People v.

Puig & Porras

Facts:
Respondents were conspiring, confederating, and helping one another, with grave
abuse of confidence, being the Cashier and Bookkeeper of the Rural Bank of Pototan,
Inc., Pototan, Iloilo, without the knowledge and/or consent of the management of the
Bank and with intent of gain, did then and there willfully, unlawfully and feloniously
take, steal and carry away the sum of P15,000.00, Philippine Currency, to the damage
and prejudice of the said bank in the aforesaid amount.

However, the trial court did not find the existence of probable cause because (1) the
element of ‘taking without the consent of the owners’ was missing on the ground that
it is the depositors-clients, and not the Bank, which filed the complaint in these cases,
who are the owners of the money allegedly taken by respondents and hence, are the
real parties-in-interest; and (2) the Informations are bereft of the phrase alleging
"dependence, guardianship or vigilance between the respondents and the offended
party that would have created a high degree of confidence between them which the
respondents could have abused.".

Issue:
Whether or not the 112 informations for qualified theft sufficiently allege the element
of taking without the consent of the owner, and the qualifying circumstance of grave
abuse of confidence.

Held:
Yes.

The dismissal by the RTC of the criminal cases was allegedly due to insufficiency of
the Informations and, therefore, because of this defect, there is no basis for the
existence of probable cause which will justify the issuance of the warrant of arrest.
Petitioner assails the dismissal contending that the Informations for Qualified Theft
sufficiently state facts which constitute (a) the qualifying circumstance of grave abuse
of confidence; and (b) the element of taking, with intent to gain and without the
consent of the owner, which is the Bank.

The RTC Judge based his conclusion that there was no probable cause simply on the
insufficiency of the allegations in the Informations concerning the facts constitutive of
the elements of the offense charged.

The relationship between banks and depositors has been held to be that of creditor and
debtor. Articles 1953 and 1980 of the New Civil Code, as appropriately pointed out
by petitioner, provide as follows:
Article 1953. A person who receives a loan of money or any other fungible
thing acquires the ownership thereof, and is bound to pay to the creditor an
equal amount of the same kind and quality.
Article 1980. Fixed, savings, and current deposits of money in banks and
similar institutions shall be governed by the provisions concerning loan.
In a long line of cases involving Qualified Theft, this Court has firmly established the
nature of possession by the Bank of the money deposits therein, and the duties being
performed by its employees who have custody of the money or have come into
possession of it. The Court has consistently considered the allegations in the
Information that such employees acted with grave abuse of confidence, to the damage
and prejudice of the Bank, without particularly referring to it as owner of the money
deposits, as sufficient to make out a case of Qualified Theft.

BPI Family Bank v. Amado Franco and Court of Appeals

G.R. No. 123498
23 November 2007

DOCTRINE/S:
The deposit of money in banks is governed by the Civil Code provisions on simple loan or mutuum.

FACTS:
 15 Aug 1989: Tevetesco Arrastre-Stevedoring Co., Inc. opened a savings and current account with
BPI-FB (petitioner)
 25 Aug: First Metro Investment Corporation (FMIC) also opened a time deposit account w/ same branch
of BPI-FB (San Francisco del Monte) in a series of transactions
 31 Aug: Amado Franco (respondent) opened three (3) accounts (current, savings, and time-deposit) w/
BPI-FB. Total amount of P2M use to open these accounts is traceable to a check issued by Tevesteco
allegedly in consideration of respondent Franco’s introduction of Eladio Teves (looking for a conduit
bank to facilitate Tevetesco’s business transactions) to Jaime Sebastian (BPI-FB’s Branch Manager).
The P2M is part of the P80M debited by BPI-FB from FMCI’s time deposit account and credited to
Tevetesco’s current account pursuant to an Authority to Debit allegedly signed by FMCI’s officers w/c
appears to be forged.
o Current: Initial deposit of P500k
o Savings: Initial deposit of P500k
o Time deposit: P1M w/ maturity date of 31 Aug 1990
 4 Sept: Antonio Ong, upon being shown the Authority to debit, personally declared his signature to be a
forgery.
 Tevetesco already effected several withdrawals from its current account amounting to P37,455,410.54
including the P2M paid to respondent Franco.
 8 Sept: BPI-FB, through Senior VP Severino Cornamcion, instructed Jesus Arangorin to debit Franco’s
savings & current accounts for the amounts remaining therein but the latter’s time deposit account
couldn’t be debited due to computer limitations.
 2 checks drawn by Franco against BPI-FB current account were dishonored upon presentment for
payment & stamped w/ notation account under garnishment.
o Garnished by virtue of an Order of Attachment issued by Makati RTC in a civil case filed by
BPI-FB against Franco, etc. to recover the P37,455,410.54 (Tevetesco’s total withdrawals
from its account)
o Dishonored checks were issued by respondent Franco & presented for payment at BPI-FB prior
to Franco’s receipt of notice of garnishment. At the time the notice dated 27 Sept was served
on BPI-FB, respondent Franco has yet to be impleaded in said case where writ of attachment
was issued. It was only on 15 May 1990 that respondent Franco was impleaded. The
attachment was subsequently lifted however the funds were not released to respondent Franco
because petitioner BPI-FB could not comply given that the money has already been debited
because of FMIC’s forgery claim. petitioner BPI-FB’s computer that branch indicated that the
current account record was not on file.
 As to respondent Franco’s savings account he agreed to an arrangement as a favor to Sebastian where
P400K from said account was temporarily transferred to Domingo Quiaoits savings account, subject to
its immediate return upon issuance of a certificate of deposit which Quiaoit needed in connection with
his visa application at the Taiwan Embassy.
o Sebastian retained custody of Quiaoits’ savings account passbook to preserve respondent
Franco’s deposits.
 17 May 1990: Respondent Franco pre-terminated his time deposit account.
o Petitioner BPI-FB deducted P63,189 from the remaining balance of the account representing
advance interest paid to him.
 Several cases have been filed and resolved pertaining to these transactions.
 PET FPI-FB’s refusal to heed RES Franco’s demand to unfreeze his accounts & release his deposits
gave rise to the latter’s filing a case with Manila RTC.
 RTC
 o Rendered judgment in favor of respondent Franco ordering Petitioner BPI-FB to pay sums of
money.
 CA
o Modified decision but Petitioner BPI-FB still to pay interest deducted rom the time-deposit of
Respondent Franco, damages, etc.

