EN BANC

G.R. No. 26085 August 12, 1927

SEVERINO 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 daños y perjuicios
ocasionados a la compañia 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.º de febrero
de 1913.

Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) años contados desde
el dia 1.º 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
años 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) años contados desde el dia
1.º 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) años 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 quiñones, 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 Doña 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
possession—a 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 money—the 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.

Avanceña, C. J., Street, Villamor, Romualdez and Villa-Real, JJ., concur.

 EN BANC

G.R. No. L-18208 February 14, 1922

THE 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.

Araullo, C.J., Street, Malcolm, Avanceña, Ostrand, Johns and Romualdez, JJ., concur.
 SECOND DIVISION

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. 1

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. 2

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. 3

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. 4

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. 5

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. 6

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. 7

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. 8 The appellate court, however, as aforestated, dismissed the
petition in a Decision dated 28 November 1986. 9 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.

Yap (Chairman), Melencio-Herrera and Sarmiento, JJ., concur.

Paras, J., took no part.

 EN BANC

G.R. No. L-13708 January 29, 1919

THE UNITED STATES, plaintiff-appellee,

vs.
FRANCISCO CONSTANTINO TAN QUINGCO CHUA, defendant-appellant.

C. Ledesma for appellant.

Attorney-General Paredes for appellee

MALCOLM, J.:

How a lean little debt of P100 contracted in the year 1911 grew and grew until, after the lapse of five short years,
interest had made of it the fat and respectable sum of approximately P700, is the story told by this record.

The tale opens on April 29, 1911, with one, Pedro Andres, borrowing of Francisco Constantino Tan Quingco Chua,
the instant defendant, the sum of P100, with interest of 24 cavanes of palay. In less than three months, or, to be
exact, on the 9th of July of the same year, the debt was raised to P125, with interest of 30 cavanes of palay. Two
years pass, and on June 28, 1913, it has become P226.70, secured by a pacto de retro, with the interest at 44
cavanes of palay annually. The day of reckoning came on October 17, 1915, when the debt was liquidated with the
result that Andres had an obligation of P474.20, which he promised to pay on the 25th of the same month. One year
later action was brought to recover this sum and the corresponding judgment rendered therefor. Then, on October
25, 1916, Andres and Tan Quingco Chua executed a documentary by which Andres sold to Tan Quingco Chua
under pacto de retro a certain parcel of land and a female carabao for the amount of P684.20; the period of
redemption was to be five months; Andres was to hold the land during this time as lessee and as such lessee to pay
a rent of 90 cavanes of palay, each cavan to weigh 44 kilos, in the month of February, 1917, and all charges during
the existence of the lease. Execution on the judgment of October 25, 1916, resulted in Andres paying to the
Chinaman P474, and turning over to him 98 cavanes of palay.

The outcome of these various transactions was the filing of an information by the provincial fiscal of Nueva Ecija,
charging Francisco Constantino Tan Quingco Chua with the crime of usury, predicated specially on the document of
October 25, 1916, above described. The trial court, the Honorable Vicente Nepomuceno, in a very able and fair
decision, found that the accused had been proved guilty and sentenced him to pay a fine of P225, or to suffer
subsidiary imprisonment in case of insolvency, and to pay the costs.

The taking of excessive interest for the loan of money has been regarded with abhorrence from the earliest times.
Usury, as such unlawful profits were known, was prohibited by the ancient laws of the Chinese and the Hindus, by
the Mosaic Law of the Jews, by the Koran, by the Athenians and by the Romans, and has been frowned upon by
distinguished publicists throughout all the ages. (See for a learned historical discussion of usury, the opinion of
Chancellor Kent in Dunham vs. Gould [1819], 16 Johnson 367; 8 Am. Dec., 323.) The illegality of usury is now
wholly a creature of legislation.

The Philippine statute on the subject is Act No. 2655, effective on the first day of May, 1916. It is a drastic law
following in many respects the most advanced American legislation. In the absence of expressed contract, the legal
rate of interest is made 6 per cent per annum. The maximum rate for mortgage loans is 12 per cent per annum
whether "directly or indirectly" taken or received. For loans not secured by mortgage, the maximum rate of interest is
14 per cent per annum. The whole interest paid with costs and attorney's fees can be recovered from the usurer.
The law proclaims that, "all conveyances, mortgages bonds, bills, notes, and other contracts or evidences of debt,
and all deposits of goods or other things, whereupon or whereby there shall be reserved, secured, taken, or
received, directly or indirectly, a higher rate or greater sum or value for the loan or forbearance of money, goods or
credits than is hereinbefore allowed, shall be void" (sec. 7). The law closes with punitive provisions, reading as
follows:

Without prejudice to the proper civil action, violations of this Act shall be subject to criminal prosecution and
the guilty person shall, upon conviction, be sentenced to a fine equivalent to the total interest stipulated or to
the value of the products or seed agreed upon as interest, and in case of insolvency, subsidiary
imprisonment shall be imposed: Provided, That in case of corporations, associations, societies or companies
the manager, administrator or gerente or the person who has charge of the management or administration of
the business, shall be the one to suffer the subsidiary imprisonment provided by this Act in the case of a
sentence of conviction. (Sec. 10.)

The gist of the offense of usury for this jurisdiction is in actually taking unlawful interest. A corrupt intent is likewise of
the essence of usurious transactions. "To constitute usury, within the prohibition of the law, there must be an
intention knowingly to contract for or take usurious interest; for if neither party intend it, but act bona fide and
innocently, the law will not infer a corrupt agreement. Where, indeed, the contract, upon its very face, imports usury,
as by an express reservation of more than legal interest, there is no room fro the presumption; for the intent is
apparent, res ipsa loquitur. But where the contract on its face is for legal interest only, there it must be proved that
there was some corrupt agreement, or devise or shift, to cover usury; and that it was in the full contemplation of the
parties." (United States Bank vs. Waggener [1835], 9 Pet., 378.)

