the safety deposit box leased to the plaintiff.

a) Twenty Thousand Pesos (P20,000.00), Philippine Currency, as actual damages; The trial court then directed that an ocular inspection on (sic) the contents of the
b) One Hundred Thousand Pesos (P100,000.00), Philippine Currency, as moral safety deposit box be conducted, which was done on December 8, 1988 by its clerk of
damages; and court in the presence of the parties and their counsels. A report thereon was then
c) Five Thousand Pesos (P5,000.00), Philippine Currency, as attorney's fees and submitted on December 12, 1988 (Records, p. 98-A) and confirmed in open court by
legal expenses. both parties thru counsel during the hearing on the same date (Ibid, p. 102) stating:

The counterclaim[s] set up by the defendant are hereby dismissed for lack of merit. 'That the Safety Box Deposit No. 54 was opened by both plaintiff Luzan Sia and the
Acting Branch Manager Jimmy B. Ynion in the presence of the undersigned, plaintiff's
No costs. and defendant's counsel. Said Safety Box when opened contains two albums of
different sizes and thickness, length and width and a tin box with printed word 'Thai
SO ORDERED." 4 Ping Shiang Roast Pork in pieces with Chinese designs and character.'

The antecedent facts of the present controversy are summarized by the public Condition of the above-stated Items --
respondent in its challenged decision as follows:
'Both albums are wet, moldy and badly damaged.
"The plaintiff rented on March 22, 1985 the Safety Deposit Box No. 54 of the
defendant bank at its Binondo Branch located at the Fookien Times Building, Soler 1. The first album measures 10 1/8 inches in length, 8 inches in width and 3/4 in thick.
St., Binondo, Manila wherein he placed his collection of stamps. The said safety The leaves of the album are attached to every page and cannot be lifted without
deposit box leased by the plaintiff was at the bottom or at the lowest level of the destroying it, hence the stamps contained therein are no longer visible.
safety deposit boxes of the defendant bank at its aforesaid Binondo Branch.
2. The second album measures 12 1/2 inches in length, 9 3/4 in width and 1 inch
During the floods that took place in 1985 and 1986, floodwater entered into the thick. Some of its pages can still be lifted. The stamps therein can still be
defendant bank's premises, seeped into the safety deposit box leased by the plaintiff distinguished but beyond restoration. Others have lost its original form.
and caused, according to the plaintiff, damage to his stamps collection. The
defendant bank rejected the plaintiff's claim for compensation for his damaged 3. The tin box is rusty inside. It contains an album with several pieces of papers stuck
stamps collection, so, the plaintiff instituted an action for damages against the up to the cover of the box. The condition of the album is the same as described in the
defendant bank. second above-mentioned album.'" 5

The defendant bank denied liability for the damaged stamps collection of the plaintiff The SECURITY BANK AND TRUST COMPANY, hereinafter referred to as SBTC,
appealed the trial court's decision to the public respondent Court of Appeals. The
appeal was docketed as CA-G.R. CV No. 26737. of an expert in order to save most of the stamps, but the appellee refused; appellee
must then bear the loss under the principle of "res perit domino."
In urging the public respondent to reverse the decision of the trial court, SBTC
contended that the latter erred in (a) holding that the lease agreement is a contract of Unsuccessful in his bid to have the above decision reconsidered by the public
adhesion; (b) finding that the defendant had failed to exercise the required diligence respondent,7 petitioner filed the instant petition wherein he contends that:
expected of a bank in maintaining the safety deposit box; (c) awarding to the plaintiff
actual damages in the amount of P20,000.00, moral damages in the amount of "I
P100,000.00 and attorney's fees and legal expenses in the amount of P5,000.00; and IT WAS A GRAVE ERROR OR AN ABUSE OF DISCRETION ON THE PART OF
(d) dismissing the counterclaim. THE RESPONDENT COURT WHEN IT RULED THAT RESPONDENT SBTC DID
NOT FAIL TO EXERCISE THE REQUIRED DILIGENCE IN MAINTAINING THE
On 21 August 1991, the public respondent promulgated its decision the dispositive SAFETY DEPOSIT BOX OF THE PETITIONER CONSIDERING THAT
portion of which reads: SUBSTANTIAL EVIDENCE EXIST (sic) PROVING THE CONTRARY.

"WHEREFORE, the decision appealed from is hereby REVERSED and instead the II
appellee's complaint is hereby DISMISSED. The appellant bank's counterclaim is THE RESPONDENT COURT SERIOUSLY ERRED IN EXCULPATING PRIVATE
likewise DISMISSED. No costs." 6 RESPONDENT FROM ANY LIABILITY WHATSOEVER BY REASON OF THE
PROVISIONS OF PARAGRAPHS 9 AND 13 OF THE AGREEMENT (EXHS. "A" AND
In reversing the trial court's decision and absolving SBTC from liability, the public "A-1").
