Eastern Shipping Lines v. CA
1169, Civil Code) but when such certainty cannot be
GR No. 97412, July 12, 1994
Facts: Petitioner-defendant was consigned to deliver a cargo. Upon
embarkment, the cargo was found to be damaged while on transit. Private
respondent-plaintiff, Mercantile Insurance, paid the consignee the amount of
damage based on a marine insurance policy. Mercantile consequently sued
the petitioner for recovery of damages it paid to the consignee. The court a
quo decided in favor of the plaintiff and further stressing the amount paid by
the insurance company to the consignee be paid and with the present legal
interest of 12% per annum commencing on the date of filing of the complaint,
until fully paid. The petitioner now constests the ruling particularly on the issue
of interest.
Issue: When should the reckoning period be for the computation of the
payment of legal interest on an award for loss or damage? What is the
applicable rate of interest?
Held: The Court laid down the following rules of thumb for guidance in
cases like that of the above:
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.
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 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.
The petition is, in part, granted.
The legal relationship between the consignee and the arrastre operator is
akin to that of a depositor and warehouseman
Accordingly, the liability imposed on Eastern Shipping Lines, Inc., the sole
petitioner in this case, is inevitable regardless of whether there are others
solidarily liable with it.
The cases can perhaps be classified into two groups according to the
similarity of the issues involved and the corresponding rulings rendered by
the court.
In the "first group", the basic issue focuses on the application of either the
6% (under the Civil Code) or 12% (under the Central Bank Circular) interest
per annum
12% interest per annum applies only to loans or forbearance of money,
goods or credits, as well as to judgments involving such loan or forbearance
of money, goods or credits, and that the 6% interest under the Civil Code
governs when the transaction involves the payment of indemnities in the
concept of damage arising from the breach or a delay in the performance of
obligations in general.
The "second group", did not alter the pronounced rule on the application of
the 6% or 12% interest per annum, depending on whether or not the amount
involved is a loan or forbearance, on the one hand, or one of indemnity for
damage, on the other hand. The "second group" varied on the
commencement of the running of the legal interest.
When an obligation, not constituting a loan or forbearance of money, is
CRED TRANS GB pg. 1
breached, an interest on the amount of damages awarded may be imposed
24
at the discretion of the court at the rate of 6% per annum. Where the
demand is established with reasonable certainty, the interest shall begin to
run from the time the claim is made judicially or extrajudicially the interest
shall begin to run only from the date the judgment of the court is made the
petition is partly GRANTED.