ISSUE:
Who has a better right to the deposits in respondent Franco’s accounts? (FRANCO)

HELD:
 No doubt that petitioner BPI-FB owns the deposited monies in the accounts of respondent Franco, but
not as a legal consequence of its unauthorized transfer of FMIC’s deposits to Tevetesco’s account.
o The deposit of money in banks is governed by the Civil Code provisions on simple loan or
mutuum.
o As there is a debtor-creditor relationship between a bank and its depositor, petitioner FPI-FB
ultimately acquired ownership of respondent Franco’s deposits, but such ownership is coupled
w/ a corresponding obligation to pay him an equal amount on demand. Although petitioner
BPI-FB owns the deposits, it cannot prevent respondent Franco from demanding payment of
the former’s obligation by drawing checks against his current account or asking for the
released of the funds in his savings account.
 When respondent Franco issued checks drawn against his current account, he had every right as creditor
to expect that those checks would be honored by petitioner BPI-FB as debtor.

FRIAS V. SAN DIEGO-SISON

(Conventional Interest )
*example of forbearance
 Parties: Petitioner Frias as the property owner and Respondent Dra. Flora San
Diego-Sison, entered into a Memorandum of Agreementover the subject property.
 MOA: Petitioner received P3M from respondent with the following agreement:
 That respondent has a period 6 months from the date of the execution of this
contract within which to notify petitioner of her intention to purchase the land
at the price ofP6.4M. Upon notice to the petitioner of respondent’s intention
to purchase the same, the latter has a period of another 6 months within which
to pay the remaining balance of P3.4 million.
 In the event that on the sixth month the respondent would decide NOT to
purchase the property, the petitioner has a period of another 6 months within
which to pay the sum of P3 million pesos provided that the said amount shall
earn compounded bank interest for the last 6 months only. Under this
circumstance, the amount of P3 million given by the respondent shall be
treated as a loan.
 Respondent decided not to purchase the property and demanded the return of her
money with 36% interest.
 Petitioner and respondent stipulated that the loaned amount shall earn compounded
bank interests, and per the certification issued by Prudential Bank, the interest rate for
loans in 1991 ranged from 25% to 32% per annum. The CA reduced the interest rate to
25% instead of the 32% awarded by the trial court which petitioner no longer assailed.

Monetary Interest: The payment of regular interest constitutes the price or cost of the use
of money and thus, until the principal sum due is returned to the creditor, regular interest
continues to accrue since the debtor continues to use such principal amount. It has been held
that for a debtor to continue in possession of the principal of the loan and to continue to use
the same after maturity of the loan without payment of the monetary interest, would constitute
unjust enrichment on the part of the debtor at the expense of the creditor.

SC: Affirmed the ruling of the CA as to the 25% interest rate. Thus, the interest rate of 25% per
annum awarded by the CA to a P2 million loan is fair and reasonable.

Sebastian Siga-an, petitioner, vs. Alicia Villanueva, respondent.

Facts: Respondent filed a complaint for sum of money against petitioner.
Respondent claimed that petitioner approached her inside the PNO and
offered to loan her the amount of P540,000.00 of which the loan agreement
was not reduced in writing and there was no stipulation as to the payment of
interest for the loan. Respondent issued a check worth P500,000.00 to
petitioner as partial payment of the loan. She then issued another check in
the amount of P200,000.00 to petitioner as payment of the remaining balance
of the loan of which the excess amount of P160,000.00 would be applied as
interest for the loan. Not satisfied with the amount applied as interest,
petitioner pestered her to pay additional interest and threatened to block or
disapprove her transactions with the PNO if she would not comply with his
demand. Thus, she paid additional amounts in cash and checks as interests
for the loan. She asked petitioner for receipt for the payments but was told
that it was not necessary as there was mutual trust and confidence between
them. According to her computation, the total amount she paid to petitioner for
the loan and interest accumulated to P1,200,000.00.

