G.R. No.

26085
SEVERINO

August 12, 1927

TOLENTINO

and

POTENCIANA

MANIO,

plaintiffs-appellants,

vs.
BENITO GONZALEZ SY CHIAM, defendants-appellee.
Araneta

and

Zaragoza

for

appellants.

Eusebio Orense for appelle.

JOHNSON, J.:
PRINCIPAL QUESTIONS PRESENTED BY THE APPEAL
The principal questions presented by this appeal are:
(a) Is the contract in question a pacto de retro or a mortgage?
(b) Under a pacto de retro, when the vendor becomes a tenant of the purchaser and
agrees to pay a certain amount per month as rent, may such rent render such a contract
usurious when the amount paid as rent, computed upon the purchase price, amounts to a
higher rate of interest upon said amount than that allowed by law?
(c)

May the contract in the present case may be modified by parol evidence?

ANTECEDENT FACTS
Sometime prior to the 28th day of November, 1922, the appellants purchased of the Luzon Rice
Mills, Inc., a piece or parcel of land with the camarin located thereon, situated in the municipality
of Tarlac of the Province of Tarlac for the price of P25,000, promising to pay therefor in three
installments. The first installment of P2,000 was due on or before the 2d day of May, 1921; the
second installment of P8,000 was due on or before 31st day of May, 1921; the balance of
P15,000 at 12 per cent interest was due and payable on or about the 30th day of November,
1922. One of the conditions of that contract of purchase was that on failure of the purchaser
(plaintiffs and appellants) to pay the balance of said purchase price or any of the installments on
the date agreed upon, the property bought would revert to the original owner.
The payments due on the 2d and 31st of May, 1921, amounting to P10,000 were paid so far as
the record shows upon the due dates. The balance of P15,000 due on said contract of purchase
was paid on or about the 1st day of December, 1922, in the manner which will be explained
below. On the date when the balance of P15,000 with interest was paid, the vendor of said
property had issued to the purchasers transfer certificate of title to said property, No. 528. Said
transfer certificate of title (No. 528) was transfer certificate of title from No. 40, which shows that
said land was originally registered in the name of the vendor on the 7th day of November, 1913.
PRESENT FACTS
On the 7th day of November, 1922 the representative of the vendor of the property in question
wrote a letter to the appellant Potenciana Manio (Exhibit A, p. 50), notifying the latter that if the

balance of said indebtedness was not paid, an action would be brought for the purpose of
recovering the property, together with damages for non compliance with the condition of the
contract of purchase. The pertinent parts of said letter read as follows:
Sirvase notar que de no estar liquidada esta cuenta el dia 30 del corriente, procederemos
judicialmente contra Vd. para reclamar la devolucion del camarin y los daos y perjuicios
ocasionados a la compaia por su incumplimiento al contrato.
Somos de Vd. atentos y S. S.
SMITH, BELL & CO., LTD.
By (Sgd.) F. I. HIGHAM
Treasurer.
General Managers
LUZON RICE MILLS INC.
According to Exhibits B and D, which represent the account rendered by the vendor, there was
due and payable upon said contract of purchase on the 30th day of November, 1922, the sum
P16,965.09. Upon receiving the letter of the vendor of said property of November 7, 1922, the
purchasers, the appellants herein, realizing that they would be unable to pay the balance due,
began to make an effort to borrow money with which to pay the balance due, began to make an
effort to borrow money with which to pay the balance of their indebtedness on the purchase
price of the property involved. Finally an application was made to the defendant for a loan for the
purpose of satisfying their indebtedness to the vendor of said property. After some negotiations
the defendants agreed to loan the plaintiffs to loan the plaintiffs the sum of P17,500 upon
condition that the plaintiffs execute and deliver to him a pacto de retro of said property.
In accordance with that agreement the defendant paid to the plaintiffs by means of a check the
sum of P16,965.09. The defendant, in addition to said amount paid by check, delivered to the
plaintiffs the sum of P354.91 together with the sum of P180 which the plaintiffs paid to the
attorneys for drafting said contract of pacto de retro, making a total paid by the defendant to the
plaintiffs and for the plaintiffs of P17,500 upon the execution and delivery of said contract. Said
contracts was dated the 28th day of November, 1922, and is in the words and figures following:
Sepan todos por la presente:
Que nosotros, los conyuges Severino Tolentino y Potenciana Manio, ambos mayores de
edad, residentes en el Municipio de Calumpit, Provincia de Bulacan, propietarios y
transeuntes en esta Ciudad de Manila, de una parte, y de otra, Benito Gonzalez Sy Chiam,
mayor de edad, casado con Maria Santiago, comerciante y vecinos de esta Ciudad de
Manila.
MANIFESTAMOS Y HACEMOS CONSTAR:

