EASTERN SHIPPING LINES VS CA (RESTATED
Allied Brokerage alleged that
IN NACAR VS GALLERY FRAMES)
FACTS
This is an action against defendants shipping company
(Eastern), arrastre operator (Metroport) and broker-
forwarder (Allied) for damages sustained by a shipment
while in defendants' custody, filed by the insurer-
subrogee who paid the consignee the value of such
losses/damages.
Two fiber drums of riboflavin were shipped from
Yokohama, Japan for delivery vessel "SS EASTERN
COMET" owned by defendant Eastern Shipping Lines
under Bill of Lading
No. YMA-8 (Exh. B). The shipment was insured under
plaintiff's Marine Insurance Policy for P36,382,466.38.
Upon arrival of the shipment in Manila, it was discharged
unto the custody of defendant Metro Port Service, Inc.
The latter excepted to one drum, said to be in bad order,
which damage was unknown to plaintiff.
Later defendant Allied Brokerage Corporation received
the shipment from defendant Metro Port Service, Inc., one
drum opened and without seal (per "Request for Bad
Order Survey." Exh. D).
Subsequently defendant Allied Brokerage Corporation
made deliveries of the shipment to the consignee's
warehouse. The latter excepted to one drum which
contained spillages, while the rest of the contents was
adulterated/fake (per "Bad Order Waybill").
Plaintiff contended that due to the losses/damage
sustained by said drum, the consignee suffered losses
totaling P19,032.95, due to the fault and negligence of
defendants. Claims were presented against defendants
who failed and refused to pay the same
As a consequence of the losses sustained, plaintiff was
compelled to pay the consignee P19,032.95 under the
aforestated marine insurance policy, so that it became
subrogated to all the rights of action of said consignee
against defendants
Defense: Eastern Shipping alleged that the shipment was
discharged in good order from the vessel unto the custody
of Metro Port Service so that any damage/losses incurred
after the shipment was incurred after the shipment was
turned over to the latter, is no longer its liability.
Metroport averred that although subject shipment was
discharged unto its custody, portion of the same was
already in bad order.
plaintiff has no cause of action against it, not having
negligent or at fault for the shipment was already in
damage and bad order condition when received by it, but
nonetheless, it still exercised extra ordinary care and
diligence in the handling/delivery of the cargo to
consignee in the same condition shipment was received
RTC and CA ordered defendants to pay plaintiff, jointly
and severally. The legal interest to be paid is SIX
PERCENT (6%) on the amount due computed from the
decision, dated 03 February 1988, of the court a quo
ISSUES
(a) whether or not a claim for damage sustained on a
shipment of goods can be a solidary, or joint and several,
liability of the common carrier, the arrastre operator and
the customs broker;
(b) whether the payment of legal interest on an award for
loss or damage is to be computed from the time the
complaint is filed or from the date the decision appealed
from is rendered; and
(c) whether the applicable rate of interest, referred to
above, is twelve percent (12%) or six percent (6%)
RULING
(a) The common carrier's duty to observe the requisite
diligence in the shipment of goods lasts from the time the
articles are surrendered to or unconditionally placed in the
possession of, and received by, the carrier for
transportation until delivered to, or until the lapse of a
reasonable time for their acceptance by, the person
entitled to receive them. When the goods shipped either
are lost or arrive in damaged condition, a presumption
arises against the carrier of its failure to observe that
diligence, and there need not be an express finding of
negligence to hold it liable.
In Fireman's Fund Insurance vs. Metro Port Services, we
have explained, in holding the carrier and the arrastre
operator liable in solidum, thus:
The legal relationship between the consignee and the
arrastre operator is akin to that of a depositor and
warehouseman. The relationship between the consignee
and the common carrier is similar to that of the consignee
and the arrastre operator. Since it is the duty of the
1
ARRASTRE to take good care of the goods that are in its
custody and to deliver them in good condition to the
consignee, such responsibility also devolves upon the
CARRIER. Both the ARRASTRE and the CARRIER are
therefore charged with the obligation to deliver the goods
in good condition to the consignee.
We do not, of course, imply by the above pronouncement
that the arrastre operator and the customs broker are
themselves always and necessarily liable solidarily with
the carrier, or vice-versa, nor that attendant facts in a
given case may not vary the rule. The instant petition has
been brought solely by Eastern Shipping Lines, which,
being the carrier and not having been able to rebut the
presumption of fault, is, in any event, to be held liable in
this particular case. A factual finding of both the court a
quo and the appellate court, we take note, is that "there is
sufficient evidence that the shipment sustained damage
while in the successive possession of appellants" (the
herein petitioner among them). Accordingly, the liability
imposed on Eastern Shipping Lines, Inc., the sole
petitioner in this case, is inevitable regardless of whether
there are others solidarily liable with it.
(b and c) SC held a TWELVE PERCENT (12%) interest
shall be imposed on such amount upon finality of this
decision until the payment thereof,
First view: the basic issue focuses on the application of
either the 6% (Civil Code) or 12% (under the Central
Bank Circular) interest per annum. It is easily discernible
in these cases that there has been a consistent holding that
the Central Bank Circular imposing the 12% interest per
annum applies only to loans or forbearance16 of money,
goods or credits, as well as to judgments involving such
loan or forbearance of money, goods or credits, and that
the 6% interest under the Civil Code governs when the
transaction involves the payment of indemnities in the
concept of damage arising from the breach or a delay in
the performance of obligations in general. Second view:
the pronounced rule on the application of the 6% or 12%
interest per annum is not altered,17depending on whether
or not the amount involved is a loan or forbearance, on
the one hand, or one of indemnity for damage, on the other
hand.
Unlike, however, the "first view" which remained
consistent in holding that the running of the legal interest
should be from the time of the filing of the complaint until
fully paid, the "second view" varied on the
commencement of the running of the legal interest.
Rules
I. When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts18 is
breached, the contravenor can be held liable for
damages.19 The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the
measure of recoverable damages.20
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have
been stipulated in writing.21 Furthermore, the interest due
shall itself earn legal interest from the time it is judicially
demanded.22 In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at
the discretion of the court24 at the rate of 6% per
annum.25 No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the
demand can be established with reasonable
certainty.26 Accordingly, where the demand is established
with reasonable certainty, the interest shall begin to run
from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time
the demand is made, the interest shall begin to run only
from the date the judgment of the court is made (at which
time the quantification of damages may be deemed to
have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the
amount finally adjudged.
3. When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of
credit.
2
RESTATED IN NACAR VS GALLERY FRAMES
FACTS: Dario Nacar filed a labor case against Gallery
Frames and its owner Felipe Bordey, Jr. Nacar alleged
that he was dismissed without cause by Gallery Frames
on January 24, 1997. On October 15, 1998, the Labor
Arbiter (LA) found Gallery Frames guilty of illegal
dismissal hence the Arbiter awarded Nacar P158,919.92
in damages consisting of backwages and separation pay.
Gallery Frames appealed all the way to the Supreme
Court. SC affirmed the decision of the Labor Arbiter and
the decision became final on May 27, 2002.
After the finality of the SC decision, Nacar filed a motion
before the LA for recomputation as he alleged that his
backwages should be computed from the time of his
illegal dismissal (January 24, 1997) until the finality of
the SC decision (May 27, 2002) with interest. The LA
denied the motion as he ruled that the reckoning point of
the computation should only be from the time Nacar was
illegally dismissed (January 24, 1997) until the decision
of the LA (October 15, 1998). The LA reasoned that the
said date should be the reckoning point because Nacar did
not appeal hence decision became final and executory.
ISSUE: Whether or not the Labor Arbiter is correct.
HELD: No. There are two parts of a decision when it
comes to illegal dismissal cases (referring to cases where
the dismissed employee wins, or loses but wins on
appeal). The first part is the ruling that the employee was
illegally dismissed. This is immediately final even if the
employer appeals – but will be reversed if employer wins
on appeal. The second part is the ruling on the award of
backwages and/or separation pay. For backwages, it will
be computed from the date of illegal dismissal until the
date of the decision of the Labor Arbiter. But if the
employer appeals, then the end date shall be extended
until the day when the appellate court’s decision shall
become final. As a consequence, the liability of the
employer, if he loses on appeal, will increase – this is just
but a risk that the ER cannot avoid when it continued to
seek recourses against the Labor Arbiter’s decision. This
is also in accordance with Article 279 of the Labor Code.