The RTC rendered a Decision holding that respondent made an overpayment

of her loan obligation to petitioner and that the latter should refund the excess
amount to the former. It ratiocinated that respondent’s obligation was only to
pay the loaned amount of P540,000.00, and that the alleged interests due
should not be included in the computation of respondent’s total monetary debt
because there was no agreement between them regarding payment of
interest. It concluded that since respondent made an excess payment to
petitioner in the amount of P660,000.00 through mistake, petitioner should
return the said amount to respondent pursuant to the principle of solutio
indebiti. Also, petitioner should pay moral damages for the sleepless nights
and wounded feelings experienced by respondent. Further, petitioner should
pay exemplary damages by way of example or correction for the public good,
plus attorney’s fees and costs of suit.

Issue: (1) Whether or not interest was due to petitioner; and (2) whether the
principle of solutio indebiti applies to the case at bar.

Ruling: (1) No. Compensatory interest is not chargeable in the instant case
because it was not duly proven that respondent defaulted in paying the loan
and no interest was due on the loan because there was no written agreement
as regards payment of interest. Article 1956 of the Civil Code, which refers to
monetary interest, specifically mandates that no interest shall be due unless it
has been expressly stipulated in writing. As can be gleaned from the
foregoing provision, payment of monetary interest is allowed only if: (1) there
was an express stipulation for the payment of interest; and (2) the agreement
for the payment of interest was reduced in writing. The concurrence of the
two conditions is required for the payment of monetary interest. Thus, we
have held that collection of interest without any stipulation therefor in writing is
prohibited by law.

(2) Petitioner cannot be compelled to return the alleged excess amount paid by
respondent as interest. Under Article 1960 of the Civil Code, if the borrower of
loan pays interest when there has been no stipulation therefor, the provisions
of the Civil Code concerning solutio indebiti shall be applied. Article 2154 of
the Civil Code explains the principle of solutio indebiti. Said provision
provides that if something is received when there is no right to demand it, and
it was unduly delivered through mistake, the obligation to return it arises. In
such a case, a creditor-debtor relationship is created under a quasi-contract
whereby the payor becomes the creditor who then has the right to demand the
return of payment made by mistake, and the person who has no right to
receive such payment becomes obligated to return the same. The
quasi-contract of solutio indebiti harks back to the ancient principle that no one
shall enrich himself unjustly at the expense of another. The principle of solutio
indebiti applies where (1) a payment is made when there exists no binding
relation between the payor, who has no duty to pay, and the person who
received the payment; and (2) the payment is made through mistake, and not
through liberality or some other cause. We have held that the principle
of solutio indebiti applies in case of erroneous payment of undue interest.

Article 2232 of the Civil Code states that in a quasi-contract, such as solutio
indebiti, exemplary damages may be imposed if the defendant acted in an
oppressive manner. Petitioner acted oppressively when he pestered
respondent to pay interest and threatened to block her transactions with the
PNO if she would not pay interest. This forced respondent to pay interest
despite lack of agreement thereto. Thus, the award of exemplary damages is
appropriate so as to deter petitioner and other lenders from committing similar
and other serious wrongdoings.

SPOUSES JUICO V. CHINA BANKING CORP.

(Conventional Interest; Escalation Clause)
(Include Concurring Opinion)
 Bank: that the interest rate changes every month based on the prevailing market rate
and notified petitioners of the prevailing rate by calling them thru a telephone
monthly before their account becomes past due. When asked if there was any written
authority from petitioners for respondent to increase the interest rate unilaterally,
respondent answered that petitioners signed a promissory note indicating that they
agreed to pay interest at the prevailing rate.
 China Bank unilaterally increased the interest rates from 15% to as high as 24.50%.

RULES on Escalation Clauses:

a) Escalation clauses are not void per se.
Escalation clauses refer to stipulations allowing an increase in the interest rate
agreed upon by the contracting parties. This Court has long recognized that there is
nothing inherently wrong with escalation clauses which are valid stipulations in
commercial contracts to maintain fiscal stability and to retain the value of money in
long term contracts. Hence, such stipulations are not void per se.

b) Escalation clauses violating the principle of mutuality of contracts are void.

Nevertheless, an escalation clause "which grants the creditor an unbridled right to
adjust the interest independently and upwardly, completely depriving the debtor of
the right to assent to an important modification in the agreement" is void. A
stipulation of such nature violates the principle of mutuality of contracts. Thus, this
Court has previously nullified the unilateral determination and imposition by creditor
banks of increases in the rate of interest provided in loan contracts.
  Banco Filipino Savings & Mortgage Bank v. Navarro: While escalation clauses
in general are considered valid, we ruled that Banco Filipino may not increase
the interest on respondent borrower’s loan, pursuant to Circular No. 494
issued by the Monetary Board, because said circular is not a law although it
has the force and effect of law and the escalation clause has no de-escalation
clause.
 De-escalation Clause: provision for reduction of the stipulated interest "in
the event that the applicable maximum rate of interest is reduced by law or by
the Monetary Board."