Primero. Que nosotros, Severino Tolentino y Potenciano Manio, por y en consideracion a la

cantidad de diecisiete mil quinientos pesos (P17,500) moneda filipina, que en este acto
hemos recibido a nuestra entera satisfaccion de Don Benito Gonzalez Sy Chiam, cedemos,
vendemos y traspasamos a favor de dicho Don Benito Gonzalez Sy Chiam, sus herederos y
causahabientes, una finca que, segun el Certificado de Transferencia de Titulo No. 40
expedido por el Registrador de Titulos de la Provincia de Tarlac a favor de "Luzon Rice Mills
Company Limited" que al incorporarse se donomino y se denomina "Luzon Rice Mills Inc.,"
y que esta corporacion nos ha transferido en venta absoluta, se describe como sigue:
Un terreno (lote No. 1) con las mejoras existentes en el mismo, situado en el Municipio de
Tarlac. Linda por el O. y N. con propiedad de Manuel Urquico; por el E. con propiedad de la
Manila Railroad Co.; y por el S. con un camino. Partiendo de un punto marcado 1 en el
plano, cuyo punto se halla al N. 41 gds. 17' E.859.42 m. del mojon de localizacion No. 2 de
la Oficina de Terrenos en Tarlac; y desde dicho punto 1 N. 81 gds. 31' O., 77 m. al punto 2;
desde este punto N. 4 gds. 22' E.; 54.70 m. al punto 3; desde este punto S. 86 gds. 17' E.;
69.25 m. al punto 4; desde este punto S. 2 gds. 42' E., 61.48 m. al punto de partida;
midiendo una extension superficcial de cuatro mil doscientos diez y seis metros cuadrados
(4,216) mas o menos. Todos los puntos nombrados se hallan marcados en el plano y sobre
el terreno los puntos 1 y 2 estan determinados por mojones de P. L. S. de 20 x 20 x 70
centimetros y los puntos 3 y 4 por mojones del P. L. S. B. L.: la orientacion seguida es la
verdadera, siendo la declinacion magnetica de 0 gds. 45' E. y la fecha de la medicion, 1.
de febrero de 1913.
Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) aos
contados desde el dia 1. de diciembre de 1922, devolvemos al expresado Don Benito
Gonzalez Sy Chiam el referido precio de diecisiete mil quinientos pesos (P17,500) queda
obligado dicho Sr. Benito Gonzalez y Chiam a retrovendernos la finca arriba descrita; pero
si transcurre dicho plazo de cinco aos sin ejercitar el derecho de retracto que nos hemos
reservado, entonces quedara esta venta absoluta e irrevocable.
Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento la
finca arriba descrita, sujeto a condiciones siguientes:
(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don Benito
Gonzalez Sy Chiam y en su domicilio, era de trescientos setenta y cinco pesos
(P375) moneda filipina, cada mes.
(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito
Gonzalez Sy Chiam, asi como tambien la prima del seguro contra incendios, si el
conviniera al referido Sr. Benito Gonzalez Sy Chiam asegurar dicha finca.
(c) La falta de pago del alquiler aqui estipulado por dos meses consecutivos dara
lugar a la terminacion de este arrendamieno y a la perdida del derecho de retracto
que nos hemos reservado, como si naturalmente hubiera expirado el termino para
ello, pudiendo en su virtud dicho Sr. Gonzalez Sy Chiam tomar posesion de la finca y
desahuciarnos de la misma.

Cuarto. Que yo, Benito Gonzalez Sy Chiam, a mi vez otorgo que acepto esta escritura en
los precisos terminos en que la dejan otorgada los conyuges Severino Tolentino y
Potenciana Manio.
En testimonio de todo lo cual, firmamos la presente de nuestra mano en Manila, por
cuadruplicado en Manila, hoy a 28 de noviembre de 1922.
(Fdo.) SEVERINO TOLENTINO
(Fda.) POTENCIANA MANIO
(Fdo.) BENITO GONZALEZ SY CHIAM
Firmado en presencia de:
(Fdos.) MOISES M. BUHAIN
B. S. BANAAG
An examination of said contract of sale with reference to the first question above, shows clearly
that it is a pacto de retro and not a mortgage. There is no pretension on the part of the appellant
that said contract, standing alone, is a mortgage. The pertinent language of the contract is:
Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) aos
contados desde el dia 1. de diciembre de 1922, devolvemos al expresado Don Benito
Gonzales Sy Chiam el referido precio de diecisiete mil quinientos pesos (P17,500) queda
obligado dicho Sr. Benito Gonzales Sy Chiam a retrovendornos la finca arriba descrita; pero
si transcurre dicho plazo de cinco (5) aos sin ejercitar al derecho de retracto que nos
hemos reservado, entonces quedara esta venta absoluta e irrevocable.
Language cannot be clearer. The purpose of the contract is expressed clearly in said quotation
that there can certainly be not doubt as to the purpose of the plaintiff to sell the property in
question, reserving the right only to repurchase the same. The intention to sell with the right to
repurchase cannot be more clearly expressed.
It will be noted from a reading of said sale of pacto de retro, that the vendor, recognizing the
absolute sale of the property, entered into a contract with the purchaser by virtue of which she
became the "tenant" of the purchaser. That contract of rent appears in said quoted document
above as follows:
Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento la
finca arriba descrita, sujeto a condiciones siguientes:
(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don Benito
Gonzalez Sy Chiam y en su domicilio, sera de trescientos setenta y cinco pesos (P375)
moneda filipina, cada mes.

