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G.R. No. 82082 March 25, 1988 IBAA in the amount of P87,647.19 as of September 15, 1984.

including
interest at 21% per annum penalty charges, and attorney's fees.
INSULAR BANK OF ASIA AND AMERICA,plaintiff-appellant,
vs. At the pre-trial on October 31, 1984, the parties and their counsels appeared.
SPOUSES EPIFANIA SALAZAR and RICARDO SALAZAR, defendants- The defendant-spouses admitted the execution of the promissory note in
appellees. consideration of P48,050.00. The trial court then rendered a summary
judgment the dispositive portion of which reads:

WHEREFORE, judgment is hereby ordered in favor of the


GUTIERREZ, JR., J.: plaintiff ordering the defendant spouses Ricardo Salazar and
Epifania Salazar to pay Insular Bank of Asia and America
This is an appeal by the Insular Bank of Asia and America (IBAA) from the (IBAA) the sum of Eleven Thousand Two Hundred Fifty
judgment of the Regional Trial Court of Leyte in Civil Case No. 6932 for Three Pesos and Twenty Five Centavos ( P11,253.25 ), with
interest thereon at the rate of 19% per annum from the filing
collection of a sum of money with preliminary attachment. The appeal was
of the complaint on September 12, 1984 until fully paid. The
originally brought to the Court of Appeals but was certified to us by that
defendants are further ordered to pay the plaintiff-attorney's
tribunal because it raises only a question of law.
fees in the amount of one Thousand Pesos ( P1,000.00 )
and to pay the costs. (p. 4, Plaintiff- Appellant's Brief).
The facts are not disputed.
Plaintiff-appellant now raises the following assigned errors:
On November 22, 1978, defendants-appellees Epifania Salazar and Ricardo
Salazar obtained a loan from the plaintiff-appellant in the amount of Forty
Two Thousand and Fifty Pesos ( P42,050.00 ) payable on or before I THE LOWER COURT ERRED IN NOT AWARDING TO PLAINTIFF-
December 12, 1980. This loan transaction was evidenced by a promissory APPELLANT PENALTY CHARGES OR LIQUIDATED DAMAGES IN THE
AMOUNT OF 2% PER MONTH ON ALL AMOUNTS DUE AND UNPAID;
note where the defendants-appellees bound themselves jointly and severally
to pay the amount with interest at 19% per annum and with the express
authority to increase without notice the rate of interest up to the maximum II THE LOWER COURT ERRED IN NOT AWARDING INTEREST ON THE
allowed by law and subject further to penalty charges or liquidated damages LOAN AT 21 % PER ANNUM.
upon default equivalent to 2% per month on any amount due and unpaid. In
the event the account was referred to an attorney for collection, the III THE LOWER COURT ERRED IN THE COMPUTATION OF THE
defendants-appellees were also bound to pay 25% of any amount due as AMOUNT OF OBLIGATION DUE FROM DEFENDANTS-APPELLEES
attorney's fees plus expenses of litigation and costs. APPELLEES IN FAVOR OF PLAINTIFF-APPELLANT

In accordance with the agreement, the plaintiff-appellant increased the rate III THE LOWER COURT ERRED IN NOT AWARDING PLAINTIFF-
of interest to 21% pursuant to Central Bank Circular No. 705 dated APPELLANT ATTORNEY'S FEES EQUIVALENT TO 25% OF THE
December 1, 1979. AMOUNT DUE AND EXPENSES OF LITIGATION; and

The promissory note matured but the defendants-appellees failed to pay their IV THE LOWER COURT ERRED IN NOT ORDERING DEFENDANTS-
account. It was only after several demands that the defendants-appellees APELLEES TO JOINTLY AND SEVERALLY PAY THE OBLIGATION. (pp. 4-
were able to make partial payment. As of November 25, 1983, they were 5, Plaintiff-Appellant's Brief)
able to pay a total of P68,676.75 which payments were applied to partially
satisfy the penalty and interest charges. The Escalation Clause provided in the promissory note reads:

On September 12, 1984, the plaintiff-appellant filed a complaint with the The interest herein charged shall be subject to in , without
Regional Trial Court alleging that the defendants-appellees were indebted to notice, depending on whatever policy IBAA may in the future
adopt conformable to law, especially to compensate for any more than 730 days as of January 2, 1976,
in Central Bank interests or rediscounting rates. and

Finding strength in the argument that the promissory note is the contract 2. The increase in the rate of interest can be effective only
between the parties and, under the law, obligations arising from contracts as of January 2, 1976 or on a later date. (Emphasis
have the force of law between the parties, the plaintiff-appellant increased supplied)
the interest rate to 21% per annum effective December 1, 1979 pursuant to
Central Bank Circular No. 705. Moreover, in its comment and supplemental comment submit, ted upon
orders of this Court, the Central Bank took the position that the issuance of
In line with the Court's ruling in the case of Banco Filipino v. Navarro (G.R. its circulars is a valid exercise of its authority to prescribe maximum rates of
No. L-46591, July 28,1987), the interest rate may not be increased by the interest and based on the general principles of contract, the Escalation
plaintiff-appellant in the instant case. It is the nile that escalation clauses are Clause is a valid provision in the loan agreement provided that- 41) the
valid stipulations in commercial contracts to maintain fiscal stability and to increased rate imposed or charged by petitioner does not exceed the ceiling
retain the value of money in long term contracts. However, the enforceability fixed by law or the Monetary Board; (2) the increase is made effective not
of such stipulations are subject to certain conditions. earlier than the effectivity of the law or regulation authorizing such an
increase and (3) the remaining maturities of the loans are more than 730
In the Banco Filipino case, the borrower questioned the additional interest days as of the effectivity of the law or regulation authorizing such an
charges on the loan of P41,300.00 she obtained when the interest rates were increase. (Emphasis supplied)
increased from 12% to 17% per Central Bank Circular No. 494, issued on
January 2, 1976. In a letter written by the Central Bank to the borrower, some In the case at bar, the loan was obtained on November 21, 1978 and was
clarifications were made. Pertinent portions of the letter read: payable on or before November 12, 1980. Central Bank Circular No. 705,
authorizing the increase from 19% to 21% was issued on December 1, 1979.
In this connection, please be advised that the Monetary Obviously, as of this date, December 1, 1979, the remaining maturity of the
Board, in its Resolution No. 1155 dated June 11, 1976 loan was less than 730 days. Hence, the plaintiff-appellant's second
adopted the following guidelines to govern interest rate assignment of error is without merit.
adjustments by banks and non-banks performing quasi-
banking functions on loans already existing as of January 3, With respect to the penalty clause, we have upheld the validity of such
1976, in the light of Central Rank Circulars Nos. 492-498: agreements in several cases. As the Court stated in the case of Government
Service Insurance System v. Court of appeals (145 SCRA 311, 321):
1 Only banks and non-bank financial intermediaries
performing quasi-banking functions may interest rates on I In the Bachrach case (supra) the Supreme Court ruled that
already existing as of January 2,1976, provided that: the Civil Code permits the agreement upon a penalty apart
from the interest. Should there be such an agreement, the
a. The pertinent loan contracts/documents penalty does not include the interest, and as such the two
contain escalation clauses expressly are different and distinct things which may be demanded
authorizing lending bank or non-bank separately. Reiterating the same principle in the later case of
performing quasi-banking functions to Equitable Banking Corp. (supra), where this Court held that
increase the rate of interest stipulated in the the stipulation about payment of such additional rate
contract, in the event that any law or Central partakes of the nature of a penalty clause, winch is
Bank regulation is promulgated increasing sanctioned by law.
the maximum interest rate for loans; and
In the case of Equitable Banking Corporation v. Liwanag (32 SCRA 293,
b. Said loans were directly granted by them 297), the Court explained:
and the remaining maturities thereof were
xxx xxx xxx
... We have not overlooked the 14% interest that appellant records as to the fluctuation of actual interest rates from 1984 and, therefore,
has been sentenced to pay. This may appear to be usurious, we order interest at the legal rate of 12% per annum on the unpaid amount.
but it is not so. The rate stipulated was 9%, subject,
however, to an additional rate of 5%, in the event of default. WHEREFORE, the decision of the lower court is MODIFIED. The
The stipulation about payment of such additional rate defendants-appellants Ricardo Salazar and Epifania Salazar are ordered to
partakes of the nature of a penalty clause, which is pay Insular Bank of Asia and America (IBAA) the sum of THIRTY-EIGHT
sanctioned by law, (Art. 1226, Civil Code of the Philippines), THOUSAND NINE HUNDRED PESOS and EIGHTEEN CENTAVOS
although, the penalty may also be reduced by the courts if it (P38,915.18 ) with interest thereon at the rate of Twelve Percent (12%) per
is iniquitous or unconscionable. (Art 1229, Civil Code of the annum from the filing of the complaint until fully paid.
Philippines). ...
SO ORDERED.
Admittedly, the defendants-appellees in the instant case failed to pay the
loan on the due date. However, with earnest efforts, they tried to pay the loan Fernan (Chairman), Feliciano and Cortes JJ., concur.
little by little so that as of November 25, 1983, a total of P68,676.75 had been
paid. The plaintiff-appellant, on the other hand, merely applied this amount to
satisfy the penalty and interest charges which it additionally imposed. We do
not find any evidence of bad faith on the part of the defendants-appellees in
their failure to pay the loan on time. Efforts were indeed made to make good
their promise. We note the trial court's observation that the plaintiff-appellant
did not even state in the complaint that the defendants-appellees had made
partial payments, making it appear that the spouses Salazars refused to pay
the loan. In their answer with counterclaim, the defendants-appellees alleged
that the bank neglected to credit said payments in the defendant's account
folio and subjected it as it did to the additional charges. Furthermore, we
agree with the trial court that the bank has already profited considerably from
the loan. In a span of about six (6) years, the bank was enriched by P
26,626.75 (p. 17, Records). The penalty charges of 2% a month are,
therefore, out of proportion to the damage incurred by the bank. In
accordance with Article 1229 of the Civil Code, the Court is constrained to
reduce the penalty for being highly iniquitous

With respect to the attorney's fees, the court is likewise empowered to


reduce the same if they are unreasonable or unconscionable notwithstanding
the express contract for attorney's fees. The award of one thousand (
P1,000.00 ) pesos by the trial court appears to be enough.

The promissory note signed by the defendants-appellants states that the loan
of P42,050.00 shall bear interest at the rate of 19% per annum. This would
yield interest of P7,989.50 per annum or a total of P 46,339.10 from
November 22, 1978 to September 12, 1984, the date of filing the complaint.
Penalty interest of 1% a month or 12% per annum is reasonable so that from
December 12, 1980 up to September 12, 1984, penalty charges should be
P19,202.83. Considering that the defendants-appellees have paid the
amount of P68,676.75, they, therefore, owed the bank the amount of
P38,915.18 when the complaint was filed. There is no indication in the
G.R. No. 97412 July 12, 1994 Port Service, Inc. The latter excepted to one drum, said to be
in bad order, which damage was unknown to plaintiff.
EASTERN SHIPPING LINES, INC., petitioner,
vs. On January 7, 1982 defendant Allied Brokerage Corporation
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, received the shipment from defendant Metro Port Service,
INC., respondents. Inc., one drum opened and without seal (per "Request for
Bad Order Survey." Exh. D).
Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.
On January 8 and 14, 1982, defendant Allied Brokerage
Zapa Law Office for private respondent. Corporation made deliveries of the shipment to the
consignee's warehouse. The latter excepted to one drum
which contained spillages, while the rest of the contents was
adulterated/fake (per "Bad Order Waybill" No. 10649, Exh.
E).
VITUG, J.:
Plaintiff contended that due to the losses/damage sustained
The issues, albeit not completely novel, are: (a) whether or not a claim for by said drum, the consignee suffered losses totaling
damage sustained on a shipment of goods can be a solidary, or joint and P19,032.95, due to the fault and negligence of defendants.
several, liability of the common carrier, the arrastre operator and the customs Claims were presented against defendants who failed and
broker; (b) whether the payment of legal interest on an award for loss or refused to pay the same (Exhs. H, I, J, K, L).
damage is to be computed from the time the complaint is filed or from the
date the decision appealed from is rendered; and (c) whether the applicable
rate of interest, referred to above, is twelve percent (12%) or six percent As a consequence of the losses sustained, plaintiff was
(6%). compelled to pay the consignee P19,032.95 under the
aforestated marine insurance policy, so that it became
subrogated to all the rights of action of said consignee
The findings of the court a quo, adopted by the Court of Appeals, on the against defendants (per "Form of Subrogation", "Release"
antecedent and undisputed facts that have led to the controversy are and Philbanking check, Exhs. M, N, and O). (pp. 85-
hereunder reproduced: 86, Rollo.)

This is an action against defendants shipping company, There were, to be sure, other factual issues that confronted both courts.
arrastre operator and broker-forwarder for damages Here, the appellate court said:
sustained by a shipment while in defendants' custody, filed
by the insurer-subrogee who paid the consignee the value of
Defendants filed their respective answers, traversing the
such losses/damages.
material allegations of the complaint contending that: As for
defendant Eastern Shipping it alleged that the shipment was
On December 4, 1981, two fiber drums of riboflavin were discharged in good order from the vessel unto the custody of
shipped from Yokohama, Japan for delivery vessel "SS Metro Port Service so that any damage/losses incurred after
EASTERN COMET" owned by defendant Eastern Shipping the shipment was incurred after the shipment was turned
Lines under Bill of Lading over to the latter, is no longer its liability (p. 17, Record);
No. YMA-8 (Exh. B). The shipment was insured under Metroport averred that although subject shipment was
plaintiff's Marine Insurance Policy No. 81/01177 for discharged unto its custody, portion of the same was already
P36,382,466.38. in bad order (p. 11, Record); Allied Brokerage alleged that
plaintiff has no cause of action against it, not having
Upon arrival of the shipment in Manila on December 12, negligent or at fault for the shipment was already in damage
1981, it was discharged unto the custody of defendant Metro and bad order condition when received by it, but
nonetheless, it still exercised extra ordinary care and vessel" to dock of Pier # 15, South Harbor,
diligence in the handling/delivery of the cargo to consignee Manila on December 12, 1981, it was
in the same condition shipment was received by it. observed that "one (1) fiber drum (was) in
damaged condition, covered by the vessel's
From the evidence the court found the following: Agent's Bad Order Tally Sheet No. 86427."
The report further states that when
defendant Allied Brokerage withdrew the
The issues are:
shipment from defendant arrastre operator's
custody on January 7, 1982, one drum was
1. Whether or not the shipment sustained found opened without seal, cello bag partly
losses/damages; torn but contents intact. Net unrecovered
spillages was
2. Whether or not these losses/damages 15 kgs. The report went on to state that
were sustained while in the custody of when the drums reached the consignee, one
defendants (in whose respective custody, if drum was found with adulterated/faked
determinable); contents. It is obvious, therefore, that these
losses/damages occurred before the
3. Whether or not defendant(s) should be shipment reached the consignee while
held liable for the losses/damages (see under the successive custodies of
plaintiff's pre-Trial Brief, Records, p. 34; defendants. Under Art. 1737 of the New Civil
Allied's pre-Trial Brief, adopting plaintiff's Code, the common carrier's duty to observe
Records, p. 38). extraordinary diligence in the vigilance of
goods remains in full force and effect even if
As to the first issue, there can be no doubt the goods are temporarily unloaded and
that the shipment sustained stored in transit in the warehouse of the
losses/damages. The two drums were carrier at the place of destination, until the
shipped in good order and condition, as consignee has been advised and has had
clearly shown by the Bill of Lading and reasonable opportunity to remove or dispose
Commercial Invoice which do not indicate of the goods (Art. 1738, NCC). Defendant
any damages drum that was shipped (Exhs. Eastern Shipping's own exhibit, the "Turn-
B and C). But when on December 12, 1981 Over Survey of Bad Order Cargoes" (Exhs.
the shipment was delivered to defendant 3-Eastern) states that on December 12,
Metro Port Service, Inc., it excepted to one 1981 one drum was found "open".
drum in bad order.
and thus held:
Correspondingly, as to the second issue, it
follows that the losses/damages were WHEREFORE, PREMISES CONSIDERED,
sustained while in the respective and/or judgment is hereby rendered:
successive custody and possession of
defendants carrier (Eastern), arrastre A. Ordering defendants to pay plaintiff, jointly and severally:
operator (Metro Port) and broker (Allied
Brokerage). This becomes evident when the 1. The amount of P19,032.95, with the
Marine Cargo Survey Report (Exh. G), with present legal interest of 12% per
its "Additional Survey Notes", are annum from October 1, 1982, the date of
considered. In the latter notes, it is stated filing of this complaints, until fully paid (the
that when the shipment was "landed on liability of defendant Eastern Shipping, Inc.
shall not exceed US$500 per case or the II. IT HELD THAT THE GRANT OF INTEREST ON THE
CIF value of the loss, whichever is lesser, CLAIM OF PRIVATE RESPONDENT SHOULD
while the liability of defendant Metro Port COMMENCE FROM THE DATE OF THE FILING OF THE
Service, Inc. shall be to the extent of the COMPLAINT AT THE RATE OF TWELVE PERCENT PER
actual invoice value of each package, crate ANNUM INSTEAD OF FROM THE DATE OF THE
box or container in no case to exceed DECISION OF THE TRIAL COURT AND ONLY AT THE
P5,000.00 each, pursuant to Section 6.01 of RATE OF SIX PERCENT PER ANNUM, PRIVATE
the Management Contract); RESPONDENT'S CLAIM BEING INDISPUTABLY
UNLIQUIDATED.
2. P3,000.00 as attorney's fees, and
The petition is, in part, granted.
3. Costs.
In this decision, we have begun by saying that the questions raised by
B. Dismissing the petitioner carrier are not all that novel. Indeed, we do have a fairly good
counterclaims and number of previous decisions this Court can merely tack to.
crossclaim of
defendant/cross-claimant The common carrier's duty to observe the requisite diligence in the shipment
Allied Brokerage of goods lasts from the time the articles are surrendered to or unconditionally
Corporation. placed in the possession of, and received by, the carrier for transportation
until delivered to, or until the lapse of a reasonable time for their acceptance
SO ORDERED. (p. 207, Record). by, the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon
vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52
Dissatisfied, defendant's recourse to US. Phil. 863). When the goods shipped either are lost or arrive in damaged
condition, a presumption arises against the carrier of its failure to observe
that diligence, and there need not be an express finding of negligence to hold
The appeal is devoid of merit. it liable (Art. 1735, Civil Code; Philippine National Railways vs. Court of
Appeals, 139 SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA
After a careful scrutiny of the evidence on record. We find 365). There are, of course, exceptional cases when such presumption of fault
that the conclusion drawn therefrom is correct. As there is is not observed but these cases, enumerated in Article 1734 1 of the Civil
sufficient evidence that the shipment sustained damage Code, are exclusive, not one of which can be applied to this case.
while in the successive possession of appellants, and
therefore they are liable to the appellee, as subrogee for the The question of charging both the carrier and the arrastre operator with the
amount it paid to the consignee. (pp. 87-89, Rollo.) obligation of properly delivering the goods to the consignee has, too, been
passed upon by the Court. In Fireman's Fund Insurance vs. Metro Port
The Court of Appeals thus affirmed in toto the judgment of the court Services (182 SCRA 455), we have explained, in holding the carrier and the
a quo. arrastre operator liable in solidum,thus:

In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes The legal relationship between the consignee and the
error and grave abuse of discretion on the part of the appellate court when arrastre operator is akin to that of a depositor and
warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA
I. IT HELD PETITIONER CARRIER JOINTLY AND 5 [1967]. The relationship between the consignee and the
SEVERALLY LIABLE WITH THE ARRASTRE OPERATOR common carrier is similar to that of the consignee and the
AND CUSTOMS BROKER FOR THE CLAIM OF PRIVATE arrastre operator (Northern Motors, Inc. v. Prince Line, et al.,
RESPONDENT AS GRANTED IN THE QUESTIONED 107 Phil. 253 [1960]). Since it is the duty of the ARRASTRE
DECISION; to take good care of the goods that are in its custody and to
deliver them in good condition to the consignee, such But then upon the provisions of Article 2213 of the Civil
responsibility also devolves upon the CARRIER. Both the Code, interest "cannot be recovered upon unliquidated
ARRASTRE and the CARRIER are therefore charged with claims or damages, except when the demand can be
the obligation to deliver the goods in good condition to the established with reasonable certainty." And as was held by
consignee. this Court in Rivera vs. Perez, 4 L-6998, February 29, 1956, if
the suit were for damages, "unliquidated and not known until
We do not, of course, imply by the above pronouncement that the arrastre definitely ascertained, assessed and determined by the
operator and the customs broker are themselves always and necessarily courts after proof (Montilla c. Corporacion de P.P. Agustinos,
liable solidarily with the carrier, or vice-versa, nor that attendant facts in a 25 Phil. 447; Lichauco v. Guzman,
given case may not vary the rule. The instant petition has been brought 38 Phil. 302)," then, interest "should be from the date of the
solely by Eastern Shipping Lines, which, being the carrier and not having decision." (Emphasis supplied)
been able to rebut the presumption of fault, is, in any event, to be held liable
in this particular case. A factual finding of both the court a quo and the The case of Reformina vs. Tomol, 5 rendered on 11 October 1985, was for
appellate court, we take note, is that "there is sufficient evidence that the "Recovery of Damages for Injury to Person and Loss of Property." After trial,
shipment sustained damage while in the successive possession of the lower court decreed:
appellants" (the herein petitioner among them). Accordingly, the liability
imposed on Eastern Shipping Lines, Inc., the sole petitioner in this case, is WHEREFORE, judgment is hereby rendered in favor of the
inevitable regardless of whether there are others solidarily liable with it. plaintiffs and third party defendants and against the
defendants and third party plaintiffs as follows:
It is over the issue of legal interest adjudged by the appellate court that
deserves more than just a passing remark. Ordering defendants and third party plaintiffs Shell and
Michael, Incorporated to pay jointly and severally the
Let us first see a chronological recitation of the major rulings of this Court: following persons:

The early case of Malayan Insurance Co., Inc., vs. Manila Port xxx xxx xxx
Service, 2 decided 3 on 15 May 1969, involved a suit for recovery of money
arising out of short deliveries and pilferage of goods. In this case, appellee (g) Plaintiffs Pacita F. Reformina and Francisco Reformina
Malayan Insurance (the plaintiff in the lower court) averred in its complaint the sum of P131,084.00 which is the value of the boat F B
that the total amount of its claim for the value of the undelivered goods Pacita III together with its accessories, fishing gear and
amounted to P3,947.20. This demand, however, was neither established in equipment minus P80,000.00 which is the value of the
its totality nor definitely ascertained. In the stipulation of facts later entered insurance recovered and the amount of P10,000.00 a month
into by the parties, in lieu of proof, the amount of P1,447.51 was agreed as the estimated monthly loss suffered by them as a result of
upon. The trial court rendered judgment ordering the appellants (defendants) the fire of May 6, 1969 up to the time they are actually paid
Manila Port Service and Manila Railroad Company to pay appellee Malayan or already the total sum of P370,000.00 as of June 4, 1972
Insurance the sum of P1,447.51 with legal interest thereon from the date the with legal interest from the filing of the complaint until
complaint was filed on 28 December 1962 until full payment thereof. The paid and to pay attorney's fees of P5,000.00 with costs
appellants then assailed,inter alia, the award of legal interest. In sustaining against defendants and third party plaintiffs. (Emphasis
the appellants, this Court ruled: supplied.)

Interest upon an obligation which calls for the payment of On appeal to the Court of Appeals, the latter modified the amount of
money, absent a stipulation, is the legal rate. Such interest damages awarded but sustained the trial court in adjudging legal
normally is allowable from the date of demand, judicial or interest from the filing of the complaint until fully paid. When the
extrajudicial. The trial court opted for judicial demand as the appellate court's decision became final, the case was remanded to
starting point. the lower court for execution, and this was when the trial court issued
its assailed resolution which applied the 6% interest per
annum prescribed in Article 2209 of the Civil Code. In their petition occasioned by an injury to person and loss of property. The trial court
for review on certiorari, the petitioners contended that Central Bank awarded private respondent Pedro Manabat actual and compensatory
Circular damages in the amount of P72,500.00 with legal interest thereon from the
No. 416, providing thus filing of the complaint until fully paid. Relying on the Reformina
v. Tomol case, this Court 8 modified the interest award from 12% to 6%
By virtue of the authority granted to it under Section 1 of Act interest per annum but sustained the time computation thereof, i.e., from the
2655, as amended, Monetary Board in its Resolution No. filing of the complaint until fully paid.
1622 dated July 29, 1974, has prescribed that the rate of
interest for the loan, or forbearance of any money, goods, or In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an action for the
credits and the rate allowed in judgments, in the absence of recovery of damages arising from the collapse of a building, ordered,
express contract as to such rate of interest, shall be twelve inter alia, the "defendant United Construction Co., Inc. (one of the
(12%) percent per annum. This Circular shall take effect petitioners)
immediately. (Emphasis found in the text) . . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal
rate from November 29, 1968, the date of the filing of the complaint until full
should have, instead, been applied. This Court 6 ruled: payment . . . ." Save from the modification of the amount granted by the
lower court, the Court of Appeals sustained the trial court's decision. When
taken to this Court for review, the case, on 03 October 1986, was decided,
The judgments spoken of and referred to are judgments in
thus:
litigations involving loans or forbearance of any money,
goods or credits. Any other kind of monetary judgment which
has nothing to do with, nor involving loans or forbearance of WHEREFORE, the decision appealed from is hereby
any money, goods or credits does not fall within the MODIFIED and considering the special and environmental
coverage of the said law for it is not within the ambit of the circumstances of this case, we deem it reasonable to render
authority granted to the Central Bank. a decision imposing, as We do hereby impose, upon the
defendant and the third-party defendants (with the exception
of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra.
xxx xxx xxx
p. 10) indemnity in favor of the Philippine Bar Association of
FIVE MILLION (P5,000,000.00) Pesos to cover all damages
Coming to the case at bar, the decision herein sought to be (with the exception to attorney's fees) occasioned by the loss
executed is one rendered in an Action for Damages for injury of the building (including interest charges and lost rentals)
to persons and loss of property and does not involve any and an additional ONE HUNDRED THOUSAND
loan, much less forbearances of any money, goods or (P100,000.00) Pesos as and for attorney's fees, the total
credits. As correctly argued by the private respondents, the sum being payable upon the finality of this decision. Upon
law applicable to the said case is Article 2209 of the New failure to pay on such finality, twelve (12%) per cent interest
Civil Code which reads per annum shall be imposed upon aforementioned amounts
from finality until paid. Solidary costs against the defendant
Art. 2209. If the obligation consists in the and third-party defendants (Except Roman Ozaeta).
payment of a sum of money, and the debtor (Emphasis supplied)
incurs in delay, the indemnity for damages,
there being no stipulation to the contrary, A motion for reconsideration was filed by United Construction,
shall be the payment of interest agreed contending that "the interest of twelve (12%) per cent per
upon, and in the absence of stipulation, the annum imposed on the total amount of the monetary award was in
legal interest which is six percent per contravention of law." The Court 10 ruled out the applicability of the
annum. Reformina and Philippine Rabbit Bus Lines cases and, in its
resolution of 15 April 1988, it explained:
The above rule was reiterated in Philippine Rabbit Bus Lines, Inc.,
v. Cruz, 7 promulgated on 28 July 1986. The case was for damages
There should be no dispute that the imposition of 12% WHEREFORE, except as modified hereinabove the decision
interest pursuant to Central Bank Circular No. 416 . . . is of the CFI of Negros Oriental dated October 31, 1972 is
applicable only in the following: (1) loans; (2) forbearance of affirmed in all respects, with the modification that
any money, goods or credit; and defendants-appellants, except defendant-appellant Merton
(3) rate allowed in judgments (judgments spoken of refer to Munn, are ordered to pay, jointly and severally, the amounts
judgments involving loans or forbearance of any money, stated in the dispositive portion of the decision, including the
goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, sum of P1,400.00 in concept of compensatory damages,
143 SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 with interest at the legal rate from the date of the filing of the
SCRA 260 [1985]). It is true that in the instant case, there is complaint until fully paid(Emphasis supplied.)
neither a loan or a forbearance, but then no interest is
actually imposed provided the sums referred to in the The petition for review to this Court was denied. The records were
judgment are paid upon the finality of the judgment. It is thereupon transmitted to the trial court, and an entry of judgment was
delay in the payment of such final judgment, that will cause made. The writ of execution issued by the trial court directed that
the imposition of the interest. only compensatory damages should earn interest at 6% per
annum from the date of the filing of the complaint. Ascribing grave
It will be noted that in the cases already adverted to, the rate abuse of discretion on the part of the trial judge, a petition
of interest is imposed on the total sum, from the filing of the for certiorari assailed the said order. This Court said:
complaint until paid; in other words, as part of the judgment
for damages. Clearly, they are not applicable to the instant . . . , it is to be noted that the Court of Appeals ordered the
case. (Emphasis supplied.) payment of interest "at the legal rate"from the time of the
filing of the complaint. . . Said circular [Central Bank Circular
The subsequent case of American Express International, Inc., No. 416] does not apply to actions based on a breach of
vs. Intermediate Appellate Court 11 was a petition for review on certiorari from employment contract like the case at bar. (Emphasis
the decision, dated 27 February 1985, of the then Intermediate Appellate supplied)
Court reducing the amount of moral and exemplary damages awarded by the
trial court, to P240,000.00 and P100,000.00, respectively, and its resolution, The Court reiterated that the 6% interest per annum on the damages
dated 29 April 1985, restoring the amount of damages awarded by the trial should be computed from the time the complaint was filed until the
court, i.e., P2,000,000.00 as moral damages and P400,000.00 as exemplary amount is fully paid.
damages with interest thereon at 12% per annum from notice of
judgment, plus costs of suit. In a decision of 09 November 1988, this Court, Quite recently, the Court had another occasion to rule on the matter. National
while recognizing the right of the private respondent to recover damages, Power Corporation vs. Angas, 14decided on 08 May 1992, involved the
held the award, however, for moral damages by the trial court, later
expropriation of certain parcels of land. After conducting a hearing on the
sustained by the IAC, to be inconceivably large. The Court 12 thus set aside
complaints for eminent domain, the trial court ordered the petitioner to pay
the decision of the appellate court and rendered a new one, "ordering the
the private respondents certain sums of money as just compensation for their
petitioner to pay private respondent the sum of One Hundred Thousand lands so expropriated "with legal interest thereon . . . until fully paid." Again,
(P100,000.00) Pesos as moral damages, with in applying the 6% legal interest per annum under the Civil Code, the
six (6%) percent interest thereon computed from the finality of this decision
Court 15 declared:
until paid. (Emphasis supplied)
. . . , (T)he transaction involved is clearly not a loan or
Reformina came into fore again in the 21 February 1989 case of Florendo
forbearance of money, goods or credits but expropriation of
v. Ruiz 13 which arose from a breach of employment contract. For having
certain parcels of land for a public purpose, the payment of
been illegally dismissed, the petitioner was awarded by the trial court moral
which is without stipulation regarding interest, and the
and exemplary damages without, however, providing any legal interest
interest adjudged by the trial court is in the nature of
thereon. When the decision was appealed to the Court of Appeals, the latter
indemnity for damages. The legal interest required to be paid
held:
on the amount of just compensation for the properties
expropriated is manifestly in the form of indemnity for case ruled that 12% interest per annum should be imposed from the finality
damages for the delay in the payment thereof. Therefore, of the decision until the judgment amount is paid.
since the kind of interest involved in the joint judgment of the
lower court sought to be enforced in this case is interest by The ostensible discord is not difficult to explain. The factual circumstances
way of damages, and not by way of earnings from loans, etc. may have called for different applications, guided by the rule that the courts
Art. 2209 of the Civil Code shall apply. are vested with discretion, depending on the equities of each case, on the
award of interest. Nonetheless, it may not be unwise, by way of clarification
Concededly, there have been seeming variances in the above holdings. The and reconciliation, to suggest the following rules of thumb for future
cases can perhaps be classified into two groups according to the similarity of guidance.
the issues involved and the corresponding rulings rendered by the court. The
"first group" would consist of the cases of Reformina v. Tomol (1985), I. When an obligation, regardless of its source, i.e., law, contracts, quasi-
Philippine Rabbit Bus Lines v. Cruz(1986), Florendo v. Ruiz (1989) contracts, delicts or quasi-delicts 18 is breached, the contravenor can be held
and National Power Corporation v. Angas (1992). In the "second group" liable for damages. 19 The provisions under Title XVIII on "Damages" of the
would be Malayan Insurance Company v.Manila Port Service (1969), Nakpil Civil Code govern in determining the measure of recoverable damages. 20
and Sons v. Court of Appeals (1988), and American Express International
v.Intermediate Appellate Court (1988).
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
In the "first group", the basic issue focuses on the application of either the imposed, as follows:
6% (under the Civil Code) or 12% (under the Central Bank Circular)
interest per annum. It is easily discernible in these cases that there has been
1. When the obligation is breached, and it consists in the payment of a sum
a consistent holding that the Central Bank Circular imposing the 12% of money, i.e., a loan or forbearance of money, the interest due should be
interest per annum applies only to loans or forbearance 16 of money, goods
that which may have been stipulated in writing. 21 Furthermore, the interest
or credits, as well as to judgments involving such loan or forbearance of due shall itself earn legal interest from the time it is judicially demanded. 22 In
money, goods or credits, and that the 6% interest under the Civil Code the absence of stipulation, the rate of interest shall be 12% per annum to be
governs when the transaction involves the payment of indemnities in the computed from default, i.e., from judicial or extrajudicial demand under and
concept of damage arising from the breach or a delay in the performance of subject to the provisions of Article 1169 23 of the Civil Code.
obligations in general. Observe, too, that in these cases, a common time
frame in the computation of the 6% interest per annum has been applied, i.e.,
from the time the complaint is filed until the adjudged amount is fully paid. 2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed
at the discretion of the court 24 at the rate of 6% per annum. 25 No interest,
The "second group", did not alter the pronounced rule on the application of
however, shall be adjudged on unliquidated claims or damages except when
the 6% or 12% interest per annum, 17depending on whether or not the
or until the demand can be established with reasonable
amount involved is a loan or forbearance, on the one hand, or one of certainty. 26 Accordingly, where the demand is established with reasonable
indemnity for damage, on the other hand. Unlike, however, the "first group" certainty, the interest shall begin to run from the time the claim is made
which remained consistent in holding that the running of the legal interest judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty
should be from the time of the filing of the complaint until fully paid, the
cannot be so reasonably established at the time the demand is made, the
"second group" varied on the commencement of the running of the legal
interest shall begin to run only from the date the judgment of the court is
interest.
made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal
Malayan held that the amount awarded should bear legal interest from the interest shall, in any case, be on the amount finally adjudged.
date of the decision of the court a quo,explaining that "if the suit were for
damages, 'unliquidated and not known until definitely ascertained, assessed
3. When the judgment of the court awarding a sum of money becomes final
and determined by the courts after proof,' then, interest 'should be from the
and executory, the rate of legal interest, whether the case falls under
date of the decision.'" American Express International v. IAC, introduced a
paragraph 1 or paragraph 2, above, shall be 12% per annum from such
different time frame for reckoning the 6% interest by ordering it to be
"computed from the finality of (the) decision until paid." The Nakpil and Sons
finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.

WHEREFORE, the petition is partly GRANTED. The appealed decision is


AFFIRMED with the MODIFICATION that the legal interest to be paid is SIX
PERCENT (6%) on the amount due computed from the decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest,
in lieu of SIX PERCENT (6%), shall be imposed on such amount upon finality
of this decision until the payment thereof.

