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Republic of the PhilippinesSUPREME COURT

Baguio City

FIRST DIVISION

G.R. No. 114286 April 19, 2001

THE CONSOLIDATED BANK AND TRUST CORPORATION (SOLIDBANK),petitionervs.THE COURT OF APPEALS, CONTINENTAL CEMENT CORPORATION, GREGORY T. LIM and

SPOUSE,respondents.

YNARES-SANTIAGO, J.:

The instant petition for review seeks to partially set aside the July 26, 1993 Decision1of respondent Court ofAppeals in CA-GR. CV No. 29950, insofar as it orders petitioner to reimburse respondent Continental CementCorporation the amount of P490, 228.90 with interest thereon at the legal rate from July 26, 1988 until fully paid.The petition also seeks to set aside the March 8, 1994 Resolution2of respondent Court of Appeals denying its

Motion for Reconsideration.

The facts are as follows:

On July 13, 1982, respondents Continental Cement Corporation (hereinafter, respondent Corporation) and GregoryT. Lim (hereinafter, respondent Lim) obtained from petitioner Consolidated Bank and Trust Corporation Letter ofCredit No. DOM-23277 in the amount of P 1,068,150.00 On the same date, respondent Corporation paid a marginaldeposit of P320,445.00 to petitioner. The letter of credit was used to purchase around five hundred thousand liters ofbunker fuel oil from Petrophil Corporation, which the latter delivered directly to respondent Corporation in itsBulacan plant. In relation to the same transaction, a trust receipt for the amount of P 1,001,520.93 was executed byrespondent Corporation, with respondent Lim as signatory.

Claiming that respondents failed to turn over the goods covered by the trust receipt or the proceeds thereof,petitioner filed a complaint for sum of money with application for preliminary attachment3before the Regional TrialCourt of Manila. In answer to the complaint, respondents averred that the transaction between them was a simpleloan and not a trust receipt transaction, and that the amount claimed by petitioner did not take into account paymentsalready made by them. Respondent Lim also denied any personal liability in the subject transactions. In aSupplemental Answer, respondents prayed for reimbursement of alleged overpayment to petitioner of the amount ofP490,228.90.

At the pre-trial conference, the parties agreed on the following issues:

1) Whether or not the transaction involved is a loan transaction or a trust receipt transaction;

2) Whether or not the interest rates charged against the defendants by the plaintiff are proper under the

letter of credit, trust receipt and under existing rules or regulations of the Central Bank;

3) Whether or not the plaintiff properly applied the previous payment of P300,456.27 by the defendantcorporation on July 13, 1982 as payment for the latters account; and

4) Whether or not the defendants are personally liable under the transaction sued for in this case.4

On September 17, 1990, the trial court rendered its Decision,5dismissing the Complaint and ordering petitioner topay respondents the following amounts under their counterclaim: P490,228.90 representing overpayment ofrespondent Corporation, with interest thereon at the legal rate from July 26, 1988 until fully paid; P10,000.00 asattorney's fees; and costs.

Both parties appealed to the Court of Appeals, which partially modified the Decision by deleting the award ofattorney's fees in favor of respondents and, instead, ordering respondent Corporation to pay petitioner P37,469.22 asand for attorney's fees and litigation expenses.

Hence, the instant petition raising the following issues:

1. WHETHER OR NOT THE RESPONDENT APPELLATE COURT ACTED INCORRECTLY ORCOMMITTED REVERSIBLE ERROR IN HOLDING THAT THERE WAS OVERPAYMENT BYPRIVATE RESPONDENTS TO THE PETITIONER IN THE AMOUNT OF P490,228.90 DESPITE THEABSENCE OF ANY COMPUTATION MADE IN THE DECISION AND THE ERRONEOUSAPPLICATION OF PAYMENTS WHICH IS IN VIOLATION OF THE NEW CIVIL CODE.

2. WHETHER OR NOT THE MANNER OF COMPUTATION OF THE MARGINAL DEPOSIT BY

THE RESPONDENT APPELLATE COURT IS IN ACCORDANCE WITH BANKING PRACTICE.

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3. WHETHER OR NOT THE AGREEMENT AMONG THE PARTIES AS TO THE FLOATING OFINTEREST RATE IS VALID UNDER APPLICABLE JURISPRUDENCE AND THE RULES ANDREGULATIONS OF THECENTRAL BANK.

4. WHETHER OR NO THE RESPONDENT APPELLATE COUR GRIEVOUSLY ERRED IN NOTCONSIDERING THE TRANSACTION AT BAR AS A TRUST RECEIPT TRANSACTION ON THE

BASIS OF THE JUDICIAL ADMISSIONS OF THE PRIVATE RESPONDENTS AND FOR WHICHRESPONDENTS ARE LIABLE THEREFOR.

5. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY ERRED IN NOTHOLDING PRIVATE RESPONDENT SPOUSES LIABLE UNDER THE TRUST RECEIPTTRANSACTION.6

The petition must be denied.

On the first issue respecting the fact of overpayment found by both the lower court and respondent Court ofAppeals, we stress the time-honored rule that findings of fact by the Court of Appeals especially if they affirmfactual findings of the trial court will not be disturbed by this Court, unless these findings are not supported byevidence.7

Petitioner decries the lack of computation by the lower court as basis for its ruling that there was an overpaymentmade. While such a computation may not have appeared in the Decision itself, we note that the trial court's findingof overpayment is supported by evidence presented before it. At any rate, we painstakingly reviewed and computedthe payments together with the interest and penalty charges due thereon and found that the amount of overpaymentmade by respondent Bank to petitioner, i.e., P263,070.13, was more than what was ordered reimbursed by the lowercourt. However, since respondents did not file an appeal in this case, the amount ordered reimbursed by the lowercourt should stand.

Moreover, petitioner's contention that the marginal deposit made by respondent Corporation should not be deductedoutright from the amount of the letter of credit is untenable. Petitioner argues that the marginal deposit should beconsidered only after computing the principal plus accrued interest and other charges. However, to sustain petitioneron this score would be to countenance a clear case of unjust enrichment, for while a marginal deposit earns no

interest in favour of the debtor-depositor, the bank is not only able to use the same for its own purposes, interest-free, but is also able to earn interest on the money loaned to respondent Corporation. Indeed, it would be onerous tocompute interest and other charges on the face value of the letter of credit which the petitioner issued, without firstcrediting or setting off the marginal deposit which the respondent Corporation paid to it. Compensation is properand should take effect by operation of law because the requisites in Article 1279 of the Civil Code are present andshould extinguish both debts to the concurrent amount.8

Hence, the interests and other charges on the subject letter of credit should be computed only on the balance ofP681,075.93, which was the portion actually loaned by the bank to respondent Corporation.

Neither do we find error when the lower court and the Court of Appeals set aside as invalid the floating rate ofinterest exhorted by petitioner to be applicable. The pertinent provision in the trust receipt agreement of the partiesfixing the interest rate states:

I, WE jointly and severally agree to any increase or decrease in the interest rate which may occur after July1, 1981, when the Central Bank floated the interest rate, and to pay additionally the penalty of 1% permonth until the amount/s or instalments/s due and unpaid under the trust receipt on the reverse side hereofis/are fully paid.9

We agree with respondent Court of Appeals that the foregoing stipulation is invalid, there being no reference rate seteither by it or by the Central Bank, leaving the determination thereof at the sole will and control ofpetitioner. 1wphi1.nt

While it may be acceptable, for practical reasons given the fluctuating economic conditions, for banks to stipulatethat interest rates on a loan not be fixed and instead be made dependent upon prevailing market conditions, there

should always be a reference rate upon which to peg such variable interest rates. An example of such a valid variableinterest rate was found inPolotan, Sr. v. Court of Appeals. 10 In that case, the contractual provision stating that "ifthere occurs any change in the prevailing market rates, the new interest rate shall be the guiding rateincomputing the interest due on the outstanding obligation without need of serving notice to the Cardholder other thanthe required posting on the monthly statement served to the Cardholder"11was considered valid. The aforequotedprovision was upheld notwithstanding that it may partake of the nature of an escalation clause, because at the sametime it provides for the decrease in the interest rate in case the prevailing market rates dictate its reduction. In otherwords, unlike the stipulation subject of the instant case, the interest rate involved in the Polotan case is designed tobe based on the prevailing market rate. On the other hand, a stipulation ostensibly signifying an agreement to "anyincrease or decrease in the interest rate," without more, cannot be accepted by this Court as valid for it leaves solelyto the creditor the determination of what interest rate to charge against an outstanding loan.

Petitioner has also failed to convince us that its transaction with respondent Corporation is really a trust receipt

transaction instead of merely a simple loan, as found by the lower court and the Court of Appeals.