respondent found and ruled that:
III
a) the fine print in the "Lease Agreement" (Exhibits "A" and "1") constitutes the terms THE RESPONDENT COURT SERIOUSLY ERRED IN NOT UPHOLDING THE
and conditions of the contract of lease which the appellee (now petitioner) had AWARDS OF THE TRIAL COURT FOR ACTUAL AND MORAL DAMAGES,
voluntarily and knowingly executed with SBTC; INCLUDING ATTORNEY'S FEES AND LEGAL EXPENSES, IN FAVOR OF THE
PETITIONER." 8
b) the contract entered into by the parties regarding Safe Deposit Box No. 54 was not
a contract of deposit wherein the bank became a depositary of the subject stamp We subsequently gave due course to the petition and required both parties to submit
collection; hence, as contended by SBTC, the provisions of Book IV, Title XII of the their respective memoranda, which they complied with. 9
Civil Code on deposits do not apply;
Petitioner insists that the trial court correctly ruled that SBTC had failed "to exercise
c) The following provisions of the questioned lease agreement of the safety deposit the required diligence expected of a bank maintaining such safety deposit box . . . in
box limiting SBTC's liability: the light of the environmental circumstances of said safety deposit box after the floods
of 1985 and 1986." He argues that such a conclusion is supported by the evidence on
"9. The liability of the bank by reason of the lease, is limited to the exercise of the record, to wit: SBTC was fully cognizant of the exact location of the safety deposit box
diligence to prevent the opening of the Safe by any person other than the Renter, his in question; it knew that the premises were inundated by floodwaters in 1985 and
authorized agent or legal representative; 1986 and considering that the bank is guarded twenty-four (24) hours a day, it is safe
to conclude that it was also aware of the inundation of the premises where the safety
xxx xxx xxx deposit box was located; despite such knowledge, however, it never bothered to
inform the petitioner of the flooding or take any appropriate measures to insure the
13. The bank is not a depositary of the contents of the Safe and it has neither the safety and good maintenance of the safety deposit box in question.
possession nor the control of the same. The Bank has no interest whatsoever in said
contents, except as herein provided, and it assumes absolutely no liability in SBTC does not squarely dispute these facts; rather, it relies on the rule that findings
connection therewith," of fact of the Court of Appeals, when supported by substantial evidence, are not
reviewable on appeal by certiorari. 10
are valid since said stipulations are not contrary to law, morals, good customs, public
order or public policy; and. The foregoing rule is, of course, subject to certain exceptions such as when there
exists a disparity between the factual findings and conclusions of the Court of Appeals
d) there is no concrete evidence to show that SBTC failed to exercise the required and the trial court. 11 Such a disparity obtains in the present case.
diligence in maintaining the safety deposit box; what was proven was that the floods
of 1985 and 1986, which were beyond the control of SBTC, caused the damage to the As We see it, SBTC's theory, which was upheld by the public respondent, is that the
stamp collection; said floods were fortuitous events which SBTC should not be held "Lease Agreement" covering Safe Deposit Box No. 54 (Exhibits "A" and "1") is just
liable for since it was not shown to have participated in the aggravation of the damage that -- a contract of lease -- and not a contract of deposit, and that paragraphs 9 and
to the stamp collection; on the contrary, it offered its services to secure the assistance 13 thereof, which expressly limit the bank's liability as follows:

"9. The liability of the bank by reason of the lease, is limited to the exercise of the
diligence to prevent the opening of the Safe by any person other than the Renter, his
authorized agent or legal representative;
xxx xxx xxx
13. The bank is not a depositary of the contents of the Safe and it has neither the
possession nor the control of the same. The Bank has no interest whatsoever in said
contents, except as herein provided, and it assumes absolutely no liability in
connection therewith," 12
are valid and binding upon the parties. In the challenged decision, the public
respondent further avers that even without such a limitation of liability, SBTC should
still be absolved from any responsibility for the damage sustained by the petitioner as
it appears that such damage was occasioned by a fortuitous event and that the
respondent bank was free from any participation in the aggravation of the injury.
We cannot accept this theory and ratiocination. Consequently, this Court finds the
petition to be impressed with merit.
In the recent case of CA Agro-Industrial Development Corp. vs. Court of
Appeals, 13 this Court explicitly rejected the contention that a contract for the use of a
safety deposit box is a contract of lease governed by Title VII, Book IV of the Civil
Code. Nor did We fully subscribe to the view that it is a contract of deposit to be
strictly governed by the Civil Code provision on deposit; 14 it is, as We declared, a
special kind of deposit. The prevailing rule in American jurisprudence -- that the
relation between a bank renting out safe deposit boxes and its customer with respect
to the contents of the box is that of a bailor and bailee, the bailment being for hire and
mutual benefit 15 -- has been adopted in this jurisdiction, thus:
"In the context of our laws which authorize banking institutions to rent out safety
deposit boxes, it is clear that in this jurisdiction, the prevailing rule in the United States
has been adopted. Section 72 of the General Banking Act [R.A. 337, as amended]
pertinently provides:
'SEC. 72. In addition to the operations specifically authorized elsewhere in this Act,
banking institutions other than building and loan associations may perform the
following services:
(a) Receive in custody funds, documents, and valuable objects, and rent safety
deposit boxes for the safeguarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted under subsections (a), (b) and (c) of
this section as depositories or as agents. . . . (emphasis supplied)
Note that the primary function is still found within the parameters of a contract of
deposit, i.e., the receiving in custody of funds, documents and other valuable objects
for safekeeping. The renting out of the safety deposit boxes is not independent from,
but related to or in conjunction with, this principal function. A contract of deposit may
be entered into orally or in writing [Art. 1969, Civil Code] and, pursuant to Article 1306
of the Civil Code, the parties thereto may establish such stipulations, clauses, terms
and conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order or public policy. The depositary's responsibility for
the safekeeping of the objects deposited in the case at bar is governed by Title I,
Book IV of the Civil Code. Accordingly, the depositary would be liable if, in performing
its obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor
of the agreement [Art. 1170, id.]. In the absence of any stipulation prescribing the
degree of diligence required, that of good father of a family is to be observed [Art.