CRED TRANS GB pg. 2

DARIO NACAR, PETITIONER, vs. GALLERY FRAMES AND/OR FELIPE
BORDEY, JR., RESPONDENTS.
G.R. No. 189871
August 13, 2013
FACTS
On January 24, 1997, Dario Nacar got dismissed by his employer, Gallery
Frames. He filed a complaint; the Labor Arbiter ruled that petitioner was
dismissed without just cause. A computation for the separation pay and back
wages were made it amounted to Php 158,919.92. The respondent sought
appeal to the NLRC, CA and Supreme Court, but they were all dismissed,
thus the judgment became final on April 17, 2002.
During the execution of the final judgment, the petitioner filed a motion for
the re-computation of the damages. The amount previously computed
includes the separation pay and back wages up to the time of his dismissal.
The petitioner argued that the damages should cover the period until the
date of final judgment. A re-computation was made and the damages was
increased to 471,320.31. Respondent prayed for the quashal of such motion
on the ground that the judgment made by the SC is already final and the
amount should not be further altered.
Petitioner also filed another motion asking the court to order the respondent
to pay the appropriate legal interest of the damages from the date of final
judgment until full payment.
ISSUES
1. Whether or not a subsequent correction of the damages awarded
during the final judgment of the Supreme Court violates the rule on
immutability of judgments.
2. Whether or not the re-computation made by the Labor Arbiter is
correct.
3. Whether or not appropriate interests may be claimed by the
petitioner.
RULING
1. Whether or not a subsequent correction of the damages awarded
during the final judgment of the Supreme Court violates the rule on
immutability of judgments.
The Supreme Court ruled that a correction in the computation of the
damages does not violate the rule on immutability of judgments. The final
decision made by the Supreme Court to award the petitioner with damages
with regards to the dismissal without justifiable cause can be divided into two
important parts. One is the finding that an illegal dismissal was indeed made.
And the other is the computation of damages. According to a previous case
of Session Delights Ice Cream and Fast Foods v. Court of Appeals, the
Supreme Court held that the second part of the decision - being merely a
computation of what the first part of the decision established and declared -
can, by its nature, be re-computed. The re-computation of the consequences
of illegal dismissal upon execution of the decision does not constitute an
alteration or amendment of the final decision being implemented. The illegal
dismissal ruling stands; only the computation of monetary consequences of
this dismissal is affected, and this is not a violation of the principle of
immutability of final judgments.
2. Whether or not the re-computation made by the Labor Arbiter is
correct.
The Supreme Court believes that the amount of 471,320.31 as damages is
correct. According to Article 279 of the Labor Code, reliefs in case of illegal
dismissal continue to add up until its full satisfaction. The original
computation clearly includes damages only up to the finality of the labor
arbiter's decision. Therefore, the Supreme Court approves the decision
confirming that a re-computation is necessary. The labor arbiter re-computed
the award to include the separation pay and the back wages due up to the
finality of the decision that fully terminated the case on the merits.
3. Whether or not appropriate interests may be claimed by the
petitioner.
The Supreme Court ruled that the petitioner shall be entitled to interest. In
the case of Eastern Shipping Lines, Inc. v. Court of Appeals, among the
guidelines laid down by the Supreme Court regarding the manner of
computing legal interest is - when the judgment of the court awarding a sum
of money becomes final and executory, the rate of legal interest shall be
12% per annum from such finality until its satisfaction. In addition to this, the
Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No.
796 dated May 16, 2013 declared that 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. Consequently, the twelve percent
(12%) per annum legal interest shall apply until June 30, 2013. Afterwards,
the new rate of six percent (6%) per annum shall be the prevailing rate of
interest when applicable.
The respondent was ordered to pay interest of twelve percent (12%) per
annum of the total monetary awards, computed from May 27, 2002 to June
30, 2013 and six percent (6%) per annum from July 1, 2013 until their full
satisfaction.
CRED TRANS GB pg. 3
Hermojina Estores vs. Spouses Arturo and Laura Supangan
G.R. No. 175139 April 18, 2012
DEL CASTILLO, J.:
Facts:
1. In Oct. 1993, Hermojina Estores and Spouses Supangan entered into a
Conditional Deed of Sale where Estores offered to sell, and Spouses
offered to buy a parcel of land in Cavite for P4.7M.
2. After almost 7 years and despite the payment of P3.5M by the Spouses,
Estores still failed to comply with her obligation to handle the peaceful
transfer of ownership as stated in 5 provisions in the contract.
3. In a letter in 2000, Spouses demanded the return of the amount within
15 days from receipt
4. In reply, Estores promised to return the same within 120 days
5. Spouses agreed but imposed an interest of 12% annually
6. Estores still failed despite demands
7. Spouses filed a complaint with the RTC against Estores and Roberto
Arias (allegedly acted as Estores’ agent)
8. In Answer, Estores said they were willing to pay the principal amount
but without the interest as it was not agreed upon
a. That since the Conditional Deed of Sale provided only for the
return of the downpayment in case of breach, they cant be
liable for legal interest as well
9. RTC ruled saying that the Spouses are entitled to the interest but only at
6% per annum and also entitled to atty’s fees
10. On appeal, CA said that the issue to resolve is
a. 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
11. CA affirmed RTC
a. That interest should start on date of formal demand by
Spouses to return the money not when contract was executed
as stated by the RTC
b. That Arias not be solidarily liable as he acted as agent only and
did not expressly bind himself or exceeded his authority
12. Estores contends:
a. Not bound to pay interest because the deed only provided for
the return of the downpayment in case of failure to comply with
her obligations
b. That atty fees not proper because both RTC and CA sustained
her contention that 12% interest was uncalled for so it showed
that Spouses did not win
13. Spouses contend:
a. It is only fair that interest be imposed because Estores failed to
return the amount upon demand and used the money for her
benefit
b. Estores failed to relocate the house outside the perimeter of
the subject lot and complete the necessary documents
c. As to the fees, they claim that they were forced to litigate when
Estores unjustly held the amount
Issue:
Is the imposition of interest and attorney’s fees is proper? YES
Interest based on Art 2209 of CC (6%) or under Central Bank Circular 416
(12%)? 12%
Held:
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.”
• Estores failed on her obligations despite demand.
o She admitted that the conditions were not fulfilled and was
willing to return the full amount of P3.5M but hasn’t done so
o She is now in default
The interest at the rate of 12% is applicable in the instant case.
• Gen Rule: the applicable interest rate shall be computed in accordance
with the stipulation of the parties
• Exc: if no stipulation, applicable rate of interest shall be 12% per annum
o When obligation arises out of a loan or forbearance of money,
goods or credits
• In other cases, it shall be 6%
• In this case, no stipulation was made
• Contract involved in this case is not a loan but a Conditional Deed
of Sale.
o No question that the obligations were not met and the
return of money not made
• Even if transaction was a Conditional Deed of Sale, the stipulation
governing the return of the money can be considered as a
forbearance of money which requires 12% interest
• In Crismina Garments, Inc. v. Court of Appeals, Forbearance--
“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.”
o In such case, “forbearance of money, goods or credits” will
have no distinct definition from a loan.
o however, the phrase “forbearance of money, goods or credits”
is meant to have a separate meaning from a loan, otherwise
CRED TRANS GB pg. 4
 there would have been no need to add that phrase as a loan is
already sufficiently defined in the Civil Code
o 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.
• Estores’ unwarranted withholding of the money amounts to forbearance
of money which can be considered as an involuntary loan so rate is 12%
starting in Sept. 2000
The award of attorney’s fees is warranted.
• no doubt that the Spouses were forced to litigate to protect their
interest, i.e., to recover their money. The amount of P50,000.00 more
appropriate