It is now settled that an escalation clause is void where the creditor unilaterally determines
and imposes an increase in the stipulated rate of interest without the express conformity of
the debtor. Such unbridled right given to creditors to adjust the interest independently and
upwardly would completely take away from the debtors the right to assent to an important
modification in their agreement and would also negate the element of mutuality in their
contracts.34 While a ceiling on interest rates under the Usury Law was already lifted under
Central Bank Circular No. 905, nothing therein "grants lenders carte blanche authority to
raise interest rates to levels which will either enslave their borrowers or lead to a
hemorrhaging of their assets."

Ecalation clause in this case: I/We hereby authorize the CHINA BANKING CORPORATION
to increase or decrease as the case may be, the interest rate/service charge presently
stipulated in this note without any advance notice to me/us in the event a law or Central
Bank regulation is passed or promulgated by the Central Bank of the Philippines or
appropriate government entities, increasing or decreasing such interest rate or service charge.

RULING: At no time did petitioners protest the new rates imposed on their loan even when
their property was foreclosed by respondent. This notwithstanding, we hold that the
escalation clause is still VOID because it grants respondent the power to impose an increased
rate of interest without a written notice to petitioners and their written consent. Respondent’s
monthly telephone calls to petitioners advising them of the prevailing interest rates would not
suffice. A detailed billing statement based on the new imposed interest with corresponding
computation of the total debt should have been provided by the respondent to enable
petitioners to make an informed decision. An appropriate form must also be signed by the
petitioners to indicate their conformity to the new rates. Compliance with these requisites is
essential to preserve the mutuality of contracts. For indeed, one-sided impositions do not
have the force of law between the parties, because such impositions are not based on the
parties’ essential equality.

Effect: Modifications in the rate of interest for loans pursuant to an escalation clause must be
the result of an agreement between the parties. Unless such important change in the contract
terms is mutually agreed upon, it has no binding effect. In the absence of consent on the part
of the petitioners to the modifications in the interest rates, the adjusted rates cannot bind
them.

NOTE: The lender and the borrower should agree on the imposed rate, and such imposed
rate should be in writing. Escalation clauses are not basically wrong or legally objectionable as
long as they are not solely potestative but based on reasonable and valid grounds.

Concurring Opinion:
Points to consider in drafting a valid escalation clause: (DAP)
1) Firstly, as a matter of equity and consistent with P.O. No. 1684, the escalation clause must be
paired with a de-escalation clause.
2) Secondly, so as not to violate the principle of mutuality, the escalation must be pegged to
theprevailing market rates, and not merely make a generalized reference to "any increase
or decrease in the interest rate" in the event a law or a Central Bank regulation is passed.
3) Thirdly, consistent with the nature of contracts, the proposed modification must be the result
of anagreement between the parties.
SPOUSES EDUARDO & LYDIA SILOS v. PHILIPPINE NATIONAL
BANK
G.R. No. 181045, 2 July 2014, SECOND DIVISION, (Del Castillo, J.)
In loan agreements, it cannot be denied that the rate of interest is a principal
condition, if
not the most important component. Thus, any modification thereof must be
mutually agreed upon;
otherwise, it has no binding effect.
Spouses Eduardo and Lydia Silos secureda revolving credit line with
Philippine National Bank (PNB)through a real estate mortgage as a security. After
two years, their credit line increased. Spouses Silos then signed a Credit Agreement,
which was also amended two years later, and several Promissory Notes (PN) as
regards their Credit Agreements with PNB.The said loan was initially subjected to a
19.5% interest rate per annum. In the Credit Agreements, Spouses Silos bound
themselves to the power of PNB to modify the interest rate depending on whatever
policy that PNB may adopt in the future, without the need of notice upon them.
Thus, the said interest rates played from 16% to as high as 32% per annum.Spouses
Silos acceded to the policy by pre-signing a total of twenty-six (26) PNs leaving the
individual applicable interest rates at hand blank since it would be subject to
modification by PNB.
Spouses Silos regularly renewed and made good on their PNs, religiously
paid the interests without objection or fail. However, during the 1997 Asian
Financial Crisis, Spouses Silos faltered when the interest rates soared. Spouses Silos’
26thPN became past due, and despite repeated demands by PNB, they failed to
make good on the note. Thus, PNB foreclosed and auctioned the involved security
for the mortgage. Spouses Silos instituted an action to annul the foreclosure sale on
the ground that the succeeding interest rates used in their loan agreements was left
to the sole will of PNB, the same fixed by the latter without their prior consent and
thus, void. The Regional Trial Court (RTC) ruled that such stipulation authorizing
both the increase and decrease of interest rates as may be applicable is valid. The
Court of Appeals (CA) affirmed the RTC decision.
ISSUE:
May the bank, on its own, modify the interest rate in a loan agreement
without violating the mutuality of contracts?
RULING:
No.Any modification in the contract, such as the interest rates, must be
made with the consent of the contracting parties. The minds of all the parties must
meet as to the proposed modification, especially when it affects an important aspect
of the agreement. In the case of loan agreements, the rate of interest is a principal
condition, if not the most important component.
UST Law Review, Vol. LIX, No. 1, May 2015
Loan and credit arrangements may be made enticing by, or "sweetened"
with, offers of low initial interest rates, but actually accompanied by provisions
written in fine print that allow lenders to later on increase or decrease interest rates
unilaterally, without the consent of the borrower, and depending on complex and
subjective factors. Because they have been lured into these contracts by initially low
interest rates, borrowers get caught and stuck in the web of subsequent steep rates
and penalties, surcharges and the like. Being ordinary individuals or entities, they
naturally dread legal complications and cannot afford court litigation; they succumb
to whatever charges the lenders impose. At the very least, borrowers should be
charged rightly; but then again this is not possible in a one-sided credit system
where
the temptation to abuse is strong and the willingness to rectify is made weak by the
eternal desire for profit.

