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Medel vs Court of Appeals, 299 SCRA 481; GR No.

131622, November 27, 1998,


Posted by Pius Morados on November 30, 2011

(Credit Transactions Loans, Usury Law, Interest Rates)

Facts: Defendants obtained a loan from Plaintiff in the amount P50, 000.00, payable
in 2 months and executed a promissory note. Plaintiff gave only the amount of P47,
000.00 to the borrowers and retained P3, 000.00 as advance interest for 1 month
at 6% per month.

Defendants obtained another loan from Defendant in the amount of P90, 000.00,
payable in 2 months, at 6% interest per month. They executed a promissory note
to evidence the loan and received only P84, 000.00 out of the proceeds of the loan.

For the third time, Defendants secured from Plaintiff another loan in the amount of
P300, 000.00, maturing in 1 month, and secured by a real estate mortgage. They
executed a promissory note in favor of the Plaintiff. However, only the sum of P275,
000.00, was given to them out of the proceeds of the loan.

Upon maturity of the three promissory notes, Defendants failed to pay the

Defendants consolidated all their previous unpaid loans totalling P440, 000.00, and
sought from Plaintiff another loan in the amount of P60, 000.00, bringing their
indebtedness to a total of P50,000.00. They executed another promissory note in
favor of Plaintiff to pay the sum of P500, 000.00 with a 5.5% interest per month
plus 2% service charge per annum, with an additional amount of 1% per month as
penalty charges.

On maturity of the loan, the Defendants failed to pay the indebtedness which
prompt the Plaintiffs to file with the RTC a complaint for collection of the full
amount of the loan including interests and other charges.

Declaring that the due execution and genuineness of the four promissory notes has
been duly proved, the RTC ruled that although the Usury Law had been repealed,
the interest charged on the loans was unconscionable and revolting to the
conscience and ordered the payment of the amount of the first 3 loans with a 12%
interest per annum and 1% per month as penalty.

On appeal, Plaintiff-appellants argued that the promissory note, which consolidated

all the unpaid loans of the defendants, is the law that governs the parties.

The Court of Appeals ruled in favor of the Plaintiff-appellants on the ground that the
Usury Law has become legally inexistent with the promulgation by the Central Bank
in 1982 of Circular No. 905, the lender and the borrower could agree on any
interest that may be charged on the loan, and ordered the Defendants to pay the
Plaintiffs the sum of P500,000, plus 5.5% per month interest and 2& service charge
per annum , and 1% per month as penalty charges.

Defendants filed the present case via petition for review on certiorari.

Issue: WON the stipulated 5.5% interest rate per month on the loan in the sum of
P500, 000.00 is usurious.

Held: No.

A stipulated rate of interest at 5.5% per month on the P500, 000.00 loan is
excessive, iniquitous, unconscionable and exorbitant, but it cannot be considered
usurious because Central Bank Circular No. 905 has expressly removed the
interest ceilings prescribed by the Usury Law and that the Usury Law is now legally

Doctrine: A CB Circular cannot repeal a law. Only a law can repeal another law.

Jurisprudence provides that CB Circular did not repeal nor in a way amend the
Usury Law but simply suspended the latters effectivity (Security Bank and Trust Co
vs RTC). Usury has been legally non-existent in our jurisdiction. Interest can now
be charged as lender and borrower may agree upon.

Law: Article 2227, Civil Code

The courts shall reduce equitably liquidated damages, whether intended as an

indemnity or a penalty if they are iniquitous or unconscionable.

Note: While the Usury Law ceiling on interest rates was lifted by the CB Circular
905, nothing in the said circular could possibly be read as granting carte blanche
authority to lenders to raise interest rates to levels which would either enslave their
borrowers or lead to a haemorrhaging of their assets (Almeda vs. CA, 256 SCRA
292 [1996]).