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The recent case of Colinares v. Court of Appeals12appears to be foursquare with the facts obtaining in the case atbar. There, we found that inasmuch as the debtor received the goods subject of the trust receipt before the trustreceipt itself was entered into, the transaction in question was a simple loan and not a trust receipt agreement. Priorto the date of execution of the trust receipt, ownership over the goods was already transferred to the debtor. Thissituation is inconsistent with what normally obtains in a pure trust receipt transaction, wherein the goods belong inownership to the bank and are only released to the importer in trust after the loan is granted.

In the case at bar, as in Colinares, the delivery to respondent Corporation of the goods subject of the trust receiptoccurred long before the trust receipt itself was executed. More specifically, delivery of the bunker fuel oil torespondent Corporation's Bulacan plant commenced on July 7, 1982 and was completed by July 19, 1982.13Further,the oil was used up by respondent Corporation in its normal operations by August, 1982.14On the other hand, thesubject trust receipt was only executed nearly two months after full delivery of the oil was made to respondentCorporation, or on September 2, 1982.

The danger in characterizing a simple loan as a trust receipt transaction was explained in Colinares, to wit:

The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes the dishonesty andabuse of confidence in the handling of money or goods to the prejudice of another regardless of whether thelatter is the owner. Here, it is crystal clear that on the part of Petitioners there was neither dishonesty nor

abuse of confidence in the handling of money to the prejudice of PBC. Petitioners continually endeavoredto meet their obligations, as shown by several receipts issued by PBC acknowledging payment of the loan.

The Information charges Petitioners with intent to defraud and misappropriating the money for theirpersonal use. The mala prohibita nature of the alleged offense notwithstanding, intent as a state of mindwas not proved to be present in Petitioners' situation. Petitioners employed no artifice in dealing with PBCand never did they evade payment of their obligation nor attempt to abscond. Instead, Petitioners soughtfavorable terms precisely to meet their obligation.

Also noteworthy is the fact that Petitioners are not importers acquiring the goods for re -sale, contrary to theexpress provision embodied in the trust receipt. They are contractors who obtained the fungible goods fortheir construction project. At no time did title over the construction materials pass to the bank, but directlyto the Petitioners from CM Builders Centre. This impresses upon the trust receipt in question vagueness

and ambiguity, which should not be the basis for criminal prosecution in the event of violation of itsprovisions.

The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and placethem under the threats of criminal prosecution should they be unable to pay it may be unjust andinequitable if not reprehensible. Such agreements are contracts of adhesion which borrowers have no optionbut to sign lest their loan be disapproved. The resort to this scheme leaves poor and hapless borrowers atthe mercy of banks, and is prone to misinterpretation, as had happened in this case. Eventually, PBCshowed its true colors and admitted that it was only after collection of the money, as manifested by itsAffidavit of Desistance.

Similarly, respondent Corporation cannot be said to have been dishonest in its dealings with petitioner. Neither has itbeen shown that it has evaded payment of its obligations. Indeed, it continually endeavored to meet the same, as

shown by the various receipts issued by petitioner acknowledging payment on the loan. Certainly, the payment ofthe sum of P1,832,158.38 on a loan with a principal amount of only P681,075.93 negates any badge of dishonesty ,abuse of confidence or mishandling of funds on the part of respondent Corporation, which are the gravamen of atrust receipt violation. Furthermore, Respondent Corporation is not an importer, which acquired the bunker fuel oilfor re-sale; it needed the oil for its own operations. More importantly, at no time did title over the oil pass topetitioner, but directly to respondent Corporation to which the oil was directly delivered long before the trust receiptwas executed. The fact that ownership of the oil belonged to respondent Corporation, through its President, GregoryLim, was acknowledged by petitioner's own account officer on the witness stand, to wit:

Q -After the bank opened a letter of credit in favor of Petrophil Corp. for the account of the defendantsthereby paying the value of the bunker fuel oil what transpired next after that?

A -Upon purchase of the bunker fuel oil and upon the requests of the defendant possession of the bunker

fuel oil were transferred to them.

Q -You mentioned them to whom are you referring to?

A -To the Continental Cement Corp. upon the execution of the trust receipt acknowledging the ownershipof the bunker fuel oil this should be acceptable for whatever disposition he may make.

Q - You mentioned about acknowledging ownership of the bunker fuel oil to whom by whom?

A - By the Continental Cement Corp.

QSo by your statement who really owns the bunker fuel oil?

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A TTY. RACHON:

Objection already answered,

COURT:

Give time to the other counsel to object.

A TTY. RACHON :

He has testified that ownership was acknowledged in favor of Continental Cement Corp. so that questionhas already been answered.

A TTY. BANAGA:

That is why I made a follow up question asking ownership of the bunker fuel oil.

COURT:

Proceed.

A TTY .BANAGA:

Q - Who owns the bunker fuel oil after purchase from Petrophil Corp. ?

A - Gregory Lim.15

By all indications, then, it is apparent that there was really no trust receipt transaction that took place. Evidently,respondent Corporation was required to sign the trust receipt simply to facilitate collection by petitioner of the loanit had extended to the former.

Finally, we are not convinced that respondent Gregory T. Lim and his spouse should be personally liable under thesubject trust receipt. Petitioner's argument that respondent Corporation and respondent Lim and his spouse are oneand the same cannot be sustained. The transactions sued upon were clearly entered into by respondent Lim in hiscapacity as Executive Vice President of respondent Corporation. We stress the hornbook law that corporatepersonality is a shield against personal liability of its officers. Thus, we agree that respondents Gregory T. Lim andhis spouse cannot be made personally liable since respondent Lim entered into and signed the contract clearly in hisofficial capacity as Executive Vice President. The personality of the corporation is separate and distinct from thepersons composing it.16

WHEREFORE,in view of all the foregoing, the instant Petition for Review is DENIED. The Decision of the Courtof Appeals dated July 26, 1993 in CA-G.R. CY No.29950 is AFFIRMED.

SO ORDERED.

Davide Jr., Puno, Pardo, Pardo, JJ., concur.

Footnotes

1penned by Associate Justice Cezar D. Francisco and concurred in by Associate Justices Gloria C. Parasand Buenaventura J. Guerrero; Petition for Review, Annex "B"; Rollo, pp. 76-93.

2Petition for Review, Annex "C"; Rollo, p. 95.

3Docketed as Civil Case No. 86-38396; Record, pp. 1-11.

4Pre-trial Order, p. 3; Record, p. 236.

5Penned by then Presiding Judge Bernardo P. Pardo, now Associate Justice of this Court; Record, pp. 435-438.

6Petition for Review, pp. 10-11; Rollo, pp. 17-18.

7Baas, jr. v. Court of Appeals, G.R. No. 102967, 10 February 2000, citing Guerrero v. Court of Appeals,285 SCRA 670 [1998] and Sta. Maria v. Court of Appeals, 285 SCRA 351 [1998].

8Civil Code, Art. 1290; Abad v. Court of Appeals, 181 SCRA 191 [1990].

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9Exhibit "A.".

10 296 SCRA 247 [1998].

11Emphasis ours.

12G.R. No. 90828, 5 September 2000.

13TSN, 19 April 1989, p. 9; Exhibits "9" and "10"; record, pp. 301-302.

14Ibid., p. 12.

15TSN, 12 April 1989, pp. 4-5.

16Penned Construction Group, Inc. v. Court of Appeals, 324 SCRA 270 [2000], citing Rustan Pulp andPaper Mills, Inc. vs. Intermediate Appellate Court, 214 SCRA 665, 672 [1992].

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Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-20240 December 31, 1965

REPUBLIC OF THE PHILIPPINES,plaintiff-appellee,vs.JOSE GRIJALDO, defendant-appellant.

Office of the Solicitor General for plaintiff-appellee.

Isabelo P. Samson for defendant-appellant.

ZALDIVAR, J.:

In the year 1943 appellant Jose Grijaldo obtained five loans from the branch office of the Bank of Taiwan, Ltd. inBacolod City, in the total sum of P1,281.97 with interest at the rate of 6% per annum, compounded quarterly. Theseloans are evidenced by five promissory notes executed by the appellant in favor of the Bank of Taiwan, Ltd., asfollows: On June 1, 1943, P600.00; on June 3, 1943, P159.11; on June 18, 1943, P22.86; on August 9,1943,P300.00; on August 13, 1943, P200.00, all notes without due dates, but because the loans were due one yearafter they were incurred. To secure the payment of the loans the appellant executed a chattel mortgage on thestanding crops on his land, Lot No. 1494 known as Hacienda Campugas in Hinigiran, Negros Occidental.