Two issues present themselves, namely: 1. Did the trial court commit an error in admitting evidence relating to facts
which occurred prior to the going into effect of the Usury Law, and has this court followed in the same treacherous
path in its narration of the evidence? 2. Did the accused violate the Usury Law by the accomplishment of what
purports to be a pacto de retro, now in evidence as Exhibit B?

1. It is an elementary rule of contracts that the laws, in force at the time contract was made, enter into and govern it.
The laws on the subject existing prior to the enactment of the Usury Law would only invalidate contracts contrary to
public morals and public order. Criminal prosecution would then have been unlikely. The same idea prevails as to
usury statutes. Ordinarily, such laws are to be construed prospectively and not retrospectively. The reason is that if
the contract is legal at its inception, it cannot be rendered illegal by any subsequent legislation for this would be
tantamount to the impairment of the obligation of the contract.

From one aspect, therefore, the contention of appellant is tenable. The guilt of the accused must be proved, if at all,
because of the formulation of Exhibit B on and after the passage of the Usury Law. In another aspects, however,
appellant is wrong. The rule of evidence should be to permit the courts to look into prior occurrence, just as they
take account of other criminal acts of an accused, in order to understand the particular fact which is claimed to be a
violation of the law, and in order to ascertain the criminal intent. This is after all only applied logic, for, other wise, as
will hereafter appear, a document apparently legal on its face could not be proved to be illegal by other and separate
acts, which go to demonstrate that it is merely a shift to evade the statute of usury.

2. It is indeed a delicate line which separates the nonusurious from the usurious contract. Lord Bacon in one of his
essays concludes that two things are to be reconciled. "The one," he says, "that the tooth of usury be grinded that it
bite not too much; the other, that there be left open the means to invite moneyed men to lend for the continuing and
quickening of trade." "The statute of usury," Chancellor Kent says, "is constantly interposing its warning voice
between the creditor and the debtor, even in their most secret and dangerous negotiations, and teaches a lesson of
moderation to the one, and offers its protecting arms to the other." (Dunham vs. Gould, supra.)

Most of the ordinary contracts, when entered into in good faith, do not come within the pale of usury. Any person
owning property may sell it at such price and at such terms as to the time and mode of payment as he may see fit,
and such a sale, if bona fide, cannot be usurious however unconscionable it may be. Lord Mansfield
characteristically says: "I lay the foundation of the whole upon a man's going to borrow under colour of buying: there
the contract is usurious; but where it is a bona fide sale . . . it certainly is not." (Floyer vs. Edwards, 1 Cowp., 112,
116; 98 Eng. Reprint, 995.0 Rent charges as in the document before us, may be created or transferred without
regard to the usury laws as long as such forms of transactions are not used as mere covers for usurious loans. A
hard bargain need not necessarily be a void bargain. (See Webb on Usury, sec. 47.)

The form of the contract is not conclusive. The cardinal inquiry is, Did the parties resort to the transaction for the
purpose of disguising usury in violation of law? 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 in intent
to violate the Usury Law, the courts should and will permit no scheme, however ingenious, to becloud the crime of
usury.

Exhibit B purports to be a pacto de retro. The ninety cavanes of palay mentioned are described as rent. If, indeed,
apacto de retro, standing alone and by itself it would undoubtedly be valid, and would resulted in no evil
consequences to the parties. This court has, however, heretofore decided, with reference to so-called pacto de
retros, that parol evidence is competent and admissible in support of the allegation that the instrument in writing
purporting on its face to transfer absolute title to property, or to transfer the title with a mere right of repurchase
under specified conditions, was in truth and in fact given merely as a security for the repayment of a loan.
(Cuyugan vs. Santos [1916], 34 Phil., 100.) Likewise, the Supreme Court of Porto Rico in Monagas vs. Alberticci
([1911]), 17 Porto Rico, 684; 235 U.S., 81) has said of a written instrument which was claimed to be a conditional
sale: "the real intention of the parties at the time the written instrument was made must govern in the interpretation
given to it by the courts. This must be ascertained from the circumstances surrounding the transaction and from the
language of the document itself."

With these principles before us, we entertain little or no doubt that Exhibit B was not a true pacto de retro, but was a
sham document to cover usurious financial manipulation. This document, framed with legal precision, was a token of
a debt originally of P100, grown to be P474,20, to which in this document was added P210 as interests, to make a
total of P684.20. Then on top of this latter sum was dumped 90 cavanes of palay, denominated as rent, but which in
reality was interest valued at P225 for the use of P684.20 for five months.

In moving toward a conclusion, we have not forgotten the canon of construction which should govern penal statutes
of this character. The rule is as stated by the Supreme Court of Alabama, namely: "When operating on the contract
or the security taken, it (the statute) is not, strictly speaking, punitive in its character, and we should so construe it as
to repress the great evil the legislature had in view in its enactment. But when the punishment of the person who
has committed usury, is sought, according to the benignant principle which pervades our criminal jurisprudence, it
should be construed in all cases of doubt and uncertainty in favor of the accused." (Metcalf vs. Watkins [1834], 1
Port., 57. See generally, 39 Cyc., 876 and Webb on Usury.)

