Yong Chan Kim vs. People of the Philippines: Technicality should not sacrifice justice

G.R. No. 84719. January 25, 1991.
YONG CHAN KIM, petitioner, vs. PEOPLE OF THE PHILIPPINES, HON. EDGAR D. GUSTILO,
Presiding Judge, RTC, 6th Judicial Region, Branch 28 Iloilo City and Court of Appeals (13th
Division), respondents.
Courts; Due Process; Technicality, when it deserts its proper office, as an aid to justice and becomes its great
hindrance and chief enemy, deserves scant consideration from courts.—On 10 August 1990, we resolved to set
aside out resolution dismissing this case and gave due course to the petition. In the said resolution, we stated: “In
several cases decided by this Court, it had set aside technicalities in the Rules in order to give way to justice and
equity. In the present case, we note that the petitioner, in filing his Notice of Appeal the very next day after
receiving the decision of the court a quo, lost no time in showing his intention to appeal, although the procedure
taken was not correct. The Court can overlook the wrong pleading filed, if strict compliance with the rules would
mean sacrificing justice to technicality, The
_______________
* SECOND DIVISION.
345
VOL. 193, JANUARY 25, 34

1991 5
Yong Chan Kim vs. People
imminence of a person being deprived unjustly of his liberty due to procedural lapse of counsel is a strong
and compelling reason to warrant suspension of the Rules. Hence, we shall consider the petition for review filed
in the Court of Appeals as a Supplement to the Notice of Appeal. As the Court declared in a recent decision, ‘x x x
there is nothing sacred about the procedure of pleadings. This Court may go beyond the pleadings when the
interest of justice so warrants. It has the prerogative to suspend its rules for the same purpose. x x x Technicality,
when it deserts its proper office as an aid to justice and becomes its great hindrance and chief enemy, deserves
scant consideration from courts. [Alonzo v. Villamor, et al., 16 Phil. 315]’ Conscience cannot rest in allowing a
man to go straight to jail, closing the door to his every entreaty for a full opportunity to be heard, even as he has
made a prima facieshowing of a meritorious cause, simply because he had chosen an appeal route, to be sure,
recognized by law but made inapplicable to his case, under altered rules of procedure. While the Court of Appeals
can not be faulted and, in fact, it has to be lauded for correctly applying the rules of procedure in appeals to the
Court of Appeals from decisions of the RTC rendered in the exercise of its appellate jurisdiction, yet, this Court,
as the ultimate bulwark of human rights and individual liberty, will not allow substantial justice to be sacrified
at the altar of procedural rigor.”
Criminal Law; Estafa by Misappropriation or Conversion; Before a person can be convicted of estafa by
misappropriation or conversion, it must be proven that he had the obligation to deliver or return the same money,
goods or personal property that he had received.—In order that a person can be convicted under the abovequoted
provision, it must be proven that he had the obligation to deliver or return the same money, goods or personal
property that he had received. Was petitioner under obligation to return the same money (cash advance) which he
had received? We believe not. Executive Order No. 10, dated 12 February 1980 provides as follows: “B. Cash
Advance for Travel x x x x x x
x x x “4. All cash advances must be liquidated within 30 days after date of projected return of the person.
Otherwise, corresponding salary deduction shall be made immediately following the expiration day.” Liquidation
simply means the settling of an indebtedness. An employee, such as herein petitioner, who liquidates a cash
advance is in fact paying back his debt in the form of a loan of money advanced to him by his employer, as per
diems and allowances. Similarly, as stated in the assailed decision of the lower court, “if the amount of the cash
advance he received is less than the amount he spent for actual travel x x x he has the right to demand
reimbursement from his employer the
346
34 SUPREME COURT REPORTS

6 ANNOTATED
amount he spent coming from his personal funds.” In other words, the money advanced by either party is
actually a loan to the other. Hence, petitioner was under no legal obligation to return the same cash or money, i.e.,
the bills or coins, which he received from the private respondent.
Same; Same; Same; Fiduciary relationship between the complainant and the accused is an essential element
of estafa by misappropriation or conversion.—The ruling of the trial judge that ownership of the cash advanced to
the petitioner by private respondent was not transferred to the latter is erroneous. Ownership of the money was
transferred to the petitioner. x x x Since ownership of the money (cash advance) was transferred to petitioner, no
fiduciary relationship was created. Absent this fiduciary relationship between petitioner and private respondent,
which is an essential element of the crime of estafa by misappropriation or conversion, petitioner could not have
committed estafa.
PETITION for certiorari to review the decision of the Court of Appeals.
The facts are stated in the opinion of the Court.

Remedios C. Balbin and Manuel C. Cases, Jr. for petitioner.
Hector P. Teodosio for private respondent.
PADILLA, J.:
This petition seeks the review on certiorari of the following:

1. 1.The decision dated 3 September 1986 of the 15th Municipal Circuit Trial Court
(Guimbal-Igbaras-Tigbauan-Tubungan) in Guimbal, Iloilo, in Criminal Case No. 628, and 1
the affirming decision of the Regional Trial Court, Branch XXVIII, Iloilo City, in Criminal
Case No. 20958, promulgated on 30 July 1987; 2
2. 2.The decision of the Court of Appeals, dated 29 April 1988, dismissing petitioner’s
3
appeal/petition for review for having been filed out of time, and the resolution, dated 19
August 1988, denying petitioner’s motion for reconsideration. 4
_______________
1 Annex “A”, pp. 32-51, Rollo.
2 Annex “B”, pp. 52-55, id.
3 Annex “C”, pp. 56-62, id.
4 Annex “D”, pp. 63-64, id.
347

1991 7
The antecedent facts are as follows:
Petitioner Yong Chan Kim was employed as a Researcher at the Aquaculture Department of the
Southeast Asian Fisheries Development Center (SEAFDEC) with head station at Tigbauan,
Province of Iloilo. As Head of the Economics Unit of the Research Division, he conducted prawn
surveys which required him to travel to various selected provinces in the country where there are
potentials for prawn culture.
On 15 June 1982, petitioner was issued Travel Order No. 2222 which covered his travels to
different places in Luzon from 16 June to 21 July 1982, a period of thirty five (35) days. Under this
travel order, he received P6,438.00 as cash advance to defray his travel expenses.
Within the same period, petitioner was issued another travel order, T.O. 2268, requiring him to
travel from the Head Station at Tigbauan, Iloilo to Roxas City from 30 June to 4 July 1982, a period
of five (5) days. For this travel order, petitioner received a cash advance of P495.00.
On 14 January 1983, petitioner presented both travel orders for liquidation, submitting Travel
Expense Reports to the Accounting Section. When the Travel Expense Reports were audited, it was
discovered that there was an overlap of four (4) days (30 June to 3 July 1982) in the two (2) travel
orders for which petitioner collected per diems twice. In sum, the total amount in the form of per
diems and allowances charged and collected by petitioner under Travel Order No. 2222, when he did
not actually and physically travel as represented by his liquidation papers, was P1,230.00.
Petitioner was required to comment on the internal auditor’s report regarding the alleged
anomalous claim for per diems. In his reply, petitioner denied the alleged anomaly, claiming that he
made make-up trips to compensate for the trips he failed to undertake under T.O. 2222 because he
was recalled to the head office and given another assignment.
In September 1983, two (2) complaints for Estafa were filed against the petitioner before the
Municipal Circuit Trial Court at Guimbal, Iloilo, docketed as Criminal Case Nos. 628 and 631.
After trial in Criminal Case No. 628, the Municipal Circuit Trial Court rendered a decision, the
dispositive part of which reads as follows:
348
34 SUPREME COURT REPORTS ANNOTATED

8
“IN VIEW OF THE FOREGOING CONSIDERATIONS, the court finds the accused, Yong Chan Kim, guilty
beyond reasonable doubt for the crime of Estafa penalized under paragraph 1(b) of Article 315, Revised Penal
Code. Records disclose there is no aggravating circumstance proven by the prosecution. Neither there is any
mitigating circumstance proven by the accused. Considering the amount subject of the present complaint, the
imposable penalty should be in the medium period of arresto mayor in its maximum period to prision correccional
in its minimum period in accordance with Article 315, No. 3, Revised Penal Code. Consonantly, the Court hereby
sentences the accused to suffer an imprisonment ranging from four (4) months as the minimum to one (1) year
and six (6) months as the maximum in accordance with the Indeterminate Sentence Law and to reimburse the
amount of P1,230.00 to SEAFDEC.
“The surety bond of the accused shall remain valid until final judgment in accordance herewith.
“Costs against the accused.” 5
Criminal Case No. 631 was subsequently dismissed for failure to prosecute.
Petitioner appealed from the decision of the Municipal Circuit Trial Court in Criminal Case No.
628. On 30 July 1987, the Regional Trial Court in Iloilo City in Criminal Case No. 20958 affirmed in
toto the trial court’s decision. 6
The decision of the Regional Trial Court was received by petitioner on 10 August 1987. On 11
August 1987, petitioner, thru counsel, filed a notice of appeal with the Regional Trial Court which
ordered the elevation of the records of the case to the then Intermediate Appellate Court on the
following day, 12 August 1987. The records of the case were received by the Intermediate Appellate
Court on 8 October 1987, and the appeal was docketed as CA-G.R. No. 05035.
On 30 October 1987, petitioner filed with the appellate court a petition for review. As earlier
stated, on 29 April 1988, the Court of Appeals dismissed the petition for having been filed out of time.
Petitioner’s motion for reconsideration was denied for lack of merit.
Hence, the present recourse.
_______________
5 Rollo, pp. 50-51.
6 Id., p. 55.
349

1991 9
On 19 October 1988, the Court resolved to require the respondents to comment on the petition for
review. The Solicitor General filed his Comment on 20 January 1989, after several grants of
extensions of time to file the same.
In his Comment, the Solicitor General prayed for the dismissal of the instant petition on the
ground that, as provided for under Section 22, Batas Pambansa 129, Section 22 of the Interim Rules
and Guidelines, and Section 3, Rule 123 of the 1985 Rules of Criminal Procedure, the petitioner
should have filed a petition for review with the then Intermediate Appellate Court instead of a notice
of appeal with the Regional Trial Court, in perfecting his appeal from the RTC to the Intermediate
Appellate Court, since the RTC judge was rendered in the exercise of its appellate jurisdiction over
municipal trial courts. The failure of petitioner to file the proper petition rendered the decision of the
Regional Trial Court final and executory, according to the Solicitor General.
Petitioner’s counsel submitted a Reply (erroneously termed Comment) wherein she contended
7
that the peculiar circumstances of a case, such as this, should be considered in order that the
principle barring a petitioner’s right of review can be made flexible in the interest of justice and
equity.
In our Resolution of 29 May 1989, we resolved to deny the petition for failure of petitioner to
sufficiently show that the Court of Appeals had committed any reversible error in its questioned
judgment which had dismissed petitioner’s petition for review for having been filed out of time. 8
Petitioner filed a motion for reconsideration maintaining that his petition for review did not limit
itself to the issue upon which the appellate court’s decision of 29 April 1988 was based, but rather it
delved into the substance and merits of the case. 9
On 10 August 1990, we resolved to set aside our resolution dismissing this case and gave due
course to the petition. In the said resolution, we stated:
_______________
7 Id., p. 138.
8 Id., p. 142.
9 Id., p. 143.
350