SO ORDERED.
G.R. No. 181045 July 2, 2014 1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5%
per annum. Interest shall be payable in advance every one hundred twenty
SPOUSES EDUARDO and LYDIA SILOS, Petitioners, days at the rate prevailing at the time of the renewal.
vs.
PHILIPPINE NATIONAL BANK, Respondent. (b) The Borrower agrees that the Bank may modify the interest rate in the
Loan depending on whatever policy the Bank may adopt in the future,
DECISION including without limitation, the shifting from the floating interest rate system
to the fixed interest rate system, or vice versa. Where the Bank has imposed
DEL CASTILLO, J.: on the Loan interest at a rate per annum, which is equal to the Banks spread
over the current floating interest rate, the Borrower hereby agrees that the
Bank may, without need of notice to the Borrower, increase or decrease its
In loan agreements, it cannot be denied that the rate of interest is a principal spread over the floating interest rate at any time depending on whatever
condition, if not the most important component. Thus, any modification policy it may adopt in the future.10 (Emphases supplied)
thereof must be mutually agreed upon; otherwise, it has no binding effect.
Moreover, the Court cannot consider a stipulation granting a party the option
The eight Promissory Notes, on the other hand, contained a stipulation
to prepay the loan if said party is not agreeable to the arbitrary interest rates
granting PNB the right to increase or reduce interest rates "within the limits
imposed. Premium may not be placed upon a stipulation in a contract which
allowed by law or by the Monetary Board."11
grants one party the right to choose whether to continue with or withdraw
from the agreement if it discovers that what the other party has been doing
all along is improper or illegal. The Real Estate Mortgage agreement provided the same right to increase or
reduce interest rates "at any time depending on whatever policy PNB may
adopt in the future."12
This Petition for Review on Certiorari1 questions the May 8, 2007
Decision2 of the Court of Appeals (CA) in CA-G.R. CV No. 79650, which
affirmed with modifications the February 28, 2003 Decision3 and the June 4, Petitioners religiously paid interest on the notes at the following rates:
2003 Order4 of the Regional Trial Court (RTC), Branch 6 of Kalibo, Aklan in
Civil Case No. 5975. 1. 1st Promissory Note dated July 24, 1989 19.5%;

Factual Antecedents 2. 2nd Promissory Note dated November 22, 1989 23%;

Spouses Eduardo and Lydia Silos (petitioners) have been in business for 3. 3rd Promissory Note dated March 21, 1990 22%;
about two decades of operating a department store and buying and selling of
ready-to-wear apparel. Respondent Philippine National Bank (PNB) is a 4. 4th Promissory Note dated July 19, 1990 24%;
banking corporation organized and existing under Philippine laws.
5. 5th Promissory Note dated December 17, 1990 28%;
To secure a one-year revolving credit line of P150,000.00 obtained from
PNB, petitioners constituted in August 1987 a Real Estate Mortgage5 over a 6. 6th Promissory Note dated February 14, 1991 32%;
370-square meter lot in Kalibo, Aklan covered by Transfer Certificate of Title
No. (TCT) T-14250. In July 1988,the credit line was increased to P1.8 million
and the mortgage was correspondingly increased to P1.8 million.6 7. 7th Promissory Note dated March 1, 1991 30%; and

And in July 1989, a Supplement to the Existing Real Estate Mortgage7 was 8. 8th Promissory Note dated July 11, 1991 24%.13
executed to cover the same credit line, which was increased to P2.5 million,
and additional security was given in the form of a 134-square meter lot In August 1991, an Amendment to Credit Agreement14 was executed by the
covered by TCT T-16208. In addition, petitioners issued eight Promissory parties, with the following stipulation regarding interest:
Notes8 and signed a Credit Agreement.9This July 1989 Credit Agreement
contained a stipulation on interest which provides as follows:
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on 18. 26th Promissory Note (PN 9707237) dated July 30, 1997
each Availment from date of each Availment up to but not including the date 25%.16
of full payment thereof at the rate per annum which is determined by the
Bank to be prime rate plus applicable spread in effect as of the date of each The 9th up to the 17th promissory notes provide for the payment of interest
Availment.15 (Emphases supplied) at the "rate the Bank may at any time without notice, raise within the limits
allowed by law x x x."17
Under this Amendment to Credit Agreement, petitioners issued in favor of
PNB the following 18 Promissory Notes, which petitioners settled except On the other hand, the 18th up to the 26th promissory notes including PN
the last (the note covering the principal) at the following interest rates: 9707237, which is the 26th promissory note carried the following provision:

1. 9th Promissory Note dated November 8, 1991 26%; x x x For this purpose, I/We agree that the rate of interest herein stipulated
may be increased or decreased for the subsequent Interest Periods, with
2. 10th Promissory Note dated March 19, 1992 25%; prior notice to the Borrower in the event of changes in interest rate
prescribed by law or the Monetary Board of the Central Bank of the
3. 11th Promissory Note dated July 11, 1992 23%; Philippines, or in the Banks overall cost of funds. I/We hereby agree that in
the event I/we are not agreeable to the interest rate fixed for any Interest
4. 12th Promissory Note dated November 10, 1992 21%; Period, I/we shall have the option top repay the loan or credit facility without
penalty within ten (10) calendar days from the Interest Setting
Date.18 (Emphasis supplied)
5. 13th Promissory Note dated March 15, 1993 21%;
Respondent regularly renewed the line from 1990 up to 1997, and petitioners
6. 14th Promissory Note dated July 12, 1993 17.5%; made good on the promissory notes, religiously paying the interests without
objection or fail. But in 1997, petitioners faltered when the interest rates
7. 15th Promissory Note dated November 17, 1993 21%; soared due to the Asian financial crisis. Petitioners sole outstanding
promissory note for P2.5 million PN 9707237 executed in July 1997 and
8. 16th Promissory Note dated March 28, 1994 21%; due 120 days later or on October 28, 1997 became past due, and despite
repeated demands, petitioners failed to make good on the note.
9. 17th Promissory Note dated July 13, 1994 21%;
Incidentally, PN 9707237 provided for the penalty equivalent to 24% per
10. 18th Promissory Note dated November 16, 1994 16%; annum in case of default, as follows:

11. 19th Promissory Note dated April 10, 1995 21%; Without need for notice or demand, failure to pay this note or any installment
thereon, when due, shall constitute default and in such cases or in case of
garnishment, receivership or bankruptcy or suit of any kind filed against
12. 20th Promissory Note dated July 19, 1995 18.5%;
me/us by the Bank, the outstanding principal of this note, at the option of the
Bank and without prior notice of demand, shall immediately become due and
13. 21st Promissory Note dated December 18, 1995 18.75%; payable and shall be subject to a penalty charge of twenty four percent
(24%) per annum based on the defaulted principal amount. x x x19 (Emphasis
14. 22nd Promissory Note dated April 22, 1996 18.5%; supplied)

15. 23rd Promissory Note dated July 22, 1996 18.5%; PNB prepared a Statement of Account20 as of October 12, 1998, detailing the
amount due and demandable from petitioners in the total amount
16. 24th Promissory Note dated November 25, 1996 18%; of P3,620,541.60, broken down as follows:

17. 25th Promissory Note dated May 30, 1997 17.5%; and
security for any and all other obligations of whatever kind and nature owing
Principal P 2,500,000.00
to respondent, which thus includes penalties imposed upon default or non-
Interest 538,874.94 payment of the principal and interest on due date.

Penalties 581,666.66 On pre-trial, the parties mutually agreed to the following material facts,
among others:
Total P 3,620,541.60
a) That since 1991 up to 1998, petitioners had paid PNB the total
amount of P3,484,287.00;25 and
Despite demand, petitioners failed to pay the foregoing amount. Thus, PNB
foreclosed on the mortgage, and on January 14, 1999, TCTs T-14250 and T- b) That PNB sent, and petitioners received, a March 10, 2000
16208 were sold to it at auction for the amount of P4,324,172.96.21 The demand letter.26
sheriffs certificate of sale was registered on March 11, 1999.
During trial, petitioner Lydia Silos (Lydia) testified that the Credit Agreement,
More than a year later, or on March 24, 2000, petitioners filed Civil Case No. the Amendment to Credit Agreement, Real Estate Mortgage and the
5975, seeking annulment of the foreclosure sale and an accounting of the Supplement thereto were all prepared by respondent PNB and were
PNB credit. Petitioners theorized that after the first promissory note where presented to her and her husband Eduardo only for signature; that she was
they agreed to pay 19.5% interest, the succeeding stipulations for the told by PNB that the latter alone would determine the interest rate; that as to
payment of interest in their loan agreements with PNB which allegedly left the Amendment to Credit Agreement, she was told that PNB would fill up the
to the latter the sole will to determine the interest rate became null and interest rate portion thereof; that at the time the parties executed the said
void. Petitioners added that because the interest rates were fixed by Credit Agreement, she was not informed about the applicable spread that
respondent without their prior consent or agreement, these rates are void, PNB would impose on her account; that the interest rate portion of all
and as a result, petitioners should only be made liable for interest at the legal Promissory Notes she and Eduardo issued were always left in blank when
rate of 12%. They claimed further that they overpaid interests on the credit, they executed them, with respondents mere assurance that it would be the
and concluded that due to this overpayment of steep interest charges, their one to enter or indicate thereon the prevailing interest rate at the time of
debt should now be deemed paid, and the foreclosure and sale of TCTs T- availment; and that they agreed to such arrangement. She further testified
14250 and T-16208 became unnecessary and wrongful. As for the imposed that the two Real Estate Mortgage agreements she signed did not stipulate
penalty of P581,666.66, petitioners alleged that since the Real Estate the payment of penalties; that she and Eduardo consulted with a lawyer, and
Mortgage and the Supplement thereto did not include penalties as part of the were told that PNBs actions were improper, and so on March 20, 2000, they
secured amount, the same should be excluded from the foreclosure amount wrote to the latter seeking a recomputation of their outstanding obligation;
or bid price, even if such penalties are provided for in the final Promissory and when PNB did not oblige, they instituted Civil Case No. 5975.27
Note, or PN 9707237.22
On cross-examination, Lydia testified that she has been in business for 20
In addition, petitioners sought to be reimbursed an alleged overpayment years; that she also borrowed from other individuals and another bank; that it
of P848,285.00 made during the period August 21, 1991 to March 5, was only with banks that she was asked to sign loan documents with no
1998,resulting from respondents imposition of the alleged illegal and steep indicated interest rate; that she did not bother to read the terms of the loan
interest rates. They also prayed to be awarded P200,000.00 by way of documents which she signed; and that she received several PNB statements
attorneys fees.23 of account detailing their outstanding obligations, but she did not complain;
that she assumed instead that what was written therein is correct.28
In its Answer,24 PNB denied that it unilaterally imposed or fixed interest rates;
that petitioners agreed that without prior notice, PNB may modify interest For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr. (Aspa), the
rates depending on future policy adopted by it; and that the imposition of sole witness for respondent, stated on cross-examination that as a practice,
penalties was agreed upon in the Credit Agreement. It added that the the determination of the prime rates of interest was the responsibility solely of
imposition of penalties is supported by the all-inclusive clause in the Real PNBs Treasury Department which is based in Manila; that these prime rates
Estate Mortgage agreement which provides that the mortgage shall stand as were simply communicated to all PNB branches for implementation; that
there are a multitude of considerations which determine the interest rate, The dispositive portion of the trial courts Decision reads:
such as the cost of money, foreign currency values, PNBs spread, bank
administrative costs, profitability, and the practice in the banking industry; IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the
that in every repricing of each loan availment, the borrower has the right to respondent and against the petitioners by DISMISSING the latters petition.
question the rates, but that this was not done by the petitioners; and that
anything that is not found in the Promissory Note may be supplemented by
Costs against the petitioners.
the Credit Agreement.29
SO ORDERED.38
Ruling of the Regional Trial Court
Petitioners moved for reconsideration. In an Order39 dated June 4, 2003, the
On February 28, 2003, the trial court rendered judgment dismissing Civil
trial court granted only a modification in the award of attorneys fees,
Case No. 5975.30 reducing the same from 10% to 1%. Thus, PNB was ordered to refund to
petitioner the excess in attorneys fees in the amount of P356,589.90, viz:
It ruled that:
WHEREFORE, judgment is hereby rendered upholding the validity of the
1. While the Credit Agreement allows PNB to unilaterally increase its interest rate charged by the respondent as well as the extra-judicial
spread over the floating interest rate at any time depending on foreclosure proceedings and the Certificate of Sale. However, respondent is
whatever policy it may adopt in the future, it likewise allows for the directed to refund to the petitioner the amount of P356,589.90 representing
decrease at any time of the same. Thus, such stipulation authorizing the excess interest charged against the latter.
both the increase and decrease of interest rates as may be
applicable is valid,31 as was held in Consolidated Bank and Trust
No pronouncement as to costs.
Corporation (SOLIDBANK) v. Court of Appeals;32
SO ORDERED.40
2. Banks are allowed to stipulate that interest rates on loans need
not be fixed and instead be made dependent on prevailing rates
upon which to peg such variable interest rates;33 Ruling of the Court of Appeals

3. The Promissory Note, as the principal contract evidencing Petitioners appealed to the CA, which issued the questioned Decision with
petitioners loan, prevails over the Credit Agreement and the Real the following decretal portion:
Estate Mortgage.
WHEREFORE, in view of the foregoing, the instant appeal is PARTLY
As such, the rate of interest, penalties and attorneys fees stipulated GRANTED. The modified Decision of the Regional Trial Court per Order
in the Promissory Note prevail over those mentioned in the Credit dated June 4, 2003 is hereby AFFIRMED with MODIFICATIONS, to wit:
Agreement and the Real Estate Mortgage agreements;34
1. [T]hat the interest rate to be applied after the expiration of the first
4. Roughly, PNBs computation of the total amount of petitioners 30-day interest period for PN. No. 9707237 should be 12% per
obligation is correct;35 annum;

5. Because the loan was admittedly due and demandable, the 2. [T]hat the attorneys fees of10% is valid and binding; and
foreclosure was regularly made;36
3. [T]hat [PNB] is hereby ordered to reimburse [petitioners] the
6. By the admission of petitioners during pre-trial, all payments made excess in the bid price of P377,505.99 which is the difference
to PNB were properly applied to the principal, interest and between the total amount due [PNB] and the amount of its bid price.
penalties.37
SO ORDERED.41 The CA believes that the 24% penalty is covered by the phrase "and other
obligations owing by the mortgagor to the mortgagee" and should thus be
On the other hand, respondent did not appeal the June 4,2003 Order of the added to the amount secured by the mortgages.44
trial court which reduced its award of attorneys fees. It simply raised the
issue in its appellees brief in the CA, and included a prayer for the reversal The CA then proceeded to declare valid the foreclosure and sale of
of said Order. properties covered by TCTs T-14250 and T-16208, which came as a
necessary result of petitioners failure to pay the outstanding obligation upon
In effect, the CA limited petitioners appeal to the following issues: demand.45The CA saw fit to increase the trial courts award of 1% to 10%,
finding the latter rate to be reasonable and citing the Real Estate Mortgage
agreement which authorized the collection of the higher rate.46
1) Whether x x x the interest rates on petitioners outstanding
obligation were unilaterally and arbitrarily imposed by PNB;
Finally, the CA ruled that petitioners are entitled to P377,505.09 surplus,
2) Whether x x x the penalty charges were secured by the real estate which is the difference between PNBs bid price of P4,324,172.96 and
petitioners total computed obligation as of January 14, 1999, or the date of
mortgage; and
the auction sale, in the amount of P3,946,667.87.47
3) Whether x x x the extrajudicial foreclosure and sale are valid.42
Hence, the present Petition.
The CA noted that, based on receipts presented by petitioners during trial,
Issues
the latter dutifully paid a total ofP3,027,324.60 in interest for the period
August 7, 1991 to August 6, 1997, over and above the P2.5 million principal
obligation. And this is exclusive of payments for insurance premiums, The following issues are raised in this Petition:
documentary stamp taxes, and penalty. All the while, petitioners did not
complain nor object to the imposition of interest; they in fact paid the same I
religiously and without fail for seven years. The appellate court ruled that
petitioners are thus estopped from questioning the same. A. THE COURT OF APPEALS AS WELL AS THE LOWER
COURT ERRED IN NOT NULLIFYING THE INTEREST
The CA nevertheless noted that for the period July 30, 1997 to August 14, RATE PROVISION IN THE CREDIT AGREEMENT DATED
1997, PNB wrongly applied an interest rate of 25.72% instead of the agreed JULY 24, 1989 X X X AND IN THE AMENDMENT TO
25%; thus it overcharged petitioners, and the latter paid, an excess CREDIT AGREEMENT DATEDAUGUST 21, 1991 X X X
ofP736.56 in interest. WHICH LEFT TO THE SOLE UNILATERAL
DETERMINATION OF THE RESPONDENT PNB THE
On the issue of penalties, the CA ruled that the express tenor of the Real ORIGINAL FIXING OF INTEREST RATE AND ITS
Estate Mortgage agreements contemplated the inclusion of the PN 9707237- INCREASE, WHICH AGREEMENT IS CONTRARY TO
stipulated 24% penalty in the amount to be secured by the mortgaged LAW, ART. 1308 OF THE [NEW CIVIL CODE], AS
property, thus ENUNCIATED IN PONCIANO ALMEIDA V. COURT OF
APPEALS,G.R. [NO.] 113412, APRIL 17, 1996, AND
For and in consideration of certain loans, overdrafts and other credit CONTRARY TO PUBLIC POLICY AND PUBLIC INTEREST,
AND IN APPLYING THE PRINCIPLE OF ESTOPPEL
accommodations obtained from the MORTGAGEE and to secure the
ARISING FROM THE ALLEGED DELAYED COMPLAINT
payment of the same and those others that the MORTGAGEE may extend to
OF PETITIONER[S], AND [THEIR] PAYMENT OF THE
the MORTGAGOR, including interest and expenses, and other obligations
INTEREST CHARGED.
owing by the MORTGAGOR to the MORTGAGEE, whether direct or indirect,
principal or secondary, as appearing in the accounts, books and records of
the MORTGAGEE, the MORTGAGOR does hereby transfer and convey by B. CONSEQUENTLY, THE COURT OF APPEALS AND
way of mortgage unto the MORTGAGEE x x x43 (Emphasis supplied) THE LOWER COURT ERRED IN NOT DECLARING THAT
PNB IS NOT AT ALL ENTITLED TO ANY INTEREST
EXCEPT THE LEGAL RATE FROM DATE OF DEMAND, Petitioners question the CAs application of the principle of estoppel, saying
AND IN NOT APPLYING THE EXCESS OVER THE LEGAL that no estoppel can proceed from an illegal act. Though they failed to timely
RATE OF THE ADMITTED PAYMENTS MADE BY question the imposition of the alleged illegal interest rates and continued to
PETITIONER[S] FROM 1991-1998 IN THE ADMITTED pay the loan on the basis of these rates, they cannot be deemed to have
TOTAL AMOUNT OF P3,484,287.00, TO PAYMENT OF acquiesced, and hence could recover what they erroneously paid. 50
THE PRINCIPAL OFP2,500,000.[00] LEAVING AN
OVERPAYMENT OFP984,287.00 REFUNDABLE BY Petitioners argue that if the interest rates were nullified, then their obligation
RESPONDENT TO PETITIONER[S] WITH INTEREST OF to PNB is deemed extinguished as of July 1997; moreover, it would appear
12% PER ANNUM. that they even made an over payment to the bank in the amount
ofP984,287.00.
II
Next, petitioners suggest that since the Real Estate Mortgage agreements
THE COURT OF APPEALS AND THE LOWER COURT ERRED IN did not include nor specify, as part of the secured amount, the penalty of
HOLDING THAT PENALTIES ARE INCLUDEDIN THE SECURED 24% authorized in PN 9707237, such amount of P581,666.66 could not be
AMOUNT, SUBJECT TO FORECLOSURE, WHEN NO PENALTIES ARE made answerable by or collected from the mortgages covering TCTs T-
MENTIONED [NOR] PROVIDED FOR IN THE REAL ESTATE MORTGAGE 14250 and T-16208. Claiming support from Philippine Bank of
AS A SECURED AMOUNT AND THEREFORE THE AMOUNT OF Communications [PBCom] v. Court of Appeals,51 petitioners insist that the
PENALTIES SHOULDHAVE BEEN EXCLUDED FROM [THE] phrase "and other obligations owing by the mortgagor to the mortgagee"52 in
FORECLOSURE AMOUNT. the mortgage agreements cannot embrace theP581,666.66 penalty,
because, as held in the PBCom case, "[a] penalty charge does not belong to
III the species of obligations enumerated in the mortgage, hence, the said
contract cannot be understood to secure the penalty";53while the mortgages
are the accessory contracts, what items are secured may only be determined
THE COURT OF APPEALS ERRED IN REVERSING THE RULING OF THE
LOWER COURT, WHICH REDUCED THE ATTORNEYS FEES OF 10% OF from the provisions of the mortgage contracts, and not from the Credit
Agreement or the promissory notes.
THE TOTAL INDEBTEDNESS CHARGED IN THE X X X EXTRAJUDICIAL
FORECLOSURE TOONLY 1%, AND [AWARDING] 10% ATTORNEYS
FEES.48 Finally, petitioners submit that the trial courts award of 1% attorneys fees
should be maintained, given that in foreclosures, a lawyers work consists
Petitioners Arguments merely in the preparation and filing of the petition, and involves minimal
study.54 To allow the imposition of a staggering P396,211.00 for such work
would be contrary to equity. Petitioners state that the purpose of attorneys
Petitioners insist that the interest rate provision in the Credit Agreement and fees in cases of this nature "is not to give respondent a larger compensation
the Amendment to Credit Agreement should be declared null and void, for for the loan than the law already allows, but to protect it against any future
they relegated to PNB the sole power to fix interest rates based on arbitrary loss or damage by being compelled to retain counsel x x x to institute judicial
criteria or factors such as bank policy, profitability, cost of money, foreign proceedings for the collection of its credit."55 And because the instant case
currency values, and bank administrative costs; spaces for interest rates in involves a simple extrajudicial foreclosure, attorneys fees may be equitably
the two Credit Agreements and the promissory notes were left blank for PNB tempered.
to unilaterally fill, and their consent or agreement to the interest rates
imposed thereafter was not obtained; the interest rate, which consists of the
prime rate plus the bank spread, is determined not by agreement of the Respondents Arguments
parties but by PNBs Treasury Department in Manila. Petitioners conclude
that by this method of fixing the interest rates, the principle of mutuality of For its part, respondent disputes petitioners claim that interest rates were
contracts is violated, and public policy as well as Circular 905 49 of the then unilaterally fixed by it, taking relief in the CA pronouncement that petitioners
Central Bank had been breached. are deemed estopped by their failure to question the imposed rates and their
continued payment thereof without opposition. It adds that because the
Credit Agreement and promissory notes contained both an escalation clause
and a de-escalation clause, it may not be said that the bank violated the provided by law or by the Monetary Board, the banks overall costs of
principle of mutuality. Besides, the increase or decrease in interest rates funds, and upon agreement of the parties.60
have been mutually agreed upon by the parties, as shown by petitioners
continuous payment without protest. Respondent adds that the alleged e. That interest rates based on prime rate plus applicable spread are
unilateral imposition of interest rates is not a proper subject for review by the indeterminate and arbitrary On this score, respondent submits
Court because the issue was never raised in the lower court. there are various factors that influence interest rates, from political
events to economic developments, etc.; the cost of money,
As for petitioners claim that interest rates imposed by it are null and void for profitability and foreign currency transactions may not be
the reasons that 1) the Credit Agreements and the promissory notes were discounted.61
signed in blank; 2) interest rates were at short periods; 3) no interest rates
could be charged where no agreement on interest rates was made in writing; On the issue of penalties, respondent reiterates the trial courts finding that
4) PNB fixed interest rates on the basis of arbitrary policies and standards during pre-trial, petitioners admitted that the Statement of Account as of
left to its choosing; and 5) interest rates based on prime rate plus applicable October 12, 1998 which detailed and included penalty charges as part of
spread are indeterminate and arbitrary PNB counters: the total outstanding obligation owing to the bank was correct. Respondent
justifies the imposition and collection of a penalty as a normal banking
a. That Credit Agreements and promissory notes were signed by practice, and the standard rate per annum for all commercial banks, at the
petitioner[s] in blank Respondent claims that this issue was never time, was 24%.
raised in the lower court. Besides, documentary evidence prevails
over testimonial evidence; Lydia Silos testimony in this regard is Respondent adds that the purpose of the penalty or a penal clause for that
self-serving, unsupported and uncorroborated, and for being the lone matter is to ensure the performance of the obligation and substitute for
evidence on this issue. The fact remains that these documents are in damages and the payment of interest in the event of non-compliance.62 And
proper form, presumed regular, and endure, against arbitrary claims the promissory note being the principal agreement as opposed to the
by Silos who is an experienced business person that she signed mortgage, which is a mere accessory should prevail. This being the case,
questionable loan documents whose provisions for interest rates its inclusion as part of the secured amount in the mortgage agreements is
were left blank, and yet she continued to pay the interests without valid and necessary.
protest for a number of years.56
Regarding the foreclosure of the mortgages, respondent accuses petitioners
b. That interest rates were at short periods Respondent argues that of pre-empting consolidation of its ownership over TCTs T-14250 and T-
the law which governs and prohibits changes in interest rates made 16208; that petitioners filed Civil Case No. 5975 ostensibly to question the
more than once every twelve months has been removed57 with the foreclosure and sale of properties covered by TCTs T-14250 and T-16208 in
issuance of Presidential Decree No. 858.58 a desperate move to retain ownership over these properties, because they
failed to timely redeem them.
c. That no interest rates could be charged where no agreement on
interest rates was made in writing in violation of Article 1956 of the Respondent directs the attention of the Court to its petition in G.R. No.
Civil Code, which provides that no interest shall be due unless it has 181046,63 where the propriety of the CAs ruling on the following issues is
been expressly stipulated in writing Respondent insists that the squarely raised:
stipulated 25% per annum as embodied in PN 9707237 should be
imposed during the interim, or the period after the loan became due
1. That the interest rate to be applied after the expiration of the first
and while it remains unpaid, and not the legal interest of 12% as 30-day interest period for PN 9707237 should be 12% per annum;
claimed by petitioners.59 and