(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito Gonzalez
Sy Chiam, asi como tambien la prima del seguro contra incendios, si le conviniera al
referido Sr. Benito Gonzalez Sy Chiam asegurar dicha finca.
From the foregoing, we are driven to the following conclusions: First, that the contract of pacto
de retro is an absolute sale of the property with the right to repurchase and not a mortgage; and,
second, that by virtue of the said contract the vendor became the tenant of the purchaser, under
the conditions mentioned in paragraph 3 of said contact quoted above.
It has been the uniform theory of this court, due to the severity of a contract of pacto de retro, to
declare the same to be a mortgage and not a sale whenever the interpretation of such a contract
justifies that conclusion. There must be something, however, in the language of the contract or in
the conduct of the parties which shows clearly and beyond doubt that they intended the contract
to be a "mortgage" and not a pacto de retro. (International Banking Corporation vs. Martinez, 10
Phil., 252; Padilla vs. Linsangan, 19 Phil., 65; Cumagun vs. Alingay, 19 Phil., 415; Olino vs.
Medina, 13 Phil., 379; Manalo vs. Gueco, 42 Phil., 925; Velazquez vs. Teodoro, 46 Phil., 757; Villa
vs. Santiago, 38 Phil., 157.)
We are not unmindful of the fact that sales with pacto de retro are not favored and that the court
will not construe an instrument to one of sale with pacto de retro, with the stringent and onerous
effect which follows, unless the terms of the document and the surrounding circumstances
require it.
While it is general rule that parol evidence is not admissible for the purpose of varying the terms
of a contract, but when an issue is squarely presented that a contract does not express the
intention of the parties, courts will, when a proper foundation is laid therefor, hear evidence for
the purpose of ascertaining the true intention of the parties.
In the present case the plaintiffs allege in their complaint that the contract in question is a pacto
de retro. They admit that they signed it. They admit they sold the property in question with the
right to repurchase it. The terms of the contract quoted by the plaintiffs to the defendant was a
"sale" with pacto de retro, and the plaintiffs have shown no circumstance whatever which would
justify us in construing said contract to be a mere "loan" with guaranty. In every case in which
this court has construed a contract to be a mortgage or a loan instead of a sale with pacto de
retro, it has done so, either because the terms of such contract were incompatible or inconsistent
with the theory that said contract was one of purchase and sale. (Olino vs. Medina, supra; Padilla
vs. Linsangan, supra; Manlagnit vs. Dy Puico, 34 Phil., 325; Rodriguez vs. Pamintuan and De
Jesus, 37 Phil., 876.)
In the case of Padilla vs. Linsangan the term employed in the contract to indicate the nature of
the conveyance of the land was "pledged" instead of "sold". In the case of Manlagnit vs. Dy
Puico, while the vendor used to the terms "sale and transfer with the right to repurchase," yet in
said contract he described himself as a "debtor" the purchaser as a "creditor" and the contract as
a "mortgage". In the case of Rodriguez vs. Pamintuan and De Jesus the person who executed the
instrument, purporting on its face to be a deed of sale of certain parcels of land, had merely
acted under a power of attorney from the owner of said land, "authorizing him to borrow money

in such amount and upon such terms and conditions as he might deem proper, and to secure
payment of the loan by a mortgage." In the case of Villa vs. Santiago (38 Phil., 157), although a
contract purporting to be a deed of sale was executed, the supposed vendor remained in
possession of the land and invested the money he had obtained from the supposed vendee in
making improvements thereon, which fact justified the court in holding that the transaction was
a mere loan and not a sale. In the case of Cuyugan vs. Santos (39 Phil., 970), the purchaser
accepted partial payments from the vendor, and such acceptance of partial payments is
absolutely incompatible with the idea of irrevocability of the title of ownership of the purchaser
at the expiration of the term stipulated in the original contract for the exercise of the right of
repurchase."
Referring again to the right of the parties to vary the terms of written contract, we quote from
the dissenting opinion of Chief Justice Cayetano S. Arellano in the case of Government of the
Philippine Islands vs. Philippine Sugar Estates Development Co., which case was appealed to the
Supreme Court of the United States and the contention of the Chief Justice in his dissenting
opinion was affirmed and the decision of the Supreme Court of the Philippine Islands was
reversed. (See decision of the Supreme Court of the United States, June 3, 1918.) 1 The Chief
Justice said in discussing that question:
According to article 1282 of the Civil Code, in order to judge of the intention of the contracting
parties, consideration must chiefly be paid to those acts executed by said parties which are
contemporary with and subsequent to the contract. And according to article 1283, however
general the terms of a contract may be, they must not be held to include things and cases
different from those with regard to which the interested parties agreed to contract. "The
Supreme Court of the Philippine Islands held the parol evidence was admissible in that case to
vary the terms of the contract between the Government of the Philippine Islands and the
Philippine Sugar Estates Development Co. In the course of the opinion of the Supreme Court of
the United States Mr. Justice Brandeis, speaking for the court, said:
It is well settled that courts of equity will reform a written contract where, owing to mutual
mistake, the language used therein did not fully or accurately express the agreement and
intention of the parties. The fact that interpretation or construction of a contract presents
a question of law and that, therefore, the mistake was one of law is not a bar to granting
relief. . . . This court is always disposed to accept the construction which the highest court
of a territory or possession has placed upon a local statute. But that disposition may not
be yielded to where the lower court has clearly erred. Here the construction adopted was
rested upon a clearly erroneous assumption as to an established rule of equity. . . . The
burden of proof resting upon the appellant cannot be satisfied by mere preponderance of
the evidence. It is settled that relief by way of reformation will not be granted unless the
proof of mutual mistake be of the clearest and most satisfactory character.
The evidence introduced by the appellant in the present case does not meet with that stringent
requirement. There is not a word, a phrase, a sentence or a paragraph in the entire record, which
justifies this court in holding that the said contract of pacto de retro is a mortgage and not a sale
with the right to repurchase. Article 1281 of the Civil Code provides: "If the terms of a contract
are clear and leave no doubt as to the intention of the contracting parties, the literal sense of its

