G.R. No. 130994.

September 18, 2002

SPOUSES FELIMON and MARIA BARRERA, Petitioners, v.SPOUSES EMILIANO and MARIA
CONCEPCION LORENZO, Respondents.

DECISION

SANDOVAL-GUTIERREZ, J.:

On December 4, 1990, spouses Felimon and Maria Barrera, petitioners, borrowed P230,000.00 from
spouses Miguel and Mary Lazaro. The loan was secured by a real estate mortgage 1over petitioners
residential lot consisting of 432 square meters located at Bunlo, Bocaue, Bulacan and registered in their
names under Transfer Certificate of Title (TCT) T-42.373 (M)2 of the Registry of Deeds of Bulacan.

A month and a half later, the Lazaro spouses needed money and informed petitioners that they would
transfer the loan to spouses Emiliano and Maria Concepcion Lorenzo, respondents. Consequently, on
May 14, 1991, petitioners executed another real estate mortgage3 over their lot, this time in favor of the
respondents to secure the loan of P325,000.00, which the latter claimed as the amount they paid spouses
Lazaro. The mortgage contract provides, among others, that the new loan shall be payable within three
(3) months, or until August 14, 1991; that it shall earn interest at 5% per month; and that should
petitioners fail to pay their loan within the said period, the mortgage shall be foreclosed.

When petitioners failed to pay their loan in full on August 14, 1991, respondents allowed them to
complete their payment until December 23, 1993. On this date, they made a total payment of
P687,000.00.

On January 17, 1994, respondents wrote petitioners demanding payment of P325,000.00, plus interest,
otherwise they would foreclose the mortgage.4 In turn, petitioners responded, claiming that they have
overpaid their obligation and demanding the return of their land title and refund of their excess
payment.5 This prompted respondents to file a petition6for extrajudicial foreclosure of mortgage with the
Office of the Ex-Officio Sheriff, Malolos, Bulacan, docketed therein as EJF 19-94.

For their part, petitioners filed with the Regional Trial Court (RTC), Branch 17, Malolos, Bulacan, a
complaint for the return of their TCT No. T-42.373 (M), sum of money and damages, with application for a
temporary restraining order and preliminary injunction, docketed as Civil Case No. 156-M-
94.7cräläwvirtualibräry

In their opposition8 to the application for a preliminary injunction, respondents alleged that petitioners loan
has been restructured three times and that their unpaid balance as of March 14, 1994 was P543,622.00.

After hearing petitioners application for a preliminary injunction, the RTC issued an order, 9 enjoining the
sheriff from proceeding with the foreclosure of mortgage, upon their posting of a bond in the amount of
P543,622.00.

Thereafter, trial on the merits ensued.

On July 31, 1995, the RTC rendered judgment,10 the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs (now
petitioners) and against the defendants (now respondents), ordering the latter:

1. to return to the plaintiffs the amount of P215,750.00 representing the overpaid amount;
2. to return to the plaintiffs the owners copy of TCT No. T-42.373 (M) offered as security;

3. to pay P20,000.000 as attorneys fees;

4. to pay the costs of the suit.

The writ of preliminary injunction issued on March 21, 1994 is hereby made permanent.

SO ORDERED."11cräläwvirtualibräry

The trial court held that the stipulated 5% monthly interest to be paid by petitioners corresponds only to
the period from May 14, 1991 up to August 14, 1991, the term of the loan. Thereafter, the monthly interest
should be 12% per annum. The trial court concluded that petitioners made an overpayment of
P214,750.00.

Upon appeal, docketed as CA GR-CV No. 51095, the Court of Appeals, in a Decision12 dated June 18,
1997, held:

We reverse.