UCPB v. Spouses Beluso

The UCPB granted the spouses Beluso a Promissory Note Line under a Credit
Agreement. The spouses Beluso constituted other than their promissory notes, a
real estate mortgage over parcels of land as additional security for the obligation.
UCPB unilaterally applied interest rates on the different promissory notes ranging
from 18% to 34%: FOR VALUE RECEIVED, I, and/or We, on or before due date,
SPS. SAMUEL AND ODETTE BELUSO (BORROWER), jointly and severally promise to
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. The spouses, however, failed to
pay their obligations with the bank. Due to this, the bank foreclosed the property
which was under mortgage. Spouses Beluso filed a petition for the annulment,
accounting and damages against UCPB. Issue:
Is UCPB authorized to unilaterally fix the interest rates?
No! A promissory note which grants the creditor the power to unilaterally fix the
interest rate means that the promissory note does not contain a clear statement in
writing of the finance charge. Such provision is illegal because it violates the
provisions of the Civil Code on mutuality of contracts Ratio:
Art. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.

We applied this provision in Philippine National Bank v. Court of Appeals, where we

held: In order that obligations arising from contracts may have the force of law
between the parties, there must be mutuality between the parties based on their
essential equality. A contract containing a condition which makes its fulfillment
dependent exclusively upon the uncontrolled will of one of the contracting parties, is
void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the
loan agreement between the PNB and the private respondent gave the PNB a
license (although in fact there was none) to increase the interest rate at will during
the term of the loan, that license would have been null and void for being violative
of the principle of mutuality essential in contracts. It would have invested the loan
agreement with the character of a contract of adhesion, where the parties do not
bargain on equal footing, the weaker party's (the debtor) participation being
reduced to the alternative "to take it or leave it" (Qua vs. Law Union & Rock
Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party
whom the courts of justice must protect against abuse and imposition. Moral:
Interest Agreements must always be mutually agreed upon by the parties! Thank

imperial vs. jaucian

Petitioner obtained six (6) separate loans amounting to P 320,000.00
from the respondent. In the written agreement, they agreed upon the 16% interest
per month plus penalty charge of 5% per month and the 25% attorneys fee, failure
to pay the said loans on the stipulated date.
Petitioner executed six (6) separate promissory notes and issued several
checks as guarantee for payment. When the said loans become overdue and
unpaid, especially when the petitioners checks issued were dishonored, respondent
made repeated oral and written demands for payment.
The petitioner was able to pay only P 116,540.00 as found by the RTC.
Although she alleged that she had already paid the amount of P 441,780.00 and the
excess of P 121,780.00 is more than the interest that could be legally charged, the
Court affirms the findings of RTC that petitioner is still indebted to the respondent.

Whether or not the stipulated interest of 16% per month, 5% per month
for penalty charge and 25% attorneys fee are usurious.

YES. The rate must be equitably reduced for being iniquitous,
unconscionable and exorbitant. While the Usury Law ceiling on interest rates was
lifted by C.B. Circular No. 905, nothing in the said circular grants lenders carte
blanche authority to raise interests rates to levels which will either enslave their
borrowers or lead to a hemorrhaging of their assets.
When the agreed rate is iniquitous or unconscionable, it considered
contrary to morals, if not against the law. Such stipulation is void. Since the
stipulation is void, it is as if there was no express contract thereon. Hence, courts
may reduce the interest rate as reason and equity demand.
The interest rate of 16% per month was reduced to 1.167% per month or
14% per annum and the penalty charge of 5% per month was also reduced to
1.167% per month or 14% per annum.
The attorneys fees here are in the nature of liquidated damages and the
stipulation therefor is aptly called a penal clause. So long as the stipulation does
not contravene the law, morals, public order or public policy, it is binding upon the
obligor. Nevertheless, in the case at bar, petitioners failure to comply fully with her
obligation was not motivated by ill will or malice. The partial payments she made
were manifestations of her good faith. Hence the attorneys fees were reduced to
10% of the total due and payable.

Liam Law vs Olympic Sawmill Co. and Elino Lee Chi 129 SCRA 449 (1984)

March 15, 2016

Ponente: J. Melencio-Herrera


Liam Law loaned P10,000.00 without interest to the Olympic Sawmill Co. and Elino
Lee Chi, as the managing partner. When the loan became due, the debtors asked
for extension and another loan was executed, extending the payment of the loan
and adding P6,000.00 as answer for attorneys fees, legal interest and other cost
incident thereto.

