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474 Phil. 335


[ G.R. No. 149569, May 28, 2004 ]




Having released fifty percent of the loan proceeds on the basis of the signed loan and mortgage contracts, petitioner can no longer require the borrowers to secure the lessor’s conformity to the Mortgage Contract as a condition precedent to the release of the loan balance. The conformity of the lessor was not necessary to protect the bank’s interest, because respondents were unquestionably the absolute owners of the mortgaged property. Furthermore, the registration of the mortgage created a real right to the properties which, in subsequent transfers by the mortgagor, the transferees are legally bound to respect.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to set aside the August 22, 2001 Decision[2] of the Court of Appeals (CA) in CA-GR CV No. 49749. The dispositive portion of the Decision reads as follows:
WHEREFORE, premises considered[,] the judgment appealed from is hereby AFFIRMED, with x x x MODIFICATION as follows:

The amount of actual damages and losses is reduced from P985,722.15 to merely P380,713.55 with legal interest from the date of the filing of the complaint. The interest payable on the loan is ordered reduced by using the agreed interest rate of 18% per annum in the computation[;]

“2. The amount of moral damages is reduced from P100,000.00 to P50,000.00;

“3. The amount of exemplary damages is reduced from P50,000.00 to P30,000.00; and

“4. The award of attorney’s fees is reduced from P200,000.00 to P50,000.00.”[3]
The Facts

The facts of the case are narrated in the assailed Decision of the CA, as follows:
“1. On April 28, 1993, [respondents] instituted an action against [Petitioner] PNB and the Provincial Sheriff of Negros Occidental alleging among others, the following:
“(a) Sometime in 1987, [respondents] opened a prawn hatchery in San Enrique, Negros Occidental, and for this purpose, leased from Nelly Bedrejo a parcel of land where the operations were conducted;

“(b) In order to increase productions and improve the hatchery facilities, [respondents] applied for and was approved a loan of P2,000,000.00, by [Petitioner] PNB. To secure its payment, [respondents] executed in favor of PNB, a real estate mortgage over two (2) parcels of land, located at Bago City, Negros Occidental, covered by Transfer Certificate of Title Nos. T-13005 and T-12642 in the names of [respondents], and another real [estate] and chattel mortgage over the buildings, culture tanks and other hatchery facilities located in the leased property of Nelly Bedrejo;

“(c) PNB partially released to [respondents] on several dates, the total sum of P1,000,000.00 less the advance interests, which amount [respondents] used for introducing improvements on the leased property where the hatchery business was located.

“(d) During the mid-part of the construction of the improvements, PNB refused to release the balance of P1,000,000.00 allegedly because [respondents] failed to comply with the bank’s requirement that Nelly Bedrejo should execute an undertaking or a ‘lessors’ conformity’ provided in Real Estate and Chattel Mortgage contract dated August 3, 1989, which states, ‘par. 9.07. It is a condition of this mortgage that while the obligations remained unpaid, the acquisition by the lessor of the permanent improvements covered by this Real Estate Mortgage as provided for in the covering Lease Contract, shall be subject to this mortgage. For this purpose, the mortgagor hereby undertakes to secure the lessor’s conformity hereto’.

“(e) For said alleged failure of [respondents] to comply with the additional requirement and the demand of PNB to pay the released amount of P1,000,000.00, PNB foreclosed the mortgaged properties, to the detriment of [respondents].

“(f) Due to the non-release of the remaining balance of the loan applied for and approved, the productions-operations of the business were disrupted causing losses to [respondents], and thereafter, to the closure of the business.
“2. On June 29, 1990, [Petitioner] PNB filed its Answer with Counterclaim alleging that the lessors’ conformity was not an additional requirement but was already part of the terms and conditions contained in the Real Estate and Chattel Mortgage dated August 3, 1989, executed between [respondents] and [petitioner]; and that the release of the balance of the loan was conditioned on the compliance and submission by the [respondents] of the required lessors’ conformity.

“3. On November 8, 1993, a writ of preliminary injunction was issued by the court a quo prohibiting PNB and the Provincial Sheriff of Negros Occidental from implementing the foreclosure proceedings including the auction sale of the properties of the [respondents] subject matter of the real [estate] and chattel mortgages.”[4]
The Regional Trial Court (RTC) ruled that Philippine National Bank (PNB) had breached its obligation under the Contract of Loan and should therefore be held liable for the consequential damages suffered by respondents. The trial court held that PNB’s refusal to release the balance of the loan was unjustified for the following reasons: 1) the bank’s partial release of the loan of respondents had estopped it from requiring them to secure the lessor’s signature on the Real Estate and Chattel Mortgage Contract; 2) Nelly Bedrejo, the lessor, had no interest in the property and was not in any manner connected with respondents’ business; thus, the fulfillment of the condition was legally impossible; and 3) the interests of PNB were amply protected, as the loan had overly been secured by collaterals with a total appraised value of P3,088,000.