The law and jurisprudence clearly provide that if the debt produces interest, payment of the principal shall
not be deemed to have been made until the interests have been covered. (Article 1253, New Civil
Code; Gobonseng, Jr. vs. Court of Appeals, 246 SCRA 472). Once it is admitted that an obligation bears
interest, partial payments are to be applied first on account of the interest and then to reduce the
principal. (San Jose vs. Ortega, 11 Phil. 442; Sunico vs. Ramirez, 14 Phil. 500). We thus find no support,
whether in law or in jurisprudence, for the Decision of the court a quo to apply the bigger amounts of
P40,000.00, P37,000.00, P50,000.00 among others, given several times by the Barrera spouses x x x for
the payment of the principal loan when the interests due on the loan that have accumulated through the
years have not been fully satisfied.

We also do not agree that the stipulated monthly interest of 5% was to apply only to the 3-month
effectivity period of the loan. This is a flawed and a grossly unfair interpretation of the terms and
conditions of the agreement of the parties. To rule in this wise is to sanction the irregular performance of
ones obligation. The Barrera spouses will be emboldened not to pay their loan within the agreed period of
3-months since on the fourth month and thereafter, they do not have to pay anymore the 5% monthly
interest, but only the 12% legal interest per annum, or a measly 1% interest per month. Such an
interpretation is totally unfair and unjust to the creditors who could have used their money in some other
ways. Until such time that the Barreras have fully paid their total indebtedness, the 5% monthly interest
subsists, there being no stipulation to the contrary.

While we commiserate with the plight of the Barrera spouses, we cannot change the terms of the loan
agreement between them and the Lorenzos as the courts have no right to make contracts for (the)
parties. (Tolentino and Manio vs. Gonzales Sy Chian, 5 Phil. 577). A contract is the law between the
parties which not even this Court can interfere with. The only requirement is that the same be not contrary
to law, morals and good customs x x x (Article 1306, New Civil Code). We find the agreement to pay a 5%
monthly interest until the loan is fully paid to be reasonable and sanctioned by regular usage and practice.

The Barreras should, therefore, be required to pay the balance of their indebtedness, including the
interests thereof. Failure to pay the same should warrant the foreclosure of their mortgaged property to
satisfy their obligation to the Lorenzo spouses.13cräläwvirtualibräry

Petitioners filed a motion for reconsideration but was denied.14cräläwvirtualibräry

Hence this petition.

The sole issue for our resolution is whether the 5% monthly interest on the loan was only for three (3)
months, or from May 14, 1991 up to August 14, 1991, as maintained by petitioners, or until the loan was
fully paid, as claimed by Respondents.

When the terms of a contract are clear and leave no doubt as to the intention of the contracting parties,
the literal meaning of its stipulations governs.15 In such cases, courts have no authority to alter a contract
by construction or to make a new contract for the parties; its duty is confined to the interpretation of the
one which they have made for themselves without regard to its wisdom or folly as the court cannot supply
material stipulations or read into the contract words which it does not contain. 16 It is only when the
contract is vague and ambiguous that courts are permitted to resort to construction of its terms and
determine the intention of the parties therein.

The salient provisions of the mortgage contract read:

a) Ang sanglaang ito ay sa loob lamang ng tatlong (3) buwan, o hanggang sa Agosto 14, 1991.

b) Ang tubo na aming napagkasunduan ay 5%, o cinco por ciento isang buwan.

c) Na sakaling mabayaran ko ang aming pagkakautang sa mag-asawa na P325,000.00 ang kasulatang

ito ay wala ng lakas at kabuluhan, subalit kung hindi ko mabayaran ang aming pinagkakautangan sa
takdang panahong 3 buwan sila ay binibigyan ko nang laya at kapangyarihan na masubasta nila ang
lupang aming ipinanagot sa labas ng hukuman sa bisa ng Batas Blg. 3135 at susog nito at akong may
utang ang siyang sagot sa lahat ng gastos at pati bayad sa abogado sa nasabing subasta sa labas ng
hukuman.17 (emphasis supplied)

It is clear from the above stipulations that the loan shall be payable within three (3) months, or from May
14, 1991 up to August 14, 1991. During such period, the loan shall earn an interest of 5% per month.
Furthermore, the contract shall have no force and effect once the loan shall have been fully paid within
the three-month period, otherwise, the mortgage shall be foreclosed extrajudicially under Act No. 3135.