0
“In several cases decided by this Court, it had set aside technicalities in the Rules in order to give way to justice
and equity. In the present case, we note that the petitioner, in filing his Notice of Appeal the very next day after
receiving the decision of the court a quo, lost no time in showing his intention to appeal, although the procedure
taken was not correct. The Court can overlook the wrong pleading filed, if strict compliance with the rules would
mean sacrificing justice to technicality. The imminence of a person being deprived unjustly of his liberty due to
procedural lapse of counsel is a strong and compelling reason to warrant suspension of the Rules. Hence, we shall
consider the petition for review filed in the Court of Appeals as a Supplement to the Notice of Appeal. As the
Court declared in a recent decision, ‘x x x there is nothing sacred about the procedure of pleadings. This Court
may go beyond the pleadings when the interest of justice so warrants. It has the prerogative to suspend its rules
for the same purpose. x x x Technicality, when it deserts its proper office as an aid to justice and becomes its great
hindrance and chief enemy, deserves scant consideration from courts. [Alonzo v. Villamor, et al., 16 Phil. 315]’
Conscience cannot rest in allowing a man to go straight to jail, closing the door to his every entreaty for a full
opportunity to be heard, even as he has made a prima facie showing of a meritorious cause, simply because he
had chosen an appeal route, to be sure, recognized by law but made inapplicable to his case, under altered rules of
procedure. While the Court of Appeals can not be faulted and, in fact, it has to be lauded for correctly applying the
rules of procedure in appeals to the Court of Appeals from decisions of the RTC rendered in the exercise of its
appellate jurisdiction, yet, this Court, as the ultimate bulwark of human rights and individual liberty, will not
allow substantial justice to be sacrified at the altar of procedural rigor.” 10
In the same resolution, the parties were required to file their respective memoranda, and in
compliance with said resolution, petitioner filed his memorandum on 25 October 1989, while private
respondent SEAFDEC filed its required memorandum on 10 April 1990. On the other hand, the
Solicitor General filed on 13 March 1990 a Recommendation for Acquittal in lieu of the required
memorandum.
Two (2) issues are raised by petitioner, to wit:
_______________
10 Id., pp. 181-182.
351

1991 1
1. I.WHETHER OR NOT THE DECISION (sic) OF THE MUNICIPAL CIRCUIT TRIAL
COURT (GUIMBAL, ILOILO) AND THE REGIONAL TRIAL COURT, BRANCH 28
(ILOILO CITY) ARE SUPPORTED BY THE FACTS AND EVIDENCE OR CONTRARY TO
LAW AND THAT THE TWO COURTS A QUO HAVE ACTED WITH GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OF JURISDICTION OR HAVE ACTED WITHOUT
OR IN EXCESS OF JURISDICTION.
2. II.WHETHER OR NOT THE DECISION OF THE HONORABLE COURT OF APPEALS

IS CONTRARY TO LAW, ESTABLISHED JURISPRUDENCE, EQUITY AND DUE
PROCESS.
The second issue has been resolved in our Resolution dated 10 August 1990, when we granted
petitioner’s second motion for reconsideration. We shall now proceed to the first issue.
We find merit in the petition.
It is undisputed that petitioner received a cash advance from private respondent SEAFDEC to
defray his travel expenses under T.O. 2222. It is likewise admitted that within the period covered by
T.O. 2222, petitioner was recalled to the head station in Iloilo and given another assignment which
was covered by T.O. 2268. The dispute arose when petitioner allegedly failed to return P1,230.00 out
of the cash advance which he received under T.O. 2222. For the alleged failure of petitioner to return
the amount of P1,230.00, he was charged with the crime of Estafa under Article 315, par. 1(b) of the
Revised Penal Code, which reads as follows:
“Art. 315. Swindling (Estafa). Any person who shall defraud another by any of the means mentioned herein
below shall be punished by:
xxx xxx xxx
“1. With unfaithfulness or abuse of confidence, namely:
(a) x x x xxx xxx
(b) By misappropriating or converting, to the prejudice of another, money, goods, or any other personal
property received by the offender in trust or on commission, or for administration, or under any other obligation
involving the duty to make delivery of; or to return, the same, even though such obligation be tatally or partially
guaranteed by a bond; or by denying having received such money, goods, or other property.”
352

2
In order that a person can be convicted under the abovequoted provision, it must be proven that he
had the obligation to deliver or return the same money, goods or personal property that he had
received. 11
Was petitioner under obligation to return the same money (cash advance) which he had received?
We belive not. Executive Order No. 10, dated 12 February 1980 provides as follows:
“B. Cash Advance for Travel
xxx xxx xxx
“4. All cash advances must be liquidated within 30 days after date of projected return of the person. Otherwise,
corresponding salary deduction shall be made immediately following the expiration day.”
Liquidation simply means the settling of an indebtedness. An employee, such as herein petitioner,
who liquidates a cash advance is in fact paying back his debt in the form of a loan of money advanced
to him by his employer, as per diems and allowances. Similarly, as stated in the assailed decision of
the lower court, “if the amount of the cash advance he received is less than the amount he spent for
actual travel x x x he has the right to demand reimbursement from his employer the amount he
spent coming from his personal funds.” In other words, the money advanced by either party is
12
actually a loan to the other. Hence, petitioner was under no legal obligation to return the same cash
or money, i.e., the bills or coins, which he received from the private respondent. 13
Article 1933 and Article 1953 of the Civil Code define the nature of a simple loan.
“Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that
the latter may use the same for a certain time and return it, in which case the contract is called a commodatum;
or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall
be
_______________
11 Yam vs. Malic, 94 SCRA 30.
12 Rollo, p. 39.
13 Yam vs. Malic, supra.
353

1991 3
paid, in which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes
to the borrower.”
“Art. 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.”
The ruling of the trial judge that ownership of the cash advanced to the petitioner by private
respondent was not transferred to the latter is erroneous. Ownership of the money was transferred
to the petitioner. Even the prosecution witness, Virgilio Hierro, testified thus:
“Q When you gave cash advance to the accused in this
Travel Order No. 2222 subject to liquidation, who owns
the funds, accused or SEAFDEC? How do you consider
the funds in the possession of the accused at the time
when there is an actual transfer of cash? x x x
A The one drawing cash advance already owns the
moneybut subject to liquidation. If he will not liquidate,
he is obliged to return the amount.
Q xxx xxx x x x.
So why do you treat the itinerary of travel temporary
when in fact as of that time the accused owned already
the cash advance. You said the cash advance given to the
accused is his own money. In other words, at the time
you departed with the money it belongs already to the
accused?
A Yes, but subject for liquidation. He will be only entitled
for that credence if he liquidates.
Q If other words, it is a transfer of ownership subject to a
suspensive condition that he liquidates the amount of
cash advance upon return to station and completion of
the travel?
A Yes, sir.
(pp. 26-28, tsn, May 8, 1985).” 14
Since ownership of the money (cash advance) was transferred

_______________
14 Recommendation for Acquittal, pp. 10-11; Rollo, pp. 257-258.
354

4
to petitioner, no fiduciary relationship was created. Absent this fiduciary relationship between
petitioner and private respondent, which is an essential element of the crime of estafa by
misappropriation or conversion, petitioner could not have committed estafa. 15
Additionally, it has been the policy of private respondent that all cash advances not liquidated are
to be deducted correspondingly from the salary of the employee concerned. The evidence shows that
the corresponding salary deduction was made in the case of petitioner vis-a-vis the cash advance in
question.
WHEREFORE, the decision dated 3 September 1986 of the 15th Municipal Circuit Trial Court in
Guimbal, Iloilo in Criminal Case No. 628, finding petitioner guilty of estafa under Article 315, par. 1
(b) of the Revised Penal Code and the affirming decision of the Regional Trial Court, Branch XXVIII,
Iloilo City, in Criminal Case No. 20958, promulgated on 30 July 1987 are both hereby SET ASIDE.
Petitioner is ACQUITTED of the criminal charges filed against him.
SO ORDERED.
Melencio-Herrera (Chairman), Paras, Sarmientoand Regalado, JJ., concur.
Decision set aside.

Note.—Fraudulent intent is not an element of estafa committed by way of misappropriation of
funds held in trust. (Hayco vs. Court of Appeals, 138 SCRA 227.)
——o0o——
VOL. 377, FEBRUARY 15, 117

2002
BPI Investment Corporation vs. Court
of Appeals
G.R. No. 133632. February 15, 2002.
*
BPI INVESTMENT CORPORATION, petitioner, vs. HON. COURT OF APPEALS and ALS
MANAGEMENT & DEVELOPMENT CORPORATION, respondents.
Obligations and Contracts; Loans; A loan contract is not a consensual contract but a real contract, perfected
only upon the delivery of the object of the contract.—We agree with private respondents. A loan contract is not a
consensual contract but a real contract. It is perfected only upon the delivery of the object of the contract.
Petitioner misapplied Bonnevie. The contract in Bonnevie declared by this Court as a perfected consensual
contract falls under the first clause of Article 1934, Civil Code. It is an accepted promise to deliver something by
way of simple loan.
Same; Same; While a perfected loan contract can give rise to an action for damages, said contract does not
constitute the real contract of loan which requires the delivery of the object of the contract for its perfection and
which gives rise to obligations only on the part of the borrower.—In Saura Import and Export Co. Inc. vs.
Development Bank of the Philippines, 44 SCRA 445, petitioner applied for a loan of P500,000 with respondent
bank. The latter approved the application through a board resolution. Thereafter, the corresponding mortgage
was executed and registered. However, because of acts attributable to petitioner, the loan was not released. Later,
petitioner instituted an action for damages. We recognized in this case, a perfected consensual contract which
under normal circumstances could have made the bank liable for not releasing the loan. However, since the fault
was attributable to petitioner therein, the court did not award it damages. A perfected consensual contract, as
shown above, can give rise to an action for damages. However, said contract does not constitute the real contract
of loan which requires the delivery of the object of the contract for its perfection and which gives rise to
obligations only on the part of the borrower.
Same; Same; A contract of loan involves a reciprocal obligation, wherein the obligation or promise of each
party is the consideration for that of the other; It is a basic principle in reciprocal obligations that neither party
incurs in delay, if the other does not comply or is not ready to comply in a proper manner with what is incumbent
upon him.—We also agree with private respondents that a contract of loan involves a reciprocal
______________
* SECOND DIVISION.
118