Anent the issue of award of interest in the form of actual
or compensatory damages, the Supreme Court ruled that
the old case of Eastern Shipping Lines vs CA is already
modified by the promulgation of the BSP Monetary Board
Resolution No. 796 which lowered the legal rate of
interest from 12% to 6%. Specifically, the rules on interest
are now as follows:
1. Monetary Obligations ex. Loans:
a. If stipulated in writing:
a.1. shall run from date of judicial demand (filing
of the case)
a.2. rate of interest shall be that amount stipulated
b. If not stipulated in writing
b.1. shall run from date of default (either failure
to pay upon extra-judicial demand or upon
judicial demand whichever is appropriate and
subject to the provisions of Article 1169 of the
Civil Code)
b.2. rate of interest shall be 6% per annum
2. Non-Monetary Obligations (such as the case at bar)
a. If already liquidated, rate of interest shall be
6% per annum, demandable from date of judicial
or extra-judicial demand (Art. 1169, Civil
Code)
b. If unliquidated, no interest
Except: When later on established with certainty. Interest
shall still be 6% per annum demandable from the date of
judgment because such on such date, it is already deemed
that the amount of damages is already ascertained.
3. Compounded Interest
– This is applicable to both monetary and non-monetary
obligations
– 6% per annum computed against award of damages
(interest) granted by the court. To be computed from the
date when the court’s decision becomes final and
executory until the award is fully satisfied by the losing
party.
4. The 6% per annum rate of legal interest shall be applied
prospectively:
– Final and executory judgments awarding damages prior
to July 1, 2013 shall apply the 12% rate;
– Final and executory judgments awarding damages on or
after July 1, 2013 shall apply the 12% rate for unpaid
obligations until June 30, 2013; unpaid obligations with
respect to said judgments on or after July 1, 2013 shall
still incur the 6% rate.
3
RULES IN EASTERN (as cited in this case) shall be adjudged on unliquidated claims or damages,
except when or until the demand can be established with
In the absence of an express stipulation as to the rate of
reasonable certainty. Accordingly, where the demand is
interest that would govern the parties, the rate of legal
established with reasonable certainty, the interest shall
interest for loans or forbearance of any money, goods begin to run from the time the claim is made judicially or
or credits and the rate allowed in judgments shall no extrajudicially (Art. 1169, Civil Code), but when such
longer be twelve percent (12%) per annum - as
certainty cannot be so reasonably established at the time
reflected in the case of Eastern Shipping Lines40and
the demand is made, the interest shall begin to run only
Subsection X305.1 of the Manual of Regulations for
from the date the judgment of the court is made (at which
Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the
time the quantification of damages may be deemed to
Manual of Regulations for Non-Bank Financial
have been reasonably ascertained). The actual base for the
Institutions, before its amendment by BSP-MB Circular
computation of legal interest shall, in any case, be on the
No. 799 - but will now be six percent (6%) per annum
amount finally adjudged.
effective July 1, 2013. It should be noted, nonetheless,
that the new rate could only be applied prospectively and When the judgment of the court awarding a sum of money
not retroactively. Consequently, the twelve percent (12%) becomes final and executory, the rate of legal interest,
per annum legal interest shall apply only until June 30, whether the case falls under paragraph 1 or paragraph 2,
2013. Come July 1, 2013 the new rate of six percent (6%) above, shall be 6% per annum from such finality until its
per annum shall be the prevailing rate of interest when satisfaction, this interim period being deemed to be by
applicable. then an equivalent to a forbearance of credit.
To recapitulate and for future guidance, the guidelines And, in addition to the above, judgments that have
laid down in the case of Eastern Shipping Lines42 are become final and executory prior to July 1, 2013, shall not
accordingly modified to embody BSP-MB Circular No. be disturbed and shall continue to be implemented
799, as follows: applying the rate of interest fixed therein.
I. When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages.
The provisions under Title XVIII on "Damages" of the
Civil Code govern in determining the measure of
recoverable damages.1âwphi1
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as
follows:
When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of
interest shall be 6% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil
Code.
When an obligation, not constituting a loan or forbearance
of money, is breached, an interest on the amount of
damages awarded may be imposed at the discretion of the
court at the rate of 6% per annum. No interest, however,
4
ESTORES VS SPOUSES SUPANGAN
FACTS: Petitioner Hermojina Estores and respondent-
spouses Arturo and Laura Supangan entered into a
Conditional Deed of Sale5 whereby petitioner offered to
sell, and respondent-spouses offered to buy, a parcel of
land located at Naic, Cavite for the sum of ₱4.7 million.
The parties likewise stipulated, among others, to wit:
1. Vendor will secure approved clearance from DAR
requirements.x x x x
4. Vendee shall be informed as to the status of DAR
clearance within 10 days upon signing of the documents.x
xxx
6. Regarding the house located within the perimeter of the
subject [lot] owned by spouses [Magbago], said house
shall be moved outside the perimeter of this subject
property to the 300 sq. m. area allocated for [it]. Vendor
hereby accepts the responsibility of seeing to it that such
agreement is carried out before full payment of the sale is
made by vendee.
7. If and after the vendor has completed all necessary
documents for registration of the title and the vendee fails
to complete payment as per agreement, a forfeiture fee of
25% or downpayment, shall be applied. However, if the
vendor fails to complete necessary documents within
thirty days without any sufficient reason, or without
informing the vendee of its status, vendee has the right to
demand return of full amount of down payment.x x x x
9. As to the boundaries and partition of the lots (15,018
sq. m. and 300 sq. m.) Vendee shall be informed
immediately of its approval by the LRC.
10. The vendor assures the vendee of a peaceful transfer
of ownership.x x x x 6
After almost seven years from the time of the execution
of the contract and notwithstanding payment of ₱3.5
million on the part of respondent-spouses, petitioner still
failed to comply with her obligation as expressly provided
in paragraphs 4, 6, 7, 9 and 10 of the contract. Hence, in
a letter, respondent-spouses demanded the return of the
amount of ₱3.5 million within 15 days from receipt of the
letter. In reply, petitioner acknowledged receipt of the
₱3.5 million and promised to return the same within 120
days. Respondent-spouses were amenable to the proposal
provided an interest of 12% compounded annually shall
be imposed on the ₱3.5 million.
When petitioner still failed to return the amount despite
demand, respondent-spouses filed a Complaint10 for sum
of money before the RTC of Malabon against herein
petitioner as well as Arias who allegedly acted as
petitioner’s agent.
In their Answer with Counterclaim, petitioner and Arias
averred that they are willing to return the principal amount
of ₱3.5 million but without any interest as the same was
not agreed upon.
RTC: finds respondent-spouses entitled to interest but
only at the rate of 6% per annum and not 12% as prayed
by them. It also found respondent-spouses entitled to
attorney’s fees as they were compelled to litigate to
protect their interest
CA: The CA noted that the only issue submitted for its
resolution is "whether it is proper to impose interest for
an obligation that does not involve a loan or forbearance
of money in the absence of stipulation of the parties."
It affirmed the ruling of the RTC finding the imposition
of 6% interest proper.However, the same shall start to run
only from September 27, 2000 when respondent-spouses
formally demanded the return of their money and not from
October 1993 when the contract was executed as held by
the RTC. The CA also modified the RTC’s ruling as
regards the liability of Arias. It held that Arias could not
be held solidarily liable with petitioner because he merely
acted as agent of the latter.
Petitioner’s Arguments
Petitioner insists that she is not bound to pay interest on
the ₱3.5 million because the Conditional Deed of Sale
only provided for the return of the downpayment in case
of failure to comply with her obligations. They cannot be
held liable to pay for legal interest. Petitioner also argues
that the award of attorney’s fees in favor of the
respondent-spouses is unwarranted because it cannot be
said that the latter won over the former since the CA even
sustained her contention that the imposition of 12%
interest compounded annually is totally uncalled for.
Respondent-spouses’ Arguments
Respondent-spouses aver that it is only fair that interest
be imposed on the amount they paid considering that
petitioner failed to return the amount upon demand and
had been using the ₱3.5 million for her benefit. Moreover,
it is undisputed that petitioner failed to perform her
obligations to relocate the house outside the perimeter of
the subject property and to complete the necessary
5
documents. As regards the attorney’s fees, they claim that
they are entitled to the same because they were forced to
litigate when petitioner unjustly withheld the amount.
Besides, the amount awarded by the CA is even smaller
compared to the filing fees they paid.
ISSUE:
(1)Whether the imposition of interest and attys fees are
proper
(2) Whether the 6% as provided under Article 2209 of the
Civil Code, or 12% under Central Bank Circular No. 416,
is due
RULING
(1)YES. Interest may be imposed even in the absence of
stipulation in the contract.
