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DELA PAZ VS L&J DEVELOPMENT

ARGUMENTS:

Facts: On December 27, 2000, Rolando lent ₱350,000.00 without any Rolando argues that the 6%monthly interest rate should not have been
security to L&J, a property developer with Atty. Esteban Salonga (Atty. invalidated because Atty. Salonga took advantage of his legal knowledge to
Salonga) as its President and General Manager. The loan, with no hoodwink him into believing that no document was necessaryto reflect the
specified maturity date, carried a 6% monthly interest, i.e., ₱21,000.00. interest rate. Moreover, the cases anent unconscionable interest rates that
From December 2000 to August 2003, L&J paid Rolando a total of the CA relied upon involve lenders who imposed the excessive rates,which
₱576,000.007 representing interest charges. are totally different from the case at bench where it is the borrower who
decided on the high interest rate. This case does not fall under a
scenariothat ‘enslaves the borrower or that leads to the hemorrhaging of his
assets’ that the courts seek to prevent.
As L&J failed to pay despite repeated demands, Rolando filed a
Complaint8 for Collection of Sum of Money with Damages against L&J
and Atty. Salonga in his personal capacity before the MeTC, docketed
as Civil Case No. 05-7755. Rolando alleged, among others, 1. that L&J, in controverting Rolando’s arguments, contends that the interest rate is
L&J’s debt as of January 2005, inclusive of the monthly interest, stood subject of negotiation and is agreedupon by both parties, not by the borrower
at ₱772,000.00; alone. Furthermore, jurisprudence has nullified interestrates on loans of 3%
per month and higher as these rates are contrary to moralsand public
1. that the 6% monthly interest was upon Atty. Salonga’s suggestion; interest. And while Rolando raises bad faithon Atty. Salonga’s part, L&J
and, avers thatsuch issue is a question of fact, a matter that cannot be raised
under Rule 45.
2. that the latter tricked him into parting with his money without the loan
transaction being reduced into writing.

ISSUE

In their Answer, L&J and Atty. Salonga denied Rolando’s allegations. Is interest due?
While they acknowledged the loan as a corporate debt, they claimed
that the failure to pay the same was due to a fortuitous event, that
is, the financial difficulties brought about by the economic crisis.
RULING: NO.

THEY FURTHER ARGUED THAT ROLANDO CANNOT ENFORCE


THE 6% MONTHLY INTEREST FOR BEING UNCONSCIONABLE The lack of a written stipulation to pay interest on the loaned amount
AND SHOCKING TO THE MORALS. Hence, the payments already disallows a creditor from charging monetary interest.
made should be applied to the ₱350,000.00 principal loan.

Under Article 1956 of the Civil Code, no interest shall bedue unless it has
METC - upheld the 6% monthly interest since L&J agreed and been expressly stipulated in writing. Jurisprudence on the matter also holds
voluntarily paid teh interest thus it was already estopped. that for interest to be due and payable, two conditions must concur: a)
express stipulation for the payment of interest; and b) the agreement to pay
interest is reduced in writing.

Nonetheless, for reasons of equity, the saidcourt reduced the interest


rate to 12% per annumon the remaining principal obligation of
₱350,000.00. Here, it is undisputed that the parties did not put down in writing their
agreement. Thus, no interest is due. The collection of interest without any
stipulation in writing is prohibited by law.

RTC

affirmed the MeTC Decision But Rolando asserts that his situation deserves an exception to the
application of Article 1956. He blames Atty. Salonga for the lack of a written
document, claiming that said lawyer used his legal knowledge to dupe him.
Rolando thus imputes bad faith on the part of L&J and Atty. Salonga.
CA

reversed and set aside the RTC Decision. The CA stressed that the
parties failed to stipulate in writing the imposition of interest on the loan. SC: The Court, however, finds no deception on the partof L&J and Atty.
Hence, no interest shall be due thereon pursuant to Article 1956 of the Salonga. For one, despite the lack of a document stipulating the payment of
Civil Code.17 And even if payment of interest has been stipulated in interest, L&J nevertheless devotedly paid interests on the loan. It only
writing, the 6% monthly interest is still outrightly illegal and stopped when it suffered from financial difficulties that prevented it from
unconscionable because it is contrary to morals, if not against the law. continuously paying the 6% monthly rate. For another,regardless of Atty.
Being void, this cannot be ratified and may be set up by the debtor as Salonga’s profession,
defense. For these reasons, Rolando cannot collect any interest even
if L&J offered to pay interest. Consequently, he has to return all the
interest payments of ₱576,000.00 to L&J.
ROLANDO WHO IS AN ARCHITECT AND AN EDUCATED MAN himself
could have been a more reasonably prudent person under the
circumstances. To top it all, he admitted that he had no prior communication
Hence, a petition was brought before the supreme court. with Atty. Salonga. Despite Atty. Salonga being a complete stranger, he
immediately trusted him and lent his company ₱350,000.00, a Cathay Finance and Leasing Corporation v. Gravador,32 "[t]he imposition of
significant amount. Moreover, as the creditor,he could have requested an unconscionable rate of interest on a money debt, even if knowingly and
or required that all the terms and conditions of the loan agreement, voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant
which include the payment of interest, be put down in writing to ensure spoliation and an iniquitous deprivation of property, repulsive to the common
that he and L&J are on the same page. Rolando had a choice of not sense of man."33 Indeed, "voluntariness does notmake the stipulation on [an
acceding and to insist that their contract be put in written form as this unconscionable] interest valid."34
will favor and safeguard him as a lender. Unfortunately, he did not. It
must be stressed that "[c]ourts cannot follow one every step of his life
and extricate him from bad bargains, protect him from unwise
investments, relieve him from one-sided contracts,or annul the effects As exhaustibly discussed, NO MONETARY INTEREST IS DUE Rolando
of foolish acts. Courts cannotconstitute themselves guardians of pursuant to Article 1956. The CA thus correctly adjudged that the excess
persons who are not legally incompetent." interest payments made by L&J should be applied to its principal loan. As
computed by the CA, Rolando is bound to return the excess payment of
₱226,000.00 to L&J following the principle of solutio indebiti.35

It may be raised that L&J is estopped from questioning the interest rate
considering that it has been paying Rolando interest at such ratefor
more than two and a half years. In fact, in its pleadings before the However, pursuant to Central Bank Circular No. 799 s. 2013 which took
MeTCand the RTC, L&J merely prayed for the reduction of interest effect on July 1, 2013,36 the interest imposed by the CA must be accordingly
from 6% monthly to 1% monthly or 12% per annum. However, in Ching modified. The ₱226,000.00 which Rolando is ordered to pay L&J shall earn
v. Nicdao,24 the daily payments of the debtor to the lender were an interest of 6% per annumfrom the finality of this Decision.
considered as payment of the principal amount of the loan because
Article 1956 was not complied with. This was notwithstanding the
debtor’s admission that the payments made were for the interests due.
The Court categorically stated therein that "[e]stoppel cannot give
validity to an act that is prohibited by law or one thatis against public
policy."

Even if the payment of interest has been reduced in writing, a 6%


monthly interest rate on a loan is unconscionable, regardless of who
between the parties proposed the rate.

Indeed at present, usury has been legally non-existent in view of the


suspension of the Usury Law25 by Central Bank Circular No. 905 s.
1982.26 Even so, not all interest rates levied upon loans are permitted
by the courts as they have the power to equitably reduce unreasonable
interest rates. In Trade & Investment Development Corporation of the
Philippines v. Roblett Industrial Construction Corporation, we said:

While the Court recognizes the right of the parties to enter into
contracts and who are expectedto comply with their terms and
obligations, this rule is not absolute. Stipulated interest rates are illegal
if they are unconscionable and the Court is allowed to temper interest
rates when necessary. In exercising this vested power to determine
what is iniquitous and unconscionable, the Court must consider the
circumstances of each case. What may be iniquitous and
unconscionable in onecase, may be just in another. x x x28

Time and again, it has been ruled in a plethora of cases that stipulated
interest rates of 3% per month and higher, are excessive, iniquitous,
unconscionable and exorbitant. Such stipulations are void for being
contrary to morals, if not against the law.29 The Court, however,
stresses that these rates shall be invalidated and shall be reduced only
in cases where the terms of the loans are open-ended, and where the
interest rates are applied for an indefinite period. Hence, the imposition
of a specific sum of ₱40,000.00 a month for six months on a
₱1,000,000.00 loan is not considered unconscionable.30

IN THE CASE AT BENCH, there is no specified period as to the


payment of the loan. Hence, levying 6% monthly or 72% interest per
annumis "definitely outrageous and inordinate."31 The situation that it
was the debtor who insisted on the interest rate will not exempt
Rolando from a ruling that the rate is void. As this Court cited in Asian
DIO VS JAPOR vehemently contend that they never consented to the said stipulations and
hence, should not be bound by them.
FACTS: Spouses Virgilio Japor and Luz Roces Japor were the owners
of a residential lot including its improvements situated in Lucena City.

RULING: The stipulation as to the 5% interest for the two-month period was
sustained. However, the stipulation as to the 5% interest for every month of
On August 23, 1982, the respondents obtained a loan of P90,000 from delay after that (compound interest) was deemed unconscionable.
the Quezon Development Bank (QDB), and as security therefor, they
mortgaged the said lots, as evidenced by a Deed of Real Estate FULL TEXT RULING:
Mortgage. Subsequently, the parties amended the deed increasing
respondents’ loan to P128,000. Central Bank Circular No. 905, which took effect on January 1, 1983,
effectively removed the ceiling on interest rates for both secured and
unsecured loans, regardless of maturity.