8 ANNOTATED
BPI Investment Corporation vs. Court of Appeals
obligation, wherein the obligation or promise of each party is the consideration for that of the other. As
averred by private respondents, the promise of BPIIC to extend and deliver the loan is upon the consideration
that ALS and Litonjua shall pay the monthly amortization commencing on May 1, 1981, one month after the
supposed release of the loan. It is a basic principle in reciprocal obligations that neither party incurs in delay, if
the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. Only
when a party has performed his part of the contract can he demand that the other party also fulfills his own
obligation and if the latter fails, default sets in. Consequently, petitioner could only demand for the payment of
the monthly amortization after September 13, 1982 for it was only then when it complied with its obligation
under the loan contract. Therefore, in computing the amount due as of the date when BPIIC extrajudicially
caused the foreclosure of the mortgage, the starting date is October 13, 1982 and not May 1, 1981.
Same; Same; Foreclosure of Mortgage; Damages; Where the borrower was irregular in the payment of its
monthly amortization, it may not claim moral and exemplary damages due to the erroneous foreclosure
proceedings initiated by the creditor-mortgagor.—Private respondents counter that BPIIC was guilty of bad faith
and should be liable for said damages because it insisted on the payment of amortization on the loan even before
it was released. Further, it did not make the corresponding deduction in the monthly amortization to conform to
the actual amount of loan released, and it immediately initiated foreclosure proceedings when private
respondents failed to make timely payment. But as admitted by private respondents themselves, they were
irregular in their payment of monthly amortization. Conformably with our ruling in SSS, we can not properly
declare BPIIC in bad faith. Consequently, we should rule out the award of moral and exemplary damages.
Same; Same; Same; Same; The negligence of the creditor-mortgagor in relying merely on the entries found in
the deed of mortgage, without checking and correspondingly adjusting its records on the amount actually released
to the borrower and the date when it was released, which negligence resulted in damages to the latter, entitles the
borrower to an award of nominal damages in recognition of its rights which were violated.—In our view, BPIIC
was negligent in relying merely on the entries found in the deed of mortgage, without checking and
correspondingly adjusting its records on the amount actually released to private respondents and the date when
it was released. Such negligence resulted in damage to private respondents, for which an award of nominal
damages should be given in
119

2002
BPI Investment Corporation vs. Court of
Appeals
recognition of their rights which were violated by BPIIC. For this purpose, the amount of P25,000 is
sufficient.
Same; Same; Same; Same; Attorney’s Fees; An award of attorney’s fees is warranted where a party was
compelled to litigate.—As in SSS where we awarded attorney’s fees because private respondents were compelled
to litigate, we sustain the award of P50,000 in favor of private respondents as attorney’s fees.
PETITION for review on certiorari of a decision and resolution of the Court of Appeals.

Benedicto, Tale, Versoza & Associates for petitioner.
Vicente B. Chuidian for private respondent.
QUISUMBING, J.:
This petition for certiorari assails the decision dated February 28, 1997, of the Court of Appeals and
its resolution dated April 21, 1998, in CA-G.R. CV No. 38887. The appellate court affirmed the
judgment of the Regional Trial Court of Pasig City, Branch 151, in (a) Civil Case No. 11831, for
foreclosure of mortgage by petitioner BPI Investment Corporation (BPIIC for brevity) against
private respondents ALS Management and Development Corporation and Antonio K.
Litonjua, consolidated with (b) Civil Case No. 52093, for damages with prayer for the issuance of a
1
writ of preliminary injunction by the private respondents against said petitioner.

The trial court had held that private respondents were not in default in the payment of their
monthly amortization, hence, the extrajudicial foreclosure conducted by BPIIC was premature and
______________
1 While Antonio K. Litonjua was not included in the caption of the petition before this court, apparently, the intention of petitioner was
to include Litonjua as private respondent for he was a party in all stages of the case both before the Regional Trial Court and the Court of
Appeals and it was clearly indicated in the petition that “ALS” collectively referred to as ALS Management and Development Corporation
and Antonio K. Litonjua.
120

0
made in bad faith. It awarded private respondents the amount of P300,000 for moral damages,
P50,000 for exemplary damages, and P50,000 for attorney’s fees and expenses for litigation. It
likewise dismissed the foreclosure suit for being premature.
The facts are as follows:
Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala Investment and
Development Corporation (AIDC), the predecessor of petitioner BPIIC, for the construction of a
house on his lot in New Alabang Village, Muntinlupa. Said house and lot were mortgaged to AIDC to
secure the loan. Sometime in 1980, Roa sold the house and lot to private respondents ALS and
Antonio Litonjua for P850,000. They paid P350,000 in cash and assumed the P500,000 balance of
Roa’s indebtedness with AIDC. The latter, however, was not willing to extend the old interest rate to
private respondents and proposed to grant them a new loan of P500,000 to be applied to Roa’s debt
and secured by the same property, at an interest rate of 20% per annum and service fee of 1% per
annum on the outstanding principal balance payable within ten years in equal monthly amortization
of P9,996.58 and penalty interest at the rate of 21% per annum per day from the date the
amortization became due and payable.
Consequently, in March 1981, private respondents executed a mortgage deed containing the
above stipulations with the provision that payment of the monthly amortization shall commence on
May 1, 1981.
On August 13, 1982, ALS and Litonjua updated Roa’s arrearages by paying BPIIC the sum of
P190,601.35. This reduced Roa’s principal balance to P457,204.90 which, in turn, was liquidated
when BPIIC applied thereto the proceeds of private respondents’ loan of P500,000.
On September 13, 1982, BPIIC released to private respondents P7,146.87, purporting to be what
was left of their loan after full payment of Roa’s loan.
In June 1984, BPIIC instituted foreclosure proceedings against private respondents on the ground
that they failed to pay the mortgage indebtedness which from May 1, 1981 to June 30, 1984,
amounted to Four Hundred Seventy Five Thousand Five Hundred
121

2002
of Appeals
Eighty Five and 31/100 Pesos (P475,585.31). A notice of sheriff ’s sale was published on August 13,
1984.
On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093 against BPIIC. They alleged,
among others, that they were not in arrears in their payment, but in fact made an overpayment as of
June 30, 1984. They maintained that they should not be made to pay amortization before the actual
release of the P500,000 loan in August and September 1982. Further, out of the P500,000 loan, only
the total amount of P464,351.77 was released to private respondents. Hence, applying the effects of
legal compensation, the balance of P35,648.23 should be applied to the initial monthly amortization
for the loan.
On August 31, 1988, the trial court rendered its judgment in Civil Case Nos. 11831 and 52093,
thus:
WHEREFORE, judgment is hereby rendered in favor of ALS Management and Development Corporation and
Antonio K. Litonjua and against BPI Investment Corporation, holding that the amount of loan granted by BPI to
ALS and Litonjua was only in the principal sum of P464,351.77, with interest at 20% plus service charge of 1%
per annum, payable on equal monthly and successive amortizations at P9,283.83 for ten (10) years or one
hundred twenty (120) months. The amortization schedule attached as Annex “A” to the “Deed of Mortgage” is
correspondingly reformed as aforestated.
The Court further finds that ALS and Litonjua suffered compensable damages when BPI caused their
publication in a newspaper of general circulation as defaulting debtors, and therefore orders BPI to pay ALS and
Litonjua the following sums:
1. a)P300,000.00 for and as moral damages;
2. b)P50,000.00 as and for exemplary damages;
3. c)P50,000.00 as and for attorney’s fees and expenses of litigation.
The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED for being premature.
Costs against BPI.
SO ORDERED. 2
______________
2 RTC Records, p. 278.
122

2
Both parties appealed to the Court of Appeals. However, private respondents’ appeal was dismissed
for non-payment of docket fees.
On February 28, 1997, the Court of Appeals promulgated its decision, the dispositive portion
reads:
WHEREFORE, finding no error in the appealed decision the same is hereby AFFIRMED in toto.
SO ORDERED. 3
In its decision, the Court of Appeals reasoned that a simple loan is perfected only upon the delivery of
the object of the contract. The contract of loan between BPIIC and ALS & Litonjua was perfected
only on September 13, 1982, the date when BPIIC released the purported balance of the P500,000
loan after deducting therefrom the value of Roa’s indebtedness. Thus, payment of the monthly
amortization should commence only a month after the said date, as can be inferred from the
stipulations in the contract. This, despite the express agreement of the parties that payment shall
commence on May 1, 1981. From October 1982 to June 1984, the total amortization due was only
P194,960.43. Evidence showed that private respondents had an overpayment, because as of June
1984, they already paid a total amount of P201,791.96. Therefore, there was no basis for BPIIC to
extrajudicially foreclose the mortgage and cause the publication in newspapers concerning private
respondents’ delinquency in the payment of their loan. This fact constituted sufficient ground for
moral damages in favor of private respondents.
The motion for reconsideration filed by petitioner BPIIC was likewise denied, hence this petition,
where BPIIC submits for resolution the following issues:
1. I.WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL CONTRACT IN
THE LIGHT OF THE RULE LAID DOWN IN BONNEVIE VS. COURT OF APPEALS, 125
SCRA 122.
2. II.WHETHER OR NOT BPI SHOULD BE HELD LIABLE FOR MORAL AND

EXEMPLARY DAMAGES AND ATTORNEY’S FEES IN
______________
3 Rollo, p. 32.
123

2002
of Appeals
1. THE FACE OF IRREGULAR PAYMENTS MADE BY ALS AND OPPOSED TO THE
RULE LAID DOWN IN SOCIAL SECURITY SYSTEM VS. COURT OF APPEALS, 120
SCRA 707.
On the first issue, petitioner contends that the Court of Appeals erred in ruling that because a simple
loan is perfected upon the delivery of the object of the contract, the loan contract in this case was
perfected only on September 13, 1982. Petitioner claims that a contract of loan is a consensual
contract, and a loan contract is perfected at the time the contract of mortgage is executed
con-formably with our ruling in Bonnevie v. Court of Appeals, 125 SCRA 122. In the present case, the
loan contract was perfected on March 31, 1981, the date when the mortgage deed was executed,
hence, the amortization and interests on the loan should be computed from said date.
Petitioner also argues that while the documents showed that the loan was released only on
August 1982, the loan was actually released on March 31, 1981, when BPIIC issued a cancellation of
mortgage of Frank Roa’s loan. This finds support in the registration on March 31, 1981 of the Deed of
Absolute Sale executed by Roa in favor of ALS, transferring the title of the property to ALS, and ALS
executing the Mortgage Deed in favor of BPIIC. Moreover, petitioner claims, the delay in the release
of the loan should be attributed to private respondents. As BPIIC only agreed to extend a P500,000
loan, private respondents were required to reduce Frank Roa’s loan below said amount. According to
petitioner, private respondents were only able to do so in August 1982.
In their comment, private respondents assert that based on Article 1934 of the Civil Code, a 4
simple loan is perfected upon the delivery of the object of the contract, hence a real contract. In this
case, even though the loan contract was signed on March 31, 1981, it was perfected only on
September 13, 1982, when the full loan was released to private respondents. They submit that
petitioner
______________
4 Art. 1934. An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but the
commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract.
124

4
misread Bonnevie. To give meaning to Article 1934, according to private respondents, Bonnevie must
be construed to mean that the contract to extend the loan was perfected on March 31, 1981 but the
contract of loan itself was only perfected upon the delivery of the full loan to private respondents on
September 13, 1982.
Private respondents further maintain that even granting, arguendo, that the loan contract was
perfected on March 31, 1981, and their payment did not start a month thereafter, still no default took
place. According to private respondents, a perfected loan agreement imposes reciprocal obligations,
where the obligation or promise of each party is the consideration of the other party. In this case, the
consideration for BPIIC in entering into the loan contract is the promise of private respondents to
pay the monthly amortization. For the latter, it is the promise of BPIIC to deliver the money. In
reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to
comply in a proper manner with what is incumbent upon him. Therefore, private respondents
conclude, they did not incur in delay when they did not commence paying the monthly amortization
on May 1, 1981, as it was only on September 13, 1982 when petitioner fully complied with its
obligation under the loan contract.
We agree with private respondents. A loan contract is not a consensual contract but a real
contract. It is perfected only upon the delivery of the object of the contract. Petitioner 5
misapplied Bonnevie. The contract in Bonneviedeclared by this Court as a perfected consensual

contract falls under the first clause of Article 1934, Civil Code. It is an accepted promise to deliver
something by way of simple loan.
In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44 SCRA 445,
petitioner applied for a loan of P500,000 with respondent bank. The latter approved the application
through a board resolution. Thereafter, the corresponding mortgage was executed and registered.
However, because of acts
______________
5 Art. 1934, Civil Code of the Philippines; Monte de Piedad vs. Javier, et al., 36 OG 2176; A. Padilla, Civil Code of the Philippines
Annotated, Vol. VI, pp. 474-475 (1987); E. Paras, Civil Code of the Philippines Annotated, Vol. V, p. 885 (1995).
125