stipulations shall be followed." Article 1282 provides: "in order to judge as to the intention of the
contracting parties, attention must be paid principally to their conduct at the time of making the
contract and subsequently thereto."
We cannot thereto conclude this branch of our discussion of the question involved, without
quoting from that very well reasoned decision of the late Chief Justice Arellano, one of the
greatest jurists of his time. He said, in discussing the question whether or not the contract, in the
case of Lichauco vs. Berenguer (20 Phil., 12), was a pacto de retro or a mortgage:
The public instrument, Exhibit C, in part reads as follows: "Don Macarion Berenguer
declares and states that he is the proprietor in fee simple of two parcels of fallow
unappropriated crown land situated within the district of his pueblo. The first has an area
of 73 quiones, 8 balitas and 8 loanes, located in the sitio of Batasan, and its boundaries
are, etc., etc. The second is in the sitio of Panantaglay, barrio of Calumpang has as area of
73 hectares, 22 ares, and 6 centares, and is bounded on the north, etc., etc."
In the executory part of the said instrument, it is stated:
'That under condition of right to repurchase (pacto de retro) he sells the said
properties to the aforementioned Doa Cornelia Laochangco for P4,000 and upon
the following conditions: First, the sale stipulated shall be for the period of two
years, counting from this date, within which time the deponent shall be entitled to
repurchase the land sold upon payment of its price; second, the lands sold shall,
during the term of the present contract, be held in lease by the undersigned who
shall pay, as rental therefor, the sum of 400 pesos per annum, or the equivalent in
sugar at the option of the vendor; third, all the fruits of the said lands shall be
deposited in the sugar depository of the vendee, situated in the district of Quiapo of
this city, and the value of which shall be applied on account of the price of this sale;
fourth, the deponent acknowledges that he has received from the vendor the
purchase price of P4,000 already paid, and in legal tender currency of this
country . . .; fifth, all the taxes which may be assessed against the lands surveyed
by competent authority, shall be payable by and constitute a charge against the
vendor; sixth, if, through any unusual event, such as flood, tempest, etc., the
properties hereinbefore enumerated should be destroyed, wholly or in part, it shall
be incumbent upon the vendor to repair the damage thereto at his own expense
and to put them into a good state of cultivation, and should he fail to do so he binds
himself to give to the vendee other lands of the same area, quality and value.'
xxx

xxx

xxx

The opponent maintained, and his theory was accepted by the trial court, that Berenguer's
contract with Laochangco was not one of sale with right of repurchase, but merely one of
loan secured by those properties, and, consequently, that the ownership of the lands in
questions could not have been conveyed to Laochangco, inasmuch as it continued to be
held by Berenguer, as well as their possession, which he had not ceased to enjoy.

Such a theory is, as argued by the appellant, erroneous. The instrument executed by
Macario Berenguer, the text of which has been transcribed in this decision, is very clear.
Berenguer's heirs may not go counter to the literal tenor of the obligation, the exact
expression of the consent of the contracting contained in the instrument, Exhibit C. Not
because the lands may have continued in possession of the vendor, not because the latter
may have assumed the payment of the taxes on such properties, nor yet because the
same party may have bound himself to substitute by another any one of the properties
which might be destroyed, does the contract cease to be what it is, as set forth in detail in
the public instrument. The vendor continued in the possession of the lands, not as the
owner thereof as before their sale, but as the lessee which he became after its
consummation, by virtue of a contract executed in his favor by the vendee in the deed
itself, Exhibit C. Right of ownership is not implied by the circumstance of the lessee's
assuming the responsibility of the payment is of the taxes on the property leased, for their
payment is not peculiarly incumbent upon the owner, nor is such right implied by the
obligation to substitute the thing sold for another while in his possession under lease,
since that obligation came from him and he continues under another character in its
possessiona reason why he guarantees its integrity and obligates himself to return the
thing even in a case of force majeure. Such liability, as a general rule, is foreign to
contracts of lease and, if required, is exorbitant, but possible and lawful, if voluntarily
agreed to and such agreement does not on this account involve any sign of ownership, nor
other meaning than the will to impose upon oneself scrupulous diligence in the care of a
thing belonging to another.
The purchase and sale, once consummated, is a contract which by its nature transfers the
ownership and other rights in the thing sold. A pacto de retro, or sale with right to
repurchase, is nothing but a personal right stipulated between the vendee and the vendor,
to the end that the latter may again acquire the ownership of the thing alienated.
It is true, very true indeed, that the sale with right of repurchase is employed as a method
of loan; it is likewise true that in practice many cases occur where the consummation of a
pacto de retro sale means the financial ruin of a person; it is also, unquestionable that in
pacto de retro sales very important interests often intervene, in the form of the price of
the lease of the thing sold, which is stipulated as an additional covenant. (Manresa, Civil
Code, p. 274.)
But in the present case, unlike others heard by this court, there is no proof that the sale
with right of repurchase, made by Berenguer in favor of Laonchangco is rather a mortgage
to secure a loan.
We come now to a discussion of the second question presented above, and that is, stating the
same in another form: May a tenant charge his landlord with a violation of the Usury Law upon
the ground that the amount of rent he pays, based upon the real value of the property, amounts
to a usurious rate of interest? When the vendor of property under a pacto de retro rents the
property and agrees to pay a rental value for the property during the period of his right to
repurchase, he thereby becomes a "tenant" and in all respects stands in the same relation with
the purchaser as a tenant under any other contract of lease.