Ligutan v ca FACTS:
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained a loan in the
amount of P120,000.00 from Security Bank and Trust Co. The obligation
matured and the bank granted an extension. Despite several demands from
the Bank, petitioners failed to settle the debt which then amounted to
P114,416.10. The Bank sent a final demand letter however petitioners still
defaulted on their obligation. The Bank then filed a complaint for recovery
of the due amount. Petitioners instead of presenting their evidence had the
schedule reset for two consecutive occasions. On the third hearing date, the
trial court resolved to consider the case submitted for decision.

Two years later petitioners filed a motion for reconsideration which was
denied by the trial court. Petitioners then interposed an appeal with the
Court of Appeals, the appellate court affirmed the judgement of the trial
court except the 2% service charge which was deleted pursuant to Central
Bank Circular No. 763. The two parties filed their motions for
reconsiderations and the Court of Appeals resolved the two motions: that the
payment of interest and penalty commence on the date when the obligation
became due and a penalty of 3% per month would suffice. The petitioners
filed an omnibus motion for reconsideration which was then denied by the
Court of Appeals.
ISSUE:

Whether or not the 15.189% interest and the penalty of 3% per month (36%
per annum) is exorbitant, iniquitous, and unconscionable.

RULI NG:

Petition is DENIED.

HELD:

The question of whether a penalty is reasonable or iniquitous can be partly

subjective and partly objective. Its resolution will depend on such factors as,
but not confined to, the type, extent and purpose of the penalty, the nature of
the obligation, the mode of breach and its consequences, the supervening
realities, the standing and relationship of the parties, and the like, the
application of which, by and large, is addressed to the sound discretion of
the court.

The Court of Appeals, exercising its good judgement has reduced the
penalty interest from 5% a month to 3% a month. Given the circumstances
and the repeated acts of breach by petitioners of their contractual obligation,
the Court sees no cogent ground to modify the ruling of the appellate court.

The stipulated interest of 15.189% per annum, does not appear as being
excessive. The essence or rationale for the payment of interest, quite often
referred to as cost of money, is not exactly the same as that as a surcharge or
a penalty. A penalty stipulation is not necessarily preclusive of interest, if
there is an agreement to that effect, the two being distinct concepts which
may separately be demanded. The interest prescribed in loan financing
arrangements is a fundamental part of the banking business and the core of a
banks existence.
EASTERN SHIPPING LINES, INC. V. CA (1994)
(Compensatory, Penalty or Indemnity Interest)
Rules on Interest:
 Interest upon an obligation which calls for the payment of money, absent a
stipulation, is thelegal rate. Such interest normally is allowable from the date of
demand, judicial or extrajudicial. The trial court opted for judicial demand as the
starting point.
 But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be
recovered upon unliquidated claims or damages, except when the demand can be
established with reasonable certainty. Here, interest should be counted from the date
of the decision (when the amount of damages are ascertained).
 Art. 2209, CC. — If the obligation consists in the payment of a sum of money, and
the debtor incurs in delay, the indemnity for damages, there being no stipulation to
the contrary, shall be the payment of interest agreed upon, and in the absence of
stipulation, the legal interest which is six percent per annum.

Rules of thumb (on the award of interests):

*NOTE: The legal rate of 12% has been amended to 6%. See Circular No. 799 (amending Circular No. 905) effective July 1, 2013, and the case
of NACAR V. GALLERY FRAMES AND/OR BORDEY (2013). Therefore, there is no need to distinguish now the obligations breached as the legal
interest applicable is 6%.

1) 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.