The RTC further observed that while the loan would mature in three years, the lease contract between Bedrejo and respondents would expire in ten years. According to a provision in the Contract, upon its expiration, all improvements found on the leased premises would belong to the lessor. Thus, in the event of nonpayment of the loan at its maturity, PNB could still foreclose on those improvements, the subject of the chattel mortgage.

Ruling of the Court of Appeals

Affirming the lower court, the CA held that Nelly Bedrejo, who was not a party to the Mortgage Contract, could not be compelled to affix her signature thereto. The appellate court further ruled that the registration of the mortgage not only revealed PNB’s intention to give full force and effect to the instrument but, more important, gave the mortgagee ample security against subsequent owners of the chattels.

The CA, however, reduced the amount of actual damages for lack of competent proof of the lost income and the unrealized profits of RBL, as well as for the additional expenses and liabilities incurred by respondents as a result of petitioner’s refusal to release the balance of the loan. Moral and exemplary damages as well as attorney’s fees were likewise lessened.

Hence, this Petition.[5]


Petitioner raises the following alleged errors for our consideration:

Whether or not the Court of Appeals committed serious error when it held that Petitioner PNB has no legal basis to require respondents to secure the conformity of the lessor and owner of the property where their hatchery business is being conducted notwithstanding that respondents obligated themselves in no uncertain terms to secure such conformity pursuant to par. 9.07 of the Real Estate and Chattel Mortgage and considering further that respondents’ authority to mortgage the lessor’s property and leasehold rights are annotated [on] the titles of the mortgage[d] properties.


Whether or not the Court of Appeals erred in holding Petitioner PNB liable for actual, moral and exemplary damages as well as attorney’s fees for the non-release of the balance of the loan applied by respondents even though there is no evidence that such non-release was attended by malice or bad faith.”[6]
Simply put, the issues are as follows: 1) whether the non-release of the balance of the loan by PNB is justified; and 2) whether it is liable for actual, moral and exemplary damages as well as attorney’s fees.

The Court’s Ruling

The Petition is partly meritorious.

First Issue:
Was PNB’s Non-Release of the Loan Justified?

Petitioner maintains that the lessor’s signature in the conforme portion of the Real Estate and Chattel Mortgage Contract was a condition precedent to the release of the balance of the loan to respondents. Petitioner invokes paragraph 9.07 of the Contract as legal basis for insisting upon respondents’ fulfillment of the aforesaid clause.

We are not persuaded. If the parties truly intended to suspend the release of the P1,000,000 balance of the loan until the lessor’s conformity to the Mortgage Contract would have been obtained, such condition should have been plainly stipulated either in that Contract or in the Credit Agreement. The tenor of the language used in paragraph. 9.07, as well as its position relative to the whole Contract, negated the supposed intention to make the release of the loan subject to the fulfillment of the clause. From a mere reading thereof, respondents could not reasonably be expected to know that it was petitioner’s unilateral intention to suspend the release of the P1,000,000 balance until the lessor’s conformity to the Mortgage Contract would have been obtained.

Respondents had complied with all the requirements set forth in the recommendation and approval sheet forwarded by petitioner’s main office to the Bacolod branch for implementation; and the Credit Agreement had been executed thereafter. Naturally, respondents were led to believe and to expect the full release of their approved loan accommodation. This belief was bolstered by the initial release of the first P1,000,000 portion of the loan.