The respondents failed to pay their aforesaid loans. However, before


the bank could foreclose on the mortgage, respondents offered to
mortgage their properties to petitioner Teresita Dio. Respondents However, nothing in said Circular grants lenders carte blanche authority to
mortgaged anew the two properties already mortgaged with QDB to impose interest rates which would result in the enslavement of their
secure the timely payment of a P350,000 loan that respondents had borrowers or to the hemorrhaging of their assets.
from petitioner Dio. Under the terms of the deed, respondents agreed
to pay the petitioner interest at the rate of five percent (5%) a month,
within a period of two months or until April 14, 1989. In the event of
While a stipulated rate of interest may not technically and necessarily be
default, an additional interest equivalent to five percent (5%) of the
usurious under Circular No. 905, usury now being legally non-existent in our
amount then due, for every month of delay, would be charged on them.
jurisdiction, nonetheless, said rate may be equitably reduced should the
However, the respondents failed to settle their obligation to petitioner
same be found to be iniquitous, unconscionable, and exorbitant, and hence,
on April 14, 1989, the agreed deadline for settlement. On August 27,
contrary to morals (contra bonos mores), if not against the law.
1991, petitioner made written demands upon the respondents to pay
their debt. Despite repeated demands, respondents did not pay, hence
petitioner applied for extrajudicial foreclosure of the mortgage.
What is iniquitous, unconscionable, and exorbitant shall depend upon the
factual circumstances of each case.
ISSUE: Won the stipulation of 5% interest within the 2 month period
and 5% interest for every month of delay after that is contrary to morals,
if not, illegal. IN THE INSTANT CASE, the Court of Appeals found that the 5% interest
rate per month and 5% penalty rate per month for every month of default or
delay is in reality interest rate at 120% per annum. This Court has held that a
stipulated interest rate of 5.5% per month or 66% per annum is void for being
CONTENTIONS:
iniquitous or unconscionable.
On the main issue, petitioner contends that The Usury Law10 has
been rendered ineffective by Central Bank Circular No. 905, series of
1982 and accordingly, usury has become legally non-existent in this We have likewise ruled that an interest rate of 6% per month or 72% per
jurisdiction, thus, interest rates may accordingly be pegged at such annum is outrageous and inordinate. Conformably to these precedent cases,
levels or rates as the lender and the borrower may agree upon. a combined interest and penalty rate at 10% per month or 120% per annum,
should be deemed iniquitous, unconscionable, and inordinate. Hence, we
sustain the appellate court when it found the interest and penalty rates in the
Petitioner avers she has not violated any law considering she is not Deed of Real Estate Mortgage in the present case excessive, hence legally
engaged in the business of money-lending. Moreover, she claims she impermissible.
has suffered inconveniences and incurred expenses for some 13 years
now as a result of respondents’ failure to pay her.
Reduction is legally called for now in rates of interest and penalty stated in
the mortgage contract.
Petitioner further points out that the 5% interest rate was proposed by
the respondents and have only themselves to blame if the interests
and penalties ballooned to its present amount due to their willful delay What then should the interest and penalty rates be?
and default in payment. The appellate court thus erred,
The evidence shows that it was indeed the respondents who proposed the 5%
petitioner now insists, in applying Sps. Almeda v. Court of Appeals and interest rate per month for two (2) months. Having agreed to said rate, the
Medel v. Court of Appeals12 to reduce the interest rate to 12% per parties are now estopped from claiming otherwise. For the succeeding
annum and the penalty to 1% per month. period after the two months, however, the Court of Appeals correctly
reduced the interest rate to 12% per annum and the penalty rate to 1% per
month, in accordance with Article 222718 of the Civil Code.
Respondents admit they owe petitioner ₱350,000 and do not question
any lawful interest on their loan but they maintain that the Deed of Real
Estate Mortgage is null and void since it did not state the true intent of But were respondents entitled to the "surplus" of ₱2,247,32619 as a result of
the parties, which limited the 5% interest rate to only two (2) months the "overpricing" in the auction?
from the date of the loan and which did not provide for penalties and
other charges in the event of default or delay. Respondents
We note that the "surplus" was the result of the computation by the
Court of Appeals of respondents’ outstanding liability based on a
reduced interest rate of 12% per annum and the reduced penalty rate
of 1% per month.

In the instant case, however, there is no "surplus" to speak of. In


adjusting the interest and penalty rates to equitable and conscionable
levels, what the Court did was merely to reflect the true price of the
land in the foreclosure sale. The amount of the petitioner’s bid merely
represented the true amount of the mortgage debt. No surplus in the
purchase price was thus created to which the respondents as the
mortgagors have a vested right.
SOLIDBANK VS PERMANENT HOMES

A month later, the rate increased to 23.5% p.a. It thereafter decreased to


20% p.a. effective August 24, 1997, but again increased to 22.5% p.a.
FACTS effective September 24, 1997. For the next month, the rate surged to 30%
p.a., and decreased to 27% p.a. for the month of November.
PERMANENT HOMES is a real estate development company, and
to finance its housing project known as the "Buena Vida
Townhomes" located within Merville Subdivision, Parañaque City, it
applied and was subsequently granted by SOLIDBANK with an The rate again surged to 34% p.a. for the month of December, and was
"Omnibus Line" credit facility in the total amount of SIXTY MILLION decreased to 30% p.a. from January 22, 1998 to February 20, 1998.
PESOS. Of the entire loan, FIFTY NINE MILLION as [sic] time loan
for a term of up to three hundred sixty (360) days, with interest
thereon at prevailing market rates, and subject to monthly repricing.
For the third loan availment on July 15, 1997, in the amount of 3.9 million,
the interest rate was initially pegged at 35% p.a., but this was decreased
to 21% p.a. from August 14 until September 11, 1997.
The remaining ONE MILLION was available for domestic bills
purchase.
The rate increased slightly to 23% p.a. on September 12, 1997, and
surged to 27% p.a. on October 13, 1997.
To secure the aforesaid loan, PERMANENT HOMES initially
mortgaged three (3) townhouse units within the Buena Vida project
in Parañaque. At the time, however, the instant complaint was filed
against SOLIDBANK, a total of thirty six (36) townhouse units were The rate went down slightly to 27% p.a. for the month of November, and
mortgaged with said bank. Of the 60 million available to to 26% p.a. for the month of December. The rate, however, again surged
PERMANENT HOMES, it availed of a total of 41.5 million pesos, to 30% p.a. on January 12, 1998 before settling at 29% p.a. for the month
covered by three (3) promissory notes, which contain the following of February.
provisions, thus:

IT IS [PERMANENT’S] STAND that SOLIDBANK unilaterally and


arbitrarily accelerated the interest rates without any declared basis of
"xxx 5.
such increases, of which PERMANENT HOMES had not agreed to, or at
We/I irrevocably authorize Solidbank to increase or decrease at any the very least, been informed of. This is contrary to their earlier agreement
time the interest rate agreed in this Note or Loan on the basis of, that any interest rate changes will be subject to mutual agreement of the
among others, prevailing rates in the local or international capital parties. PERMANENT HOMES further admits that it was not able to
markets. For this purpose, protest such arbitrary increases at the time they were imposed by
SOLIDBANK, for fear that SOLIDBANK might cut off the credit facility it
We/I authorize Solidbank to debit any deposit or placement account extended to PERMANENT HOMES. Permanent was then in the midst of
with Solidbank belonging to any one of us. The adjustment of the the construction of its project in Merville, Parañaque City, and
interest rate shall be effective from the date indicated in the written SOLIDBANK knew that it was relying substantially on the credit facility the
notice sent to us by the bank, or if no date is indicated, from the time latter extended to it. [Permanent] thus filed a case before the trial court
the notice was sent. seeking the following:

Should We/I disagree to the interest rate adjustment, We/I shall (1) the annulment of the increases in interest rates on the loans it
prepay all amounts due under this Note or Loan within thirty (30) obtained from SOLIDBANK, on the ground that it was violative of the
days from the receipt by anyone of us of the written notice. principle of mutuality of agreement of the parties, as enunciated in Article
Otherwise, We/I shall be deemed to have given our consent to the 1409 of the New Civil Code,
interest rate adjustment."
(2) the fixing of the interest rates at the applicable interest rate, and

(3) for the trial court to order SOLIDBANK to make an accounting of the
Contrary, however, to the specific provisions as afore-quoted, there payments it made, so as to determine the amount of refund PERMANENT
was a standing agreement by the parties that any increase or is entitled to, as well as to order SOLIDBANK to release the remaining
decrease in interest rates shall be subject to the mutual agreement available balance of the loan it extended to PERMANENT.
of the parties. For the first loan availment of PERMANENT HOMES
on March 20, 1997, in the amount of 19.6 MILLION, from the initial
interest rate of 14.25% per annum (p.a.), the same was increased
ISSUE: Was the increase in rates proper?
15% p.a. effective May 19, 1997; it was again increased to 26% p.a.
effective July 18, 1997. It was thereafter reduced to 20% p.a.
effective August 18, 1997, and then increased to 24% p.a. effective
September 17, 1997. The rate was increased further to 30% p.a. RULING: The stipulations on interest rate repricing are valid. (see below)
effective October 17, 1997, then decreased to 27% p.a. on
November 17, 1997, and again increased to 34% p.a. effective
December 17, 1997. The rate then decreased to 30% p.a. on
January 16, 1998. The three promissory notes between Solidbank and Permanent all
contain the following provisions:

For the second loan availment in the amount of 18 million, the rate
was initially pegged at 15.75% p.a. on June 24, 1997. 5. We/I irrevocably authorize Solidbank to increase or decrease at any
time the interest rate agreed in this Note or Loan on the basis of, among
others, prevailing rates in the local or international capital markets.
For this purpose, We/I authorize Solidbank to debit any deposit or
placement account with Solidbank belonging to any one of us. The We also recognize that Solidbank admitted that it did not promptly send
adjustment of the interest rate shall be effective from the date Permanent written repriced rates, but rather verbally advised
indicated in the written notice sent to us by the bank, or if no date is Permanent’s officers over the phone at the start of the period. Solidbank
indicated, from the time the notice was sent. did not present any written memorandum to support its allegation that it
promptly advised Permanent of the change in interest rates.