Law filed a collection case when the defendants were unable to pay the second
time. The CFI of Bulacan decided in favor of the plaintiff. On appeal, the Court of
Appeals endorsed the case to the Supreme Court, stating that the issue involved
was one of law.


Whether or not the agreement to pay P6,000.00 in addition to the principal

obligation is lawful.


Yes. Article 1354 of the Civil Code states that:

Article 1354. Although the cause is not stated in the contract, it is

presumed that it exists and is lawful, unless the debtor proves the contrary.
In relation to the case, the agreement of the parties relative to the
P6,000.00 obligation, without an evidentiary hearing, it has to be concluded that
defendants had not proven that the P6,000.00 obligation was illegal. Hence, it is
presumed that the agreement of the parties relative to the P6,000.00 exists and is


MARCH 28, 2013 ~ VBDIAZ





G.R. No. 160545; March 9, 2010

December 8, 1993, Pantaleon, President and Chairman of the Board of PRISMA,
obtained a P1M loan from the respondent, with monthly interest of P40,000.00
payable for 6 months, or a total obligation of P1,240,000.00 payable within 6 mos.
To secure the payment of the loan, Pantaleon issued a promissory. Pantaleon signed
the promissory note in his personal capacity and as duly authorized by the Board of

Directors of PRISMA. The petitioners failed to completely pay the loan within the 6month period.

As of January 4, 1997, respondent found that the petitioners still had an

outstanding balance of P1,364,151.00, to which respondent applied a 4% monthly

On August 28, 1997, respondent filed a complaint for sum of money to enforce the
unpaid balance, plus 4% monthly interest. In their Answer, the petitioners admitted
the loan of P1,240,000.00, but denied the stipulation on the 4% monthly interest,
arguing that the interest was not provided in the promissory note. Pantaleon also
denied that he made himself personally liable and that he made representations
that the loan would be repaid within six (6) months.

RTC found that the respondent issued a check for P1M in favor of the petitioners for
a loan that would earn an interest of 4% or P40,000.00 per month, or a total of
P240,000.00 for a 6-month period. RTC ordered the petitioners to jointly and
severally pay the respondent the amount of P3,526,117.00 plus 4% per month
interest from February 11, 1999 until fully paid.

Petitioners appealed to CA insisting that there was no express stipulation on the 4%

monthly interest. CA favored respondent but noted that the interest of 4% per
month, or 48% per annum, was unreasonable and should be reduced to 12% per
annum. MR denied hence this petition.

Whether the parties agreed to the 4% monthly interest on the loan. If so, does the
rate of interest apply to the 6-month payment period only or until full payment of
the loan?

Petition is meritorious. Interest due should be stipulated in writing; otherwise, 12%
per annum

Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith. When the terms of a contract are

clear and leave no doubt as to the intention of the contracting parties, the literal
meaning of its stipulations governs. Courts have no authority to alter the contract
by construction or to make a new contract for the parties; a courts duty is confined
to the interpretation of the contract the parties made for themselves without regard
to its wisdom or folly, as the court cannot supply material stipulations or read into
the contract words the contract does not contain. It is only when the contract is
vague and ambiguous that courts are permitted to resort to the interpretation of its
terms to determine the parties intent.

In the present case, the respondent issued a check for P1M. In turn, Pantaleon, in
his personal capacity and as authorized by the Board, executed the promissory
note. Thus, the P1M loan shall be payable within 6 months. The loan shall earn an
interest of P40,000.00 per month, for a total obligation of P1,240,000.00 for the
six-month period. We note that this agreed sum can be computed at 4% interest
per month, but no such rate of interest was stipulated in the promissory note;
rather a fixed sum equivalent to this rate was agreed upon.

Article 1956 of the Civil Code specifically mandates that no interest shall be due
unless it has been expressly stipulated in writing. The payment of interest in loans
or forbearance of money is allowed only if: (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 interest at a stipulated rate. The collection of interest without any
stipulation in writing is prohibited by law.

The interest of P40,000.00 per month corresponds only to the six-month period of
the loan, or from January 8, 1994 to June 8, 1994, as agreed upon by the parties in
the promissory note. Thereafter, the interest on the loan should be at the legal
interest rate of 12% per annum.

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 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.