By virtue of Vesting Order No. P-4, dated January 21, 1946, and under the authority provided for in the Tradingwith the Enemy Act, as amended, the assets in the Philippines of the Bank of Taiwan, Ltd. were vested in theGovernment of the United States. Pursuant to the Philippine Property Act of 1946 of the United States, these assets,including the loans in question, were subsequently transferred to the Republic of the Philippines by the Governmentof the United States under Transfer Agreement dated July 20, 1954. These assets were among the properties thatwere placed under the administration of the Board of Liquidators created under Executive Order No. 372, datedNovember 24, 1950, and in accordance with Republic Acts Nos. 8 and 477 and other pertinent laws.

On September 29, 1954 the appellee, Republic of the Philippines, represented by the Chairman of the Board ofLiquidators, made a written extrajudicial demand upon the appellant for the payment of the account in question. Therecord shows that the appellant had actually received the written demand for payment, but he failed to pay.

The aggregate amount due as principal of the five loans in question, computed under the Ballantyne scale of valuesas of the time that the loans were incurred in 1943, was P889.64; and the interest due thereon at the rate of 6% perannum compounded quarterly, computed as of December 31, 1959 was P2,377.23.

On January 17, 1961 the appellee filed a complaint in the Justice of the Peace Court of Hinigaran, NegrosOccidental, to collect from the appellant the unpaid account in question. The Justice of the Peace Of Hinigaran, afterhearing, dismissed the case on the ground that the action had prescribed. The appellee appealed to the Court of First

Instance of Negros Occidental and on March 26, 1962 the court a quo rendered a decision ordering the appellant topay the appellee the sum of P2,377.23 as of December 31, 1959, plus interest at the rate of 6% per annumcompounded quarterly from the date of the filing of the complaint until full payment was made. The appellant wasalso ordered to pay the sum equivalent to 10% of the amount due as attorney's fees and costs.

The appellant appealed directly to this Court. During the pendency of this appeal the appellant Jose Grijaldo died.Upon motion by the Solicitor General this Court, in a resolution of May 13, 1963, required Manuel Lagtapon,Jacinto Lagtapon, Ruben Lagtapon and Anita L. Aguilar, who are the legal heirs of Jose Grijaldo to appear and besubstituted as appellants in accordance with Section 17 of Rule 3 of the Rules of Court.

In the present appeal the appellant contends: (1) that the appellee has no cause of action against the appellant; (2)that if the appellee has a cause of action at all, that action had prescribed; and (3) that the lower court erred inordering the appellant to pay the amount of P2,377.23.

In discussing the first point of contention, the appellant maintains that the appellee has no privity of contract withthe appellant. It is claimed that the transaction between the Taiwan Bank, Ltd. and the appellant, so that the appellee,Republic of the Philippines, could not legally bring action against the appellant for the enforcement of the obligationinvolved in said transaction. This contention has no merit. It is true that the Bank of Taiwan, Ltd. was the originalcreditor and the transaction between the appellant and the Bank of Taiwan was a private contract of loan. However,pursuant to the Trading with the Enemy Act, as amended, and Executive Order No. 9095 of the United States; andunder Vesting Order No. P-4, dated January 21, 1946, the properties of the Bank of Taiwan, Ltd., an entity whichwas declared to be under the jurisdiction of the enemy country (Japan), were vested in the United States Governmentand the Republic of the Philippines, the assets of the Bank of Taiwan, Ltd. were transferred to and vested in theRepublic of the Philippines. The successive transfer of the rights over the loans in question from the Bank ofTaiwan, Ltd. to the United States Government, and from the United States Government to the government of theRepublic of the Philippines, made the Republic of the Philippines the successor of the rights, title and interest in said

loans, thereby creating a privity of contract between the appellee and the appellant. In defining the word "privy" thisCourt, in a case, said:

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The word "privy" denotes the idea of succession ... hence an assignee of a credit, and one subrogated to it,etc. will be privies; in short, he who by succession is placed in the position of one of those who contractedthe judicial relation and executed the private document and appears to be substituting him in the personalrights and obligation is a privy (Alpurto vs. Perez, 38 Phil. 785, 790).

The United States of America acting as a belligerent sovereign power seized the assets of the Bank of Taiwan, Ltd.

which belonged to an enemy country. The confiscation of the assets of the Bank of Taiwan, Ltd. being aninvoluntary act of war, and sanctioned by international law, the United States succeeded to the rights and interests ofsaid Bank of Taiwan, Ltd. over the assets of said bank. As successor in interest in, and transferee of, the propertyrights of the United States of America over the loans in question, the Republic of the Philippines had therebybecome a privy to the original contracts of loan between the Bank of Taiwan, Ltd. and the appellant. It follows,therefore, that the Republic of the Philippines has a legal right to bring the present action against the appellant JoseGrijaldo.

The appellant likewise maintains, in support of his contention that the appellee has no cause of action, that becausethe loans were secured by a chattel mortgage on the standing crops on a land owned by him and these crops werelost or destroyed through enemy action his obligation to pay the loans was thereby extinguished. This argument isuntenable. The terms of the promissory notes and the chattel mortgage that the appellant executed in favor of theBank of Taiwan, Ltd. do not support the claim of appellant. The obligation of the appellant under the five

promissory notes was not to deliver a determinate thing namely, the crops to be harvested from his land, or the valueof the crops that would be harvested from his land. Rather, his obligation was to pay a generic thingthe amountof money representing the total sum of the five loans, with interest. The transaction between the appellant and theBank of Taiwan, Ltd. was a series of five contracts of simple loan of sums of money. "By a contract of (simple)loan, one of the parties delivers to another ... money or other consumable thing upon the condition that the sameamount of the same kind and quality shall be paid." (Article 1933, Civil Code) The obligation of the appellant underthe five promissory notes evidencing the loans in questions is to pay the value thereof; that is, to deliver a sum ofmoneya clear case of an obligation to deliver, a generic thing. Article 1263 of the Civil Code provides:

In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does notextinguish the obligation.

The chattel mortgage on the crops growing on appellant's land simply stood as a security for the fulfillment of

appellant's obligation covered by the five promissory notes, and the loss of the crops did not extinguish hisobligation to pay, because the account could still be paid from other sources aside from the mortgaged crops.

In his second point of contention, the appellant maintains that the action of the appellee had prescribed. Theappellant points out that the loans became due on June 1, 1944; and when the complaint was filed on January17,1961 a period of more than 16 years had already elapsedfar beyond the period of ten years when an actionbased on a written contract should be brought to court.

This contention of the appellant has no merit. Firstly, it should be considered that the complaint in the present casewas brought by the Republic of the Philippines not as a nominal party but in the exercise of its sovereign functions,to protect the interests of the State over a public property. Under paragraph 4 of Article 1108 of the Civil Codeprescription, both acquisitive and extinctive, does not run against the State. This Court has held that the statute oflimitations does not run against the right of action of the Government of the Philippines (Government of the

Philippine Islands vs. Monte de Piedad, etc., 35 Phil. 738-751).Secondly, the running of the period of prescription ofthe action to collect the loan from the appellant was interrupted by the moratorium laws (Executive Orders No. 25,dated November 18, 1944; Executive Order No. 32. dated March 10, 1945; and Republic Act No. 342, approved onJuly 26, 1948). The loan in question, as evidenced by the five promissory notes, were incurred in the year 1943, orduring the period of Japanese occupation of the Philippines. This case is squarely covered by Executive Order No.25, which became effective on November 18, 1944, providing for the suspension of payments of debts incurred afterDecember 31, 1941. The period of prescription was, therefore, suspended beginning November 18, 1944. ThisCourt, in the case ofRutter vs. Esteban(L-3708, May 18, 1953, 93 Phil. 68), declared on May 18, 1953 that theMoratorium Laws, R.A. No. 342 and Executive Orders Nos. 25 and 32, are unconstitutional; but in that case thisCourt ruled that the moratorium laws had suspended the prescriptive period until May 18, 1953. This ruling wascategorically reiterated in the decision in the case ofManila Motors vs. Flores, L-9396, August 16, 1956. It follows,therefore, that the prescriptive period in the case now before US was suspended from November 18,1944, whenExecutive Orders Nos. 25 and 32 were declared unconstitutional by this Court. Computed accordingly, the

prescriptive period was suspended for 8 years and 6 months. By the appellant's own admission, the cause of actionon the five promissory notes in question arose on June 1, 1944. The complaint in the present case was filed onJanuary 17, 1961, or after a period of 16 years, 6 months and 16 days when the cause of action arose. If theprescriptive period was not interrupted by the moratorium laws, the action would have prescribed already; but, asWe have stated, the prescriptive period was suspended by the moratorium laws for a period of 8 years and 6 months.If we deduct the period of suspension (8 years and 6 months) from the period that elapsed from the time the cause ofaction arose to the time when the complaint was filed (16 years, 6 months and 16 days) there remains a period of 8years and 16 days. In other words, the prescriptive period ran for only 8 years and 16 days. There still remained aperiod of one year, 11 months and 14 days of the prescriptive period when the complaint was filed.