We agree with the RTC in its ruling on this point:
“x x x. In the instant case, there is a clear and categorical showing that when the parties have finally executed the contract of loan and the Real Estate and Chattel Mortgage Contract, the applicant complied with the terms and conditions imposed by defendant bank on the recommendation and approval sheet, hence, defendant bank waived its right to further require the plaintiffs other conditions not specified in the previous agreement. Should there [appear] any obscurity after such execution, the same should not favor the party who caused such obscurity. Therefore, such obscurity must be construed against the party who drew up the contract. Art. 1377 of the Civil Code applies x x x [even] with greater force [to] this type of contract where the contract is already prepared by a big concern and [the] other party merely adheres to it.”[7] (Citations omitted)
Conditions Precedent

Conditions precedent are not favored. Unless impelled by plain and unambiguous language or by necessary implication, courts will not construe a stipulation as laden with such burden, particularly when that stipulation would result in a forfeiture or in inequitable consequences.[8]

Nowhere did PNB explicitly state that the release of the second half of the loan accommodation was subject to the mortgagor’s procurement of the lessor’s conformity to the Mortgage Contract. Absent such a condition, the efficacy of the Credit Agreement stood, and petitioner was obligated to release the balance of the loan. Its refusal to do so constituted a breach of its reciprocal obligation under the Loan Agreement.

Flimsy was the insistence of petitioner that the lessor should be compelled to sign the Mortgage Contract, since she was allegedly a beneficiary thereof. The chattel mortgage was a mere accessory to the contract of loan executed between PNB and RBL. The latter was undisputably the absolute owner of the properties covered by the chattel mortgage. Clearly, the lessor was never a party to either the loan or the Mortgage Contract.

The Real Nature of a Mortgage

The records show that all the real estate and chattel mortgages were registered with the Register of Deeds of Bago City, Negros Occidental, and annotated at the back of the mortgaged titles. Thus, petitioner had ample security to protect its interest. As correctly held by the appellate court, the lessor’s nonconformity to the Mortgage Contract would not cause petitioner any undue prejudice or disadvantage, because the registration and the annotation were considered sufficient notice to third parties that the property was subject to an encumbrance.[9]

Article 2126 of the Civil Code describes the real nature of a mortgage: it is a real right following the property, such that in subsequent transfers by the mortgagor, the transferee must respect the mortgage. A registered mortgage lien is considered inseparable from the property inasmuch as it is a right in rem.[10] The mortgage creates a real right or a lien which, after being recorded, follows the chattel wherever it goes. Under Article 2129 of the same Code, the mortgage on the property may still be foreclosed despite the transfer.

Indeed, even if the mortgaged property is in the possession of the debtor, the creditor is still protected. To protect the latter from the former’s possible disposal of the property, the chattel mortgage is made effective against third persons by the process of registration.

PNB violated the Loan Agreement when it refused to release the P1,000,000 balance. As regards the partial release of that amount, over which respondents executed three Promissory Notes, the bank is deemed to have complied with its reciprocal obligation. The Promissory Notes compelled them to pay that initial amount when it fell due. Their failure to pay any overdue amortizations under those Promissory Notes rendered them liable thereunder.

Effect of Failure of Consideration

Since PNB failed to release the P1,000,000 balance of the loan, the Real Estate and Chattel Mortgage Contract became unenforceable to that extent. Relevantly, we quote this Court’s ruling in Central Bank of the Philippines v. Court of Appeals: [11]
“The consideration of the accessory contract of real estate mortgage is the same as that of the principal contract. For the debtor, the consideration of his obligation to pay is the existence of a debt. Thus, in the accessory contract of real estate mortgage, the consideration of the debtor in furnishing the mortgage is the existence of a valid, voidable, or unenforceable debt.

x x x     x x x     x x x

“[W]hen there is partial failure of consideration, the mortgage becomes unenforceable to the extent of such failure. Where the indebtedness actually owing to the holder of the mortgage is less than the sum named in the mortgage, the mortgage cannot be enforced for more than the actual sum due.”[12]
Second Issue:
Propriety of Award for Damages
and Attorney’s Fees

In reducing the award for actual damages from P985,722.15 to P380,713.55, the CA explained:
“The alleged projected cash flow and net income for the 5-year period of operations were not substantiated by any other evidence to sufficiently establish the attainability of the projection. No evidence was also introduced to show the accounts payable of and other expenses incurred by [respondents]. The court a quo therefore, erred when it ruled that [respondents] incurred actual damages and losses amounting to P985,722.15 from 1990 to 1992, when no evidence was presented to establish the same.

“Compensatory or actual damages cannot be presumed. They cannot be allowed if there are no specific facts, which should be a basis for measuring the amount. The trial court cannot rely on speculation as to the fact and amount of damages, but must depend on actual proof that damage had been suffered. The amount of loss must not only be capable of proof but must actually be proven with reasonable degree of certainty, premised upon competent proof or best evidence to support his claim for actual damages.