Article 2210 of the Civil Code expressly provides that
"[i]nterest may, in the discretion of the court, be allowed
upon damages awarded for breach of contract." In this
case, there is no question that petitioner is legally
obligated to return the ₱3.5 million because of her failure
to fulfill the obligation under the Conditional Deed of
Sale, despite demand. She has in fact admitted that the
conditions were not fulfilled and that she was willing to
return the full amount of ₱3.5 million but has not actually
done so. Petitioner enjoyed the use of the money from the
time it was given to her30 until now. Thus, she is already
in default of her obligation from the date of demand, i.e.,
on September 27, 2000.
The award of attorney’s fees is also warranted.
Under Article 2208 of the Civil Code, attorney’s fees may
be recovered: x x x x
(2) When the defendant’s act or omission has compelled
the plaintiff to litigate with third persons or to incur
expenses to protect his interest; x x x x
(11) In any other case where the court deems it just and
equitable that attorney’s fees and expenses of litigation
should be recovered.
In all cases, the attorney’s fees and expenses of litigation
must be reasonable.
Considering the circumstances of the instant case, we find
respondent-spouses entitled to recover attorney’s fees.
There is no doubt that they were forced to litigate to
protect their interest, i.e., to recover their money.
However, we find the amount of ₱50,000.00 more
appropriate in line with the policy enunciated in Article
2208 of the Civil Code that the award of attorney’s fees
must always be reasonable.
(2) The interest at the rate of 12% is applicable in the
instant case.
Anent the interest rate, the general rule is that the
applicable rate of interest "shall be computed in
accordance with the stipulation of the parties."31 Absent
any stipulation, the applicable rate of interest shall be 12%
per annum "when the obligation arises out of a loan or a
forbearance of money, goods or credits. In other cases, it
shall be six percent (6%)."32 In this case, the parties did
not stipulate as to the applicable rate of interest. The only
question remaining therefore is whether the 6% as
provided under Article 2209 of the Civil Code, or 12%
under Central Bank Circular No. 416, is due.
The contract involved in this case is admittedly not a loan
but a Conditional Deed of Sale. However, the contract
provides that the seller (petitioner) must return the
payment made by the buyer (respondent-spouses) if the
conditions are not fulfilled. There is no question that they
have in fact, not been fulfilled as the seller (petitioner) has
admitted this. Notwithstanding demand by the buyer
(respondent-spouses), the seller (petitioner) has failed to
return the money andshould be considered in default from
the time that demand was made on September 27, 2000.
Even if the transaction involved a Conditional Deed of
Sale, can the stipulation governing the return of the
money be considered as a forbearance of money which
required payment of interest at the rate of 12%? We
believe so.
Petitioner’s unwarranted withholding of the money which
rightfully pertains to respondent-spouses amounts to
forbearance of money which can be considered as an
involuntary loan. Thus, the applicable rate of interest is
12% per annum.
Since the date of demand which is September 27, 2000
was satisfactorily established during trial, then the interest
rate of 12% should be reckoned from said date of demand
until the principal amount and the interest thereon is fully
satisfied.1âwphi1
WHEREFORE the rate of interest shall be twelve percent
(12%) per annum, computed from September 27, 2000
until fully satisfied. The award of attorney’s fees is further
reduced to ₱50,000.00.
6
UCPB VS SPOUSES BELUSO
FACTS:
On 16 April 1996, UCPB granted the spouses Beluso a
Promissory Notes Line under a Credit Agreement
whereby the latter could avail from the former credit of
up to a maximum amount of ₱1.2 Million pesos for a term
ending on 30 April 1997. The spouses Beluso constituted,
other than their promissory notes, a real estate mortgage
over parcels of land in Roxas City, covered by Transfer
Certificates of Title No. T-31539 and T-27828, as
additional security for the obligation. The Credit
Agreement was subsequently amended to increase the
amount of the Promissory Notes Line to a maximum of
₱2.35 Million pesos and to extend the term thereof to 28
February 1998.
The spouses Beluso availed themselves of the credit line
under three promissory notes which were renewed several
times. On 30 April 1997, the payment of the principal and
interest of the latter two promissory notes were debited
from the spouses Beluso’s account with UCPB; yet, a
consolidated loan for ₱1.3 Million was again released to
the spouses Beluso under one promissory note with a due
date of 28 February 1998.
To completely avail themselves of the ₱2.35 Million
credit line extended to them by UCPB, the spouses Beluso
executed two more promissory notes for a total of
₱350,000.00
However, the spouses Beluso alleged that the amounts
covered by these last two promissory notes were never
released or credited to their account and, thus, claimed
that the principal indebtedness was only ₱2 Million.
In any case, UCPB applied interest rates on the different
promissory notes ranging from 18% to 34%. From 1996
to February 1998 the spouses Beluso were able to pay the
total sum of ₱763,692.03.
From 28 February 1998 to 10 June 1998, UCPB continued
to charge interest and penalty on the obligations of the
spouses Beluso
The spouses Beluso, however, failed to make any
payment of the foregoing amounts.
On 2 September 1998, UCPB demanded that the spouses
Beluso pay their total obligation of ₱2,932,543.00 plus
25% attorney’s fees, but the spouses Beluso failed to
comply therewith. On 28 December 1998, UCPB
foreclosed the properties mortgaged by the spouses
Beluso to secure their credit line, which, by that time,
already ballooned to ₱3,784,603.00.
On 9 February 1999, the spouses Beluso filed a Petition
for Annulment, Accounting and Damages against UCPB
with the RTC of Makati City.
RTC ruled in favor of the spouses Beluso, disposing of
the case as follows:
PREMISES CONSIDERED, judgment is hereby
rendered declaring the interest rate used by [UCPB] void
and the foreclosure and Sheriff’s Certificate of Sale void.
[UCPB] is hereby ordered to return to [the spouses
Beluso] the properties subject of the foreclosure; to pay
[the spouses Beluso] the amount of ₱50,000.00 by way of
attorney’s fees; and to pay the costs of suit. [The spouses
Beluso] are hereby ordered to pay [UCPB] the sum of
₱1,560,308.00
CA affirmed RTC’s decision
RULING
(1) Validity of the interest
The Court of Appeals held that the imposition of interest
in the following provision found in the promissory notes
of the spouses Beluso is void, as the interest rates and the
bases therefor were determined solely by petitioner
UCPB
FOR VALUE RECEIVED, I, and/or We, on or
before due date, SPS. SAMUEL AND ODETTE
BELUSO (BORROWER), jointly and severally
promise to pay to UNITED COCONUT
PLANTERS BANK (LENDER) or order at
UCPB Bldg., Makati Avenue, Makati City,
Philippines, the sum of ______________
PESOS, (P_____), Philippine Currency, with
interest thereon at the rate indicative of DBD
retail rate or as determined by the Branch Head
Furthermore, UCPB argues that even if the proviso "as
determined by the branch head" is considered void, such
a declaration would not ipso facto render the connecting
clause "indicative of DBD retail rate" void in view of the
separability clause of the Credit Agreement, which reads:
Section 9.08 Separability Clause. If any one or more of
the provisions contained in this AGREEMENT, or
documents executed in connection herewith shall be
declared invalid, illegal or unenforceable in any respect,
the validity, legality and enforceability of the remaining
7
provisions hereof shall not in any way be affected or
impaired
According to UCPB, the imposition of the questioned
interest rates did not infringe on the principle of mutuality
of contracts, because the spouses Beluso had the liberty to
choose whether or not to renew their credit line at the new
interest rates pegged by petitioner.
The Supreme Court agreed with the CA.
Article 1308 of the Civil Code provides:
Art. 1308. The contract must bind both contracting
parties; its validity or compliance cannot be left to the will
of one of them.
The provision stating that the interest shall be at the "rate
indicative of DBD retail rate or as determined by the
Branch Head" is indeed dependent solely on the will of
petitioner UCPB. Under such provision, petitioner UCPB
has two choices on what the interest rate shall be: (1) a
rate indicative of the DBD retail rate; or (2) a rate as
determined by the Branch Head. As UCPB is given this
choice, the rate should be categorically determinable in
both choices. If either of these two choices presents an
opportunity for UCPB to fix the rate at will, the bank can
easily choose such an option, thus making the entire
interest rate provision violative of the principle of
mutuality of contracts.
Not just one, but rather both, of these choices are
dependent solely on the will of UCPB. Clearly, a rate "as
determined by the Branch Head" gives the latter
unfettered discretion on what the rate may be. The Branch
Head may choose any rate he or she desires. As regards
the rate "indicative of the DBD retail rate," the same
cannot be considered as valid for being akin to a
"prevailing rate" or "prime rate"
the Separability Clause cannot save either of the two
options of UCPB as to the interest to be imposed, as both
options violate the principle of mutuality of contracts.