2) 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:
a) Obligation breached: consists in the payment of a sum of money, i.e., a loan or
forbearance of money
Interest Due:
i) that which may have been stipulated in writing. Furthermore, the interest
due shall itself earn legal interest from the time it is judicially demanded.
ii) 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. (amended to
6%)
b) Obligation breached: not constituting a loan or forbearance of money,
Interest due: 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.
o 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)
o When such certainty cannot be so reasonably established at the time
the demand is made, the interest shall begin to run only from the
date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest
shall, in any case, be on the amount finally adjudged.
c) 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. (amended to 6%)
NACAR V. GALLERY FRAMES AND/OR BORDEY, (2013)
(Compensatory, Penalty or Indemnity Interest)
*Amending the Eastern Shipping Doctrine
*Important: because this case discusses the amendment of the legal interest in loan and
forbearance of money, credits or goods from 12% to 6% effective July 1, 2013.

Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796, approved
the amendment of Section 2 of Circular No. 905, Series of 1982 and, accordingly, issued
Circular No. 799, Series of 2013, effective July 1, 2013, the pertinent portion of which reads:
Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and
the rate allowed in judgments, in the absence of an express contract as to such rate of interest,
shall be six percent (6%) per annum.

Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that
would govern the parties, the rate of legal interest for loans or forbearance of any money,
goods or credits and the rate allowed in judgments shall no longer be 12% per annum but will
now be 6% per annum effective July 1, 2013.
 It should be noted, nonetheless, that the new rate could only be applied prospectively
and not retroactively. Consequently, the 12% per annum legal interest shall apply only
until June 30, 2013. Come July 1, 2013 the new rate of 6% per annum shall be the
prevailing rate of interest when applicable.

To recapitulate and for future guidance, the guidelines laid down in the case of Eastern
Shipping Lines are accordingly modified to embody BSP-MB Circular No. 799, as follows:
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:

New guidelines in the award of interest:

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 6% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.
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 the
quantification of damages may be deemed to have been reasonably ascertained). The
actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.
3.) When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be6% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.
Application in this case: The interest of 12% per annum of the total monetary awards,
computed from May 27, 2002 to June 30, 2013 and 6% per annum from July 1, 2013 until
their full satisfaction, is awarded.
ESTORES V. SPOUSES SUPANGAN, (2012)
(Compensatory, Penalty or Indemnity Interest)
*Forbearance of money
ISSUE: Whether it is proper to impose interest for an obligation that does not involve a loan or
forbearance of money in the absence of stipulation of the parties.

HELD:
YES. Interest may be imposed even in the absence of stipulation in the contract.
Article 2210 of the Civil Code expressly provides that “[i]nterest may, in the discretion of the court, be
allowed upon damages awarded for breach of contract.” In this case, there is no question that
petitioner is legally obligated to return the P3.5 million because of her failure to fulfill the obligation
under the Conditional Deed of Sale, despite demand. Petitioner enjoyed the use of the money from the
time it was given to her until now. Thus, she is already in default of her obligation from the date of
demand.

Forbearance is defined as a “contractual obligation of lender or creditor to refrain during a given

period of time, from requiring the borrower or debtor to repay a loan or debt then due and
payable.” This definition describes a loan where a debtor is given a period within which to pay a loan or
debt. In such case, “forbearance of money, goods or credits” will have no distinct definition from a
loan. We believe however, that the phrase “forbearance of money, goods or credits” is meant to have a
separate meaning from a loan, otherwise there would have been no need to add that phrase as a loan is
already sufficiently defined in the Civil Code.

Forbearance of money, goods or credits should therefore refer to arrangements other than loan
agreements, where a person acquiesces to the temporary use of his money, goods or credits pending
happening of certain events or fulfillment of certain conditions.

In this case, the respondent-spouses parted with their money even before the conditions were
fulfilled. They have therefore allowed or granted forbearance to the seller (petitioner) to use their
money pending fulfillment of the conditions. They were deprived of the use of their money for the
period pending fulfillment of the conditions and when those conditions were breached, they are
entitled not only to the return of the principal amount paid, but also to compensation for the use of
their money. And the compensation for the use of their money, absent any stipulation, should be the
same rate of legal interest applicable to a loan since the use or deprivation of funds is similar to a loan.

ADVOCATES FOR TRUTH IN LENDING, INC. VS. BANGKO SENTRAL NG PILIPINAS

Advocates for Truth in Lending, Inc. vs. BSP, et. al.

G.R. No. 192986 / January 15, 2013
REYES, J.

FACTS:
Advocates for Truth in Lending, Inc. and its President, Eduardo Olaguer claim that
they are raising issues of transcendental importance to the public and so they filed
Petition for Certiorari under Rule 65 ROC seeking to declare that the Bangko Sentral
ng Pilipinas Monetary Board (BSP-MB), replacing the Central Bank Monetary Board
(CB-MB) by virtue of R.A. No. 7653, has no authority to continue enforcing Central
Bank Circular No. 905, issued by the CB-MB in 1982, which "suspended" the Usury
Law of 1916 (Act No. 2655).
R.A. No. 265, which created the Central Bank (CB) of the Philippines, empowered the
CB-MB to, among others, set the maximum interest rates which banks may charge
for all types of loans and other credit operations, within limits prescribed by the
Usury Law.

In its Resolution No. 2224, the CB-MB issued CB Circular No. 905, Series of 1982.
Section 1 of the Circular, under its General Provisions, removed the ceilings on
interest rates on loans or forbearance of any money, goods or credits.