No doubt and uncertainty exists in this case. If the facts as found by the trial court are true, and we think they are,
and if the law as enunciated in this decision is correct, and we think it is, then, this surely is usury, if there ever was
usury. The money lenders did not alone pursue their calling in old Judea. The Shylocks have not merely strutted or
skulked on the Shakesperian stage. The Philippines abound with such who exact their pound of flesh — and for
these the law was intended and for these shall be enforced.

The penalty imposed being in accordance with the law, no other recourse exists but to affirm the judgement, with
costs against appellant, "without prejudice to the proper civil action." So ordered.

Arellano, C.J., Torres, Carson, Araullo, Street, Avanceña and Moir, JJ., concur.
 FIRST DIVISION

G.R. No. L-48349 December 29, 1986

FRANCISCO HERRERA, plaintiff-appellant,

vs.
PETROPHIL CORPORATION, defendant-appellee.

Paterno R. Canlas Law Offices for plaintiff-appellant.

CRUZ, J.:

This is an appeal by the plaintiff-appellant from a decision rendered by the then Court of First Instance of Rizal on a
pure question of law. 1

The judgment appealed from was rendered on the pleadings, the parties having agreed during the pretrial
conference on the factual antecedents.

The facts are as follows: On December 5, 1969, the plaintiff-appellant and ESSO Standard Eastern. Inc., (later
substituted by Petrophil Corporation) entered into a "Lease Agreement" whereby the former leased to the latter a
portion of his property for a period of twenty (20) years from said date, subject inter alia to the following conditions:

3. Rental: The LESSEE shall pay the LESSOR a rental of Pl.40 sqm. per month on 400 sqm. and are to be
expropriated later on (sic) or P560 per month and Fl.40 per sqm. per month on 1,693 sqm. or P2,370.21 per
month or a total of P2,930.20 per month 2,093 sqm. more or less, payable yearly in advance within the 1st
twenty days of each year; provided, a financial aid in the sum of P15,000 to clear the leased premises of
existing improvements thereon is paid in this manner; P10,000 upon execution of this lease and P5,000
upon delivery of leased premises free and clear of improvements thereon within 30 days from the date of
execution of this agreement. The portion on the side of the leased premises with an area of 365 sqrm. more
or less, will be occupied by LESSEE without rental during the lifetime of this lease. PROVIDED FINALLY,
that the Lessor is paid 8 years advance rental based on P2,930.70 per month discounted at 12% interest per
annum or a total net amount of P130,288.47 before registration of lease. Leased premises shall be delivered
within 30 days after 1st partial payment of financial aid. 2

On December 31, 1969, pursuant to the said contract, the defendant-appellee paid to the plaintfff-appellant advance
rentals for the first eight years, subtracting therefrom the amount of P101,010.73, the amount it computed as
constituting the interest or discount for the first eight years, in the total sum P180,288.47. On August 20, 1970, the
defendant-appellee, explaining that there had been a mistake in computation, paid to the appellant the additional
sum of P2,182.70, thereby reducing the deducted amount to only P98,828.03. 3

On October 14, 1974, the plaintiff-appellant sued the defendant-appellee for the sum of P98,828.03, with interest,
claiming this had been illegally deducted from him in violation of the Usury Law. 4 He also prayed for moral damages
and attorney's fees. In its answer, the defendant-appellee admitted the factual allegations of the complaint but
argued that the amount deducted was not usurious interest but a given to it for paying the rentals in advance for
eight years. 5 Judgment on the pleadings was rendered for the defendant. 6

Plaintiff-appellant now prays for a reversal of that judgment, insisting that the lower court erred in the computation of
the interest collected out of the rentals paid for the first eight years; that such interest was excessive and violative of
the Usury Law; and that he had neither agreed to nor accepted the defendant-appellant's computation of the total
amount to be deducted for the eight years advance rentals. 7

The thrust of the plaintiff-appellant's position is set forth in paragraph 6 of his complaint, which read:

6. The interest collected by defendant out of the rentals for the first eight years was excessive and beyond
that allowable by law, because the total interest on the said amount is only P33,755.90 at P4,219.4880 per
yearly rental; and considering that the interest should be computed excluding the first year rental because at
the time the amount of P281, 199.20 was paid it was already due under the lease contract hence no interest
should be collected from the rental for the first year, the amount of P29,536.42 only as the total interest
should have been deducted by defendant from the sum of P281,299.20.

The defendant maintains that the correct amount of the discount is P98,828.03 and that the same is not excessive
and above that allowed by law.

As its title plainly indicates, the contract between the parties is one of lease and not of loan. It is clearly denominated
a "LEASE AGREEMENT." Nowhere in the contract is there any showing that the parties intended a loan rather than
a lease. The provision for the payment of rentals in advance cannot be construed as a repayment of a loan because
there was no grant or forbearance of money as to constitute an indebtedness on the part of the lessor. On the
contrary, the defendant-appellee was discharging its obligation in advance by paying the eight years rentals, and it
was for this advance payment that it was getting a rebate or discount.

The provision for a discount is not unusual in lease contracts. As to its validity, it is settled that the parties may
establish such stipulations, clauses, terms and condition as they may want to include; and as long as such
agreements are not contrary to law, morals, good customs, public policy or public order, they shall have the force of
law between them. 8

There is no usury in this case because no money was given by the defendant-appellee to the plaintiff-appellant, nor
did it allow him to use its money already in his possession. 9 There was neither loan nor forbearance but a mere
discount which the plaintiff-appellant allowed the defendant-appellee to deduct from the total payments because
they were being made in advance for eight years. The discount was in effect a reduction of the rentals which the
lessor had the right to determine, and any reduction thereof, by any amount, would not contravene the Usury Law.

