Here’s a digest of the case:

G.R. No. 4015
ANGEL JAVELLANA, plaintiff-appellee, vs. JOSE LIM, ET AL., defendants-appellants.
August 24, 1908

FACTS:

On May 26, 1897, Jose Lim and Ceferino Domingo Lim (defendants-appellants) executed a document stating they received P2,686.58 from Angel Javellana (plaintiff-appellee) “as a deposit without interest,” which they promised to return jointly and severally by January 20, 1898.

When the obligation became due, the defendants begged the plaintiff for an extension, binding themselves to pay interest at 15% per annum on the amount. The plaintiff acceded. On May 15, 1902, the debtors paid P1,000 on account of the interest due.

Javellana filed a complaint seeking payment of the principal sum plus 15% interest from January 20, 1898, less the P1,000 interest payment.

The defendants acknowledged the original document but denied any agreement for an extension or for interest. They claimed the P1,000 payment was for the principal, not interest. They also filed a counterclaim, alleging they had paid a total of P5,602.16 to the plaintiff, exceeding the principal debt, and sought to recover P2,915.58 from Javellana.

The Court of First Instance of Iloilo rendered judgment in favor of Javellana for P5,714.44 and costs. The defendants appealed.

ISSUE:

1. Whether the contract entered into by the parties was a contract of deposit or a contract of loan.
2. Whether the defendants are liable for the agreed-upon interest.
3. Whether defendant Jose Lim is bound by the subsequent agreement to pay interest, despite not personally signing the document acknowledging it.

RULING:

1. The contract was a contract of loan, not a deposit. The Court held that despite the document calling it a “deposit without interest,” the subsequent actions of the defendants clearly indicated it was a loan. The defendants’ request for an extension due to their inability to return the money, their acknowledgment of losses and damages caused to the creditor for non-compliance, and their agreement to pay interest at 15% per annum, demonstrated they had used the funds for their own benefit and profit. This conduct, coupled with the creditor’s assent to the extension and interest, showed an implied, if not express, permission for the defendants to make use of the funds. Under Articles 1767 and 1768 of the Civil Code, when a depository has permission to use the thing deposited, the contract loses its character as a deposit and becomes a loan or bailment.

2. Yes, the defendants are liable for interest. The agreement to pay 15% interest from January 20, 1898, until full payment, deducting the P1,000 already paid, was valid and binding. The defendants’ counterclaim for overpayment was rejected as they failed to satisfactorily prove the alleged payments beyond the acknowledged P1,000 (which was for interest, not principal) and other payments which were proven to be for separate debts.

3. Yes, Jose Lim is bound. Although Jose Lim did not sign the document (Exhibit 2) acknowledging the interest and partial payment, it was executed by his co-debtor Ceferino Domingo Lim on behalf of both, and its authenticity was not contested. The Court found sufficient evidence that Jose Lim was aware of and authorized his co-debtor to liquidate the interest and execute the document. Furthermore, Jose Lim himself personally sought an extension for payment and consented to pay interest for the concession.

The Supreme Court affirmed the judgment of the lower court, holding the defendants jointly and severally liable for the principal sum of P2,686.58 plus 15% interest per annum from January 20, 1898, until full payment, deducting the P1,000 already paid.