CRED TRANS GB pg. 5

United Coconut Planters Bank v. Sps Beluso (2007)
Chico-Nazario, J.
Facts:
• Apr 16, 1996: UCPB granted the Sps Beluso a Promissory Notes Line
under a Credit Agreement whereby the Belusos could avail a credit up
to a max amt of P1.2 mil for a term ending on Apr 30, 1997. The
Belusos, in addition to the promissory notes, executed a real estate
mortgage over some land in Roxas as additional security.
o Later on, their Credit Agreement was amended to increase the
amount of the Promissory Notes Line to P2.3 mil. The term
was also amended: extended to Feb 23, 1998.
• The Belusos availed of 3 promissory notes amounting to P2mil, which
were renewed several times. Apr 30, 1997, the payment of the principal
+ interest of the last 2 notes was debited form their account with UCPB
(both added up to P1.3 mil). Later, a loan of P1.3mil was still released to
them under a promissory note whose due date was Feb 28, 1998.
(meaning their loan was still an even P2mil)
o To completely avail of the P2.35 mil credit line, they executed 2
more promissory notes amounting to P350k. However, they
allege that the notes were never released to them so they
claim that their debt is still only P2mil.
• (Anyway) UCPB applied interest rates on the promissory notes ranging
from 18% to 34%:
o From 1996 to Feb 1998, the Belusos paid P763k.
o From Feb 1998 to June 1998, UCPB charged them interests
and penalties. The Belusos failed to make any payment on
these.
o Sept 1998, UCPB demanded pay P2.93 mil PLUS 25% atty
fees. Belusos did not pay.
o Dec 1998, UCPB foreclosed on the Belusos’ mortgaged
properties. (by that time already ballonned to P3.7 mil)
• RTC: interest rate provided in the promissory notes are void. Imposed
fine of P26k for violating the Truth in Lending Act.
• CA: affirmed because the rates were determined solely by the UCPB.
Issues/Held:
Are the interest rates valid? NO
Is UCPB liable for violation of the Truth in Lending Act? YES
Ratio:
RE: Validity of the int rates
• Arguments UCPB:
o While the rate was not quantified in the face of the promissory
notes, it was fixed at the time of execution as: “at the rate
indicative of the DBP retail rate.” This must be read with
another stipulation in the promissory note that states: “the int
rate may be increased or decreased by the lender considering,
among others, the prevailing financial and monetary c
onditions, OR the rate and charges which other banks or
financial institutions offer to charge for similar conditions,
AND/OR the resulting profitability to the LENDER after due
consideration with the borrower.
o These are valid reference rates akin to a “prevailing rate” or
“prime rate” allowed in Polotan v. CA
o The imposition of the int rates did not infringe on the mutuality
of contracts bec the Belusos chose whether to renew their
credit. Assuming there was any defect, it was cured by the
subsequent act of availing of the credit line from Apr 1996-Feb
1998 without protest. Therefore, they are in estoppel.
• SC disagrees with the UCPB.
* (PNB v. CA: There must be mutuality.) The provision: “interest shall be at
the rate indicative of DBD retail rate OR as determined by the Branch Head”
means the int rates are solely on the will of UCPB. Under the provision,
UCPB has 2 choices:
1. Rate indicative of the DBD rate
2. Rate as determined by the branch head
Because UCPB has the choice, the rate should be determinable in
BOTH choices. If either gives UCPB to determine the rate at will, then
the bank can just do that, thus making the entire int rate provision
violative of the principle of mutuality.
• In this case, BOTH are dependent solely on the will of UCPB. In the
case of the “rate indicative of the DBD rate” it is not akin to a
“prevailing/prime rate” in Polotan. In Polotan, the interest rate was
CRED TRANS GB pg. 6
 “interest per annum at 3% interest plus the prime rate of Security Bank
and Trust Company”
o here, there is a fixed margin over the reference rate: 3%.
Parties can easily determine the rate by applying simple
arithmetic
o In UCPB’s provision, there is no specification of any margin
above or below the DBD retail rate. It can peg the interest at
any percentage above or below the DBD retail rate (giving it
unfettered didiscretion in determining the int rate
• Also, the stipulation that the interest rate is subjected to a review is
given to UCPB alone as the lender. (int rate MAY be increased or
decreased by the LENDER considering: prevailing financial and
monetary conditions, rate of other banks or financial instituti ons,
resulting profitability to the lender)
RE: Error in computation
• UCPB argues:
o While both RTC/CA voided the interest rates, they failed to
include in the computation the legal interest rate of 12% per
annum and that they are entitled to atty fees and penalties