UCPB likewise failed to convince us that the spouses
Beluso were in estoppel.
Estoppel cannot be predicated on an illegal act. As
between the parties to a contract, validity cannot be given
to it by estoppel if it is prohibited by law or is against
public policy
The interest rate provisions in the case at bar are illegal
not only because of the provisions of the Civil Code on
mutuality of contracts, but also, as shall be discussed later,
because they violate the Truth in Lending Act. Not
disclosing the true finance charges in connection with the
extensions of credit is, furthermore, a form of deception
which we cannot countenance.
Moreover, while the spouses Beluso indeed agreed to
renew the credit line, the offending provisions are found
in the promissory notes themselves, not in the credit
line. In fixing the interest rates in the promissory notes to
cover the renewed credit line, UCPB still reserved to itself
the same two options (1) a rate indicative of the DBD
retail rate; or (2) a rate as determined by the Branch Head.
(2) Error in computation
UCPB asserts that while both the RTC and the Court of
Appeals voided the interest rates imposed by UCPB, both
failed to include in their computation of the outstanding
obligation of the spouses Beluso the legal rate of interest
of 12% per annum. Furthermore, the penalty charges were
also deleted in the decisions of the RTC and the Court of
Appeals.
Thus, according to UCPB, the interest charges, penalty
charges, and attorneys fees had been erroneously
excluded by the RTC and the Court of Appeals from the
computation of the total amount due and demandable
from spouses Beluso.
The spouses Belusos defense as to all these issues is that
the demand made by UCPB is for a considerably bigger
amount and, therefore, the demand should be considered
void. There being no valid demand, according to the
spouses Beluso, there would be no default, and therefore
the interests and penalties would not commence to run. As
it was likewise improper to foreclose the mortgaged
properties or file a case against the spouses Beluso,
attorneys fees were not warranted.
We agree with UCPB on this score. Default commences
upon judicial or extrajudicial demand.[26] The excess
amount in such a demand does not nullify the demand
itself, which is valid with respect to the proper amount. A
contrary ruling would put commercial transactions in
disarray, as validity of demands would be dependent on
the exactness of the computations thereof, which are too
often contested.
There being a valid demand on the part of UCPB, albeit
excessive, the spouses Beluso are considered in default
with respect to the proper amount and, therefore, the
interests and the penalties began to run at that point.
8
As regards the award of 12% legal interest in favor of
petitioner, the RTC actually recognized that said legal
interest should be imposed, thus: There being no valid
stipulation as to interest, the legal rate of interest shall be
charged.[27] It seems that the RTC inadvertently
overlooked its non-inclusion in its computation.
The spouses Beluso had even originally asked for the
RTC to impose this legal rate of interest in both the body
and the prayer of its petition with the RTC
All these show that the spouses Beluso had acknowledged
before the RTC their obligation to pay a 12% legal interest
on their loans. When the RTC failed to include the 12%
legal interest in its computation, however, the spouses
Beluso merely defended in the appellate courts this non-
inclusion, as the same was beneficial to them. We see,
however, sufficient basis to impose a 12% legal interest
in favor of petitioner in the case at bar, as what we have
voided is merely the stipulated rate of interest and not the
stipulation that the loan shall earn interest.
We must likewise uphold the contract stipulation
providing the compounding of interest. The provisions in
the Credit Agreement and in the promissory notes
providing for the compounding of interest were neither
nullified by the RTC or the Court of Appeals, nor assailed
by the spouses Beluso in their petition with the RTC. The
compounding of interests has furthermore been declared
by this Court to be legal. We have held in Tan v. Court of
Appeals,[29] that:
Without prejudice to the provisions of Article 2212,
interest due and unpaid shall not earn interest. However,
the contracting parties may by stipulation capitalize
the interest due and unpaid, which as added principal,
shall earn new interest.
As regards the imposition of penalties, however, although
we are likewise upholding the imposition thereof in the
contract, we find the rate iniquitous. We find the penalty
imposed by UCPB, ranging from 30.41% to 36%, to be
iniquitous considering the fact that this penalty is already
over and above the compounded interest likewise
imposed in the contract. If a 36% interest in itself has been
declared unconscionable by this Court,[31] what more a
30.41% to 36% penalty, over and above the payment of
compounded interest? UCPB itself must have realized
this, as it gave us a sample computation of the spouses
Belusos obligation if both the interest and the penalty
charge are reduced to 12%.
In sum, we hold that spouses Beluso should still be held
liable for a compounded legal interest of 12% per annum
and a penalty charge of 12% per annum. We also hold
that, instead of awarding attorneys fees in favor of
petitioner, we shall merely affirm the deletion of the
award of attorneys fees to the spouses Beluso.
(3) Annulment of the Foreclosure Sale
Properties of spouses Beluso had been foreclosed, titles to
which had already been consolidated in the name of
UCPB, as the spouses Beluso failed to exercise their right
of redemption which expired on 25 March 2000.
We agree with UCPB and affirm the validity of the
foreclosure proceedings. Since we already found that a
valid demand was made by UCPB upon the spouses
Beluso, despite being excessive, the spouses Beluso are
considered in default with respect to the proper amount of
their obligation to UCPB and, thus, the property they
mortgaged to secure such amounts may be
foreclosed. Consequently, proceeds of the foreclosure
sale should be applied to the extent of the amounts to
which UCPB is rightfully entitled.
(4) Liability for Violation of Truth in Lending Act
The RTC, affirmed by the Court of Appeals, imposed a
fine of P26,000.00 for UCPBs alleged violation of
Republic Act No. 3765, (Truth in Lending Act)
UCPB challenges this imposition, on the argument that
Section 6(a) of the Truth in Lending Act which mandates
the filing of an action to recover such penalty must be
made under the following circumstances:
Section 6. (a) Any creditor who in connection with any
credit transaction fails to disclose to any person any
information in violation of this Act or any regulation
issued thereunder shall be liable to such person in the
amount of P100 or in an amount equal to twice the finance
charge required by such creditor in connection with such
transaction, whichever is greater, except that such liability
shall not exceed P2,000 on any credit transaction. Action
to recover such penalty may be brought by such
person within one year from the date of the occurrence
of the violation, in any court of competent
jurisdiction. x x x (Emphasis ours.)
9
UCPB further claims that the action to recover the penalty
for the violation of the Truth in Lending Act had been
barred by the one-year prescriptive period provided for in
the Act.
On the matter of allegation of the violation of the Truth in
Lending Act, the Court of Appeals ruled:
Admittedly the original complaint did not explicitly
allege a violation of the Truth in Lending Act and no
action to formally admit the amended petition was made
either by [respondents] spouses Beluso and the lower
court. In such transactions, the debtor and the lending
institutions do not deal on an equal footing and this law
was intended to protect the public from hidden or
undisclosed charges on their loan obligations, requiring a
full disclosure thereof by the lender. We find that its
infringement may be inferred or implied from allegations
that when [respondents] spouses Beluso executed the
promissory notes, the interest rate chargeable thereon
were left blank. Thus, [petitioner] UCPB failed to
discharge its duty to disclose in full to [respondents]
Spouses Beluso the charges applicable on their loans.[36]
We agree with the Court of Appeals. The allegations in
the complaint, much more than the title thereof, are
controlling. Other than that stated by the Court of
Appeals, we find that the allegation of violation of the
Truth in Lending Act can also be inferred from the same
allegation in the complaint we discussed earlier:
b.) In unilaterally imposing an increased interest rates
(sic) respondent bank has relied on the provision of their
promissory note granting respondent bank the power to
unilaterally fix the interest rates, which rate was not
determined in the promissory note but was left solely to
the will of the Branch Head of the respondent Bank, x x
x.[37]
The allegation that the promissory notes grant UCPB the
power to unilaterally fix the interest rates certainly also
means that the promissory notes do not contain a clear
statement in writing of (6) the finance charge expressed
in terms of pesos and centavos; and (7) the percentage that
the finance charge bears to the amount to be financed
expressed as a simple annual rate on the outstanding
unpaid balance of the obligation.[38] Furthermore, the
spouses Belusos prayer for such other reliefs just and
equitable in the premises should be deemed to include the
civil penalty provided for in Section 6(a) of the Truth in
Lending Act.