In his third point of contention the appellant maintains that the lower court erred in ordering him to pay the amountof P2,377.23. It is claimed by the appellant that it was error on the part of the lower court to apply the BallantyneScale of values in evaluating the Japanese war notes as of June 1943 when the loans were incurred, because what

should be done is to evaluate the loans on the basis of the Ballantyne Scale as of the time the loans became due, andthat was in June 1944. This contention of the appellant is also without merit.

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The decision of the court a quo ordered the appellant to pay the sum of P2,377.23 as of December 31, 1959, plusinterest rate of 6% per annum compounded quarterly from the date of the filing of the complaint. The sum total ofthe five loans obtained by the appellant from the Bank of Taiwan, Ltd. was P1,281.97 in Japanese war notes.Computed under the Ballantyne Scale of values as of June 1943, this sum of P1,281.97 in Japanese war notes inJune 1943 is equivalent to P889.64 in genuine Philippine currency which was considered the aggregate amount dueas principal of the five loans, and the amount of P2,377.23 as of December 31, 1959 was arrived at after computingthe interest on the principal sum of P889.64 compounded quarterly from the time the obligations were incurred in1943.

It is the stand of the appellee that the Ballantyne scale of values should be applied as of the time the obligation wasincurred, and that was in June 1943. This stand of the appellee was upheld by the lower court; and the decision ofthe lower court is supported by the ruling of this Court in the case ofHilado vs. De la Costa(G.R. No. L-150, April30, 1949; 46 O.G. 5472), which states:

... Contracts stipulating for payments presumably in Japanese war notes may be enforced in our Courts afterthe liberation to the extent of the just obligation of the contracting parties and, as said notes have becomeworthless, in order that justice may be done and the party entitled to be paid can recover their actual valuein Philippine Currency, what the debtor or defendant bank should return or pay is the value of the Japanesemilitary notes in relation to the peso in Philippine Currency obtaining on the date when and at the place

where the obligation was incurred unless the parties had agreed otherwise. ... . (italics supplied)

IN VIEW OF THE FOREGOING, the decision appealed from is affirmed, with costs against the appellant.Inasmuch as the appellant Jose Grijaldo died during the pendency of this appeal, his estate must answer in theexecution of the judgment in the present case.

Bengzon, C.J., Concepcion, Barrera, Regala, Bautista Angelo, Reyes, J.B.L., Makalintal and Bengzon, J.P.,

JJ.,concur.

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Philippine National Bank vs. Court of Appeals, G.R. No. 88880, 196 SCRA 536 , April 30, 1991Philippine National Bank vs. Court of Appeals, G.R. No. 88880, 196 SCRA 536 , April 30, 1991

PETITION for certiorari to review the decision of the Court of Appeals.

The facts are stated in the opinion of the Court.

The Chief Legal Counsel for petitioner.Ambrosio Padilla, Mempin & Reyes Law Offices for private respondent.

GRIO-AQUINO, J.:

The Philippine National Bank (PNB) has appealed by certiorari from the decision promulgated on June 27, 1989 bythe Court of Appeals in CA-G.R. CV No. 09791 entitled, AMBROSIO PADILLA, plaintiff-appellant versusPHILIPPINE NATIONAL BANK, defendant-appellee, reversing the decision of the trial court which haddismissed the private respondents complaint to annul interest increases. (p. 32, Rollo.) The Court of Appealsrendered judgment:

x x x declaring the questioned increases of interest as unreasonable, excessive and arbitrary and ordering the

defendant-appellee [PNB] to refund to the plaintiff-appellant the amount of interest collected from July, 1984 inexcess of twenty-four percent (24%) per annum. Costs against the defendant-appellee. (pp. 14-15, Rollo.)

In July 1982, the private respondent applied for, and was granted by petitioner PNB, a credit line of P1.8 million,secured by a real estate mortgage, for a term of two (2) years, with 18% interest per annum. Private respondentexecuted in favor of the PNB a Credit Agreement, two (2) promissory notes in the amount of P900,000.00 each, anda Real Estate Mortgage Contract.

The Credit Agreement provided that

9.06 Other Conditions. The Borrowers hereby agree to be bound by the rules and regulations of the Central Bank

and the current and general policies of the Bank and those which the Bank may adopt in the future, which may haverelation to or in any way affect the Line, which rules, regulations and policies are incorporated herein by referenceas if set forth herein in full. Promptly upon receipt of a written request from the Bank, the Borrowers shall executeand deliver such documents and instruments, in form and substance satisfactory to the Bank, in order to effectuate orotherwise comply with such rules, regulations and policies. (p. 85, Rollo.)

The Promissory Notes, in turn, uniformly authorized the PNB to increase the stipulated 18% interest per annumwithin the limits allowed by law at any time depending on whatever policy it [PNB] may adopt in the future;

Provided, that, the interest rate on this note shall be correspondingly decreased in the event that the applicablemaximum interest rate is reduced by law or by the Monetary Board. (pp. 85 -86, Rollo; italics ours.)

The Real Estate Mortgage Contract likewise provided that:

(k) INCREASE OF INTEREST RATE

The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount whichmay have been advanced by the MORTGAGEE, in accordance with the provisions hereof, shall be subject duringthe life of this contract to such an increase within the rate allowed by law, as the Board of Directors of theMORTGAGEE may prescribe for its debtors. (p. 86, Rollo; emphasis supplied.)

Four (4) months advance interest and incidental expenses/ charges were deducted from the loan, the net proceeds ofwhich were released to the private respondent by crediting or transferring the amount to his current account with thebank.

On June 20, 1984, PNB informed the private respondent that (1) his credit line of P1.8 million will expire on July

4, 1984, (2) [i]f renewal of the line for another year is intended, please submit soonest possible your request, and

(3) the present policy of the Bank requires at least 30% reduction of principal before your line can be renewed.

(pp. 86-87, Rollo.) Complying, private respondent on June 25, 1984, paid PNB P540,000.00 (30% of P1.8 million)and requested that the balance of P1,260,000.00 be renewed for another period of two (2) years under the same

arrangement and that the increase of the interest rate of my mortgage loan be from 18% to 21% (p. 87, Rollo.)

On July 4, 1984, private respondent paid PNB P360,000.00.

On July 18, 1984, private respondent reiterated in writing his request that the increase in the rate of interest from

18% be fixed at 21% of 24%. (p. 87, Rollo.)

On July 26, 1984, private respondent made an additional payment of P100,000.

On August 10, 1984, PNB informed private respondent that we can not give due course to your request for

preferential interest rate in view of the following reasons: Existing Loan Policies of the bank requires 32% for loanof more than one year; Our present cost of funds has substantially increased. (pp. 87-88, Rollo.)

On August 17, 1984, private respondent further paid PNB P150,000.00.

In a letter dated August 24, 1984 to PNB, private respondent announced that he would continue making furtherpayments, and instead of a loan of more than one year, I shall pay the said loan before the lapse of one year or

before July 4, 1985. x x x I reiterate my request that the increase of my rate of interest from 18% be fixed at 21% or

24%. (p. 88, Rollo.) On September 12, 1984, private respondent paid PNB P160,000.00.

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In letters dated September 12, 1984 and September 13, 1984, PNB informed private respondent that the interest

rate on your outstanding line/loan is hereby adjusted from 32% p.a. to 41% p.a. (35% prime rate + 6%) effectiveSeptember 6, 1984; and further explained why we can not grant your request for a lower rate of 21% or 24%.

(pp. 88-89, Rollo.)

In a letter dated September 24, 1984 to PNB, private respondent registered his protest against the increase of interestrate from 18% to 32% on July 4, 1984 and from 32% to 41% on September 6, 1984.

On October 15, 1984, private respondent reiterated his request that the interest rate should not be increased from18% to 32% and from 32% to 41%. He also attached (as payment) a check for P140,000.00.

Like rubbing salt on the private respondents wound, the petitioner informed private respondent on October 29,

1984, that the interest rate on your outstanding line/loan is hereby adjusted from 41% p.a. to 48% p.a. (42% primerate plus 6% spread) effective 25 October 1984. (p. 89, Rollo.)

In November 1984, private respondent paid PNB P50,000.00 thus reducing his principal loan obligation toP300,000.00.