2002
of Appeals
attributable to petitioner, the loan was not released. Later, petitioner instituted an action for
damages. We recognized in this case, a perfected consensual contract which under normal
circumstances could have made the bank liable for not releasing the loan. However, since the fault
was attributable to petitioner therein, the court did not award it damages.
A perfected consensual contract, as shown above, can give rise to an action for damages. However,
said contract does not constitute the real contract of loan which requires the delivery of the object of
the contract for its perfection and which gives rise to obligations only on the part of the borrower. 6
In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on the
other, was perfected only on September 13, 1982, the date of the second release of the loan. Following
the intentions of the parties on the commencement of the monthly amortization, as found by the
Court of Appeals, private respondents’ obligation to pay commenced only on October 13, 1982, a
month after the perfection of the contract. 7
We also agree with private respondents that a contract of loan involves a reciprocal obligation,
wherein the obligation or promise of each party is the consideration for that of the other. As averred 8
by private respondents, the promise of BPIIC to extend and deliver the loan is upon the
consideration that ALS and Litonjua shall pay the monthly amortization commencing on May 1,
1981, one month after the supposed release of the loan. It is a basic principle in reciprocal obligations
that neither party incurs in delay, if the other does not comply or is not ready to comply in a proper
manner with what is incumbent upon him. Only when a party has per- 9
______________
6 A. Tolentino, Civil Code of the Philippines, V. 5, p. 443 (1992).
7 Supra, note 3 at 30.
8 Rose Packing Co. Inc. vs. Court of Appeals, No. L-33084, 167 SCRA 309, 318-319 (1988).
9 Art. 1169, Civil Code:
xxx
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with
what is
126

6
formed his part of the contract can he demand that the other party also fulfills his own obligation and
if the latter fails, default sets in. Consequently, petitioner could only demand for the payment of the
monthly amortization after September 13, 1982 for it was only then when it complied with its
obligation under the loan contract. Therefore, in computing the amount due as of the date when
BPIIC extrajudicially caused the foreclosure of the mortgage, the starting date is October 13, 1982
and not May 1, 1981.
Other points raised by petitioner in connection with the first issue, such as the date of actual
release of the loan and whether private respondents were the cause of the delay in the release of the
loan, are factual. Since petitioner has not shown that the instant case is one of the exceptions to the
basic rule that only questions of law can be raised in a petition for review under Rule 45 of the Rules
of Court, factual matters need not tarry us now. On these points we are bound by the findings of the
10
appellate and trial courts.

On the second issue, petitioner claims that it should not be held liable for moral and exemplary
damages for it did not act maliciously when it initiated the foreclosure proceedings. It merely
exercised its right under the mortgage contract because private respondents were irregular in their
monthly amortization. It invoked our ruling in Social Security System vs. Court of Appeals, 120
SCRA 707, where we said:
Nor can the SSS be held liable for moral and temperate damages. As concluded by the Court of Appeals “the
negligence of the appellant is not so gross as to warrant moral and temperate damages,” except that, said Court
reduced those damages by only P5,000.00 instead of eliminating them. Neither can we agree with the findings of
both the Trial Court and respondent Court that the SSS had acted maliciously or in bad faith. The SSS was of the
belief that it was acting in the legitimate exercise of its right under the mortgage contract in the face of irregular
payments made by private respondents and placed reliance on the automatic acceleration
______________
incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins.
10 American President Lines, Ltd. vs. Court of Appeals, G.R. No. 110853, 336 SCRA 582, 586 (2000).
127

2002
of Appeals
clause in the contract. The filing alone of the foreclosure application should not be a ground for an award of moral
damages in the same way that a clearly unfounded civil action is not among the grounds for moral damages.
Private respondents counter that BPIIC was guilty of bad faith and should be liable for said damages
because it insisted on the payment of amortization on the loan even before it was released. Further,
it did not make the corresponding deduction in the monthly amortization to conform to the actual
amount of loan released, and it immediately initiated foreclosure proceedings when private
respondents failed to make timely payment.
But as admitted by private respondents themselves, they were irregular in their payment of
monthly amortization. Conformably with our ruling in SSS, we can not properly declare BPIIC in
bad faith. Consequently, we should rule out the award of moral and exemplary damages. 11
However, in our view, BPIIC was negligent in relying merely on the entries found in the deed of
mortgage, without checking and correspondingly adjusting its records on the amount actually
released to private respondents and the date when it was released. Such negligence resulted in
damage to private respondents, for which an award of nominal damages should be given in
recognition of their rights which were violated by BPIIC. For this purpose, the amount of P25,000 is
12
sufficient.
______________
11 “Art. 2234, Civil Code: While the amount of the exemplary damages need not be proved, the plaintiff must show that he is entitled to
moral, temperate or compensatory damages before the court may consider the question of whether or not exemplary damages should be
awarded. In case liquidated damages have been agreed upon, although no proof of loss is necessary in order that such liquidated damages
may be recovered, nevertheless, before the court may consider the question of granting exemplary in addition to the liquidated damages,
the plaintiff must show that he would be entitled to moral, temperate or compensatory damages were it not for the stipulation for liquidated
damages.
12 Art. 2221, Civil Code: Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the
defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him.
128

8
Lastly, as in SSS where we awarded attorney’s fees because private respondents were compelled to
litigate, we sustain the award of P50,000 in favor of private respondents as attorney’s fees.
WHEREFORE, the decision dated February 28, 1997, of the Court of Appeals and its resolution
dated April 21, 1998, are AFFIRMED WITH MODIFICATION as to the award of damages. The
award of moral and exemplary damages in favor of private respondents is DELETED, but the award
to them of attorney’s fees in the amount of P50,000 is UPHELD. Additionally, petitioner is
ORDERED to pay private respondents P25,000 as nominal damages. Costs against petitioner.
SO ORDERED.
Bellosillo (Chairman), Mendoza, Buena and De Leon, Jr., concur.
Judgment affirmed with modification.

Notes.—Creditors do not have material interest to sue for rescission of a contract of sale—theirs
is only a personal right to receive payment for the loan, not a real right over the property subject of
the deed of sale. (Adorable vs. Court of Appeals, 319 SCRA 200 [1999])
The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and
place them under the threats of criminal prosecution should they be unable to pay it may be unjust
and inequitable, if not reprehensible. (Colinares vs. Court of Appeals, 339 SCRA 609 [2000])
An extension granted to the debtor by the creditor without the consent of the guarantor
extinguishes the guaranty. (Security Bank and Trust Company, Inc. vs. Cuenca, 341 SCRA
781 [2000])
——o0o——
G.R. No. 97412. July 12, 1994. *
EASTERN SHIPPING LINES, INC., petitioner, vs. HON. COURT OF APPEALS AND
MERCANTILE INSURANCE COMPANY, INC., respondents.
Common Carriers; Obligations; Presumption of Fault; When the goods shipped either are lost or arrive in
damaged condition, a presumption arises against the carrier of its failure to observe that requisite diligence, and
there need not be an express finding of negligence to hold it liable.—The common carrier’s duty to observe the
requisite diligence in the shipment of goods lasts from the time the articles are surrendered to or unconditionally
placed in the possession of, and received by, the carrier for transportation until delivered to, or until the lapse of a
reasonable time for their acceptance by, the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon
vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods shipped
either are lost or arrive in damaged condition, a presumption arises against the carrier of its failure to observe
that diligence, and there need not be an express finding of negligence to hold it liable (Art. 1735, Civil Code;
Philippine National Railways vs. Court
______________
*EN BANC.
79
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1994
Eastern Shipping Lines, Inc. vs.
Court of Appeals
of Appeals, 139 SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA 365). There are, of course,
exceptional cases when such presumption of fault is not observed but these cases, enumerated in Article 1734 of
the Civil Code, are exclusive, not one of which can be applied to this case.
Same; Same; Arrastre Operator; Carrier and arrastre operator liable in solidum for the proper delivery of the
goods to the consignee.—The question of charging both the carrier and the arrastre operator with the obligation of
properly delivering the goods to the consignee has, too, been passed upon by the Court. In Fireman’s Fund
Insurance Co. vs. Metro Port Service, Inc. (182 SCRA 455), we have explained, in holding the carrier and the
arrastre operator liable in solidum, thus: “The legal relationship between the consignee and the arrastre operator
is akin to that of a depositor and warehouseman (Lua Kian v. Manila Railroad Co., et al., 19 SCRA 5 [1967]. The
relationship between the consignee and the common carrier is similar to that of the consignee and the arrastre
operator (Northern Motors, Inc. v. Prince Line, et al., 107 Phil. 253 [1960]). Since it is the duty of the ARRASTRE
to take good care of the goods that are in its custody and to deliver them in good condition to the consignee, such
responsibility also devolves upon the CARRIER. Both the ARRASTRE and the CARRIER are therefore charged
with the obligation to deliver the goods in good condition to the consignee.”
Same; Same; Same; The Supreme Court is not implying, however, that the arrastre operator and the customs
broker are themselves always and necessarily liable solidarily with the carrier, or vice-versa, nor that attendant
facts in a given case may not vary the rule.—We do not, of course, imply by the above pronouncement that the
arrastre operator and the customs broker are themselves always and necessarily liable solidarily with the carrier,
or vice-versa, nor that attendant facts in a given case may not vary the rule. The instant petition has been
brought solely by Eastern Shipping Lines which, being the carrier and not having been able to rebut the
presumption of fault, is, in any event, to be held liable in this particular case. A factual finding of both the court a
quo and the appellate court, we take note, is that “there is sufficient evidence that the shipment sustained
damage while in the successive possession of appellants” (the herein petitioner among them). 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.
Damages; Interest Rates; Rules of thumb for future guidance in the award of damages and interest
rates.—The ostensible discord is not difficult to explain. The factual circumstances may have called for
80

0 ANNOTATED
Eastern Shipping Lines, Inc. vs. Court of Appeals
different applications, guided by the rule that the courts are vested with discretion, depending on the
equities of each case, on the award of interest. Nonetheless, it may not be unwise, by way of clarification and
reconciliation, to suggest the following rules of thumb for future guidance.
Same; Same; Same; When an obligation is breached, the contravenor can be held liable for damages.—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.
Same; Same; Same; Interests in the Concept of Actual and Compensatory Damages; In a loan or forbearance
of money, the interest due should be that stipulated in writing, and in the absence thereof, the rate shall be 12% per
annum.—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.
Same; Same; Same; Same; In case of other obligations, the interest on the amount of damages may be
imposed at the discretion of the court at the rate of 6% per annum.—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.
81
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1994
Eastern Shipping Lines, Inc. vs.
Court of Appeals
Same; Same; Same; Same; 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, this interim
period being deemed to be by then an equivalent to a forbearance of credit.—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.
PETITION for review of a decision of the Court of Appeals.