The difference between a discount and a loan or forbearance is that the former does not have to be repaid. The loan
or forbearance is subject to repayment and is therefore governed by the laws on usury. 10

To constitute usury, "there must be loan or forbearance; the loan must be of money or something circulating as
money; it must be repayable absolutely and in all events; and something must be exacted for the use of the money
in excess of and in addition to interest allowed by law." 11

It has been held that the elements of usury are (1) a loan, express or implied; (2) an understanding between the
parties that the money lent shall or may be returned; that for such loan a greater rate or interest that is allowed by
law shall be paid, or agreed to be paid, as the case may be; and (4) a corrupt intent to take more than the legal rate
for the use of money loaned. Unless these four things concur in every transaction, it is safe to affirm that no case of
usury can be declared. 12

Concerning the computation of the deductible discount, the trial court declared:

As above-quoted, the 'Lease Agreement' expressly provides that the lessee (defendant) shag pay the lessor
(plaintiff) eight (8) years in advance rentals based on P2,930.20 per month discounted at 12% interest per
annum. Thus, the total rental for one-year period is P35,162.40 (P2,930.20 multiplied by 12 months) and
that the interest therefrom is P4,219.4880 (P35,162.40 multiplied by 12%). So, therefore, the total interest
for the first eight (8) years should be only P33,755.90 (P4,129.4880 multiplied by eight (8) years and not
P98,828.03 as the defendant claimed it to be.

The afore-quoted manner of computation made by plaintiff is patently erroneous. It is most seriously
misleading. He just computed the annual discount to be at P4,129.4880 and then simply multiplied it by eight
(8) years. He did not take into consideration the naked fact that the rentals due on the eight year were paid
in advance by seven (7) years, the rentals due on the seventh year were paid in advance by six (6) years,
those due on the sixth year by five (5) years, those due on the fifth year by four (4) years, those due on the
fourth year by three (3) years, those due on the third year by two (2) years, and those due on the second
year by one (1) year, so much so that the total number of years by which the annual rental of P4,129.4880
was paid in advance is twenty-eight (28), resulting in a total amount of P118,145.44 (P4,129.48 multiplied by
28 years) as the discount. However, defendant was most fair to plaintiff. It did not simply multiply the annual
rental discount by 28 years. It computed the total discount with the principal diminishing month to month as
shown by Annex 'A' of its memorandum. This is why the total discount amount to only P 8,828.03.

The allegation of plaintiff that defendant made the computation in a compounded manner is erroneous. Also
after making its own computations and after examining closely defendant's Annex 'A' of its memorandum,
the court finds that defendant did not charge 12% discount on the rentals due for the first year so much so
that the computation conforms with the provision of the Lease Agreement to the effect that the rentals shall
be 'payable yearly in advance within the 1st 20 days of each year. '

We do not agree. The above computation appears to be too much technical mumbo-jumbo and could not have been
the intention of the parties to the transaction. Had it been so, then it should have been clearly stipulated in the
contract. Contracts should be interpreted according to their literal meaning and should not be interpreted beyond
their obvious intendment. 13

The plaintfff-appellant simply understood that for every year of advance payment there would be a deduction of 12%
and this amount would be the same for each of the eight years. There is no showing that the intricate computation
applied by the trial court was explained to him by the defendant-appellee or that he knowingly accepted it.

The lower court, following the defendant-appellee's formula, declared that the plaintiff-appellant had actually agreed
to a 12% reduction for advance rentals for all of twenty eight years. That is absurd. It is not normal for a person to
agree to a reduction corresponding to twenty eight years advance rentals when all he is receiving in advance rentals
is for only eight years.
The deduction shall be for only eight years because that was plainly what the parties intended at the time they
signed the lease agreement. "Simplistic" it may be, as the Solicitor General describes it, but that is how the lessor
understood the arrangement. In fact, the Court will reject his subsequent modification that the interest should be
limited to only seven years because the first year rental was not being paid in advance. The agreement was for
a uniform deduction for the advance rentals for each of the eight years, and neither of the parties can deviate from it
now.

On the annual rental of P35,168.40, the deducted 12% discount was P4,220.21; and for eight years, the total rental
was P281,347.20 from which was deducted the total discount of P33,761.68, leaving a difference of P247,585.52.
Subtracting from this amount, the sum of P182,471.17 already paid will leave a balance of P65,114.35 still due the
plaintiff-appellant.

The above computation is based on the more reasonable interpretation of the contract as a whole rather on the
single stipulation invoked by the respondent for the flat reduction of P130,288.47.

WHEREFORE, the decision of the trial court is hereby modified, and the defendant-appellee Petrophil Corporation is
ordered to pay plaintiff-appellant the amount of Sixty Five Thousand One Hundred Fourteen pesos and Thirty-Five
Centavos (P65,114.35), with interest at the legal rate until fully paid, plus Ten Thousand Pesos (P10,000.00) as
attorney's fees. Costs against the defendant-appellee.

SO ORDERED.

Yap (Chairman), Narvasa, Melencio-Herrera and Feliciano, JJ., concur.

 EN BANC

G.R. No. L-29292 March 13, 1929

TOMASA C. VIUDA DE PAMINTUAN, plaintiff-appellant,

vs.
JUAN TIGLAO, defendant-appellant

Jose Ma. Cavanna for plaintiff-appellant.

Alfonso Ponce Enrile for defendant-appellant.

OSTRAND, J.:

This action was instituted in the court of the justice of the peace of Mabalacat, Pampanga, by Tomasa C. Vda. de
Pamintuan, as guardian of her five minor children, bearing ther surname of Pamintuan y Centeno, for the purpose of
recovering from Juan Tiglao the possession of 2 parcels of land described in the complaint, as well as quantity of
palay and sugar, as rent, together with damages and an attorney's fee, and costs. In the said court the cause was
decided favorably to the plaintiff, whereupon the defendant appealed to the Court of First Instance. In the latter court
the defendant challenged the jurisdiction of the court and set up various counterclaims not necessary to be here
specified.