On December 18, 1984, private respondent filed in the Regional Trial Court of Manila a complaint against PNBentitled, AMBROSIO PADILLA vs. PHILIPPINE NATIONAL BANK (Civil Case No. 84-28391), praying thatjudgment be rendered:

a. Declaring that the unilateral increase of interest ratesfrom 18% to 32%, then to 41% and again to 48% areillegal, not valid nor binding on plaintiff, and that an adjustment of his interest rate from 18% to 24% is reasonable,fair and just;

b. The interest rate on the P900,000.00 released on September 27,1982 be counted from said date and not fromJuly 4, 1984;

c. The excess of interest payment collected by defendant bank by debiting plaintiffs current account be refunded

to plaintiff or credited to his current account;

d. Pending the determination of the merits of this case, a restraining order and/or a writ of preliminary injunctionbe issued (1) to restrain and/or enjoin defendant bank for [sic] collecting from plaintiff and/or debiting his currentaccount with illegal and excessive increases of interest rates; and (2) to prevent defendant bank from declaringplaintiff in default for non-payment and from instituting any foreclosure proceeding, extrajudicial or judicial, of the

valuable commercial property of plaintiff. (pp. 89-90, Rollo.)

In its answer to the complaint, PNB denied that the increases in interest rates were illegal, unilateral excessive andarbitrary and recited the reasons justifying said increases.

On March 31, 1985, the private respondent paid the P300,000-balance of his obligation to PNBN (Exh. 5).

The trial court rendered judgment on April 14, 1986, dismissing the complaint because the increases of interest wereproperly made.

The private respondent appealed to the Court of Appeals. On June 27, 1989, the Court of Appeals reversed the trialcourt, hence, PNBs recourse to this Court by a petition for review under Rule 45 of the Rules of Court.

The assignments of error raised in PNBs petition for review can be resolved into a single legal issue of whether the

bank, within the term of the loan which it granted to the private respondent, may unilaterally change or increase theinterest rate stipulated therein at will and as often as it pleased.

The answer to that question is no.

In the first place, although Section 2, P.D. No. 116 of January 29, 1973, authorizes the Monetary Board to prescribethe maximum rate or rates of interest for loans or renewal thereof and to change such rate or rates wheneverwarranted by prevailing economic and social conditions, it expressly provides that such changes shall not be madeoftener than once every twelve months.

In this case, PNB, over the objection of the private respondent, and without authority from the Monetary Board,within a period of only four (4) months, increased the 18% interest rate on the private respondents loan obligationthree (3) times: (a) to 32% in July 1984; (b) to 41% in October 1984; and (c) to 48% in November 1984. Thoseincreases were null and void, for if the Monetary Board itself was not authorized to make such changes oftener thanonce a year, even less so may a bank which is subordinate to the Board.

Secondly, as pointed out by the Court of Appeals, while the private respondent-debtor did agree in the Deed of RealEstate Mortgage (Exh. 5) that the interest rate may be increased during the life of the contract to such increasewithin the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe (Exh. 5 -e-1) orwithin the limits allowed by law (Promissory Notes, Exhs. 2, 3, and 4), no law was ever passed in July toNovember 1984 increasing the interest rates on loans or renewals thereof to 32%, 41% and 48% (per annum), and nodocuments were executed and delivered by the debtor to effectuate the increases. The Court of Appeals observed.

x x x We focus Our attention first of all on the agreement between the parties as embodied in the followinginstruments, to wit: (1) Exhibit 1Credit Agreement dated July 1, 1982; (2) Exhibit 2Promissory Note datedJuly 5, 1982; (3) Exhibit 3Promissory Note dated January 3, 1983; (4) Exhibit 4Promissory Note, datedDecember 13, 1983; and (5) Exhibit 5Real Estate Mortgage contract dated July 1, 1982.

Exhibit 1 states in its portion marked Exhibit 1 -g-1:

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9.06 Other Conditions. The Borrowers hereby agree to be bound by the rules and regulations of the Central Bankand the current and general policies of the Bank and those which the Bank may adopt in the future, which may haverelation to or in any way affect the Line, which rules, regulations and policies are incorporated herein by referenceas if set forth herein in full. Promptly upon receipt of a written request from the Bank, the Borrowers shall executeand deliver such documents and instruments, in form and substance satisfactory to the Bank, in order to effectuate orotherwise comply with such rules, regulations and policies.

Exhibits 2, 3, and 4 in their portions respectively marked Exhibits 2 -B, 3-B, and 4-B uniformly authorizethe defendant bank to increase the stipualted interest rte of 18% per annum within the limits allowed by law at anytime depending on whatever policy it may adopt in the future: Provided, that, the interest rate on this note shall becorrespondingly decreased in the event that the applicable maximum interest rate is reduced by law or by theMonetary Board.

Exhibit 5 in its portion marked Exhibit 5 -e-1 stipulates:

(k) INCREASE OF INTEREST RATE

The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amo unt whichmay have been advanced by the MORTGAGEE, in accordance with the provisions hereof, shall be subject during

the life of this contract to such an increase within the rate allowed by law, as the Board of Directors of theMORTGAGEE may prescribe for its debtors.

Clearly, then, the agreement between the parties authorized the defendant bank to increase the interest rate beyond

the original rate of 18% per annum but within the limits allowed by law or within the rate allowed by law, it

being declared the obligation of the plaintiff as borrower to execute and deliver the corresponding documents andinstruments to effectuate the increase. (pp. 11-12, Rollo.)

In Banco Filipino Savings and Mortgage Bank vs. Navarro, 15 SCRA 346 (1987), this Court disauthorized the bankfrom raising the interest rate on the borrowers loan from 12% to 17% despite an escalation clause in the loan

agreement signed by the debtors authorizing Banco Filipino to correspondingly increase the interest rate stipulated

in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates ofinterest that may be charged on this particular kind of loan. (italics supplied.)

In the Banco Filipino case, the bank relied on Section 3 of CB Circular No. 494 dated July 1, 1976 (72 O.G. No. 3,p. 676-J) which provided that the maximum rate of interest, including commissions premiums, fees and othercharges on loans with a maturity of more than 730 days by banking institution x x x shall be 19%.

This Court disallowed the increase for the simple reason that said Circular No. 494, although it has the effect of law

is not a law. Speaking through Mme. Justice Ameurfina M. Herrera, this Court held:

It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1) that therecan be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation tobe valid, it must include a provision for reduction of the stipulated interest in the event that the applicablemaximum rate of interest is reduced by law or by the Monetary Board. (p. 111, Rollo.)

In the present case, the PNB relied on its own Board Resolution No. 681 (Exh. 10), PNB Circular No. 40-79-84(Exh. 13), and PNB Circular No. 40-129-84 (Exh. 15), but those resolution and circulars are neither laws norresolutions of the Monetary Board.

CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest rates

x x x increases in interest rates are not subject to any ceiling prescribed by the Usury Law.

but it did not authorize the PNB, or any bank for that matter, to unilaterally and successively increase the agreedinterest rates from 18% to 48% within a span of four (4) months, in violation of P.D. 116 which limits such changesto once every twelve months.

Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest rate on the private respondents

loan, violated the mutuality of contracts ordained in Article 1308 of the Civil Code:

ART. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of

one of them.

In order that obligations arising from contracts may have the force of law between the parties, there must bemutuality between the parties based on their essential equality. A contract containing a condition which makes itsfulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia vs.Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan agreement between the PNBand the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate atwill during the term of the loan, that license would have been null and void for being violative of the principle ofmutuality essential in contracts. It would have invested the loan agreement with the character of a contract ofadhesion, where the parties do not bargain on equal footing, the weaker partys (the debtor) participation beingreduced to the alternative to take it or leave it (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a

contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse andimposition.

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PNBs successive increases of the interest rate on the private respondents loan, over the latters protest, were

arbitrary as they violated an express provision of the Credit Agreement (Exh. 1) Section 9.01 that its terms may be

amended only by an instrument in writing signed by the party to be bound as burdened by such amendment. Theincreases imposed by PNB also contravene Art. 1956 of the Civil Code which provides that no interest shall be due

unless it has been expressly stipulated in writing.

The debtor herein never agreed in writing to pay the interest increases fixed by the PNB beyond 24% per annum,

hence, he is not bound to pay a higher rate than that.

That an increase in the interest rate from 18% to 48% within a period of four (4) months is excessive, as found bythe Court of Appeals, is indisputable.

WHEREFORE, finding no reversible error in the decision of the Court of Appeals in CA-G.R. CV No. 09791, theCourt resolved to deny the petition for review for lack of merit, with costs against the petitioner.

SO ORDERED.

Narvasa (Chairman), Cruz, Gancayco and Medialdea, JJ., concur.

