We see loan transactions left and right daily, ranging from a small, pay-day loan for the average family, to project financing for a medium company or a small start-up, and to bigger loan arrangements for large corporations. In reality, there are common denominators for every loan transaction regardless of the amount involved. They are all governed by the parties' respective agreements. It is likewise basic that the law is deemed written into every contract, hence the provisions of positive law which regulate contracts shall limit and govern the relations between the parties.

To this end, in a case where the lender refuses to release collateral despite full payment of the loan obligation, resulting in damage to the borrower such as cancellation of its existing business arrangements, can the lender be held liable?

The Supreme Court had the opportunity to address this in the case of Premiere Development Bank vs. Court of Appeals, et. al.. (G.R. No. 159352, 14 April, 2004). In that case, private respondent Panacor had acquired an exclusive distributorship of products manufactured by Colgate Palmolive Philippines, Inc. (Colgate for short). To meet the capital requirements of the exclusive distributorship, Panacor applied for a loan of P4.1 million with Premiere Development Bank for which only P2.7 million was released, falling below the P4.1 million credit line which was previously approved. Panacor negotiated a loan with Iba Finance Corporation (Iba Finance) to pay out the loan from Premiere Bank to be released after the cancellation by Premiere of the real estate mortgage for the loan to Panacor.

The Supreme Court found that in a letter of agreement Iba-Finance informed Premiere Bank of its approval of Panacor's loan application in the amount of P10 million to be secured by a real estate mortgage over a parcel of land covered. It was agreed that Premiere Bank shall entrust to Iba-Finance the owner's duplicate copy of the transfer certificate of title for the land covered by the mortgage, after which Iba-Finance shall pay off Arizona's outstanding indebtedness. Accordingly, Iba-Finance remitted P6,235,754.79 to Premiere Bank on the understanding that said the amount represented the full payment of Arizona's loan obligations. Still, Premiere Bank did not deliver the mortgage document.

Hence, Iba-Finance was unable to release the remaining P2.5 million loan to Panacor, which finally led to the revocation of its distributorship agreement with Colgate.

The Supreme Court found that the conduct of Premiere Bank caused damage to Panacor and Iba-Finance. The unjustified refusal by Premiere Bank to release the mortgage document prompted Iba-Finance to withhold the release of the P2.5 million earmarked for Panacor, and this eventually lead to the termination of the distributorship agreement. It also found that Premiere Bank deviated from the terms of the credit line agreement when it unilaterally and arbitrarily downgraded the credit line of Panacor from P4.1 million to P2.7 million. In effect, the downgrading and deviation from the Credit Line Agreement prompted Panacor to seek a pay-out loan from Iba Finance.

Having entered into a well-defined contractual relationship, it is imperative that the parties should honor and adhere to their respective rights and obligations thereunder. Law and jurisprudence dictate that obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.

Nevertheless, the Supreme Court could not affirm the grant of actual damages in the amount of P4,520,000 for lack of receipts to substantiate the same. In determining actual damages, the court must depend on competent proof and the best evidence obtainable regarding the actual amount of loss. It cannot depend on mere testimony and private writing on the capital expenditures and losses from the failed operation of Panacor. Instead, the Supreme Court granted the sum of P200,000 as temperate damages, which is allowed where definite proof of pecuniary loss cannot be adduced, although the court is convinced that the aggrieved party suffered some pecuniary loss.

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