WAKALA: It’s Concept and Permissibility

Wakala is a structure that utilizes the idea of principal and agent theory. The principal provides the capital, and the agent gets hired to provide expertise and labor. Under a wakala, the capital provider receives the profits from the venture, less an agreed-upon fee that goes to pay the agent. Bank deposits can also be structured as a wakala.[1]

The word “Wakala” literally has several meanings including, delegation, authorization, preservation and performing a task on behalf of others. Technically Wakala refers to a type of contract in which one person delegated another person to perform some tasks on behalf of him.[2] Wakala has essential element as a matter of contract, these are the principal (muwakkil), the agent (wakil) and the subject matter (muwakkal bihi). These three elements must be concurred for its validity.[3]

According to Imaam al Shawkhani, “It is permissible for an owner to give authority to someone else to act his behalf in respect of every dealings in as much as there is nothing that could legally prevent such, If an agent sells beyond the amount specified by the owner, the excess money goes to the owner, and if the he acts contrary to the owner’s specification for a better achievement or he like, and the owner is pleased with it, then the transaction becomes valid.”[4]

One of the legal basis from Qur’an often cited on the principle of wakala is the verse found in Surah al Baqara, when Allah said:

وَإِذ قالَ رَبُّكَ لِلمَلائِكَةِ إِنّي جاعِلٌ فِي الأَرضِ خَليفَةً ۖ قالوا أَتَجعَلُ فيها مَن يُفسِدُ فيها وَيَسفِكُ الدِّماءَ وَنَحنُ نُسَبِّحُ بِحَمدِكَ وَنُقَدِّسُ لَكَ ۖ قالَ إِنّي أَعلَمُ ما لا تَعلَم

When your Lord said to the angels, ‘Indeed I am going to set a vicegerent on the earth, ’they said, ‘Will You set in it someone who will cause corruption in it, and shed blood, while we celebrate Your praise and proclaim Your sanctity? He said, ‘Indeed I know what you do not know.’[5]

However, it has to be noted that according to Muslims scholars, the mentioned verse was mainly referring to the authority which Allah has bestowed upon man on earth, such as leadership or political leadership, and as spiritual torch bearer in the Muslim community. A khalifa or viceregent as contemplated from this legislation also in the purview of leading a small unit, such as but not limited to a family, firm, organization, platoons of military armies, or any other institution that requires management and leadership.          

In relation to the discussion on wakala as far as Islamic commercial transactions are concerned, Wakala in modern sense could be linked to the Remittances. According to the basic definition, "a remittance means "send back." In terms of money, a remittance is the sending of money to a recipient who lives abroad. Most families living in slow-growing economies and developing nations rely heavily on these remittances as their main source of income, (anonymous, ccto)".  

Accordingly, the three essential elements of Wakala as mentioned above, Muwakkil is the principal or sender, wakil as the agent, while muwakkil bihe is the subject matter, or the money to be sent. Thus, in remittances, muwakkil is the sender of money from abroad, and wakil is the remittance center, or a bank who facilitates the transferee, while the money is the muwakkil bihe, or the object of the transaction. Thereafter, every successful transaction of remittances was accompanied by a written contract. The receipt issued by the wakil or agent serves as evidence of a perfected contract between the wakil or agent and the muwakkil or principal-sender.          

Based on this transaction, the agent or wakil was entrusted by the muwakkil of his property (money transfer), as such it contemplates the notion of Wakala. Hence, under Islamic commercial transaction, the wakala or remittances is permissible, provided that when the agent do not transgress to the limit as to the authority given to him by the principal, (i.e.) that the agent do not misappropriate the fund entrusted to him to be remitted.

Another Qur’anic legislation that regulates Islamic commercial transaction was found in Surah al Baqara, when Allah said:

يا أَيُّهَا الَّذينَ آمَنوا إِذا تَدايَنتُم بِدَينٍ إِلىٰ أَجَلٍ مُسَمًّى فَاكتُبوهُ ۚ وَليَكتُب بَينَكُم كاتِبٌ بِالعَدلِ ۚ وَلا يَأبَ كاتِبٌ أَن يَكتُبَ كَما عَلَّمَهُ اللَّهُ ۚ فَليَكتُب وَليُملِلِ الَّذي عَلَيهِ الحَقُّ وَليَتَّقِ اللَّهَ رَبَّهُ وَلا يَبخَس مِنهُ شَيئًا ۚ فَإِن كانَ الَّذي عَلَيهِ الحَقُّ سَفيهًا أَو ضَعيفًا أَو لا يَستَطيعُ أَن يُمِلَّ هُوَ فَليُملِل وَلِيُّهُ بِالعَدلِ 