1173, id.]. Hence, any stipulation exempting the depositary from any liability arising
from the loss of the thing deposited on account of fraud, negligence or delay would be
void for being contrary to law and public policy. In the instant case, petitioner
maintains that conditions 13 and 14 of the questioned contract of lease of the safety
deposit box, which read:
'13. The bank is not a depositary of the contents of the safe and it has neither the
possession nor control of the same.
14. The bank has no interest whatsoever in said contents, except as herein expressly
provided, and it assumes absolutely no liability in connection therewith.'
are void as they are contrary to law and public policy. We find Ourselves in
agreement with this proposition for indeed, said provisions are inconsistent with the
respondent Bank's responsibility as a depositary under Section 72(a) of the General
Banking Act. Both exempt the latter from any liability except as contemplated in
condition 8 thereof which limits its duty to exercise reasonable diligence only with
respect to who shall be admitted to any rented safe, to wit:
'8. The Bank shall use due diligence that no unauthorized person shall be admitted to
any rented safe and beyond this, the Bank will not be responsible for the contents of
any safe rented from it.'
Furthermore, condition 13 stands on a wrong premise and is contrary to the actual
practice of the Bank. It is not correct to assert that the Bank has neither the
possession nor control of the contents of the box since in fact, the safety deposit box
itself is located in its premises and is under its absolute control; moreover, the
respondent Bank keeps the guard key to said box. As stated earlier, renters cannot
open their respective boxes unless the Bank cooperates by presenting and using this
guard key. Clearly then, to the extent above stated, the foregoing conditions in the
contract in question are void and ineffective. It has been said:
'With respect to property deposited in a safe-deposit box by a customer of a safe-
deposit company, the parties, since the relation is a contractual one, may by special
contract define their respective duties or provide for increasing or limiting the liability
of the deposit company, provided such contract is not in violation of law or public
policy. It must clearly appear that there actually was such a special contract, however,
in order to vary the ordinary obligations implied by law from the relationship of the
parties; liability of the deposit company will not be enlarged or restricted by words of
doubtful meaning. The company, in renting safe-deposit boxes, cannot exempt itself
from liability for loss of the contents by its own fraud or negligence or that of its agents
or servants, and if a provision of the contract may be construed as an attempt to do
so, it will be held ineffective for the purpose. Although it has been held that the lessor
of a safe-deposit box cannot limit its liability for loss of the contents thereof through its
own negligence, the view has been taken that such a lessor may limit its liability to
some extent by agreement or stipulation.' [10 AM JUR 2d., 446]." (citations omitted) 16
It must be noted that conditions No. 13 and No. 14 in the Contract of Lease of Safety
Deposit Box in CA Agro-Industrial Development Corp. are strikingly similar to
condition No. 13 in the instant case. On the other hand, both condition No. 8 in CA
Agro-Industrial Development Corp. and condition No. 9 in the present case in limit the
scope of the exercise of due diligence by the banks involved to merely seeing to it
that only the renter, his authorized agent or his legal representative should open or
have access to the safety deposit box. In short, in all other situations, it would seem
that SBTC is not bound to exercise diligence of any kind at all. Assayed in the light of
Our aforementioned pronouncements in CA Agro-Industrial Development Corp., it is
not at all difficult to conclude that both conditions No. 9 and No. 13 of the "Lease
Agreement" covering the safety deposit box in question (Exhibits "A" and "1") must be
stricken down for being contrary to law and public policy as they are meant to exempt
SBTC from any liability for damage, loss or destruction of the contents of the safety
deposit box which may arise from its own or its agents' fraud, negligence or delay.
Accordingly, SBTC cannot take refuge under the said conditions.
Public respondent further postulates that SBTC cannot be held responsible for the
destruction or loss of the stamp collection because the flooding was a fortuitous event
and there was no showing of SBTC's participation in the aggravation of the loss or
injury. It states:
"Article 1174 of the Civil Code provides:
'Except in cases expressly specified by the law, or when it is otherwise declared by
stipulation, or when the nature of the obligation requires the assumption of risk, no
person shall be responsible for those events which could not be foreseen, or which,
though foreseen, were inevitable.'
In its dissertation of the phrase 'caso fortuito' the Enciclopedia Juridicada
Española 17 says: 'In a legal sense and, consequently, also in relation to contracts, a
'caso fortuito' prevents (sic) 18 the following essential characteristics: (1) the cause of
the unforeseen and unexpected occurrence, or of the failure of the debtor to comply
with his obligation, must be independent of the human will; (2) it must be impossible
to foresee the event which constitutes the 'caso fortuito,' or if it can be foreseen, it
must be impossible to avoid; (3) the occurrence must be such as to render it
impossible for one debtor to fulfill his obligation in a normal manner; and (4) the
obligor must be free from any participation in the aggravation of the injury resulting to
the creditor.' (cited in Servando vs. Phil. Steam Navigation Co., supra). 19
Here, the unforeseen or unexpected inundating floods were independent of the will of
the appellant bank and the latter was not shown to have participated in aggravating
damage (sic) to the stamps collection of the appellee. In fact, the appellant bank
offered its services to secure the assistance of an expert to save most of the then
good stamps but the appellee refused and let (sic) these recoverable stamps inside
the safety deposit box until they were ruined." 20
Both the law and authority cited are clear enough and require no further elucidation.