d. That PNB fixed interest rates on the basis of arbitrary policies and
2. That PNB should reimburse petitioners the excess in the bid price
standards left to its choosing According to respondent, interest
of P377,505.99 which is the difference between the total amount due
rates were fixed taking into consideration increases or decreases as to PNB and the amount of its bid price.
Our Ruling the interest rate agreed upon shall take effect on the effectivity date of the
increase or decrease in the maximum interest rate.
The Court grants the Petition.
The Promissory Note, in turn, authorized the PNB to raise the rate of interest,
Before anything else, it must be said that it is not the function of the Court to at any time without notice, beyond the stipulated rate of 12% but only "within
re-examine or re-evaluate evidence adduced by the parties in the the limits allowed by law."
proceedings below. The rule admits of certain well-recognized exceptions,
though, as when the lower courts findings are not supported by the evidence The Real Estate Mortgage contract likewise provided that
on record or are based on a misapprehension of facts, or when certain
relevant and undisputed facts were manifestly overlooked that, if properly (k) INCREASE OF INTEREST RATE: The rate of interest charged on the
considered, would justify a different conclusion. This case falls within such obligation secured by this mortgage as well as the interest on the amount
exceptions. which may have been advanced by the MORTGAGEE, in accordance with
the provision hereof, shall be subject during the life of this contract to such an
The Court notes that on March 5, 2008, a Resolution was issued by the increase within the rate allowed by law, as the Board of Directors of the
Courts First Division denying respondents petition in G.R. No. 181046, due MORTGAGEE may prescribe for its debtors.
to late filing, failure to attach the required affidavit of service of the petition on
the trial court and the petitioners, and submission of a defective verification xxxx
and certification of non-forum shopping. On June 25, 2008, the Court issued
another Resolution denying with finality respondents motion for
In making the unilateral increases in interest rates, petitioner bank relied on
reconsideration of the March 5, 2008 Resolution. And on August 15, 2008,
the escalation clause contained in their credit agreement which provides, as
entry of judgment was made. This thus settles the issues, as above-stated,
follows:
covering a) the interest rate or 12% per annum that applies upon
expiration of the first 30 days interest period provided under PN 9707237,
and b)the CAs decree that PNB should reimburse petitioner the excess in The Bank reserves the right to increase the interest rate within the limits
the bid price of P377,505.09. allowed by law at any time depending on whatever policy it may adopt in the
future and provided, that, the interest rate on this accommodation shall be
correspondingly decreased in the event that the applicable maximum interest
It appears that respondents practice, more than once proscribed by the
rate is reduced by law or by the Monetary Board. In either case, the
Court, has been carried over once more to the petitioners. In a number of adjustment in the interest rate agreed upon shall take effect on the effectivity
decided cases, the Court struck down provisions in credit documents issued
date of the increase or decrease in maximum interest rate.
by PNB to, or required of, its borrowers which allow the bank to increase or
decrease interest rates "within the limits allowed by law at any time
depending on whatever policy it may adopt in the future." Thus, in Philippine This clause is authorized by Section 2 of Presidential Decree (P.D.) No. 1684
National Bank v. Court of Appeals,64 such stipulation and similar ones were which further amended Act No. 2655 ("The Usury Law"), as amended, thus:
declared in violation of Article 130865 of the Civil Code. In a second case,
Philippine National Bank v. Court of Appeals,66 the very same stipulations Section 2. The same Act is hereby amended by adding a new section after
found in the credit agreement and the promissory notes prepared and issued Section 7, to read as follows:
by the respondent were again invalidated. The Court therein said:
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of
The Credit Agreement provided inter alia, that money, goods or credits may stipulate that the rate of interest agreed upon
may be increased in the event that the applicable maximum rate of interest is
(a) The BANK reserves the right to increase the interest rate within the limits increased bylaw or by the Monetary Board; Provided, That such stipulation
allowed by law at any time depending on whatever policy it may adopt in the shall be valid only if there is also a stipulation in the agreement that the rate
future; Provided, that the interest rate on this accommodation shall be of interest agreed upon shall be reduced in the event that the applicable
correspondingly decreased in the event that the applicable maximum interest maximum rate of interest is reduced by law or by the Monetary Board;
is reduced by law or by the Monetary Board. In either case, the adjustment in Provided further, That the adjustment in the rate of interest agreed upon shall
take effect on or after the effectivity of the increase or decrease in the Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545
maximum rate of interest. (1991) we held

Section 1 of P.D. No. 1684 also empowered the Central Banks Monetary x x x The unilateral action of the PNB in increasing the interest rate on the
Board to prescribe the maximum rates of interest for loans and certain private respondents loan violated the mutuality of contracts ordained in
forbearances. Pursuant to such authority, the Monetary Board issued Central Article 1308 of the Civil Code:
Bank (C.B.) Circular No. 905, series of 1982, Section 5 of which provides:
Art. 1308. The contract must bind both contracting parties; its validity or
Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other compliance cannot be left to the will of one of them.
Financial Intermediaries) is hereby amended to read as follows:
In order that obligations arising from contracts may have the force of law
Sec. 1303. Interest and Other Charges. between the parties, there must be mutuality between the parties based on
their essential equality. A contract containing a condition which makes its
The rate of interest, including commissions, premiums, fees and other fulfillment dependent exclusively upon the uncontrolled will of one of the
charges, on any loan, or forbearance of any money, goods or credits, contracting parties, is void . . . . Hence, even assuming that the . . . loan
regardless of maturity and whether secured or unsecured, shall not be agreement between the PNB and the private respondent gave the PNB a
subject to any ceiling prescribed under or pursuant to the Usury Law, as license (although in fact there was none) to increase the interest rate at will
amended. 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
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting
adhesion, where the parties do not bargain on equal footing, the weaker
parties to stipulate freely regarding any subsequent adjustment in the interest
partys (the debtor) participation being reduced to the alternative "to take it or
rate that shall accrue on a loan or forbearance of money, goods or credits. In
fine, they can agree to adjust, upward or downward, the interest previously leave it" . . . . Such a contract is a veritable trap for the weaker party whom
stipulated. However, contrary to the stubborn insistence of petitioner bank, the courts of justice must protect against abuse and imposition.67 (Emphases
supplied)
the said law and circular did not authorize either party to unilaterally raise the
interest rate without the others consent.
Then again, in a third case, Spouses Almeda v. Court of Appeals,68 the Court
It is basic that there can be no contract in the true sense in the absence of invalidated the very same provisions in the respondents prepared Credit
Agreement, declaring thus:
the element of agreement, or of mutual assent of the parties. If this assent is
wanting on the part of the one who contracts, his act has no more efficacy
than if it had been done under duress or by a person of unsound mind. The binding effect of any agreement between parties to a contract is
premised on two settled principles: (1) that any obligation arising from
Similarly, contract changes must be made with the consent of the contracting contract has the force of law between the parties; and (2) that there must be
mutuality between the parties based on their essential equality. Any contract
parties. The minds of all the parties must meet as to the proposed
which appears to be heavily weighed in favor of one of the parties so as to
modification, especially when it affects an important aspect of the agreement.
lead to an unconscionable result is void. Any stipulation regarding the validity
In the case of loan contracts, it cannot be gainsaid that the rate of interest is
or compliance of the contract which is left solely to the will of one of the
always a vital component, for it can make or break a capital venture. Thus,
any change must be mutually agreed upon, otherwise, it is bereft of any parties, is likewise, invalid.
binding effect.
It is plainly obvious, therefore, from the undisputed facts of the case that
respondent bank unilaterally altered the terms of its contract with petitioners
We cannot countenance petitioner banks posturing that the escalation
by increasing the interest rates on the loan without the prior assent of the
clause at bench gives it unbridled right to unilaterally upwardly adjust the
interest on private respondents loan. That would completely take away from latter. In fact, the manner of agreement is itself explicitly stipulated by the
private respondents the right to assent to an important modification in their Civil Code when it provides, in Article 1956 that "No interest shall be due
unless it has been expressly stipulated in writing." What has been "stipulated
agreement, and would negate the element of mutuality in contracts. In
in writing" from a perusal of interest rate provision of the credit agreement The promissory note contained the following stipulation:
signed between the parties is that petitioners were bound merely to pay 21%
interest, subject to a possible escalation or de-escalation, when 1) the For value received, I/we, [private respondents] jointly and severally promise
circumstances warrant such escalation or de-escalation; 2) within the limits to pay to the ORDER of the PHILIPPINE NATIONAL BANK, at its office in
allowed by law; and 3) upon agreement. San Jose City, Philippines, the sum of FIFTEEN THOUSAND ONLY
(P15,000.00), Philippine Currency, together with interest thereon at the rate
Indeed, the interest rate which appears to have been agreed upon by the of 12% per annum until paid, which interest rate the Bank may at any time
parties to the contract in this case was the 21% rate stipulated in the interest without notice, raise within the limits allowed by law, and I/we also agree to
provision. Any doubt about this is in fact readily resolved by a careful reading pay jointly and severally ____% per annum penalty charge, by way of
of the credit agreement because the same plainly uses the phrase "interest liquidated damages should this note be unpaid or is not renewed on due
rate agreed upon," in reference to the original 21% interest rate. x x x dated.

xxxx Payment of this note shall be as follows:

Petitioners never agreed in writing to pay the increased interest rates *THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE
demanded by respondent bank in contravention to the tenor of their credit
agreement. That an increase in interest rates from 18% to as much as 68% On the reverse side of the note the following condition was stamped:
is excessive and unconscionable is indisputable. Between 1981 and 1984,
petitioners had paid an amount equivalent to virtually half of the entire
All short-term loans to be granted starting January 1, 1978 shall be made
principal (P7,735,004.66) which was applied to interest alone. By the time the
subject to the condition that any and/or all extensions hereof that will leave
spouses tendered the amount of P40,142,518.00 in settlement of their
any portion of the amount still unpaid after 730 days shall automatically
obligations; respondent bank was demanding P58,377,487.00 over and
convert the outstanding balance into a medium or long-term obligation as the
above those amounts already previously paid by the spouses. case may be and give the Bank the right to charge the interest rates
prescribed under its policies from the date the account was originally
Escalation clauses are not basically wrong or legally objectionable so long as granted.
they are not solely potestative but based on reasonable and valid grounds.
Here, as clearly demonstrated above, not only [are] the increases of the
To secure payment of the loan the parties executed a real estate mortgage
interest rates on the basis of the escalation clause patently unreasonable contract which provided:
and unconscionable, but also there are no valid and reasonable standards
upon which the increases are anchored.
(k) INCREASE OF INTEREST RATE:
xxxx
The rate of interest charged on the obligation secured by this mortgage as
well as the interest on the amount which may have been advanced by the
In the face of the unequivocal interest rate provisions in the credit agreement
MORTGAGEE, in accordance with the provision hereof, shall be subject
and in the law requiring the parties to agree to changes in the interest rate in
during the life of this contract to such an increase within the rate allowed by
writing, we hold that the unilateral and progressive increases imposed by
law, as the Board of Directors of the MORTGAGEE may prescribe for its
respondent PNB were null and void. Their effect was to increase the total debtors.
obligation on an eighteen million peso loan to an amount way over three
times that which was originally granted to the borrowers. That these
increases, occasioned by crafty manipulations in the interest rates is xxxx
unconscionable and neutralizes the salutary policies of extending loans to
spur business cannot be disputed.69 (Emphases supplied) To begin with, PNBs argument rests on a misapprehension of the import of
the appellate courts ruling. The Court of Appeals nullified the interest rate
Still, in a fourth case, Philippine National Bank v. Court of Appeals,70 the increases not because the promissory note did not comply with P.D. No.
above doctrine was reiterated:
1684 by providing for a de-escalation, but because the absence of such not bargain on equal footing, the weaker partys (the debtor) participation
provision made the clause so one-sided as to make it unreasonable. 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
That ruling is correct. It is in line with our decision in Banco Filipino Savings & weaker party whom the courts of justice must protect against abuse and
Mortgage Bank v. Navarro that although P.D. No. 1684 is not to be imposition.
retroactively applied to loans granted before its effectivity, there must
nevertheless be a de-escalation clause to mitigate the one-sidedness of the A similar ruling was made in Philippine National Bank v. Court of Appeals.
escalation clause. Indeed because of concern for the unequal status of The credit agreement in that case provided:
borrowers vis--vis the banks, our cases after Banco Filipino have fashioned
the rule that any increase in the rate of interest made pursuant to an The BANK reserves the right to increase the interest rate within the limits
escalation clause must be the result of agreement between the parties. allowed by law at any time depending on whatever policy it may adopt in the
future: Provided, that the interest rate on this accommodation shall be
Thus in Philippine National Bank v. Court of Appeals, two promissory notes correspondingly decreased in the event that the applicable maximum interest
authorized PNB to increase the stipulated interest per annum" within the is reduced by law or by the Monetary Board. . . .
limits allowed by law at any time depending on whatever policy [PNB] may
adopt in the future; Provided, that the interest rate on this note shall be As in the first case, PNB successively increased the stipulated interest so
correspondingly decreased in the event that the applicable maximum interest that what was originally 12% per annum became, after only two years, 42%.
rate is reduced by law or by the Monetary Board." The real estate mortgage In declaring the increases invalid, we held:
likewise provided:
We cannot countenance petitioner banks posturing that the escalation
The rate of interest charged on the obligation secured by this mortgage as clause at bench gives it unbridled right to unilaterally upwardly adjust the
well as the interest on the amount which may have been advanced by the interest on private respondents loan. That would completely take away from
MORTGAGEE, in accordance with the provisions hereof, shall be subject private respondents the right to assent to an important modification in their
during the life of this contract to such an increase within the rate allowed by agreement, and would negate the element of mutuality in contracts.
law, as the Board of Directors of the MORTGAGEE may prescribe for its
debtors.
Only recently we invalidated another round of interest increases decreed by
PNB pursuant to a similar agreement it had with other borrowers:
Pursuant to these clauses, PNB successively increased the interest from
18% to 32%, then to 41% and then to 48%. This Court declared the
[W]hile the Usury Law ceiling on interest rates was lifted by C.B. Circular
increases unilaterally imposed by [PNB] to be in violation of the principle of
905, nothing in the said circular could possibly be read as granting
mutuality as embodied in Art.1308 of the Civil Code, which provides that
respondent bank carte blanche authority to raise interest rates to levels
"[t]he contract must bind both contracting parties; its validity or compliance
which would either enslave its borrowers or lead to a hemorrhaging of their
cannot be left to the will of one of them." As the Court explained: assets.

