Republic of the Philippines

Congress of the Philippines

Metro Manila

Thirteenth Congress
Third Special Session

Begun and held in Metro Manila, on Monday, the nineteenth day of February, two
thousand seven.

Republic Act No. 9474 May 22, 2007

AN ACT GOVERNING THE ESTABLISHMENT, OPERATION AND REGULATION OF

LENDING COMPANIES

Be it enacted by the Senate and the House of Representatives of the Philippines in

Congress assembled:

SECTION 1. Title. - This Act shall be known as the ""Lending Company Regulation
Act of 2007"".

SEC. 2. Declaration of Policy. - It is hereby declared the policy of the State to regulate
the establishment of lending companies and to place their operation on a sound,
efficient and stable condition to derive the optimum advantages from them as an
additional source of credit; to prevent and mitigate, as far as practicable, practices
prejudicial to public interest; and to lay down the minimum requirements and standards
under which they may be established and do business.

SEC. 3. Definition of Terms. - For purposes of implementing this Act, the following
definitions shall apply:

(a) Lending Company shall refer to a corporation engaged in granting loans from
its own capital funds or from funds sourced from not more than nineteen (19)
persons. It shall not be deemed to include banking institutions, investment
houses, savings and loan associations, financing companies, pawnshops,
insurance companies, cooperatives and other credit institutions already regulated
by law. The term shall be synonymous with lending investors.

(b) Debtor shall refer to a borrower or person granted a loan by the lending
company.

(c) Quasi-Bank shall refer to a non-bank financial institution authorized by the

BSP to engage in quasi-banking functions and to borrow funds from more than
 nineteen (19) lenders through the issuance, endorsement or assignment with
recourse or acceptance of deposit substitutes as defined in Section 95 of
Republic Act No. 7653 (the ":New Central Bank Act":) for purposes of relending
or purchasing of receivables and other obligations.

(d) Subsidiary shall refer to a corporation more than fifty percent (50%) of the
voting stock of which is owned by a bank or quasi-bank.

(e) Affiliate shall refer to a corporation, the voting stock of which, to the extent of
fifty percent (50%) or less, is owned by a bank or quasi-bank which is related or
linked to such institution through common stockholders or such other factors as
may be determined by the Monetary Board of the BSP.

(f) SEC shall refer to the Securities and Exchange Commission.

(g) BSP shall refer to the Bangko Sentral ng Pilipinas.

SEC. 4. Form of Organization. - A lending company shall be established only as a

corporation: Provided That existing lending investors organized as single
proprietorships or partnerships shall be disallowed from engaging in the business of
granting loans to the public one year after the date of effectivity of this Act.

No lending company shall conduct business unless granted an authority to operate by

the SEC.

SEC. 5. Capital. - The minimum paid in capital of any lending company which may be
established after the effectivity of this Act shall be One million pesos
(P1,000,000.00): Provided, however, That lending companies established and in
operation prior thereto shall comply with the minimum capitalization required under the
provisions of this Section within such time as may be prescribed by the SEC which time
shall, in no case, be less than three years from the date of effectivity of this Act
and: Provided, further, That the SEC may prescribe a higher minimum capitalization if
warranted by circumstances.

SEC. 6. Citizenship Requirements. - Upon the effectivity of this Act, at least a majority
of the voting capital stock shall be owned by citizens of the Philippines.

The percentage of foreign-owned voting stock in any lending company existing prior to
the effectivity of this Act, if such percentage is in excess of forty-nine percent (49%) of
the voting stock, shall not be increased but may be reduced and, once reduced, shall
not be increased thereafter beyond forty-nine percent (49%) of the voting stock of the
lending company. The percentage of foreign-owned voting stocks in any lending
company shall be determined by the citizenship of the individual stockholders. In the
case of corporations owning shares in a lending company, the citizenship of the
individual owners of voting stock in such corporations shall be the basis in the
computation of the percentage.
No foreign national may be allowed to own stock unless the country of which he is a
national accords reciprocal rights to Filipinos.

SEC. 7. Amount and Charges on Loans. - A lending company may grant loans in
such amounts and reasonable interest rates and charges as may be agreed upon
between the lending company and the debtor: Provided, That the agreement shall be in
compliance with the provisions of Republic Act No. 3765, otherwise known as the "Truth
in Lending Act" and Republic Act 7394, otherwise known as the "Consumer Act of the
Philippines": Provided, further, That the Monetary Board, in consultation with the SEC
and the industry, may prescribe such interest rate as may be warranted by prevailing
economic and social conditions.

SEC. 8. Maintenance of Books of Accounts and Records. - Every lending company

shall maintain books of accounts and records as may be required by the SEC and
prescribed by the Bureau of Internal Revenue and other government agencies. In case
a lending company engages in other businesses, it shall maintain separate books of
accounts for these businesses.

The Manual of Accounts prescribed by the BSP for lending investors shall continue to
be adopted by lending companies for uniform recording and reporting of their
operations, until a new Manual of Accounts shall have been prescribed by the SEC.

It shall issue the appropriate instruments and documents to the parties concerned to
evidence its lending and borrowing transactions.

SEC. 9. Authority of the SEC. - The SEC is hereby authorized to:

(a) Create a new division or bureau within its control to regulate and supervise
the operations and activities of lending companies in the country;

(b) Issue rules and regulations to implement the provisions contained herein;

(c) Issue rules and regulations on, among other things, minimum capitalization,
uses of funds received, method of marketing and distribution, maturity of funds
received, restrictions or outright prohibition of purchases or sales of receivables
with or without recourse basis;

(d) Require from lending companies reports of condition and such other reports
necessary to determine compliance with the provisions of this Act;

(e) Exercise visitorial powers whenever deemed necessary; and

(f) Impose such administrative sanctions including suspension or revocation of

the lending company's authority to operate and the imposition of fines for
violations of this Act and regulations issued by the SEC in pursuance thereto.
SEC. 10. Implementing Rules and Regulations. Within three months after the
approval of this Act, the SEC shall promulgate the necessary rules and regulations
implementing the provisions of this Act.

SEC. 11. Delineation of Authority between SEC and the BSP. - Lending companies
shall be under the supervision and regulation of the SEC: Provided, however, That
lending companies which are subsidiaries and affiliates of banks and quasi-banks shall
be subject to BSP supervision and examination in accordance with Republic Act No.
7653: Provider further, That the Monetary Board, after being satisfied that there is
reasonable ground to believe that a lending company is being used as a conduit by a
bank, quasi-bank or their subsidiary/affiliate to circumvent or violate BSP rules and
regulations, may order an examination of the lending company's books and accounts.

SEC. 12. Penalty. - A fine of not less than Ten Thousand Pesos (P10,000.00) and not
more than Fifty thousand pesos(P50,000.00) or imprisonment of not less than six
months but not more than ten (10) years or both, at the discretion of the court, shall be
imposed upon:

1. Any person who shall engage in the business of a lending company without a
validly subsisting authority to operate from the SEC.

2. The president, treasurer and other officers of the corporation, including the
managing officer thereof, who shall knowingly and willingly:

a. Engage in the business of a lending company without a validly

subsisting authority to operate from the SEC;

b. Hold themselves out to be a lending company, either through

advertisement in whatever form, whether in its stationery, commercial
paper, or other document, or through other representations without
authority;

c. Make use of a trade or firm name containing the words "lending

company" or "lending investor" or any other designation that would give
the public the impression that it is engaged in the business of a lending
company as defined in this Act without authority; and

d. Violate the provisions of this Act.

3. Any officer, employee, or agent of a lending company who shall:

a. Knowingly and willingly make any statement in any application, report,

or document required to be filed under this Act, which statement is false or
misleading with respect to any material fact; and
 b. Overvalue or aid in overvaluing any security for the purpose of
influencing in any way the action of the company in any loan, or
discounting line.

4. Any officer, employee or examiner of the SEC directly charged with the
implementation of this Act or of other government agencies who shall commit,
connive, aid, or assist in the commission of acts enumerated under Subsections
1 and 2 of this Section.

SEC. 13. Matters not Covered by this Act. The provisions of Republic Act No. 3765,
otherwise known as the "Truth in Lending Act", Republic Act No. 7394 or the "Consumer
Act of the Philippines" and other existing laws, insofar as they are not in conflict with any
provision of this Act, shall apply in matters not otherwise specifically provided in this Act.

SEC. 14. Repealing Clause. - All laws, executive orders, letters of instruction, rules and
regulations, or provisions thereof which are inconsistent with the provisions of this Act
are hereby repealed, amended or modified accordingly.

SEC. 15. Separability Clause. - If any portion hereof shall be held invalid or
unconstitutional, such invalidity or unconstitutionality shall not affect the other provisions
which shall remain in full force and effect.

SEC. 16. Effectivity. - This Act shall take effect fifteen (15) days after its publication in
at least two national newspapers of general circulation.

Approved,

REPUBLIC ACT No. 3765

AN ACT TO REQUIRE THE DISCLOSURE OF FINANCE CHARGES IN

CONNECTION WITH EXTENSIONS OF CREDIT.

Section 1. This Act shall be known as the "Truth in Lending Act."

Section 2. Declaration of Policy. It is hereby declared to be the policy of the State to

protect its citizens from a lack of awareness of the true cost of credit to the user by
assuring a full disclosure of such cost with a view of preventing the uninformed use of
credit to the detriment of the national economy.

Section 3. As used in this Act, the term

(1) "Board" means the Monetary Board of the Central Bank of the Philippines.

(2) "Credit" means any loan, mortgage, deed of trust, advance, or discount; any
conditional sales contract; any contract to sell, or sale or contract of sale of
property or services, either for present or future delivery, under which part or all
 of the price is payable subsequent to the making of such sale or contract; any
rental-purchase contract; any contract or arrangement for the hire, bailment, or
leasing of property; any option, demand, lien, pledge, or other claim against, or
for the delivery of, property or money; any purchase, or other acquisition of, or
any credit upon the security of, any obligation of claim arising out of any of the
foregoing; and any transaction or series of transactions having a similar purpose
or effect.

(3) "Finance charge" includes interest, fees, service charges, discounts, and
such other charges incident to the extension of credit as the Board may be
regulation prescribe.

(4) "Creditor" means any person engaged in the business of extending credit
(including any person who as a regular business practice make loans or sells or
rents property or services on a time, credit, or installment basis, either as
principal or as agent) who requires as an incident to the extension of credit, the
payment of a finance charge.

(5) "Person" means any individual, corporation, partnership, association, or other

organized group of persons, or the legal successor or representative of the
foregoing, and includes the Philippine Government or any agency thereof, or any
other government, or of any of its political subdivisions, or any agency of the
foregoing.

Section 4. Any creditor shall furnish to each person to whom credit is extended, prior to
the consummation of the transaction, a clear statement in writing setting forth, to the
extent applicable and in accordance with rules and regulations prescribed by the Board,
the following information:

(1) the cash price or delivered price of the property or service to be acquired;

(2) the amounts, if any, to be credited as down payment and/or trade-in;

(3) the difference between the amounts set forth under clauses (1) and (2);

(4) the charges, individually itemized, which are paid or to be paid by such
person in connection with the transaction but which are not incident to the
extension of credit;

(5) the total amount to be financed;

(6) the finance charge expressed in terms of pesos and centavos; and

(7) the percentage that the finance bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.
Section 5. The Board shall prescribe such rules and regulations as may be necessary
or proper in carrying out the provisions of this Act. Any rule or regulation prescribed
hereunder may contain such classifications and differentiations as in the judgment of
the Board are necessary or proper to effectuate the purposes of this Act or to prevent
circumvention or evasion, or to facilitate the enforcement of this Act, or any rule or
regulation issued thereunder.