Unfortunately, however, the public respondent failed to consider that the instant case,
as correctly held by the trial court, SBTC was guilty of negligence. The facts
constituting negligence are enumerated in the petition and have been summarized in
this ponencia. SBTC's negligence aggravated the injury or damage to the petitioner
which resulted from the loss or destruction of the stamp collection. SBTC was aware
of the floods of 1985 and 1986; it also knew that the floodwaters inundated the room
where Safe Deposit Box No. 54 was located. In view hereof, it should have lost no
time in notifying the petitioner in order that the box could have been opened to
retrieved the stamps, thus saving the same from further deterioration and loss. In this
respect, it failed to exercise the reasonable care and prudence expected of a good
father or a family, thereby becoming a party to the aggravation of the injury or loss.
Accordingly, the aforementioned fourth characteristic of a fortuitous event is absent
and Article 1170 of the Civil Code, which reads:
"Those who in the performance of their obligations are guilty of fraud, negligence, or
delay, and those who in any manner contravene the tenor thereof, are liable for
damages,"
thus comes to the succor of the petitioner. The destruction or loss of the stamp
collection which was, in the language of the trial court, the "product of 27 years of
patience and diligence" 21 caused the petitioner pecuniary loss; hence, he must be
compensated therefor.
We cannot, however, place Our imprimatur on the trial court's award of moral
damages. Since the relationship between the petitioner and SBTC is based on a
contract, either of them may be held liable for moral damages for breach thereof only
if said party had acted fraudulently or in bad faith. 22 There is here no proof of fraud or
bad faith on the part of SBTC.
WHEREFORE, the instant petition is hereby GRANTED. The challenged Decision
and Resolution of the public respondent Court of Appeals of 21 August 1991 and 21
November 1991, respectively, in CA-G.R. CV No. 26737, are hereby SET ASIDE and
the Decision of 19 February 1990 of Branch 47 of the Regional Trial Court of Manila
in Civil Case No. 87-42601 is hereby REINSTATED in full, except as to the award of
moral damages which is hereby set aside.
Costs against the private respondent.
SO ORDERED.
 Guillermo Baron, the plaintiff in the other action, is his uncle. In the months of March,
SILVESTRA BARON, plaintiff-appellant, vs. PABLO DAVID, defendant and April, and May, 1920, Silvestra Baron placed a quantity of palay in the defendant's
mill; and this, in connection with some that she took over from Guillermo Baron,
appellant, amounted to 1,012 cavans and 24 kilos. During approximately the same period
And Guillermo Baron placed other 1,865 cavans and 43 kilos of palay in the mill. No
compensation has ever been received by Silvestra Baron upon account of the palay
GUILLERMO BARON, plaintiff and appellant, vs. PABLO DAVID, defendant- thus placed with the defendant. As against the palay delivered by Guillermo Baron, he
has received from the defendant advancements amounting to P2,800; but apart from
appellant. this he has not been compensated. Both the plaintiffs claim that the palay which was
delivered by them to the defendant was sold to the defendant; while the defendant, on
G.R. Nos. 26948 and 26949 | 1927-10-08 the other hand, claims that the palay was deposited subject to future withdrawal by
the depositors or subject to some future sale which was never effected. He therefore
DECISION
supposes himself to be relieved from all responsibility by virtue of the fire of January
17, 1921, already mentioned.
STREET, J.:
The plaintiffs further say that their palay was delivered to the defendant at his special
request, coupled with a promise on his part to pay for the same at the highest price
These two actions were instituted in the Court of First Instance of the Province of
per cavan at which palay would sell during the year 1920; and they say that in August
Pampanga by the respective plaintiffs, Silvestra Baron and Guillermo Baron, for the
of that year the defendant promised to pay them severally the price of P8.40 per
purpose of recovering from the defendant, Pablo David, the value of palay alleged to
cavan, which was about the top of the market for the season, provided they would
have been sold by the plaintiffs to the defendant in the year 1920. Owing to the fact
wait for payment until December. The trial judge found that no such promise had been
that the defendant is the same in both cases and that the two cases depend in part
given; and the incredulity of the court upon this point seems to us to be justified. A
upon the same facts, the cases were heard together in the trial court and determined
careful examination of the proof, however, leads us to the conclusion that the plaintiffs
in a single opinion. The same course will accordingly be followed here.
did, some time in the early part of August, 1920, make demand upon the defendant
for a settlement, which he evaded or postponed, leaving the exact amount due to the
In the first case, i. e., that in which Silvestra Baron is plaintiff, the court gave judgment
plaintiffs undetermined.
for her to recover of the defendant the sum of P5,238.51, with costs. From this
judgment both the plaintiff and the defendant appealed.
It should be stated that the palay in question was placed by the plaintiffs in the
defendant's mill with the understanding that the defendant was at liberty to convert it
In the second case, i. e., that in which Guillermo Baron is plaintiff, the court gave
into rice and dispose of it at his pleasure. The mill was actively running during the
judgment for him to recover of the defendant the sum of P5,734.60, with costs, from
entire season, and as palay was daily coming in from many customers and as rice
which judgment both the plaintiff and the defendant also appealed. In the same case
was being constantly shipped by the defendant to Manila, or other rice markets, it was
the defendant interposed a counterclaim in which he asked credit for the sum of
impossible to keep the plaintiffs' palay segregated. In fact the defendant admits that
P2,800 which he had advanced to the plaintiff Guillermo Baron on various occasions.
the plaintiffs' palay was mixed with that of others. In view of the nature of the
This credit was admitted by the plaintiff and allowed by the trial court. But the
defendant's activities and the way in which the palay was handled in the defendant's
defendant also interposed a cross-action against Guillermo Baron in which the
mill, it is quite certain that all of the plaintiffs' palay, which was put in before June
defendant claimed compensation for damages alleged to have been suffered by him
1,1920, had been milled and disposed of long prior to the fire of January 17, 1921.