O you who have believed, when you contract a debt for a specified term, write it down. And let a scribe write (it) between you in justice. Let no scribe refuse to write as Allah has taught him. So let him write and let the one who has the obligation dictate. And let him fear Allah, his Lord, and not leave anything out of it. But if the one who has the obligation is of limited understanding or weak or unable to dictate himself, then let his guardian dictate in justice.[6]

 

This verse highlighted the general procedure on how a credit should be regulated, and the fundamental requisites. Thus, an oral agreement is something not recommended under this ruling, instead, a written agreement is preferred. One of the reasons could be that a man in character is scatterbrained, and upon writing, such is to become conclusive evidence. 

To be valid, credit transaction must contain the following: (1), that there is specified credit (2), such must be in writing (3), in a just (4), if one of the parties is illiterate, weak of understating, be represented by his guardian with just (5), and that there should be witnessed by at least two men, or two women and one man. It must be noted that the required witness for this kind of transaction is two men of just, or two women together with one man all of them be of just.[7] 

 

Conclusion 

Wakala, this principle falls within the second division of Islamic aspects called Muammalat. It is referring to the relationship between man and his fellow in relation to the formulation of human society and their community; such relationship is governed by Shari’ah as to the civil aspects of the law.

As defined above, Wakala regulates the business transaction between the principal and his duly authorized representative. When the principal authorized other in his behalf, it is viewed that whatever may be the action taken by the delegate, is the same as it was executed by the principal by himself, and by his owned utterances and act, provided, however, that agent do not step up wholly in the shoe of the principal without his consent.

In other words, although Wakala is permitted, it not absolute. The act of the agent to be valid must be confined to the authorized acts purported to be, otherwise, that act could be challenged. Also, the agent under this principle would not only be limited as to the specific action that he may exercise, but it should be in accordance with the essential requisites mentioned in the Qur’anic regulation. 

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[1] https://ideas.darden.virginia.edu/islamic-finance

[2] Dr. Kheiralla Sirour, The Rules of Wakala Contract (agency) in Sharia law and its application in Islamic Finance A Comparative study, 2015

[3] Ibid

[4] Ash-Shawkhani, Comprehensive Islamic Jurisprudence, Dakwah Corner Bookstore, Malaysia, 1173-1255H, p., 593

[5] Al Qur’an, 2:30

[6] Al Qur’an, 2:282

[7] Ibid, 2015

ROMY AGAG, petitioner vs. ALPHA FINANCING CORPORATION, respondent, GR. No. 154826, July 31, 2003

Doctrine:     The rule that a purchaser or mortgagee of land is not required to look further than what appears on the face of the title does not apply to banks and other financial institutions. These entities are required to exercise more care and prudence in dealing even with registered lands for their business is one affected with public interest. The ascertainment of the status and condition of properties offered to it must be a standard and indispensable part of its operations.

Facts:                     On March 15, 1977, petitioner Romy Agag and Teresita Vda. De Castro executed a document denominated as "Pinagtibay na Pagpapatibay" whereby the latter sold to petitioner, in consideration of the amount of P36,120.00, payable on installment basis, three parcels of land covered by Transfer Certificate of Title. On the same date, petitioner took possession of and occupied said lots after paying a down payment. He was able to pay a total of P37,295.78. Meanwhile, he introduced improvements on the subject lots consisting of fruit trees and a residential house worth more or less P500,000.00. He repeatedly demanded from De Castro the delivery to him of the title of the lots but the latter failed to do so.

On January 30, 1997, petitioner received a letter from respondent Alpha Financing Corporation requesting him to vacate the disputed lots. Respondent claimed that it is the lawful owner of the subject parcels of land occupied by petitioner, having purchased the same in a foreclosure sale after Teresita Vda. De Castro, the original owner thereof failed to pay her loan with a mortgagee bank. Thereafter, the certificates of title in the name of De Castro were cancelled, and a Certificate of Title were issued in the name of respondent. In view of petitioner’s refusal to vacate the premises, respondent filed an ejectment case with the Municipal Trial Court.