Upon the trial of the cause in the Court of First instance justice was again rendered in favor of the plaintiff for the
possession of the land in question and requiring the defendant to pay for the plaintiff, as rent for the agricultural year
1925-1926, three hundred cavans of palay (Pinilingbeltu), or in the default thereof, its equivalent in the money at the
rate of P3.75 per caravan, as well as four hundred piculs of sugar; and as rent for agricultural year 1926-1927,
another three hundred cavans of palay, or in default thereof, its equivalent value in money at the same rate per
cavan, with interest on all of said sums from April 10, 1926. From this judgment both the plaintiff and appellant
appealed: the plaintiff appealing with respect to so much of the judgement as failed to award the stipulated
attorney's fee of P1000 and stipulated interest at the rate of 15 percent per annum upon the unpaid rents; the
defendant appealing from the court's refusal to dismiss the cause of lack of jurisdiction, as well as from the failure of
the court to allow the defendant his own attorney's fee.

It appears that on March 18, 1925, one Jose v. Ramirez, as attorney-in-fact of Florentino Pamintuan, entered into a
written contract with the defendant herein, Juan Tiglao, whereby the former leased to the latter 2 parcels of land
described in the plaintiff's complaint, located in the barrio of Dolores, municipality of Mabalacat, Province of
Pampanga. The term of the lease was fixed at two agricultural years, beginning with the month of April, 1925, and
continuing to March, 1927.

In the fourth paragraph of this contract the annual rent due upon the lease was fixed at three hundred cavans of
palay and four hundred piculs of sugar, of defined quality, and deliverable on or before the last day of March,
marking the end of two respective years covered by the lease. The rent for the first year not having been paid on or
before March 31, 1926, nor thereafter, this action was instituted on September 10, 1926, after proper demand made,
for the purposes indicated in the first paragraph of this opinion.

Logically speaking, the first question that presents itself upon this record is whether the court of justice of the peace
has jurisdiction to entertain an action of the detainer, at the instance of the landlord, upon failure of the tenant to pay
rent at the time and manner stipulated; and consequently whether this action, which was instituted prior to the
termination of the full period fixed by the lease, can be considered premature. Upon this point, it may be recalled as
rudimentary in the law governing leases of rural and urban property, that it is the duty of the lessee to pay the price
of the lease in the manner agreed upon (art. 1555, Civ. Code). Furthermore, the failure on the part of the lessee to
comply with this obligation supplies a ground for rescission of the contract and recovery of damages by the lessor
(art. 1556, Civ. Code). Again, in section 80 of the Code of Civil Procedure, it is in effect, among other things,
declared that any landlord against whom the possession of any land is unlawfully withheld after the determination of
the right to hold possession shall, at any time with one year after the commencement of such unlawful withholding of
possession, be entitled, as against the person so depriving him of possession, to restitution of the land, together
with the damages and costs. From these provisions it is clear that upon non-payment of rent by the lessee, the
lessor may elect to treat the contract as rescinded and thereby determine the right of the lessee to continue in
possession; and this right to recover possession may be enforced in an action of unlawful detainer. It is not
necessary, in such situation, that an independent action for the recission of the lease should first be instituted, in the
Court of First Instance, for the purpose of putting an end to the right of the tenant to remain in possession under the
lease. Indeed, the proviso to the section of the Code of Civil Procedure last above cited, gives express recognition
to the right of the landlord to recover possession in an ordinary action of detainer, for non-payment of rent by the
lessee, the condition being that non-payment of the rent must have continued for the period of at least three days
after demand duly made.

It appears from the record that after this action was begun, and before the case was decided, the defendant
voluntarily surrendered possession of the land to the plaintiff. Upon this it is contended by the attorney for the
defendant that the court of the justice of the peace — and consequently the Court of First Instance — lost
jurisdiction to entertain the action. This contention is of course untenable. The jurisdiction of the court having once
attached, that jurisdiction continues until the complete remedy is granted. The defendant-appellant further contends
that inasmuch as he set up a counterclaim for damages in the amount of P6,000, the jurisdiction of the court of
justice of the peace over the main action was destroyed. But this proposition also is untenable.

What has been said disposes of the main points raised in the appeal of the defendant. With respect to the plaintiff's
appeal, we note, first, a provision in the contract of lease to the effect that if the stipulated rent should not be paid at
the times stated, the lessee must indemnify the lessor in an additional amount equivalent to 15 per centum annually,
or 1.25 per cent of each month of delay, to be calculated upon the highest quotation registered in the market, for the
commodity which should have been paid, within the sixty days following the due date of such rent. The trial court
refused to give effect to this stipulation on the ground that, in effect, it was a stipulation for the payment of usurious
interest. In this connection it will be recalled that at that time the contract in question was made, the highest rate that
could be legally collected upon any unsecured loan or forebearance of money, goods, or credits, was 14 per centum
per annum. In view of this provision, we are of the opinion that the trial court committed no error in refusing to allow
the interest thus stipulated for. In dealing with situations of this kind it is the duty of the court to look through the form
and into the substance of the transaction, and we are of the opinion that this stipulation really contemplated interest,
as interest, and that the stipulation did not contemplate what may be called liquidated damages, as contended by
the plaintiff-appellant.