by reason of the alleged malicious and false statements made by the plaintiff against
Furthermore, the proof shows that when the fire occurred there could not have been
the defendant in suing out an attachment against the defendant's property soon after
more than about 360 cavans of palay in the mill, none of which by any reasonable
the institution of the action. In the same cross-action the defendant also sought
probability could have been any part of the palay delivered by the plaintiffs.
compensation for damages incident to the shutting down of the defendant's rice mill
Considering the fact that the defendant had thus milled and doubtless sold the
for the period of one hundred seventy days during which the above-mentioned
plaintiffs' palay prior to the date of the fire, it results that he is bound to account for its
attachment was in force. The trial judge disallowed these claims for damages, and
value, and his liability was not extinguished by the occurrence of the fire. In the briefs
from this feature of the decision the defendant appealed. We are therefore confronted
before us it seems to have been assumed by the opposing attorneys that in order for
with five distinct appeals in this record.
the plaintiffs to recover, it is necessary that they should be able to establish that the
plaintiffs' palay was delivered in the character of a sale, and that if, on the contrary,
Prior to January 17,1921, the defendant Pablo David had been engaged in running a
the defendant should prove that the delivery was made in the character of deposit, the
rice mill in the municipality of Magalang, in the Province of Pampanga, a mill which
defendant should be absolved. But the case does not depend precisely upon this
was well patronized by the rice growers of the vicinity and almost constantly running.
explicit alternative; for even supposing that the palay may have been delivered in the
On the date stated a fire occurred that destroyed the mill and its contents, and it was
character of deposit, subject to future sale or withdrawal at plaintiffs' election,
some time before the mill could be rebuilt and put in operation again. Silvestra Baron,
nevertheless if it was understood that the defendant might mill the palay and he has in
the plaintiff in the first of the actions before us, is an aunt of the defendant; while
fact appropriated it to his own use, he is of course bound to account for its value.
Under article 1768 of the Civil Code, when the depositary has permission to make use
of the thing deposited, the contract loses the character of mere deposit and becomes
a loan or a commodatum; and of course by appropriating the thing, the bailee
becomes responsible for its value. In this connection we wholly reject the defendant's
pretense that the palay delivered by the plaintiffs or any part of it was actually
consumed in the fire of January, 1921. Nor is the liability of the defendant in any wise
affected by the circumstance that, by a custom prevailing among rice millers in this
country, persons placing palay with them without special agreement as to price are at
liberty to withdraw it later, proper allowance being made for storage and shrinkage, a
thing that is sometimes done, though rarely.
In view of what has been said it becomes necessary to discover the price which the
defendant should be required to pay for the plaintiffs' palay. Upon this point the trial
judge fixed upon P6.15 per cavan; and although we are not exactly in agreement with
him as to the propriety of the method by which he arrived at this figure, we are
nevertheless of the opinion that, all things considered, the result is approximately
correct. It appears that the price of palay during the months of April, May, and June,
1920, had been excessively high in the Philippine Islands, and even prior to that
period the Government of the Philippine Islands had been attempting to hold the price
in check by executive regulation. The highest point which was touched in this season
was apparently about P8.50 per cavan, but the market began to sag in May or June
and presently entered upon a precipitate decline. As We have already stated, the
plaintiffs made demand upon the defendant for settlement in the early part of August;
and, so far as we are able to judge from the proof, the price of P6.15 per cavan, fixed
by the trial court, is about the price at which the defendant should be required to settle
as of that date. It was the date of the demand of the plaintiffs for settlement that
determined the price to be paid by the defendant, and this is true whether the palay
was delivered in the character of sale with price undetermined or in the character of
deposit subject to use by the defendant. It results that the plaintiffs are respectively
entitled to recover the value of the palay which they had placed with the defendant
during the period referred to, with interest from the date of the filing of their several
complaints.
As already stated, the trial court found that at the time of the fire there were about 360
cavans of palay in the mill and that this palay was destroyed. His Honor assumed that
this was part of the palay delivered by the plaintiffs, and he held that the defendant
should be credited with said amount. His Honor therefore deducted from the claims of
the plaintiffs their respective proportionate shares of this amount of palay. We are
unable to see the propriety of this feature of the decision. There were many
customers of the defendant's rice mill who had placed their palay with the defendant
under the same conditions as the plaintiffs, and nothing can be more certain than that
the palay which was burned did not belong to the plaintiffs. That palay without a doubt
had long been sold and marketed. The assignments of error of each of the plaintiffs-
appellants in which this feature of the decision is attacked are therefore well taken;
and the appealed judgments must be modified by eliminating the deductions which
the trial court allowed from the plaintiffs' claims.
The trial judge also allowed a deduction from the claim of the plaintiff Guillermo Baron
of 167 cavans of palay, as indicated in Exhibits 12, 13, 14, and 16. This was also
erroneous. These exhibits relate to transactions that occurred nearly two years after
the transactions with which we are here concerned, and they were offered in evidence
merely to show the character of subsequent transactions between the parties, it
appearing that at the time said exhibits came into existence the defendant had
reconstructed his mill and that business relations with Guillermo Baron had been
resumed. The transactions shown by these exhibits (which relate to palay withdrawn
by the plaintiff from the defendant's mill) were not made the subject of controversy in
either the complaint or the cross-complaint of that defendant in the second case. They
therefore should not have been taken into account as a credit in favor of the
defendant. Said credit must therefore be likewise disallowed, though this feature of
our decision will of course be without prejudice to any proper adjustment of the rights
of the parties with respect to these subsequent transactions that they have heretofore
or may hereafter effect.