The Municipal Trial Court rendered a decision in favor of petitioner. It held that the mortgage and the foreclosure sale from which respondent allegedly derived his rights are inferior to the prior unregistered deed of absolute sale executed by De Castro, the original owner in favor of petitioner. Since De Castro was no longer the owner of the property at the time of the mortgage, respondent acquired no right from her. However, the Court of Appeals reversed the decision of the Regional Trial Court and ordered petitioner to vacate the lots in favor of respondent. It held that the latter had a better right to possess the lots because the best proof of ownership is the indefeasible and incontrovertible title registered in its name.

Issue: Whether or not the respondent has a better right to possess the disputed lots?

Held:  In the case at bar, the resolution of the issue of ownership is indispensable because respondent’s cause of action and petitioner’s defense are both grounded on ownership of the questioned lots. Respondent invokes good faith and the indefeasibility of the transfer certificates of title issued in its name, while petitioner anchors his claim on prior possession as well as on the unregistered sale in his favor of subject lots as embodied in the "Pinagtibay na Pagpapatibay".

The Municipal Trial Court did not err in sustaining the claim of petitioner that the sale of the questioned lots preceded the mortgage and foreclosure sale claimed by respondent. Petitioner had repeatedly challenged respondent to produce documentary evidence which would substantiate the mortgage and foreclosure sale, but the latter failed to produce any. Neither did respondent question the finding of the Municipal Trial Court that the sale occurred prior to the mortgage, nor did it give the name of the mortgagee bank which foreclosed and sold the lots at public auction, assuming that the said bank exists. Finally, respondent failed to show that the properties were indeed mortgaged, and that the mortgage was foreclosed and the lots sold at public action.                   

As a general rule, where there is nothing on the certificate of title to indicate any cloud or vice in the ownership of the property, or any encumbrance thereon, the purchaser is not required to explore further than what the Torrens Title indicates on its face, in quest for any hidden defect or inchoate right that may subsequently defeat his right thereto. This rule, however, applies only to innocent purchasers for value and in good faith. An innocent purchaser for value or any equivalent phrase shall be deemed, under Section 39 of Act 496 (Land Registration Act), to include an innocent lessee, mortgagee or any other encumbrancer for value. It excludes a purchaser or mortgagee who has knowledge of a defect or lack of title in the vendor, or of facts sufficient to induce a reasonably prudent man to inquire into the status of the property.

Respondent, being a financial institution, cannot claim good faith considering that neither it nor the alleged mortgagee bank was in possession of the lots prior and after the foreclosure sale. Had respondent conducted an ocular inspection of the premises, this being the standard practice in the real estate industry, it would have discovered that the land is occupied by petitioner. The failure of respondent to take such precautionary steps is considered negligence on its part and would thereby preclude the defense of good faith.

WHEREFORE, in view of all the foregoing, the instant petition is GRANTED. The decision of the Court of Appeals is REVERSED and SET ASIDE.

 

 

 

AUTOCORP GROUP, petitioner, vs. INTRA STRATA ASSURANCE CORP., respondent, GR No. 16662, June 27, 2008

 

Doctrine:     In the case of Philippine American General Insurance Co., Inc. v. Mutuc, the Court held that an agreement whereby the sureties bound themselves to be liable in case of an extension or renewal of the bond, without the necessity of executing another indemnity agreement for the purpose and without the necessity of being notified of such extension or renewal, is valid; and that there is nothing in it that militates against the law, good customs, good morals, public order or public policy.

Facts:

The petitioner Autocorp Group, secured an ordinary re-export bond, Instrata Bond No. 5770, from private respondent Intra Strata Assurance Corporation (ISAC) in favor of public respondent Bureau of Customs (BOC), in the amount of P327,040.00, to guarantee the re-export of one unit of Hyundai Excel 4-door 1.5 LS and/or to pay the taxes and duties.

The petitioner also obtained another re-export bond, Instrata Bond No. 7154, from ISAC in favor of the BOC, in the amount of P447,671.00, which was eventually increased to P707,609.00 per bond. Thereafter, petitioner executed and signed two Indemnity Agreements with identical stipulations in favor of ISAC, agreeing to act as surety of the subject bonds

The undersigned agree at all times to jointly and severally indemnify the COMPANY and keep it indemnified and hold and save it harmless from and against any and all damages, losses, costs, stamps, taxes, penalties, charges and expenses of whatsoever kind including counsel or attorney's fee.