Section 6. (a) Any creditor who in connection with any credit transaction fails to
disclose to any person any information in violation of this Act or any regulation issued
thereunder shall be liable to such person in the amount of P100 or in an amount equal
to twice the finance charged required by such creditor in connection with such
transaction, whichever is the greater, except that such liability shall not exceed P2,000
on any credit transaction. Action to recover such penalty may be brought by such
person within one year from the date of the occurrence of the violation, in any court of
competent jurisdiction. In any action under this subsection in which any person is
entitled to a recovery, the creditor shall be liable for reasonable attorney's fees and
court costs as determined by the court.

(b) Except as specified in subsection (a) of this section, nothing contained in this
Act or any regulation contained in this Act or any regulation thereunder shall
affect the validity or enforceability of any contract or transactions.

(c) Any person who willfully violates any provision of this Act or any regulation
issued thereunder shall be fined by not less than P1,00 or more than P5,000 or
imprisonment for not less than 6 months, nor more than one year or both.

(d) No punishment or penalty provided by this Act shall apply to the Philippine
Government or any agency or any political subdivision thereof.

(e) A final judgment hereafter rendered in any criminal proceeding under this Act
to the effect that a defendant has willfully violated this Act shall be prima facie
evidence against such defendant in an action or proceeding brought by any other
party against such defendant under this Act as to all matters respecting which
said judgment would be an estoppel as between the parties thereto.

Section 7. This Act shall become effective upon approval.

Approved: June 22, 1963

Republic of the Philippines

Congress of the Philippines
Metro Manila

Fourteenth Congress
Second Regular Session
Begun and held in Metro Manila, on Monday, the twenty-eight day of July, two thousand
eight.

Republic Act No. 9510 October 31, 2008

AN ACT ESTABLISHING THE CREDIT INFORMATION SYSTEM AND FOR OTHER

PURPOSES

Be it enacted by the Senate and House of Representatives of the Philippines in

Congress assembled:

Section 1. Title. This Act shall be known as the Credit Information System Act.

Section 2. Declaration of Policy. The State recognizes the need to establish a

comprehensive and centralized credit information system for the collection and
dissemination of fair and accurate information relevant to, or arising from, credit and
credit-related activities of all entities participating in the financial system. A credit
information system will directly address the need for reliable credit information
concerning the credit standing and track record of borrowers.

The operations and services of a credit information system can be expected to: greatly
improve the overall availability of credit especially to micro, small and medium-scale
enterprises; provide mechanisms to make credit more cost-effective; and reduce the
excessive dependence on collateral to secure credit facilities.

The State shall endeavor to have credit information provided at the least cost to all
participants and shall ensure the protection of consumer rights and the existence of fair
competition in the industry at all times.

An efficient credit information system will also enable financial institutions to reduce
their over-all credit risk, contributing to a healthier and more stable financial system.

Section 3. Definition of Terms. For purposes of this Act:

(a) Accessing Entity refers to any submitting entity or any other entity authorized by
the Corporation to access basic credit data from the Corporation.

(b) Basic Credit Data refers to positive and negative information provided by a
borrower to a submitting entity in connection with the application for and availment of a
credit facility and any information on the borrowers creditworthiness in the possession
of the submitting entity and other factual and objective information related or relevant
thereto in the submitting entitys data files or that of other sources of
information: Provided, that in the absence of a written waiver duly accomplished by the
borrower, basic credit data shall exclude confidential information on bank deposits
and/or clients funds under Republic Act No. 1405 (Law on Secrecy of Bank Deposits),
Republic Act No. 6426 (The Foreign Currency Deposit Act), Republic Act No. 8791 (The
General Banking Law of 2000), Republic Act No. 9160 (Anti-Money Laundering Law)
and their amendatory laws.

(c) Borrower refers to a natural or juridical person, including any local government unit
(LGU), its subsidiaries and affiliates, that applies for and/or avails of a credit facility.

(d) BSP refers to the Bangko Sentral ng Pilipinas, created under Republic Act
No.7653.

(e) Corporation refers to the Credit Information Corporation established under Section
5 of this Act.

(f) Credit facility refers to any loan, credit line, guarantee or any other form of financial
accommodation from a submitting entity: Provided, That for purposes of this Act,
deposits in banks shall not be considered a credit facility extended by the depositor in
favor of the bank.

(g) Credit Rating refers to an opinion regarding the creditworthiness of a borrower or of

an issuer of debt security, using an established and defined ranking system.

(h) Credit Report refers to a summary of consolidated and evaluated information on

creditworthiness, credit standing, credit capacity, character and general reputation of a
borrower.

(i) Government Lending Institutions refers to existing and future government (GFIs),
government-owned and controlled corporations (GOCCs) primarilly engaged in lending
activities.

(j) Negative Credit Information refers to information/data concerning the poor credit
performance of borrowers such as, but not limited to, defaults on loans, adverse court
judgments relating to debts and reports on bankruptcy, insolvency, petitions or orders
on suspension of payments and corporate rehabilitation.

(k) Non-Accessing Entity refers to an entity other than a Submitting Entity, Special
Accessing Entity or Borrower that is authorized by the Corporation to access credit
information from a Special Accessing Entity.

(l) Outsource entity refers to any accredited third party provider to whom the
Corporation may outsource the processing and consolidation of basic credit data
pertaining to a borrower or issuer of debt or convertible securities under such
qualifications, criteria and strict confidentiality guidelines that the Corporation shall
prescribe and duly publish.

(m) Positive credit information refers to information/data concerning the credit

performance of a borrower such as, but not limited to, information on timely repayments
or non-delinquency.

(n) Relevant Government Agencies refers to the Department of Finance, Department

of Trade and Industry, Bangko Sentral ng Pilipinas, Insurance Commission and the
Cooperative Development Authority.

(o) SEC refers to the Securities and Exchange Commission.

(p) Special Accessing Entity refers to a duly accredited private corporation engaged
primarily in the business of providing credit reports, ratings and other similar credit
information products and services.

(q) Submitting Entity refers to any entity that provides credit facilities such as, but not
limited to, banks, quasi-banks, trust entities, investment houses, financing companies,
cooperatives, nongovernmental, micro-financing organizations, credit card companies,
insurance companies and government lending institutions.

Section 4. Establishment of the Credit Information System. In furtherance of the

policy set forth in Section 2 of this Act, a credit information system is hereby
established.

(a) Banks, quasi-banks, their subsidiaries and affiliates, life insurance companies, credit
card companies and other entities that provide credit facilities are required to submit
basic credit data and updates thereon on a regular basis to the Corporation.

(b) The Corporation may include other credit providers to be subject to compulsory
participation: Provided, That all other entities qualified to be submitting entities may
participate subject to their acceptance by the Corporation: Provided, further, That, in all
cases, participation under the system shall be in accordance with such standards and
rules that the SEC in coordination with the relevant government agencies my prescribe.

(c) Participating submitting entities are required to submit to the Corporation any
negative and positive credit information that tends to update and/or correct the credit
status of borrowers. The Corporation shall fix the time interval for such
submission: Provided, That such interval shall not be less than fifteen (15) working days
but not more than thirty (30) working days.
(d) The Corporation should regularly collect basic credit data of borrowers at least on a
quarterly basis to correct/update the basic credit data of said borrowers.

(e) The Corporation may also access credit and other relevant information from
government offices, judicial and administrative tribunals, prosecutorial agencies and
other related offices, as well as pension plans administered by the government.

(f) Each submitting entity shall notify its borrowers of the formers obligation to submit
basic credit data to the Corporation and the disclosure thereof to the Corporation,
subject to the provisions of this Act and the implementing rules and regulations.

(g) The Corporation is in turn authorized to release consolidated basic credit data on the
borrower, subject to the provisions of Section 6 of this Act.

(h) The negative information on the borrower as contained in the credit history files of
borrowers should stay in the database of the Corporation unless sooner corrected, for
not more than three (3) years from and after the date when the negative credit
information was rectified through payment or liquidation of the debt, or through
settlement of debts through compromise agreements or court decisions that exculpate
the borrower from liability. Negative information shall be corrected and updated within
fifteen (15) days from the time of payment, liquidation or settlement of debts.

(i) Special Accessing Entities shall be accredited by the Corporation in accordance with
such standards and rules as the SEC in coordination with the relevant government
agencies, may prescribe.

(j) Special accessing entities shall be entitled access to the Corporations pool of
consolidated basic credit data, subject to the provisions of Section s 6 and 7 of this Act
and related implementing rules and regulations.

(k) Special accessing entities are prohibited from releasing basic credit data received
from the Corporation or credit reports and credit ratings derived from the basic credit
data received from the Corporation, to non-accessing entities unless the written consent
or authorization has been obtained from the Borrower: Provided, however, That in case
the borrower is a local government unit (LGU) or its subsidiary or affiliate, the special
accessing entity may release credit information on the LGU, its subsidiary or affiliate
upon written request and payment of reasonable fees by a constituent of the concerned
LGU.

(l) Outsource Entities, which may process and consolidate basic credit data, are
absolutely prohibited from releasing such data received from the Corporation other than
to the Corporation itself.
(m) Accessing Entities shall hold strictly confidential any credit information they receive
from the Corporation.

(n) The borrower has the right to know the causes of refusal of the application for credit
facilities or services from a financial institution that uses basic credit data as basis or
ground for such a refusal.

(o) The borrower, for a reasonable fee, shall have, as a matter of right, ready and
immediate access to the credit information pertinent to the borrower. In case of
erroneous, incomplete or misleading credit information, the subject borrower shall have
the right to dispute the erroneous, incomplete, outdated or misleading credit information
before the Corporation. The Corporation shall investigate and verify the disputed
information within five (5) working days from receipt of the complaint. If its accuracy
cannot be verified and cannot be proven, the disputed information shall be deleted. The
borrower and the accessing entities and special accessing entities who have received
such information shall be informed of the corresponding correction or removal within five
(5) working days. The Corporation should use a simplified dispute resolution process to
fast track the settlement/resolution of disputed credit information. Denial of these
borrowers rights, without justifiable reason, shall entitle the borrower to indemnity.

Section 5. Establishment of the Central Credit Information Corporation. There is

hereby created a Corporation which shall be known as the Credit Information
Corporation, whose primary purpose shall be to receive and consolidate basic credit
data, to act as a central registry or central repository of credit information, and to
provide access to reliable, standardized information on credit history and financial
condition of borrowers.

(a) The Corporation is hereby authorized to adopt, alter, and use a corporate seal which
shall be judicially noticed; to enter into contracts; to incur liabilities; to lease or own real
or personal property, and to sell or otherwise dispose of the same; to sue and be sued;
to compromise, condone or release any liability and otherwise to do and perform any
and all things that may be necessary or proper to carry out the purposes of this Act.

(b) The authorized capital stock of the Corporation shall be Five hundred million pesos
(P500,000,000.00) which shall be divided into common and preferred shares which
shall be non-voting. The National Government shall own and hold sixty percent (60%) of
the common shares while the balance of forty percent (40%) shall be owned by and
held by qualified investors which shall be limited to industry associations of banks,
quasi-banks and other credit related associations including associations of consumers.
The amount of Seventy-five million pesos (PhP75,000,000.00) shall be appropriated in
the General Appropriations Act for the subscription of common shares by the National
Government to represent its sixty percent (60%) equity share and the amount of Fifty
million pesos (PhP50,000,000.00) shall be subscribed and paid up by such qualified
investors in accordance with Section 5(d) hereof.
(c) The National Government may subscribe or purchase securities or financial
instrument that may be issued by the Corporation as a supplement to capital.