The second fault involved in the plaintiff's appeal has reference to the refusal of the trial court to allow an attorney's
fee. In paragraph 11 of the contract, it is stipulated that in case of litigation for non-compliance with the lease, the
lessee shall pay to the lessor the sum of P1000 for his attorney's fee and other expenses. The justice of the peace,
before whom the case was brought, refused to take cognizance of this item on the ground that the sum exceeded
the amount over which he could take jurisdiction. Upon appeal, the Court of First Instance held that as it was only
exercising its appellate jurisdiction, it could not take cognizance of matters beyond the jurisdiction of the justice of
the peace court.

In our opinion, the views of the two lower courts are correct. A justice of the peace court is of limited jurisdiction, and
the limits are fully and clearly defined in the statutes. This is an action for forcible entry and detainer and, as such,
can only involve " the restitution of the land, building, and premises possession of which is unlawfully withheld,
together with damages and costs" (see sec 80, Code of Civil Procedure). Damages do not include attorney's fees;
whatever doubt there may be on that point should be dispelled by section 84 of the same code, which reads as
follows:

If, upon trial, the court shall find that the complainant is not true, it shall enter judgement against the plaintiff
for costs. If it finds the complaint to be true, it shall render judgement against the defendant in favor of the
plaintiff for restitution of the premises, and cost of suit, and for all arrears of rent, or a reasonable
compensation for the use and occupation of the premises. (Emphasis supplied.)

The costs referred to are fixed by section 491 of the code and do not include attorney's fees.

In conclusion we note that the defendant supposes that he is entitled to recover his own attorney's fee under section
7 of the Usury law (Act no. 2655), in view of the usurious character of the stipulation for the payment of 15 per cent
interest to the lessor for the payment of overdue rents. This suggestion is untenable, since the right to the attorney's
fee under the section referred to attaches only when usurious interest has in fact been paid. The circumstance that
usurious interest is stipulated for does not entitle the borrower to an attorney's fee in an action declaring the
stipulation usurious.

The judgement appealed from is in accordance with the law and the facts and is affirmed without costs. So ordered.

Johnson, Malcolm, Johns, Romualdez, and Villa-Real, JJ., concur.

Separate Opinions

STREET, J., dissenting in part:

Though concurring in the main, I am unable to subscribe to so much of this decision as fails to concede to the
plaintiff a reasonable allowance, within the limits of one thousand pesos, for attorney's fees and other expenses.
The lease contains a special stipulation to the effect that in case litigation shall result from non-compliance with the
contract upon part of the lessee, the latter will pay the sum of one thousand pesos for attorney's fees and other
expenses. stipulations of this kind have heretofore been uniformly respected by this court, though it does not hold
itself bound to allow the whole amount stipulated for. The justice of the peace and the Judge of the First Instance, in
denying this fee, proceeded in the theory that the one thousand pesos mentioned in the stipulation was in excess of
the maximum amount over which the court of a justice of the peace has jurisdiction, and for this reason they
disallowed any fee. The reasoning contained in the opinion written by Justice Ostrand for this court denies the right
of the litigant to recover any attorney's fee at all, regardless of the amount stipulated for. In this view no recovery
could ever be had of an attorney's fee, though expressly stipulated for, in an action of unlawful detainer. I consider
both points of view to be incorrect.

It is to be admitted of course that when an attorney's fee is not expressly stipulated for, it cannot be allowed as
costs, expenses, disbursements, or as damages, but where there is a stipulation to pay a certain amount as
attorney's fee in case litigation results from breach of contract, a reasonable fee can be allowed, not in excess of the
amount agreed upon; and of course it must be allowed in the character of damages. In the innumerable instances
where stipulations of this kind have been enforced, the liability arise from breach of the contract, and there is no
other conception than damages under which it can be imagined that the fee is allowable.

The jurisdiction of the court of justice of the peace in civil actions is defined in section 68 of Act No. 136, where it is
in substance declared among other things that the court of justice of the peace shall have original jurisdiction in
forcible entry and detainable proceedings, whether the subject of litigation is or is not capable of pecuniary
estimation. Under this general provision the court of a justice of the peace, having jurisdiction to the determine the
right of possession, may award damages in any amount in connection with the determination of the right of
possession. And this power is not restricted by anything contained in section 84 in the Code of Civil Procedure. The
evident purpose of that provision is to describe the ordinary incidents of the liability of the defendant with respect to
the unlawful detention. No attempt is there made to give any exhaustive statement of all the relief procurable in such
an action; while section 80 expressly provides for the award of damages.

In the case before us the rights of the litigant parties were defined in the contract of lease, and the right of the lessor
to recover the possession of the premises had its origin in a breach of this contract by the lessee. Moreover, the
right of the plaintiff to recover a reasonable attorney's fee under the stipulation mentioned arose from the institution
of litigation as a result of the same breach of the contract on the part of the defendant; and inasmuch as the right to
a fee is an inseparable incident from the plaintiff's right to possession, he is entitled to recover a fee as a part of a
damage resulting from the breach.

It is a recognized rule that, generally speaking, liability under a contract is not divisible and, if the plaintiff cannot
recover the fee in the action that he is forced to bring to recover possession, he cannot recover it in any court.
Necessarily the result of the present decision is to make an outlaw of a stipulation for attorney's fee in the contract of
lease, in all cases where the plaintiff finds it necessary to have recourse to a court of the justice of the peace to
recover the possession of the leased of the premises. I cannot see either the justice or the propriety of putting such
a stipulation under the ban.
 EN BANC

G.R. No. L-13708 January 29, 1919

THE UNITED STATES, Plaintiff-Appellee, vs. FRANCISCO CONSTANTINO TAN QUINGCO

CHUA, Defendant-Appellant.