The preceding discussion disposes of all vital contentions relative to the liability of the
defendant upon the causes of action stated in the complaints. We proceed therefore
now to consider the question of the liability of the plaintiff Guillermo Baron upon the
cross-complaint of Pablo David in case R. G. No. 26949. In this cross-action the
defendant seeks, as stated in the third paragraph of this opinion, to recover damages
for the wrongful suing out of an attachment by the plaintiff and the levy of the same
upon the defendant's rice mill. It appears that about two and one half months after
said action was begun, the plaintiff, Guillermo Baron, asked for an attachment to be
issued against the property of the defendant; and to procure the issuance of said writ
the plaintiff made affidavit to the effect that the defendant was disposing, or
attempting to dispose of his property for the purpose of defrauding the plaintiff. Upon
this affidavit an attachment was issued as prayed, and on March 27, 1924, it was
levied upon the defendant's rice mill, and other property, real and personal.
Upon attaching the property the sheriff closed the mill and placed it in the care of a
deputy. Operations were not resumed until September 13,1924, when the attachment
was dissolved by an order of the court and the defendant was permitted to resume
control. At the time the attachment was levied there were, in the bodega, more than
20,000 cavans of palay belonging to persons who held receipts therefor; and in order
to get this grain away from the sheriff, twenty-four of the depositors found it necessary
to submit third-party claims to the sheriff. When these claims were put in the sheriff
notified the plaintiff that a bond in the amount of P50,000 must be given, otherwise
the grain would be released. The plaintiff, being unable or unwilling to give this bond,
the sheriff surrendered the palay to the claimants; but the attachment on the rice mill
was maintained until September 13, as above stated, covering a period of one
hundred seventy days during which the mill was idle. The ground upon which the
attachment was based, as set forth in the plaintiff's affidavit, was that the defendant
was disposing or attempting to dispose of his property for the purpose of defrauding
the plaintiff. That this allegation was false is clearly apparent, and not a word of proof
has been submitted in support of the assertion. On the contrary, the defendant
testified that at the time this attachment was secured he was solvent and could have
paid his indebtedness to the plaintiff if judgment had been rendered against him in
ordinary course. His financial condition was of course well known to the plaintiff, who
is his uncle. The defendant also states that he had not conveyed away any of his
property, nor had intended to do so, for the purpose of defrauding the plaintiff. We
have before us therefore a case of a baseless attachment, recklessly sued out upon a
false affidavit and levied upon the defendant's property to his great and needless
damage. That the act of the plaintiff in suing out the writ was wholly unjustifiable is
perhaps also indicated in the circumstance that the attachment was finally dissolved
upon the motion of the plaintiff himself.
The defendant testified that his mill was accustomed to clean from 400 to 450 cavans
of palay per clay, producing 225 cavans of rice, of 57 kilos each. The price charged
for cleaning each cavan of rice was 30 centavos. The defendant also stated that the
expense of running the mill per day was from P18 to P25, and that the net profit per
day on the mill was more than P40. As the mill was not accustomed to run on
Sundays and holidays, we estimate that the defendant lost the profit that would have
been earned on not less than one hundred forty work days. Figuring his profits at P40
per day, which would appear to be a conservative estimate, the actual net loss
resulting from his failure to operate the mill during the time stated could not have been
less than P5,600. The reasonableness of these figures is also indicated in the fact
that the twenty-four customers who intervened with third-party claims took out of the
camarin 20,000 cavans of palay, practically all of which, in the in this plant by the
defendant. And of course other grain would have found its way to this mill if it had
remained open during the one hundred forty days when it was closed.
But this is not all. When the attachment was dissolved and the mill again opened, the
defendant found that his customers had become scattered and could not be easily
gotten back. So slow, indeed, was his patronage in returning that during the
remainder of the year 1924 the defendant was able to mill scarcely more than the
grain belonging to himself and his brothers; and even after the next season opened
many of his old customers did not return. Several of these individuals, testifying as
witnesses in this case, stated that, owing to the unpleasant experience which they
had had in getting back their grain from the sheriff in the third-party proceedings, they
had not come back to the mill of the defendant, though they had previously had much
confidence in him.
As against the defendant's proof showing the facts above stated the plaintiff
submitted no evidence whatever. We are therefore constrained to hold that the
defendant was damaged by the attachment to the extent of P5,600, in profits lost by
the closure of the mill, and to the extent of P1,400 for injury to the good-will of his
business, making a total of P7,000. For this amount the defendant must recover
judgment on his cross-complaint.
levy of the attachment.
Before closing this opinion a word should be said upon the point raised in the first
assignment of error of Pablo David as defendant in case R. G. No. 26949. In this
connection it appears that the deposition of Guillermo Baron was presented in court
as evidence and was admitted as an exhibit, without being actually read to the court.
It is supposed in the assignment of error now under consideration that the deposition
is not available as evidence to the plaintiff because it was not actually read out in
court. This contention is not well founded. It is true that in section 364 of the Code of
Civil Procedure it is said that a deposition, once taken, may be read by either party
and will then be deemed the evidence of the party reading it. The use of the word
"read" in this section finds its explanation of course in the American practice of trying
cases for the most part before juries. When a case is thus tried the actual reading of
the deposition is necessary in order that the jurymen may become acquainted with its
contents. But in courts of equity, and in all courts where judges have the evidence
before them for perusal at their pleasure, it is not necessary that the deposition should
be actually read when presented as evidence.
From what has been said it results that the judgment of the court below must be
modified with respect to the amounts recoverable by the respective plaintiffs in the
two actions R. G. Nos. 26948 and 26949 and must be reversed in respect to the
disposition of the cross-complaint interposed by the defendant in case R. G. No.