6. Should We/I disagree to the interest rate adjustment, We/I shall


prepay all amounts due under this Note or Loan within thirty (30) SC rule that Solidbank’s computation of the interest due from Permanent
days from the receipt by anyone of us of the written notice. should be adjusted to take effect only upon Permanent’s receipt of the
Otherwise, We/I shall be deemed to have given our consent to the written notice from Solidbank.
interest rate adjustment.

Discussion
The stipulations on interest rate repricing are valid because (1) the
parties mutually agreed on said stipulations; (2) repricing takes Q: What did they agree upon as to the interest rates imposed as to
effect only upon Solidbank’s written notice to Permanent of the new the loans? Can Solidbank increase the interest rates?
interest rate; and (3) Permanent has the option to prepay its loan if
A: They agreed in their promissory notes that an increase or
Permanent and Solidbank do not agree on the new interest rate.
decrease in the interest rates shall be mutually agreed by the
The phrases "irrevocably authorize," "at any time" and "adjustment parties.
of the interest rate shall be effective from the date indicated in the
written notice sent to us by the bank, or if no date is indicated, from
the time the notice was sent," emphasize that Permanent should Q: Is that agreement considered valid?
receive a written notice from Solidbank as a condition for the
adjustment of the interest rates. A: Yes, the SC said it is valid. First, the parties mutually agreed on
the said stipulations. Second, the repricing only takes effect
uponSolidbank’s written notice to Permanent of the new interest
rate. Third, Permanent has the option to repay its loan, if they do not
In order that obligations arising from contracts may have the force of
agree on the new interest rate.
law between the parties, there must be a mutuality between the
parties based on their essential equality.

Q: Since the stipulation was valid, was it proper for Solidbank to


impose the increased rates to Permanent Homes? From what time?
10 A contract containing a condition which makes its fulfillment
From the time the interest rates were already increased? What was
dependent exclusively upon the uncontrolled will of one of the
the reason behind the increase of interest rates by Solidbank? This
contracting parties is void.
was taken into consideration by the court. Why was there a need for
Solidbank to increase the rates? What happened?

11 There was no showing that either Solidbank or Permanent A: As contained in the promissory notes, there was a provision
coerced each other to enter into the loan agreements. The terms of stating that they irrevocably authorize Solidbank to increase or
the Omnibus Line Agreement and the promissory notes were decrease at any time the interest rate agreed in the note, or in the
mutually and freely agreed upon by the parties. business thereof, or the prevailing rates in the local or international
capital markets.

Moreover, Solidbank’s range of lending rates were consistent with


"prevailing rates in the local or international capital markets." Q: What was the factor that made Solidbank increase the interest
rate to be imposed on the loans of Permanent?

A: Because of the Asian financial crisis during that time.


Solidbank’s lending rates, as reported to Bangko Sentral ng
Pilipinas and compared the lending rates with the interest rates
charged by Solidbank on Permanent’s loans, thus:
Q: With that, they increased the rate. The SC the increase was
proper and it was not unconscionable because of the Asian financial
crisis. We are saying that the stipulation is valid. However, was it
The repriced interest rates from 12 September to 21 November already proper for Solidbank to impose the interest rate?
1997 conformed to the range of Solidbank’s lending rates to other
borrowers. The 12 December 1997 to 12 February 1998 repriced A: Permanent should first receive a written notice from Solidbank as
interest rates were not unconscionably out of line with the upper a condition for the adjustment of the interest. In this case, they did
range of lending rates to other borrowers. not receive any notice.

The interest rate repricing happened at the height of the Asian Although as we have mentioned earlier, the Usury Law has already
financial crises in late 1997, when banks clamped down on lendings been legally ineffective or suspended since January 1, 1983, and
because of higher credit risks across industries, particularly the real that there is no more ceiling in interest rates, the lenders still do not
estate industry. have unbridled license to impose increased interest rates.
Here, the stipulations on interest rate repricing are valid because (1) Usury is not applicable in:
the parties mutually agreed on said stipulations; (2) repricing takes
effect only upon Solidbank’s written notice to Permanent of the new 1.Rentals
interest rate; and (3) Permanent has the option to prepay its loan if
Permanent and Solidbank do not agree on the new interest rate. 2.Contracts of lease
The phrases "irrevocably authorize," "at any time" and "adjustment
3.Bona fide sale
of the interest rate shall be effective from the date indicated in the
written notice sent to us by the bank, or if no date is indicated, from 4.Increase in price of things sold as a result of a sale on credit
the time the notice was sent," emphasize that Permanent should
receive a written notice from Solidbank as a condition for the 5.True pacto de retro sale
adjustment of the interest rates.

Just take note of that in case the Usury Law is no longer


In relation to (1), take note that for parties to agree in any increase suspended.
in the interest rates, which is an escalation clause, there must also
be a provision that in case of lower interest rates due to the financial
markets, it should also be present in the contract. In other words,
there is an escalation clause and a de-escalation clause, which are
both present in the agreement between the parties.

Again, while the stipulation is considered valid, Solidbank’s


computation of the interest due from Permanent should be adjusted
to take effect only upon Permanent’s receipt of the written notice
from Solidbank. In this case, Solidbank did not present any written
memorandum to support its allegation that it promptly advised
Permanent of the change in interest rates.

The repricing in interest rates under the facts of this case were held
to be not unconscionably out of line with the upper range of lending
rates to other borrowers since it happened at theheight of the Asian
financial crisis in 1997. Here, the repricing of the interest rate was
not deemed unconscionable. Remember- factual circumstances of
the case.

Why do we still discuss the Usury Law? Because it was merely


suspended.

Elements for usury to exist:

1.There is a loan or forbearance of money, goods or credits; and

2.There is an agreement or understanding between the parties that


the loan shall or may be returned

For the interest to be considered usurious, there must be unlawful


intent on the part of the creditor to take more that the legal rate for
the use of money or its equivalent, and that the takingor agreeing to
take for the use of the loan of something in excess of what is
allowed by law.

Purpose of the Usury Law: For the protection ofborrowers from the
imposition of unscrupulous lenders who take undue advantage of
the necessities of others.

Nevertheless despite its suspension, the interest of borrowers is still


protected by the rulings of the SC as to what interest is considered
unconscionable or exorbitant.
PAN PACIFIC VS EQUITABLE Instead, respondent offered Pan Pacific a loan of ₱1.8 million.

Against its will and on the strength of respondent’s promise that the price
adjustment would be released soon, Pan Pacific, through Del Rosario,
The Facts was constrained to execute a promissory note in the amount of ₱1.8
million as a requirement for the loan.
Pan Pacific Service Contractors, Inc. (Pan Pacific) is engaged in
contracting mechanical works on airconditioning system.

Pan Pacific also posted a surety bond. The ₱1.8 million was released
directly to laborers and suppliers and not a single centavo was given to
On 24 November 1989, Pan Pacific, through its President, Ricardo Pan Pacific.
F. Del Rosario (Del Rosario), entered into a contract of mechanical
works (Contract) with respondent for ₱20,688,800. Pan Pacific and Pan Pacific made several demands for payment on the price adjustment
respondent also agreed on nine change orders for ₱2,622,610.30. but respondent merely kept on promising to release the same.

Thus, the total consideration for the whole project was Meanwhile, the ₱1.8 million loan matured and respondent demanded
₱23,311,410.30.6 The Contract stipulated, among others, that Pan payment plus interest and penalty. Pan Pacific refused to pay the loan.
Pacific shall be entitled to a price adjustment in case of increase in Pan Pacific insisted that it would not have incurred the loan if respondent
labor costs and prices of materials under paragraphs 70.17 and released the price adjustment on time.
70.28 of the "General Conditions for the Construction of PCIB
Tower II Extension" (the escalation clause)

Pan Pacific alleged that the promissory note did not express the true
agreement of the parties. Pan Pacific maintained that the ₱1.8 million was
Pursuant to the contract, Pan Pacific commenced the mechanical to be considered as an advance payment on the price adjustment.
works in the project site, the PCIB Tower II extension building in Therefore, there was really no consideration for the promissory note;
Makati City. The project was completed in June 1992. Respondent hence, it is null and void from the beginning Respondent stood firm that it
accepted the project on 9 July 1992. would not release any amount of the price adjustment to Pan Pacific but it
would offset the price adjustment with Pan Pacific’s outstanding balance
of ₱3,226,186.01, representing the loan, interests, penalties and
collection charges.
In 1990, labor costs and prices of materials escalated. On 5 April
1991, in accordance with the escalation clause, Pan Pacific claimed
a price adjustment of ₱5,165,945.52.
Pan Pacific refused the offsetting but agreed to receive the reduced
amount of ₱3,730,957.07 as recommended by the TCGI Engineers for
the purpose of extrajudicial settlement, less ₱1.8 million and ₱414,942 as
Respondent’s appointed project engineer, TCGI Engineers, asked
advance payments.
for a reduction in the price adjustment. To show goodwill, Pan
Pacific reduced the price adjustment to ₱4,858,548.67.