Alojado & Garcia and Jimenea, Dala & Zaragoza for petitioner.
Zapa Law Office for private respondent.
VITUG,J.:
The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a
shipment of goods can be a solidary, or joint and several, liability of the common carrier, the arrastre
operator and the customs broker; (b) whether the payment of legal interest on an award for loss or
damage is to be computed from the time the complaint is filed or from the date the decision appealed
from is rendered; and (c) whether the applicable rate of interest, referred to above, is twelve percent
(12%) or six percent (6%).
The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and
undisputed facts that have led to the controversy are hereunder reproduced:
“This is an action against defendants shipping company, arrastre operator and broker-forwarder for damages
sustained by a shipment while in defendants’ custody, filed by the insurer-subrogee who paid the consignee the
value of such losses/damages.
“On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for delivery vessel
‘SS EASTERN COMET’ owned by defendant Eastern Shipping Lines, Inc. under Bill of Lading No. YMA-8 (Exh.
B). The shipment was insured under plaintiff’s Marine Insurance Policy No. 81/01177 for P36,382,466.38.
82

2
“Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the custody of
defendant Metro Port Service, Inc. The latter excepted to one drum, said to be in bad order, which damage was
unknown to plaintiff.
“On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from defendant Metro
Port Service, Inc., one drum opened and without seal (per ‘Request for Bad Order Survey.’ (Exh. D).
“On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of the shipment to the
consignee’s warehouse. The latter excepted to one drum which contained spillages, while the rest of the contents
was adulterated/fake (per ‘Bad Order Waybill’ No. 10649, Exh. E).
“Plaintiff contended that due to the losses/damage sustained by said drum, the consignee suffered losses
totaling P19,032.95, due to the fault and negligence of defendants. Claims were presented against defendants
who failed and refused to pay the same (Exhs. H, I, J, K, L).
“As a consequence of the losses sustained, plaintiff was compelled to pay the consignee P19,032.95 under the
aforestated marine insurance policy, so that it became subrogated to all the rights of action of said consignee
against defendants (per ‘Form of Subrogation,’ ‘Release’ and Philbanking check, Exhs. M, N, and O).” (pp. 85-86,
Rollo.)
There were, to be sure, other factual issues that confronted both courts. Here, the appellate court
said:
“Defendants filed their respective answers, traversing the material allegations of the complaint contending that:
As for defendant Eastern Shipping it alleged that the shipment was discharged in good order from the vessel unto
the custody of Metro Port Service so that any damage/losses incurred after the shipment was incurred after the
shipment was turned over to the latter, is no longer its liability (p. 17, Record); Metroport averred that although
subject shipment was discharged unto its custody, portion of the same was already in bad order (p. 11, Record);
Allied Brokerage alleged that plaintiff has no cause of action against it, not having negligent or at fault for the
shipment was already in damage and bad order condition when received by it, but nonetheless, it still exercised
extra ordinary care and diligence in the handling/delivery of the cargo to consignee in the same condition
shipment was received by it.
“From the evidence the court found the following:
1. “‘The issues are:
2. ‘1.Whether or not the shipment sustained losses/damages;
3. ‘2.Whether or not these losses/damages were sustained
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1994
Eastern Shipping Lines, Inc.
vs. Court of Appeals
1. while in the custody of defendants (in whose respective custody, if determinable);
2. ‘3.Whether or not defendant(s) should be held liable for the losses/damages (see plaintiff’s pre-Trial
Brief, Records, p. 34; Allied’s pre-Trial Brief, adopting plaintiff’s Records, p. 38).’
‘As to the first issue, there can be no doubt that the shipment sustained losses/damages. The two, drums were
shipped in good order and condition, as clearly shown by the Bill of Lading and Commercial Invoice which do not
indicate any damages drum that was shipped (Exhs. B and C). But when on December 12, 1981 the shipment was
delivered to defendant Metro Port Service, Inc., it excepted to one drum in bad order.
‘Correspondingly, as to the second issue, it follows that the losses/damages were sustained while in the
respective and/or successive custody and possession of defendants carrier (Eastern), arrastre operator (Metro
Port) and broker (Allied Brokerage). This becomes evident when the Marine Cargo Survey Report (Exh. G), with
its ‘Additional Survey Notes,’ are considered. In the latter notes, it is stated that when the shipment was ‘landed
on vessel’ to dock of Pier # 15, South Harbor, Manila on December 12, 1981,’ it was observed that ‘one (1) fiber
drum (was) in damaged condition, covered by the vessel’s Agent’s Bad Order Tally Sheet No. 86427.’ The report
further states that when defendant Allied Brokerage withdrew the shipment from defendant arrastre operator’s
custody on January 7, 1982, one drum was found opened without seal, cello bag partly torn but contents intact.
Net unrecovered spillage was 15 kgs. The report went on to state that when the drums reached the consignee, one
drum was found with adul-terated/faked contents. It is obvious, therefore, that these losses/ damages occurred
before the shipment reached the consignee while under the successive custodies of defendants. Under Art. 1737 of
the New Civil Code, the common carrier’s duty to observe extraordinary diligence in the vigilance of goods
remains in full force and effect even if the goods are temporarily unloaded and stored in transit in the warehouse
of the carrier at the place of destination, until the consignee has been advised and has had reasonable
opportunity to remove or dispose of the goods (Art. 1738, NCC). Defendant Eastern Shipping’s own exhibit, the
‘Turn-Over Survey of Bad Order Cargoes’ (Exhs. 3-Eastern) states that on December 12, 1981 one drum was
found ‘open.’
“and thus held:
84

4
‘WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:
A.Ordering defendants to pay plaintiff, jointly and severally:
1. 1.The amount of P19,032.95, with the present legal interest of 12% per annum from October 1, 1982,
the date of filing of this complaints, until fully paid (the liability of defendant Eastern Shipping, Inc.
shall not exceed US$500 per case or the CIF value of the loss, whichever is lesser, while the liability of
defendant Metro Port Service, Inc. shall be to the extent of the actual invoice value of each package, crate
box or container in no case to exceed P5,000.00 each, pursuant to Section 6.01 of the Management
Contract);
2. 2.P3,000.00 as attorney’s fees, and
3. 3.Costs.
B.Dismissing the counterclaims and crossclaim of defendant/cross-claimant Allied Brokerage Corporation.

SO ORDERED.’ (p. 207, Record).
“Dissatisfied, defendant’s recourse to US.
“The appeal is devoid of merit.
“After a careful scrutiny of the evidence on record. We find that the conclusion drawn therefrom is correct. As
there is sufficient evidence that the shipment sustained damage while in the successive possession of appellants,
and therefore they are liable to the appellee, as subrogee for the amount it paid to the consignee.” (pp. 87-89,
Rollo.)
The Court of Appeals thus affirmed in toto the judgment of the court a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave
abuse of discretion on the part of the appellate court when—
1. I.IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE
ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF PRIVATE
RESPONDENT AS GRANTED IN THE QUESTIONED DECISION;
2. II.IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE

RESPONDENT SHOULD COMMENCE FROM THE DATE OF THE FILING OF THE
COMPLAINT AT THE RATE OF TWELVE PERCENT PER ANNUM INSTEAD OF FROM
THE
85
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1994
1. DATE OF THE DECISION OF THE TRIAL COURT AND ONLY AT THE RATE OF SIX
PERCENT PER ANNUM, PRIVATE RESPONDENT’S CLAIM BEING INDISPUTABLY
UNLIQUIDATED.
The petition is, in part, granted.

In this decision, we have begun by saying that the questions raised by petitioner carrier are not all
that novel. Indeed, we do have a fairly good number of previous decisions this Court can merely tack
to.
The common carrier’s duty to observe the requisite diligence in the shipment of goods lasts from
the time the articles are surrendered to or unconditionally placed in the possession of, and received
by, the carrier for transportation until delivered to, or until the lapse of a reasonable time for their
acceptance by, the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court of
Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods shipped
either are lost or arrive in damaged condition, a presumption arises against the carrier of its failure
to observe that diligence, and there need not be an express finding of negligence to hold it liable (Art.
1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139 SCRA 87; Metro Port
Service, Inc. vs. Court of Appeals, 131 SCRA 365). There are, of course, exceptional cases when such
presumption of fault is not observed but these cases, enumerated in Article 1734 of the Civil Code, 1
are exclusive, not one of which can be applied to this case.

The question of charging both the carrier and the arrastre operator with the obligation of properly
delivering the goods to
_________________
1 Art.1734.Common carriers are responsible for the loss, destruction, or deterioration of the goods, unless the same is due to any of the
following causes only:
1. (1)Flood, storm, earthquake, lightning, or other natural disaster or calamity;

2. (2)Act of the public enemy in war, whether international or civil;
3. (3)Act or omission of the shipper or owner of the goods;
4. (4)The character of the goods or defects in the packing or in the containers;
5. (5)Order or act of competent public authority.
86

6
the consignee has, too, been passed upon by the Court. In Fireman’s Fund Insurance, Co. vs. Metro
Port Service, Inc.(182 SCRA 455), we have explained, in holding the carrier and the arrastre
operator liable in solidum, thus:
“The legal relationship between the consignee and the arrastre operator is akin to that of a depositor and
warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5 [1967]. The relationship between the consignee and
the common carrier is similar to that of the consignee and the arrastre operator (Northern Motors, Inc. v. Prince
Line, et al., 107 Phil. 253 [1960]). Since it is the duty of the ARRASTRE to take good care of the goods that are in
its custody and to deliver them in good condition to the consignee, such responsibility also devolves upon the
CARRIER. Both the ARRASTRE and the CARRIER are therefore charged with the obligation to deliver the goods
in good condition to the consignee.”
We do not, of course, imply by the above pronouncement that the arrastre operator and the customs
broker are themselves always and necessarily liable solidarily with the carrier, or vice-versa, nor
that attendant facts in a given case may not vary the rule. The instant petition has been brought
solely by Eastern Shipping Lines which, being the carrier and not having been able to rebut the
presumption of fault, is, in any event, to be held liable in this particular case. A factual finding of
both the court a quo and the appellate court, we take note, is that “there is sufficient evidence that
the shipment sustained damage while in the successive possession of appellants” (the herein
petitioner among them). 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.
It is over the issue of legal interest adjudged by the appellate court that deserves more than just a
passing remark.
Let us first see a chronological recitation of the major rulings of this Court:
The early case of Malayan Insurance Co., Inc., vs. Manila Port Service, decided on 15 May 1969, 2 3
involved a suit for

_______________
2 28 SCRA 65.
3 Penned by Justice Conrado Sanchez, concurred in by Justices Jose B.L. Reyes, Arsenio Dizon, Querube Makalintal, Calixto Zaldivar,
87
VOL. 234, JULY12, 87