Records show that upon maturity of the loan on August 14, 1991, petitioners failed to pay their entire
obligation. Instead of exercising their right to have the mortgage foreclosed, respondents allowed
petitioners to pay the loan on a monthly installment basis until December, 1993. It bears emphasis that
there is no written agreement between the parties that the loan will continue to bear 5% monthly interest
beyond the agreed three-month period. Respondent Ma. Concepcion Lorenzo testified as follows:

Atty. Marcos:

Q Now, based on this document which was marked as Exh. 1, there is no dispute that the monthly
interest for the three month period that is from May 14, 1991 to August 14, 1991 is 5% monthly interest,
there is no dispute about that. Now, Miss Witness, my question is, could you go over the entire document
that Exh. 1 and please tell this Hon. Court whether there is a provision in clear and unequivocal terms
providing for that monthly interest after August 14, 1991?

A No, sir, there is none.

Q Are you sure of that?

A Yes, sir.
Q You mean to say there is no stipulation in that document providing for the 5% monthly interest to the
loan after August 14, 1991?

A Yes, sir, they are supposed to return my money.

Court:

Q After they failed to comply with that provision, was there any subsequent agreement between you and
the plaintiffs?

xxx

Q Was there an agreement?

A There was, your Honor.

Q What was that agreement about?

A Verbal agreement, your Honor?

Q Why was that agreement not reduced into writing?

A It was not reduced into writing, your Honor.

Q Why?

A I am in good faith, your Honor.18cräläwvirtualibräry

Article 1956 of the Civil Code mandates that (n)o interest shall be due unless it has been expressly
stipulated in writing. Applying this provision, the trial court correctly held that the monthly interest of 5%
corresponds only to the three-month period of the loan, or from May 14, 1991 to August 14, 1991, as
agreed upon by the parties in writing. Thereafter, the interest rate for the loan is 12% per annum.
In Eastern Shipping Lines, Inc. vs. Court of Appeals,19 this Court laid down the following doctrine:

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.
(emphasis supplied)

The above ruling was reiterated in Sulit vs. Court of Appeals,20Crismina Garments vs. Court of
Appeals,21 Eastern Assurance and Surety Corporation vs. Court of Appeals,22 Catungal vs.
Hao,23 and Yong et al. vs. Tiu et al..24 Thus, the Court of Appeals erred in reversing the RTC Decision
and holding that the 5% monthly interest should be paid by petitioners even beyond August 14, 1991.

WHEREFORE, the assailed Decision of the Court of Appeals dated June 18, 1997 and its Resolution
dated October 17, 1997 are REVERSED and SET ASIDE. The Decision of the Regional Trial Court,
Branch 17, Malolos, Bulacan dated July 31, 1995 is REINSTATED.

SO ORDERED.
G.R. No. 173227. January 20, 2009
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 worthP500,000.00 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 ofP160,000.00 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 ofP660,000.00 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 assolutio 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.
Eastern Shipping vs CA

GR No. 97412, 12 July 1994

234 SCRA 78

FACTS

Two fiber drums were shipped owned by Eastern Shipping from Japan. The shipment as insured
with a marine policy. Upon arrival in Manila unto the custody of metro Port Service, which excepted to one
drum, said to be in bad order and which damage was unknown the Mercantile Insurance Company. Allied
Brokerage Corporation received the shipment from Metro, one drum opened and without seal. Allied
delivered the shipment to the consignee’s warehouse. The latter excepted to one drum which contained
spillages while the rest of the contents was adulterated/fake. As consequence of the loss, the insurance
company paid the consignee, so that it became subrogated to all the rights of action of consignee against
the defendants Eastern Shipping, Metro Port and Allied Brokerage. The insurance company filed before
the trial court. The trial court ruled in favor of plaintiff an ordered defendants to pay the former with present
legal interest of 12% per annum from the date of the filing of the complaint. On appeal by defendants, the
appellate court denied the same and affirmed in toto the decision of the trial court.