In order that obligations arising from contracts may have the force of law
In this case no attempt was made by PNB to secure the conformity of private
between the parties, there must be mutuality between the parties based on
respondents to the successive increases in the interest rate. Private
their essential equality. A contract containing a condition which makes its
respondents assent to the increases can not be implied from their lack of
fulfillment dependent exclusively upon the uncontrolled will of one of the response to the letters sent by PNB, informing them of the increases. For as
contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). stated in one case, no one receiving a proposal to change a contract is
Hence, even assuming that the P1.8 million loan agreement between the
obliged to answer the proposal.71 (Emphasis supplied)
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 We made the same pronouncement in a fifth case, New Sampaguita Builders
principle of mutuality essential in contracts. It would have invested the loan Construction, Inc. v. Philippine National Bank,72 thus
agreement with the character of a contract of adhesion, where the parties do
Courts have the authority to strike down or to modify provisions in promissory Thus, the July 1989 Credit Agreement executed by petitioners and
notes that grant the lenders unrestrained power to increase interest rates, respondent contained the following stipulation on interest:
penalties and other charges at the latters sole discretion and without giving
prior notice to and securing the consent of the borrowers. This unilateral 1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5%
authority is anathema to the mutuality of contracts and enable lenders to take [per annum]. Interest shall be payable in advance every one hundred twenty
undue advantage of borrowers. Although the Usury Law has been effectively days at the rate prevailing at the time of the renewal.
repealed, courts may still reduce iniquitous or unconscionable rates charged
for the use of money. Furthermore, excessive interests, penalties and other (b) The Borrower agrees that the Bank may modify the interest rate in the
charges not revealed in disclosure statements issued by banks, even if Loan depending on whatever policy the Bank may adopt in the future,
stipulated in the promissory notes, cannot be given effect under the Truth in
including without limitation, the shifting from the floating interest rate system
Lending Act.73 (Emphasis supplied)
to the fixed interest rate system, or vice versa. Where the Bank has imposed
on the Loan interest at a rate per annum which is equal to the Banks spread
Yet again, in a sixth disposition, Philippine National Bank v. Spouses over the current floating interest rate, the Borrower hereby agrees that the
Rocamora,74 the above pronouncements were reiterated to debunk PNBs Bank may, without need of notice to the Borrower, increase or decrease its
repeated reliance on its invalidated contract stipulations: spread over the floating interest rate at any time depending on whatever
policy it may adopt in the future.76 (Emphases supplied)
We repeated this rule in the 1994 case of PNB v. CA and Jayme Fernandez
and the 1996 case of PNB v. CA and Spouses Basco. Taking no heed of while the eight promissory notes issued pursuant thereto granted PNB the
these rulings, the escalation clause PNB used in the present case to justify right to increase or reduce interest rates "within the limits allowed by law or
the increased interest rates is no different from the escalation clause assailed the Monetary Board"77 and the Real Estate Mortgage agreement included the
in the 1996 PNB case; in both, the interest rates were increased from the same right to increase or reduce interest rates "at any time depending on
agreed 12% per annum rate to 42%. x x x whatever policy PNB may adopt in the future."78

xxxx On the basis of the Credit Agreement, petitioners issued promissory notes
which they signed in blank, and respondent later on entered their
On the strength of this ruling, PNBs argument that the spouses corresponding interest rates, as follows:
Rocamoras failure to contest the increased interest rates that were
purportedly reflected in the statements of account and the demand letters 1st Promissory Note dated July 24, 1989 19.5%;
sent by the bank amounted to their implied acceptance of the increase
should likewise fail.
2nd Promissory Note dated November 22, 1989 23%;

Evidently, PNBs failure to secure the spouses Rocamoras consent to the 3rd Promissory Note dated March 21, 1990 22%;
increased interest rates prompted the lower courts to declare excessive and
illegal the interest rates imposed. Togo around this lower court finding, PNB
alleges that the P206,297.47 deficiency claim was computed using only the 4th Promissory Note dated July 19, 1990 24%;
original 12% per annum interest rate. We find this unlikely. Our examination
of PNBs own ledgers, included in the records of the case, clearly indicates 5th Promissory Note dated December 17, 1990 28%;
that PNB imposed interest rates higher than the agreed 12% per annum rate.
This confirmatory finding, albeit based solely on ledgers found in the records, 6th Promissory Note dated February 14, 1991 32%;
reinforces the application in this case of the rule that findings of the RTC,
when affirmed by the CA, are binding upon this Court.75 (Emphases supplied) 7th Promissory Note dated March 1, 1991 30%; and

Verily, all these cases, including the present one, involve identical or similar 8th Promissory Note dated July 11, 1991 24%.79
provisions found in respondents credit agreements and promissory notes.
On the other hand, the August 1991 Amendment to Credit Agreement 24th Promissory Note dated November 25, 1996 18%;
contains the following stipulation regarding interest:
25th Promissory Note dated May 30, 1997 17.5%; and
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on
each Availment from date of each Availment up to but not including the date 26th Promissory Note (PN 9707237) dated July 30, 1997 25%.81
of full payment thereof at the rate per annum which is determined by the
Bank to be prime rate plus applicable spread in effect as of the date of each The 9th up to the 17th promissory notes provide for the payment of interest
Availment.80 (Emphases supplied) at the "rate the Bank may at any time without notice, raise within the limits
allowed by law x x x."82 On the other hand, the 18th up to the 26th
and under this Amendment to Credit Agreement, petitioners again executed promissory notes which includes PN 9707237 carried the following
and signed the following promissory notes in blank, for the respondent to provision:
later on enter the corresponding interest rates, which it did, as follows:
x x x For this purpose, I/We agree that the rate of interest herein stipulated
9th Promissory Note dated November 8, 1991 26%; may be increased or decreased for the subsequent Interest Periods, with
prior notice to the Borrower in the event of changes in interest rate
10th Promissory Note dated March 19, 1992 25%; prescribed by law or the Monetary Board of the Central Bank of the
Philippines, or in the Banks overall cost of funds. I/We hereby agree that in
11th Promissory Note dated July 11, 1992 23%; the event I/we are not agreeable to the interest rate fixed for any Interest
Period, I/we shall have the option to prepay the loan or credit facility without
penalty within ten (10) calendar days from the Interest Setting
12th Promissory Note dated November 10, 1992 21%;
Date.83 (Emphasis supplied)
13th Promissory Note dated March 15, 1993 21%;
These stipulations must be once more invalidated, as was done in previous
cases. The common denominator in these cases is the lack of agreement of
14th Promissory Note dated July 12, 1993 17.5%; the parties to the imposed interest rates. For this case, this lack of consent
by the petitioners has been made obvious by the fact that they signed the
15th Promissory Note dated November 17, 1993 21%; promissory notes in blank for the respondent to fill. We find credible the
testimony of Lydia in this respect. Respondent failed to discredit her; in fact,
16th Promissory Note dated March 28, 1994 21%; its witness PNB Kalibo Branch Manager Aspa admitted that interest rates
were fixed solely by its Treasury Department in Manila, which were then
17th Promissory Note dated July 13, 1994 21%; simply communicated to all PNB branches for implementation. If this were
the case, then this would explain why petitioners had to sign the promissory
notes in blank, since the imposable interest rates have yet to be determined
18th Promissory Note dated November 16, 1994 16%;
and fixed by respondents Treasury Department in Manila.

19th Promissory Note dated April 10, 1995 21%;


Moreover, in Aspas enumeration of the factors that determine the interest
rates PNB fixes such as cost of money, foreign currency values, bank
20th Promissory Note dated July 19, 1995 18.5%; administrative costs, profitability, and considerations which affect the banking
industry it can be seen that considerations which affect PNBs borrowers
21st Promissory Note dated December 18, 1995 18.75%; are ignored. A borrowers current financial state, his feedback or opinions,
the nature and purpose of his borrowings, the effect of foreign currency
22nd Promissory Note dated April 22, 1996 18.5%; values or fluctuations on his business or borrowing, etc. these are not
factors which influence the fixing of interest rates to be imposed on him.
23rd Promissory Note dated July 22, 1996 18.5%; Clearly, respondents method of fixing interest rates based on one-sided,
indeterminate, and subjective criteria such as profitability, cost of money,
bank costs, etc. is arbitrary for there is no fixed standard or margin above or The Bank reserves the right to increase the interest rate within the limits
below these considerations. allowed by law at any time depending on whatever policy it may adopt in the
future: Provided, that, the interest rate on this accommodation shall be
The stipulation in the promissory notes subjecting the interest rate to review correspondingly decreased in the event that the applicable maximum interest
does not render the imposition by UCPB of interest rates on the obligations rate is reduced by law or by the Monetary Board. In either case, the
of the spouses Beluso valid. According to said stipulation: adjustment in the interest rate agreed upon shall take effect on the effectivity
date of the increase or decrease in maximum interest rate.85 (Emphasis
The interest rate shall be subject to review and may be increased or supplied)
decreased by the LENDER considering among others the prevailing financial
and monetary conditions; or the rate of interest and charges which other Whereas, in the present credit agreements under scrutiny, it is stated that:
banks or financial institutions charge or offer to charge for similar
accommodations; and/or the resulting profitability to the LENDER after due IN THE JULY 1989 CREDIT AGREEMENT
consideration of all dealings with the BORROWER.
(b) The Borrower agrees that the Bank may modify the interest rate on the
It should be pointed out that the authority to review the interest rate was Loan depending on whatever policy the Bank may adopt in the future,
given [to] UCPB alone as the lender. Moreover, UCPB may apply the including without limitation, the shifting from the floating interest rate system
considerations enumerated in this provision as it wishes. As worded in the to the fixed interest rate system, or vice versa. Where the Bank has imposed
above provision, UCPB may give as much weight as it desires to each of the on the Loan interest at a rate per annum, which is equal to the Banks spread
following considerations: (1) the prevailing financial and monetary over the current floating interest rate, the Borrower hereby agrees that the
condition;(2) the rate of interest and charges which other banks or financial Bank may, without need of notice to the Borrower, increase or decrease its
institutions charge or offer to charge for similar accommodations; and/or(3) spread over the floating interest rate at any time depending on whatever
the resulting profitability to the LENDER (UCPB) after due consideration of all policy it may adopt in the future.86 (Emphases supplied)
dealings with the BORROWER (the spouses Beluso). Again, as in the case
of the interest rate provision, there is no fixed margin above or below these IN THE AUGUST 1991 AMENDMENT TO CREDIT AGREEMENT
considerations.
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on
In view of the foregoing, the Separability Clause cannot save either of the each Availment from date of each Availment up to but not including the date
two options of UCPB as to the interest to be imposed, as both options violate of full payment thereof at the rate per annum which is determined by the
the principle of mutuality of contracts.84 (Emphases supplied) Bank to be prime rate plus applicable spread in effect as of the date of each
Availment.87 (Emphasis supplied)
To repeat what has been said in the above-cited cases, any modification in
the contract, such as the interest rates, must be made with the consent of the Plainly, with the present credit agreement, the element of consent or
contracting parties.1wphi1 The minds of all the parties must meet as to the agreement by the borrower is now completely lacking, which makes
proposed modification, especially when it affects an important aspect of the respondents unlawful act all the more reprehensible.
agreement. In the case of loan agreements, the rate of interest is a principal
condition, if not the most important component. Thus, any modification
Accordingly, petitioners are correct in arguing that estoppel should not apply
thereof must be mutually agreed upon; otherwise, it has no binding effect.
to them, for "[e]stoppel cannot be predicated on an illegal act. As between
the parties to a contract, validity cannot be given to it by estoppel if it is
What is even more glaring in the present case is that, the stipulations in prohibited by law or is against public policy."88
question no longer provide that the parties shall agree upon the interest rate
to be fixed; -instead, they are worded in such a way that the borrower shall
It appears that by its acts, respondent violated the Truth in Lending Act, or
agree to whatever interest rate respondent fixes. In credit agreements
Republic Act No. 3765, which was enacted "to protect x x x citizens from a
covered by the above-cited cases, it is provided that: lack of awareness of the true cost of credit to the user by using a full
disclosure of such cost with a view of preventing the uninformed use of credit
to the detriment of the national economy."89 The law "gives a detailed
enumeration of the specific information required to be disclosed, among UCPB further argues that since the spouses Beluso were duly given copies
which are the interest and other charges incident to the extension of of the subject promissory notes after their execution, then they were duly
credit."90 Section 4 thereof provides that a disclosure statement must be notified of the terms thereof, in substantial compliance with the Truth in
furnished prior to the consummation of the transaction, thus: Lending Act.

SEC. 4. Any creditor shall furnish to each person to whom credit is extended, Once more, we disagree. Section 4 of the Truth in Lending Act clearly
prior to the consummation of the transaction, a clear statement in writing provides that the disclosure statement must be furnished prior to the
setting forth, to the extent applicable and in accordance with rules and consummation of the transaction:
regulations prescribed by the Board, the following information:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended,
(1) the cash price or delivered price of the property or service to be prior to the consummation of the transaction, a clear statement in writing
acquired; setting forth, to the extent applicable and in accordance with rules and
regulations prescribed by the Board, the following information:
(2) the amounts, if any, to be credited as down payment and/or
trade-in; (1) the cash price or delivered price of the property or service to be
acquired;
(3) the difference between the amounts set forth under clauses (1)
and (2); (2) the amounts, if any, to be credited as down payment and/or
trade-in;
(4) the charges, individually itemized, which are paid or to be paid by
such person in connection with the transaction but which are not (3) the difference between the amounts set forth under clauses (1)
incident to the extension of credit; and (2);

(5) the total amount to be financed; (4) the charges, individually itemized, which are paid or to be paid by
such person in connection with the transaction but which are not
(6) the finance charge expressed in terms of pesos and centavos; incident to the extension of credit;
and
(5) the total amount to be financed;
(7) the percentage that the finance bears to the total amount to be
financed expressed as a simple annual rate on the outstanding (6) the finance charge expressed in terms of pesos and centavos;
unpaid balance of the obligation. and