1994
recovery of money arising out of short deliveries and pilferage of goods. In this case, appellee Malayan
Insurance (the plaintiff in the lower court) averred in its complaint that the total amount of its claim
for the value of the undelivered goods amounted to P3,947.20. This demand, however, was neither
established in its totality nor definitely ascertained. In the stipulation of facts later entered into by
the parties, in lieu of proof, the amount of P1,447.51 was agreed upon. The trial court rendered
judgment ordering the appellants (defendants) Manila Port Service and Manila Railroad Company
to pay appellee Malayan Insurance the sum of P1,447.51 with legal interest thereon from the date the
complaint was filed on 28 December 1962 until full payment thereof. The appellants then
assailed, inter alia, the award of legal interest. In sustaining the appellants, this Court ruled:
“Interest upon an obligation which calls for the payment of money, absent a stipulation, is the legal 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.’ And as
was held by this Court in Rivera vs. Perez, L-6998, February 29, 1956,if the suit were for damages, ‘unliquidated
4
and not known until definitely ascertained, assessed and determined by the courts after proof (Montilla c.
Corporacion de P. P. Agustinos, 25 Phil. 447; Lichauco v. Guzman, 38 Phil. 302),’ then, interest ‘should be from the
date of the decision.’”(Italics supplied)
The case of Reformina vs. Tomol, rendered on 11 October 1985, was for “Recovery of Damages for
5
Injury to Person and Loss of Property.” After trial, the lower court decreed: Enrique Fernando,
Francisco Capistrano, Claudio Teehankee and Antonio Barredo. Chief Justice Roberto Concepcion
and Justice Fred Ruiz Castro were on official leave.
________________
4 The correct caption of the case is “Claro Rivera vs. Amadeo Matute, L-6998, 29 February 1956,” 98 Phil. 516.
5 139 SCRA 260, 265.
88

8
“WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party defendants and against
the defendants and third party plaintiffs as follows:
“Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay jointly and severally
the following persons:
“(a).....
“x x x xxx
“(g)Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00 which is the value of the
boat F B Pacita III together with its accessories, fishing gear and equipment minus P80,000.00 which is the value
of the insurance recovered and the amount of P10,000.00 a month as the estimated monthly loss suffered by them
as a result of the fire of May 6, 1969 up to the time they are actually paid or alreadythe total sum of P370,000.00
as of June 4, 1972 with legal interest from the filing of the complaint until paid and to pay attorney’s fees of
P5,000.00 with costs against defendants and third party plaintiffs.” (Italics supplied.)
On appeal to the Court of Appeals, the latter modified the amount of damages awarded but sustained
the trial court in adjudging legal interest from the filing of the complaint until fully paid. When the
appellate court’s decision became final, the case was remanded to the lower court for execution, and
this was when the trial court issued its assailed resolution which applied the 6% interest per annum
prescribed in Article 2209 of the Civil Code. In their petition for review on certiorari, the petitioners
contended that Central Bank Circular No. 416, providing thus—
“By virtue of the authority granted to it under Section 1 of Act 2655, as amended, Monetary Board in its
Resolution No. 1622 dated July 29, 1974, has prescribed 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 express contract as to such rate
of interest, shall be twelve (12%) percent per annum. This Circular shall take effect immediately.” (Italics found
in the text)—
should have, instead, been applied. This Court ruled: 6
_________________
6 Penned by Justice Serafin Cuevas, concurred in by Justices Hermogenes Concepcion, Jr., Vicente Abad Santos, Ameurfina
Melencio-Herrera, Venicio Escolin, Lorenzo Relova, Hugo Gutierrez, Jr., Buena
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VOL. 234, JULY 12, 89

1994
“The judgments spoken of and referred to are judgments in litigations involving loans or forbearance of any
money, goods or credits. Any other kind of monetary judgment which has nothing to do with, nor involving loans
or forbearance of any money, goods or credits does not fall within the coverage of the said law for it is not within
the ambit of the authority granted to the Central Bank.
“x x x xxx xxx
“Coming to the case at bar, the decision herein sought to be executed is one rendered in an Action for Damages
for injury to persons and loss of property and does not involve any loan, much less forbear-ances of any money,
goods or credits. As correctly argued by the private respondents, the law applicable to the said case is Article 2209
of the New Civil Code which reads—
‘Art.2209.—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.’”
The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz, promulgated on 28 July
7
1986. The case was for damages occasioned by an injury to person and loss of property. The trial
court awarded private respondent Pedro Manabat actual and compensatory damages in the amount
of P72,500.00 withlegal interest thereon from the filing of the complaint until fully paid. Relying on
the Reformina v. Tomol case, this Court modified the interest award from 12% to 6% interest per
8
annum but sustained the time computation thereof, i.e., from the filing of the complaint until fully
paid.
________________
ventura de la Fuente, Nestor Alampay and Lino Patajo. Justice Ramon Aquino concurred in the result. Justice Efren Plana filed a
concurring and dissenting opinion, concurred in by Justice Claudio Teehankee while Chief Justice Felix Makasiar concurred with the
separate opinion of Justice Plana.
7 143 SCRA 158.

8 Penned by then Justice, now Chief Justice, Andres Narvasa, concurred in by Justices Pedro Yap, Ameurfina Melencio-Herrera, Isagani
A. Cruz and Edgardo Paras.
90

0
In Nakpil and Sons vs. Court of Appeals, the trial court, in an action for the recovery of damages
9
arising from the collapse of a building, ordered, inter alia, the “defendant United Construction Co.,
Inc. (one of the petitioners) x x x to pay the plaintiff, x x x, the sum of P989,335.68 with interest at the
legal rate from November 29, 1968, the date of the filing of the complaint until full payment x x x.”
Save from the modification of the amount granted by the lower court, the Court of Appeals sustained
the trial court’s decision. When taken to this Court for review, the case, on 03 October 1986, was
decided, thus:
“WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and environmental
circumstances of this case, we deem it reasonable to render a decision imposing, as We do hereby impose, upon
the defendant and the third-party defendants (with the exception of Roman Ozaeta) a solidary (Art. 1723, Civil
Code, Supra, p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos
to cover all damages (with the exception of attorney’s fees) occasioned by the loss of the building (including
interest charges and lost rentals) and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and
for attorney’s fees, the total sum being payable upon the finality of this decision. Upon failure to pay on such
finality, twelve (12%) per cent interest per annum shall be imposed upon aforementioned amounts from finality
until paid. Solidary costs against the defendant and third-party defen-dants (except Roman Ozaeta).” (Italics
supplied)
A motion for reconsideration was filed by United Construction, contending that “the interest of
twelve (12%) percent per annum imposed on the total amount of the monetary award was in
contravention of law.” The Court ruled out the applicability of the Reformina and Philippine Rabbit
10
Bus Lines cases and, in its resolution of 15 April 1988, it explained:

“There should be no dispute that the imposition of 12% interest pursuant to Central Bank Circular No. 416 x x x
is applicable only in
________________
9 160 SCRA 334.
10 Penned by Justice Edgardo Paras, with the concurrence of Justices Marcelo Fernan, Teodoro Padilla, Abdulwahid Bidin, and Irene
Cortes. Justice Hugo Gutierrez, Jr., took no part because he was the ponente in the Court of Appeals.
91
VOL. 234, JULY 12, 91

1994
the following: (1) loans; (2) forbearance of any money, goods or credit; and (3) rate allowed in judgments
(judgments spoken of refer to judgments involving loans or forbearance of any money, goods or credits.
(Philippine Rabbit Bus Lines Inc. v. Cruz, 143 SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA
260[1985]). It is true that in the instant case, there is neither a loan or a forbearance, but then no interest is
actually imposed provided the sums referred to in the judgment are paid upon the finality of the judgment. It is
delay in the payment of such final judgment, that will cause the imposition of the interest. “It will be noted that in
the cases already adverted to, the rate of interest is imposed on the total sum, from the filing of the complaint
until paid; in other words, as part of the judgment for damages. Clearly, they are not applicable to the instant
case.” (Italics supplied)
The subsequent case of American Express International, Inc., vs. Intermediate Appellate Court was 11
a petition for review on certiorari from the decision, dated 27 February 1985, of the then
Intermediate Appellate Court reducing the amount of moral and exemplary damages awarded by the
trial court, to P240,000.00 and P100,000.00, respectively, and its resolution, dated 29 April 1985,
restoring the amount of damages awarded by the trial court, i.e., P2,000,000.00 as moral damages
and P400,000.00 as exemplary damages with interest thereon at 12% per annum from notice of
judgment, plus costs of suit. In a decision of 09 November 1988, this Court, while recognizing the
right of the private respondent to recover damages, held the award, however, for moral damages by
the trial court, later sustained by the IAC, to be inconceivably large. The Court thus set aside the 12
decision of the appellate court and rendered a new one, “ordering the petitioner to pay private
respondent the sum of One Hundred Thousand (P100,000.00) Pesos as moral damages, with six (6%)
percent interest thereon computed from the finality of this decision until paid.” (Italics supplied)
___________________
11 167 SCRA 209.
12 Rendered per curiam with the concurrence of then Chief Justice Marcelo Fernan, Justices Andres Narvasa, Isagani A. Cruz, Emilio
Gancayco, Teodoro Padilla, Abdulwahid Bidin, Abraham Sarmiento, Irene Cortes, Carolina Griño-Aquino, Leo Medialdea and Florenz
Regalado. Justices Ameurfina Melencio-Herrera and Hugo Gutierrez, Jr., took no part because they did not participate in the deliberations.
Justices Edgardo Paras and Florentino Feliciano also took no part.
92

2
Reformina came into fore again in the 21 February 1989case of Florendo v.Ruiz which arose from a 13
breach of employment contract. For having been illegally dismissed, the petitioner was awarded by
the trial court moral and exemplary damages without, however, providing any legal interest thereon.
When the decision was appealed to the Court of Appeals, the latter held:
“WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental dated October 31,
1972 is affirmed in all respects, with the modification that defendants-appellants, except defendant-appellant
Merton Munn, are ordered to pay, jointly and severally, the amounts stated in the dispositive portion of the
decision, including the sum of P1,400.00 in concept of compensatory damages, with interest at the legal rate from
the date of the filing of the complaint until fully paid.” (Italics supplied)
The petition for review to this Court was denied. The records were thereupon transmitted to the trial
court, and an entry of judgment was made. The writ of execution issued by the trial court directed
that only compensatory damages should earn interest at 6% per annum from the date of the filing of
the complaint. Ascribing grave abuse of discretion on the part of the trial judge, a petition
forcertiorari assailed the said order. This Court said:
“x x x, it is to be noted that the Court of Appeals ordered the payment of interest ‘at the legal rate’ from the time of
the filing of the complaint. x x x. Said circular [Central Bank Circular No. 416] does not apply to actions based on
a breach of employment contract like the case at bar.” (Italics supplied)
The Court reiterated that the 6% interest per annum on the damages should be computed from the
time the complaint was filed until the amount is fully paid.
Quite recently, the Court had another occasion to rule on the matter.National Power Corporation
vs. Angas, decided on 08 May 1992, involved the expropriation of certain parcels of land. After
14
conducting a hearing on the complaints for eminent domain,

________________
13 170 SCRA 461.
14 208 SCRA 542.
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VOL. 234, JULY 12, 93