In sum, ISAC issued the subject bonds to guarantee compliance by the petitioner with their undertaking with the BOC to re-export the imported vehicles within the given period and pay the taxes and/or duties. In turn, petitioners agreed, as surety, to indemnify ISAC for the liability the latter may incur on the said bonds.

Meanwhile, the Autocorp Group failed to re-export the items guaranteed by the bonds and/or liquidate the entries or cancel the bonds, and pay the taxes and duties pertaining to the said items despite repeated demands.

ISAC filed with the RTC on 24 October 1995 an action against petitioners to recover the sum of P1,034,649.00,... plus 25% thereof or P258,662.25 as attorney's fees.

The RTC rendered its Decision ordering petitioner to pay ISAC and/or the BOC the face value of the subject bonds in the total amount of P1,034,649.00, in which, the Court of Appeals affirmed the lower court decision with modification of Attorney’s fee.

 

Issue:           Whether or not the petitioner is jointly liable when amendments were introduced, without his consent and approval?

Held:

The subject bonds, Instrata Bonds No. 5770 and No. 7154, became due and demandable upon the failure of petitioner Autocorp Group to comply with a condition set forth in its undertaking with the BOC, specifically to re-export the imported vehicles within the period of six months... from their date of entry. Since it issued the subject bonds, ISAC then also became liable to the BOC. At this point, the Indemnity Agreements already give ISAC the right to proceed against petitioners via court action or otherwise.

The Indemnity Agreements, therefore, give ISAC the right to recover from petitioner the face value of the subject bonds plus attorney's fees at the time ISAC becomes liable on the said bonds to the BOC, regardless of whether the BOC had actually forfeited the bonds, demanded... payment thereof and/or received such payment. It must be pointed out that the Indemnity Agreements explicitly provide that petitioners shall be liable to indemnify ISAC "whether or not payment has actually been made by the ISAC" and ISAC may proceed against petitioners by... court action or otherwise "even prior to making payment to the [BOC] which may hereafter be done by ISAC.

INDEMNITY, The undersigned Autocorp Group and Rodriguez agree at all times to jointly and severally indemnify the COMPANY [ISAC] and keep it indemnified and hold and save it harmless from and against any and all damages, losses, costs, stamps, taxes, penalties, charges and expenses of whatsoever kind and nature including counsel or attorney’s fee which the COMPANY [ISAC] shall or may at any time sustain or incur in consequence of having become surety upon the bond herein above referred to…

The foregoing provision in the Indemnity Agreements clearly authorized ISAC to consent to the granting of any extension, modification, alteration and/or renewal of the subject bonds.

WHEREFORE, the Decision of the Court of Appeals which affirmed with modification the Decision of the Regional Trial Court is AFFIRMED in toto.

 

 

 

 

 

BASIC RULES OF RAMADHAN UNDER SHARI’AH LAW

What does Ramadhan mean?

The term Ramadhan was taken from its root word “ramad”, it is an Arabic term, which means “be burnt or scorched”. Technically, Ramadhan refers to (29) Twenty-Nine or (30) Thirty days of fasting by which, it is attributed to the burning of sins, or forgiveness of all sins upon perseverance and repentance to Allah. 

Ramadhan is the 9^th month of Hijri Calendar, while fasting during this month is called Sawm.  

 Is Sawm or fasting during Ramadhan mandatory?

Under the law (Surah Al Baqara: 183), Fasting was prescribed upon all Muslims. “O believers, fasting is prescribed for you, as it was prescribed those before you…” Hence, fasting during the month of Ramadhan is wajib; it means obligatory.

 Who is required to observe Sawm or fasting?

·       All competent Muslims of either gender, male or female;

·       Children upon reaching at the age of puberty;

·       Insane person upon recovery of his sound mind.

 Is there an exception to not observe fasting?

Under the law, (Surah Al Baqara: 185), the principle of Rukhsa as an exception to the rule may be applied. A Rukhsa principle is when the Lawgiver has enjoined His servant, He corollary grants the facility of bringing easiness out of difficulties, “Allah intends for you ease and does not intend for you hardship…”

 Exception to the exception

Under the law, the applicability of the principle of Rukhsa is valid only in times of adversities, and when it ceases to exist, the obligatory duties must be complied with. Thus, a traveler is only allowed to break his fasting while on journey, but the concessionary principle ceases upon reaching his destination, and those days he missed up by him during the month of Ramadhan must be fulfilled in any days after the month of Ramadhan, except during Fridays.  