Under Section 4(6), "finance charge" represents the amount to be paid by the (7) the percentage that the finance bears to the total amount to be
debtor incident to the extension of credit such as interest or discounts, financed expressed as a simple annual rate on the outstanding
collection fees, credit investigation fees, attorneys fees, and other service unpaid balance of the obligation.
charges. The total finance charge represents the difference between (1) the
aggregate consideration (down payment plus installments) on the part of the The rationale of this provision is to protect users of credit from a lack of
debtor, and (2) the sum of the cash price and non-finance charges.91 awareness of the true cost thereof, proceeding from the experience that
banks are able to conceal such true cost by hidden charges, uncertainty of
By requiring the petitioners to sign the credit documents and the promissory interest rates, deduction of interests from the loaned amount, and the like.
notes in blank, and then unilaterally filling them up later on, respondent The law thereby seeks to protect debtors by permitting them to fully
violated the Truth in Lending Act, and was remiss in its disclosure appreciate the true cost of their loan, to enable them to give full consent to
obligations. In one case, which the Court finds applicable here, it was held: the contract, and to properly evaluate their options in arriving at business
decisions. Upholding UCPBs claim of substantial compliance would defeat
these purposes of the Truth in Lending Act. The belated discovery of the true borrowers questions respondents practice of unilaterally fixing interest rates,
cost of credit will too often not be able to reverse the ill effects of an already then only the loan arrangement with that lone complaining borrower will enjoy
consummated business decision. the benefit of review or re-negotiation; as to the 99 others, the questionable
practice will continue unchecked, and respondent will continue to reap the
In addition, the promissory notes, the copies of which were presented to the profits from such unscrupulous practice. The Court can no more condone a
spouses Beluso after execution, are not sufficient notification from UCPB. As view so perverse. This is exactly what the Court meant in the immediately
earlier discussed, the interest rate provision therein does not sufficiently preceding cited case when it said that "the belated discovery of the true cost
indicate with particularity the interest rate to be applied to the loan covered of credit does not reverse the ill effects of an already consummated business
by said promissory notes.92(Emphases supplied) decision;"95 as to the 99 borrowers who did not or could not complain, the
illegal act shall have become a fait accompli to their detriment, they have
already suffered the oppressive rates.
However, the one-year period within which an action for violation of the Truth
in Lending Act may be filed evidently prescribed long ago, or sometime in
2001, one year after petitioners received the March 2000 demand letter Besides, that petitioners are given the right to question the interest rates
which contained the illegal charges. imposed is, under the circumstances, irrelevant; we have a situation where
the petitioners do not stand on equal footing with the respondent. It is
doubtful that any borrower who finds himself in petitioners position would
The fact that petitioners later received several statements of account
dare question respondents power to arbitrarily modify interest rates at any
detailing its outstanding obligations does not cure respondents breach. To
time. In the second place, on what basis could any borrower question such
repeat, the belated discovery of the true cost of credit does not reverse the ill
effects of an already consummated business decision. 93 power, when the criteria or standards which are really one-sided, arbitrary
and subjective for the exercise of such power are precisely lost on him?
Neither may the statements be considered proposals sent to secure the
For the same reasons, the Court cannot validly consider that, as stipulated in
petitioners conformity; they were sent after the imposition and application of
the 18th up to the 26th promissory notes, petitioners are granted the option
the interest rate, and not before. And even if it were to be presumed that
these are proposals or offers, there was no acceptance by petitioners. "No to prepay the loan or credit facility without penalty within 10 calendar days
from the Interest Setting Date if they are not agreeable to the interest rate
one receiving a proposal to modify a loan contract, especially regarding
fixed. It has been shown that the promissory notes are executed and signed
interest, is obliged to answer the proposal."94
in blank, meaning that by the time petitioners learn of the interest rate, they
are already bound to pay it because they have already pre-signed the note
Loan and credit arrangements may be made enticing by, or "sweetened" where the rate is subsequently entered.
with, offers of low initial interest rates, but actually accompanied by
provisions written in fine print that allow lenders to later on increase or
Besides, premium may not be placed upon a stipulation in a contract which
decrease interest rates unilaterally, without the consent of the borrower, and
grants one party the right to choose whether to continue with or withdraw
depending on complex and subjective factors. Because they have been lured
from the agreement if it discovers that what the other party has been doing
into these contracts by initially low interest rates, borrowers get caught and
stuck in the web of subsequent steep rates and penalties, surcharges and all along is improper or illegal.
the like. Being ordinary individuals or entities, they naturally dread legal
complications and cannot afford court litigation; they succumb to whatever Thus said, respondents arguments relative to the credit documents that
charges the lenders impose. At the very least, borrowers should be charged documentary evidence prevails over testimonial evidence; that the credit
rightly; but then again this is not possible in a one-sided credit system where documents are in proper form, presumed regular, and endure, against
the temptation to abuse is strong and the willingness to rectify is made weak arbitrary claims by petitioners, experienced business persons that they are,
by the eternal desire for profit. they signed questionable loan documents whose provisions for interest rates
were left blank, and yet they continued to pay the interests without protest for
a number of years deserve no consideration.
Given the above supposition, the Court cannot subscribe to respondents
argument that in every repricing of petitioners loan availment, they are given
the right to question the interest rates imposed. The import of respondents With regard to interest, the Court finds that since the escalation clause is
line of reasoning cannot be other than that if one out of every hundred annulled, the principal amount of the loan is subject to the original or
stipulated rate of interest, and upon maturity, the amount due shall be subject executed an amended mortgage agreement with the petitioners, thereby
to legal interest at the rate of 12% per annum. This is the uniform ruling including penalties in the amount to be secured by the encumbered
adopted in previous cases, including those cited here.96 The interests paid by properties. Yet it did not.
petitioners should be applied first to the payment of the stipulated or legal
and unpaid interest, as the case may be, and later, to the capital or With regard to attorneys fees, it was plain error for the CA to have passed
principal.97 Respondent should then refund the excess amount of interest upon the issue since it was not raised by the petitioners in their appeal; it was
that it has illegally imposed upon petitioners; "[t]he amount to be refunded the respondent that improperly brought it up in its appellees brief, when it
refers to that paid by petitioners when they had no obligation to do should have interposed an appeal, since the trial courts Decision on this
so."98 Thus, the parties original agreement stipulated the payment of 19.5% issue is adverse to it. It is an elementary principle in the subject of appeals
interest; however, this rate was intended to apply only to the first promissory that an appellee who does not himself appeal cannot obtain from the
note which expired on November 21, 1989 and was paid by petitioners; it appellate court any affirmative relief other than those granted in the decision
was not intended to apply to the whole duration of the loan. Subsequent of the court below.
higher interest rates have been declared illegal; but because only the rates
are found to be improper, the obligation to pay interest subsists, the same to x x x [A]n appellee, who is at the same time not an appellant, may on appeal
be fixed at the legal rate of 12% per annum. However, the 12% interest shall be permitted to make counter assignments of error in ordinary actions, when
apply only until June 30, 2013. Starting July1, 2013, the prevailing rate of
the purpose is merely to defend himself against an appeal in which errors are
interest shall be 6% per annum pursuant to our ruling in Nacar v. Gallery
alleged to have been committed by the trial court both in the appreciation of
Frames99 and Bangko Sentral ng Pilipinas-Monetary Board Circular No. 799.
facts and in the interpretation of the law, in order to sustain the judgment in
his favor but not when his purpose is to seek modification or reversal of the
Now to the issue of penalty. PN 9707237 provides that failure to pay it or any judgment, in which case it is necessary for him to have excepted to and
installment thereon, when due, shall constitute default, and a penalty charge appealed from the judgment.102
of 24% per annum based on the defaulted principal amount shall be
imposed. Petitioners claim that this penalty should be excluded from the
Since petitioners did not raise the issue of reduction of attorneys fees, the
foreclosure amount or bid price because the Real Estate Mortgage and the
CA possessed no authority to pass upon it at the instance of respondent. The
Supplement thereto did not specifically include it as part of the secured ruling of the trial court in this respect should remain undisturbed.
amount. Respondent justifies its inclusion in the secured amount, saying that
the purpose of the penalty or a penal clause is to ensure the performance of
the obligation and substitute for damages and the payment of interest in the For the fixing of the proper amounts due and owing to the parties to the
event of non-compliance.100 Respondent adds that the imposition and respondent as creditor and to the petitioners who are entitled to a refund as a
collection of a penalty is a normal banking practice, and the standard rate per consequence of overpayment considering that they paid more by way of
annum for all commercial banks, at the time, was 24%. Its inclusion as part of interest charges than the 12% per annum 103 herein allowed the case
the secured amount in the mortgage agreements is thus valid and necessary. should be remanded to the lower court for proper accounting and
computation, applying the following procedure:
The Court sustains petitioners view that the penalty may not be included as
part of the secured amount. Having found the credit agreements and 1. The 1st Promissory Note with the 19.5% interest rate is deemed
promissory notes to be tainted, we must accord the same treatment to the proper and paid;
mortgages. After all, "[a] mortgage and a note secured by it are deemed
parts of one transaction and are construed together."101 Being so tainted and 2. All subsequent promissory notes (from the 2nd to the 26th
having the attributes of a contract of adhesion as the principal credit promissory notes) shall carry an interest rate of only 12% per
documents, we must construe the mortgage contracts strictly, and against annum.104 Thus, interest payment made in excess of 12% on the 2nd
the party who drafted it. An examination of the mortgage agreements reveals promissory note shall immediately be applied to the principal, and
that nowhere is it stated that penalties are to be included in the secured the principal shall be accordingly reduced. The reduced principal
amount. Construing this silence strictly against the respondent, the Court can shall then be subjected to the 12%105 interest on the 3rd promissory
only conclude that the parties did not intend to include the penalty allowed note, and the excess over 12% interest payment on the 3rd
under PN 9707237 as part of the secured amount. Given its resources, promissory note shall again be applied to the principal, which shall
respondent could have if it truly wanted to conveniently prepared and again be reduced accordingly. The reduced principal shall then be
subjected to the 12% interest on the 4th promissory note, and the be RETURNED to the petitioners, with legal interest, under the
excess over12% interest payment on the 4th promissory note shall principle of solutio indebiti;107
again be applied to the principal, which shall again be reduced
accordingly. And so on and so forth; 12. Likewise, if the overpayment exceeds the total amount of interest
(4.) and award of 1% attorneys fees (6.), the trial court shall
3. After the above procedure is carried out, the trial court shall be INVALIDATE THE EXTRAJUDICIAL FORECLOSURE AND SALE;
able to conclude if petitioners a) still have an OUTSTANDING
BALANCE/OBLIGATION or b) MADE PAYMENTS OVER AND 13. HOWEVER, if the total amount of interest (4.) and award of 1%
ABOVE THEIR TOTAL OBLIGATION (principal and interest); attorneys fees (6.) exceed petitioners overpayment, then the excess
shall be DEDUCTED from the bid price of P4,324,172.96;
4. Such outstanding balance/obligation, if there be any, shall then be
subjected to a 12% per annum interest from October 28, 1997 until 14. The difference in (13.) [P4,324,172.96 LESS sum total of the
January 14, 1999, which is the date of the auction sale; interest (4.) and 1% attorneys fees (6.)] shall be DELIVERED TO
THE PETITIONERS;
5. Such outstanding balance/obligation shall also be charged a 24%
per annum penalty from August 14, 1997 until January 14, 1999. But 15. Respondent may then proceed to consolidate its title to TCTs T-
from this total penalty, the petitioners previous payment of penalties 14250 and T-16208. The outstanding penalties, if any, shall be
in the amount of P202,000.00made on January 27, 1998106 shall be collected by other means.
DEDUCTED;
From the above, it will be seen that if, after proper accounting, it
6. To this outstanding balance (3.), the interest (4.), penalties (5.), turns out that the petitioners made payments exceeding what they
and the final and executory award of 1% attorneys fees shall be actually owe by way of principal, interest, and attorneys fees, then
ADDED; the mortgaged properties need not answer for any outstanding
secured amount, because there is not any; quite the contrary,
7. The sum total of the outstanding balance (3.), interest (4.) and 1% respondent must refund the excess to petitioners.1wphi1 In such
attorneys fees (6.) shall be DEDUCTED from the bid price case, the extrajudicial foreclosure and sale of the properties shall be
of P4,324,172.96. The penalties (5.) are not included because they declared null and void for obvious lack of basis, the case being one
are not included in the secured amount; of solutio indebiti instead. If, on the other hand, it turns out that
petitioners overpayments in interests do not exceed their total
8. The difference in (7.) [P4,324,172.96 LESS sum total of the obligation, then the respondent may consolidate its ownership over
outstanding balance (3.), interest (4.), and 1% attorneys fees (6.)] the properties, since the period for redemption has expired. Its only
shall be DELIVERED TO THE PETITIONERS; obligation will be to return the difference between its bid price
(P4,324,172.96) and petitioners total obligation outstanding except
penalties after applying the latters overpayments.
9. Respondent may then proceed to consolidate its title to TCTs T-
14250 and T-16208;
WHEREFORE, premises considered, the Petition is GRANTED. The May 8,
10. ON THE OTHER HAND, if after performing the procedure in (2.), 2007 Decision of the Court of Appeals in CA-G.R. CV No. 79650 is
it turns out that petitioners made an OVERPAYMENT, the interest ANNULLED and SET ASIDE. Judgment is hereby rendered as follows:
(4.), penalties (5.), and the award of 1% attorneys fees (6.) shall be
DEDUCTED from the overpayment. There is no outstanding 1. The interest rates imposed and indicated in the 2nd up to the 26th
balance/obligation precisely because petitioners have paid beyond Promissory Notes are DECLARED NULL AND VOID, and such
the amount of the principal and interest; notes shall instead be subject to interest at the rate of twelve percent
(12%) per annum up to June 30, 2013, and starting July 1, 2013, six
percent (6%) per annum until full satisfaction;
11. If the overpayment exceeds the sum total of the interest (4.),
penalties (5.), and award of 1% attorneys fees (6.), the excess shall
2. The penalty charge imposed in Promissory Note No. 9707237
shall be EXCLUDED from the amounts secured by the real estate
mortgages;

3. The trial courts award of one per cent (1%) attorneys fees is
REINSTATED;

4. The case is ordered REMANDED to the Regional Trial Court,


Branch 6 of Kalibo, Aklan for the computation of overpayments made
by petitioners spouses Eduardo and Lydia Silos to respondent
Philippine National Bank, taking into consideration the foregoing
dispositions, and applying the procedure hereinabove set forth;

5. Thereafter, the trial court is ORDERED to make a determination


as to the validity of the extrajudicial foreclosure and sale, declaring
the same null and void in case of overpayment and ordering the
release and return of Transfer Certificates of Title Nos. T-14250 and
TCT T-16208 to petitioners, or ordering the delivery to the petitioners
of the difference between the bid price and the total remaining
obligation of petitioners, if any;

6. In the meantime, the respondent Philippine National Bank is


ENJOINED from consolidating title to Transfer Certificates of Title
Nos. T-14250 and T-16208 until all the steps in the procedure above
set forth have been taken and applied;

7. The reimbursement of the excess in the bid price of P377,505.99,


which respondent Philippine National Bank is ordered to reimburse
petitioners, should be HELD IN ABEYANCE until the true amount
owing to or owed by the parties as against each other is determined;

8. Considering that this case has been pending for such a long time
and that further proceedings, albeit uncomplicated, are required, the
trial court is ORDERED to proceed with dispatch.

SO ORDERED.
[G.R. No. 88880. April 30, 1991.]
The Promissory Notes, in turn, uniformly authorized the PNB to increase the
PHILIPPINE NATIONAL BANK, Petitioner, v. THE HON. COURT OF stipulated 18% interest per annum "within the limits allowed by law at any
APPEALS and AMBROSIO PADILLA, Respondents. time depending on whatever policy it [PNB] may adopt in the future;
Provided, that, the interest rate on this note shall be correspondingly
The Chief Legal Counsel for Petitioner. decreased in the event that the applicable maximum interest rate is reduced
by law or by the Monetary Board." (pp. 85-86, Rollo; Emphasis ours.)
Ambrosio Padilla, Mempin & Reyes Law Offices for Private Respondent.
The Real Estate Mortgage Contract likewise provided
DECISION that:jgc:chanrobles.com.ph

GRIO-AQUINO, J.: "(k) INCREASE OF INTEREST RATE

"The rate of interest charged on the obligation secured by this mortgage as


The Philippine National Bank (PNB) has appealed by certiorari from the well as the interest on the amount which may have been advanced by the
decision promulgated on June 27, 1989 by the Court of Appeals in CA-G.R. MORTGAGEE, in accordance with the provisions hereof, shall be subject
CV No. 09791 entitled, "AMBROSIO PADILLA, plaintiff-appellant versus during the life of this contract to such an increase within the rate allowed by
PHILIPPINE NATIONAL BANK, defendant-appellee," reversing the decision law, as the Board of Directors of the MORTGAGEE may prescribe for its
of the trial court which had dismissed the private respondents complaint "to debtors." (p. 86, Rollo;Emphasis supplied.)
annul interest increases." (p. 32, Rollo.) The Court of Appeals rendered
judgment:jgc:chanrobles.com.ph Four (4) months advance interest and incidental expenses/charges were
deducted from the loan, the net proceeds of which were released to the
". . . declaring the questioned increases of interest as unreasonable, private respondent by crediting or transferring the amount to his current
excessive and arbitrary and ordering the defendant-appellee [PNB] to refund account with the bank.chanrobles.com : virtual law library
to the plaintiff-appellant the amount of interest collected from July, 1984 in
excess of twenty-four percent (24%) per annum. Costs against the On June 20, 1984, PNB informed the private respondent that (1) his credit
defendant-appellee." (pp 14-15, Rollo.) line of P1.8 million "will expire on July 4, 1984," (2)" [i]f renewal of the line for
another year is intended, please submit soonest possible your request," and
In July 1982, the private respondent applied for, and was granted by (3) the "present policy of the Bank requires at least 30% reduction of
petitioner PNB, a credit line of 321.8 million, secured by a real estate principal before your line can be renewed." (pp. 86-87, Rollo.) Complying,
mortgage, for a term of two (2) years, with 18% interest per annum. Private private respondent on June 25, 1984, paid PNB P540,000 00 (30% of P1.8
respondent executed in favor of the PNB a Credit Agreement, two (2) million) and requested that "the balance of P1,260,000.00 be renewed for
promissory notes in the amount of P900,000.00 each, and a Real Estate another period of two (2) years under the same arrangement" and that "the
Mortgage Contract. increase of the interest rate of my mortgage loan be from 18% to 21%" (p.
87, Rollo.).
The Credit Agreement provided that
On July 4, 1984, private respondent paid PNB P360,000.00.
"9.06 Other Conditions. The Borrowers hereby agree to be bound by the
rules and regulations of the Central Bank and the current and general On July 18, 1984, private respondent reiterated in writing his request that
policies of the Bank and those which the Bank may adopt in the future, which "the increase in the rate of interest from 18% be fixed at 21% of 24%. (p. 87,
may have relation to or in any way affect the Line, which rules, regulations Rollo.)
and policies are incorporated herein by reference as if set forth herein in full.
Promptly upon receipt of a written request from the Bank, the Borrowers shall On July 26, 1984, private respondent made an additional payment of
execute and deliver such documents and instruments, in form and substance P100,000.
satisfactory to the Bank, in order to effectuate or otherwise comply with such
rules, regulations and policies." (p. 85, Rollo.) On August 10, 1984, PNB informed private respondent that "we can not give
due course to your request for preferential interest rate in view of the fair and just;
following reasons: Existing Loan Policies of the bank requires 32% for loan of
more than one year; our present cost of funds has substantially increased." "b. The interest rate on the P900,000.00 released on September 27, 1982 be
(pp. 8788, Rollo.) counted from said date and not from July 4, 1984;

On August 17, 1984, private respondent further paid PNB P150,000.00. "c. The excess of interest payment collected by defendant bank by debiting
plaintiffs current account be refunded to plaintiff or credited to his current
In a letter dated August 24, 1984 to PNB, private respondent announced that account;
he would "continue making further payments, and instead of a loan of more
than one year, I shall pay the said loan before the lapse of one year or "d. Pending the determination of the merits of this case, a restraining order
before July 4, 1985. . . . I reiterate my request that the increase of my rate of and or a writ of preliminary injunction be issued (1) to restrain and or enjoin
interest from 18% be fixed at 21% or 24%." (p. 88, Rollo.) defendant bank for [sic] collecting from plaintiff and/or debiting his current
account with illegal and excessive increases of interest rates; and (2) to
On September 12, 1984, private respondent paid PNB P160,000.00. prevent defendant bank from declaring plaintiff in default for non-payment
and from instituting any foreclosure proceeding, extrajudicial or judicial, of the
In letters dated September 12, 1984 and September 13, 1984, PNB informed valuable commercial property of plaintiff." (pp. 89-90, Rollo.)
private respondent that "the interest rate on your outstanding line/loan is
hereby adjusted from 32% p.a. to 41% p.a. (35% prime rate + 6%) effective In its answer to the complaint, PNB denied that the increases in interest rates
September 6, 1984;" and further explained "why we can not grant your were illegal, unilateral excessive and arbitrary and recited the reasons
request for a lower rate of 21% or 24%." (pp. 88-89, Rollo.) justifying said increases.