The facts show that the parties agreed to the payment of a specific sum of money
of P40,000.00 per month for six months, not to a 4% rate of interest payable within
a 6-month period.

No issue on the excessiveness of the stipulated amount of P40,000.00 per month

was ever put in issue by the petitioners; they only assailed the application of a 4%
interest rate, since it was not agreed upon.

It is a familiar doctrine in obligations and contracts that the parties are bound by
the stipulations, clauses, terms and conditions they have agreed to, which is the
law between them, the only limitation being that these stipulations, clauses, terms
and conditions are not contrary to law, morals, public order or public policy. The
payment of the specific sum of money of P40,000.00 per month was voluntarily
agreed upon by the petitioners and the respondent. There is nothing from the
records and, in fact, there is no allegation showing that petitioners were victims of
fraud when they entered into the agreement with the respondent.

Therefore, as agreed by the parties, the loan of P1M shall earn P40,000.00 per
month for a period of 6 months, for a total principal and interest amount of
P1,240,000.00. Thereafter, interest at the rate of 12% per annum shall apply. The
amounts already paid by the petitioners during the pendency of the suit, amounting
toP1,228,772.00 as of February 12, 1999, should be deducted from the total
amount due, computed as indicated above. We remand the case to the trial court
for the actual computation of the total amount due.

WHEREFORE, in light of all the foregoing, we hereby REVERSE and SET ASIDE the
Decision CA

Pilipinas Bank v. CA
1994 / Puno / Petition for review of a CA decision
The cause > Different categories > Proximate
Florencio Reyes issued postdated checks to Winner Industrial Corporation (20k~) and
Vincent Tui (11k~) as payments for the purchased shoe materials and rubber shoes. To
cover the face value of the checks, Reyes requested PCIB Money Shops manager to effect
the withdrawal of 32k from his savings account and have it deposited with his current
account with Pilipinas Bank. Roberto Santos was requested to make the deposit.
In depositing in the name of Reyes, Santos inquired from the teller Reyes current
account number to complete the deposit slip he was accomplishing. He was informed that it

was 815 so that was the number he placed on the slip. Noting that the account number
coincided with the name Florencio, Efren Alagasi [Pilipinas Bank Current Account
Bookkeeper] thought it was for Florencio Amador, so he posted the deposit in the account of
The check in favor of Winner was presented for payment. Since Reyes ledger
indicated that his account only had 4k~ balance, the check was dishonored. This check was
redeposited 4 days later but it was dishonored again. This also happened with the check
issued in Tuis favor. Tui returned the check to Reyes and demanded a cash payment of its
face value.
Furious over the incident, Reyes proceeded to Pilipinas Bank and urged an immediate
verification of his account. It was then that the bank noticed the error. The 32k posted in
Amadors account was transferred to Reyes account upon being cleared by the former that
he did not effect a deposit of 32k. The bank then honored the check.
RTC ordered Pilipinas Bank to pay damages to Reyes, and the CA affirmed the RTC.


For NCC 2179 to apply, it must be established that Reyes own negligence was the
immediate and proximate cause of his injury.
Proximate cause any cause which, in natural and continuous sequence, unbroken
by any efficient intervening cause, produces the result complained of and without which
would not have occurred and from which it ought to have been foreseen or reasonably
anticipated by a person of ordinary case that the injury complained of or some similar
injury, would result therefrom as a natural and probable consequence.
Alagasi failed to exercise degree of care required in the performance of his duties
He posted the cash deposit in Amadors account from the assumption that the name
Florencio appearing on the ledger without going through the full name, is the same
Florencio stated in the deposit slip
He should have continuously gone beyond mere assumption and proceeded with
clear certainty, considering the amount involved and the repercussions it would create -->
checks issued by Reyes were dishonored because his ledger indicated an insufficient balance

solidbank vs. permanent homes

G.R. No. 171925 : July 23, 2010 SOLIDBANK CORPORATION, (now Metroplolitan
Bank and Trust Company), Petitioner, vs. PERMANENT HOMES, INCORPORATED,
Respondent. FACTS: The records disclose that PERMANENT HOMES is a real estate
development company, and to finance its housing project known as the Buena Vida
Townhome located within Merville Subdivision, Paraaque City, it applied and was
subsequently granted by SOLIDBANK with an Omnibus Line credit facility in the
total amount of SIXTY MILLION PESOS. Of the entire loan, FIFTY NINE MILLION as
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. The remaining ONE
MILLION was available for domestic bills purchase. To secure the aforesaid loan,
PERMANENT HOMES initially mortgaged three(3) townhouse units within the Buena
Vida project in Paraaque. At the time, however, the instant complaint was filed
against SOLIDBANK, a total of thirty six (36) townhouse units were mortgaged with
said bank. Of the 60 million available to PERMANENT HOMES, it availed of a total of