26949, with the following results: In case R. G. No. 26948 the plaintiff Silvestra Baron
will recover of the defendant Pablo David the sum of P6,227.24, with interest from
November 21, 1923, the date of the filing of her complaint, and with costs. In case R.
G. No. 26949 the plaintiff Guillermo Baron will recover of the defendant Pablo David
the sum of P8,669.76, with interest from January 9, 1924. In the same case the
defendant Pablo David, as plaintiff in the cross-complaint, will recover of Guillermo
Baron the sum of P7,000, without costs. So ordered.

The trial court, in dismissing the defendant's cross-complaint for damages resulting
from the wrongful suing out of the attachment, suggested that the closure of the rice
mill was a mere act of the sheriff for which the plaintiff was not responsible and that
the defendant might have been permitted by the sheriff to continue running the mill if
he had applied to the sheriff for permission to operate it. This singular suggestion will
not bear a moment's criticism. It was of course the duty of the sheriff, in levying the
attachment, to take the attached property into his possession, and the closure of the
mill was a natural, and even necessary, consequence of the attachment. For the
damage thus inflicted upon the defendant the plaintiff is undoubtedly responsible.

One feature of the cross-complaint consists in the claim of the defendant (cross-
complainant) for the sum of P20,000 as damages caused to the defendant by the
false and alleged malicious statements contained in the affidavit upon which the
attachment was procured. The additional sum of P5,000 is also claimed as exemplary
damages. It is clear that with respect to these damages the cross-action cannot be
maintained, for the reason that the affidavit in question was used in course of a legal
proceeding for the purpose of obtaining a legal remedy, and it is therefore privileged.
But though the affidavit is not actionable as a libelous publication, this fact is no
obstacle to the maintenance of an action to recover the damage resulting from the

ANGEL JAVELLANA, plaintiff-appellee, vs. JOSE LIM, ET. AL., defendants-
appellants.
G.R. No. 4015 | 1908-08-24
DECISION
TORRES, J.:
The attorney for the plaintiff, Angel Javellana, filed a complaint on the 30th of
October, 1906, with the Court of First Instance of Iloilo, praying that the defendants,
Jose Lim and Ceferino Domingo Lim, be sentenced to jointly and severally pay the
sum of P2,686.58, with interest thereon at the rate of 15 per cent per annum from the
20th of January, 1898, until full payment should be made, deducting from the amount
of interest due the sum of P1,102.16, and to pay the costs of the proceedings.
Authority from the court having been previously obtained, the complaint was amended
on the 10th of January, 1907; it was then alleged, that on the 26th of May, 1897, the
defendants executed and subscribed a document in favor of the plaintiff reading as
follows:
"We have received from Angel Javellana, as a deposit without interest, the sum of two
thousand six hundred and eighty-six pesos and fifty-eight cents of pesos fuentes,
which we will return to the said gentleman, jointly and severally, on the 20th of
January, 1898. ---- Jaro, 26th of May, 1897. ---- Signed: Jose Lim. ---- Signed:
Ceferino Domingo Lim."
That, when the obligation became due, the defendants begged the plaintiff for an
extension of time for the payment thereof, binding themselves to pay interest at the
rate of 15 per cent on the amount of their indebtedness, to which the plaintiff acceded;
that on the 15th of May, 1902, the debtors paid on account of interest due the sum of
1,000 pesos, with the exception of which they had not paid any other sum on account
of either capital or interest, notwithstanding the requests made by the plaintiff, who
had thereby been subjected to loss and damages.
A demurrer to the original complaint was overruled, and on the 4th of January, 1907,
the defendants answered the original complaint before its amendment, setting forth
that they acknowledged the facts stated in Nos. 1 and 2 of the complaint; that they
admitted the statements of the plaintiff relative to the payment of 1,102.16 pesos
made on the l5th' of November, 1902, not, however, as payment of interest on the
amount stated in the foregoing document, but on account of the principal, and denied
that there had been any agreement as to an extension of the time for payment and
the payment of interest at the rate of 15 per cent per annum as alleged in paragraph 3
of the complaint, and also denied all the other statements contained therein.
As a counterclaim, the defendants alleged that they had paid to the plaintiff sums
which, together with the P1,102.16 acknowledged in the complaint, aggregated the
total sum of P5,602.16, and that, deducting therefrom the P2,686.58 stated in the
document transcribed in the complaint, the plaintiff still owed the defendants
P2,915.58; therefore, they asked that judgment be entered absolving them, and
sentencing the plaintiff to pay them the sum of P2,915.58 with the costs.
Evidence was adduced by both parties and, upon their exhibits, together with an
account book having been made of record, the court below rendered judgment on the
15th of January, 1907, in favor of the plaintiff for the recovery of the sum of P5,714.44
and costs.
The defendants excepted to the above decision and moved for a new trial. This
motion was overruled and was also excepted to by them; the bill of exceptions
presented by the appellants having been approved, the same was in due course
submitted to this court.