o RTC/CA also erred in negating the Compounded interest
agreed upon by the parties unders Sec 2.02 of their Credit
Agreement,
• Belusos argue:
o The demand made by UCPB was considerably bigger and so
the demand should be considered void. No valid demand = no
default
o Since the foreclosure was improper = atty fees not warranted
• SC agrees with UCPB
o Default commences on demand. The excess amt in such
demand does not nullify the demand wrt the proper amt
o Belusos are considered in default wrt the proper amt, therefore
the interests and penalties bagen to run at that point
o As there was no valid stipulation to interest, legal interest shall
be charged (the Belusos even originally asked the RTC to
impose the legal interest rate. This shows that they
acknowledge their obligation to pay 12% legal interest) §
§ This is proper bec what was voided was the stipulated
interest and not the stipulation that the loan shall earn
interest o Also, uphold the compounding of interest
• Penalty = iniquitous (bec this 30-36% is already over and above the
compounded in rate
• Atty fees: both were forced to litigate so both parties are compensated.
Merely affirm deletion of atty fees.
RE: Liability for violating the Truth in Lending Act
• UCPB contests this:
o Barred by the 1 yr prescriptive period (latest of the promissory
notes was executed on Jan 2, 1998, but orig petition was filed
on Feb 9, 1999)
o The original complain did not explicitly allege a violation of the
Truth in Lending Act and no action to formally admit the
amended petition was made
o Being a criminal offense, it cannot be inferred nor implied from
the allegations
• CA says (and the SC agrees): there was no explicit allegation but the
infringement may be inferred from the allegations when the Belusos
executed the promissory notes, the interest charged were left blank.
Thus, UCPB failed to discharge its duty to disclose in full to th e Belusos
the charges applicable on their loans.
• SC says: the allegations in the complaint are controlling. SC adds some
other parts in the complaint from which some violations can also be
inferred: “unilaterally imposed an increased interest rate by relying on
the provision in the promissory note that granted it the power to
unilaterally fix the interest rate. Such interest rate was not determined in
the promissory note but was left solely to the will of the branch head.”
o this means the promisorry notes did not contain a clear
statement in writing of the finance charge expressed in terms
of pesos and centavos/the percentage that the finance charge
bears to the amount to be financed expressed as a simple
annual rate on t he outstanding unpaid balance of the
obligation
RE: Prescriptive period
• SC disagrees. The penalty for violation of the act is P100 or an amt
equal to twice the finance charge required by creditor in connection with
such transaction, whichever is greater (will not exceed P2k).
o not that the penalty depends on the finance charged to the
borrower. Hence, the borrowers cause of action would only
accrue when the finance charge is required.
o Here, the date of demand was Sept 2, 1998. Therefore, the
filing of the case on Feb 1999 was within the prescriptive
period.
RE: Cannot be implied nor inferred
CRED TRANS GB pg. 7
• Violation of the Act gives rise to both criminal and civil liabilities:
o Sec 6 (c) considers a criminal offense the wilful violation of the
Act. Penalty: Fine/imprisonment/both
o Sec 6 (a) provides for a civil cause of action for failure to
disclose any information of the required information to any
person in violation of the Act. Penalty: P100 or amt equal to
twice the finance charge required by the creditor in connection
with suc h transaction, whichever is greater, not exceeding P2k
• In this case, the civil action to recover under Sec 6 (a) was jointly
instituted with:
o The action to declare the interests void; and
o The action to declare the foreclosure void. Under the Rules of
Court, the Joinder is allowed.
RE: Due Process
disclosure statement must be made prior to the consummation of the
transaction
• Rationale: to protect users of credit from lack of awareness of the true
cost, proceeding from the experience that banks are able to conceal
such true cost by hidden charges, uncertainty of interest rates,
deduction of interests from the loaned amount
• The law seeks to protect debtors by permitting them to fully appreciate
the cost of their loan, to enable them to give full consent to the contract
and to properly evaluate their options in arriving at business decisions
• Upholding the claim of substantial compliance would defeat the
purposes of the Act
• Also, the promissory notes are not sufficient notification. The interest
rate provision does not sufficiently indicate with particularity the interest
rate to be applied