 Who may exercise the Rukhsa Principle?

Among the recognized exceptions under the law are the following:

·       Insane;

·       Pregnant or Breastfeeding woman;

·       Menstruation;

·       Illness or sick person;

·       Travelers;

·       Elderly person;

·       Individuals who are experiencing extreme hunger or thirst that could harm his health.

 What are prohibited acts while fasting?

Under the law, among others, the prohibited acts are as follows:

·       Intentional eating or drinking of any kinds of consumable items before sunset;

·       Sexual Intercourse at daytimes;

·       Gossips, and all other forms of slander;

·       Adult talks and lewd conversation;

·       Fighting or Grudges;

·       Unnecessary and excessive arguments;

·       and others

 What is the penalty of having sexual intercourse at daytimes during Ramadhan?

Under the law, (Hadith Sahih Bukhari, No. 1835), the following are the penalties, either of these may compensate such offense:

·       Freeing a slave (Muslim slave);

·       Fasting for two consecutive months, if he does not own a slave or incapable of getting one;

·       Feeding sixty (60) indigent people.

 Is declaration of intention at evening or dawn required?

Under the law (Hadith: Mutafaqun Alayhi; Sahih Bukhari and Sahih Muslim), the declaration of Niyyah or Intention is important. “Indeed, deeds are (judged) by intentions. Every man will be rewarded only for what they intended”.

 The intention or niyyah is an action by heart. No need to utter something to that effect.

 Is sohoor or eating at dawn mandatory?

Under the law (Hadith: Mutafaqun Alayhi; Sahih Bukhari and Sahih Muslim),

The sohoor or eating before dawn is Sunnah. This is not mandatory for fasting, but the sohoor or eating before dawn, there is a blessing in it.

 What is the best time to break fasting?

Taking an Iftar (break-fast) should be immediate after sunset, or as soon as the Adhan for Maghrib was pronounced in the locality.

 

 

 

 

FIRST METRO INVESTMENT CORP., petitioner, vs. ESTE DEL SOL MOUNTAIN RESERVE, INC., et al, respondents, GR No. 141811, Nov. 15, 2001

 

Doctrine:      When a contract between two (2) parties is evidenced by a written instrument, such document is ordinarily the best evidence of the terms of the contract. Courts only need to rely on the face of written contracts to determine the intention of the parties. However, this rule is not without exception. The form of the contract is not conclusive for the law will not permit a usurious loan to hide itself behind a legal form. Parol evidence is admissible to show that a written document though legal in form was in fact a device to cover usury. If from a construction of the whole transaction it becomes apparent that there exists a corrupt intention to violate the Usury Law, the courts should and will permit no scheme, however ingenious, to becloud the crime of usury.

Facts:          

The petitioner FMIC granted respondent Este del Sol a loan of Seven Million Three Hundred Eighty-Five Thousand Five Hundred Pesos (P7,385,500.00) to finance the construction of its sports/resort complex project. Under the terms of the Loan Agreement, the proceeds of the loan were to be released on installment basis with an interest of sixteen (16%) percent per annum based on the diminishing balance.

The loan was payable in thirty-six (36) equal and consecutive monthly and Iin case of default, an acceleration clause shall apply and the amount due was made subject to a twenty (20%) percent one-time penalty on the amount due and such amount shall bear interest at the highest rate permitted by law from the date of default until full payment thereof plus liquidated damages at the rate of two (2%) percent per month compounded quarterly on the unpaid balance and accrued interests together with all the penalties, fees, expenses or charges thereon until the unpaid balance is fully paid.

However, the respondent failed to repay its obligation, it appeared to have incurred a total obligation of Twelve Million Six Hundred Seventy-Nine Thousand Six Hundred Thirty Pesos and Ninety-Eight Centavos (P12,679,630.98).