The appellant contends that the rental price paid during the period of the existence of the right
to repurchase, or the sum of P375 per month, based upon the value of the property, amounted to
usury. Usury, generally speaking, may be defined as contracting for or receiving something in
excess of the amount allowed by law for the loan or forbearance of moneythe taking of more
interest for the use of money than the law allows. It seems that the taking of interest for the loan
of money, at least the taking of excessive interest has been regarded with abhorrence from the
earliest times. (Dunham vs. Gould, 16 Johnson [N. Y.], 367.) During the middle ages the people of
England, and especially the English Church, entertained the opinion, then, current in Europe, that
the taking of any interest for the loan of money was a detestable vice, hateful to man and
contrary to the laws of God. (3 Coke's Institute, 150; Tayler on Usury, 44.)
Chancellor Kent, in the case of Dunham vs. Gould, supra, said: "If we look back upon history, we
shall find that there is scarcely any people, ancient or modern, that have not had usury laws. . . .
The Romans, through the greater part of their history, had the deepest abhorrence of usury. . . . It
will be deemed a little singular, that the same voice against usury should have been raised in the
laws of China, in the Hindu institutes of Menu, in the Koran of Mahomet, and perhaps, we may
say, in the laws of all nations that we know of, whether Greek or Barbarian."
The collection of a rate of interest higher than that allowed by law is condemned by the
Philippine Legislature (Acts Nos. 2655, 2662 and 2992). But is it unlawful for the owner of a
property to enter into a contract with the tenant for the payment of a specific amount of rent for
the use and occupation of said property, even though the amount paid as "rent," based upon the
value of the property, might exceed the rate of interest allowed by law? That question has never
been decided in this jurisdiction. It is one of first impression. No cases have been found in this
jurisdiction answering that question. Act No. 2655 is "An Act fixing rates of interest upon 'loans'
and declaring the effect of receiving or taking usurious rates."
It will be noted that said statute imposes a penalty upon a "loan" or forbearance of any money,
goods, chattels or credits, etc. The central idea of said statute is to prohibit a rate of interest on
"loans." A contract of "loan," is very different contract from that of "rent". A "loan," as that term
is used in the statute, signifies the giving of a sum of money, goods or credits to another, with a
promise to repay, but not a promise to return the same thing. To "loan," in general parlance, is to
deliver to another for temporary use, on condition that the thing or its equivalent be returned; or
to deliver for temporary use on condition that an equivalent in kind shall be returned with a
compensation for its use. The word "loan," however, as used in the statute, has a technical
meaning. It never means the return of the same thing. It means the return of an equivalent only,
but never the same thing loaned. A "loan" has been properly defined as an advance payment of
money, goods or credits upon a contract or stipulation to repay, not to return, the thing loaned at
some future day in accordance with the terms of the contract. Under the contract of "loan," as
used in said statute, the moment the contract is completed the money, goods or chattels given
cease to be the property of the former owner and becomes the property of the obligor to be used
according to his own will, unless the contract itself expressly provides for a special or specific use
of the same. At all events, the money, goods or chattels, the moment the contract is executed,
cease to be the property of the former owner and becomes the absolute property of the obligor.