• UCPB argues: due process mandates that a defendant should be Dispositive: CA decision modified.
sufficiently apprised of the matters he/she would be defending himself • Belusos liable for:
against o P2.35 mil
• SC says: “any attempt of UCPB to feign ignorance as to prevent it from o Penalty 12% per annum from date of demand
putting up a defense is plainly hogwash! o Compounded legal interest rate 12% per annum from date of
o Actually, in the Pre Trial Brief, the claim for civil sanctions was demand
expressly alleged (that since from the start, the bank vilated the • Ffg amts to be deducted from Belusos liability:
Act in not informing them in writing before the execution of the o Payments made: P763k. (payments to be applied to the date of
promissory notes of the interest rates expressed as a actual payment of the ffg in order:
percentage of the total loan § Penalty charges
o Also, in that brief they raised the issue: does the expression § Interest
indicative rate of DBD comply with the Truth in Lending Act § Principal
provision to express the interest rate as a simple annual § Outstanding balance
percentage of the loan? o Penalty of P26k under the Act (amt deducted from liability of
• Opening a credit line did not create a creadit transaction (mutuum). Belusos on Feb 1999 in the ffg order:
Credit line = preparatory contract to the mutuum. § Penalty
• Credit transaction occurred not when the line was opened, but when it § Interest
was availed of § Principal
• Violation of the Act occurred not when they executed the Credit § Outstanding balance
Agreement (where no interest rate was mentioned) but when the parties • Foreclosure of mortgage valid
executed the promissory notes (where the offending interest rate was o Amts which the RTC/CA ordered the Belusos to pay is
stipulated) deducted from the proceeds of the foreclosure sale

RE: Substantial compliance

• UCPB argues: the Belusos were given copies of the promissory notes
after their execution. Then they were duly notified = substantial
compliance with the Act
• SC disagrees. Sec 4 of the Truth in Lending Act provides that the

CRED TRANS GB pg. 8

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
CRED TRANS GB pg. 9
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.

CRED TRANS GB pg. 10

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
CRED TRANS GB pg. 11
divisible contract, if the illegal terms can be separated from the legal ones, subjugated the mind of a contracting party as to destroy his free agency,
the latter may be enforced." making him express the will of another rather than his own.

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.
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.

(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

CRED TRANS GB pg. 12