Petition denied.

Note.Both Article 2212 of the Civil Code and Sec. 5 of the Usury Law refer to stipulated or conventional interest

and does not apply where no interest was stipulated by the parties (Philippine American Accident InsuranceCompany, Inc. vs. Flores, 97 SCRA 811.) [Philippine National Bank vs. Court of Appeals, 196 SCRA 536(1991)]

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Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. 97412 July 12, 1994

EASTERN SHIPPING LINES, INC.,petitioner,vs.HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents.

Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.

Zapa Law Office for private respondent.

VITUG, J.:

The issues,albeitnot completely novel, are: (a) whether or not a claim for damage sustained on a shipment of goodscan be a solidary, or joint and several, liability of the common carrier, the arrastre operator and the customs broker;(b) whether the payment of legal interest on an award for loss or damage is to be computed from the time thecomplaint is filed or from the date the decision appealed from is rendered; and (c) whether the applicable rate ofinterest, referred to above, is twelve percent (12%) or six percent (6%).

The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed facts that haveled to the controversy are hereunder reproduced:

This is an action against defendants shipping company, arrastre operator and broker-forwarder fordamages sustained by a shipment while in defendants' custody, filed by the insurer-subrogee whopaid the consignee the value of such losses/damages.

On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan fordelivery vessel "SS EASTERN COMET" owned by defendant Eastern Shipping Lines under Billof LadingNo. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance Policy No.81/01177 for P36,382,466.38.

Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the custodyof defendant Metro Port Service, Inc. The latter excepted to one drum, said to be in bad order,which damage was unknown to plaintiff.

On January 7, 1982 defendant Allied Brokerage Corporation received the shipment fromdefendant Metro Port Service, Inc., one drum opened and without seal (per "Request for BadOrder Survey." Exh. D).

On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of theshipment to the consignee's warehouse. The latter excepted to one drum which contained spillages,while the rest of the contents was adulterated/fake (per "Bad Order Waybill" No. 10649, Exh. E).

Plaintiff contended that due to the losses/damage sustained by said drum, the consignee sufferedlosses totaling P19,032.95, due to the fault and negligence of defendants. Claims were presentedagainst defendants who failed and refused to pay the same (Exhs. H, I, J, K, L).

As a consequence of the losses sustained, plaintiff was compelled to pay the consignee P19,032.95under the aforestated marine insurance policy, so that it became subrogated to all the rights ofaction of said consignee against defendants (per "Form of Subrogation", "Release" andPhilbanking check, Exhs. M, N, and O). (pp. 85-86,Rollo.)

There were, to be sure, other factual issues that confronted both courts. Here, the appellate court said:

Defendants filed their respective answers, traversing the material allegations of the complaintcontending that: As for defendant Eastern Shipping it alleged that the shipment was discharged ingood order from the vessel unto the custody of Metro Port Service so that any damage/lossesincurred after the shipment was incurred after the shipment was turned over to the latter, is nolonger its liability (p. 17, Record); Metroport averred that although subject shipment was

discharged unto its custody, portion of the same was already in bad order (p. 11, Record); AlliedBrokerage alleged that plaintiff has no cause of action against it, not having negligent or at fault

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for the shipment was already in damage and bad order condition when received by it, butnonetheless, it still exercised extra ordinary care and diligence in the handling/delivery of thecargo to consignee in the same condition shipment was received by it.

From the evidence the court found the following:

The issues are:

1. Whether or not the shipment sustained losses/damages;

2. Whether or not these losses/damages were sustained while in the custody ofdefendants (in whose respective custody, if determinable);

3. Whether or not defendant(s) should be held liable for the losses/damages (seeplaintiff's pre-Trial Brief, Records, p. 34; Allied's pre-Trial Brief, adoptingplaintiff's Records, p. 38).

As to the first issue, there can be no doubt that the shipment sustainedlosses/damages. The two drums were shipped in good order and condition, asclearly shown by the Bill of Lading and Commercial Invoice which do notindicate any damages drum that was shipped (Exhs. B and C). But when onDecember 12, 1981 the shipment was delivered to defendant Metro Port Service,Inc., it excepted to one drum in bad order.

Correspondingly, as to the second issue, it follows that the losses/damages weresustained while in the respective and/or successive custody and possession ofdefendants carrier (Eastern), arrastre operator (Metro Port) and broker (AlliedBrokerage). This becomes evident when the Marine Cargo Survey Report (Exh.G), with its "Additional Survey Notes", are considered. In the latter notes, it isstated that when the shipment was "landed on vessel" to dock of Pier # 15, SouthHarbor, Manila on December 12, 1981, it was observed that "one (1) fiber drum(was) in damaged condition, covered by the vessel's Agent's Bad Order Tally

Sheet No.86427." The report further states that when defendant AlliedBrokerage withdrew the shipment from defendant arrastre operator's custody onJanuary 7, 1982, one drum was found opened without seal, cello bag partly tornbut contents intact. Net unrecovered spillages was15 kgs. The report went on to state that when the drums reached the consignee,one drum was found with adulterated/faked contents. It is obvious, therefore,that these losses/damages occurred before the shipment reached the consigneewhile under the successive custodies of defendants. Under Art. 1737 of the NewCivil Code, the common carrier's duty to observe extraordinary diligence in thevigilance of goods remains in full force and effect even if the goods aretemporarily unloaded and stored in transit in the warehouse of the carrier at theplace of destination, until the consignee has been advised and has hadreasonable opportunity to remove or dispose of the goods (Art. 1738, NCC).

Defendant Eastern Shipping's own exhibit, the "Turn-Over Survey of Bad OrderCargoes" (Exhs. 3-Eastern) states that on December 12, 1981 one drum wasfound "open".

and thus held:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:

A. Ordering defendants to pay plaintiff, jointly and severally:

1. The amount of P19,032.95, with the present legal interest of 12%perannumfrom October 1, 1982, the date of filing of this complaints, until fully

paid (the liability of defendant Eastern Shipping, Inc. shall not exceed US$500per case or the CIF value of the loss, whichever is lesser, while the liability ofdefendant Metro Port Service, Inc. shall be to the extent of the actual invoicevalue of each package, crate box or container in no case to exceed P5,000.00each, pursuant to Section 6.01 of the Management Contract);

2. P3,000.00 as attorney's fees, and

3. Costs.

B. Dismissing the counterclaims and crossclaim ofdefendant/cross-claimant Allied Brokerage Corporation.

SO ORDERED. (p. 207, Record).

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Dissatisfied, defendant's recourse to US.

The appeal is devoid of merit.

After a careful scrutiny of the evidence on record. We find that the conclusion drawn therefrom iscorrect. As there is sufficient evidence that the shipment sustained damage while in the successive

possession of appellants, and therefore they are liable to the appellee, as subrogee for the amount itpaid to the consignee. (pp. 87-89,Rollo.)

The Court of Appeals thus affirmed in totothe judgment of the courta quo.

In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse of discretion onthe part of the appellate court when

I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THEARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF PRIVATERESPONDENT AS GRANTED IN THE QUESTIONED DECISION;

II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATERESPONDENT SHOULD COMMENCE FROM THE DATE OF THE FILING OF THECOMPLAINT AT THE RATE OF TWELVE PERCENTPER ANNUMINSTEAD OF FROMTHE DATE OF THE DECISION OF THE TRIAL COURT AND ONLY AT THE RATE OF SIXPERCENTPER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING INDISPUTABLYUNLIQUIDATED.

The petition is, in part, granted.

In this decision, we have begun by saying that the questions raised by petitioner carrier are not all that novel. Indeed,we do have a fairly good number of previous decisions this Court can merely tack to.

The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the time the articlesare surrendered to or unconditionally placed in the possession of, and received by, the carrier for transportation untildelivered to, or until the lapse of a reasonable time for their acceptance by, the person entitled to receive them (Arts.1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil.863). When the goods shipped either are lost or arrive in damaged condition, a presumption arises against the carrierof its failure to observe that diligence, and there need not be an express finding of negligence to hold it liable (Art.1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139 SCRA 87; Metro Port Service vs. Courtof Appeals, 131 SCRA 365). There are, of course, exceptional cases when such presumption of fault is not observedbut these cases, enumerated in Article 17341of the Civil Code, are exclusive, not one of which can be applied tothis case.