(d) Equal equity participation in the Corporation shall be offered and held by qualified
private sector investors but in no case shall each of the qualified investor represented
by an association of banks, quasi-banks and other credit-related associations including
the associations of consumers have more than ten percent (10%) each of the total
common shares issued by the Corporation.

(e) The SEC in coordination with relevant government agencies, shall prescribe
additional requirements for the establishment of the Corporation, such as industry
representation, capital structure, number of independent directors, and the process for
nominating directors, and such other requirements to ensure consumer protection and
free, fair and healthy competition in the industry.

(f) The Chairman of the SEC shall be the Chairman of the Board of Directors of the
Corporation. Whenever the Chairman of the SEC is unable to attend a meeting of the
Board, he/she shall designate an Associate Commissioner of the SEC to act as his/her
alternate.

The powers and functions of the Corporation shall be exercised by a board of directors
composed of fifteen (15) members. The directors representing the government shares
shall be appointed by the President of the Philippines.

(g) The directors and principal officers of the Corporation, shall be qualified by the fit
and proper rule for bank directors and officers. To maintain the quality of management
of the Corporation and afford better protection to the system and the public in general,
the SEC in coordination with the relevant government agencies, shall prescribe, pass
upon and review the qualifications and disqualifications of individuals elected or
appointed directors of the Corporation and disqualify those found unfit. After due notice
to the board of directors of the Corporation, the SEC may disqualify, suspend or remove
any director who commits or omits an act which render him unfit for the position. In
determining whether an individual is fit and proper to hold the position of a director of
the Corporation, due regard shall be given to his integrity, experience, education,
training and competence.

The members of the Board of Directors must be Filipino citizens and at least thirty (30)
years of age. In addition, they shall be persons of good moral character, of
unquestionable integrity, of known probity, and have attained competence in the fields
of law, finance, economics, computer science or information technology. In addition to
the disqualifications imposed by the Corporation Code, as amended, no person shall be
nominated by the national government if he has been connected directly with a banking
or financial institution as a director or officer, or has substantial interest therein within
three (3) years prior to his appointment.
(h) The Board of Directors may appoint such officers and employees as are not
otherwise provided for in this Act, define their duties, fix their compensations and
impose disciplinary sanctions upon such officers and employees, for cause. The
salaries and other compensation of the officers and employees of the Corporation shall
be exempt from the Salary Standardization Law. Appointments in the Corporation,
except to those which are policy-determining, primarily confidential or highly technical in
nature, shall be made only according to the Civil Service Law.

(i) The Corporation shall acquire and use state-of-the-art technology and facilities in its
operations to ensure its continuing competence and capability to provide updated
negative and positive credit information; to enable the Corporation to relay credit
information electronically as well as in writing to those authorized to have access to the
credit information system; and to insure accuracy of collected, stored and disseminated
credit information. The Corporation shall implement a borrowers identification system
for the purpose of consolidating credit information.

(j) The provisions of any general or special law to the contrary notwithstanding, the
importation by the Corporation of all equipment, hardware or software, as well as all
other equipment needed for its operations shall be fully exempt from all customs duties
and from all other taxes, assessments and charges related to such importation.

(k) The Corporation shall have its principal place of business in Metro Manila, but may
maintain branches in such other places as the proper conduct of its business may
require.

(l) Any and all acquisition of goods and services by the Corporation shall be subject to
Procurement Laws.

(m) The national government shall continue to hold sixty percent (60%) of the common
shares for a period not to exceed five (5) years from the date of commencement of
operations of the Corporation. After the said period, the national government shall
dispose of at least twenty percent (20%) of its stockholdings in the Corporation to
qualified investors which shall be limited to industry associations of banks, quasi-banks
and other credit-related associations, including associations of consumers. The national
government shall offer equal equity participation in the Corporation to all qualified
investors. When the ownership of the majority of the common voting shares of the
Corporation passes to private investors, the stockholders shall cause the adoption and
registration with the SEC of the amended articles of incorporation within three (3)
months from such transfer of ownership.

Section 6. Confidentiality of Credit Information. The Corporation, the submitting

entities, the accessing entities, the outsource entities, the special accessing entities and
the duly authorized non-accessing entities shall hold the credit information under strict
confidentiality and shall use the same only for the declared purpose of establishing the
creditworthiness of the borrower. Outsource entities which may process and consolidate
basic credit data are absolutely prohibited from releasing such data received from the
Corporation other than to the Corporation.

The accreditation of an accessing entity, a special entity and/or an outsource entity

which violates the confidentiality of, or which misuses, the credit information accessed
from the Corporation, may be suspended or revoked. Any entity which violates this
section may be barred access to the credit information system and penalized pursuant
to Section 11 of this Act.

The Corporation shall be authorized to release and disclose consolidated basic credit
data only to the Accessing Entities, the Special Accessing Entities, the Outsource
Entities and Borrowers. Basic Consolidated basic credit data released to Accessing
Entities shall be limited to those pertaining to existing Borrowers or Borrowers with
pending credit applications. Credit information shall not be released to entities other
than those enumerated under this Section except upon order of the court.

Section 7. Educational Campaign. A continuing nationwide educational campaign

shall be developed and undertaken by the Corporation to promote the benefits of a
credit information system to the economy; to create awareness on the rights of
consumers/borrowers to access their credit reports collected, stored and disseminated
by the Corporation; to disseminate the rights of the borrowers to dispute any
incorrect/inaccurate credit information in the database file of the Corporation; to
familiarize consumers of the procedure in collecting, storing and disseminating credit
information of borrowers by the Corporation; and to brief consumers of other related
information.

Section 8. Rules and Regulations. For purposes of creating a healthy balance

between the need for reliable credit information and safeguarding consumer protection,
ensuring free and healthy competition in the industry, the SEC, in coordination with
relevant government agencies and existing industry stakeholders, shall issue the
implementing rules and regulations (IRRs), which shall be reviewed, revised and
approved by the Oversight Committee to ensure consistency and compliance with the
provisions of this Act, embodying among others:

(a) The basic credit data shall be limited or confined in form and content to an objective
and factual information and shall exclude any subjective information or opinion;

(b) Restrictions on the use and transfer of credit information;

(c) Rights of the borrowers to access their respective credit information and to dispute
the factual accuracy of such credit information;
(d) Requirements and standards for the establishment of the Corporation including, but
not limited to, ownership, industry representation, independent directors and process of
nomination of directors;

(e) Accreditation standards for submitting entities and special accessing entities and
non-accessing entities;

(f) Sanctions to be imposed by the Corporation on:

(i) The submitting entities for non-submission of reports and for delayed and/or
erroneous reporting;

(ii) Accessing entities, special accessing entities, outsource entities and duly authorized
non-accessing entities, for breaches of the confidentiality of misuse of, the credit
information obtained from the credit information system; and

(iii) Violations of other applicable rules and regulations: Provided, That these
administrative sanctions shall be in the form of fines in amounts as may be determined
by the Corporation but in no case to exceed Thirty thousand pesos (PhP30,000.00) a
day for each violation, taking into consideration the attendant circumstances, such as
the nature and gravity of the violation or irregularity. Imposition of administrative
sanctions shall be without prejudice to any criminal and other sanctions as may be
applicable under this Act and relevant laws;

(g) Suspension or cancellation of the rights of any Accessing Entity or Special

Accessing Entity to access Credit Information from the Corporation; Provided, That the
SEC in coordination with relevant government agencies and existing industry
stakeholders, may issue subsequent regulations consistent with the IRR as approved by
the Congressional Oversight Committee.

In addition, the SEC may regulate access to the credit information system as well as the
fees that shall be collected by the Corporation from the Accessing and Special
Accessing Entities, taking into consideration the policy of lowering the cost of credit,
promoting fair competition, and the need of the Corporation to employ state-of-the-art
technology; and

(h) The basic credit data about a borrower shall be limited to credit information existing
on the date of the enactment of this Act and thereafter.

Section 9. Congressional Oversight Committee. There is hereby created a

congressional oversight committee, composed of seven (7) members from the Senate
and seven (7) members from the House of Representatives. The Members from the
Senate shall be appointed by the Senate President with at least three (3) Senators
representing the minority. The Members of the House of Representatives shall be
appointed by the Speaker with at least three (3) members representing the minority.

After the Oversight Committee approved the implementing rules and regulations, it shall
thereafter become functus officio, and therefore cease to exist: Provided, That the
Congress may revive the Congressional Oversight Committee in case of a need for any
major revision/s in the implementing rules and regulations.

Section 10. Indemnity in Favor of the Corporation, its Officers and Employees.
Unless the Corporation or any of its officers and employees is found liable for any willful
violation of this Act, bad faith, malice and/or gross negligence, the Submitting Entities,
Accessing Entities, Special Accessing Entities, Outsource Entities and duly authorized
non-accessing entities shall hold the Corporation, its directors, officers and employees
free and harmless to the fullest extent permitted by law and shall indemnify them from
any and all liabilities, losses, claims, demands, damages, deficiencies, costs and
expenses of whatsoever kind and nature that may arise in connection with the
performance of their functions without prejudice to any criminal liability under existing
laws.

Section 11. Penalties. Any person who willfully violates any of the provisions of this
Act or the rules and regulations promulgated by the SEC in coordination with the
relevant government agencies shall, upon conviction, suffer a fine of not less than Fifty
thousand pesos (PhP50,000.00). nor more than One million pesos (PhP1,000,000.00)
or imprisonment of not less than one (1) year nor more than five (5) years, or both, at
the discretion of the court.

Section 12. Inviolable Nature of the Secrecy of Bank Deposits and/or Client
Funds. -Pursuant to Republic Act No. 1405 (Law on Secrecy of Bank Deposits),
Republic Act No. 6426 (The Foreign Currency Deposit Act), Republic Act No. 8791 (The
General Banking Law of 2000), Republic Act No. 9160 (Anti-Money Laundering Law)
and their amendatory laws, nothing in this Act shall impair the secrecy of bank deposits
and and/or client funds and investments in government securities or funds.

Section 13. Annual Report. The SEC shall submit an annual report to Congress on
the status of the implementation of this Act.

Sec. 14. Principal Government Agency. The SEC shall be the lead government
agency to implement and enforce this Act. As lead agency, the SEC shall consult and
coordinate with other relevant government agencies in the adoption of all rules and
regulations for the full and effective implementation and enforcement of this Act, taking
into account the policy objectives contained in Section 2 hereof.
Section 15. Separability Clause. Should any provision of this Act or the application
thereof to any person or circumstance be held invalid, the other provisions or sections of
this Act shall not be affected thereby.

Section 16. Repealing Clause. This Act repeals Presidential Decree No. 1941 in its
entirety. All laws, decrees, executive orders, rules and regulations or parts thereof which
are inconsistent with this Act are hereby repealed, amended or modified accordingly.

Section 17. Effectivity Clause. This Act shall take effect fifteen (15) days following
its publication in the Official Gazette or in at least two (2) newspapers of general
circulation.

Approved

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 183360 September 8, 2014

ROLANDO C. DE LA PAZ,* Petitioner,

vs.
L & J DEVELOPMENT COMPANY, Respondent.

DECISION

DEL CASTILLO, J.:

"No interest shall be due unless it has been expressly stipulated in writing." 1

This is a Petition for Review on Certiorari2 assailing the February 27, 2008 Decision3 of
the Court of Appeals (CA) in CA-G.R. SP No. 100094, which reversed and set aside the
Decision4 dated April 19, 2007 of the Regional Trial Court (RTC), Branch 192, Marikina
City in Civil Case No. 06-1145-MK. The said RTC Decision affirmed in all respects the
Decision5 dated June 30, 2006 of the Metropolitan Trial Court (MeTC), Branch 75,
Marikina City in Civil Case No. 05-7755, which ordered respondent L & J Development
Company (L&J) to pay petitioner Architect Rolando C. De La Paz (Rolando) its principal
obligation of 350,000.00, plus 12% interest per annumreckoned from the filing of the
Complaint until full payment of the obligation.