On 6 May 1994, petitioners filed a complaint for declaration of


nullity/annulment of the promissory note, sum of money, and damages
On 28 April 1992, TCGI Engineers recommended to respondent
against the respondent with the RTC.
that the price adjustment should be pegged at ₱3,730,957.07. TCGI
Engineers based their evaluation of the price adjustment on the
following factors:
Upon reaching the CA, it imposed a 12% legal interest in the amount, Pan
Pacific claims that the interest rate applicable should be the 18% bank
lending rate.
1. Labor Indices of the Department of Labor and Employment.

2. Price Index of the National Statistics Office.


ISSUE: What interest should apply? - 18%
PD 1594 and its Implementing Rules and Regulations as amended,
15 March 1991.

In this appeal, petitioners allege that the contract between the parties
consists of two parts, the Agreement and the General Conditions, both of
Pan Pacific contended that with this recommendation, respondent
which provide for interest at the bank lending rate on any unpaid amount
was already estopped from disclaiming liability of at least
due under the contract. Petitioners further claim that there is nothing in
₱3,730,957.07 in accordance with the escalation clause.
the contract which requires the consent of the respondent to be given in
order that petitioners can charge the bank lending rate.

Due to the extraordinary increases in the costs of labor and


materials, Pan Pacific’s operational capital was becoming
Specifically, petitioners invoke Section 2.5 of the Agreement and Section
inadequate for the project. However, respondent withheld the
60.10 of the General Conditions as follows:
payment of the price adjustment under the escalation clause
despite Pan Pacific’s repeated demands.

Agreement
2.5 If any payment is delayed, the CONTRACTOR may charge The escalation clause must be read in conjunction with Section 2.5 of the
interest thereon at the current bank lending rates, without prejudice Agreement and Section 60.10 of the General Conditions which pertain to
to OWNER’S recourse to any other remedy available under existing the time of payment.
law.

Once the parties agree on the price adjustment after due consultation in
General Conditions compliance with the provisions of the escalation clause, the agreement is
in effect an amendment to the original
60.10 Time for payment
contract, and gives rise to the liability of respondent to pay the adjusted
The amount due to the Contractor under any interim certificate costs.
issued by the Engineer pursuant to this Clause, or to any term of the
Contract, shall, subject to clause 47, be paid by the Owner to the
Contractor within 28 days after such interim certificate has been
delivered to the Owner, or, in the case of the Final Certificate Under Section 60.10 of the General Conditions, the respondent shall pay
referred to in Sub-Clause 60.8, within 56 days, after such Final such liability to the petitioner within 28 days from issuance of the interim
Certificate has been delivered to the Owner. certificate. Upon respondent’s failure to pay within the time provided (28
days), then it shall be liable to pay the stipulated interest.

In the event of the failure of the Owner to make payment within the
times stated, the Owner shall pay to the Contractor interest at the This is the logical interpretation of the agreement of the parties on the
rate based on banking loan rates prevailing at the time of the imposition of interest. To provide a contrary interpretation, as one
signing of the contract upon all sums unpaid from the date by which requiring a separate consent for the imposition of the stipulated interest,
the same should have been paid. would render the intentions of the parties nugatory.

The provisions of this Sub-Clause are without prejudice to the Article 1956 of the Civil Code, which refers to monetary interest,
Contractor’s entitlement under Clause 69. (Emphasis supplied) specifically mandates that no interest shall be due unless it has been
expressly stipulated in writing. Therefore, payment of monetary interest is
allowed only if:

Petitioners thus submit that it is automatically entitled to the bank


lending rate of interest from the time an amount is determined to be
due thereto, which respondent should have paid. Therefore, as (1) there was an express stipulation for the payment of interest; and
petitioners have already proven their entitlement to the price
adjustment, it necessarily follows that the bank lending interest rate (2) the agreement for the payment of interest was reduced in writing.
of 18% shall be applied.

The concurrence of the two conditions is required for the payment of


The escalation clause of the contract provides: monetary interest.

CHANGES IN COST AND LEGISLATION

70.1 Increase or Decrease of Cost SC:

There shall be added to or deducted from the Contract Price such We agree with petitioners’ interpretation that in case of default, the
sums in respect of rise or fall in the cost of labor and/or materials or consent of the respondent is not needed in order to impose interest at the
any other matters affecting the cost of the execution of the Works as current bank lending rate.
may be determined.

Applicable Interest Rate


70.2 Subsequent Legislation
Under Article 2209 of the Civil Code, the appropriate measure for
If, after the date 28 days prior to the latest date of submission of damages in case of delay in discharging an obligation consisting of the
tenders for the Contract there occur in the country in which the payment of a sum of money is the payment of penalty interest at the rate
Works are being or are to be executed changes to any National or agreed upon in the contract of the parties.
State Statute, Ordinance, Decree or other Law or any regulation or
bye-law (sic) of any local or other duly constituted authority, or the
introduction of any such State Statute, Ordinance, Decree, Law, In the absence of a stipulation of a particular rate of penalty interest,
regulation or bye-law (sic) which causes additional or reduced cost payment of additional interest at a rate equal to the regular monetary
to the contractor, other than under Sub-Clause 70.1, in the interest becomes due and payable.
execution of the Contract, such additional or reduced cost shall,
after due consultation with the Owner and Contractor, be
determined by the Engineer and shall be added to or deducted from
the Contract Price and the Engineer shall notify the Contractor Finally, if no regular interest had been agreed upon by the contracting
accordingly, with a copy to the Owner. parties, then the damages payable will consist of payment of legal interest
which is 6%, or in the case of loans or forbearances of money, 12% per
annum. It is only when the parties to a contract have failed to fix the rate
of interest or when such amount is unwarranted that the Court will apply
the 12% interest per annum on a loan or forbearance of money.
stipulated in writing. Therefore, payment of the monetary interest is
allowed only if:
The written agreement entered into between petitioners and
respondent provides for an interest at the current bank lending rate
in case of delay in payment and the promissory note charged an
interest of 18%. 1.there was an express stipulation for the payment of interest; and

2.the agreement for the payment of interest was reduced in writing.


The concurrence of the two conditions is required for the payment of
To prove petitioners’ entitlement to the 18% bank lending rate of the monetary interest.
interest, petitioners presented the promissory note36 prepared by
respondent bank itself. This promissory note, although declared
void by the lower courts because it did not express the real intention
of the parties, is substantial proof that the bank lending rate at the Also, under Article 2209 of the NCC, the appropriate measure for
time of default was 18% per annum. Absent any evidence of fraud, the damages in the case of delay in discharging an obligation
undue influence or any vice of consent exercised by petitioners consisting of the payment of a sum of money is the payment of the
against the respondent, the interest rate agreed upon is binding on penalty interest at the rate agreed upon in the contract of the
them. parties. In the absence of a stipulation of a particular rate of penalty
interest, payment of additional interest at a rate equal to the regular
monetary interest becomes due and payable. Finally, if no regular
interest had been agreed upon by the contracting parties, then the
Q1: What is the proper interest rate that should be imposed? damages payable will consist of payment of legal interest, which is
6%, or in the case of loans or forbearance of money, 12% p.a. It is
A1: The interest rate that should be imposed is 18%. only when the parties to a contract have failed to fix the rate of
interest or when such amount is unwarranted that the Court will
apply the 12% interest p.a. on a loan or forbearance of money.
Q2: Why?

A2: “Settled is the rule that the agreement or the contract between Another thing that you should consider is the difference
the parties is the formal expression of the parties’ rights, duties, and between monetary and compensatory interests.
obligations. It is the best evidence of the intention of the parties.
Thus, when the terms of an agreement have been reduced in 1.Monetary Interest – compensation for the use of money;
writing it is considered as containing all the terms agreed upon and
there can be, between the parties and their succesors-in-interest, 2.Compensatory Interest – penalty or indemnity of payment for
no evidence of such terms other than the contents of the written damages.
agreement.”

Debtor in delay is liable to pay the legal interest as indemnity fro


Q3: Where was it stipulated? damages even in the absence of stipulation of payment of interest.
Those obliged to deliver or to do something incur in delay from the
A3: Under the General Conditions Section 60.10, which provides time the oblige judicially or extrajudicially demands from them the
that the CONTRACTOR may charge interest at the current bank fulfillment of the obligation. This is in relation to Article 1169.
lending rates. The current bank lending rate is at 18% p.a.

Q4: But isn’t it that the PN was considered void for lack of
consideration?

A4: The written agreement provides that the interest be at the


current bank lending rate in case there is delay in payment. While it
is true that the PN was declared void as it did not express the real
intention of the parties, it was nevertheless considered as
substantial proof that the bank lending rate at that time of default is
18% p.a.

When the terms of the contract are clear and leave no doubt
as to the intention of the parties, the literal meaning of the
stipulation governs. Once, the parties agree on the price adjustment
after due consultation in compliance with the provisions of the
escalation clause, the agreement is in effect an amendment to the
original contract, and gives rise to the liability of the respondent to
pay the adjusted costs. Upon respondent’s failure to pay within the
time provided, then it shall be liable to pay the stipulated interests.
Therefore, the basis is the delay of EPCI such that its consent is not
anymore needed before it can become liable for the adjusted price.