The question of charging both the carrier and the arrastre operator with the obligation of properly delivering thegoods to the consignee has, too, been passed upon by the Court. InFireman's Fund Insurance vs.Metro Port

Services(182 SCRA 455), we have explained, in holding the carrier and the arrastre operator liable insolidum,thus:

The legal relationship between the consignee and the arrastre operator is akin to that of a depositorand warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5 [1967]. The relationshipbetween the consignee and the common carrier is similar to that of the consignee and the arrastreoperator (Northern Motors, Inc. v. Prince Line, et al., 107 Phil. 253 [1960]). Since it is the duty ofthe ARRASTRE to take good care of the goods that are in its custody and to deliver them in goodcondition to the consignee, such responsibility also devolves upon the CARRIER. Both theARRASTRE and the CARRIER are therefore charged with the obligation to deliver the goods ingood condition to the consignee.

We do not, of course, imply by the above pronouncement that the arrastre operator and the customs broker arethemselves always and necessarily liable solidarily with the carrier, or vice-versa,nor that attendant facts in a given

case may not vary the rule. The instant petition has been brought solely by Eastern Shipping Lines, which, being thecarrier and not having been able to rebut the presumption of fault, is, in any event, to be held liable in this particularcase. A factual finding of both the court a quoand the appellate court, we take note, is that "there is sufficientevidence that the shipment sustained damage while in the successive possession of appellants" (the herein petitioneramong them). Accordingly, the liability imposed on Eastern Shipping Lines, Inc., the sole petitioner in this case, isinevitable regardless of whether there are others solidarily liable with it.

It is over the issue of legal interest adjudged by the appellate court that deserves more than just a passing remark.

Let us first see a chronological recitation of the major rulings of this Court:

The early case ofMalayan Insurance Co., Inc., vs.Manila PortService,2decided3on 15 May 1969, involved a suit for recovery of money arising out of short deliveries andpilferage of goods. In this case, appellee Malayan Insurance (the plaintiff in the lower court) averred in its complaint

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that the total amount of its claim for the value of the undelivered goods amounted to P3,947.20. This demand,however, was neither established in its totality nor definitely ascertained. In the stipulation of facts later entered intoby the parties, in lieu of proof, the amount of P1,447.51 was agreed upon. The trial court rendered judgmentordering the appellants (defendants) Manila Port Service and Manila Railroad Company to pay appellee MalayanInsurance the sum of P1,447.51 with legal interest thereon from the date the complaint was filed on 28 December1962 until full payment thereof.The appellants then assailed, inter alia, the award of legal interest. In sustaining theappellants, this Court ruled:

Interest upon an obligation which calls for the payment of money, absent a stipulation, is the legalrate. Such interest normally is allowable from the date of demand, judicial or extrajudicial. Thetrial court opted for judicial demand as the starting point.

But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be recovered uponunliquidated claims or damages, except when the demand can be established with reasonablecertainty." And as was held by this Court inRivera vs.Perez,4L-6998, February 29, 1956, if thesuit were for damages, "unliquidated and not known until definitely ascertained, assessed anddetermined by the courts after proof (Montilla c.Corporacion de P.P.Agustinos, 25 Phil.447;Lichauco v.Guzman,38 Phil.302),"then, interest "should be from the date of the decision." (Emphasis supplied)

The case ofReformina vs.Tomol,5rendered on 11 October 1985, was for "Recovery of Damages for Injury toPerson and Loss of Property."After trial, the lower court decreed:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party defendantsand against the defendants and third party plaintiffs as follows:

Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay jointly andseverally the following persons:

xxx xxx xxx

(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00 which is thevalue of the boat F B Pacita III together with its accessories, fishing gear and equipment minusP80,000.00 which is the value of the insurance recovered and the amount of P10,000.00 a monthas the estimated monthly loss suffered by them as a result of the fire of May 6, 1969 up to the timethey are actually paid or already the total sum of P370,000.00 as of June 4, 1972 with legalinterest from the filing of the complaint until paid and to pay attorney's fees of P5,000.00 withcosts against defendants and third party plaintiffs. (Emphasis supplied.)

On appeal to the Court of Appeals, the latter modified the amount of damages awarded but sustained thetrial court in adjudging legal interest from the filing of the complaint until fully paid. When the appellatecourt's decision became final, the case was remanded to the lower court for execution, and this was whenthe trial court issued its assailed resolution which applied the 6% interestper annumprescribed in Article2209 of the Civil Code. In their petition for review on certiorari, the petitioners contended that CentralBank CircularNo. 416, providing thus

By virtue of the authority granted to it under Section 1 of Act 2655, as amended, Monetary Boardin its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest for the loan,or forbearance of any money, goods, or credits and the rate allowed in judgments, in the absenceof express contract as to such rate of interest, shall be twelve (12%) percent per annum. ThisCircular shall take effect immediately. (Emphasis found in the text)

should have, instead, been applied. This Court6ruled:

The judgments spoken of and referred to are judgments in litigations involving loans orforbearance of any money, goods or credits. Any other kind of monetary judgment which has

nothing to do with, nor involving loans or forbearance of any money, goods or credits does not fallwithin the coverage of the said law for it is not within the ambit of the authority granted to theCentral Bank.

xxx xxx xxx

Coming to the case at bar, the decision herein sought to be executed is one rendered in an Actionfor Damages for injury to persons and loss of property and does not involve any loan, much lessforbearances of any money, goods or credits. As correctly argued by the private respondents, thelaw applicable to the said case is Article 2209 of the New Civil Code which reads

Art. 2209.If the obligation consists in the payment of a sum of money, andthe debtor incurs in delay, the indemnity for damages, there being no stipulation

to the contrary, shall be the payment of interest agreed upon, and in the absenceof stipulation, the legal interest which is six percentper annum.

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The above rule was reiterated inPhilippine Rabbit Bus Lines, Inc., v. Cruz,7promulgated on 28 July 1986. The casewas for damages occasioned by an injury to person and loss of property. The trial court awarded private respondentPedro Manabat actual and compensatory damages in the amount of P72,500.00 with legal interest thereon from thefiling of the complaint until fully paid. Relying on theReformina v.Tomolcase, this Court8modified the interestaward from 12% to 6% interest per annum but sustained the time computation thereof, i .e., from the filing of thecomplaint until fully paid.

InNakpil and Sons vs.Court of Appeals,9the trial court, in an action for the recovery of damages arising from thecollapse of a building, ordered,inter alia, the "defendant United Construction Co., Inc. (one of the petitioners). . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from November 29, 1968, the dateof the filing of the complaint until full payment . . . ." Save from the modification of the amount granted by the lowercourt, the Court of Appeals sustained the trial court's decision. When taken to this Court for review, the case, on 03October 1986, was decided, thus:

WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special andenvironmental circumstances of this case, we deem it reasonable to render a decision imposing, asWe do hereby impose, upon the defendant and the third-party defendants (with the exception ofRoman Ozaeta) a solidary (Art. 1723, Civil Code, Supra.

p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00)Pesos to cover all damages (with the exception to attorney's fees) occasioned by the loss of thebuilding (including interest charges and lost rentals) and an additional ONE HUNDREDTHOUSAND (P100,000.00) Pesos as and for attorney's fees, the total sum being payable upon thefinality of this decision. Upon failure to pay on such finality, twelve (12%) per cent interest perannum shall be imposed upon aforementioned amounts from finality until paid. Solidary costsagainst the defendant and third-party defendants (Except Roman Ozaeta). (Emphasis supplied)

A motion for reconsideration was filed by United Construction, contending that "the interest of twelve(12%) per centper annumimposed on the total amount of the monetary award was in contravention oflaw." The Court10ruled out the applicability of the Reformina and Philippine Rabbit Bus Lines cases and,in its resolution of 15 April 1988, it explained:

There should be no dispute that the imposition of 12% interest pursuant to Central Bank CircularNo. 416 . . . is applicable only in the following: (1) loans; (2) forbearance of any money, goods orcredit; and(3) rate allowed in judgments (judgments spoken of refer to judgments involving loans orforbearance of any money, goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143 SCRA160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260 [1985]).It is true that in the instantcase, there is neither a loan or a forbearance, but then no interest is actually imposed provided

the sums referred to in the judgment are paid upon the finality of the judgment.It is delay in thepayment of such final judgment, that will cause the imposition of the interest.

It will be noted that in the cases already adverted to, the rate of interest is imposed on the totalsum, from the filing of the complaint until paid; in other words, as part of the judgment fordamages. Clearly, they are not applicable to the instant case. (Emphasis supplied.)