“At most, the court a quo may declare as lost income and unrealized profits, the amount of P380,713.55 for the 3-year period of business operations from 1990 when PNB refused to release the loans until closure of business in 1992, based on the highest quarterly taxable income earned in 1989 in the amount of P28,754.80, with a conservative and reasonable increase of 10% per year on the net income. The amount of actual damages is therefore, reduced from P985,722.15 to P380,713.55 x x x.”[13]
We see no reason to overturn these findings. True, indemnification for damages comprises not only the loss that was actually suffered, but also the profits -- referred to as compensatory damages -- that the obligee failed to obtain. To justify a grant of actual or compensatory damages, however, it would be necessary to prove the amount of loss with a reasonable degree of certainty, based upon competent proof and the best evidence obtainable by the injured party.[14] The quarterly income tax report of Respondent RBL Enterprises, Inc., which was presented by petitioner and used by the appellate court as basis for computing the average profits earned by respondents in their business, provided a reasonable means for ascertaining their claims for lost profits. Thus, we believe that the assessment by the Court of Appeals was fair and just.

On the other hand, the award for moral and exemplary damages should be deleted, because respondents failed to prove malice or bad faith on the part of petitioner.

Moral damages are explicitly authorized in breaches of contract when the defendant has acted fraudulently or in bad faith.[15] Concededly, the bank was remiss in its obligation to release the balance of the loan extended to respondents. Nothing in the findings of the trial and the appellate courts, however, sufficiently indicate a deliberate intent on the part of PNB to cause harm to respondents.

Exemplary damages, in turn, are intended to serve as an example or a correction for the public good. Courts may award them if the defendant is found to have acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.[16] Given the above premises and the circumstances here obtaining, the exemplary damages granted by the courts a quo cannot be sustained.

Finally, the award of attorney’s fees as part of the damages is just and equitable under the circumstances.[17] Such fees may be awarded when parties are compelled to litigate or to incur expenses to protect their interest by reason of an unjustified act of the opposing party.[18] In the present case, petitioner’s refusal to release the balance of the loan has compelled respondents to institute an action for injunction and damages in order to protect their clear rights and interests.

WHEREFORE, the Petition is PARTLY GRANTED. The assailed Decision is hereby AFFIRMED, with the MODIFICATION that the award of actual and exemplary damages is deleted. No costs.


Ynares-Santiago, and Carpio, JJ., concur.
Davide, Jr., C.J., (Chairman), on official leave.
Azcuna, J., took no part, former PNB Chairman.

[1] Rollo, pp. 8-22.

[2] Id., pp. 24-34. Eleventh Division. Penned by Justice Juan Q. Enriquez Jr. and concurred in by Justices Ruben T. Reyes (Division chairman) and Presbitero J. Velasco Jr. (member).

[3] CA Decision, pp. 9-10; rollo, pp. 32-33.

[4] Id., pp. 2-3 & 25-26. Italics in the original.

[5] This case was deemed submitted for decision on July 9, 2002, upon this Court’s actual receipt of respondent’s Memorandum, which was signed by Atty. William N. Mirano. Petitioners’ Memorandum, signed by Attys. Eligio P. Petilla and Jose Troy A. Almario, was received by the Court on June 28, 2002.

[6] Petitioners’ Memorandum, p. 7; rollo, p. 112. Original in upper case.

[7] RTC Decision, pp. 11–12; records, pp. 372–373.

[8] 17A Am. Jur. 2d, S 471, p. 491.

[9] Isaguirre v. De Lara, 332 SCRA 803, May 31, 2000; Asuncion v. Evangelista, 316 SCRA 848, October 13, 1999; Northern Motors, Inc. v. Coquia, 68 SCRA 374, December 15, 1975; Ong Liong Tiak v. Luneta Motor Company, 66 Phil. 459, November 7, 1938.

[10] Ganzon v. Inserto, 208 Phil. 630, July 25, 1983.

[11] 139 SCRA 46, October 3, 1985.

[12] Id., p. 56, per Makasiar, CJ.

[13] CA Decision, p. 8; rollo, p. 31. Citations omitted.

[14] Integrated Packaging Corporation v. Court of Appeals, 333 SCRA 170, June 8, 2000.

[15] Mirasol v. Court of Appeals, 351 SCRA 44, February 1, 2001.

[16] Article 2232 of the Civil Code; Far East Bank and Trust Company v. Court of Appeals, supra.

[17] Article 2208 of the Civil Code.

[18] Producers Bank of the Philippines v. Court of Appeals, supra.

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