Likewise assailed is the CAs June 6, 2008 Resolution6 which denied Rolandos Motion
for Reconsideration.
Factual Antecedents

On December 27, 2000, Rolando lent 350,000.00 without any security to L&J, a
property developer with Atty. Esteban Salonga (Atty. Salonga) as its President and
General Manager. The loan, with no specified maturity date, carried a 6% monthly
interest, i.e., 21,000.00. From December 2000 to August 2003, L&J paid Rolando a
total of 576,000.007 representing interest charges.

As L&J failed to pay despite repeated demands, Rolando filed a Complaint 8 for
Collection of Sum of Money with Damages against L&J and Atty. Salonga in his
personal capacity before the MeTC, docketed as Civil Case No. 05-7755. Rolando
alleged, amongothers, that L&Js debtas of January 2005, inclusive of the monthly
interest, stood at 772,000.00; that the 6% monthly interest was upon Atty. Salongas
suggestion; and, that the latter tricked him into parting with his money without the loan
transaction being reduced into writing.

In their Answer,9 L&J and Atty. Salonga denied Rolandos allegations. While they
acknowledged the loan as a corporate debt, they claimed that the failure to pay the
same was due to a fortuitous event, that is, the financial difficulties brought about by the
economic crisis. They further argued that Rolando cannot enforce the 6% monthly
interest for being unconscionable and shocking to the morals. Hence, the payments
already made should be applied to the 350,000.00 principal loan.

During trial, Rolando testified that he had no communication with Atty. Salonga prior to
the loan transaction but knew him as a lawyer, a son of a former Senator, and the
owner of L&J which developed Brentwood Subdivision in Antipolo where his associate
Nilo Velasco (Nilo) lives. When Nilo told him that Atty. Salonga and L&J needed money
to finish their projects, heagreed to lend them money. He personally met withAtty.
Salonga and their meeting was cordial.

He narrated that when L&J was in the process of borrowing the 350,000.00 from him,
it was Arlene San Juan (Arlene), the secretary/treasurer of L&J, who negotiated the
terms and conditions thereof.She said that the money was to finance L&Js housing
project. Rolando claimed that it was not he who demanded for the 6% monthly interest.
It was L&J and Atty. Salonga, through Arlene, who insisted on paying the said interest
as they asserted that the loan was only a short-term one.

Ruling of the Metropolitan Trial Court

The MeTC, in its Decision10 of June 30, 2006, upheld the 6% monthly interest. In so
ruling, it ratiocinated that since L&J agreed thereto and voluntarily paid the interest at
suchrate from 2000 to 2003, it isalready estopped from impugning the same.
Nonetheless, for reasons of equity, the saidcourt reduced the interest rate to 12% per
annumon the remaining principal obligation of 350,000.00. With regard to Rolandos
prayer for moral damages, the MeTC denied the same as it found no malice or bad faith
on the part ofL&J in not paying the obligation. It likewise relieved Atty. Salonga of any
liability as it found that he merely acted in his official capacity in obtaining the loan. The
MeTC disposed of the case as follows:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the

plaintiff, Arch. Rolando C. Dela Paz, and against the defendant, L & J Development Co.,
Inc., as follows:

a) ordering the defendant L & J Development Co., Inc. to pay plaintiff the amount
of Three Hundred Fifty Thousand Pesos (350,000.00) representing the principal
obligation, plus interest at the legal rate of 12% per annum to be computed from
January 20, 2005, the date of the filing of the complaint, until the whole obligation
is fully paid;

b) ordering the defendant L & J Development Co., Inc. to pay plaintiff the amount
of Five Thousand Pesos (5,000.00) as and for attorneys fees; and

c) to pay the costs of this suit.

SO ORDERED.11

Ruling of the Regional Trial Court

L&J appealed to the RTC. It asserted in its appeal memorandum 12 that from December
2000 to March 2003, it paid monthly interest of 21,000.00 based on the agreed-upon
interest rate of 6%monthly and from April 2003 to August 2003, interest paymentsin
various amounts.13 The total of interest payments made amounts to 576,000.00 an
amount which is even more than the principal obligation of 350,000.00

L&J insisted that the 6% monthly interest rate is unconscionable and immoral. Hence,
the 12% per annumlegal interest should have been applied from the time of the
constitution of the obligation. At 12% per annum interest rate, it asserted that the
amount of interestit ought to pay from December 2000 to March 2003 and from April
2003 to August 2003, only amounts to 105,000.00. If this amount is deducted from the
total interest paymentsalready made, which is 576,000.00, the amount of 471,000.00
appears to have beenpaid over and above what is due. Applying the rule on
compensation, the principal loan of 350,000.00 should be set-off against the
471,000.00, resulting in the complete payment of the principal loan.

Unconvinced, the RTC, inits April 19, 2007 Decision,14 affirmed the MeTC Decision, viz:
WHEREFORE, premises considered, the Decision appealed from is hereby AFFIRMED
in all respects, with costs against the appellant.

SO ORDERED.15

Ruling of the Court of Appeals

Undaunted, L&J went to the CA and echoed its arguments and proposed computation
as proffered before the RTC.

In a Decision16 dated February 27, 2008, the CAreversed and set aside the RTC
Decision. The CA stressed that the parties failedto stipulate in writing the imposition of
interest on the loan. Hence, no interest shall be due thereon pursuant to Article 1956 of
the Civil Code.17 And even if payment of interest has been stipulated in writing, the 6%
monthly interest is still outrightly illegal and unconscionable because it is contrary to
morals, if not against the law. Being void, this cannot be ratified and may be set up by
the debtor as defense. For these reasons, Rolando cannot collect any interest even if
L&J offered to pay interest. Consequently, he has to return all the interest payments of
576,000.00 to L&J.

Considering further that Rolando and L&J thereby became creditor and debtor of each
other, the CA applied the principle of legal compensation under Article 1279 of the Civil
Code.18 Accordingly, it set off the principal loan of 350,000.00 against the 576,000.00
total interest payments made, leaving an excess of 226,000.00, which the CA ordered
Rolando to pay L&J plus interest. Thus:

WHEREFORE, the DECISION DATED APRIL 19, 2007 is REVERSED and SET
ASIDE.

CONSEQUENT TO THE FOREGOING, respondent Rolando C. Dela Paz is ordered to

pay to the petitioner the amount of 226,000.00,plus interest of 12% per annumfrom the
finality of this decision.

Costs of suit to be paid by respondent Dela Paz.

SO ORDERED.19

In his Motion for Reconsideration,20 Rolando argued thatthe circumstances exempt both
the application of Article 1956 and of jurisprudence holding that a 6% monthly interest is
unconscionable, unreasonable, and exorbitant. He alleged that Atty. Salonga, a lawyer,
should have taken it upon himself to have the loan and the stipulated rate of interest
documented but, by way of legal maneuver, Atty. Salonga, whom he fully trusted and
relied upon, tricked him into believing that the undocumented and uncollateralized loan
was withinlegal bounds. Had Atty. Salonga told him that the stipulated interest should
be in writing, he would have readily assented. Furthermore, Rolando insisted that the
6% monthly interest ratecould not be unconscionable as in the first place, the interest
was not imposed by the creditor but was in fact offered by the borrower, who also
dictated all the terms of the loan. He stressed that in cases where interest rates were
declared unconscionable, those meant to be protected by such declaration are helpless
borrowers which is not the case here.

Still, the CA denied Rolandos motion in its Resolution21 of June 6, 2008.

Hence, this Petition.

The Parties Arguments

Rolando argues that the 6%monthly interest rateshould not have been invalidated
because Atty. Salonga took advantage of his legal knowledge to hoodwink him into
believing that no document was necessaryto reflect the interest rate. Moreover, the
cases anent unconscionable interest rates that the CA relied upon involve lenders who
imposed the excessive rates,which are totally different from the case at bench where it
is the borrower who decided on the high interest rate. This case does not fall under a
scenariothat enslaves the borrower or that leads to the hemorrhaging of his assets that
the courts seek to prevent.

L&J, in controverting Rolandos arguments, contends that the interest rate is subject of
negotiation and is agreedupon by both parties, not by the borrower alone. Furthermore,
jurisprudence has nullified interestrates on loans of 3% per month and higher as these
rates are contrary to moralsand public interest. And while Rolando raises bad faithon
Atty. Salongas part, L&J avers thatsuch issue is a question of fact, a matter that cannot
be raised under Rule 45.

Issue

The Courts determination of whether to uphold the judgment of the CA that the principal
loan is deemed paid isdependent on the validity of the monthly interest rate imposed.
And in determining such validity, the Court must necessarily delve into matters
regarding a) the form of the agreement of interest under the law and b) the alleged
unconscionability of the interest rate. Our Ruling

The Petition is devoid of merit.

The lack of a written stipulation to pay interest on the loaned amount disallows a
creditor from charging monetary interest.

Under Article 1956 of the Civil Code, no interest shall bedue unless it has been
expressly stipulated in writing. Jurisprudence on the matter also holds that for interest to
be due and payable, two conditions must concur: a) express stipulation for the payment
of interest; and b) the agreement to pay interest is reduced in writing.

Here, it is undisputed that the parties did not put down in writing their agreement. Thus,
no interest is due. The collection of interest without any stipulation in writing is
prohibited by law.22

But Rolando asserts that his situation deserves an exception to the application of Article
1956. He blames Atty. Salonga for the lack of a written document, claiming that said
lawyer used his legal knowledge to dupe him. Rolando thus imputes bad faith on the
part of L&J and Atty. Salonga. The Court, however, finds no deception on the partof L&J
and Atty. Salonga. For one, despite the lack of a document stipulating the payment of
interest, L&J nevertheless devotedly paid interests on the loan. It only stopped when it
suffered from financial difficulties that prevented it from continuously paying the 6%
monthly rate. For another,regardless of Atty. Salongas profession, Rolando who is an
architect and an educated man himself could have been a more reasonably prudent
person under the circumstances. To top it all, he admitted that he had no prior
communication with Atty. Salonga. Despite Atty. Salonga being a complete stranger, he
immediately trusted him and lent his company 350,000.00, a significant amount.
Moreover, as the creditor,he could have requested or required that all the terms and
conditions of the loan agreement, which include the payment of interest, be put down in
writing to ensure that he and L&J are on the same page. Rolando had a choice of not
acceding and to insist that their contract be put in written form as this will favor and
safeguard him as a lender. Unfortunately, he did not. It must be stressed that "[c]ourts
cannot follow one every step of his life and extricate him from bad bargains, protect him
from unwise investments, relieve him from one-sided contracts,or annul the effects of
foolish acts. Courts cannotconstitute themselves guardians of persons who are not
legally incompetent."23

It may be raised that L&J is estopped from questioning the interest rate considering that
it has been paying Rolando interest at such ratefor more than two and a half years. In
fact, in its pleadings before the MeTCand the RTC, L&J merely prayed for the reduction
of interest from 6% monthly to 1% monthly or 12% per annum. However, in Ching v.
Nicdao,24 the daily payments of the debtor to the lender were considered as payment of
the principal amount of the loan because Article 1956 was not complied with. This was
notwithstanding the debtors admission that the payments made were for the interests
due. The Court categorically stated therein that "[e]stoppel cannot give validity to an act
that is prohibited by law or one thatis against public policy."