1994
the trial court ordered the petitioner to pay the private respondents certain sums of money as just
compensation for their lands so expropriated “with legal interest thereon x x x until fully paid.” Again,
in applying the 6% legal interest per annum under the Civil Code, the Court declared: 15
“x x x, (T)he transaction involved is clearly not a loan or forbearance of money, goods or credits but expropriation
of certain parcels of land for a public purpose, the payment of which is without stipulation regarding interest, and
the interest adjudged by the trial court is in the nature of indemnity for damages. The legal interest required to
be paid on the amount of just compensation for the properties expropriated is manifestly in the form of indemnity
for damages for the delay in the payment thereof. Therefore, since the kind of interest involved in the joint
judgment of the lower court sought to be enforced in this case is interest by way of damages, and not by way of
earnings from loans, etc. Art. 2209 of the Civil Code shall apply.”
Concededly, there have been seeming variances in the above holdings. 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. The “first group” would consist of the cases of Reformina v. Tomol
(1985), Philippine Rabbit Bus Lines v. Cruz (1986), Florendo v. Ruiz (1989) and National Power
Corporation v. Angas (1992). In the “second group” would be Malayan Insurance Company v. Manila
Port Service (1969), Nakpil and Sons v. Court of Appeals (1988), and American Express
International v. Intermediate Appellate Court (1988).
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. It is easily discernible in these
cases that there has been a consistent holding that the Central Bank Circular imposing the 12%
interest per annum applies only to loans or forbearance of money, goods or credits,
16
__________________
15 Penned by Justice Edgardo Paras with the concurrence of Justices Ameurfina Melencio-Herrera, Teodoro Padilla, Florenz Regalado
and Rodolfo Nocon.
16 Black’s Law Dictionary (1990 ed., 644) citing the case of Hafer v. Spaeth, 22 Wash. 2d 378, 156 P.2d 408, 411 defines the word
94
4
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.
Observe, too, that in these cases, a common time frame in the computation of the 6% interest per
annum has been applied, i.e., from the time the complaint is filed until the adjudged amount is fully
paid.
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
17
the one hand, or one of indemnity for damage, on the other hand. Unlike, however, the “first group”
which remained consistent in holding that the running of the legal interest should be from the time
of the filing of the complaint until fully paid, the “second group” varied on the commencement of the
running of the legal interest.
Malayan held that the amount awarded should bear legal interest from the date of the decision of
the court a quo, explaining that “if the suit were for damages, ‘unliquidated and not known until
definitely ascertained, assessed and determined by the courts after proof,’ then, interest ‘should be
from the date of the decision.’” American Express International v. IAC, introduced a different time
frame for reckoning the 6% interest by ordering it to be “computed from the finality of (the) decision
until paid.” The Nakpil and Sons case ruled that 12% interest per annum should be imposed from
the finality of the decision until the judgment amount is paid.
The ostensible discord is not difficult to explain. The factual circumstances may have called for
different applications, guided by the rule that the courts are vested with discretion, depending
_________________
forbearance, within the context of usury law, as a contractual obligation of lender or creditor to refrain, during given period of time, from
requiring borrower or debtor to repay loan or debt then due and payable.
17 In the case of Malayan Insurance, the application of the 6% and 12% interest per annum has no bearing considering that this case was
decided upon before the issuance of Circular No. 416 by the Central Bank.
95
VOL. 234, JULY 12, 95

1994
on the equities of each case, on the award of interest. Nonetheless, it may not be unwise, by way of
clarification and reconciliation, to suggest the following rules of thumb for future guidance.
1. 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
18 19
under Title XVIII on “Damages” of the Civil Code govern in determining the measure of
recoverable damages. 20
2. 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
21
demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed
22
from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article
1169 of the Civil Code.
23
___________________
18 “ART.1157.Obligations arise from.
1. (1)Law;
2. (2)Contracts;
3. (3)Quasi-contracts;
4. (4)Acts or omissions punished by law; and
5. (5)Quasi-delicts.”
19 “ART.1170.Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner
contravene the tenor thereof, are liable for damages.”
20 “ART.2195.The provisions of this Title (on Damages) shall be respectively applicable to all obligations mentioned in article 1157.”
21 “ART.1956.No interest shall be due unless it has been expressly stipulated in writing.”
22 “ART.2212.Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon
this point.”
23 “ART.1169.Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands
from them the fulfillment of their obligation.
96

6
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 24
annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or
25
until the demand can be established with reasonable certainty. Accordingly, where the demand is 26
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
___________________
“However, the demand by the creditor shall not be necessary in order that delay may exist:
1. (1)When the obligation or the law expressly so declare; or
2. (2)When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is
to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or
3. (3)When demand would be useless, as when the obligor has rendered it beyond his power to perform.
“In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with
what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins.”
“ART.2210.Interest may, in the discretion of the court, be allowed upon damages awarded for breach of contract. “ART.2211.In crimes
24
and quasi-delicts, interest as a part of the damages may, in a proper case, be adjudicated in the discretion of the court.”
“Art.2209.If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there
25
being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest,
which is six per cent per annum.”
“ART.2213.Interest cannot be recovered upon unliquidated claims or damages, except when the demand can be established with
26
reasonable certainty.”
97
VOL. 234, JULY 12, 97

1994
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.
WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the
MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due
computed from the decision, dated 03 February 1988, of the courta quo. A TWELVE PERCENT (12%)
interest, in lieu of SIX PERCENT (6%), shall be imposed on such amount upon finality of this
decision until the payment thereof.
SO ORDERED.
Narvasa (C.J.), Cruz, Feliciano, Padilla, Bidin, Regalado, Davide,
Jr., Romero, Bellosillo, Melo, Quiason, Puno and Kapunan, JJ., concur.
Mendoza, J., Took no part in deliberations.
Petition partly granted.

Notes.—Where the obligation arose from a contract or purchase and sale and not from a contract
of loan or mutuum, the applicable rate is 6% per annum as provided in Article 2209 of the Civil Code
and not the rate of 12% per annum as provided in Circular No. 416 (Pilipinas Bank vs. Court of
Appeals, 225 SCRA 268 [1993]).
While common carriers are required to observe extraordinary diligence and are presumed at fault,
no such presumption applies to private carriers (Planters Products, Inc. vs. Court of Appeals, 226
SCRA 476 [1993]).
——o0o——
G.R. No. 128721. March 9, 1999. *
CRISMINA GARMENTS, INC., petitioner, vs. COURT OF APPEALS and NORMA SIAPNO,
respondents.
Civil Law; Interest; Instances where the interest rate under CB Circular No. 416 applies; Cases beyond the
scope of the said circular are governed by Article 2209 of the Civil Code which considers inter-
________________
* THIRD DIVISION.
357
VOL. 304, MARCH 9, 357

1999
Crismina Garments, Inc. vs. Court of
Appeals
est a form of indemnity for the delay in the performance of an obligation.—In Reformina v. Tomol, Jr., this
Court stressed that the interest rate under CB Circular No. 416 applies to (1) loans; (2) forbearance of money,
goods or credits; or (3) a judgment involving a loan or forbearance of money, goods or credits. Cases beyond the
scope of the said circular are governed by Article 2209 of the Civil Code, which considers interest a form of
indemnity for the delay in the performance of an obligation.
Same; Same; Same; The monetary award shall earn interest at twelve percent (12%) per annum from the date
of the finality of the judgment until its satisfaction, regardless of whether or not the case involves a loan or
forbearance of money.—In Keng Hua Paper Products Co., Inc. v. CA, we also ruled that the monetary award shall
earn interest at twelve percent (12%) per annum from the date of the finality of the judgment until its satisfaction,
regardless of whether or not the case involves a loan or forbearance of money. The interim period is deemed to be
equivalent to a forbearance of credit.
Same; Same; Same; In Eastern Shipping, the Court observed that a “forbearance” in the context of the usury
law is 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.”—Private respondent maintains that the twelve
percent (12%) interest should be imposed, because the obligation arose from a forbearance of money. This is
erroneous. In Eastern Shipping, the Court observed that a “forbearance” in the context of the usury law is 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.” Using this standard, the obligation in this case was
obviously not a forbearance of money, goods or credit.
PETITION for review on certiorari of a decision of the Court of Appeals.

H.D. Tumaneng & Associates for petitioner.
Punzalan and Associates Law Office for private respondent.
358

8
Crismina Garments, Inc. vs. Court of Appeals
PANGANIBAN, J.:
Interest shall be computed in accordance with the stipulation of the parties. In the absence of such
agreement, the rate shall be twelve percent (12%) per annum when the obligation arises out of a loan
or a forbearance of money, goods or credits. In other cases, it shall be six percent (6%).
The Case
On May 5, 1997, Crismina Garments, Inc. filed a Petition for Review on Certiorari assailing the 1
December 28, 1995 Decision and March 17, 1997 Resolution of the Court of Appeals in CA-GR CV
2 3
No. 28973. On September 24, 1997, this Court issued a minute Resolution denying the petition “for 4
its failure to show any reversible error on the part of the Court of Appeals.”
Petitioner then filed a Motion for Reconsideration, arguing that the interest rate should be
5
computed at 6 percent per annum as provided under Article 2209 of the Civil Code, not 12 percent
per annum as prescribed under Circular No. 416 of the Central Bank of the Philippines. Acting on
the Motion, the Court reinstated the Petition, but only with respect to the issue of which interest
6
rate should be applied. 7
__________________
1 Rollo, pp. 7-21.
2 Penned by Justice Romeo J. Callejo, Sr.; with the concurrence of J. Antonio M. Martinez, Division chairman (now a retired member of
this Court), and Pacita Cañizares-Nye, member.
3 Also penned by Justice Callejo, Sr. with JJ. Antonio M. Martinez, Division chairman, and Ruben T. Reyes, member, both concurring.
4 Rollo, pp. 104-105.
5 Ibid., pp. 106-112.
6 Resolution dated April 27, 1998; rollo, p. 118.
7 Rollo, pp. 140-141.
359
VOL. 304, MARCH 9, 359

1999
Crismina Garments, Inc. vs.
Court of Appeals
The Facts
As the facts of the case are no longer disputed, we are reproducing hereunder the findings of the
appellate court:
“During the period from February 1979 to April 1979, the [herein petitioner], which was engaged in the export of
girls’ denim pants, contracted the services of the [respondent], the sole proprietress of the D’Wilmar Garments,
for the sewing of 20,762 pieces of assorted girls[’] denims supplied by the [petitioner] under Purchase Orders Nos.
1404, dated February 15, 1979, 0430 dated February 1, 1979, 1453 dated April 30, 1979. The [petitioner] was
obliged to pay the [respondent], for her services, in the total amount of P76,410.00. The [respondent] sew[ed] the
materials and delivered the same to the [petitioner] which acknowledged the same per Delivery Receipt Nos.
0030, dated February 9, 1979; 0032, dated February 15, 1979; 0033, dated February 21, 1979; 0034, dated
February 24, 1979; 0036, dated February 20, 1979; 0038, dated March 11, 1979[;] 0039, dated March 24, 1979;
0040, dated March 27, 1979; 0041, dated March 29, 1979; 0044, dated Marc[h] 25, 1979; 0101, dated May 18,
1979[;] 0037, dated March 10, 1979 and 0042, dated March 10, 1979, in good order condition. At first, the
[respondent] was told that the sewing of some of the pants w[as] defective. She offered to take delivery of the
defective pants. However, she was later told by [petitioner]’s representative that the goods were already good.
She was told to just return for her check of P76,410.00. However, the [petitioner] failed to pay her the aforesaid
amount. This prompted her to hire the services of counsel who, on November 12, 1979, wrote a letter to the
[petitioner] demanding payment of the aforesaid amount within ten (10) days from receipt thereof. On February 7,
1990, the [petitioner]’s [v]ice-[p]resident-[c]omptroller, wrote a letter to [respondent]’s counsel, averring, inter
alia, that the pairs of jeans sewn by her, numbering 6,164 pairs, were defective and that she was liable to the
[petitioner] for the amount of P49,925.51 which was the value of the damaged pairs of denim pants and
demanded refund of the aforesaid amount.
“On January 8, 1981, the [respondent] filed her complaint against the [petitioner] with the [trial court] for the
collection of the principal amount of P76,410.00.
xxx
xxx xxx xxx
360