In a letter dated September 24, 1984 to PNB, private respondent registered On March 31, 1985, the private respondent paid the P300,000 balance of his
his protest against the increase of interest rate from 18% to 32% on July 4, obligation to PNBN (Exh. 5).
1984 and from 32% to 41% on September 6, 1984.
The trial court rendered judgment on April 14, 1986, dismissing the complaint
On October 15, 1984, private respondent reiterated his request that the because the increases of interest were properly made.
interest rate should not be increased from 18% to 32% and from 32% to
41%. He also attached (as payment) a check for The private respondent appealed to the Court of Appeals. On June 27, 1989,
P140,000.00.chanrobles.com.ph : virtual law library the Court of Appeals reversed the trial court, hence, NBs recourse to this
Court by a petition for review under Rule 45 of the Rules of Court.
Like rubbing salt on the private respondents wound, the petitioner informed
private respondent on October 29, 1984, that "the interest rate on your The assignments of error raised in PNBs petition for review can be resolved
outstanding line/loan is hereby adjusted from 41% p.a. to 48% p.a. (42% into a single legal issue of whether the bank, within the term of the loan
prime rate plus 6% spread) effective 25 October 1984." (p. 89, Rollo.) which it granted to the private respondent, may unilaterally change or
increase the interest rate stipulated therein at will and as often as it pleased.
In November 1984, private respondent paid PNB P50,000.00 thus reducing
his principal loan obligation to P300,000.00. The answer to that question is no.

On December 18, 1984, private respondent filed in the Regional Trial Court In the first place, although Section 2, PD. No. 116 of January 29, 1973,
of Manila a complaint against PNB entitled, "AMBROSIO PADILLA v. authorizes the Monetary Board to prescribe the maximum rate or rates of
PHILIPPINE NATIONAL BANK" (Civil Case No. 84-28391), praying that interest for loans or renewal thereof and to change such rate or rates
judgment be rendered:jgc:chanrobles.com.ph whenever warranted by prevailing economic and social conditions, it
expressly provides that "such changes shall not be made oftener than once
"a. Declaring that the unilateral increase of interest rates from 18% to 32%, every twelve months."cralaw virtua1aw library
then to 41% and again to 48% are illegal, not valid nor binding on plaintiff,
and that an adjustment of his interest rate from 18% to 24% is reasonable, In this case, PNB, over the objection of the private respondent, and without
authority from the Monetary Board, within a period of only four (4) months,
increased the 18% interest rate on the private respondents loan obligation "Exhibit 5 in its portion marked Exhibit 5-e-1 stipulates:chanrob1es virtual
three (3) times: (a) to 32% in July 1984; (b) to 41% in October 1984; and (c) 1aw library
to 48% in November 1984. Those increases were null and void, for if the
Monetary Board itself was not authorized to make such changes oftener than (k) INCREASE OF INTEREST RATE
once a year, even less so may a bank which is subordinate to the
Board.chanrobles law library : red The rate of interest charged on the obligation secured by this mortgage as
well as the interest on the amount which may have been advanced by the
Secondly, as pointed out by the Court of Appeals, while the private MORTGAGEE, in accordance with the provisions hereof, shall be subject
respondent-debtor did agree in the Deed of Real Estate Mortgage (Exh. 5) during the life of this contract to such an increase within the rate allowed by
that the interest rate may be increased during the life of the contract "to such law, as the Board of Directors of the MORTGAGEE may prescribe for its
increase within the rate allowed by law, as the Board of Directors of the debtors.
MORTGAGEE may prescribe" (Exh. 5-e-1) or "within the limits allowed by
law" (Promissory Notes, Exs. 2, 3, and 4), no law was ever passed in July to "Clearly, then, the agreement between the parties authorized the defendant
November 1984 increasing the interest rates on loans or renewals thereof to bank to increase the interest rate beyond the original rate of 18% per annum
32%, 41% and 48% (per annum), and no documents were executed and but within the limits allowed by law or within the rate allowed by law, it
delivered by the debtor to effectuate the increases. The Court of Appeals being declared the obligation of the plaintiff as borrower to execute and
observed. deliver the corresponding documents and instruments to effectuate the
increase." (pp. 11-12, Rollo.)
". . . We focus Our attention first of all on the agreement between the parties
as embodied in the following instruments, to wit: (1) Exhibit 1 Credit In Banco Filipino Savings and Mortgage Bank v. Navarro, 15 SCRA 346
Agreement dated July 1, 1982; (2) Exhibit 2 Promissory Note dated July (1987), this Court disauthorized the bank from raising the interest rate on the
5, 1982; (3) Exhibit (3) Promissory Note dated January 3, 1983; (4) borrowers loan from 12% to 17% despite an escalation clause in the loan
Exhibit 4 Promissory Note, dated December 13, 1983; and (5) Exhibit 5 agreement signed by the debtors authorizing Banco Filipino "to
Real Estate Mortgage contract dated July 1, 1982. correspondingly increase the interest rate stipulated in this contract without
advance notice to me/us in the event a law should be enacted increasing the
"Exhibit 1 states in its portion marked Exhibit 1-g-1:chanrob1es virtual 1aw lawful rates of interest that may be charged on this particular kind of loan."
library (Emphasis supplied.)chanrobles virtual lawlibrary

9 .06 Other Conditions. The Borrowers hereby agree to be bound by the In the Banco Filipino case, the bank relied on Section 3 of CB Circular No.
rules and regulations of the Central Bank and the current and general 494 dated July 1, 1976 (72 O.G. No. 3, p. 676-J) which provided that "the
policies of the Bank and those which the Bank may adopt in the future, which maximum rate of interest, including commissions premiums, fees and other
may have relation to or in any way affect the Line, which rules, regulations charges on loans with a maturity of more than 730 days by banking institution
and policies are incorporated herein by reference as if set forth herein in full. . . . shall be 19%."cralaw virtua1aw library
Promptly upon receipt of a written request from the Bank, the Borrowers shall
execute and deliver such documents and instruments, in form and substance This Court disallowed the increase for the simple reason that said "Circular
satisfactory to the Bank, in order to effectuate or otherwise comply with such No. 494, although it has the effect of law is not a law." Speaking through
rules, regulations and policies. Mme. Justice Ameurfina M. Herrera, this Court held:jgc:chanrobles.com.ph

"Exhibits 2, 3, and 4 in their portions respectively marked Exhibits 2-B, "It is now clear that from March 17, 1980, escalation clauses to be valid
3-B, and 4-B uniformly authorize the defendant bank to increase the should specifically provide: (1) that there can be an increase in interest if
stipulated interest rate of 18% per annum within the limits allowed by law at increased by law or by the Monetary Board; and (2) in order for such
any time depending on whatever policy it may adopt in the future: Provided, stipulation to be valid, it must include a provision for reduction of the
that, the interest rate on this note shall be correspondingly decreased in the stipulated interest in the event that the applicable maximum rate of interest is
event that the applicable maximum interest rate is reduced by law or by the reduced by law or by the Monetary Board." p. 111, Rollo.).
Monetary Board.
In the present case, the PNB relied on its own Board Resolution No. 681 be due unless it has been expressly stipulated in writing."cralaw virtua1aw
(Exh. 10), PNB Circular No. 40-79-84 (Exh. 13), and PNB Circular No. 40- library
129-84 (Exh. 15), but those resolution and circulars are neither laws nor
resolutions of the Monetary Board. The debtor herein never agreed in writing to pay the interest increases fixed
by the PNB beyond 24% per annum, hence, he is not bound to pay a higher
CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling rate than that.
on interest rates
That an increase in the interest rate from 18% to 48% within a period of four
". . . increases in interest rates are not subject to any ceiling prescribed by (4) months is excessive, as found by the Court of Appeals, is indisputable.
the Usury Law."cralaw virtua1aw library
WHEREFORE, finding no reversible error in the decision of the Court of
but it did not authorize the PNB, or any bank for that matter, to unilaterally Appeals in CA-G.R. CV No. 09791, the Court resolved to deny the petition for
and successively increase the agreed interest rates from 18% to 48% within review for lack of merit, with costs against the petitioner.
a span of four (4) months, in violation of PD. 116 which limits such changes
to "once every twelve months."cralaw virtua1aw library SO ORDERED.

Besides violating PD. 116, the unilateral action of the PNB in increasing the
interest rate on the private respondents loan, violated the mutuality of
contracts ordained in Article 1308 of the Civil Code:jgc:chanrobles.com.ph

"ART. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them."cralaw virtua1aw library

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 v. Rita Legarda, Inc., 21 SCRA 555).
Hence, even assuming that the P1.8 million 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 partys (the debtor) participation
being reduced to the alternative "to take it or leave it" (Qua v. 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.

PNBS successive increases of the interest rate on the private respondents


loan, over the latters protest, were arbitrary as they violated an express
provision of the Credit Agreement (Exh. 1) Section 9.01 that its terms "may
be amended only by an instrument in writing signed by the party to be bound
as burdened by such amendment." The increases imposed by PNB also
contravene Art. 1956 of the Civil Code which provides that "no interest shall
[G.R. No. 113926. October 23, 1996] On all the abovementioned notes, private respondents Leila Ventura had
signed as co-maker.[4]
Upon maturity which fell on the different dates below, the principal
balance remaining on the notes stood at:
SECURITY BANK AND TRUST COMPANY, petitioner, vs. REGIONAL
TRIAL COURT OF MAKATI, BRANCH 61, MAGTANGGOL
EUSEBIO and LEILA VENTURA, respondents. 1) PN No. TL/74/748/83 P16,665.00 as of September 1983.

DECISION 2) PN No. TL/74/1296/83 P83,333.00 as of August 1983

HERMOSISIMA, JR., J.: 3) PN No. TL/74/1991/83 P65,000.00 as of August 1983.

Questions of law which are the first impression are sought to be resolved Upon the failure and refusal of respondent Eusebio to pay the aforestated
in this case: Should the rate of interest on a loan or forbearance of money, balance payable, a collectible case was filed in court by petitioner
goods or credits, as stipulated in a contract, far in excess of the ceiling SBTC.[5] On March 30, 1993, the court a quo rendered a judgment in favor of
prescribed under or pursuant to the Usury Law, prevail over Section 2 of petitioner SBTC, the dispositive portion which reads:
Central Bank Circular No. 905 which prescribes that the rate of interest thereof
shall continue to be 12% per annum? Do the Courts have the discretion to
WHEREFORE, premises above-considered, and plaintiffs claim having been duly
arbitrarily override stipulated interest rates of promissory notes and stipulated proven, judgment is hereby rendered in favor of plaintiff and as against defendant
interest rates of promissory notes and thereby impose a 12% interest on the Eusebio who is hereby ordered to:
loans, in the absence of evidence justifying the impositions of a higher rate?
This is a petition for review on certiorari for the purpose of assailing the 1. Pay the sum of P16,665.00, plus interest of 12% per annum starting 27 September
decision of Honorable Judge Fernando V. Gorospe of the Regional Trial Court 1983, until fully paid;
of Makati, Branch 61, datedMarch 30, 1993, which found private respondent
Eusebio liable to petitioner for a sum of money. Interest was lowered by the 2. Pay the sum of P83,333.00, plus interest of 12% per annum starting 28 August
court a quo from 23% per annum as agreed upon by the parties to 12% per 1983, until fully paid;
annum.
The undisputed facts are as follows: 3. Pay the sum of P65,000.00, plus interest of 12% per annum starting 31 August
1983, until fully paid;
On April 27, 1983, private respondent Magtanggol Eusebio executed
Promissory Note No. TL/74/178/83 in favor of petitioner Security Bank and 4. Pay the sum equivalent to 20% of the total amount due and payable to plaintiff as
Trust Co. (SBTC) in the total amount of One Hundred Thousand Pesos and by way of attorneys fees; and to
(P100,000.00) payable in six monthly installments with a stipulated interest of
23% per annum up to the fifth installments.[1]
5. Pay the cost of this suit.
On July 28, 1983, respondent Eusebio again executed Promissory note
No TL/74/1296/83 in favor of petitioner SBTC. Respondent bound himself to SO ORDERED.[6]
pay the sum of One Hundred Thousand Pesos (P100.000.00) in six (6)
monthly installments plus 23% interest per annum.[2]
On August 6, 1993, a motion for partial reconsideration was filed by
Finally, another Promissory Note No. TL74/1491/83 was executed petitioner SBTC contending that:
on August 31, 1983 in the amount of Sixty Five Thousand Pesos
(1) the interest rate agreed upon by the parties during the signing of
(P65,000.00). Respondent agreed to pay this note in six (6) monthly
the promissory notes was 23% per annum;
installments plus interest at the rate of 23% per annum.[3]
(2) the interests awarded should be compounded quarterly from due
date as provided in three (3) promissory notes;
(3) defendant Leila Ventura should likewise be held liable to pay the In the exercise of the authority herein granted, the Monetary Board may prescribed
balance on the promissory notes since she has signed as co-maker and higher maximum rates for loans of low priority, such as consumer loans or renewals
as such, is liable jointly and severally with defendant Eusebio without a thereof as well as such loans made by pawnshops, finance companies and other
need for demand upon her.[7] similar credit institutions although the rates prescribed for these institutions need not
necessarily be uniform. The Monetary Board is also authorized to prescribed
Consequently, an Order was issued by the court a quo denying the different maximum rate or rates for different types of borrowings, including deposits
motion to grant the rates of interest beyond 12% per annum; and holding and deposit substitutes, or loans of financial intermediaries.[10]
defendant Leila Ventura jointly and severally liable with co-defendant Eusebio.
Hence, this petition. This court has ruled in the case of Philippine National Bank v. Court of
Appeals[11] that:
The sole issue to be settled in this petition is whether or not the 23% rate
of interest per annum agreed upon by petitioner bank and respondents is
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to
allowable and not against the Usury Law.
stipulate freely regarding any subsequent adjustment in the interest rate that shall
We find merit in this petition. accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to
adjust, upward or downward, the interest previously stipulated.
From the examination of the records, it appears that indeed the agreed
rate of interest as stipulated on the three (3) promissory notes is 23% per
All the promissory notes were signed in 1983 and, therefore, were already
annum.[8] The applicable provision of law is the Central Bank Circular No. 905
covered by CB Circular No. 905. Contrary to the claim of respondent court,
which took effect on December 22, 1982, particularly Sections 1 and 2 which
this circular did not repeal nor in anyway amend the Usury Law but simply
state:[9]
suspended the latters effectivity.
Sec. 1. The rate of interest, including commissions, premiums, fees and other Basic is the rule of statutory construction that when the law is clear and
charges, on a loan or forbearance of any money, goods or credits, regardless of unambiguous, the court is left with no alternative but to apply the same
maturity and whether secured or unsecured, that may be charged or collected by any according to its clear language. As we have held in the case of Quijano v.
person, whether natural or judicial, shall not be subject to any ceiling prescribed Development Bank of the Philippines:[12]
under or pursuant to the Usury Law, as amended.
xxx We cannot see any room for interpretation or construction in the clear and
Sec. 2. The rate of interest for the loan or forbearance of any money, goods or credits unambiguous language of the above-quoted provision of law. This Court had
and the rate allowed in judgments, in the absence of express contract as to such rate steadfastly adhered to the doctrine that its first and fundamental duty is the
of interest, shall continue to be twelve per cent (12%) per annum. application of the law according to its express terms, interpretation being called for
only when such literal application is impossible. No process of interpretation or
CB Circular 905 was issued by the Central Banks Monetary Board construction need be resorted to where a provision of law peremptorily calls for
pursuant to P.D. 1684 empowering them to prescribe the maximum rates of application. Where a requirement or condition is made in explicit and unambiguous
interest for loans and certain forbearances, to wit: terms, no discretion is left to the judiciary. It must see to it that its mandate is
obeyed.
SECTION 1. Section 1-a of Act No. 2655, as amended, is hereby amended to read as
follows: The rate of interest was agreed upon by the parties freely. Significantly,
respondent did not question that rate. It is not for respondent court a quo to
change the stipulations in the contract where it is not illegal. Furthermore,
SEC. 1-a The Monetary Board is hereby authorized to prescribed the maximum rate
Article 1306 of the New Civil code provides that contracting parties may
or rates of interest for the loan or renewal thereof or the forbearance of any money,
establish such stipulations, clauses, terms and conditions as they may deem
goods or credits, and to change such rate or rates whenever warranted by prevailing
convenient, provided they are not contrary to law, morals, good customs,
economic and social conditions: Provided, That changes in such rates or rates may be
public order, or public policy. We find no valid reason for the respondent
effected gradually on scheduled dates announced in advance.
court a quo to impose a 12% rate of interest on the principal balance owing to
petitioner by respondent in the presence of a valid stipulation. In a loan or
forbearance of money, the interest due should be that stipulated in writing, and
in the absence thereof, the rate shall be 12% per annum.[13] Hence, only in the
absence of a stipulation can the court impose the 12% rate of interest.
The promissory notes were signed by both parties voluntarily. Therefore,
stipulations therein are binding between them. Respondent Eusebio, likewise,
did not question any of the stipulations therein. In fact, in the Comment file by
respondent Eusebio to this court, he chose not to question the decision and
instead expressed his desire to negotiate with the petitioner bank for terms
within which to settle his obligation.[14]
IN VIEW OF THE FOREGOING, the decision of the respondent court a
quo, is hereby AFFIRMED with the MODIFICATION that the rate of interest
that should be imposed be 23% per annum.
SO ORDERED.
SECOND DIVISION
SPOUSES DAVID B. CARPO G.R. Nos. 150773 & six (6) months with an interest rate of six percent (6%) per month. To secure
and RECHILDA S. CARPO, 153599 the payment of the loan, petitioners mortgaged their residential house and lot
Petitioners,
Present: situated at San Francisco, Magarao, Camarines Sur, which lot is covered by
Transfer Certificate of Title (TCT) No. 23180. Petitioners failed to pay the loan
- versus - PUNO, J.,
Chairman, upon demand. Consequently, the real estate mortgage was extrajudicially
AUSTRIA-MARTINEZ, foreclosed and the mortgaged property sold at a public auction on 8 July 1996.
CALLEJO, SR.,
ELEANOR CHUA and TINGA, and The house and lot was awarded to respondents, who were the only bidders,
ELMA DY NG, CHICO-NAZARIO, JJ.
for the amount of Three Hundred Sixty-Seven Thousand Four Hundred Fifty-
Respondents.
Promulgated: Seven Pesos and Eighty Centavos (P367,457.80).
September 30, 2005

x-------------------------------------------------------------------x Upon failure of petitioners to exercise their right of redemption, a


certificate of sale was issued on 5 September 1997 by Sheriff Rolando A.

DECISION Borja. TCT No. 23180 was cancelled and in its stead, TCT No. 29338 was
issued in the name of respondents.
TINGA, J.:

Despite the issuance of the TCT, petitioners continued to occupy the


Before this Court are two consolidated petitions for review. The first,
said house and lot, prompting respondents to file a petition for writ of
docketed as G.R. No. 150773, assails the Decision[1] of the Regional Trial
possession with the RTC docketed as Special Proceedings (SP) No. 98-1665.
Court (RTC), Branch 26 of Naga City dated 26 October 2001 in Civil Case No.
On 23 March 1999, RTC Judge Ernesto A. Miguel issued an Order[4]for the
99-4376. RTC Judge Filemon B. Montenegro dismissed the complaint[2] for
issuance of a writ of possession.
annulment of real estate mortgage and consequent foreclosure proceedings
filed by the spouses David B. Carpo and Rechilda S. Carpo (petitioners).
On 23 July 1999, petitioners filed a complaint for annulment of real
The second, docketed as G.R. No. 153599, seeks to annul the Court of estate mortgage and the consequent foreclosure proceedings, docketed as
Appeals Decision[3] dated 30 April 2002 in CA-G.R. SP No. 57297. The Court Civil Case No. 99-4376 of the RTC. Petitioners consigned the amount of Two
of Appeals Third Division annulled and set aside the orders of Judge Corazon Hundred Fifty-Seven Thousand One Hundred Ninety-Seven Pesos and
A. Tordilla to suspend the sheriffs enforcement of the writ of possession. Twenty-Six Centavos (P257,197.26) with the RTC.