Article 1956, which refers to the monetary interest, specifically


mandates that no interest shall be due unless it has been expressly
NACAR VS GALLERY FRAMES 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.

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 6% per annum from such
finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.

Recently, however, the Bangko Sentral ng Pilipinas Monetary Board


(BSP-MB), in its Resolution No. 796 dated May 16, 2013, approved the
amendment of Section 234 of Circular No. 905, Series of 1982 and,
accordingly, issued Circular No. 799,35 Series of 2013, effective July 1,
2013, the pertinent portion of which reads:

The Monetary Board, in its Resolution No. 796 dated 16 May 2013,
approved the following revisions governing the rate of interest in the
absence of stipulation in loan contracts, thereby amending Section 2 of
Circular No. 905, Series of 1982:

ISSUE: How should the new legal interest apply? - Prospectively. Section 1. The rate of interest for the loan or forbearance of any money,
goods or credits and the rate allowed in judgments, in the absence of an
express contract as to such rate of interest, shall be six percent (6%) per
annum.
HELD:

To recapitulate and for future guidance, the guidelines laid down in


the case of Eastern Shipping Linesare accordingly modified to Section 2. In view of the above, Subsection X305.136 of the Manual of
embody BSP-MB Circular No. 799, as follows: Regulations for Banks and Sections 4305Q.1,37 4305S.338 and
4303P.139 of the Manual of Regulations for Non- Bank Financial
I. When an obligation, regardless of its source, i.e., law, contracts,
Institutions are hereby amended accordingly.
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. This Circular shall take effect on 1 July 2013.

II. With regard particularly to an award of interest in the concept of Thus, from the foregoing, in the absence of an express stipulation as to
actual and compensatory damages, the rate of interest, as well as the rate of interest that would govern the parties, the rate of legal interest
the accrual thereof, is imposed, as follows: for loans or forbearance of any money, goods or credits and the rate
allowed in judgments shall no longer be twelve percent (12%) per annum
- as reflected in the case of Eastern Shipping Lines and Subsection
X305.1 of the Manual of Regulations for Banks and Sections 4305Q.1,
When the obligation is breached, and it consists in the payment of a
4305S. and 4303P.1 of the Manual of Regulations for Non-Bank Financial
sum of money, i.e., a loan or forbearance of money, the interest due
Institutions, before its amendment by BSP-MB Circular No. 799 - but will
should be that which may have been stipulated in writing.
now be six percent (6%) per annum effective July 1, 2013.
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 It should be noted, nonetheless, that the new rate could only be applied
provisions of Article 1169 of the Civil Code. prospectively and not retroactively. Consequently, the twelve percent
(12%) per annum legal interest shall apply only until June 30, 2013. Come
July 1, 2013 the new rate of six percent (6%) per annum shall be the
prevailing rate of interest when applicable.
When an obligation, not constituting a loan or forbearance of money,
is breached, an interest on the amount of damages awarded may
be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated
claims or damages, except when or until the demand can be
established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code), but when such certainty
cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the
Q1: When was the 12% interest rate imposed?

A1: The 12% interest was imposed on the award of backwages from
the finality of the decision on May 27, 2002.

Q2: Why 12%?

A2: It was 12 % first because they followed the ruling in Eastern


Shipping. The guideline in Eastern Shipping (3rd paragraph) states
that when the judgment of the court awarding a sum of money
becomes final and executory, the interest to be imposed is 12%.

Q3: So what is May 27, 2002?

A3: The date when the resolution/decision of the court became final
and executory.

Q4: After that, what is the penalty to be imposed?

A5: The penalty to be imposed is 6% until full payment.

Alright, what do we have here? This is actually emanating from a


case of dismissal with the NLRC wherein there was a judgment for
liability for Php 158,000 as backwages and separation pay. The
judgment became final and executory on May 27, 2002 and there
was a recomputation – from Php 158,000, it became Php 417,000
plus because of the interest rates. Backwages is computed from
time of illegal dismissal until final judgment. Separation pay is
computed from the time of employment until final judgment.

Interest rate of 12% per annum of the total monetary award from
May 27, 2002 (resolution became final and executory). Thereafter,
6% from July 1, 2013 until full satisfaction. Take note that Circular
No. 799 issued by the Bangko Sentral Monetary Board saying that
the legal interest is now 6% should be applied prospectively, not
retroactively. Consequently, the 12% interest shall run until June 30,
2013. (By the way, walay 31 and June) So from July 1, 2013, it is
6% per annum as the prevailing rate of interest.

Again, that is the relevance of why we still discuss cases applying


the rule in Eastern Shipping. We have to make a distinction for
interest rates made applicable prior to July 1, 2013.
SPOUSES SALVADOR ABELLA VS SPOUSES ROMEO interest made after the perfection of the loan in 1999 but before the
ABELLA demand was made in 2002 were invalid.

FACTS:

In their Complaint, petitioners alleged that respondents obtained a ISSUE:


loan from them in the amount of P500,000.00.

Was there a loan?


The loan was evidenced by an acknowledgment receipt dated
March 22, 1999 and was payable within one (1) year. Petitioners
added that respondents were able to pay a total of P200,000.00—
P100,000.00 paid on two separate occasions—leaving an unpaid What interest should apply?
balance of P300,000.00.

RULING -
In their Answer (with counterclaim and motion to dismiss),
Respondents’ claims, as articulated in their testimonies before the trial
respondents alleged that the amount involved did not pertain to a
court, cannot prevail over the clear terms of the document attesting to the
loan they obtained from petitioners but was part of the capital for a
relation of the parties. "If the terms of a contract are clear and leave no
joint venture involving the lending of money.
doubt upon the intention of the contracting parties, the literal meaning of
its stipulations shall control."32

Specifically, respondents claimed that they were approached by


petitioners, who proposed that if respondents were to "undertake
Articles 1933 and 1953 of the Civil Code provide the guideposts that
the management of whatever money [petitioners] would give them,
determine if a contractual relation is one of simple loan or mutuum:
[petitioners] would get 2.5% a month with a 2.5% service fee to
[respondents]."

Art. 1933. By the contract of loan, one of the parties delivers to another,
either something not consumable so that the latter may use the same for
The 2.5% that each party would be receiving represented their
a certain time and return it, in which case the contract is called a
sharing of the 5% interest that the joint venture was supposedly
commodatum; or money or other consumable thing, upon the condition
going to charge against its debtors. Respondents further alleged
that the same amount of the same kind and quality shall be paid, in which
that the one year averred by petitioners was not a deadline for
case the contract is simply called a loan or mutuum.
payment but the term within which they were to return the money
placed by petitioners should the joint venture prove to be not
lucrative. Moreover, they claimed that the entire amount of
P500,000.00 was disposed of in accordance with their agreed terms Commodatum is essentially gratuitous.
and conditions and that petitioners terminated the joint venture,
prompting them to collect from the joint venture’s borrowers. They
were, however, able to collect only to the extent of P200,000.00;
hence, the P300,000.00 balance remained unpaid. Simple loan may be gratuitous or with a stipulation to pay interest.

RTC ruled in favor of petitioners. It noted that the terms of the In commodatum the bailor retains the ownership of the thing loaned, while
acknowledgment receipt executed by respondents clearly showed in simple loan, ownership passes to the borrower.
that: (a) respondents were indebted to the extent of P500,000.00; (b)
this indebtedness was to be paid within one (1) year; and (c) the
indebtedness was subject to interest. Thus, the trial court ....
concluded that respondents obtained a simple loan, although
they later invested its proceeds in a lending enterprise. The
Regional Trial Court adjudged respondents solidarily liable to
petitioners. Art. 1953. A person who receives a loan of money or any other fungible
thing acquires the ownership thereof, and is bound to pay to the creditor
an equal amount of the same kind and quality.

CA ruled that while respondents had indeed entered into a simple


loan with petitioners, respondents were no longer liable to pay the
outstanding amount of P300,000.00. On March 22, 1999, respondents executed an acknowledgment receipt to
petitioners, which states:

As to the loan’s not having earned stipulated interest - at the time


respondents were making interest payments of 2.5% per month, Batan, Aklan
these interest payments were invalid for not being properly
stipulated by the parties.
March 22, 1999

As to the loan’s not having earned interest in the concept of actual


or compensatory damages, -the payments for the 2.5% monthly
This is to acknowledge receipt of the Amount of Five Hundred The rule is not only definite; it is cast in mandatory language. From
Thousand (P500,000.00) Pesos from Mrs. Alma R. Abella, payable Eastern Shipping to Security Bank to Spouses Toring, jurisprudence has
within one (1) year from date hereof with interest. repeatedly used the word "shall," a term that has long been settled to
denote something imperative or operating to impose a duty. Thus, the rule
leaves no room for alternatives or otherwise does not allow for discretion.
It requires the application of the legal rate of interest.
Annie C. Abella (sgd.) Romeo M. Abella (sgd.)

Our intervening Decision in Nacar v. Gallery Frames recognized that the


legal rate of interest has been reduced to 6% per annum:
The text of the acknowledgment receipt is uncomplicated and
straightforward. It attests to: first, respondents’ receipt of the sum of
P500,000.00 from petitioner Alma Abella; second, respondents’ duty Recently, however, the Bangko Sentral ng Pilipinas Monetary Board
to pay back this amount within one (1) year from March 22, 1999; (BSP-MB), in its Resolution No. 796 dated May 16, 2013, approved the
and third, respondents’ duty to pay interest. Consistent with what amendment of Section 2 of Circular No. 905, Series of 1982 and,
typifies a simple loan, petitioners delivered to respondents with the accordingly, issued Circular No. 799, Series of 2013, effective July 1,
corresponding condition that respondents shall pay the same 2013, the pertinent portion of which reads:
amount to petitioners within one (1) year.