UCPBs contention that this action to recover the penalty
for the violation of the Truth in Lending Act has already
prescribed is likewise without merit. The penalty for the
violation of the act is P100 or an amount equal to twice
the finance charge required by such creditor in
connection with such transaction, whichever is greater,
except that such liability shall not exceed P2,000.00 on
any credit transaction.[39] As this penalty depends on
the finance charge required of the borrower, the
borrowers cause of action would only accrue when such
finance charge is required. In the case at bar, the date of
the demand for payment of the finance charge is 2
September 1998, while the foreclosure was made on 28
December 1998. The filing of the case on 9 February
1999 is therefore within the one-year prescriptive period.
UCPB argues that a violation of the Truth in Lending Act,
being a criminal offense, cannot be inferred nor implied
from the allegations made in the complaint.[40]Pertinent
provisions of the Act read:
Sec. 6. (a) Any creditor who in connection with any credit
transaction fails to disclose to any person any information
in violation of this Act or any regulation issued thereunder
shall be liable to such person in the amount of P100 or in
an amount equal to twice the finance charge required by
such creditor in connection with such transaction,
whichever is the greater, except that such liability shall
not exceed P2,000 on any credit transaction. Action to
recover such penalty may be brought by such person
within one year from the date of the occurrence of the
violation, in any court of competent jurisdiction. In any
action under this subsection in which any person is
entitled to a recovery, the creditor shall be liable for
reasonable attorneys fees and court costs as determined
by the court.
xxxx
(c) Any person who willfully violates any
provision of this Act or any regulation issued thereunder
shall be fined by not less than P1,000 or more than P5,000
or imprisonment for not less than 6 months, nor more than
one year or both.
As can be gleaned from Section 6(a) and (c) of the Truth
in Lending Act, the violation of the said Act gives rise to
both criminal and civil liabilities. Section 6(c) considers a
criminal offense the willful violation of the Act, imposing
the penalty therefor of fine, imprisonment or
both. Section 6(a), on the other hand, clearly provides for
a civil cause of action for failure to disclose any
10
information of the required information to any person in
violation of the Act. The penalty therefor is an amount
of P100 or in an amount equal to twice the finance charge
required by the creditor in connection with such
transaction, whichever is greater, except that the liability
shall not exceed P2,000.00 on any credit transaction. The
action to recover such penalty may be instituted by the
aggrieved private person separately and independently
from the criminal case for the same offense.
In the case at bar, therefore, the civil action to recover the
penalty under Section 6(a) of the Truth in Lending Act
had been jointly instituted with (1) the action to declare
the interests in the promissory notes void, and (2) the
action to declare the foreclosure void.
In attacking the RTCs disposition on the violation of the
Truth in Lending Act since the same was not alleged in
the complaint, UCPB is actually asserting a violation of
due process. Indeed, due process mandates that a
defendant should be sufficiently apprised of the matters
he or she would be defending himself or herself
against. However, in the 1 July 1999 pre-trial brief filed
by the spouses Beluso before the RTC, the claim for civil
sanctions for violation of the Truth in Lending Act was
expressly alleged, thus:
Moreover, since from the start, respondent bank violated
the Truth in Lending Act in not informing the borrower in
writing before the execution of the Promissory Notes of
the interest rate expressed as a percentage of the total loan,
the respondent bank instead is liable to pay petitioners
double the amount the bank is charging petitioners by way
of sanction for its violation.[41]
In the same pre-trial brief, the spouses Beluso also
expressly raised the following issue:
b.) Does the expression indicative rate of DBD retail (sic)
comply with the Truth in Lending Act provision to
express the interest rate as a simple annual percentage of
the loan?[42]
These assertions are so clear and unequivocal that any
attempt of UCPB to feign ignorance of the assertion of
this issue in this case as to prevent it from putting up a
defense thereto is plainly hogwash.
Petitioner further posits that it is the Metropolitan Trial
Court which has jurisdiction to try and adjudicate the
alleged violation of the Truth in Lending Act, considering
that the present action allegedly involved a single credit
transaction as there was only one Promissory Note Line.
We disagree. We have already ruled that the action to
recover the penalty under Section 6(a) of the Truth in
Lending Act had been jointly instituted with (1) the action
to declare the interests in the promissory notes void, and
(2) the action to declare the foreclosure void. There had
been no question that the above actions belong to the
jurisdiction of the RTC. Subsection (c) of the above-
quoted Section 5 of the Rules of Court on Joinder of
Causes of Action provides:
(c) Where the causes of action are between the same
parties but pertain to different venues or jurisdictions, the
joinder may be allowed in the Regional Trial Court
provided one of the causes of action falls within the
jurisdiction of said court and the venue lies therein.
Furthermore, opening a credit line does not create a credit
transaction of loan or mutuum, since the former is merely
a preparatory contract to the contract of loan
or mutuum. Under such credit line, the bank is merely
obliged, for the considerations specified therefor, to lend
to the other party amounts not exceeding the limit
provided. The credit transaction thus occurred not when
the credit line was opened, but rather when the credit line
was availed of. In the case at bar, the violation of the
Truth in Lending Act allegedly occurred not when the
parties executed the Credit Agreement, where no interest
rate was mentioned, but when the parties executed the
promissory notes, where the allegedly offending interest
rate was stipulated.
UCPB further argues that since the spouses Beluso were
duly given copies of the subject promissory notes after
their execution, then they were duly notified of the terms
thereof, in substantial compliance with the Truth in
Lending Act.
Once more, we disagree. Section 4 of the Truth in
Lending Act clearly provides that the disclosure statement
must be furnished prior to the consummation of the
transaction:
SEC. 4. Any creditor shall furnish to each person to whom
credit is extended, prior to the consummation of the
transaction, a clear statement in writing setting forth, to
the extent applicable and in accordance with rules and
regulations prescribed by the Board, the following
information:
(1) the cash price or delivered price of the property or
service to be acquired;
11
(2) the amounts, if any, to be credited as down payment
and/or trade-in;
(3) the difference between the amounts set forth under
clauses (1) and (2)
(4) the charges, individually itemized, which are paid or
to be paid by such person in connection with the
transaction but which are not incident to the extension of
credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and
centavos; and
(7) the percentage that the finance bears to the total
amount to be financed expressed as a simple annual rate
on the outstanding unpaid balance of the obligation.
The rationale of this provision is to protect users of credit
from a lack of awareness of the true cost thereof,
proceeding from the experience that banks are able to
conceal such true cost by hidden charges, uncertainty of
interest rates, deduction of interests from the loaned
amount, and the like. The law thereby seeks to protect
debtors by permitting them to fully appreciate the true
cost of their loan, to enable them to give full consent to
the contract, and to properly evaluate their options in
arriving at business decisions.Upholding UCPBs claim of
substantial compliance would defeat these purposes of the
Truth in Lending Act. The belated discovery of the true
cost of credit will too often not be able to reverse the ill
effects of an already consummated business decision.
In addition, the promissory notes, the copies of which
were presented to the spouses Beluso after execution, are
not sufficient notification from UCPB. As earlier
discussed, the interest rate provision therein does not
sufficiently indicate with particularity the interest rate to
be applied to the loan covered by said promissory notes.
Forum Shopping
UCPB had earlier moved to dismiss the petition
(originally Case No. 99-314 in RTC, Makati City) on the
ground that the spouses Beluso instituted another case
(Civil Case No. V-7227) before the RTC of Roxas City,
involving the same parties and issues. UCPB claims that
while Civil Case No. V-7227 initially appears to be a
different action, as it prayed for the issuance of a
temporary restraining order and/or injunction to stop
foreclosure of spouses Belusos properties, it poses issues
which are similar to those of the present case.[43] To prove
its point, UCPB cited the spouses Belusos Amended
Petition in Civil Case No. V-7227, which contains similar
allegations as those in the present case.The RTC of
Makati denied UCPBs Motion to Dismiss Case No. 99-
314 for lack of merit. Petitioner UCPB raised the same
issue with the Court of Appeals, and is raising the same
issue with us now.
In the case at bar, Civil Case No. V-7227 before the RTC
of Roxas City was an action for injunction against a
foreclosure sale that has already been held, while Civil
Case No. 99-314 before the RTC of Makati City includes
an action for the annulment of said foreclosure, an action
certainly more proper in view of the execution of the
foreclosure sale. The former case was improperly filed
in Roxas City, while the latter was filed in Makati City,
the proper venue of the action as mandated by the Credit
Agreement. It is evident, therefore, that Civil Case No.
99-314 is the more appropriate vehicle for litigating the
issues between the parties, as compared to Civil Case No.
V-7227. Thus, we rule that the RTC of Makati City was
not in error in not dismissing Civil Case No. 99-314.