Accordingly, petitioner FMIC caused the extrajudicial foreclosure of the real estate mortgage at the public auction, petitioner FMIC was the highest bidder of the mortgaged properties for Nine Million Pesos (P9,000,000.00).  A Five Million Eight Hundred Eleven Thousand Three Hundred Sixty-Nine Pesos and Twenty-Five Centavos (P5,811,369.25) was applied to interests and penalty charges and partly against the principal, thereby leaving a balance of Six Million Eight Hundred Sixty-Three Thousand Two Hundred Ninety-Seven Pesos and Seventy-Three Centavos (P6,863,297.73). Thus, the petitioner demands for the settlement of the obligations with the alleged deficiency balance, but despite of it no avail was obtain.

The trial court rendered its decision in favor of petitioner FMIC, against defendants, ordering them jointly and severally to pay to plaintiff the unpaid balanced.

In contrast, the Appellate court reversed the challenged decision of the trial court.

 

Issue:           Whether or not the loan agreement refers to stipulation penalties, liquidated damages are excessive, iniquitous and unconscionable?

Held: After a careful and thorough review of the record including the evidence adduced, we find no reason to depart from the findings of the appellate court.

First, there is no merit to petitioner FMIC's contention that Central Bank Circular No. 905 which took effect on January 1, 1983 and removed the ceiling on interest rates for secured and unsecured loans, regardless of maturity, should be applied retroactively to a contract executed on January 31, 1978, as in the case at bar, that is, while the Usury Law was in full force and effect. It is an elementary rule of contracts that the laws, in force at the time the contract was made and entered into, govern it. More significantly, Central Bank Circular No. 905 did not repeal nor in any way amend the Usury Law but simply suspended the latter's effectivity.

Second, when a contract between two (2) parties is evidenced by a written instrument, such document is ordinarily the best evidence of the terms of the contract. Courts only need to rely on the face of written contracts to determine the intention of the parties. However, this rule is not without exception.

In this case, this Court agrees with the conclusion of the appellate court. We find the stipulated penalties, liquidated damages and attorney's fees, excessive, iniquitous and unconscionable and revolting to the conscience as they hardly allow the borrower any chance of survival in case of default.

WHEREFORE, the instant petition is hereby DENIED, and the assailed Decision of the Court of Appeals is AFFIRMED.

 

 

 

 

 

LARA'S GIFTS & DECORS, INC., petitioner vs. MIDTOWN INDUSTRIAL SALES, INC., Respondent, GR No. 225433, August 28, 2019

 

Doctrine:      When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.      

Facts:

Petitioner purchased from respondent various industrial and construction materials, this purchased was covered by a 60 days credit with a condition of 24% interest per annum that would be charged on all accounts overdue as stated in the sales invoice. Upon maturity of the credit, the petitioner paid its obligation by two checks, but checks were dishonored due to insufficient fund.

Meanwhile, the respondent sent demand letter for the settlement of the obligation, it turned no avail. Thereafter. The respondent filed a complaint for sum of Money with prayer for the attachment against the petitioner.

In his Answer, the petitioner argued that in his counterclaim that the product of the Respondent is substandard and that the finished product of the petitioner was rejected by its client because of poor quality. However, despite of the contentions, the Trial Court rendered its decision in favor of Respondent in which the CA affirmed such decision on the ground that the 24% of interest was agreed upon by the parties and that the same had been stated in the sales invoice.

Issue:           Whether or not the 24% of interest stated in the sales invoice is valid? 

Held:            In deciding this case, the Court laydown a guideline as to the payment of interest in cases of loan, forbearance of money, good and credit.

One of those guidelines is that when there is written stipulation between the parties, such rate of interest agreed upon by them shall be applied.  The legal interest as contemplated from the Civil Code be applied only in the absence of stipulation.

In this case, according to the Court, it is clear from the sales invoice which was agreed by the parties that the 24% interest per annum would be charged for all the account overdue.

Therefore, according to the court, the stipulated interest shall be applied until full payment of the obligation because that is the law between the parties.

 

In details, the court declared that:

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

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

a)    When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

b)    When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date of the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount of finally adjudged.

c)    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 annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

Paragraph 3 above failed to qualify that for loans or forbearance of money, the prevailing legal interest should only apply in the absence of stipulated interest. The stipulated interest is the law between the parties and should apply from the time of extrajudicial or judicial demand until full payment. This omission resulted in several rulings of this Court, which imposed the stipulated interest on the adjudged amount until finality of the decision BUT applied the prevailing legal interest in lieu of the stipulated interest from finality of the decision until full payment of the obligation. This is in direct contravention of the law, particularly Article 2209 of the Civil Code, which mandates that when a debtor incurs a delay in obligations to pay a sum of money, the indemnity for damages shall be the payment of the interest agreed upon. Only in the absence of a stipulated interest will the legal interest be applied.