A contract of "loan" differs materially from a contract of "rent." In a contract of "rent" the owner
of the property does not lose his ownership. He simply loses his control over the property rented
during the period of the contract. In a contract of "loan" the thing loaned becomes the property
of the obligor. In a contract of "rent" the thing still remains the property of the lessor. He simply
loses control of the same in a limited way during the period of the contract of "rent" or lease. In a
contract of "rent" the relation between the contractors is that of landlord and tenant. In a
contract of "loan" of money, goods, chattels or credits, the relation between the parties is that of
obligor and obligee. "Rent" may be defined as the compensation either in money, provisions,
chattels, or labor, received by the owner of the soil from the occupant thereof. It is defined as the
return or compensation for the possession of some corporeal inheritance, and is a profit issuing
out of lands or tenements, in return for their use. It is that, which is to paid for the use of land,
whether in money, labor or other thing agreed upon. A contract of "rent" is a contract by which
one of the parties delivers to the other some nonconsumable thing, in order that the latter may
use it during a certain period and return it to the former; whereas a contract of "loan", as that
word is used in the statute, signifies the delivery of money or other consumable things upon
condition of returning an equivalent amount of the same kind or quantity, in which cases it is
called merely a "loan." In the case of a contract of "rent," under the civil law, it is called a
"commodatum."
From the foregoing it will be seen that there is a while distinction between a contract of "loan," as
that word is used in the statute, and a contract of "rent" even though those words are used in
ordinary parlance as interchangeable terms.
The value of money, goods or credits is easily ascertained while the amount of rent to be paid for
the use and occupation of the property may depend upon a thousand different conditions; as for
example, farm lands of exactly equal productive capacity and of the same physical value may
have a different rental value, depending upon location, prices of commodities, proximity to the
market, etc. Houses may have a different rental value due to location, conditions of business,
general prosperity or depression, adaptability to particular purposes, even though they have
exactly the same original cost. A store on the Escolta, in the center of business, constructed
exactly like a store located outside of the business center, will have a much higher rental value
than the other. Two places of business located in different sections of the city may be constructed
exactly on the same architectural plan and yet one, due to particular location or adaptability to a
particular business which the lessor desires to conduct, may have a very much higher rental
value than one not so located and not so well adapted to the particular business. A very cheap
building on the carnival ground may rent for more money, due to the particular circumstances
and surroundings, than a much more valuable property located elsewhere. It will thus be seen
that the rent to be paid for the use and occupation of property is not necessarily fixed upon the
value of the property. The amount of rent is fixed, based upon a thousand different conditions
and may or may not have any direct reference to the value of the property rented. To hold that
"usury" can be based upon the comparative actual rental value and the actual value of the
property, is to subject every landlord to an annoyance not contemplated by the law, and would
create a very great disturbance in every business or rural community. We cannot bring ourselves
to believe that the Legislature contemplated any such disturbance in the equilibrium of the
business of the country.

In the present case the property in question was sold. It was an absolute sale with the right only
to repurchase. During the period of redemption the purchaser was the absolute owner of the
property. During the period of redemption the vendor was not the owner of the property. During
the period of redemption the vendor was a tenant of the purchaser. During the period of
redemption the relation which existed between the vendor and the vendee was that of landlord
and tenant. That relation can only be terminated by a repurchase of the property by the vendor
in accordance with the terms of the said contract. The contract was one of rent. The contract was
not a loan, as that word is used in Act No. 2655.
As obnoxious as contracts of pacto de retro are, yet nevertheless, the courts have no right to
make contracts for parties. They made their own contract in the present case. There is not a
word, a phrase, a sentence or paragraph, which in the slightest way indicates that the parties to
the contract in question did not intend to sell the property in question absolutely, simply with the
right to repurchase. People who make their own beds must lie thereon.
What has been said above with reference to the right to modify contracts by parol evidence,
sufficiently answers the third questions presented above. The language of the contract is explicit,
clear, unambiguous and beyond question. It expresses the exact intention of the parties at the
time it was made. There is not a word, a phrase, a sentence or paragraph found in said contract
which needs explanation. The parties thereto entered into said contract with the full
understanding of its terms and should not now be permitted to change or modify it by parol
evidence.
With reference to the improvements made upon said property by the plaintiffs during the life of
the contract, Exhibit C, there is hereby reserved to the plaintiffs the right to exercise in a
separate action the right guaranteed to them under article 361 of the Civil Code.
For all of the foregoing reasons, we are fully persuaded from the facts of the record, in relation
with the law applicable thereto, that the judgment appealed from should be and is hereby
affirmed, with costs. So ordered.

G.R. No. L-18208

THE

February 14, 1922

UNITED

STATES,

plaintiff-appellee,

vs.
VICENTE DIAZ CONDE and APOLINARIA R. DE CONDE, defendants-appellants.

Araneta

&

Zaragoza

for

appellants.

Attorney-General Villareal for appellee.

JOHNSON, J.:
It appears from the record that on the 6th day of May, 1921, a complaint was presented in the
Court of First Instance of the city of Manila, charging the defendants with a violation of the Usury
Law (Act No. 2655). Upon said complaint they were each arrested, arraigned, and pleaded not
guilty. The cause was finally brought on for trial on the 1st day of September, 1921. At the close
of the trial, and after a consideration of the evidence adduced, the Honorable M. V. del Rosario,
judge, found that the defendants were guilty of the crime charged in the complaint and
sentenced each of them to pay a fine of P120 and, in case of insolvency, to suffer subsidiary
imprisonment in accordance with the provisions of the law. From that sentence each of the
defendants appealed to this court.
The appellants now contend: (a) That the contract upon which the alleged usurious interest was
collected was executed before Act No. 2655 was adopted; (b) that at the time said contract was
made (December 30, 1915), there was no usury law in force in the Philippine Islands; (c) that
said Act No. 2655 did not become effective until the 1st day of May, 1916, or four months and a
half after the contract in question was executed; (d) that said law could have no retroactive
effect or operation, and (e) that said law impairs the obligation of a contract, and that for all of
said reasons the judgment imposed by the lower court should be revoked; that the complaint
should be dismissed, and that they should each be discharged from the custody of the law.
The essential facts constituting the basis of the criminal action are not in dispute, and may be
stated as follows: (1) That on the 30th day of December, 1915, the alleged offended persons
Bartolome Oliveros and Engracia Lianco executed and delivered to the defendants a contract
(Exhibit B) evidencing the fact that the former had borrowed from the latter the sum of P300, and
(2) that, by virtue of the terms of said contract, the said Bartolome Oliveros and Engracia Lianco
obligated themselves to pay to the defendants interest at the rate of five per cent (5%) per
month, payable within the first ten days of each and every month, the first payment to be made
on the 10th day of January, 1916. There were other terms in the contract which, however, are not
important for the decision in the present case.
The lower court, in the course of its opinion, stated that at the time of the execution and delivery
of said contract (Exhibit B), there was no law in force in the Philippine Islands punishing usury;
but, inasmuch as the defendants had collected a usurious rate of interest after the adoption of
the Usury Law in the Philippine Islands (Act No. 2655), they were guilty of a violation of that law
and should be punished in accordance with its provisions.
The law, we think, is well established that when a contract contains an obligation to pay interest
upon the principal, the interest thereby becomes part of the principal and is included within the
promise to pay. In other words, the obligation to pay interest on money due under a contract, be
it express or implied, is a part of the obligation of the contract. Laws adopted after the execution
of a contract, changing or altering the rate of interest, cannot be made to apply to such contract