The document of indebtedness inserted in the complaint states that the plaintiff left on
deposit with the defendants a given sum of money which they were jointly and
severally obliged to return on a certain date fixed in the document; but that,
nevertheless, when the document appearing as Exhibit 2, written in the Visayan
dialect and followed by a translation into Spanish was executed, it was
acknowledged, at the date thereof, the 15th of November, 1902, that the amount
deposited had not yet been returned to the creditor, whereby he was subjected to
losses and damages amounting to 830 pesos since the 20th of January, 1898, when
the return was again stipulated with the further agreement that the amount deposited
should bear interest at the rate of 15 per cent per annum from the aforesaid date of
January 20, and that the 1,000 pesos paid to the depositor on the 15th of May, 1900,
according to the receipt issued by him to the debtors, would be included, and that the
said rate of interest would obtain until the debtors, paid the creditor the said amount in
full. In this second document the contract between the parties, which is a real loan of
money with interest, appears perfectly defined, notwithstanding the fact that in the
original document executed by the debtors, on the 26th of May, 1897, it is called a
deposit; so that when they bound themselves jointly and severally to refund the sum
of 2,686.58 pesos to the depositor, Javellana, they did not engage to return the same
coins received and of which the amount deposited consisted, and they could have
accomplished the return agreed upon by the delivery of a sum equal to the one
received by them. For this reason it must be understood that the debtors were lawfully
authorized to make use of the amount deposited, which they have done, as
subsequently shown when asking for an extension of the time for the return thereof,
inasmuch as, acknowledging that they have subjected the lender, their creditor, to
losses and damages for not complying with what had been stipulated, and being
conscious that they had used, for their own profit and gain, the money that they
received apparently as a deposit, they engaged to pay interest to the creditor from the
date named until the time when the refund should be made. Such conduct on the part
of the debtors is unquestionable evidence that the transaction entered into between
the interested parties was not a deposit, but a real contract of loan.
Article 1767 of the Civil Code provides that ----
"The depositary can not make use of the thing deposited without the express
permission of the depositor.
"Otherwise he shall be liable for losses and damages."
Article 1768 also provides that ----
"When the depositary has permission to make use of the thing deposited, the contract
loses the character of a deposit and becomes a loan or bailment.
"The permission shall not be presumed, and its existence must be proven."
When on one of the latter days of January, 1898, Jose Lim went to the office of the
creditor asking for an extension of one year, in view of the fact that money was
scarce, and because neither himself nor the other defendant were able to return the
amount deposited, for which reason he agreed to pay interest at the rate of 15 per
cent per annum, it was because, as a matter of fact, he did not have in his possession
the amount deposited, he having made use of the same in his business and for his
own profit; and the creditor, by granting them the extension, evidently confirmed the
express permission previously given them to use and dispose of the amount slated as
having been deposited, which, in accordance with the terms of the law, must be
considered as given them on loan, to all intents and purposes gratuitously, until the
20th of January, 1898, and from that date with interest at 15 per cent per annum until
its full payment, deducting from the total amount of interest the sum of 1,000 pesos, in
accordance with the provisions of article 1173 of the Civil Code.
clearly shown.
The original joint obligation contracted by the defendant debtors still exists, and it has
not been shown or proven in the proceedings that the creditor had released Jose Lim
from complying with his obligation in order that he should not be sued for or
sentenced to pay the amount of capital and interest together with his codebtor,
Ceferino Domingo Lim, because the record offers satisfactory evidence against the
pretension of Jose Lim, and it further appears that document No. 2 was executed by
the other debtor, Ceferino Domingo Lim, for himself and on behalf of Jose Lim; and it
has also been proven that Jose Lim, being fully aware that his debt had not yet been
settled, took steps to secure an extension of the time for payment, and consented to
pay interest in return for the concession requested from the creditor.
In view of the foregoing, and adopting the findings in the judgment appealed
from, it is our opinion that the same should be and is hereby affirmed with the costs of
this instance against the appellant, provided that the interest agreed upon shall be
paid until the complete liquidation of the debt. So ordered.

Notwithstanding the fact that it does not appear that Jose Lim signed the document
(Exhibit 2) executed in the presence of three witnesses on the 15th of November,
1902, by Ceferino Domingo Lim on behalf of himself and the former, nevertheless, the
said document has not been contested as false, either by a criminal or by a civil
proceeding, nor has any doubt been cast upon the authenticity of the signatures of
the witnesses who attested the execution of the same; and from the evidence in the
case one is sufficiently convinced that the said Jose Lim was perfectly aware of and
had authorized his joint codebtor to liquidate the interest, to pay the sum of 1,000
pesos, on account thereof, and to execute the aforesaid document No. 2. A true
ratification of the original document of deposit was thus made, and not the least proof
is shown in the record that Jose Lim had ever paid the whole or any part of the capital
stated in the original document, Exhibit 1.

If the amount, together with interest claimed in the complaint, less 1,000 pesos
appears as fully established, such is not the case with the defendants' counterclaim
for P5,602.16, because the existence and certainty of said indebtedness imputed to
the plaintiff has not been proven, and the defendants, who call themselves creditors
for the said amount, have not proven in a satisfactory manner that the plaintiff had
received partial payments on account of the same; the latter alleges with good
reason, that they should produce the receipts which he may have issued, and which
he did issue whenever they paid him any money on account. The plaintiff's allegation
that the two amounts of 400 and 1,200 pesos, referred to in documents marked "C"
and "D" offered in evidence by the defendants, had been received from Ceferino
Domingo Lim on account of other debts of his, has not been contradicted, and the fact
that in the original complaint the sum of 1,102.16 pesos, was expressed in lieu of
1,000 pesos, the only payment made on account of interest on the amount deposited
according to documents No. 2 and letter "B" above referred to, was due to a mistake.

Moreover, for the reasons above set forth it may, as a matter of course, be inferred
that there was no renewal of the contract of deposit converted into a loan, because,
as has already been stated, the defendants received said amount by virtue of a real
loan contract under the name of a deposit, since the so-called bails were forthwith
authorized to dispose of the amount deposited. This they have done, as has been