Even if the payment of interest has been reduced in writing, a 6% monthly interest rate
on a loan is unconscionable, regardless of who between the parties proposed the rate.

Indeed at present, usury has been legally non-existent in view of the suspension of the
Usury Law25 by Central Bank Circular No. 905 s. 1982.26 Even so, not all interest rates
levied upon loans are permitted by the courts as they have the power to equitably
reduce unreasonable interest rates. In Trade & Investment Development Corporation of
the Philippines v. Roblett Industrial Construction Corporation,27 we said:

While the Court recognizes the right of the parties to enter into contracts and who are
expectedto comply with their terms and obligations, this rule is not absolute. Stipulated
interest rates are illegal if they are unconscionable and the Court is allowed to temper
interest rates when necessary. In exercising this vested power to determine what is
iniquitous and unconscionable, the Court must consider the circumstances of each
case. What may be iniquitous and unconscionable in onecase, may be just in another. x
x x28
Time and again, it has been ruled in a plethora of cases that stipulated interest rates of
3% per month and higher, are excessive, iniquitous, unconscionable and exorbitant.
Such stipulations are void for being contrary to morals, if not against the law. 29 The
Court, however, stresses that these rates shall be invalidated and shall be reduced only
in cases where the terms of the loans are open-ended, and where the interest rates are
applied for an indefinite period. Hence, the imposition of a specific sum of 40,000.00 a
month for six months on a 1,000,000.00 loan is not considered unconscionable. 30

In the case at bench, there is no specified period as to the payment of the loan. Hence,
levying 6% monthly or 72% interest per annumis "definitely outrageous and
inordinate."31 The situation that it was the debtor who insisted on the interest rate will
not exempt Rolando from a ruling that the rate is void. As this Court cited in Asian
Cathay Finance and Leasing Corporation v. Gravador,32 "[t]he imposition of an
unconscionable rate of interest on a money debt, even if knowingly and voluntarily
assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an
iniquitous deprivation of property, repulsive to the common sense of man."33 Indeed,
"voluntariness does notmake the stipulation on [an unconscionable] interest valid." 34

As exhaustibly discussed,no monetary interest isdue Rolando pursuant to Article

1956.1wphi1 The CA thus correctly adjudged that the excess interest payments made
by L&J should be applied to its principal loan. As computed by the CA, Rolando is
bound to return the excess payment of 226,000.00 to L&J following the principle of
solutio indebiti.35

However, pursuant to Central Bank Circular No. 799 s. 2013 which took effect on July 1,
2013,36 the interest imposed by the CA must be accordingly modified. The 226,000.00
which Rolando is ordered to pay L&J shall earn an interest of 6% per annumfrom the
finality of this Decision.

WHEREFORE, the Decision dated February 27, 2008 of the Court of Appeals in CA-
G.R. SP No. 100094 is hereby AFFIRMED with modification that petitioner Rolando C.
De La Paz is ordered to pay respondent L&J Development Company the amount of
,226,000.00, plus interest of 6o/o per annum from the finality of this Decision until fully
paid.

SO ORDERED.

SECOND DIVISION
TRADE & INVESTMENT DEVE- G.R. No. 139290
LOPMENT CORPORATION OF
THE PHILIPPINES (Formerly Present:
Philippine Export & Foreign
Loan Guarantee Corporation, PUNO, J.,
Petitioner, Chairman,
AUSTRIA-MARTINEZ,
CALLEJO, SR.,
- versus - TINGA, and
CHICO-NAZARIO, JJ.
ROBLETT INDUSTRIAL CONS-
TRUCTION CORPORATION, Promulgated:
ROBERTO G. ABIERA and
LETICIA ABIERA, and PARA- November 11, 2005
MOUNT INSURANCE CORPORA-
TION,
Respondents.

x-------------------------------------------------------------------x

DECISION

TINGA, J.:

The central issue in this case is whether respondent Paramount Insurance Corporation
(Paramount) is liable as surety to petitioner Philippine Export and Foreign
Loan Guarantee Corporation[1] (Philguarantee), under a surety bond (Surety Bond)
dated 12 March 1984. This Surety Bond was one of a series of undertakings involving
several parties, occasioned by the bid of respondent Roblett Industrial Construction
Corporation (Roblett) for a Kuwaiti government contract. The assailed ruling of the Court
of Appeals (CA) discharged Paramount from its liability on the Surety Bond. Yet
Paramounts liability is established under the terms of the Surety Bond. We reverse.
The facts, as culled from the records, follow.

As the general contractor of the Kuwait National Petroleum Company (KNPC), Braun
Transworld Corporation opened for bidding in 1984 a subcontract for the supply of
skilled and semi-skilled workers for the Mina Abdulla Refinery Modernization Project in
the State of Kuwait. Among the interested bidders was respondent Roblett. To qualify
as a bidder, Roblett was required to post a bid bond equivalent to 1% of its total
proposed tender price or Kiwaiti Dinar (KD) 159,781.05.

Consequently, Roblett applied with the Bank of Kuwait and the Middle East
(BKME) for a letter of guarantee to cover the said amount. BKME consented to the
request on the condition that Roblett would obtain a counterguarantee to secure the
letter of guarantee.
 Roblett then requested from petitioner Philguarantee that the latter issue a
counterguarantee in favor of BKME to fulfill the condition required by BKME. Petitioner
consented and issued Letter Guarantee No. 84-035F[2] on 13 March 1984 in an amount
not to exceed KD 159,781.05 effective 19 March 1984 and expiring on 4 October 1984.
However, the issuance of this counterguarantee was further conditioned upon the
execution by Roblett and its Chairman and Treasurer[3], of a Deed of
Undertaking[4] (Deed) in favor of petitioner. Under the terms of the Deed, Roblett bound
itself to keep petitioner free and harmless from any damage or liability which may arise
out of the issuance of its bid bond guarantee and to give their irrevocable consent and
approval to any and all extensions of the period of the guarantee.

Furthermore, the Deed required that the counterguarantee be secured by a

surety bond or other acceptable liquid instrument (i.e., money market placements,
certificates of deposit, CBCIs and other government securities) equivalent to 100% of
the guarantee accommodation. Should the instrument be in the form of a surety bond,
the same must be issued by an insurance company acceptable to Philguarantee and
must be coterminus with the guarantee to be issued.[5]

To comply with petitioners requirement of a counterguarantee, Roblett obtained

from Paramount, Surety Bond No. G-(16)4889[6] in the amount of P11,775,611.35, the
peso equivalent of petitioners guarantee accommodation. The term of the Surety Bond
was coterminous with petitioners counterguarantee. The Surety Bond, which forms the
crux of the present petition, reads in part:

That we, ROBLETT INDUSTRIAL CONSTRUCTION

CORPORATION, as principal, and PARAMOUNT INSURANCE
CORPORATION, as surety, are held and firmly bound unto Philippine
Export and Foreign Loan Guarantee Corporation (PHILGUARANTEE) in
the sum of P11,775,611.35, Philippine Currency, for the payment of which,
well and truly to be made, we bind ourselves, our heirs, executors,
administrators, successors and assigns, jointly and severally, firmly by
these presents.

WHEREAS, PHILGUARANTEE approved principals request for the

issuance of bidders bond the validity date of which extends up to October
4, 1984, in the amount of KUWAITI DINAR: ONE HUNDRED FIFTY NINE
THOUSAND SEVEN HUNDRED EIGHTY ONE & 05/100 (KD159,781.05),
in favor of the Bank of Kuwait and the Middle East, in relation to principals
project in Refinery Modernization/Mina Abdualla, Kuwait.
 WHEREAS, in approving the aforementioned guarantee,
PHILGUARANTEE required the principal to give a good and sufficient
bond in the amount of P11,775,611.35 as security for the prompt payment
by principal to PHILGUARANTEE of whatever damages or liabilities
PHILGUARANTEE may incur by virtue of its guarantee.

NOW, THEREFORE, if the Principal shall well and truly pay or

reimburse PHILGUARANTEE for whatever damages or liabilities it
may have incurred under and by virtue of its guarantee, then this
obligation shall be null and void, otherwise, it shall remain in full
force and effect.

The Expiry Date of this Surety Bond shall be co-terminus with

the expiry date of the Guarantee referred to in the first Whereas
Clause hereof, and said bond will be considered automatically
cancelled ninety-one (91) days after its expiration.

However, should the Surety and Principal receive a written

notice from PHILGUARANTEE stating that PHILGUARANTEE has
been called upon by _(Bank of Kuwait and the Middle East)_ to
extend the validity of the guarantee, the Surety hereby agrees that it
will either pay PHILGUARANTEE the full amount outstanding under
this Surety Bond, or extend this Surety Bond to a new maturity date
specified by PHILGUARANTEE.

Surety further agrees to pay PHILGUARANTEE, interest at the

rate of 18% per annum, on the amount paid by PHILGUARANTEE by
virtue of _(LG No. 84-035F)_ and which is covered by this Surety
Bond, from date of receipt by surety of PHILGUARANTEEs first
demand letter up to the date of actual payment.[7]

In turn, Paramount required Roblett and its President, Baltazar F. Benlot, to

execute an Indemnity Agreement[8] in its favor to answer for whatever damages and
liabilities it may suffer by virtue of its Surety Bond. This was accomplished on 12 March
1984, the same date the Surety Bond was issued.

Upon receipt of Paramounts bond on 13 March 1984, petitioner issued its letter
guarantee to BKME effective 19 March 1984. Upon receipt thereof on 14 March 1984,
BKME in turn, issued its bid bond by way of Letter of Guarantee No. LGKUW
84070030[9] in favor of KNPC, undertaking to pay the amount of the bid bond in behalf
of Roblett at KNPCs first written request.
Roblett somehow had anticipated that it would be declared the winning bidder, and on
that expectation, it made necessary preparations. Roblett wrote petitioner on 19 May
1984, requesting the issuance of another counterguarantee in favor of BKME to enable
the latter to assure the issuance of the performance bond ostensibly to be required
under the subcontract.[10]

In reply[11] four days later, petitioner expressed its willingness to issue the
counterguarantee for the performance bond subject to the usual requirements, among
which is the Central Bank approval. Roblett then requested the Central Bank for the
approval of the new counterguarantee.

As it expected, Roblett was awarded the subcontract on 27 June 1984, being the lowest
bidder. The Subcontract Agreement[12] was executed by Roblett and KNPC on 5 July
1984, the terms of which required Roblett to post within fourteen (14) days or until 19
July 1984, a performance bond in the amount corresponding to 10% of the monetary
value of the subcontract, or US$4,576,900.00 or its equivalent in Kuwait Dinar.
Robletts request for approval of the performance bond was already pending with
the Central Bank at the time Roblett was formally awarded the bid. Yet, on 23 July
1984, the Central Bank wrote Roblett disapproving its application. The Central Bank
considered the financial arrangements unacceptable in view of BKMEs requirement that
the Central Bank place a dollar time deposit in the amount of the performance bond as
cash collateral.[13] As a result, Roblett was not able to post the required performance
bond.

Roblett was thus deemed by KNPC to have breached the subcontract. This
development would bear a domino effect on the several undertakings executed by
Roblett and its guarantors. First, BKMEs bid bond was confiscated by KNPC even
though such guarantee was constituted to secure Robletts bid proposal. Next, BKME
called on petitioners counterguarantee on 29 July 1984.[14] As petitioners guarantee had
been called upon, came its own turn to call upon its own guarantors, Roblett and
Paramount. Petitioner first turned to Roblett for restitution.

In a letter[15] dated 8 August 1984, petitioner informed Roblett of the demand by

BKME calling in full the counterguarantee.
Roblett then made several repayment proposals to petitioner. In the meantime, Roblett
twice applied for the extension of Paramounts surety bond from 4 October 1984 to 4
December 1984, thence to 5 March 1985.