The subsequent case ofAmerican Express International, Inc., vs.Intermediate Appellate Court11was a petition forreview on certiorarifrom the decision, dated 27 February 1985, of the then Intermediate Appellate Court reducingthe amount of moral and exemplary damages awarded by the trial court, to P240,000.00 and P100,000.00,respectively, and its resolution, dated 29 April 1985, restoring the amount of damages awarded by the trialcourt, i.e., P2,000,000.00 as moral damages and P400,000.00 as exemplary damages with interest thereon at 12%per annum from notice of judgment,plus costs of suit. In a decision of 09 November 1988, this Court, whilerecognizing the right of the private respondent to recover damages, held the award, however, for moral damages bythe trial court, later sustained by the IAC, to be inconceivably large. The Court12thus set aside the decision of theappellate court and rendered a new one, "ordering the petitioner to pay private respondent the sum of One HundredThousand (P100,000.00) Pesos as moral damages, withsix (6%) percent interest thereon computed from the finality of this decision until paid. (Emphasis supplied)

Reformina came into fore again in the 21 February 1989 case ofFlorendo v.Ruiz13

which arose from a breach ofemployment contract. For having been illegally dismissed, the petitioner was awarded by the trial court moral andexemplary damages without, however, providing any legal interest thereon. When the decision was appealed to theCourt of Appeals, the latter held:

WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental datedOctober 31, 1972 is affirmed in all respects, with the modification that defendants-appellants,except defendant-appellant Merton Munn, are ordered to pay, jointly and severally, the amountsstated in the dispositive portion of the decision, including the sum of P1,400.00 in concept ofcompensatory damages, with interest at the legal rate from the date of the filing of the complaintuntil fully paid(Emphasis supplied.)

The petition for review to this Court was denied. The records were thereupon transmitted to the trial court,

and an entry of judgment was made. The writ of execution issued by the trial court directed that onlycompensatory damages should earn interest at 6%per annumfrom the date of the filing of the complaint.

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Ascribing grave abuse of discretion on the part of the trial judge, a petition for certiorariassailed the saidorder. This Court said:

. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the legalrate"from the time of the filing of the complaint. . . Said circular [Central Bank Circular No. 416]does not apply to actions based on a breach of employment contract like the case at bar. (Emphasis

supplied)

The Court reiterated that the 6% interestper annum on the damages should be computed from the time thecomplaint was filed until the amount is fully paid.

Quite recently, the Court had another occasion to rule on the matter.National Power Corporationvs.Angas,14decided on 08 May 1992, involved the expropriation of certain parcels of land. After conducting ahearing on the complaints for eminent domain,the trial court ordered the petitioner to pay the private respondentscertain sums of money as just compensation for their lands so expropriated "with legal interest thereon. . . until fullypaid." Again, in applying the 6% legal interestper annum under the Civil Code, the Court15declared:

. . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods or credits butexpropriation of certain parcels of land for a public purpose, the payment of which is without

stipulation regarding interest, and the interest adjudged by the trial court is in the nature ofindemnity for damages. The legal interest required to be paid on the amount of just compensationfor the properties expropriated is manifestly in the form of indemnity for damages for the delay inthe payment thereof. Therefore, since the kind of interest involved in the joint judgment of thelower court sought to be enforced in this case is interest by way of damages, and not by way ofearnings from loans, etc. Art. 2209 of the Civil Code shall apply.

Concededly, there have been seeming variances in the above holdings. The cases can perhaps be classified into twogroups according to the similarity of the issues involved and the corresponding rulings rendered by the court. The"first group" would consist of the cases of Reformina v.Tomol(1985), Philippine Rabbit Bus Lines v.Cruz(1986),Florendo v.Ruiz(1989)andNational Power Corporation v.Angas(1992). In the "second group" would beMalayan Insurance Companyv.Manila Port Service(1969), Nakpil and Sons v.Court of Appeals(1988),andAmerican Express International

v.Intermediate Appellate Court(1988).

In the "first group", the basic issue focuses on the application of either the 6% (under the Civil Code) or 12% (underthe Central Bank Circular) interestper annum. It is easily discernible in these cases that there has been a consistentholding that the Central Bank Circular imposing the 12% interestper annumapplies only to loans orforbearance16of money, goods or credits, as well as to judgments involving such loan or forbearance of money,goods or credits, and that the 6% interest under the Civil Code governs when the transaction involves the payment ofindemnities in the concept of damage arising from the breach or a delay in the performance of obligations in general.Observe, too, that in these cases, a common time frame in the computation of the 6% interestper annum has beenapplied, i.e., from the time the complaint is filed until the adjudged amount is fully paid.

The "second group", did not alter the pronounced rule on the application of the 6% or 12% interest perannum,17depending on whether or not the amount involved is a loan or forbearance, on the one hand, or one of

indemnity for damage, on the other hand. Unlike, however, the "first group" which remained consistent in holdingthat the running of the legal interest should be from the time of the filing of the complaint until fully paid, the"second group" varied on the commencement of the running of the legal interest.

Malayan held that the amount awarded should bear legal interest from the date of the decision of the court aquo,explaining that "if the suit were for damages, 'unliquidated and not known until definitely ascertained, assessedand determined by the courts after proof,' then, interest 'should be from the date of the decision.'"American ExpressInternational v.IAC,introduced a different time frame for reckoning the 6% interest by ordering it to be "computedfrom the finality of (the) decision until paid." The Nakpil and Sons case ruled that 12% interestper annumshould beimposed from the finality of the decision until the judgment amount is paid.

The ostensible discord is not difficult to explain. The factual circumstances may have called for differentapplications, guided by the rule that the courts are vested with discretion, depending on the equities of each case, on

the award of interest. Nonetheless, it may not be unwise, by way of clarification and reconciliation, to suggest thefollowing rules of thumb for future guidance.

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts18isbreached, the contravenor can be held liable for damages.19The provisions under Title XVIII on "Damages" of theCivil Code govern in determining the measure of recoverable damages.20

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate ofinterest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance ofmoney, the interest due should be that which may have been stipulated in writing. 21Furthermore, the interest due

shall itself earn legal interest from the time it is judicially demanded.

22

In the absence of stipulation, the rate of

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interest shall be 12%per annumto be computed from default, i.e., from judicial or extrajudicial demand under andsubject to the provisions of Article 116923of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount ofdamages awarded may be imposed at the discretion of the court24at the rate of 6%per annum.25No interest,however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established

with reasonable certainty.26

Accordingly, where the demand is established with reasonable certainty, the interestshall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when suchcertainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run onlyfrom the date the judgment of the court is made (at which time the quantification of damages may be deemed tohave been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on theamount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest,whether the case falls under paragraph 1 or paragraph 2, above, shall be 12%per annumfrom such finality until itssatisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the MODIFICATIONthat the legal interest to be paid is SIX PERCENT (6%) on the amount due computed from the decision, dated

03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT (6%), shallbe imposed on such amount upon finality of this decision until the payment thereof.

SO ORDERED.

Narvasa, C.J., Cruz, Feliciano, Padilla, Bidin, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason,

Puno and Kapunan, JJ., concur.

Mendoza, J., took no part.

#Footnotes

1 Art. 1734. Common carriers are responsible for the loss, destruction, or deterioration of thegoods, unless the same is due to any of the following causes only:

(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;

(2) Act of the public enemy in war, whether international or civil;

(3) Act or omission of the shipper or owner of the goods;

(4) The character of the goods or defects in the packing or in the containers;

(5) Order or act of competent public authority.

2 28 SCRA 65.

3 Penned by Justice Conrado Sanchez, concurred in by Justices Jose B.L. Reyes, Arsenio Dizon,Querube Makalintal, Calixto Zaldivar, Enrique Fernando, Francisco Capistrano, ClaudioTeehankee and Antonio Barredo, Chief Justice Roberto Concepcion and Justice Fred Ruiz Castrowere on official leave.

4 The correct caption of the case is "Claro Rivera vs. Amadeo Matute, L-6998,29 February 1956," 98 Phil. 516.

5 139 SCRA 260, 265.

6 Penned by Justice Serafin Cuevas, concurred in by Justices Hermogenes Concepcion, Jr.,Vicente Abad Santos, Ameurfina Melencio-Herrera, Venicio Escolin, Lorenzo Relova, HugoGutierrez, Jr., Buenaventura de la Fuente, Nestor Alampay and Lino Patajo. Justice RamonAquino concurred in the result. Justice Efren Plana filed a concurring and dissenting opinion,concurred in by Justice Claudio Teehankee while Chief Justice Felix Makasiar concurred with theseparate opinion of Justice Plana.

7 143 SCRA 158.

8 Penned by then Justice, now Chief Justice, Andres Narvasa, concurred in by Justices Pedro Yap,

Ameurfina Melencio-Herrera, Isagani A. Cruz and Edgardo Paras.

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9 160 SCRA 334.

10 Penned by Justice Edgardo Paras, with the concurrence of Justices Marcelo Fernan, TeodoroPadilla, Abdulwahid Bidin, and Irene Cortes. Justice Hugo Gutierrez, Jr.,