On June 14, 1993, President Fidel V. Ramos signed into law R.A. No. 7653
establishing the Bangko Sentral ng Pilipinas (BSP) to replace the CB.

ISSUE/S:
1. Whether the CB-MB exceeded its authority when it issued CB Circular No. 905,
which removed all interest ceilings and thus suspended Act No. 2655 as regards
usurious interest rates. NO

2. Whether under R.A. No. 7653, the BSP-MB may continue to enforce CB
Circular No. 905. YES

RULING:

1. The CB-MB merely suspended the effectivity of the Usury Law when it issued CB
Circular No. 905.
The power of the CB to effectively suspend the Usury Law pursuant to P.D. No. 1684
has long been recognized and upheld in many cases. As the Court explained in the
landmark case of Medel v. CA, citing several cases, CB Circular No. 905 "did not
repeal nor in anyway amend the Usury Law but simply suspended the latter’s
effectivity;" that "a CB Circular cannot repeal a law, [for] only a law can repeal
another law;" that "by virtue of CB Circular No. 905, the Usury Law has been
rendered ineffective;" and "Usury has been legally non-existent in our jurisdiction.
Interest can now be charged as lender and borrower may agree upon."

By lifting the interest ceiling, CB Circular No. 905 merely upheld the parties’ freedom
of contract to agree freely on the rate of interest. It cited Article 1306 of the New
Civil Code, under which the contracting parties may establish such stipulations,
clauses, terms and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public policy.

2. The BSP-MB has authority to enforce CB Circular No. 905.

Section 1 of CB Circular No. 905 provides that, "The rate of interest, including
commissions, premiums, fees and other charges, on a loan or forbearance of any
money, goods, or credits, regardless of maturity and whether secured or unsecured,
that may be charged or collected by any person, whether natural or juridical, shall
not be subject to any ceiling prescribed under or pursuant to the Usury Law, as
amended." It does not purport to suspend the Usury Law only as it applies to banks,
but to all lenders.

Petitioners contend that, granting that the CB had power to "suspend" the Usury
Law, the new BSP-MB did not retain this power of its predecessor, in view of Section
135 of R.A. No. 7653, which expressly repealed R.A. No. 265. The petitioners point
out that R.A. No. 7653 did not reenact a provision similar to Section 109 of R.A. No.
265.

A closer perusal shows that Section 109 of R.A. No. 265 covered only loans extended
by banks, whereas under Section 1-a of the Usury Law, as amended, the BSP-MB
may prescribe the maximum rate or rates of interest for all loans or renewals thereof
or the forbearance of any money, goods or credits, including those for loans of low
priority such as consumer loans, as well as such loans made by pawnshops, finance
companies and similar credit institutions. It even authorizes the BSP-MB to prescribe
different maximum rate or rates for different types of borrowings, including deposits
and deposit substitutes, or loans of financial intermediaries. Act No. 2655, an earlier
law, is much broader in scope, whereas R.A. No. 265, now R.A. No. 7653, merely
supplemented it as it concerns loans by banks and other financial institutions. Had
R.A. No. 7653 been intended to repeal Section 1-a of Act No. 2655, it would have so
stated in unequivocal terms.

Further, the lifting of the ceilings for interest rates does not authorize stipulations
charging excessive, unconscionable, and iniquitous interest. It is settled that nothing
in CB Circular No. 905 grants lenders a carte blanche authority to raise interest rates
to levels which will either enslave their borrowers or lead to a hemorrhaging of their
assets. Stipulations authorizing iniquitous or unconscionable interests have been
invariably struck down for being contrary to morals, if not against the law.

G.R. Nos. 150773 & 153599 September 30, 2005

SPOUSES DAVID B. CARPO and RECHILDA S. CARPO, Petitioners,

- versus -
ELEANOR CHUA and TINGA, and ELMA DY NG, CHICO-NAZARIO, JJ. Respondents.

DOCTRINE: Usurious loan transaction is not a complete nullity but defective only with respect to the agreed
interest.

In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the
principal debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The
illegality lies only as to the prestation to pay the stipulated interest; hence, being separable, the
latter only should be deemed void, since it is the only one that is illegal.

FACTS:
1. Petitioners borrowed from respondents the amount of P175,000.00, payable within six (6) months with an
interest rate of six percent (6%) per month. To secure the payment of the loan, petitioners mortgaged their
residential house and lot.

2. Petitioners failed to pay the loan upon demand. Consequently, the real estate mortgage was extrajudicially
foreclosed where the respondents emerged winners in the public auction.
3. Petitioners failed to exercise their right of redemption, thus a certificate of sale was issued and new TCT
was issued in the name of respondents. Despite the issuance of the TCT, petitioners continued to occupy the said
house and lot, prompting respondents to file a petition for writ of possession.Writ of possession was then issued.