Significantly, Paramount approved the extensions requested by Roblett.[16]

On 12 December 1984, petitioner paid the sum of KD 159,781.05 to BKME .

On 19 December 1984, petitioner through its then Vice-President, Jesus M.

Taedo, notified Paramount of the advance payment it had made to BKME in the amount
of P11,775,611.35, the peso equivalent of KD 159,781.05, as well as of Robletts
proposal to repay petitioner, and it requested confirmation by Paramount of its liability
for Robletts account. Said letter[17] reads in part, to wit:

We hereby serve notice that PHILGUARANTEE advanced the

peso equivalent of KD159,781.050 on 12 December 1984 and is also
committed to advance the peso value of the KD 5,885.448 interest
upon receipt of the Central Banks authority to remit the interest
payment.

Roblett has submitted a proposal to repay PHILGUARANTEES

advance within a period of three (3) years with the condition that PIC shall
continue to be liable to PHILGUARANTEE under the captioned surety
bond. At present, we are still evaluating Robletts proposal and as an
adjunct to this process, it is imperative that we obtain PICs continuing
commitment.

In view of the foregoing premises therefore, please

acknowledge/confirm PICs liability for the advances that
PHILGUARANTEE has made and will have to make for Robletts account
and PICs commitment to repay such advances with interest thereon at
18% per annum upon demand by PHILGUARANTEE. (Emphasis
supplied.)
In a letter[18] dated 1 March 1985, Paramount confirmed its commitment under the
Surety Bond to guarantee Robletts repayment proposal. However, Paramount
expressed its preference to issue a new bond to secure said repayment scheme. Said
letter reads in part:

This is to confirm our commitment to undertake and guarantee the

repayment proposal of our bounden principal, Roblett Industrial
Construction Corporation under PIC Surety Bond No. G(16)4889
covering P11,775,611.35, securing the KD 159,781.05 Bid Bond issued by
Bank of Kuwait and the Middle East.
We understand that you have advanced the said peso equivalent,
hence, your request for the conversion of our bond from Bidders to
Guaranty Payment. In our opinion, it is more appropriate for us to issue a
separate guaranty payment bond to answer for the loan. We believe that it
is against the bonding principles to guarantee two separate undertakings
in one bond.
Please let us hear from you as to when you would like us to issue
the bond.

On even date and without any indication of having received Paramounts letter,
petitioner advised Paramount that it has advanced the peso equivalent of the amount of
the bid bond plus interest thereon pursuant to the call of BKME on its counterguarantee,
thereby serving upon Paramount its formal notice of demand against the latters surety
bond. Petitioners letter[19] reads in part:

We wish to advise you that on 12 December 1984 and 10 January 1985,

PHILGUARANTEE advanced the peso equivalent of KD163,598.05
representing the principal (KD159,781.05) and interest (KD3,816.99) for
the period from 06 August 1984 to 31 October 1984 of the called bid bond
issued by the Bank of Kuwait and the Middle East.
Please consider this letter, therefore, as our formal notice of
demand against your captioned bond. An interest of 18% per annum is
charged on any unpaid amount of our claim. (Emphasis supplied)

Ten days later, or on 11 March 1985, petitioner again wrote Paramount, as

follows:
 We acknowledge receipt of your letter dated 01 March 1985
confirming your commitment to fully guarantee the repayment proposal of
RICC covering PHILGUARANTEES advances relative to the bid bond
guarantee which was called by the Bank of Kuwait and the Middle
East. Until the above arrangement, however, is in place and your firm
has issued the new bond, our demand on the captioned bond
remains outstanding together with 18% interest.

We shall advise you the terms of the new bond and when to
issue after clarifying some details in PICCs repayment plan.[20]

This apparently was the last time Paramount heard from petitioner for a long
while. Four (4) years of negotiations between Roblett and petitioner on the repayment
proposals proved fruitless. Then, petitioner sent Roblett a letter[21] dated 8 March 1990
reminding the latter of its outstanding account and further informing it that petitioner
shall take legal action in connection therewith.

Thereafter, petitioner filed a complaint[22] against both Roblett and Paramount

with the Regional Trial Court (RTC) of Makati on 5 June 1990. Petitioner sought
payment from Roblett of the amount of P29,804,831.03 representing the total amounts
advanced by petitioner for the guaranteed obligation of Roblett, inclusive of interest at
the rate of 16% per annum and penalty charges at the rate of 16% per annum
computed as of 16 March 1990 pursuant to the Deed. Petitioner also sought payment
from Paramount as surety to the extent of the amount under the Surety Bond which
is P11,775,611.35 of the P29,804,831.03 owed by Roblett, plus interest of 18% per
annum computed from its receipt of petitioners first demand letter until actual payment.
Petitioner also sought payment of 10% of the total amount as attorneys fees pursuant to
the Deed.

In its Answer,[23] Paramount filed a counterclaim for attorneys fees and costs of suit
against petitioner, as well as a crossclaim against Roblett pursuant to the Indemnity
Agreement. It also filed third-party complaints[24] against several defendants who were
later declared in default.[25]

Both Roblett and Paramount denied they were liable to petitioner. On Robletts part, it
argued that petitioners issuance of the counterguarantee was subject to the Central
Banks approval, a suspensive condition the non-fulfillment of which did not give rise to
an obligation between the parties. It further contended that since the condition
depended entirely on the will of a third person, the Central Bank, which cannot be
compelled to carry it out, its obligation under the contract is deemed complied with if it
does all that is in its power and it is then incumbent on the other party to comply with the
terms of the contract. It added that BKMEs requirement for Central Bank to put up a
dollar deposit was beyond its control and contemplation, thus invoking Art. 1267 of the
Civil Code[26] as ground for releasing them from the obligation.

On the other hand, Paramount contended that Robletts obligations under the
subcontract were to be covered by the performance bond. It characterized the bond it
had issued as a bidders bond and not a performance bond which did not guarantee
Robletts performance on the subcontract with KNPC. Even assuming that it was liable
on its bond, Paramount argued that no call was timely made thereon during the original
period of the bond. It opined that although the claim made against the same was within
the extended period of the effectivity of the bond, the extensions were obtained by
petitioner and Roblett through misrepresentation and material concealment of facts. It
claimed that it was never informed of the award of the subcontract to Roblett, its
subsequent breach thereof, and BKMEs previous call on the counterguarantee, thereby
rendering the extensions invalid. Had it known of the foregoing developments, it claimed
it would not have agreed to the extensions.

Paramount also insisted that Roblett entered into a repayment/restructuring agreement

with petitioner without its consent. Said agreement allegedly amounted to a material
novation of the principal obligation, thereby releasing Paramount from any liability under
its bond.

After trial, the trial court found the complaint meritorious and rendered its decision [27] on
10 September 1993, finding all the respondents liable to petitioner. The dispositive
portion of the decision reads, thus:

Premises considered, judgment is rendered as follows:

a) ordering defendants Roblett, the Abieras and Paramount jointly and

severally liable to pay plaintiff the amount of P11,775,611.25 plus legal
interest from 05 June 1990 until fully paid;

b) ordering defendants Roblett and the Abieras jointly and severally

liable to pay plaintiff the amount of P18,029,219.78 plus legal interest
from 5 June 1990 until fully paid;
 c) ordering defendants Roblett, the Abierras and Paramount jointly and
severally liable to pay plaintiff P100,000.00 as attorneys fees and the
costs of this suit;

d) ordering Roblett and Benlot jointly and severally to reimburse

Paramount the full amount it paid plaintiff including all interests,
attorneys fees and the costs; and

e) ordering third party defendants Eurasia and Cutaran to pay liable to

pay the amount of P6,211,162.20 representing unremitted premiums
plus legal interest from 3 September 1991 until fully paid and the
amount of P25,000 as reasonable attorneys fees. The filing fee which
third party plaintiff failed to pay shall constitute a lien on the judgment
amount.[28]

From this decision, Paramount and Roblett appealed via ordinary appeal under
Rule 41 of the Rules of Court.[29]

On 30 June 1999, the Court of Appeals rendered its Decision[30] affirming the trial
courts judgment except in three respects.

Contrary to the RTCs conclusion, the Court of Appeals ruled that Paramounts
bond expired on 4 October 1984 without any claim having been made thereon. The
Court of Appeals found that the two extensions referred to by petitioner were invalid.
The appellate court also ruled that it was petitioner which failed to refute Paramounts
charges of concealment and fraudulent misrepresentation on petitioners part, thereby
bolstering Paramounts position that material facts were indeed concealed from it, thus
rendering the extensions invalid. The appellate court concluded that formal demand was
made by petitioner only on 5 March 1985 which was beyond the effectivity of
Paramounts Surety Bond.

Second, the appellate court ruled that the trial court failed to justify its award of
attorneys fees in the body of its decision, making the same improper. It also stressed
the policy against putting a premium on the right to litigate and accordingly deleted the
award of attorneys fees against all defendants, including third-party defendants.

Third, the appellate court clarified the legal interest awarded by the trial court to
be at the rate of 6% per annum to distinguish it from legal interest on loan at 12% per
annum.
 Hence, this petition.

It is well to note that since only petitioner appealed the Decision of the appellate
court, the same has become final and executory as to Roblett and the other parties to
the case, save for Paramount, and in that respect it shall not be disturbed by this Court.
Thus, the issues herein, as raised by petitioner, may be summarized as follows: (a)
whether or not respondent Paramount is liable to petitioner under its Surety Bond; (b)
whether the stipulated interest rate of 16% per annum under the Deed should be
applied on the advances made by petitioner to BKME instead of 6% per annum as
ordered by the appellate court; (c) whether or not the respondents are liable to pay the
penalty charge of 16% per annum as stipulated in the Deed; and (d) whether or not
petitioner is entitled to attorneys fees.
We first consider Paramounts liability on the Surety Bond. Both the trial court and
the appellate court ruled that what Paramount issued was a surety bond and by the
terms thereof, it bound itself as surety to pay petitioner whatever damages or liabilities
the latter may incur by virtue of the counterguarantee.

Anent the first issue, Paramount again contends that the bond it issued was in
the nature of a bidders bond and not a performance bond. Since Robletts obligations
under the subcontract should have been covered by a performance bond, Paramounts
bidders bond cannot be called upon to answer for Robletts default under the
subcontract. And assuming that Paramount was liable, no claim was made against it
during the effectivity of the Surety Bond.

There is persistent reliance by Paramount on the conceptual difference between

a bidders bond and a performance bond. It argues that when the subcontract was
awarded to and was entered into by Roblett, its liability on the Surety Bond, which was
actually a bidders bond, already ceased.

We are not persuaded.

In Eastern Assurance & Surety Corporation v. Intermediate Appellate

Court,[31] this Court had occasion to distinguish between a proposal or bid bond and a
performance bond. Thus, we held:
 A proposal or bid bond has for its purpose to assure the owner of
the project the good faith of the bidder and that the bidder will enter into a
contract with the project owner should his proposal be accepted. A
performance bond is, upon the other hand, designed to afford the project
owner security that the bidder, now the contractor, will faithfully comply
with the requirements of the contract awarded to the contractor and make
good damages sustained by the project owner in case of the contractors
failure to so perform.