ISSUE

(1) Whether the applicable rate of legal interest is 12% or 6%.

(2) Whether the payment of legal interest on the award for loss or damage is to be computed from
the time the complaint is filed from the date the decision appealed from is rendered.

HELD

(1) The Court held that the legal interest is 6% computed from the decision of the court a
quo. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damaes awarded may be imposed at the discretion of the court at the rate of 6% per annum. No
interest shall be adjudged on unliquidated claims or damages except when or until the demand can be
established with reasonable certainty.

When the judgment of the court awarding a sum of money becomes final and executor, the
rate of legal interest shall be 12% per annum from such finality until satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of money.

The interest due shall be 12% PA to be computed fro default, J or EJD.

(2) From the date the judgment is made. Where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made judicially or EJ but when such
certainty cannot be so reasonably established at the time the demand is made, the interest shll begin to
run only from the date of judgment of the court is made.

(3) The Court held that it should be computed from the decision rendered by the court a quo.
SPS. MALLARI vs. PRUDENTIAL BANK
[G.R. No. 197861. June 5, 2013. 697 SCRA 555]

DOCTRINE:
Unconscionable interest rates – The SC has ruled in the following cases that the interest is
unconscionable: 3% and 3.81% per month on a P10 Million loan (Toring vs. Sps. Ganzon-Olan, 2008);
66% per annum or 5.5% per month on a P500 thousand loan (Medel vs. Court of Appeals, 1998) and; 7%
and 5% or 84% and 60% per annum (Chua vs. Timan, 2008). The Court has also ruled affirmed in a
plethora of cases that stipulated interest rates of 3% per month and higher are excessive, unconscionable
and exorbitant.

Conscionable interest rates – In this case 23% per annum or 2% per month as agreed upon by
petitioner and respondent bank is NOT unconscionable. It is much lower than the above mentioned
unconscionable interest rates and there is no similarity of factual milieu.

FACTS:
[Decided 2013] In 1984, Petitioner Florentino Mallari obtained a loan from respondent Prudential Bank in
the amount of P300,000.00. It was subject to an interest rate of 21% per annum and, in case of default, a
penalty of 12% per annum of the total amount due and attorneys fees equivalent of 15% of the total
amount due. This was secured by a Deed of Assignment (DOA) over petitioner's time deposit account. In
1989, Spouses Florentino and Aurea Mallari obtained another loan from respondent for P1.7 million,
stipulating interest of 23% per annum with the same penalties in case of default. This was secured by
Real Estate Mortgage (REM).

Petitioners defaulted. When computed in 1992, the total debt was P571,218.54 and P2,991,294.82 for the
first and second loans respectively.

Respondent tried to extrajudicially foreclose the mortgage. Petitioners on the other hand tried to nullify the
mortgage claiming that the Bank imposed onerous terms and conditions and that the bank was
unilaterally increasing its charges and interest over and above those stipulated. The Bank claimed that
the basis for its computation was all written in the Promissory Notes.

The RTC ruled in favor of respondent bank. CA affirmed.

ISSUE: Whether or not an interest rate of 23% per annum and 12% per annum penalty is
unconscionable.

HELD:
No. The Court has also ruled affirmed in a plethora of cases that stipulated interest rates of 3% per month
and higher are excessive, unconscionable and exorbitant. thus, the 23% per annum interest rate imposed
on petitioners’ loan in this case can by no means be considered excessive or unconscionable. And
neither is the 12% per annum penalty charge unconscionable as the counrt found in DBP vs. Family
Foods (2009) and Ruiz vs. Court of Appeals (2003).