(153) Liam Law V.

Olympic Sawmill
Gr L-30771, May 28, 1984 [Per J. Melencio-Herrera, First Division]

TOPIC: Essential Elements of Contracts

Cause presumed that it exists and lawful

What have we learned: Article 1354 of the Civil Code provides that although the cause is not
stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the
contrary.

Section 9 of the Usury Law (Act 2655) provided:

SEC. 9. The person or corporation sued shall file its answer in writing under oath
to any complaint brought or filed against said person or corporation before a
competent court to recover the money or other personal or real property, seeds or
agricultural products, charged or received in violation of the provisions of this
Act. The lack of taking an oath to an answer to a complaint will mean the
admission of the facts contained in the latter.

What the case teaches us? The agreement of the parties relative to the P6,000.00 obligation,
without an evidentiary hearing, it has to be concluded that defendants had not proven that the
P6,000.00 obligation was illegal.

ISSUE: Whether or not the P6,000.00 to pay in addition to the principal obligation is lawful.

FACTS: Plaintiff Liam Law loaned Php 10,000 without interest to the Defendant Olympic
Sawmill Co. When the loan became due, it was not paid on the due date. The parties executed
another loan document. Payment of the P10,000.00 was extended, but the obligation was
increased by P6,000.00 as answer for attorney’s fees, legal interest and other cost incident
thereto. Defendants again failed to pay their obligation by April 30, 1960 and, on September 23,
1960, plaintiff instituted this collection case. Defendants admitted the P10,000.00 principal
obligation, but claimed that the additional P6,000.00 constituted usurious interest. CFI of
Bulacan decided in favor of the plaintiff. On appeal, the Court of Appeals endorsed the case to
the Supreme Court, stating that the issue involved was one of law.

HELD: Yes. Article 1354 of the Civil Code provides that although the cause is not stated in the
contract, it is presumed that it exists and is lawful, unless the debtor proves the contrary. Here the
agreement of the parties relative to the P6,000.00 obligation, without an evidentiary hearing, it
has to be concluded that defendants had not proven that the P6,000.00 obligation was illegal.
Therefore, it is presumed that the agreement of the parties relative to the P6,000.00 exists and is
lawful.
The foregoing provision envisages a complaint filed against an entity which has committed
usury, for the recovery of the usurious interest paid. In that case, if the entity sued shall not file
its answer under oath denying the allegation of usury, the defendant shall be deemed to have
admitted the usury. The provision does not apply to a case, as in the present, where it is the
defendant, not the plaintiff, who is alleging usury.