The Monetary Board, in its Resolution No. 796 dated 16 May 2013,
approved the following revisions governing the rate of interest in the
absence of stipulation in loan contracts, thereby amending Section 2 of
ON THE DUTY TO PAY CONVENTIONAL INTEREST Circular No. 905, Series of 1982:
Article 1956 of the Civil Code spells out the basic rule that "[n]o
interest shall be due unless it has been expressly stipulated in
writing." Section 1. The rate of interest for the loan or forbearance of any money,
goods or credits and the rate allowed in judgments, in the absence of an
express contract as to such rate of interest, shall be six percent (6%) per
annum.
On the matter of interest, the text of the acknowledgment receipt is
simple, plain, and unequivocal. It attests to the contracting parties’
intent to subject to interest the loan extended by petitioners to
respondents. The controversy, however, stems from the Section 2. In view of the above, Subsection X305.1 of the Manual of
acknowledgment receipt’s failure to state the exact rate of interest. Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of
the Manual of Regulations for

Jurisprudence is clear about the applicable interest rate if a written


instrument fails to specify a rate. In Spouses Toring v. Spouses Non-Bank Financial Institutions are hereby amended accordingly.
Olan,35 this court clarified the effect of Article 1956 of the Civil Code
and noted that the legal rate of interest (then at 12%) is to apply: "In
a loan or forbearance of money, according to the Civil Code, the
interest due should be that stipulated in writing, and in the absence This Circular shall take effect on 1 July 2013.
thereof, the rate shall be 12% per annum."

Thus, from the foregoing, in the absence of an express stipulation as


Spouses Toring cites and restates (practically verbatim) what this to the rate of interest that would govern the parties, the rate of legal
court settled in Security Bank and Trust Company v. Regional Trial interest for loans or forbearance of any money, goods or credits and
Court of Makati, Branch 61: "In a loan or forbearance of money, the the rate allowed in judgments shall no longer be twelve percent (12%)
interest due should be that stipulated in writing, and in the absence per annum — as reflected in the case of Eastern Shipping Lines and
thereof, the rate shall be 12% per annum." Subsection X305.1 of the Manual of Regulations for Banks and Sections
4305Q.1,= 4305S.3 and 4303P.1 of the Manual of Regulations for Non-
Bank Financial Institutions, before its amendment by BSP-MB Circular No.
799 — but will now be six percent (6%) per annum effective July 1, 2013.
Security Bank also refers to Eastern Shipping Lines, Inc. v. Court of It should be noted, nonetheless, that the new rate could only be applied
Appeals, which, in turn, stated: prospectively and not retroactively.

1. When the obligation is breached, and it consists in the payment of Consequently, the twelve percent (12%) per annum legal interest shall
a sum of money, i.e., a loan or forbearance of money, the interest apply only until June 30, 2013. Come July 1, 2013 the new rate of six
due should be that which may have been stipulated in writing. percent (6%) per annum shall be the prevailing rate of interest when
Furthermore, the interest due shall itself earn legal interest from the applicable.42 (Emphasis supplied, citations omitted)
time it is judicially demanded. In the absence of stipulation, the rate
of interest shall be 12% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.39 (Emphasis supplied) Nevertheless, both Bangko Sentral ng Pilipinas Circular No. 799, Series
of 2013 and Nacar retain the definite and mandatory framing of the rule
articulated in Eastern Shipping, Security Bank, and Spouses Toring.
Nacar even restates Eastern Shipping:
The rule spelled out in Security Bank and Spouses Toring is anchored on
Article 1956 of the Civil Code and specifically governs simple loans or
To recapitulate and for future guidance, the guidelines laid down in mutuum.
the case of Eastern Shipping Lines are accordingly modified to
embody BSP-MB Circular No. 799, as follows:

Mutuum is a type of nominate contract that is specifically recognized by


the Civil Code and for which the Civil Code provides a specific set of
.... governing rules: Articles 1953 to 1961. In contrast, Article 1371 is among
the Civil Code provisions generally dealing with contracts. As this case
particularly involves a simple loan, the specific rule spelled out in Security
Bank and Spouses Toring finds preferential application as against Article
1. When the obligation is breached, and it consists in the payment of
1371.
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 In sum, two (2) things must be established for parol evidence to be
of interest shall be 6% per annum to be computed from default, i.e., admitted: first,
from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.43 (Emphasis supplied, 1. that the existence of any of the four (4) exceptions has been put in
citations omitted) issue in a party’s pleading or has not been objected to by the adverse
party; and

2. second, that the parol evidence sought to be presented serves to form


Thus, it remains that where interest was stipulated in writing by the the basis of the conclusion proposed by the presenting party.
debtor and creditor in a simple loan or mutuum, but no exact interest
rate was mentioned, the legal rate of interest shall apply. At present,
this is 6% per annum, subject to Nacar’s qualification on prospective
application. In the Petition they filed before this court, petitioners themselves
acknowledged that checks supposedly attesting to payment of monthly
interest at the rate of 2.5% were admitted by the trial court (and marked
as Exhibits "2," "3," "4," "5," "6," "7," and "8").49 What petitioners have an
Applying this, the loan obtained by respondents from petitioners is issue with is not the admission of these pieces of evidence but how these
deemed subjected to conventional interest at the rate of 12% per have not been appreciated in a manner consistent with the conclusions
annum, the legal rate of interest at the time the parties executed they advance.
their agreement. Moreover, should conventional interest still be due
as of July 1, 2013, the rate of 12% per annum shall persist as the
rate of conventional interest.
Even if it can be shown that the parties have agreed to monthly interest at
the rate of 2.5%, this is unconscionable. As emphasized in Castro v. Tan,
the willingness of the parties to enter into a relation involving an
This is so because interest in this respect is used as a surrogate for unconscionable interest rate is inconsequential to the validity of the
the parties’ intent, as expressed as of the time of the execution of stipulated rate:
their contract. In this sense, the legal rate of interest is an affirmation
of the contracting parties’ intent; that is, by their contract’s silence on
a specific rate, the then prevailing legal rate of interest shall be the
cost of borrowing money. This rate, which by their contract the The imposition of an unconscionable rate of interest on a money
parties have settled on, is deemed to persist regardless of shifts in debt, even if knowingly and voluntarily assumed, is immoral and
the legal rate of interest. Stated otherwise, the legal rate of interest, unjust. It is tantamount to a repugnant spoliation and an iniquitous
when applied as conventional interest, shall always be the legal rate deprivation of property, repulsive to the common sense of man. It has no
at the time the agreement was executed and shall not be support in law, in principles of justice, or in the human conscience nor is
susceptible to shifts in rate. there any reason whatsoever which may justify such imposition as
righteous and as one that may be sustained within the sphere of public or
private morals.

Petitioners, however, insist on conventional interest at the rate of


2.5% per month or 30% per annum. They argue that the
acknowledgment receipt fails to show the complete and accurate The imposition of an unconscionable interest rate is void ab initio for being
intention of the contracting parties. They rely on Article 1371 of the "contrary to morals, and the law."
Civil Code, which provides that the contemporaneous and
subsequent acts of the contracting parties shall be considered
should there be a need to ascertain their intent.44 In addition, they In determining whether the rate of interest is unconscionable, the
claim that this case falls under the exceptions to the Parol Evidence mechanical application of pre-established floors would be wanting. The
Rule, as spelled out in Rule 130, Section 9 of the Revised Rules on lowest rates that have previously been considered unconscionable need
Evidence.45 not be an impenetrable minimum. What is more crucial is a consideration
of the parties’ contexts. Moreover, interest rates must be appreciated in
light of the fundamental nature of interest as compensation to the creditor
It is a basic precept in legal interpretation and construction that a for money lent to another, which he or she could otherwise have used for
rule or provision that treats a subject with specificity prevails over a his or her own purposes at the time it was lent. It is not the default vehicle
rule or provision that treats a subject in general terms. for predatory gain. As such, interest need only be reasonable. It ought not
be a supine mechanism for the creditor’s unjust enrichment at the
expense of another.
The legal rate of interest is the presumptive reasonable The Pre-Trial Order dated December 2, 2002,58 stated that the parties
compensation for borrowed money. While parties are free to deviate admitted that "from the time the principal sum of P500,000.00 was
from this, any deviation must be reasonable and fair. Any deviation borrowed from [petitioners], [respondents] ha[d] been religiously
that is far-removed is suspect. Thus, in cases where stipulated paying"59 what was supposedly interest "at the rate of 2.5% per
interest is more than twice the prevailing legal rate of interest, it is month."60
for the creditor to prove that this rate is required by prevailing market
conditions. Here, petitioners have articulated no such justification.
From March 22, 1999 (after the loan was perfected) to June 22, 2001
(before respondents’ payment of P100,000.00 on June 30, 2001, which
In sum, Article 1956 of the Civil Code, read in light of established was deducted from the principal amount of P500,000.00), the 2.5%
jurisprudence, prevents the application of any interest rate other monthly "interest" was pegged to the principal amount of P500,000.00.
than that specifically provided for by the parties in their loan These monthly interests, thus, amounted to P12,500.00 per month.
document or, in lieu of it, the legal rate. Here, as the contracting Considering that the period from March 1999 to June 2001 spanned
parties failed to make a specific stipulation, the legal rate must apply. twenty seven (27) months, respondents paid a total of P337,500.00.
Moreover, the rate that petitioners adverted to is unconscionable.
The conventional interest due on the principal amount loaned by
respondents from petitioners is held to be 12% per annum.
From June 22, 2001 up to December 22, 2001 (before respondents’
payment of another P100,000.00 on December 30, 2001, which was
deducted from the remaining principal amount of P400,000.00), the 2.5%
III monthly "interest" was pegged to the remaining principal amount of
P400,000.00. These monthly interests, thus, amounted to P10,000.00 per
month. Considering that this period spanned six (6) months, respondents
paid a total of P60,000.00.
Apart from respondents’ liability for conventional interest at the rate
of 12% per annum, outstanding conventional interest—if any is due
from respondents—shall itself earn legal interest from the time
judicial demand was made by petitioners, i.e., on July 31, 2002, From after December 22, 2001 up to June 2002 (when petitioners filed
when they filed their Complaint. This is consistent with Article 2212 their Complaint), the 2.5% monthly "interest" was pegged to the remaining
of the Civil Code, which provides: principal amount of P300,000.00. These monthly interests, thus,
amounted to P7,500.00 per month. Considering that this period spanned
six (6) months, respondents paid a total of P45,000.00.63
Art. 2212. Interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent upon this
point. APPLYING THESE FACTS AND THE PROPERLY APPLICABLE
INTEREST RATE (FOR CONVENTIONAL INTEREST, 12% PER
ANNUM; for interest on conventional interest, 12% per annum from July
31, 2002 up to June 30, 2013 and 6% per annum henceforth), the
So, too, Nacar states that "the interest due shall itself earn legal following conclusions may be drawn:
interest from the time it is judicially demanded."53