without violating the provisions of the constitution which prohibit the adoption of a law "impairing
the obligation of contract." (8 Cyc., 996; 12 Corpus Juris, 1058-1059.)
The obligation of the contract is the law which binds the parties to perform their agreement if it
is not contrary to the law of the land, morals or public order. That law must govern and control
the contract in every aspect in which it is intended to bear upon it, whether it affect its validity,
construction, or discharge. Any law which enlarges, abridges, or in any manner changes the
intention of the parties, necessarily impairs the contract itself. If a law impairs the obligation of a
contract, it is prohibited by the Jones Law, and is null and void. The laws in force in the Philippine
Islands prior to any legislation by the American sovereignty, prohibited the Legislature from
giving to any penal law a retroactive effect unless such law was favorable to the person accused.
(Articles 21 and 22, Penal Code.)
A law imposing a new penalty, or a new liability or disability, or giving a new right of action, must
not be construed as having a retroactive effect. It is an elementary rule of contract that the laws
in force at the time the contract was made must govern its interpretation and application. Laws
must be construed prospectively and not retrospectively. If a contract is legal at its inception, it
cannot be rendered illegal by any subsequent legislation. If that were permitted then the
obligations of a contract might be impaired, which is prohibited by the organic law of the
Philippine Islands. (U.S. vs. Constantino Tan Quingco Chua, 39 Phil., 552; Aguilar vs. Rubiato and
Gonzales Vila, 40 Phil., 570.)
Ex post facto laws, unless they are favorable to the defendant, are prohibited in this jurisdiction.
Every law that makes an action, done before the passage of the law, and which was innocent
when done, criminal, and punishes such action, is an ex post facto law. In the present case Act
No. 2655 made an act which had been done before the law was adopted, a criminal act, and to
make said Act applicable to the act complained of would be to give it an ex post facto operation.
The Legislature is prohibited from adopting a law which will make an act done before its adoption
a crime. A law may be given a retroactive effect in civil action, providing it is curative in
character, but ex post facto laws are absolutely prohibited unless its retroactive effect is
favorable to the defendant.
For the reason, therefore, that the acts complained of in the present case were legal at the time
of their occurrence, they cannot be made criminal by any subsequent or ex post facto legislation.
What the courts may say, considering the provisions of article 1255 of the Civil Code, when a civil
action is brought upon said contract, cannot now be determined. A contract may be annulled by
the courts when it is shown that it is against morals or public order.
For all of the foregoing reasons, we are of the opinion, and so decide, that the acts complained of
by the defendants did not constitute a crime at the time they were committed, and therefore the
sentence of the lower court should be, and is hereby, revoked; and it is hereby ordered and
decreed that the complaint be dismissed, and that the defendants be discharged from the
custody of the law, with costs de oficio. So ordered.

G.R. No. 77735 January 29, 1988

WILFREDO

VERDEJO,

petitioner,

vs.
THE HON. COURT OF APPEALS, HON. SOFRONIO G. SAYO, Presiding Judge, RTC, Br. III,
Pasay City, and HERMINIA PATINIO, ET AL., respondents.
RESOLUTION

PADILLA, J.:
Petition for review on certiorari of the decision * rendered by the respondent appellate court,
dated 28 November 1986, in CA-G.R. No. SP-10429 entitled: "Wilfredo Verdejo, petitioner, versus
Hon. Sofronio Sayo, etc., et al., respondents", which dismissed the petition to annul and set aside
the order, dated 8 October 1986, directing the issuance of a writ of execution in Civil Case No.
2546-P of the Regional Trial Court of Pasay City, as well as the Resolution, dated 5 March 1987,
which denied the petitioner's motion for reconsideration of said decision of 28 November 1986.
The pertinent facts of the case are as follows:
On 20 December 1984, the herein petitioner filed a complaint against the private respondent
Herminia Patinio and one John Doe before the Regional Trial Court of Pasay City, docketed therein
as Civil Case No. 2546-P, for collection of a sum of money amounting to P60,500.00, which said
Herminia Patinio had allegedly borrowed from him but failed to pay when it became due,
notwithstanding demands.

Answering, Herminia Patinio admitted having obtained loans from the petitioner but claimed that
the amount borrowed by her was very much less than the amount demanded in the complaint,
which amount she had already paid or settled, and that the petitioner had exacted or charged
interest on the loan ranging from 10% to 12% per month, which is exorbitant and in gross
violation of the Usury Law. Wherefore she prayed that she be reimbursed the usurious interests
charged and paid. She also asked for damages, attorney's fees and costs of suit.