C. Ledesma for appellant.

Attorney-General Paredes for appellee

MALCOLM, J.:

How a lean little debt of P100 contracted in the year 1911 grew and grew until, after the lapse of five
short years, interest had made of it the fat and respectable sum of approximately P700, is the story told
by this record.chanroblesvirtualawlibrary chanrobles virtual law library

The tale opens on April 29, 1911, with one, Pedro Andres, borrowing of Francisco Constantino Tan Quingco
Chua, the instant defendant, the sum of P100, with interest of 24 cavanes of palay. In less than three
months, or, to be exact, on the 9th of July of the same year, the debt was raised to P125, with interest of
30 cavanes of palay. Two years pass, and on June 28, 1913, it has become P226.70, secured by a pacto
de retro, with the interest at 44 cavanes of palay annually. The day of reckoning came on October 17,
1915, when the debt was liquidated with the result that Andres had an obligation of P474.20, which he
promised to pay on the 25th of the same month. One year later action was brought to recover this sum
and the corresponding judgment rendered therefor. Then, on October 25, 1916, Andres and Tan Quingco
Chua executed a documentary by which Andres sold to Tan Quingco Chua under pacto de retro a certain
parcel of land and a female carabao for the amount of P684.20; the period of redemption was to be five
months; Andres was to hold the land during this time as lessee and as such lessee to pay a rent of 90
cavanes of palay, each cavan to weigh 44 kilos, in the month of February, 1917, and all charges during
the existence of the lease. Execution on the judgment of October 25, 1916, resulted in Andres paying to
the Chinaman P474, and turning over to him 98 cavanes of palay.chanroblesvirtualawlibrary chanrobles
virtual law library

The outcome of these various transactions was the filing of an information by the provincial fiscal of Nueva
Ecija, charging Francisco Constantino Tan Quingco Chua with the crime of usury, predicated specially on
the document of October 25, 1916, above described. The trial court, the Honorable Vicente Nepomuceno,
in a very able and fair decision, found that the accused had been proved guilty and sentenced him to pay
a fine of P225, or to suffer subsidiary imprisonment in case of insolvency, and to pay the
costs.chanroblesvirtualawlibrary chanrobles virtual law library

The taking of excessive interest for the loan of money has been regarded with abhorrence from the
earliest times. Usury, as such unlawful profits were known, was prohibited by the ancient laws of the
Chinese and the Hindus, by the Mosaic Law of the Jews, by the Koran, by the Athenians and by the
Romans, and has been frowned upon by distinguished publicists throughout all the ages. (See for a
learned historical discussion of usury, the opinion of Chancellor Kent in Dunham vs. Gould [1819], 16
Johnson 367; 8 Am. Dec., 323.) The illegality of usury is now wholly a creature of
legislation.chanroblesvirtualawlibrary chanrobles virtual law library

The Philippine statute on the subject is Act No. 2655, effective on the first day of May, 1916. It is a drastic
law following in many respects the most advanced American legislation. In the absence of expressed
contract, the legal rate of interest is made 6 per cent per annum. The maximum rate for mortgage loans is
12 per cent per annum whether "directly or indirectly" taken or received. For loans not secured by
mortgage, the maximum rate of interest is 14 per cent per annum. The whole interest paid with costs and
attorney's fees can be recovered from the usurer. The law proclaims that, "all conveyances, mortgages
bonds, bills, notes, and other contracts or evidences of debt, and all deposits of goods or other things,
whereupon or whereby there shall be reserved, secured, taken, or received, directly or indirectly, a higher
rate or greater sum or value for the loan or forbearance of money, goods or credits than is hereinbefore
allowed, shall be void" (sec. 7). The law closes with punitive provisions, reading as follows:

Without prejudice to the proper civil action, violations of this Act shall be subject to criminal prosecution
and the guilty person shall, upon conviction, be sentenced to a fine equivalent to the total interest
stipulated or to the value of the products or seed agreed upon as interest, and in case of insolvency,
subsidiary imprisonment shall be imposed: Provided, That in case of corporations, associations, societies
or companies the manager, administrator or gerente or the person who has charge of the management or
administration of the business, shall be the one to suffer the subsidiary imprisonment provided by this Act
in the case of a sentence of conviction. (Sec. 10.)

The gist of the offense of usury for this jurisdiction is in actually taking unlawful interest. A corrupt intent
is likewise of the essence of usurious transactions. "To constitute usury, within the prohibition of the law,
there must be an intention knowingly to contract for or take usurious interest; for if neither party intend
it, but act bona fide and innocently, the law will not infer a corrupt agreement. Where, indeed, the
contract, upon its very face, imports usury, as by an express reservation of more than legal interest, there
is no room fro the presumption; for the intent is apparent,res ipsa loquitur. But where the contract on its
face is for legal interest only, there it must be proved that there was some corrupt agreement, or devise
or shift, to cover usury; and that it was in the full contemplation of the parties." (United States
Bank vs. Waggener [1835], 9 Pet., 378.)chanrobles virtual law library

Two issues present themselves, namely: 1. Did the trial court commit an error in admitting evidence
relating to facts which occurred prior to the going into effect of the Usury Law, and has this court followed
in the same treacherous path in its narration of the evidence? 2. Did the accused violate the Usury Law by
the accomplishment of what purports to be a pacto de retro, now in evidence as Exhibit B?chanrobles
virtual law library

1. It is an elementary rule of contracts that the laws, in force at the time contract was made, enter into
and govern it. The laws on the subject existing prior to the enactment of the Usury Law would only
invalidate contracts contrary to public morals and public order. Criminal prosecution would then have been
unlikely. The same idea prevails as to usury statutes. Ordinarily, such laws are to be construed
prospectively and not retrospectively. The reason is that if the contract is legal at its inception, it cannot
be rendered illegal by any subsequent legislation for this would be tantamount to the impairment of the
obligation of the contract.chanroblesvirtualawlibrary chanrobles virtual law library