However, we find this distinction ultimately irrelevant in the case at bar. A perusal
of the Surety Bond reveals that Paramount bound itself jointly and severally with Roblett
to pay petitioner to the extent of P11,775,611.35 whatever damages and liabilities the
latter may incur by virtue of its guarantee. This liability on the part of Paramount
obtains upon the occurrence of one condition: that petitioners counterguarantee
be called upon by BKME. What is actually secured by Paramounts bond is not
Robletts bid with KNPC, but rather the guarantee put up by petitioner to secure BKMEs
bidders bond. Paramounts Surety Bond guarantees indemnification to petitioner for
whatever it may pay by virtue of its counterguarantee. Time and again, we have ruled
that the liability of a surety is determined strictly on the basis of the terms and conditions
set out in the surety agreement.[32] Hence, we need not look beyond the contract to
determine the nature and scope of Paramounts undertaking.

There is no doubt that the event insured against by the Surety Bond, the call on
petitioners guarantee by BKME, occurred on 29 July 1984 well within the effectivity of
the Surety Bond. There is also no dispute that petitioner informed Roblett of BKMEs call
on 8 August 1984, likewise within the lifetime of the Surety Bond. But still to be resolved
are whether Paramount was properly notified of this call by petitioner and whether a
timely demand was made against the Surety Bond.

Undoubtedly, the exercise involves an examination of facts which is normally

beyond the ambit of the Courts functions under Rule 45 of the Revised Rules of Court
for it is a well-settled rule that this Court is not a trier of facts and the findings of facts of
the Court of Appeals are conclusive and binding on the Court. However, it is equally
well-settled that this rule admits of exceptions,[33] such as when the findings of facts of
the appellate court are contrary to those of the trial courts. Obviously, the exception is
present given the diverse rulings of the RTC and the Court of Appeals as to Paramounts
liability.
 According to Paramount, petitioner concealed the fact of BKMEs call on its
guarantee and instead sought an extension of the effectivity of the Surety Bond in its
letter dated 19 December 1984. While Paramount acceded to this request of petitioner,
the former characterizes such reply as innocen[t].

In the Courts view, the letter dated 19 December 1984 sufficiently apprised
Paramount that a call had been made on petitioners guarantee. It is noteworthy to
restate the pertinent parts thereof:

We hereby serve notice that PHILGUARANTEE advanced the

peso equivalent of KD159,781.050 on 12 December 1984 and is also
committed to advance the peso value of the KD5,885.448 interest
upon receipt of the Central Banks authority to remit the interest
payment.

Roblett has submitted a proposal to repay PHILGUARANTEEs

advance within a period of three (3) years with the condition that PIC shall
continue to be liable to PHILGUARANTEE under the captioned surety
bond. At present, we are still evaluating Robletts proposal and as an
adjunct to this process, it is imperative that we obtain PICs continuing
commitment.

In view of the foregoing premises therefore, please

acknowledge/confirm PICs liability for the advances that
PHILGUARANTEE has made and will have to make for Robletts
account and PICs commitment to repay such advances with interest
thereon at 18% per annum upon demand by PHILGUARANTEE. [34]

It is clear that the letter sufficiently notifies Paramount that petitioner was called
upon by BKME to answer to its counterguarantee on the bid bond, for then why else
would petitioner advance the exact amount of the bid bond to BKME? Certainly, it was
unnecessary for petitioner to put the exact words therein in order for Paramount, an
insurance company experienced in these transactions, to understand that a call had in
fact been made.

The letter of 19 December 1984 was not only sufficient written notice to
Paramount of BKMEs call on petitioners guarantee, it was made by petitioner before the
expiration of the Surety Bond as well. Again, we refer to the terms of the Bond:
 The Expiry Date of this Surety Bond shall be co-terminus with the
expiry date of the Guarantee referred to in the first Whereas Clause
thereof and said bond will be considered automatically cancelled ninety-
one (91) days after its expiration.[35]

The original expiry date of the Surety Bond as provided in the first Whereas
Clause was 4 October 1984. BKMEs call on petitioners counterguarantee was made on
29 July 1984. Petitioner informed Roblett of BKMEs call as early as 8 August 1984.
Thus, the event that Paramount guaranteed against as surety had already occurred
before the expiration of the Surety Bond.

Note that petitioner notified Paramount of BKMEs call on 19 December 1984,

which according to Paramount, was beyond the Bonds expiry date. Yet it is clear from
the terms of the Agreement that the Bond is not automatically cancelled simultaneously
with the expiration of the term. Instead, a 91-day period from the date of the expiration
of the term is allotted before the bond can be deemed cancelled.

There is a purposive distinction between the lifetime of the guarantee period and
the lifetime of the bond itself. The former governs as to the event insured against, which
must occur within the term of the bond. On the other hand, the lifetime of the bond itself,
which extends to 91 days from the expiration of the term, affords the opportunity for the
insured to make the necessary notice and or call on the bond. Such an arrangement is
especially useful for circumstances such as when the event insured against occurs just
days prior to the expiration of the term. The surety cannot reasonably be expected to be
notified of such an event on the same day, or even days after the occurrence of the
event. The 91-day period offers ample opportunity for the insured to notify the insurer of
any possible claims on the bond. Thus, the above stipulation is clear that petitioner had
91 days from 4 October 1984 within which to claim against the Surety Bond before the
same is automatically cancelled. This, petitioner accomplished, since its notice of
payment was made only seventy-six (76) days from 4 October 1984.
 It is thus that Paramounts obligations as a surety had become due and
demandable, as the Surety Bond had become enforceable against it upon the
occurrence of the conditions stated therein. What then are these obligations of
Paramount?

Under the terms of the Surety Bond, Paramount bound itself to perform either of
two obligations upon receipt of petitioners notice. The first one is to pay petitioner the
full amount of the Bond. The second is to extend the Bond to a new maturity date
specified by petitioner.

However, in its reply to petitioner dated 1 March 1984 Paramount proposed

instead a third option not provided for in the Surety Bondto issue a new bond to answer
for the repayment scheme of Roblett. Said letter reads in part, thus:

We understand that you have advanced the said peso equivalent,

hence, your request for the conversion of our bond from Bidders to
Guaranty Payment. In our opinion, it is more appropriate for us to issue a
separate guaranty payment bond to answer for the loan. We believe that it
is against the bonding principles to guarantee two separate undertakings
in one bond.
Please let us hear from you as to when you would like us to issue
the bond.[36]

It is clear that Paramount, while acknowledging its liability under the Surety Bond,
considered it more appropriate on its part to issue a new bond in view of the repayment
proposal of Roblett, which would naturally contain terms different from the original
surety agreement. Such an option may not have been provided for in the contract, but at
its end, petitioner was, at the very least, amenable to this option. Nonetheless, it
advised Paramount to wait for the negotiated terms before issuing the new bond. This is
evident from its reply to Paramount dated 11 March 1985, to wit:

We acknowledge receipt of your letter dated 01 March 1985

confirming your commitment to fully guarantee the repayment proposal of
RICC covering PHILGUARANTEEs advances relative to the bid bond
guarantee which was called by the Bank of Kuwait and the Middle East.
Until the above arrangement, however, is in place and your firm has
issued the new bond, our demand on the captioned bond remains
outstanding together with 18% interest.
 We shall advise you the terms of the new bond and when to issue
after clarifying some details in PICCs repayment plan.[37]

Still, it appears that petitioner never advised Paramount of the terms of the new
bond. This was simply because Robletts proposals did not materialize; thus, no terms
were agreed upon for the issuance of a new bond.

It must be emphasized that pursuant to the Surety Bond, Paramount agreed,

upon call of its Bond, to either pay Philguarantee the full amount outstanding under this
Surety Bond, or extend this Surety Bond to a new maturity date specified by
Philguarantee. Paramount was not afforded the discretion to choose which among
those two obligations to perform. At the same time, the second optionthe extension of
the Bond to a new maturity datecould only become viable should petitioner provide for a
new maturity date. Since petitioner did not provide a new maturity date for the Bond, the
obligation left for Paramount was to pay the full amount outstanding thereunder.

It is clear in petitioners letter that its demand on Paramount subsisted until the
above arrangement, however, is in place and your firm has issued the new
bond.[38] Thus, Paramount cannot complain that four long years had passed before
petitioner finally demanded payment from it.

As a surety, Paramount is liable to petitioner solidarily with Roblett. In Jeanette

D. Molino v. Security Diners International Corporation,[39] we held:

A surety is considered in law as being the same party as the debtor

in relation to whatever is adjudged touching the obligation of the latter, and
their liabilities are interwoven as to be inseparable. Although the contract
of a surety is in essence secondary only to a valid principal obligation, his
liability to the creditor is direct, primary and absolute; he becomes liable
for the debt and duty of another although he possesses no direct or
personal interest over the obligations nor does he receive any benefit
therefrom.[40]

As solidary debtors, it is not necessary that Roblett failed to pay before

Paramount could be made liable. It is enough that petitioner demanded payment from
Paramount for liability to attach. Article 1216 of the Civil Code provides:
 The creditor may proceed against any one of the solidary debtors
or some or all of them simultaneously. The demand made against one of
them shall not be an obstacle to those which may subsequently be
directed against the others, so long as the debt has not been fully
collected.

Is there merit in Paramounts contention that it was acquitted of its obligations as

a surety on account of alleged material novation when Roblett entered into a
repayment/restructuring agreement with petitioner without its consent? We hold
otherwise.

There is no proof that a new contract was ever perfected between the two
parties. At best, only negotiations were had for Roblett to reimburse the advances made
by petitioner to BKME. The testimony of petitioners Vice-President, Jesus M. Taedo, on
cross-examination by Paramounts counsel, is enlightening, viz:

Q: Now, also among the documents which you identified was the letter
dated December 19, 1984 addressed to defendant Paramount
previously marked as Exh. O. Do you recall that letter?
A: Yes, sir.

Q: In the second paragraph of this letter, you state and I quote, Roblett
has submitted a proposal to repay Philguarantees advance within a
period of three (3) years with the condition that PIC shall continue
to be liable to Philguarantee under the captioned surety bond. Now
this proposal to be paid, was this a written proposal?
A: I cannot recall right now, sir.

....

Q: Your referral here therefore to a proposal does this proposal have

specific terms and conditions?
A: If I may describe the situation prevailing at that time. As soon as the
bond was called, there was an effort, Your Honor, to talk or to
negotiate to the Kuwaite [sic] Government to refund the money
which Philguarantee had paid to Kuwait, citing favorable relations
between two (2) countries, PNOC was a large buyer of Kuwaite
 [sic] oil so that effort was on going, also Roblett officials (sic)
regularly getting in touch with us updating what was going on. The
scenario, Your Honor, was that they say, our first alternative of
paying Petitioner is to be able to get the money back from the
Kuwaite [sic] Government and give it back to you and if that option
does not work out, we pay Philguarantee over a period of three (3)
years from earnings from our overseas projects but they could not
at that time, to my best recollection, formalize that because they did
not have the contract itself, it would have been a hollow proposal
for them to be able to say this amortization would be coming from
this contract. To the best of my recollection, they were making
these verbal assurances that they will pay but they could not pin it
down yet at that time because the contracts were not existent yet at
that time.

....

Q: Now, I noticed that after the letter of March 11, 1985, the next
communication relating to the matter comes almost 5 years later in
the letter dated March 8, 1990. Do you agree to that?
A: Between Philguarantee and Roblett, yes.

Q: In the third paragraph of this letterwhich states and I quote,

Please note that more than four (4) years had passed since we
started with the rehabilitation exercise of your firm. The start
of your repayment proposal has been deferred a number of
times and Philguarantee is not in a position to wait endlessly
for Robletts promised settlement. Do you confirm what is
contained in this letter?
A: Yes, sir.