ADVOCATES FOR TRUTH IN LENDING, INC. and
EDUARDO B. OLAGUER vs.
BANGKO SENTRAL MONETARY BOARD
FACTS: Petitioner "Advocates for Truth in Lending,
Inc." (AFTIL) is a non-profit, non-stock corporation
organized to engage in pro bono concerns and activities
relating to money lending issues. It filed this petition,
joined by its founder and president, Eduardo B. Olaguer,
suing as a taxpayer and a citizen.
R.A. No. 265, which created the Central Bank (CB) of the
Philippines on June 15, 1948, empowered the CB-MB to,
among others, set the maximum interest rates which
banks may charge for all types of loans and other credit
operations, within limits prescribed by the Usury Law.
On March 17, 1980, the Usury Law was amended by PD
No. 1684, giving the CB-MB authority to prescribe
different maximum rates of interest which may be
imposed for a loan or renewal thereof or the forbearance
of any money, goods or credits, provided that the changes
are effected gradually and announced in advance.
In its Resolution No. 2224 dated December 3, 1982,3 the
CB-MB issued CB Circular No. 905, Series of 1982,
12
effective on January 1, 1983. Section 1 of the Circular,
under its General Provisions, removed the ceilings on
interest rates on loans or forbearance of any money, goods
or credits
The Circular then went on to amend Books I to IV of the
CB’s "Manual of Regulations for Banks and Other
Financial Intermediaries" (Manual of Regulations) by
removing the applicable ceilings on specific interest rates.
On June 14, 1993, President Fidel V. Ramos signed into
law R.A. No. 7653 establishing the Bangko Sentral ng
Pilipinas (BSP) to replace the CB.
To justify their skipping the hierarchy of courts and going
directly to this Court to secure a writ of certiorari,
petitioners contend that the transcendental importance of
their Petition can readily be seen in the issues raised
therein, to wit:
a) Whether under R.A. No. 265 and/or P.D. No. 1684, the
CB-MB had the statutory or constitutional authority to
prescribe the maximum rates of interest for all kinds of
credit transactions and forbearance of money, goods or
credit beyond the limits prescribed in the Usury Law;
b) If so, whether the CB-MB exceeded its authority when
it issued CB Circular No. 905, which removed all interest
ceilings and thus suspended Act No. 2655 as regards
usurious interest rates;
c) Whether under R.A. No. 7653, the new BSP-MB may
continue to enforce CB Circular No. 905.
RULING
The petition must fail.
A. The Petition is procedurally infirm.
The decision on whether or not to accept a petition for
certiorari, as well as to grant due course thereto, is
addressed to the sound discretion of the court.15 A petition
for certiorari being an extraordinary remedy, the party
seeking to avail of the same must strictly observe the
procedural rules laid down by law, and non-observance
thereof may not be brushed aside as mere technicality.16
In Section 1 Rule 65, a writ of certiorari is directed against
a tribunal exercising judicial or quasi-judicial functions
The CB-MB (now BSP-MB) was created to perform
executive functions with respect to the establishment,
operation or liquidation of banking and credit institutions,
and branches and agencies thereof.19 It does not perform
judicial or quasi-judicial functions. Certainly, the
issuance of CB Circular No. 905 was done in the exercise
of an executive function. Certiorari will not lie in the
instant case
B. Petitioners have no locus standi to file the Petition
Locus standi is defined as "a right of appearance in a court
of justice on a given question." In private suits, Section 2,
Rule 3 of the 1997 Rules of Civil Procedure provides that
"every action must be prosecuted or defended in the name
of the real party in interest," who is "the party who stands
to be benefited or injured by the judgment in the suit or
the party entitled to the avails of the suit."
While petitioners assert a public right to assail CB
Circular No. 905 as an illegal executive action, it is
nonetheless required of them to make out a sufficient
interest in the vindication of the public order and the
securing of relief. It is significant that in this petition, the
petitioners do not allege that they sustained any personal
injury from the issuance of CB Circular No. 905.
Petitioners also do not claim that public funds were being
misused in the enforcement of CB Circular No. 905
Petitioners do not in fact show what particularized interest
they have for bringing this suit. It does not detract from
the high regard for petitioners as civic leaders to say that
their interest falls short of that required to maintain an
action under the Rule 3, Sec. 2
C. The Petition raises no issues of transcendental
importance
In the instant case, there is no allegation of misuse of
public funds in the implementation of CB Circular No.
905. Neither were borrowers who were actually affected
by the suspension of the Usury Law joined in this petition.
Absent any showing of transcendental importance, the
petition must fail.
D. The CB-MB merely suspended the effectivity of the
Usury Law when it issued CB Circular No. 905.
The power of the CB to effectively suspend the Usury
Law pursuant to P.D. No. 1684 has long been recognized
and upheld in many cases. As the Court explained in the
landmark case of Medel v. CA,36 citing several cases, CB
Circular No. 905 "did not repeal nor in anyway amend the
Usury Law but simply suspended the latter’s
effectivity;"37that "a CB Circular cannot repeal a law,
[for] only a law can repeal another law;"38 that "by virtue
of CB Circular No. 905, the Usury Law has been rendered
ineffective;"39 and "Usury has been legally non-existent
13
in our jurisdiction. Interest can now be charged as lender institutions. It even authorizes the BSP-MB to prescribe
and borrower may agree upon. different maximum rate or rates for different types of
borrowings, including deposits and deposit substitutes, or
Central Bank Circular No. 905 did not repeal nor in any
loans of financial intermediaries.
way amend the Usury Law but simply suspended the
latter’s effectivity. The illegality of usury is wholly the Act No. 2655, an earlier law, is much broader in scope,
creature of legislation. A Central Bank Circular cannot whereas R.A. No. 265, now R.A. No. 7653, merely
repeal a law. Only a law can repeal another law. supplemented it as it concerns loans by banks and other
financial institutions. Had R.A. No. 7653 been intended
P.D. No. 1684 and C.B. Circular No. 905 no more than
to repeal Section 1-a of Act No. 2655, it would have so
allow contracting parties to stipulate freely regarding any
stated in unequivocal terms.
subsequent adjustment in the interest rate that shall accrue
on a loan or forbearance of money, goods or credits. In Moreover, the rule is settled that repeals by implication
fine, they can agree to adjust, upward or downward, the are not favored, because laws are presumed to be passed
interest previously stipulated. x x x.45 with deliberation and full knowledge of all laws existing
pertaining to the subject.46 An implied repeal is predicated
Thus, according to the Court, by lifting the interest
upon the condition that a substantial conflict or
ceiling, CB Circular No. 905 merely upheld the parties’
repugnancy is found between the new and prior laws.
freedom of contract to agree freely on the rate of interest.
Thus, in the absence of an express repeal, a subsequent
It cited Article 1306 of the New Civil Code, under which
law cannot be construed as repealing a prior law unless an
the contracting parties may establish such stipulations,
irreconcilable inconsistency and repugnancy exists in the
clauses, terms and conditions as they may deem
terms of the new and old laws.47 We find no such conflict
convenient, provided they are not contrary to law, morals,
between the provisions of Act 2655 and R.A. No. 7653.
good customs, public order, or public policy.
F. The lifting of the ceilings for interest rates does not
E. The BSP-MB has authority to enforce CB Circular No.
authorize stipulations charging excessive,
905.
unconscionable, and iniquitous interest.
Section 1 of CB Circular No. 905 provides that "The rate
It is settled that nothing in CB Circular No. 905 grants
of interest, including commissions, premiums, fees and
lenders a carte blanche authority to raise interest rates to
other charges, on a loan or forbearance of any money,
levels which will either enslave their borrowers or lead to
goods, or credits, regardless of maturity and whether
a hemorrhaging of their assets
secured or unsecured, that may be charged or collected by
any person, whether natural or juridical, shall not be Stipulations authorizing iniquitous or unconscionable
subject to any ceiling prescribed under or pursuant to the interests have been invariably struck down for being
Usury Law, as amended." It does not purport to suspend contrary to morals, if not against the law.51 Indeed, under
the Law only as it applies to banks, but to all lenders. Article 1409 of the Civil Code, these contracts are deemed
inexistent and void ab initio, and therefore cannot be
Petitioners contend that, granting that the CB had power
ratified, nor may the right to set up their illegality as a
to "suspend" the Usury Law, the new BSP-MB did not
defense be waived.
retain this power of its predecessor, in view of Section 135
of R.A. No. 7653, which repealed R.A. No. 265. The The nullity of the stipulation of usurious interest does not
petitioners point out that R.A. No. 7653 did not reenact a affect the lender’s right to recover the principal of a loan,
provision similar to Section 109 of R.A. No. 265. nor affect the other terms thereof.52 Thus, in a usurious
loan with mortgage, the right to foreclose the mortgage
A closer perusal shows that Section 109 of R.A. No. 265
subsists, and this right can be exercised by the creditor
covered only loans extended by banks, whereas under
upon failure by the debtor to pay the debt due. The debt
Section 1-a of the Usury Law, as amended, the BSP-MB
due is considered as without the stipulated excessive
may prescribe the maximum rate or rates of interest for all
interest, and a legal interest of 12% per annum will be
loans or renewals thereof or the forbearance of any
added in place of the excessive interest formerly
money, goods or credits, including those for loans of low
imposed,53following the guidelines laid down in the
priority such as consumer loans, as well as such loans
landmark case of Eastern Shipping Lines, Inc.
made by pawnshops, finance companies and similar credit

14
SPOUSES DAVID B. CARPO & and RECHILDA S.