PHILIPPINE NATIONAL BANK, petitioner, vs. ROSARIO TAJONERA, respondent, G.R. No. 195889, Sept. 24, 2014

 Doctrine:      Failure to perform a reciprocal obligation is a Breach of Contract.  Under the law, a loan requires the delivery of money or any other consumable object by one party to another, on the condition that the same amount or quality shall be paid. Loan is a reciprocal obligation, as it arises from the same cause where one party is the creditor, and the other is the debtor. The obligation of one party in a reciprocal obligation is dependent upon the obligation of the other, and the performance should ideally be simultaneous. This means that in a loan, the creditor should release the full loan amount and the debtor repays it when it becomes due and demandable.

Facts:

Through Rosario, the Vice President of Eduarosa Realty Development, Inc. (ERDI) obtained loans from Philippine National Bank (PNB) and entered into several credit agreements to finance the completion of the construction of their 20-storey Eduarosa Tower Condominium.

Pursuant to the Credit Agreement, ERDI obtained from PNB a loan in the amount of ₱60,000,000.00 plus ₱5,000,000.00 Domestic Bills. To secure this initial loan, ERDI mortgaged in favor of PNB its Paranaque properties together with the 20-storey condominium building to be erected thereon.

Subsequently, ERDI and PNB entered into The First Amendment wherein the former obtained an additional loan of ₱40,000,000.00. As security for the additional loan, the ERDI’s Greenhills property was mortgaged as evidenced by the Supplement to Mortgage.

Thereafter, the parties made Second Amendment was likewise entered into by the parties for the purpose of extending the repayment dates of the loan and the additional loan. Afterward, A Third Amendment was entered into by the parties wherein the respondents were granted a second additional loan of ₱55,000,000.00.

Nevertheless, ERDI failed to settle its obligation. As a consequence, PNB filed an application for foreclosure of the Greenhills property. As the highest bidder, PNB was issued the Certificate of Sale. Upon ERDI’s failure to redeem the property, PNB consolidated its title and caused the cancellation of the title in the name of the respondent. A new title was issued in the name of PNB.

This prompted the respondents to file a complaint against PNB for annulment of sale, cancellation of title, cancellation of mortgage, and damages before the RTC.

The RTC rendered its judgment in favor of the respondents on the ground that PNB did not release the remaining balance of the approved loan under the Third Amendment.   PNB appealed to CA, but CA affirms TRC’s decision with modification.

Issue:           Whether or not the CA erred in annulling the mortgage contract constituted over the Greenhills property of the respondents?

Held:            PNB insists that there was no breach of its contractual obligation when it did not release the remaining balance of the approved loan to the respondents considering that the latter had no history of any payment either on interest or principal of the loan.

The agreement between PNB and the respondents was one of a loan. Under the law, a loan requires the delivery of money or any other consumable object by one party to another who acquires ownership thereof, on the condition that the same amount or quality shall be paid. Loan is a reciprocal obligation, as it arises from the same cause where one party is the creditor, and the other the debtor. The obligation of one party in a reciprocal obligation is dependent upon the obligation of the other, and the performance should ideally be simultaneous. This means that in a loan, the creditor should release the full loan amount and the debtor repays it when it becomes due and demandable.

PNB, not having released the balance of the last loan proceeds in accordance with the Third Amendment had no right to demand from the respondent compliance with their own obligation under the loan. Indeed, if a party in a reciprocal contract like a loan does not perform its obligation, the other party cannot be obliged to perform what is expected of them while the other's obligation remains unfulfilled.

In view of the foregoing, the court a quo aptly ruled that the refusal of PNB to release portion of the additional loan granted under the Third Amendment to Credit Transaction is not justified. In this jurisdiction, breach of contract is defined as:

It is the failure without legal reason to comply with the terms of a contract. It is also defined as the failure, without legal excuse, to perform any promise which forms the whole or part of the contract.

Undoubtedly, PNB breached its contractual obligation when it failed to release to Appellees the remaining balance of the approved loan.

WHEREFORE, the petition is DENIED. The Decision and Resolution of the Court of Appeals are AFFIRMED.