4. Petitioners filed a complaint for annulment of real estate mortgage and the consequent foreclosure
proceedings.

5. Petitioners claim that following the Courts ruling in Medel v. Court of Appeals the rate of interest stipulated in
the principal loan agreement is clearly null and void. Consequently, they also argue that the nullity of the agreed
interest rate affects the validity of the real estate mortgage.

ISSUE: A. Whether the interest rate is valid.---NO

B. Whether validity of said interest rate affects the Mortgage Contract.--NO

HELD: A. INTEREST RATE

Petitioners contend that the agreed rate of interest of 6% per month or 72% per annum is so excessive,
iniquitous, unconscionable and exorbitant that it should have been declared null and void. Instead of dismissing
their complaint, they aver that the lower court should have declared them liable to respondents for the original
amount of the loan plus 12% interest per annum and 1% monthly penalty charge as liquidated damages, in view
of the ruling in Medel v. Court of Appeals where the Court found that the interest stipulated at 5.5% per month
or 66% per annum was so iniquitous or unconscionable as to render the stipulation void.

In a long line of cases, this Court has invalidated similar stipulations on interest rates for being excessive,
iniquitous, unconscionable and exorbitant.

In the case at bar, the stipulated interest rate is 6% per month, or 72% per annum. By the standards set in the
above-cited cases, this stipulation is similarly invalid.From that perspective, it is apparent that the stipulated
interest in the subject loan is excessive, iniquitous, unconscionable and exorbitant. Pursuant to the freedom of
contract principle embodied in Article 1306 of the Civil Code, contracting parties may establish such stipulations,
clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy. In the ordinary course, the codal provision may be invoked to annul the
excessive stipulated interest.

B. INTEREST RATE INVALIDITY &MORTGAGE CONTRACT

The question as to whether the invalidity of the stipulation on interest carries with it the invalidity of the
principal obligation is crucial . The consideration of the mortgage contract is the same as that of the principal
contract from which it receives life, and without which it cannot exist as an independent contract. Being a mere
accessory contract, the validity of the mortgage contract would depend on the validity of the loan secured by it.

Notably in Medel, the Court did not invalidate the entire loan obligation despite the inequitability of the
stipulated interest, but instead reduced the rate of interest to the more reasonable rate of 12% per annum.
This is congruent with the rule that a usurious loan transaction is not a complete nullity but defective only with
respect to the agreed interest.

Further, Article 1273, Civil Code, provides: "The renunciation of the principal debt shall
extinguish the accessory obligations; but the waiver of the latter shall leave the former in force."

Article 1420 of the New Civil Code provides in this regard: "In case of a divisible contract, if the
illegal terms can be separated from the legal ones, the latter may be enforced."

In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the
principal debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The
illegality lies only as to the prestation to pay the stipulated interest; hence, being separable, the
latter only should be deemed void, since it is the only one that is illegal.

The principal debt remaining without stipulation for payment of interest can thus be recovered by
judicial action. And in case of such demand, and the debtor incurs in delay, the debt earns interest
from the date of the demand (in this case from the filing of the complaint). Such interest is not due
to stipulation, for there was none, the same being void. Rather, it is due to the general provision of
law that in obligations to pay money, where the debtor incurs in delay, he has to pay interest by
way of damages

Hence, it is clear and settled that the principal loan obligation still stands and remains valid. By the same token,
since the mortgage contract derives its vitality from the validity of the principal obligation, the invalid stipulation
on interest rate is similarly insufficient to render void the ancillary mortgage contract.

(Note: I included the below in case it is deemed relevant in Credit Trans)

C. UNDUE INFLUENCE
RTC pronounced that the complaint was barred by the four-year prescriptive period because of vitiated consent
through undue influence.

SC: Disagrees. Article 1391, in relation to Article 1390 of the Civil Code, grants the aggrieved party the right to
obtain the annulment of contract on account of factors which vitiate consent. Article 1337 defines the concept of
undue influence, as follows:

There is undue influence when a person takes improper advantage of his power over the will of another,
depriving the latter of a reasonable freedom of choice. The following circumstances shall be considered:
the confidential, family, spiritual and other relations between the parties or the fact that the person
alleged to have been unduly influenced was suffering from mental weakness, or was ignorant or in
financial distress.

While petitioners were allegedly financially distressed, it must be proven that there is deprivation of their free
agency. In other words, for undue influence to be present, the influence exerted must have so overpowered or
subjugated the mind of a contracting party as to destroy his free agency, making him express the will of another
rather than his own.

The RTC had likewise concluded that petitioners were barred by laches from assailing the validity of the real
estate mortgage.

SC: Agrees. If indeed petitioners unwillingly gave their consent to the agreement, they should have
raised this issue as early as in the foreclosure proceedings. It was only when the writ of possession was
issued did petitioners challenge the stipulations in the loan contract in their action for annulment of
mortgage. Evidently, petitioners slept on their rights.

Clearly then, with the absence of undue influence, petitioners have no cause of action. Even assuming undue
influence vitiated their consent to the loan contract, their action would already be barred by prescription when
they filed it. Moreover, petitioners had clearly slept on their rights as they failed to timely assail the validity of
the mortgage agreement.