CARPO vs. ELEANOR CHUA and ELMA DY NG
FACTS
Before this Court are two consolidated petitions for
review. On 18 July 1995, petitioners borrowed from
Eleanor Chua and Elma Dy Ng (respondents) the amount
of ₱175,000.00, payable within six (6) months with an
interest rate of six percent (6%) per month
To secure the payment of the loan, petitioners mortgaged
their residential house and lot situated at San Francisco,
Magarao, Camarines Sur. Petitioners failed to pay the
loan upon demand. Consequently, the real estate
mortgage was extrajudicially foreclosed and the
mortgaged property sold at a public auction on 8 July
1996. The house and lot was awarded to respondents, who
were the only bidders, for the amount of ₱367,457.80.
Upon failure of petitioners to exercise their right of
redemption, a certificate of sale was issuedby Sheriff
Rolando A. Borja. TCT No. 29338 was issued in the name
of respondents.
Despite the issuance of the TCT, petitioners continued to
occupy the said house and lot, prompting respondents to
file a petition for writ of possession with the RTC
docketed as Special Proceedings (SP) No. 98-1665
On 23 July 1999, petitioners filed a complaint for
annulment of real estate mortgage and the consequent
foreclosure proceedings, docketed as Civil Case No. 99-
4376 of the RTC. Petitioners consigned the amount of
₱257,197.26 with the RTC.
Meanwhile, in SP No. 98-1665, a temporary restraining
order was issued upon motion, enjoining the enforcement
of the writ of possession. In an Order5 dated 6 January
2000, the RTC suspended the enforcement of the writ of
possession pending the final disposition of Civil Case No.
99-4376. Against this Order, respondents filed a petition
for certiorari and mandamus before the Court of Appeals,
docketed as CA-G.R. SP No. 57297.
During the pendency of the case before the Court of
Appeals, RTC Judge Filemon B. Montenegro dismissed
the complaint in Civil Case No. 99-4376 on the ground
that it was filed out of time and barred by laches. The RTC
proceeded from the premise that the complaint was one
for annulment of a voidable contract and thus barred by
the four-year prescriptive period. Hence, the first petition
for review now under consideration was filed with this
Court, assailing the dismissal of the complaint.
In G.R. No. 150773, petitioners claim that following the
Court’s ruling in Medel v. Court of Appeals6 the rate of
interest stipulated in the principal loan agreement is
clearly null and void. Consequently, they also argue that
the nullity of the agreed interest rate affects the validity of
the real estate mortgage. Notably, while petitioners were
silent in their petition on the issues of prescription and
laches on which the RTC grounded the dismissal of the
complaint, they belatedly raised the matters in
their Memorandum. Nonetheless, these points warrant
brief comment.
On the other hand, petitioners argue in G.R. No. 153599
that the RTC did not commit any grave abuse of discretion
when it issued the orders dated 3 August 1999 and 6
January 2000, and that these orders could not have been
"the proper subjects of a petition for certiorari and
mandamus". More accurately, the justiciable issues
before us are whether the Court of Appeals could properly
entertain the petition for certiorari from the timeliness
aspect, and whether the appellate court correctly
concluded that the writ of possession could no longer be
stayed.
RULING
GR NO 150773
Petitioners contend that the agreed rate of interest of 6%
per month or 72% per annum is so excessive, iniquitous,
unconscionable and exorbitant that it should have been
declared null and void. Instead of dismissing their
complaint, they aver that the lower court should have
declared them liable to respondents for the original
amount of the loan plus 12% interest per annum and 1%
monthly penalty charge as liquidated damages,7 in view
of the ruling in Medel v. Court of Appeals.8
In Medel, the Court found that the interest stipulated at
5.5% per month or 66% per annum was so iniquitous or
unconscionable as to render the stipulation void.
In the case at bar, the stipulated interest rate is 6% per
month, or 72% per annum. By the standards set in the
above-cited case, this stipulation is similarly invalid.
However, the RTC refused to apply the principle cited and
employed in Medel on the ground that Medel did not
pertain to the annulment of a real estate mortgage,15 as it
was a case for annulment of the loan contract itself. The
question thus sensibly arises whether the invalidity of the
stipulation on interest carries with it the invalidity of the
principal obligation.
15
The question is crucial to the present petition even if the
subject thereof is not the annulment of the loan contract
but that of the mortgage contract. The consideration of the
mortgage contract is the same as that of the principal
contract from which it receives life, and without which it
cannot exist as an independent contract. Being a mere
accessory contract, the validity of the mortgage contract
would depend on the validity of the loan secured by it.16
Notably in Medel, the Court did not invalidate the entire
loan obligation despite the inequitability of the stipulated
interest, but instead reduced the rate of interest to the more
reasonable rate of 12% per annum. The same remedial
approach to the wrongful interest rates involved was
employed or affirmed by the Court
in Solangon, Imperial, Ruiz, Cuaton, and Arrofo.
The Court’s ultimate affirmation in the cases cited of the
validity of the principal loan obligation side by side with
the invalidation of the interest rates thereupon is
congruent with the rule that a usurious loan transaction is
not a complete nullity but defective only with respect to
the agreed interest.
The view has been expressed, however, that the ruling
thus consistently adhered to should now be abandoned
because Article 1957 of the new Civil Code — a
subsequent law — provides that contracts and
stipulations, under any cloak or device whatever, intended
to circumvent the laws against usury, shall be void, and
that in such cases "the borrower may recover in
accordance with the laws on usury." From this the
conclusion is drawn that the whole contract is void and
that, therefore, the creditor has no right to recover — not
even his capital.
The meaning and scope of our ruling in the cases
mentioned heretofore is clearly stated, and the view
referred to in the preceding paragraph is adequately
answered, in Angel Jose, etc. vs. Chelda Enterprises, et al.
(L-25704, April 24, 1968). On the question of whether a
creditor in a usurious contract may or may not recover the
principal of the loan, and, in the affirmative, whether or
not he may also recover interest thereon at the legal rate,
We said the following:
". . . .
Appealing directly to Us, defendants raise two questions
of law: (1) In a loan with usurious interest, may the
creditor recover the principal of the loan? (2) Should
attorney's fees be awarded in plaintiff's favor?"
Great reliance is made by appellants on Art. 1411 of the
New Civil Code . . . .
Since, according to the appellants, a usurious loan is void
due to illegality of cause or object, the rule of pari delicto
expressed in Article 1411, supra, applies, so that neither
party can bring action against each other. Said rule,
however, appellants add, is modified as to the borrower,
by express provision of the law (Art. 1413, New Civil
Code), allowing the borrower to recover interest paid in
excess of the interest allowed by the Usury Law. As to the
lender, no exception is made to the rule; hence, he cannot
recover on the contract. So — they continue — the New
Civil Code provisions must be upheld as against the Usury
Law, under which a loan with usurious interest is not
totally void, because of Article 1961 of the New Civil
Code, that: "Usurious contracts shall be governed by the
Usury Law and other special laws, so far as they are not
inconsistent with this Code."
We do not agree with such reasoning. Article 1411 of the
New Civil Code is not new; it is the same as Article 1305
of the Old Civil Code. Therefore, said provision is no
warrant for departing from previous interpretation that, as
provided in the Usury Law (Act No. 2655, as amended),
a loan with usurious interest is not totally void only as to
the interest.
. . . [a]ppellants fail to consider that a contract of loan
with usurious interest consists of principal and
accessory stipulations; the principal one is to pay the
debt; the accessory stipulation is to pay interest
thereon.
And said two stipulations are divisible in the sense that
the former can still stand without the latter. Article
1273, Civil Code, attests to this: "The renunciation of
the principal debt shall extinguish the accessory
obligations; but the waiver of the latter shall leave the
former in force."