41.5 million pesos covered by three(3) promissory notes. There was a standing
agreement by the parties that any increase or decrease in interest rates shall be
subject to the mutual agreement of the parties. For the three loan availments that
PERMANENT HOMES obtained, the herein respondent argued that SOLIDBANK
unilaterally and arbitrarily accelerated the interest rates without any declared basis
of such increases, of which PERMANENT HOMES had not agreed to, or at the very
least, been informed of. On July 5, 2002, the trial court promulgated its Decision in
favor of Solidbank. Permanent then filed an appeal before the appellate court which
was granted, in which reversed and set aside the assailed decision dated July 5,
2002. Hence, the present petition. ISSUES: (1) WON the Honorable Court of
Appeals was correct in ruling that the increases in the interest rates on Permanents
loans are void for having been unilaterally imposed without basis. (2) WON the
Honorable Court of Appeals was correct in ordering the parties to enter into an
express agreement regarding the applicable interest rates on Permanents loan
availments subsequent to the initial thirty-day (30) period. RULING: (1) Yes.
Although interest rates are no longer subject to a ceiling, the lender still does not
have an unbridled license to impose increased interest rates. The lender and the
borrower should agree on the imposed rate, and such imposed rate should be in
writing of which was not provided by petitioner. (2) Yes. In order that obligations
arising from contracts may have the force of law between the parties, there must
be mutuality between the parties based on their essential quality. A contract
containing a condition which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties is void. There was no showing
that either Solidbank or Permanent coerced each other to enter into the loan
agreements. The terms of the Omnibus Line Agreement and the promissory notes
were mutually and freely agreed upon by the parties.

Chua vs Timan
Interest Rate Usurious Rates 12% Per Annum Interest Rate Central Bank
Circular No. 905-82 Legal Rate

In February and March 1999 Chua loaned the Timans 6 loans amounting to P864k.
The interest rate agreed upon was 7%. The Timans paid at that rate until
September 1999. In October 1999, the % rate was reduced to 5%. In March 2000,
the Timans offered to pay P764k. Chua did not accept payment as they wanted the

full amount of P864k. The Timans then consigned with the court the amount of

The RTC ruled that the 7% and the reduced rate of 5% stipulated rate is excessive,
iniquitous, unconscionable and exorbitant (equivalent to 84% and 60% per annum
rate). Chua averred that by virtue of CB Circular 905, the ceiling on interest rate
has been removed hence the 5-7% rate is valid and in the first place, Timan agreed
to it.

ISSUE: Whether or not the rate is valid.

HELD: No. As has been ruled by the Supreme Court in a multitude of cases, interest
rates of 3% and higher are already excessive. The rate should then be reduced to
12% per annum or 1% per month. The Usury Law has been rendered ineffective by
the said CB Circular but it has not repealed the law, it merely suspended it. Note
that only laws can repeal laws, not circulars.

While C.B. Circular No. 905-82, which took effect on January 1, 1983, effectively
removed the ceiling on interest rates for both secured and unsecured loans,
regardless of maturity, nothing in the said circular could possibly be read as
granting carte blanche authority to lenders to raise interest rates to levels which
would either enslave their borrowers or lead to a hemorrhaging of their assets.