Q: With this statement that the start of the repayment proposal has
been deferred a number of time (sic), are we correct in taking
this to mean that this refers to a specific proposal for a term of
payment?
A: No, sir. The negotiations or discussions for restructuring even at
this point in time were still discussions, the whole frustration
of Philguarantees part was that, we have given the firm so
much time for four (4) years but the firm had not yet been able
to come up with substantial projects to be able to repay
Philguarantee even at this point in time, the firm kept on
presenting us with cash loan projections but they were all
academic because there were no projects, there were no
contracts to back up this projection.
 ....
Q: And when you state here that you were merely clarifying, some details
this seems to imply that there were already some terms and
conditions which you were already agreed (sic) is that correct?
A: Imply, yes, sir.

Q: What were those terms and conditions that were already hear (sic) to
you as unacceptable (sic) mode of your payment by defendant
Roblett?
A: They were specific projects, sub-contract of Roblett fairly substantial
which if they won, under certain substantial (sic) they would be able
to repay.[41]

Clearly, no definite agreement arose out of the negotiations between Roblett and
petitioner so that there could not have been any new contract which can be considered
to have substituted the original one between them. Hence, there could be no material
novation to speak of.

There being a valid claim made by petitioner during the original lifetime of the
Surety Bond, Paramount cannot escape liability thereon. It is therefore unnecessary to
delve into the validity of the subsequent extensions of the period of the Surety Bond.

Next, the issue on the applicable rate of interest on the advances made by
petitioner to BKME.

In its award, the trial court adjudged the interest to be paid on top of the principal
obligations of respondents to be the legal interest without specifying any rate. In its
assailed decision, the appellate court clarified the legal interest to be 6% per annum to
distinguish it from 12% per annum on loans. Petitioner now questions the same and
argues that the rate of interest awarded should have been 16% per annum as provided
under the Deed, or at the very least, 12% since the obligation in question is a
forebearance of money.

To clarify, the trial courts reference to legal interest may only mean either of two
things: 6% or 12% per annum. In Eastern Shipping Lines, Inc. v. Court of
Appeals,[42] this Court laid down the following rules with respect to the manner of
computing legal interest:
 I. When an obligation, regardless of its source, i.e., law, contracts, quasi-
contracts, delicts or quasi-delicts is breached, the contravenor can be held
liable for damages. The provisions under Title XVIII on 'Damages' of the
Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual

and compensatory damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the

payment of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from
the time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of
Article 1169 of the Civil Code.

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 at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment of the court is
made (at which time quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of
legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money

becomes final and executory, the rate of legal interest, whether the case
falls under paragraph 1 or paragraph 2, above, shall be 12% per annum
from such finality until its satisfaction, this interim period being deemed to
be by then an equivalent to a forbearance of credit.[43]

It is obvious that the obligation herein is one for the payment of a sum of money
for which the rate of interest has been stipulated by the parties. It was error on the part
of the appellate court to peg the interest rate at 6% per annum when there had been a
valid stipulation on interest in the contracts in question.
 As to the interest rate on Robletts obligations, the Deed provides:

6. Should PHILGUARANTEE be required to proportionately advance for

the guaranteed and/or counterguaranteed obligations, then such
advances shall be subject to the following charges:

a) On amount advanced or portions thereof remaining unpaid for

fifteen (15) days or less:

i. One time service charge of 2% of amount advanced, same

to be included in the receivable account.

ii. Interest at 16% per annum.

iii. No penalty charge.

b) On amount advanced or portions thereof remaining unpaid for more

than fifteen (15) days:

i. Same as a.i. on the preceding paragraph;

ii. Same as a.ii. above; and

iii. Penalty charge of 16% per annum compounded monthly

computed from date the account becomes liable to this charge.

However, whatever amount may be advanced by PHILGUARANTEE

arising out of the guarantee and/or counterguarantee shall be subject to
whatever interest rate and penalty charges that are effective at the time
each advance is made.[44]

Meanwhile, the Surety Bond specifically provides for an interest rate of 18% per
annum to be paid by Paramount as surety, to wit:

Surety further agrees to pay PHILGUARANTEE, interest rate of

18% per annum, on the amount paid by PHILGUARANTEE by virtue of
(0LG No. 84-035F) and which is covered by this Surety Bond, from date of
receipt by surety of PHILGUARANTEE's first demand letter up to the date
of actual payment.[45]
 None of the parties questioned the validity of the above stipulations. Neither do
we find the same illegal. Therefore, they must be upheld as the law between the parties,
hence, valid and binding on them.[46]

From what date should the respective interests due from Paramount and Roblett
commence? As to the principal amount of P11,775,611.25, the RTC ruled that both
Paramount and Roblett are liable on the interest from 5 June 1990, or the date of the
filing of the complaint. The RTC further held Roblett and the Abieras liable for the
amount of P18,029,219.78, which apparently represents interests and penalties

approximately due from the time petitioner made the advances to BKME. [47] This was
affirmed by the Court of Appeals. Since neither Roblett nor the Abieras filed a petition
challenging the adverse rulings before this Court, this award of P18,029,219.78 plus
interest has become final as to them, and thus, beyond the scope of our review.
However, petitioner questions the rate of interest to be paid thereon. The trial court did
not specify the rate of legal interest to be paid thereon. The appellate court clarified the
rate to be 6% per annum. Again, we disagree.

The amount of P18,029,219.78 is not part of the principal debt but it represents
rather the interest and penalty charges on the advances made by petitioner to BKME as
of the time of filing of the complaint. Hence, the appropriate interest rate to be applied
thereon is 12% per annum reckoned from the time of finality of judgment until fully paid
as said amount constitutes a judgment award. Consequently, the 16% interest per
annum, on the principal amount of P11,775,611.25 should commence on 5 June 1990,
the date of the filing of the complaint.

As to Paramount, we affirm that the rate of interest on its obligation in favor of

petitioner should commence from the date of judicial demand, or on 5 June 1990.

Admittedly, the record indicates that on 1 March 1984, petitioner made a formal
notice of demand on the surety bond to Paramount.[48]Ostensibly, interest on a
monetary obligation that is due and demandable should commence from the time
demand is first made, whether judicial or extra-judicial.[49] Yet it is undisputed that the
last communication received by Paramount from petitioner was its letter dated 11 March
1985 whereby it expressed openness to accepting a new bond from Paramount for
Robletts repayment scheme but advising it to wait for further instructions on the terms
thereof before issuing the same. Apparently, this put Paramounts actions on hold.
Although the obligation of Paramount had already arisen, the delay of four years in the
performance thereof is attributable to the failure of Philguarantee to inform it of the
developments in the negotiations with Roblett. Hence, it is but fair that interest for that
period be not counted against Paramount as the delay cannot be said to have been
caused by its downright refusal to pay petitioner. Instead, the interest should commence
from the date of judicial demand, or on 5 June 1990.

Of course, legal interest of 12% per annum on the total amount shall be
computed from the time of finality of judgment until fully paid, the interim period being
deemed by then as equivalent to a forbearance of credit.

As to the penalty charges, the Deed clearly provides for a penalty charge of 16%
per annum compounded monthly on the amount advanced by petitioner or portions
thereof remaining unpaid for more than 15 days. Petitioners advances on its
counterguarantee have remained unpaid for more than 20 years. Obviously, the
stipulation on penalty charges should apply. However, only Roblett and the Abieras are
liable for penalty charges. Paramount cannot be held liable therefor as it is not a party to
the Deed. Neither does the Surety Bond contain any stipulation for penalty charges.

As to the appellate courts award of legal interest of 6% per annum on the

unremitted premiums on the Surety Bond, neither Paramount nor the third-party
defendants Eurasia and Jose Cutaran appealed therefrom. Thus, we find no reason to
disturb the award.

Anent the fourth and final issue, petitioner argues that the appellate court erred in
deleting the award of attorneys fees in its favor in view of the provision in Annex A of the
Deed for the imposition of 10% attorneys fees on the total guaranteed obligations once
the account is endorsed to its Legal Counsel and legal action is actually
accomplished.[50] The appellate court pointed out that the text of the trial courts decision
made no mention of attorneys fees and the award thereof to petitioner appears only in
the dispositive portion. It then concluded that the same is improper and should be
deleted.

We disagree.
 The award of attorneys fees is the exception rather than the rule, and it must
have some factual, legal and equitable bases.[51] The stipulation on attorneys fees
contained in the Deed constitutes what is known as a penal clause. [52] The award of
attorneys fees by the lower court, therefore, is not in the nature of an indemnity but
rather a penalty in the form of liquidated damages in accordance with the contract
between petitioner and Roblett. Such a stipulation has been upheld by this Court as
binding between the parties so long as it does not contravene the law, morals, public
order or public policy.[53] Hence, it was improper for the appellate court to have deleted
the award of attorneys fees to petitioner despite the express stipulation therefor
contained in the Deed.

Nevertheless, the courts still have the power to reduce the amount of attorneys
fees whether intended as an indemnity or a penalty, if the same is iniquitous or
unconscionable.[54]

While indeed we have upheld the reasonableness of penalties in the form of

attorneys fees consisting of ten percent (10%) of the principal debt plus interest,
however, we make an exception in this case. The principal amount in the case at bar
is P11,775,611.35. At the time the complaint was filed in 1990, the amount had already
ballooned to P29,804,831.03 inclusive of interest and penalty charges. Today, the
interest alone runs roughly to P37 million, which is thrice as much as the principal debt.
Consequently, ten percent (10%) of the principal debt plus interest and penalty charges
would definitely exceed the principal amount, thus making the attorneys fees manifestly
exorbitant. Accordingly, we reduce the same to ten percent (10%) of the principal debt
only.

However, since Paramount is not privy to the Deed, it cannot be held liable for
the attorneys fees as stipulated therein. Nonetheless, Paramount may still be made
liable for a reasonable amount of attorneys fees pursuant not to the Deed but to Article
2208 of the Civil Code which adverts to instances when it is just and equitable that
attorneys fees and expenses of litigation should be recovered.[55] We deem it proper to
hold Paramount jointly and severally liable with Roblett and the Abierras to pay
petitioner reasonable attorneys fees to the extent of P100,000.00 as ordered by the trial
court.
WHEREFORE, premises considered, the petition is hereby GRANTED.
The Decision of the Court of Appeals is REVERSED and the judgment of the Regional
Trial Court is REINSTATED with the following modifications:

a) ordering respondents Roblett, the Abieras, and Paramount, jointly and

severally, to pay petitioner Philguarantee the amount of P11,775,611.25,
with the following rates of interest and penalty charge, to wit:

i. for respondent Paramount, eighteen percent (18%)

interest per annum from 5 June 1990 until fully paid;

ii. for respondents Roblett and the Abieras, sixteen

percent (16%) interest per annum from 5 June 1990 until fully paid; and
penalty charge of sixteen percent (16%) per annum compounded
monthly from 5 June 1990 until fully paid;

b) ordering respondents Roblett and the Abieras, jointly and severally, to

pay petitioner Philguarantee the amount of P18,029,219.78 plus 12%
interest thereon from the time of finality of judgment until fully paid;

c) ordering respondents Roblett and the Abieras, jointly and severally, to

pay petitioner Philguarantee ten percent (10%) of P11,775,611.25, as
attorneys fees, plus the costs of suit;

d) ordering respondent Paramount, jointly and severally with respondents

Roblett and the Abieras, to pay petitioner Philguarantee P100,000.00 as
reasonable attorneys fees;

e) ordering respondents Roblett and Benlot, jointly and severally, to

reimburse respondent Paramount whatever amount it would pay petitioner
Philguarantee including all interests, attorneys fees and the costs; and

f) ordering all the respondents, jointly and severally, and the third-party
defendants, also jointly and severally, to pay petitioner Philguarantee legal
interest of 12% per annum on the judgment awards respectively against
them from the time of finality of judgment until fully paid.
SO ORDERED.