The cases stemmed from a loan contracted by petitioners. On 18 July 1995, Meanwhile, in SP No. 98-1665, a temporary restraining order was
they borrowed from Eleanor Chua and Elma Dy Ng (respondents) the amount issued upon motion on 3 August 1999, enjoining the enforcement of the writ of
of One Hundred Seventy-Five Thousand Pesos (P175,000.00), payable within possession. In an Order[5] dated 6 January 2000, the RTC suspended the
enforcement of the writ of possession pending the final disposition of Civil On the other hand, petitioners argue in G.R. No. 153599 that the RTC did not
Case No. 99-4376. Against this Order, respondents filed a petition for certiorari commit any grave abuse of discretion when it issued the orders dated 3 August
and mandamus before the Court of Appeals, docketed as CA-G.R. SP No. 1999 and 6 January 2000, and that these orders could not have been the
57297. proper subjects of a petition for certiorari and mandamus. More accurately, the
justiciable issues before us are whether the Court of Appeals could properly
During the pendency of the case before the Court of Appeals, RTC entertain the petition for certiorari from the timeliness aspect, and whether the
Judge Filemon B. Montenegro dismissed the complaint in Civil Case No. 99- appellate court correctly concluded that the writ of possession could no longer
4376 on the ground that it was filed out of time and barred by laches. The RTC be stayed.
proceeded from the premise that the complaint was one for annulment of a
voidable contract and thus barred by the four-year prescriptive period. Hence,
the first petition for review now under consideration was filed with this Court, We first resolve the petition in G.R. No. 150773.
assailing the dismissal of the complaint.
Petitioners contend that the agreed rate of interest of 6% per month
The second petition for review was filed with the Court after the Court or 72% per annum is so excessive, iniquitous, unconscionable and exorbitant
of Appeals on 30 April 2002 annulled and set aside the RTC orders in SP No. that it should have been declared null and void. Instead of dismissing their
98-1665 on the ground that it was the ministerial duty of the lower court to complaint, they aver that the lower court should have declared them liable to
issue the writ of possession when title over the mortgaged property had been respondents for the original amount of the loan plus 12% interest per annum
consolidated in the mortgagee. and 1% monthly penalty charge as liquidated damages,[7] in view of the ruling
in Medel v. Court of Appeals.[8]
This Court ordered the consolidation of the two cases, on motion of petitioners.
In Medel, the Court found that the interest stipulated at 5.5% per
In G.R. No. 150773, petitioners claim that following the Courts ruling in Medel month or 66% per annum was so iniquitous or unconscionable as to render
v. Court of Appeals[6] the rate of interest stipulated in the principal loan the stipulation void.
agreement is clearly null and void. Consequently, they also argue that the
Nevertheless, we find the interest at 5.5% per month,
nullity of the agreed interest rate affects the validity of the real estate mortgage. or 66% per annum, stipulated upon by the parties in the
Notably, while petitioners were silent in their petition on the issues of promissory note iniquitous or unconscionable, and, hence,
contrary to morals (contra bonos mores), if not against the
prescription and laches on which the RTC grounded the dismissal of the law. The stipulation is void. The Court shall reduce equitably
complaint, they belatedly raised the matters in their Memorandum. liquidated damages, whether intended as an indemnity or a
penalty if they are iniquitous or unconscionable.[9]
Nonetheless, these points warrant brief comment.
In a long line of cases, this Court has invalidated similar stipulations The question is crucial to the present petition even if the subject
on interest rates for being excessive, iniquitous, unconscionable and thereof is not the annulment of the loan contract but that of the mortgage
exorbitant. In Solangon v. Salazar,[10] we annulled the stipulation of 6% per contract. The consideration of the mortgage contract is the same as that of the
month or 72% per annum interest on a P60,000.00 loan. In Imperial v. principal contract from which it receives life, and without which it cannot exist
Jaucian,[11] we reduced the interest rate from 16% to 1.167% per month or as an independent contract. Being a mere accessory contract, the validity of
14% per annum. In Ruiz v. Court of Appeals,[12] we equitably reduced the the mortgage contract would depend on the validity of the loan secured by it.[16]
agreed 3% per month or 36% per annum interest to 1% per month or 12% per
annum interest. The 10% and 8% interest rates per month on a P1,000,000.00 Notably in Medel, the Court did not invalidate the entire loan obligation despite
loan were reduced to 12% per annum in Cuaton v. Salud.[13] Recently, this the inequitability of the stipulated interest, but instead reduced the rate of
Court, in Arrofo v. Quino,[14] reduced the 7% interest per month on interest to the more reasonable rate of 12% per annum. The same remedial
a P15,000.00 loan amounting to 84% interest per annum to 18% per annum. approach to the wrongful interest rates involved was employed or affirmed by
the Court in Solangon, Imperial, Ruiz, Cuaton, and Arrofo.
There is no need to unsettle the principle affirmed in Medel and like cases.
From that perspective, it is apparent that the stipulated interest in the subject The Courts ultimate affirmation in the cases cited of the validity of the principal
loan is excessive, iniquitous, unconscionable and exorbitant. Pursuant to the loan obligation side by side with the invalidation of the interest rates thereupon
freedom of contract principle embodied in Article 1306 of the Civil Code, is congruent with the rule that a usurious loan transaction is not a complete
contracting parties may establish such stipulations, clauses, terms and nullity but defective only with respect to the agreed interest.
conditions as they may deem convenient, provided they are not contrary to
law, morals, good customs, public order, or public policy. In the ordinary We are aware that the Court of Appeals, on certain occasions, had ruled that
course, the codal provision may be invoked to annul the excessive stipulated a usurious loan is wholly null and void both as to the loan and as to the usurious
interest. interest.[17] However, this Court adopted the contrary rule,

In the case at bar, the stipulated interest rate is 6% per month, or 72%
per annum. By the standards set in the above-cited cases, this stipulation is as comprehensively discussed in Briones v. Cammayo:[18]
similarly invalid. However, the RTC refused to apply the principle cited and
employed in Medel on the ground that Medel did not pertain to the annulment In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court
likewise declared that, in any event, the debtor in a usurious
of a real estate mortgage,[15] as it was a case for annulment of the loan contract contract of loan should pay the creditor the amount which he justly
itself. The question thus sensibly arises whether the invalidity of the stipulation owes him, citing in support of this ruling its previous decisions in
Go Chioco, Supra, Aguilar vs. Rubiato, et al., 40 Phil. 570, and
on interest carries with it the invalidity of the principal obligation. Delgado vs. Duque Valgona, 44 Phil. 739.
.... the loan? (2) Should attorney's fees be awarded
in plaintiff's favor?"

Then in Lopez and Javelona vs. El Hogar Filipino, 47 Phil. Great reliance is made by appellants on
249, We also held that the standing jurisprudence of this Court on Art. 1411 of the New Civil Code . . . .
the question under consideration was clearly to the effect that the
Usury Law, by its letter and spirit, did not deprive the lender of his Since, according to the appellants, a usurious
right to recover from the borrower the money actually loaned to loan is void due to illegality of cause or object, the
and enjoyed by the latter. This Court went further to say that the rule of pari delicto expressed in Article
Usury Law did not provide for the forfeiture of the capital in favor 1411, supra, applies, so that neither party can
of the debtor in usurious contracts, and that while the forfeiture bring action against each other. Said rule,
might appear to be convenient as a drastic measure to eradicate however, appellants add, is modified as to the
the evil of usury, the legal question involved should not be borrower, by express provision of the law (Art.
resolved on the basis of convenience. 1413, New Civil Code), allowing the borrower to
recover interest paid in excess of the interest
Other cases upholding the same principle are Palileo vs. allowed by the Usury Law. As to the lender, no
Cosio, 97 Phil. 919 and Pascua vs. Perez, L-19554, January 31, exception is made to the rule; hence, he cannot
1964, 10 SCRA 199, 200-202. In the latter We expressly held that recover on the contract. So they continue the New
when a contract is found to be tainted with usury "the only right of Civil Code provisions must be upheld as against
the respondent (creditor) . . . was merely to collect the amount of the Usury Law, under which a loan with usurious
the loan, plus interest due thereon." interest is not totally void, because of Article 1961
of the New Civil Code, that: "Usurious contracts
The view has been expressed, however, that the ruling shall be governed by the Usury Law and other
thus consistently adhered to should now be abandoned because special laws, so far as they are not inconsistent
Article 1957 of the new Civil Code a subsequent law provides that with this Code."
contracts and stipulations, under any cloak or device whatever,
intended to circumvent the laws against usury, shall be void, and We do not agree with such reasoning.
that in such cases "the borrower may recover in accordance with Article 1411 of the New Civil Code is not new; it is
the laws on usury." From this the conclusion is drawn that the the same as Article 1305 of the Old Civil Code.
whole contract is void and that, therefore, the creditor has no right Therefore, said provision is no warrant for
to recover not even his capital. departing from previous interpretation that, as
provided in the Usury Law (Act No. 2655, as
The meaning and scope of our ruling in the cases amended), a loan with usurious interest is not
mentioned heretofore is clearly stated, and the view referred to in totally void only as to the interest.
the preceding paragraph is adequately answered, in Angel Jose,
etc. vs. Chelda Enterprises, et al. (L-25704, April 24, 1968). On . . . [a]ppellants fail to consider that a
the question of whether a creditor in a usurious contract may or contract of loan with usurious interest
may not recover the principal of the loan, and, in the affirmative, consists of principal and accessory
whether or not he may also recover interest thereon at the legal stipulations; the principal one is to pay the
rate, We said the following: debt; the accessory stipulation is to pay
interest thereon.
....
And said two stipulations are divisible
Appealing directly to Us, defendants raise in the sense that the former can still stand
two questions of law: (1) In a loan with usurious without the latter. Article 1273, Civil Code,
interest, may the creditor recover the principal of attests to this: "The renunciation of the
principal debt shall extinguish the accessory
obligations; but the waiver of the latter shall and the offending interest rate merely corrected. Hence, it is clear and settled
leave the former in force." that the principal loan obligation still stands and remains valid. By the same

The question therefore to resolve is token, since the mortgage contract derives its vitality from the validity of the
whether the illegal terms as to payment of principal obligation, the invalid stipulation on interest rate is similarly
interest likewise renders a nullity the legal
terms as to payments of the principal debt. insufficient to render void the ancillary mortgage contract.
Article 1420 of the New Civil Code provides in
this regard: "In case of a divisible contract, if
the illegal terms can be separated from the It should be noted that had the Court declared the loan and mortgage
legal ones, the latter may be enforced."
agreements void for being contrary to public policy, no prescriptive period
In simple loan with stipulation of could have run.[20] Such benefit is obviously not available to petitioners.
usurious interest, the prestation of the debtor
to pay the principal debt, which is the cause of
the contract (Article 1350, Civil Code), is not Yet the RTC pronounced that the complaint was barred by the four-
illegal. The illegality lies only as to the
prestation to pay the stipulated interest; year prescriptive period provided in Article 1391 of the Civil Code, which
hence, being separable, the latter only should governs voidable contracts. This conclusion was derived from the allegation in
be deemed void, since it is the only one that is
illegal. the complaint that the consent of petitioners was vitiated through undue
influence. While the RTC correctly acknowledged the rule of prescription for
....
voidable contracts, it erred in applying the rule in this case. We are hard put to
The principal debt remaining without
stipulation for payment of interest can thus be conclude in this case that there was any undue influence in the first place.
recovered by judicial action. And in case of such
demand, and the debtor incurs in delay, the debt
earns interest from the date of the demand (in this There is ultimately no showing that petitioners consent to the loan
case from the filing of the complaint). Such and mortgage agreements was vitiated by undue influence. The financial
interest is not due to stipulation, for there was
none, the same being void. Rather, it is due to the condition of petitioners may have motivated them to contract with
general provision of law that in obligations to pay
respondents, but undue influence cannot be attributed to respondents simply
money, where the debtor incurs in delay, he has
to pay interest by way of damages (Art. 2209, Civil because they had lent money. Article 1391, in relation to Article 1390 of the
Code). The court a quo therefore, did not err in
ordering defendants to pay the principal debt with Civil Code, grants the aggrieved party the right to obtain the annulment of
interest thereon at the legal rate, from the date of contract on account of factors which vitiate consent. Article 1337 defines the
filing of the complaint."[19]
concept of undue influence, as follows:

The Courts wholehearted affirmation of the rule that the principal obligation There is undue influence when a person takes
improper advantage of his power over the will of another,
subsists despite the nullity of the stipulated interest is evinced by its
depriving the latter of a reasonable freedom of choice. The
subsequent rulings, cited above, in all of which the main obligation was upheld following circumstances shall be considered: the confidential,
family, spiritual and other relations between the parties or the
fact that the person alleged to have been unduly influenced contract, their action would already be barred by prescription when they filed
was suffering from mental weakness, or was ignorant or in it. Moreover, petitioners had clearly slept on their rights as they failed to timely
financial distress.
assail the validity of the mortgage agreement. The denial of the petition in G.R.
No. 150773 is warranted.
While petitioners were allegedly financially distressed, it must be proven that
there is deprivation of their free agency. In other words, for undue influence to
We now resolve the petition in G.R. No. 153599.
be present, the influence exerted must have so overpowered or subjugated
Petitioners claim that the assailed RTC orders dated 3 August 1999 and 6
the mind of a contracting party as to destroy his free agency, making him
January 2000 could no longer be questioned in a special civil action for
express the will of another rather than his own.[21] The alleged lingering
certiorari and mandamus as the reglementary period for such action had
financial woes of petitioners per se cannot be equated with the presence of
already elapsed.
undue influence.

It must be noted that the Order dated 3 August 1999 suspending the
The RTC had likewise concluded that petitioners were barred by
enforcement of the writ of possession had a period of effectivity of only twenty
laches from assailing the validity of the real estate mortgage. We
(20) days from 3 August 1999, or until 23 August 1999. Thus, upon the
wholeheartedly agree. If indeed petitioners unwillingly gave their consent to
expiration of the twenty (20)-day period, the said Order becamefunctus officio.
the agreement, they should have raised this issue as early as in the foreclosure
Thus, there is really no sense in assailing the validity of this Order, mooted as
proceedings. It was only when the writ of possession was issued did petitioners
it was. For the same reason, the validity of the order need not have been
challenge the stipulations in the loan contract in their action for annulment of
assailed by respondents in their special civil action before the Court of
mortgage. Evidently, petitioners slept on their rights. The Court of Appeals
Appeals.
succinctly made the following observations:
On the other hand, the Order dated 6 January 2000 is in the nature of a writ of
In all these proceedings starting from the foreclosure,
followed by the issuance of a provisional certificate of sale; injunction whose period of efficacy is indefinite. It may be properly assailed by
then the definite certificate of sale; then the issuance of TCT way of the special civil action for certiorari, as it is interlocutory in nature.
No. 29338 in favor of the defendants and finally the petition for
the issuance of the writ of possession in favor of the As a rule, the special civil action for certiorari under Rule 65 must be filed not
defendants, there is no showing that plaintiffs questioned the later than sixty (60) days from notice of the judgment or order. [23]Petitioners
validity of these proceedings. It was only after the issuance of
the writ of possession in favor of the defendants, that plaintiffs argue that the 3 August 1999 Order could no longer be assailed by
allegedly tendered to the defendants the amount
respondents in a special civil action for certiorari before the Court of Appeals,
of P260,000.00 which the defendants refused. In all these
proceedings, why did plaintiffs sleep on their rights?[22] as the petition was filed beyond sixty (60) days following respondents receipt
Clearly then, with the absence of undue influence, petitioners have no cause of the Order. Considering that the 3 August 1999 Orderhad become functus
of action. Even assuming undue influence vitiated their consent to the loan officio in the first place, this argument deserves scant consideration.
Petitioners further claim that the 6 January 2000 Order could not have likewise
Thus, we also affirm the Court of Appeals ruling to set aside the RTC
been the subject of a special civil action for certiorari, as it is according to them
orders enjoining the enforcement of the writ of possession.[27] The purchaser
a final order, as opposed to an interlocutory order. That the 6 January
in a foreclosure sale is entitled as a matter of right to a writ of possession,
2000 Order is interlocutory in nature should be beyond doubt. An order is
regardless of whether or not there is a pending suit for annulment of the
interlocutory if its effects would only be provisional in character and would still
mortgage or the foreclosure proceedings. An injunction to prohibit the issuance
leave substantial proceedings to be further had by the issuing court in order to
or enforcement of the writ is entirely out of place.[28]
put the controversy to rest.[24] The injunctive relief granted by the order is
definitely final, but merely provisional, its effectivity hinging on the ultimate
One final note. The issue on the validity of the stipulated interest rates,
outcome of the then pending action for annulment of real estate mortgage.
regrettably for petitioners, was not raised at the earliest possible opportunity.
Indeed, an interlocutory order hardly puts to a close, or disposes of, a case or
It should be pointed out though that since an excessive stipulated interest rate
a disputed issue leaving nothing else to be done by the court in respect thereto,
may be void for being contrary to public policy, an action to annul said interest
as is characteristic of a final order.
rate does not prescribe. Such indeed is the remedy; it is not the action for
annulment of the ancillary real estate mortgage. Despite the nullity of the
Since the 6 January 2000 Order is not a final order, but rather interlocutory in
stipulated interest rate, the principal loan obligation subsists, and along with it
nature, we cannot agree with petitioners who insist that it may be assailed only
the mortgage that serves as collateral security for it.
through an appeal perfected within fifteen (15) days from receipt thereof by
respondents. It is axiomatic that an interlocutory order cannot be challenged
WHEREFORE, in view of all the foregoing, the petitions are DENIED. Costs
by an appeal,
against petitioners.

SO ORDERED.
but is susceptible to review only through the special civil action of
certiorari.[25] The sixty (60)-day reglementary period for special civil actions
under Rule 65 applies, and respondents petition was filed with the Court of
Appeals well within the period.
Accordingly, no error can be attributed to the Court of Appeals in granting the
petition for certiorari and mandamus. As pointed out by respondents, the
remedy of mandamus lies to compel the performance of a ministerial duty. The
issuance of a writ of possession to a purchaser in an extrajudicial foreclosure
is merely a ministerial function.[26]