By the end of the first year following the perfection of the loan, or as of
Consistent with Nacar, as well as with our ruling in Rivera v. March 21, 2000, P560,000.00 was due from respondents. This consisted
Spouses Chua,54 the interest due on conventional interest shall be of the principal of P500,000.00 and conventional interest of P60,000.00.
at the rate of 12% per annum from July 31, 2002 to June 30, 2013.
Thereafter, or starting July 1, 2013, this shall be at the rate of 6%
per annum.
Within this first year, respondents made twelve (12) monthly payments
totalling P150,000.00 (P12,500.00 each from April 1999 to March 2000).
This was in addition to their initial payment of P6,000.00 in March 1999.
IV

Application of payments must be in accordance with Article 1253 of the


Proceeding from these premises, we find that RESPONDENTS Civil Code, which reads:
MADE AN OVERPAYMENT IN THE AMOUNT OF P3,379.17.

Art. 1253. If the debt produces interest, payment of the principal shall not
As acknowledged by petitioner Salvador Abella, respondents paid a be deemed to have been made until the interests have been covered.
total of P200,000.00, which was charged against the principal
amount of P500,000.00. The first payment of P100,000.00 was
made on June 30, 2001,55 while the second payment of
P100,000.00 was made on December 30, 2001.56 Thus, the payments respondents made must first be reckoned as interest
payments. Thereafter, any excess payments shall be charged against the
principal. As respondents paid a total of P156,000.00 within the first year,
the conventional interest of P60,000.00 must be deemed fully paid and
The Court of Appeals’ September 30, 2010 Decision stated that the remaining amount that respondents paid (i.e., P96,000.00) is to be
respondents paid P6,000.00 in March 1999.57 charged against the principal. This yields a balance of P404,000.00. By
the end of the second year following the perfection of the loan, or as of
March 21, 2001, P452,480.00 was due from respondents. This By the end of the fourth year following the perfection of the loan, or as of
consisted of the outstanding principal of P404,000.00 and March 21, 2003, P21,203. would have been due from respondents. This
conventional interest of P48,480.00. consists of: (a) the outstanding principal of P18,777.60, (b) conventional
interest of P2,253.31, and (c) interest due on conventional interest
starting from July 31, 2002, the date of judicial demand, in the amount of
P172.60. The last (i.e., interest on interest) must be pro-rated. There were
Within this second year, respondents completed another round of only 233 days from July 31, 2002 (the date of judicial demand) to March
twelve (12) monthly payments totaling P150,000.00. 21, 2003 (the end of the fourth year); this left 63.83% of the fourth year,
within which interest on interest might have accrued. Thus, the full annual
interest on interest of 12% per annum could not have been completed,
Consistent with Article 1253 of the Civil Code, as respondents paid and only the proportional amount of 7.66% per annum may be properly
a total of P156,000.00 within the second year, the conventional imposed for the remainder of the fourth year.
interest of P48,480.00 must be deemed fully paid and the remaining
amount that respondents paid (i.e., P101,520.00) is to be charged
against the principal. This yields a balance of P302,480.00. From the end of March 2002 to June 2002, respondents delivered three (3)
more monthly payments of P7,500.00 each. Thus, during this period, they
delivered three (3) monthly payments totalling P22,500.00.
By the end of the third year following the perfection of the loan, or as
of March 21, 2002, P338,777.60 was due from respondents. This
consists of the outstanding principal of P302,480.00 and At this rate, however, payment would have been completed by
conventional interest of P36,297.60. respondents even before the end of the fourth year. Thus, for precision, it
is more appropriate to reckon the amounts due as against payments
made on a monthly, rather than an annual, basis.
Within this third year, respondents paid a total of P320,000.00, as
follows:
By April 21, 2002, _18,965.38 (i.e., remaining principal of P18,777.60 plus
pro-rated monthly conventional interest at 1%, amounting to P187.78)
(a) Between March 22, 2001 and June 30, 2001, respondents would have been due from respondents. Deducting the monthly payment
completed three (3) monthly payments of P12,500.00 each, totaling of P7,500.00 for the preceding month in a manner consistent with Article
P37,500.00. 1253 of the Civil Code would yield a balance of P11,465.38.

(b) On June 30, 2001, respondents paid P100,000.00, which was By May 21, 2002, _11,580.03 (i.e., remaining principal of P11,465.38 plus
charged as principal payment. pro-rated monthly conventional interest at 1%, amounting to P114.65)
would have been due from respondents. Deducting the monthly payment
of P7,500.00 for the preceding month in a manner consistent with Article
1253 of the Civil Code would yield a balance of P4,080.03.
(c) Between June 30, 2001 and December 30, 2001, respondents
delivered monthly payments of P10,000.00 each. At this point, the
monthly payments no longer amounted to P12,500.00 each
because the supposed monthly interest payments were pegged to By June 21, 2002, P4,120.83 (i.e., remaining principal of P4,080.03 plus
the supposedly remaining principal of P400,000.00. Thus, during pro-rated monthly conventional interest at 1%, amounting to P40.80)
this period, they paid a total of six (6) monthly payments totaling would have been due from respondents. Deducting the monthly payment
P60,000.00. of P7,500.00 for the preceding month in a manner consistent with Article
1253 of the Civil Code would yield a negative balance of P3,379.17.

(d) On December 30, 2001, respondents paid P100,000.00, which,


like the June 30, 2001 payment, was charged against the principal. Thus, by June 21, 2002, respondents had not only fully paid the principal
and all the conventional interest that had accrued on their loan. By this
date, they also overpaid P3,379.17. Moreover, while hypothetically,
interest on conventional interest would not have run from July 31, 2002,
(e) From the end of December 2002 to the end of February 2002, no such interest accrued since there was no longer any conventional
respondents delivered monthly payments of P7,500.00 each. At this interest due from respondents by then.
point, the supposed monthly interest payments were now pegged to
the supposedly remaining principal of P300,000.00. Thus, during
this period, they delivered three (3) monthly payments totaling
P22,500.00. As respondents made an overpayment, the principle of solutio indebiti as
provided by Article 2154 of the Civil Code64 applies. Article 2154 reads:

Consistent with Article 1253 of the Civil Code, as respondents paid


a total of P320,000.00 within the third year, the conventional interest Article 2154. If something is received when there is no right to demand it,
of P36,927.50 must be deemed fully paid and the remaining amount and it was unduly delivered through mistake, the obligation to return it
that respondents paid (i.e., P283,702.40) is to be charged against arises.
the principal. This yields a balance of P18,777.60.

In Moreno-Lentfer v. Wolff,65 this court explained the application of


solutio indebiti:
Spouses Salvador and Alma Abella are DIRECTED to jointly and
severally reimburse respondents Spouses Romeo and Annie Abella the
The quasi-contract of solutio indebiti harks back to the ancient amount of P3,379.17, which respondents have overpaid.
principle that no one shall enrich himself unjustly at the expense of
another. It applies where (1) a payment is made when there exists
no binding relation between the payor, who has no duty to pay, and
the person who received the payment, and (2) the payment is made A legal interest of 6% per annum shall likewise be imposed on the total
through mistake, and not through liberality or some other cause.66 judgment award from the finality of this Decision until its full satisfaction.

As respondents had already fully paid the principal and all


conventional interest that had accrued, they were no longer obliged
to make further payments.1awp++i1 Any further payment they made
was only because of a mistaken impression that they were still due.
Accordingly, petitioners are now bound by a quasi-contractual
obligation to return any and all excess payments delivered by
respondents.