After trial court on 3 September 1986, the trial court rendered Judgment, as follows:
WHEREFORE, judgment is hereby rendered dismissing plaintiff's complaint for lack
of merit.
On defendants' counterclaim plaintiff is hereby ordered to refund to defendants the
amount of P13,890.00 and to further pay to defendants the amount of P5,000.00 as
attorney's fees and the costs of this suit.

Counsel for the petitioner received a copy of the trial court's decision on 5 September 1986, and
on 19 September 1986, he sent a notice of appeal to the court by special delivery. The notice of
appeal was received by the court on 26 September 1986. On that same day the court also
received the motion for execution filed by the private respondent, Herminia Patinio.

The petitioner opposed the motion claiming that he had already filed a notice of appeal through
the mail so that the motion for execution was improper.

The private respondent, however, replied that the petitioner's notice of appeal was filed beyond
the reglementary period and reiterated her prayer for the issuance of a writ of execution.

Resolving the matter, the trial court issued an Order on 8 October 1986, the dispositive part of
which reads as follows:

WHEREFORE, as plaintiff's Notice of appeal was filed beyond the reglementary

period, the same is hereby DENIED.
As the judgment rendered herein has become final and executory, let the
corresponding Writ of Execution issue to enforce the same.

Thereafter, the petitioner filed a petition for certiorari before the Court of Appeals, docketed
therein as CA-G.R. No. SP-10429, to annul said Order of 8 October 1986.

The appellate court,

however, as aforestated, dismissed the petition in a Decision dated 28 November 1986.

The

petitioner filed a motion for reconsideration of the decision, but his motion was denied in a
Resolution dated 5 March 1987.

10

Hence, the petitioner's present recourse.

The only issue in this petition is whether or not the Court should allow an appeal where the
notice of appeal was sent by special delivery mail within the period for perfection of appeals, but
received in court after the expiration of said period.
For the proper exercise of the right to appeal, the petitioner should have complied with Section 1,
Rule 13 of the Rules of Court which reads as follows:
Section 1. Filing with the court, defined.-The Filing of pleadings, appearances,
motions, notice orders and other papers with the court as required by these rules
shall be made by filing them personally with the clerk of the court or by sending
them by registered mail. In the first case, the clerk shall endorse on the pleading
the date and hour of filing. In the second case, the date of mailing of motions,
pleadings, or any other papers or payments or deposits, as shown by the post office
stamp on the envelope or the registry reciept shall be considered as the date of
their filing, payment, or deposit in court. The envelope shall be attached to the
record of the case.
In justifying his failure to comply strictly with the requirements for perfecting an appeal, as
aforestated, the petitioner alleges that his counsel was sick at the time, and in order to beat the
deadline for the filing of the appeal, he mailed the notice of appeal by special delivery mail, not
knowing that it should be sent by registered mail.

11

We find merit in the petition. The Rules of Court expressly provide that the rules should be
liberally construed in order to promote their object and to assist the parties in obtaining just,
speedy, and inexpensive determination of every action and proceeding,

12

and in the absence of

a clear lack of merit or intention to delay, a case should not be allowed to go off on procedural
points or technicality. As much as possible, failure of' justice should be avoided.

13

In the instant case, the notice of appeal was sent by special delivery, instead of registered mail.
Considering that said notice of appeal was sent within the period for perfection of appeals by the
petitioner who, not being a lawyer, is not well versed in the finer points of the law, and, hence,
committed an honest mistake; and that the petitioner appears to have a good and valid cause of
action, we find that there was substantial compliance with the rules.

The case involves an alleged violation of the Usury Law, where the petitioner was found by the
trial court to have charged and collected usurious interests from the private respondent on loans
which were first obtained on 15 February 1982, later renewed, and finally culminated with the
execution by private respondent of the Deed of Sale with Right of Repurchase on 17 November
1983. This Court has ruled in one case

14

that with the promulgation of Central Bank Circular No.

905, series of 1982, usury has become "legally inexistent" as the lender and the borrower can
agree on any interest that may be charged on the loan. This Circular was also given retroactive
effect. But, whether or not this Circular should also be given retroactive effect and applied in this
case is yet to be determined by the appellate court at the proper time.
Moreover, it appears that the computation of the amount considered as usurious interest is
incorrect. The trial court merely added the amounts paid by the private respondent to the
petitioner and, thereafter, deducted therefrom the amounts given as loan to the private
respondent and considered the excess amount usurious, without apparently considering the
lawful interest that may be collected on said loans. Only usurious interests may be reimbursed.
To prevent a miscarriage of justice, the petitioner should be allowed to prosecute his appeal.
ACCORDINGLY, the petition is GRANTED. The questioned Decision and Resolution issued by the
respondent Court of Appeals on 28 November 1986 and 5 March 1987, respectively, in CA-G.R.
No. SP-10429, as well as the Order issued by the Regional Trial Court of Pasay City in Civil Case
No. 2546-P on 8 October 1986, are hereby ANNULLED and SET ASIDE and another one entered
approving the notice of appeal filed by the petitioner. Without costs.
SO ORDERED.