The question therefore to resolve is whether the illegal
terms as to payment of interest likewise renders a
nullity the legal terms as to payments of the principal
debt. Article 1420 of the New Civil Code provides in
this regard: "In case of a divisible contract, if the
illegal terms can be separated from the legal ones, the
latter may be enforced."
In simple loan with stipulation of usurious interest, the
prestation of the debtor to pay the principal debt,
which is the cause of the contract (Article 1350, Civil
Code), is not illegal. The illegality lies only as to the
16
prestation to pay the stipulated interest; hence, being
separable, the latter only should be deemed void, since
it is the only one that is illegal.
....
The principal debt remaining without stipulation for
payment of interest can thus be recovered by judicial
action. And in case of such demand, and the debtor incurs
in delay, the debt earns interest from the date of the
demand (in this case from the filing of the complaint).
Such interest is not due to stipulation, for there was none,
the same being void. Rather, it is due to the general
provision of law that in obligations to pay money, where
the debtor incurs in delay, he has to pay interest by way
of damages (Art. 2209, Civil Code). The court a quo
therefore, did not err in ordering defendants to pay the
principal debt with interest thereon at the legal rate, from
the date of filing of the complaint."19
The Court’s wholehearted affirmation of the rule that the
principal obligation subsists despite the nullity of the
stipulated interest is evinced by its subsequent rulings,
cited above, in all of which the main obligation was
upheld and the offending interest rate merely corrected.
Hence, it is clear and settled that the principal loan
obligation still stands and remains valid. By the same
token, since the mortgage contract derives its vitality from
the validity of the principal obligation, the invalid
stipulation on interest rate is similarly insufficient to
render void the ancillary mortgage contract.
It should be noted that had the Court declared the loan and
mortgage agreements void for being contrary to public
policy, no prescriptive period could have run.20 Such
benefit is obviously not available to petitioners.
Yet the RTC pronounced that the complaint was barred
by the four-year prescriptive period provided in Article
1391 of the Civil Code, which governs voidable contracts.
This conclusion was derived from the allegation in the
complaint that the consent of petitioners was vitiated
through undue influence. While the RTC correctly
acknowledged the rule of prescription for voidable
contracts, it erred in applying the rule in this case. We are
hard put to conclude in this case that there was any undue
influence in the first place.
There is ultimately no showing that petitioners’ consent
to the loan and mortgage agreements was vitiated by
undue influence. The financial condition of petitioners
may have motivated them to contract with respondents,
but undue influence cannot be attributed to respondents
simply because they had lent money. Article 1391, in
relation to Article 1390 of the Civil Code, grants the
aggrieved party the right to obtain the annulment of
contract on account of factors which vitiate consent.
Article 1337 defines the concept of undue influence, as
follows:
There is undue influence when a person takes improper
advantage of his power over the will of another, depriving
the latter of a reasonable freedom of choice. The
following circumstances shall be considered: the
confidential, family, spiritual and other relations between
the parties or the fact that the person alleged to have been
unduly influenced was suffering from mental weakness,
or was ignorant or in financial distress.
While petitioners were allegedly financially distressed, it
must be proven that there is deprivation of their free
agency. In other words, for undue influence to be present,
the influence exerted must have so overpowered or
subjugated the mind of a contracting party as to destroy
his free agency, making him express the will of another
rather than his own.21 The alleged lingering financial
woes of petitioners per se cannot be equated with the
presence of undue influence.
The RTC had likewise concluded that petitioners were
barred by laches from assailing the validity of the real
estate mortgage. We wholeheartedly agree. If indeed
petitioners unwillingly gave their consent to the
agreement, they should have raised this issue as early as
in the foreclosure proceedings. It was only when the writ
of possession was issued did petitioners challenge the
stipulations in the loan contract in their action for
annulment of mortgage. Evidently, petitioners slept on
their rights. The Court of Appeals succinctly made the
following observations:
In all these proceedings starting from the foreclosure,
followed by the issuance of a provisional certificate of
sale; then the definite certificate of sale; then the issuance
of TCT No. 29338 in favor of the defendants and finally
the petition for the issuance of the writ of possession in
favor of the defendants, there is no showing that plaintiffs
questioned the validity of these proceedings. It was only
after the issuance of the writ of possession in favor of the
defendants, that plaintiffs allegedly tendered to the
defendants the amount of ₱260,000.00 which the
defendants refused. In all these proceedings, why did
plaintiffs sleep on their rights?22
17
Clearly then, with the absence of undue influence,
petitioners have no cause of action. Even assuming undue
influence vitiated their consent to the loan contract, their
action would already be barred by prescription when they
filed it. Moreover, petitioners had clearly slept on their
rights as they failed to timely assail the validity of the
mortgage agreement. The denial of the petition in G.R.
No. 150773 is warranted.
We now resolve the petition in G.R. No. 153599.
Petitioners claim that the assailed RTC orders dated 3
August 1999 and 6 January 2000 could no longer be
questioned in a special civil action for certiorari and
mandamus as the reglementary period for such action had
already elapsed.
It must be noted that the Order dated 3 August 1999
suspending the enforcement of the writ of possession had
a period of effectivity of only twenty (20) days from 3
August 1999, or until 23 August 1999. Thus, upon the
expiration of the twenty (20)-day period, the
said Order became functus officio. Thus, there is really no
sense in assailing the validity of this Order, mooted as it
was. For the same reason, the validity of the order need
not have been assailed by respondents in their special civil
action before the Court of Appeals.
On the other hand, the Order dated 6 January 2000 is in
the nature of a writ of injunction whose period of efficacy
is indefinite. It may be properly assailed by way of the
special civil action for certiorari, as it is interlocutory in
nature.
As a rule, the special civil action for certiorari under Rule
65 must be filed not later than sixty (60) days from notice
of the judgment or order.23 Petitioners argue that the 3
August 1999 Order could no longer be assailed by
respondents in a special civil action for certiorari before
the Court of Appeals, as the petition was filed beyond
sixty (60) days following respondents’ receipt of
the Order. Considering that the 3 August 1999 Order had
become functus officio in the first place, this argument
deserves scant consideration.
Petitioners further claim that the 6 January
2000 Order could not have likewise been the subject of a
special civil action for certiorari, as it is according to them
a final order, as opposed to an interlocutory order. That
the 6 January 2000 Order is interlocutory in nature should
be beyond doubt. An order is interlocutory if its effects
would only be provisional in character and would still
leave substantial proceedings to be further had by the
issuing court in order to put the controversy to rest.24 The
injunctive relief granted by the order is definitely final,
but merely provisional, its effectivity hinging on the
ultimate outcome of the then pending action for
annulment of real estate mortgage. Indeed, an
interlocutory order hardly puts to a close, or disposes of,
a case or a disputed issue leaving nothing else to be done
by the court in respect thereto, as is characteristic of a
final order.
Since the 6 January 2000 Order is not a final order, but
rather interlocutory in nature, we cannot agree with
petitioners who insist that it may be assailed only through
an appeal perfected within fifteen (15) days from receipt
thereof by respondents. It is axiomatic that an
interlocutory order cannot be challenged by an appeal,
but is susceptible to review only through the special civil
action of certiorari.25 The sixty (60)-day reglementary
period for special civil actions under Rule 65 applies, and
respondents’ petition was filed with the Court of Appeals
well within the period.
Accordingly, no error can be attributed to the Court of
Appeals in granting the petition for certiorari and
mandamus. As pointed out by respondents, the remedy of
mandamus lies to compel the performance of a ministerial
duty. The issuance of a writ of possession to a purchaser
in an extrajudicial foreclosure is merely a ministerial
function.26
Thus, we also affirm the Court of Appeals’ ruling to set
aside the RTC orders enjoining the enforcement of the
writ of possession.27 The purchaser in a foreclosure sale is
entitled as a matter of right to a writ of possession,
regardless of whether or not there is a pending suit for
annulment of the mortgage or the foreclosure
proceedings. An injunction to prohibit the issuance or
enforcement of the writ is entirely out of place.28
One final note. The issue on the validity of the stipulated
interest rates, regrettably for petitioners, was not raised at
the earliest possible opportunity. It should be pointed out
though that since an excessive stipulated interest rate may
be void for being contrary to public policy, an action to
annul said interest rate does not prescribe. Such indeed is
the remedy; it is not the action for annulment of the
ancillary real estate mortgage. Despite the nullity of the
stipulated interest rate, the principal loan obligation
subsists, and along with it the mortgage that serves as
collateral security for it.
18