Nacar provides that "[w]hen 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 ISLA VS ESTORGA
the rate of 6% per annum."67 This applies to obligations arising
from quasi-contracts such as solutio indebiti. Facts:

On December 6, 2004, petitioners obtained a loan in the amount of


P100,000.00 from respondent, payable anytime from six (6) months to
Further, Article 2159 of the Civil Code provides: one (1) year and subject to interest at the rate of ten percent (10%) per
month, payable on or before the end of each month.

Art. 2159. Whoever in bad faith accepts an undue payment, shall


pay legal interest if a sum of money is involved, or shall be liable for As security, a real estate mortgage was constituted over a parcel of land
fruits received or which should have been received if the thing located in Pasay City, covered by Transfer Certificate of Title (TCT) No.
produces fruits. 1326736 and registered under the name of Edilberto Isla (Edilberto), who
is married to Catalina (subject property).

He shall furthermore be answerable for any loss or impairment of


the thing from any cause, and for damages to the person who When petitioners failed to pay the said loan, respondent sought
delivered the thing, until it is recovered. assistance from the barangay, and consequently, a Kasulatan ng Pautang
dated December 8, 2005 was executed.

Consistent however, with our finding that the excess payment made
by respondents were borne out of a mere mistake that it was due, Petitioners, however, failed to comply with its terms, prompting
we find it in the better interest of equity to no longer hold petitioners respondent to send a demand letter dated November 16, 2006. Once
liable for interest arising from their quasi-contractual obligation. more, petitioners failed to comply with the demand, causing respondent to
file a Petition for Judicial Foreclosure against them before the RTC.

Nevertheless, Nacar also provides:


For their part,petitioners maintained that the subject mortgage was not a
real estate mortgage but a mere loan, and that the stipulated interest of
ten percent (10%) per month was exorbitant and grossly
3. When the judgment of the court awarding a sum of money unconscionable.12 They also insisted that since petitioners were not the
becomes final and executory, the rate of legal interest, whether the absolute owners of the subject property - as the same was allegedly
case falls under paragraph 1 or paragraph 2, above, shall be 6% per owned by Edilberto – they could not have validly constituted the subject
annum from such finality until its satisfaction, this interim period mortgage thereon.
being deemed to be by then an equivalent to a forbearance of
credit.68

RTC granted the Petition for Judicial Foreclosure. Further, the RTC
observed that while it is true that the present action pertains to a judicial
Thus, interest at the rate of 6% per annum may be properly imposed foreclosure, the underlying principle is that a real estate mortgage is but a
on the total judgment award. This shall be reckoned from the finality security and not a satisfaction of indebtedness. Thus, it is only proper to
of this Decision until its full satisfaction. render petitioners solidarily liable to pay respondent and/or foreclose the
subject mortgage should they fail to fulfill their obligation.16

WHEREFORE, the assailed September 30, 2010 Decision and the


January 4, 2011 Resolution of the Court of Appeals Nineteenth
Division in CA-G.R. CV No. 01388 are SET ASIDE. Petitioners
Consequently, the RTC directed petitioners to pay respondent the not written in the contract; whereas
amounts of P100,000.00 with twelve percent (12%) interest per the parties' agreement on the payment
annum from December 2007 until fully paid and P20,000.00 as of interest on the principal loan
attorney's fees. obligation subsists.35 It is as if the
parties failed to specify the interest rate
to be imposed on the principal amount,
in which case the legal rate of interest
CA
prevailing at the time the agreement
Affirmed RTC decision but ordered petitioners to pay respondent the was entered into is applied by the
following sums: (a) P100,000.00 representing the principal of the Court. This is because, according to
loan obligation; (b) an amount equivalent to twelve percent (12%) of jurisprudence, the legal rate of
P100,000.00 computed per year from November 16, 2006 until full interest is the presumptive
payment, representing interest on the loan; (c) an amount reasonable compensation for
equivalent to six percent (6%) of the sums due in (a) and (b) per borrowed money
annum computed from the finality of the CA Decision until full
payment, representing legal interest;
IN THIS CASE, petitioners and respondent entered into a loan obligation
and clearly stipulated for the payment of monetary interest. However,
CA ruled that the RTC erred in imposing the interest rate of twelve the stipulated interest of ten percent (10%) per month was found to be
percent (12%) per annum from December 2007 until full payment. unconscionable, and thus, the courts a quo struck down the same and
pegged a new monetary interest of twelve percent (12%) per annum,
which was the prevailing legal rate of interest for loans and forbearances
of money at the time the loan was contracted on December 6, 2004.
ISSUE: Did the CA err in warding 12% interest on the principal
obligation until full payment?

Reiteration of SPS ABELLA CASE:

RULING: Jurisprudence is clear about the applicable interest rate if a written


instrument fails to specify a rate. In Spouses Toring v. Spouses
Case law states that there are two (2) types of interest, namely, Olan [(589 Phil. 362 [2008])], this court clarified the effect of Article
monetary interest and compensatory interest. 1956 of the Civil Code and noted that the legal rate of interest (then
at 12%) is to apply: "In a loan or forbearance of money, according to
the Civil Code, the interest due should be that stipulated in writing,
and in the absence thereof, the rate shall be 12% per annum."

Spouses Toring cites and restates (practically verbatim) what this


court settled in Security Bank and Trust Company v. Regional Trial
Monetary Interest Compensatory interest Court of Makati, Branch 61 [(331 Phil. 787 [1996])]: "In a loan or
forbearance of money, the interest due should be that stipulated in
Monetary interest is the On the other hand, writing, and in the absence thereof, the rate shall be 12% per
compensation fixed by the parties for compensatory interest is that annum."
the use or forbearance of money. imposed by law or by the
courts as penalty or indemnity
for damages.
xxxx
Accordingly, the right to recover or as damages for delay or
interest arises only either by virtue of a failure to pay the principal
contract (monetary interest) loan on which the interest is The rule is not only definite; it is cast in mandatory language. From
demanded (compensatory Eastern Shipping [Lines, Inc. v. CA] [(G.R. No. 97412, July 12,
interest). 1994, 234 SCRA 78)] to Security Bank to Spouses Toring,
jurisprudence has repeatedly used the word "shall," a term that has
Anent monetary interest, the parties long been settled to denote something imperative or operating to
are free to stipulate their preferred rate. impose a duty. Thus, the rule leaves no room for alternatives or
otherwise does not allow for discretion. It requires the application of
the legal rate of interest.
However, courts are allowed to
equitably temper interest rates that are
found to be excessive, iniquitous, Our intervening Decision in Nacar v. Gallery Frames [(716 Phil. 267
unconscionable, and/or exorbitant, [2013])] recognized that the legal rate of interest has been reduced
such as stipulated interest rates of to 6% per annum[.]
three percent (3%) per month or
higher.

xxxx

In such instances, it is well to clarify


that only the unconscionable
interest rate is nullified and deemed Nevertheless, both Bangko Sentral ng Pilipinas Circular No. 799,
Series of 2013 and Nacar retain the definite and mandatory framing annum from judicial demand, i.e., the date of the filing of the complaint on
of the rule articulated in Eastern Shipping, Security Bank, and July 24, 2007, to June 30, 2013, and thereafter, at the rate of six percent
Spouses Toring. Nacar even restates Eastern Shipping: (6%) per annum from July 1, 2013 until fully paid.

xxxx

Thus, it remains that where interest was stipulated in writing by the


debtor and creditor in a simple loan or mutuum, but no exact interest
rate was mentioned, the legal rate of interest shall apply. At present,
this is 6% per annum, subject to Nacar 's qualification on
prospective application.

Applying this, the loan obtained by respondents from petitioners is


deemed subjected to conventional interest at the rate of 12% per
annum, the legal rate of interest at the time the parties executed
their agreement. Moreover, should conventional interest still be due
as of July 1, 2013, the rate of 12% per annum shall persist as the
rate of conventional interest.

This is so because interest in this respect is used as a surrogate for


the parties' intent, as expressed as of the time of the execution of
their contract. In this sense, the legal rate of interest is an
affirmation of the contracting parties' intent; that is, by their
contract's silence on a specific rate, the then prevailing legal
rate of interest shall be the cost of borrowing money. This rate,
which by their contract the parties have settled on, is deemed
to persist regardless of shifts in the legal rate of interest.
Stated otherwise, the legal rate of interest, when applied as
conventional interest, shall always be the legal rate at the time
the agreement was executed and shall not be susceptible to
shifts in rate.

Following this pronouncement, the Court rules that the CA correctly


imposed a STRAIGHT MONETARY INTEREST RATE OF
TWELVE PERCENT (12%) PER ANNUM ON THE PRINCIPAL
LOAN OBLIGATION OF PETITIONERS TO RESPONDENT,
RECKONED FROM THE DATE OF EXTRAJUDICIAL DEMAND
UNTIL FINALITY OF THIS RULING. At this point, suffice it to say
that petitioner's reliance on ECE Realty is misplaced primarily
because unlike in this case, the amount due therein does not
partake of a loan obligation or forbearance of money.

In addition, not only the principal amount but also the monetary
interest due to respondent as discussed above shall itself earn
compensatory interest at the legal rate, pursuant to Article 2212 of
the Civil Code, which states that "[i]nterest due shall earn legal
interest from the time it is judicially demanded, although the
obligation may be silent upon this point."

To be sure, Article 2212 contemplates the presence of stipulated or


conventional interest, i.e., monetary interest, which has accrued
when demand was judicially made. In cases where no monetary
interest had been stipulated by the parties, no accrued monetary
interest could further earn compensatory .interest upon judicial
demand.

Thus, the principal amount and monetary interest due to respondent


shall earn compensatory interest of twelve percent (12%) per