Gullas VS PNB
Facts: On august 2, 1933 the Treasurer of the United states Veterans Bureau issued
a warrant in the amount of $361. Atty. Paulino Gullas and Pedro Lopez signed as
endorsers of this check which was cashed by PNB and dishonored by insular
treasurer. The outstanding balance of Atty. Gullas on the books of the bank was
P509. Gullas left his residence for Manila so the notices of dishonor, informing him
that the amount of $366 was applied to his outstanding balance, was not received
by him. Upon his return from Cebu, he paid the balance inconvenience to his
account, which are the insurance unpaid due to lack of credit and the periodicals in
the vicinity

ISSUE: Whether or not the bank had the right to automatically credit Gullas
account, and it was not prejudicial to him

RULING: It has been held a long line of authorities that notice of dishonor is in
order to charge all the endorser and that the right of action against him does not
accrue until the notice is given. A bank has a right to set off the deposits in its
hands for the payment of any indebtness to in on the part of a depositor. However
this may be, as to an endorser the situation is different, and notices should actually
have been given to him in order that he might protect his interests.


JAPOR, respondents July 8, 2005 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. However, nothing in said
Circular grants lenders carte blanche authority to impose interest rates which would
result in the enslavement of their borrowers or to the hemorrhaging of their assets.
While a stipulated rate of interest may not technically and necessarily be usurious
under Circular No. 905, usury now being legally non-existent in our jurisdiction,
nonetheless, said rate may be equitably reduced should the same be found to be
iniquitous, unconscionable, and exorbitant, and hence, contrary to morals (contra
bonos mores), if not against the law. FACTS: Herein respondents Spouses Virgilio
Japor and Luz Roces Japor were the owners of an 845.5 square-meter residential
lot including its improvements, situated in Barangay Ibabang Mayao, Lucena City,
as shown by Transfer Certificate of Title (TCT) No. T-39514. Adjacent to the
Japors lot is another lot owned by respondent Marta Japor, which consisted of
325.5 square meters and titled under TCT No. T-15018. On August 23, 1982, the
respondents obtained a loan of P90,000 from the Quezon Development Bank
(QDB), and as security therefor, they mortgaged the lots covered by TCT Nos. T39514 and T-15018 to QDB, as evidenced by a Deed of Real Estate Mortgage duly
executed by and between the respondents and QDB. On December 6, 1983,
respondents and QDB amended the Deed of Real Estate Mortgage increasing
respondents loan to P128,000. The respondents failed to pay their aforesaid
loans. However, before the bank could foreclose on the mortgage, respondents,
thru their broker, one Lucia G. Orian, offered to mortgage their properties to
petitioner Teresita Dio. Petitioner prepared a Deed of Real Estate Mortgage,
whereby respondents mortgaged anew the two properties already mortgaged with
QDB to secure the timely payment of a P350,000 loan that respondents had from
petitioner Dio. The Deed of Real Estate Mortgage, though dated January 1989, was
actually executed on February 13, 1989 and notarized on February 17, 1989. 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 default, an additional interest equivalent to five percent (5%) of the
amount then due, for every month of delay, would be charged on them. The
respondents failed to settle their obligation to petitioner on April 14, 1989, the
agreed deadline for settlement. On August 27, 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. The auction of the unredeemed properties was set for February 26,
1992. ISSUE: Whether or not the stipulated penalty and interest are excessive,
iniquitous, unconscionable, exorbitant, and contrary to morals? HELD: Yes. 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 iniquitous or unconscionable. We
have likewise ruled that an interest rate of 6% per month or 72% per annum is
outrageous and inordinate. Conformably to these precedent cases, a combined
interest and penalty rate at 10% per month or 120% per annum, should be
deemed iniquitous, unconscionable, and inordinate. The evidence shows that it was
indeed the respondents who proposed the 5% interest rate per month for two (2)
months. Having agreed to said rate, the parties are now estopped from claiming
otherwise. For the succeeding 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 2227 of the Civil Code.

Dario Nacar



703 SCRA 439 Civil Law Torts and Damages Actual and Compensatory
Damages Legal Rate of Interest is now 6%
Labor Law Labor Relations Illegal Dismissal Computation of Monetary Benefits

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). The Supreme
Court 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 as to him, that 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 courts decision
shall become final. Hence, as a consequence, the liability of the employer, if he
loses on appeal, will increase this is just but a risk that the employer cannot avoid
when it continued to seek recourses against the Labor Arbiters 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 Bangko Sentral ng Pilipinas
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


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 courts 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.