From one aspect, therefore, the contention of appellant is tenable. The guilt of the accused must be
proved, if at all, because of the formulation of Exhibit B on and after the passage of the Usury Law. In
another aspects, however, appellant is wrong. The rule of evidence should be to permit the courts to look
into prior occurrence, just as they take account of other criminal acts of an accused, in order to
understand the particular fact which is claimed to be a violation of the law, and in order to ascertain the
criminal intent. This is after all only applied logic, for, other wise, as will hereafter appear, a document
apparently legal on its face could not be proved to be illegal by other and separate acts, which go to
demonstrate that it is merely a shift to evade the statute of usury.chanroblesvirtualawlibrary chanrobles
virtual law library

2. It is indeed a delicate line which separates the nonusurious from the usurious contract. Lord Bacon in
one of his essays concludes that two things are to be reconciled. "The one," he says, "that the tooth of
usury be grinded that it bite not too much; the other, that there be left open the means to invite moneyed
men to lend for the continuing and quickening of trade." "The statute of usury," Chancellor Kent says, "is
constantly interposing its warning voice between the creditor and the debtor, even in their most secret
and dangerous negotiations, and teaches a lesson of moderation to the one, and offers its protecting arms
to the other." (Dunham vs. Gould, supra.)chanrobles virtual law library

Most of the ordinary contracts, when entered into in good faith, do not come within the pale of usury. Any
person owning property may sell it at such price and at such terms as to the time and mode of payment
as he may see fit, and such a sale, if bona fide, cannot be usurious however unconscionable it may be.
Lord Mansfield characteristically says: "I lay the foundation of the whole upon a man's going to borrow
under colour of buying: there the contract is usurious; but where it is a bona fide sale . . . it certainly is
not." (Floyer vs. Edwards, 1 Cowp., 112, 116; 98 Eng. Reprint, 995.0 Rent charges as in the document
before us, may be created or transferred without regard to the usury laws as long as such forms of
transactions are not used as mere covers for usurious loans. A hard bargain need not necessarily be a void
bargain. (See Webb on Usury, sec. 47.)chanrobles virtual law library

The form of the contract is not conclusive. The cardinal inquiry is, Did the parties resort to the transaction
for the purpose of disguising usury in violation of law? 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 in intent to violate the Usury Law, the courts should and will permit no scheme,
however ingenious, to becloud the crime of usury.chanroblesvirtualawlibrary chanrobles virtual law library

Exhibit B purports to be a pacto de retro. The ninety cavanes of palay mentioned are described as rent. If,
indeed, a pacto de retro, standing alone and by itself it would undoubtedly be valid, and would resulted in
no evil consequences to the parties. This court has, however, heretofore decided, with reference to so-
called pacto de retros, that parol evidence is competent and admissible in support of the allegation that
the instrument in writing purporting on its face to transfer absolute title to property, or to transfer the title
with a mere right of repurchase under specified conditions, was in truth and in fact given merely as a
security for the repayment of a loan. (Cuyugan vs. Santos [1916], 34 Phil., 100.) Likewise, the Supreme
Court of Porto Rico in Monagas vs. Alberticci ([1911]), 17 Porto Rico, 684; 235 U.S., 81) has said of a
written instrument which was claimed to be a conditional sale: "the real intention of the parties at the
time the written instrument was made must govern in the interpretation given to it by the courts. This
must be ascertained from the circumstances surrounding the transaction and from the language of the
document itself."chanrobles virtual law library
With these principles before us, we entertain little or no doubt that Exhibit B was not a true pacto de retro,
but was a sham document to cover usurious financial manipulation. This document, framed with legal
precision, was a token of a debt originally of P100, grown to be P474,20, to which in this document was
added P210 as interests, to make a total of P684.20. Then on top of this latter sum was dumped 90
cavanes of palay, denominated as rent, but which in reality was interest valued at P225 for the use of
P684.20 for five months.chanroblesvirtualawlibrary chanrobles virtual law library

In moving toward a conclusion, we have not forgotten the canon of construction which should govern
penal statutes of this character. The rule is as stated by the Supreme Court of Alabama, namely: "When
operating on the contract or the security taken, it (the statute) is not, strictly speaking, punitive in its
character, and we should so construe it as to repress the great evil the legislature had in view in its
enactment. But when the punishment of the person who has committed usury, is sought, according to the
benignant principle which pervades our criminal jurisprudence, it should be construed in all cases of doubt
and uncertainty in favor of the accused." (Metcalf vs. Watkins [1834], 1 Port., 57. See generally, 39 Cyc.,
876 and Webb on Usury.)chanrobles virtual law library

No doubt and uncertainty exists in this case. If the facts as found by the trial court are true, and we think
they are, and if the law as enunciated in this decision is correct, and we think it is, then, this surely is
usury, if there ever was usury. The money lenders did not alone pursue their calling in old Judea. The
Shylocks have not merely strutted or skulked on the Shakesperian stage. The Philippines abound with
such who exact their pound of flesh - and for these the law was intended and for these shall be
enforced.chanroblesvirtualawlibrary chanrobles virtual law library

The penalty imposed being in accordance with the law, no other recourse exists but to affirm the
judgement, with costs against appellant, "without prejudice to the proper civil action." So
ordered.chanroblesvirtualawlibrary chanrobles virtual law library

Arellano, C.J., Torres, Carson, Araullo, Street, Avanceña and Moir, JJ.,concur.