0
“After due proceedings, the [trial court] rendered judgment, on February 28, 1989, in favor of the [respondent]
against the [petitioner], the dispositive portion of which reads as follows:
‘WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant ordering the
latter to pay the former:
1. (1)The sum of P76,140.00 with interest thereon at 12% per annum, to be counted from the filing of this
complaint on January 8, 1981, until fully paid;
2. (2)The sum of P5,000 as attorney[’]s fees; and
3. (3)The costs of this suit;
4. (4)Defendant’s counterclaim is hereby dismissed.’ ” 8
The Court of Appeals (CA) affirmed the trial court’s ruling, except for the award of attorney’s fees
which was deleted. Subsequently, the CA denied the Motion for Reconsideration.
9 10
Hence, this recourse to this Court. 11
Sole Issue
In light of the Court’s Resolution dated April 27, 1998, petitioner submits for our consideration this
sole issue:
“Whether or not it is proper to impose interest at the rate of twelve percent (12%) per annum for an obligation
that does not involve a loan or forbearance of money in the absence of stipulation of the parties.” 12
________________
8 CA Decision, pp. 1-4; rollo, pp. 25-28 (citations omitted).
9 Ibid., p. 8; rollo, p. 31.
10 Rollo, p. 33.
11 The case was deemed submitted for resolution on December 17, 1998, when this Court received private respondent’s Memorandum.
12 Petitioner’s Memorandum, p. 2; rollo, p. 160.
361
VOL. 304, MARCH 9, 361

1999
Court of Appeals
This Court’s Ruling
We sustain petitioner’s contention that the interest rate should be computed at six percent (6%) per
annum.
Sole Issue: Interest Rate
The controversy revolves around petitioner’s payment of the price beyond the period prescribed in a
contract for a piece of work. Article 1589 of the Civil Code provides that “[t]he vendee [herein
petitioner] shall owe interest for the period between the delivery of the thing and the payment of the
price x x x should he be in default, from the time of judicial or extrajudicial demand for the payment
of the price.” The only issue now is the applicable rate of interest for the late payment.
Because the case before us is “an action for the enforcement of an obligation for payment of money
arising from a contract for a piece of work,” petitioner submits that the interest rate should be six
13
percent (6%), pursuant to Article 2209 of the Civil Code, which states:
“If the obligation consists in the payment of money and the debtor incurs in delay, the indemnity for damages,
there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of
stipulation, the legal interest, which is six percent per annum.” (Emphasis supplied.)
On the other hand, private respondent maintains that the interest rate should be twelve percent
(12%) per annum, in accordance with Central Bank (CB) Circular No. 416, which reads:
“By virtue of the authority granted to it under Section 1 of Act No. 2655, as amended, otherwise known as the
‘Usury Law,’ the Monetary Board, in its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of
interest for the loan or forbearance of any
_________________
13 Ibid., p. 3; rollo, p. 161.
362

2
money, goods or credits and the rate allowed in judgments, in the absence of express contract as to such rate of
interest, shall be twelve per cent (12%) per annum.” (Emphasis supplied.)
She argues that the circular applies, since “the money sought to be recovered by her is in the form of
forbearance.” 14
We agree with the petitioner. In Reformina v. Tomol, Jr., this Court stressed that the interest
15
rate under CB Circular No. 416 applies to (1) loans; (2) forbearance of money, goods or credits; or (3)
a judgment involving a loan or forbearance of money, goods or credits. Cases beyond the scope of the
said circular are governed by Article 2209 of the Civil Code, which considers interest a form of
16
indemnity for the delay in the performance of an obligation. 17
In Eastern Shipping Lines, Inc. v. Court of Appeals, the Court gave the following guidelines for
18
the application of the proper interest rates:

“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
_______________
14 Memorandum for Private Respondent, p. 8; rollo, p. 175.
15 139 SCRA 260, October 11, 1985, per Cuevas, J. See also Philippine Rabbit Bus Lines, Inc. v. Cruz, 143 SCRA 158, 160-161, July 28,
1986; and Pilipinas Bank v. Court of Appeals, 225 SCRA 268, 275, August 12, 1993.
16 National Power Corporation v. Angas, 208 SCRA 542, 546-549, May 8, 1992; Tio Khe Chio v. Court of Appeals, 202 SCRA 119, 123-124,
September 30, 1991; Philippine Virginia Tobacco Administration v. Tensuan, 188 SCRA 628, 632-633, August 20, 1990; Central Azucarera
de Bais v. Court of Appeals, 188 SCRA 328, 338-339, August 3, 1990; Meridian Assurance Corporation v. Dayrit, 184 SCRA 20, 23-24, April
3, 1990; and GSIS v. Court of Appeals, 145 SCRA 311, 321, October 30, 1986.
17 Castelo v. Court of Appeals, 244 SCRA 180, 190, May 22, 1995 and Pacific Mills, Inc. v. Court of Appeals, 206 SCRA 317, 326, February
17, 1992.
18 234 SCRA 78, 95-97, July 12, 1994, per Vitug, J.
363
VOL. 304, MARCH 9, 363

1999
Court of Appeals
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. 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. “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 x x x the amount finally
adjudged.
3. “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.” 19
_______________
19 A. C. Enterprises, Inc. v. Construction Industry Arbitration Commission, 244 SCRA 55, 57-58, May 9, 1995, per Quiason, J.
364

4
In Keng Hua Paper Products Co., Inc. v. CA, we also ruled that the monetary award shall earn
20
interest at twelve percent (12%) per annum from the date of the finality of the judgment until its
satisfaction, regardless of whether or not the case involves a loan or forbearance of money. The
interim period is deemed to be equivalent to a forbearance of credit. 21
Because the amount due in this case arose from a contract for a piece of work, not from a loan or
forbearance of money, the legal interest of six percent (6%) per annum should be applied.
Furthermore, since the amount of the demand could be established with certainty when the
Complaint was filed, the six percent (6%) interest should be computed from the filing of the said
Complaint. But after the judgment becomes final and executory until the obligation is satisfied, the
interest should be reckoned at twelve percent (12%) per year.
Private respondent maintains that the twelve percent (12%) interest should be imposed, because
the obligation arose from a forbearance of money. This is erroneous. In Eastern Shipping, the Court
22 23
observed that a “forbearance” in the context of the usury law is 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.” Using this standard, the obligation in this case was obviously not
a forbearance of money, goods or credit.
WHEREFORE, the appealed Decision is MODIFIED. The rate of interest shall be six percent (6%)
per annum, computed from the time of the filing of the Complaint in the trial court until the finality
of the judgment. If the adjudged principal and the interest (or any part thereof) remain unpaid
thereaf-
________________
20 GR No. 116863, February 12, 1998, per Panganiban, J.
21 Philippine National Bank v. Court of Appeals, 263 SCRA 766, 770-772, October 30, 1996; and Food Terminal, Inc. v. Court of
Appeals, 262 SCRA 339, 343-344, September 23, 1996.
22 Private respondent’s Memorandum, p. 8; rollo, p. 175.
23 Supra, at p. 94.
365
VOL. 304, MARCH 10, 36

1999 5
Francisco vs. Leyva
ter, the interest rate shall be twelve percent (12%) per annum computed from the time the judgment
becomes final and executory until it is fully satisfied. No pronouncement as to costs.
SO ORDERED.
Romero (Chairman), Vitug, Purisima and Gonzaga-Reyes, JJ., concur.
Judgment modified.
Note.—In the absence of a stipulation as to interest, the loan due will now earn interest at the
legal rate of 12% per annum. (Sulit vs. Court of Appeals, 268 SCRA 441 [1997])
——o0o——
October 30, 1996.G.R. No. 123643. *
PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF APPEALS and DR. ERLINDA G.
IBARROLA, respondents.
Obligations; Interest Rates; Where an obligation arises “from a contract of purchase and sale and not from a
contract of loan or mutuum,” the applicable rate is “6% per annum as provided in Article 2209 of the NCC and not
the rate of 12% per annum as provided in (CB) Cir. No. 416.”—The case at bench does not involve a loan,
forbearance of money or judgment involving a loan or forbearance of money as it arose from a contract of sale
whereby Ibarrola did not
_______________
* THIRD DIVISION.
767
VOL. 263, OCTOBER 30, 767

1996
Philippine National Bank vs. Court of
Appeals
receive full payment for her merchandise. When an obligation arises “from a contract of purchase and sale
and not from a contract of loan or mutuum,” the applicable rate is 6% per annum as provided in Article 2209 of
the NCC and not the rate of 12% per annum as provided in (CB) Cir. No. 416.” Indeed, PNB’s liability is based
only on the RTC’s judgment where it was held solidarily liable with the other defendants due to its negligence
when it “failed to assure itself” if the Provincial Treasurer was “properly authorized” by Ibarrola to “make
endorsements” of said checks.
Same; Same; Administrative Law; The rate of 12% interest referred to in Cir. 416 applies only to: “[L]oan or
forbearance of money, or to cases where money is transferred from one person to another and the obligation to
return the same or a portion thereof is adjudged, and any other monetary judgment which does not involve or
which has nothing to do with loans or forbearance of any money, goods or credit does not fall within its coverage for
such imposition is not within the ambit of the authority granted to the Central Bank.”—The rate of 12% interest
referred to in Cir. 416 applies only to: “[L]oan or forbearance of money, or to cases where money is transferred
from one person to another and the obligation to return the same or a portion thereof is adjudged. Any other
monetary judgment which does not involve or which has nothing to do with loans or forbearance of any money,
goods or credit does not fall within its coverage for such imposition is not within the ambit of the authority
granted to the Central Bank. When an obligation not constituting a loan or forbearance of money is breached then
an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum in accordance with Art. 2209 of the Civil Code. Indeed, the monetary judgment in favor of private
respondent does not involve a loan or forbearance of money, hence the proper imposable rate of interest is six (6%)
per cent.” (Italics ours.)
Same; Same; Judgments; The interest rate on a judgment for damages is only 6%, computed from the time of
the filing of the complaint but once the judgment becomes final and executory, and until fully satisfied, the rate
applicable is 12%.—Applying the aforequoted rule, therefore, the proper rate of interest referred to in the
judgment under execution is only 6%. This interest according to Eastern Shipping shall be computed from the
time of the filing of the complaint considering that the amount adjudged (P98,691.90) can be established with
reasonable certainty. Said amount being merely
768

8 ANNOTATED
Philippine National Bank vs. Court of Appeals
the uncollected balance of the purchase price covered by the 23 checks encashed and appropriated by
Ibarrola’s agents. However, once the judgment becomes final and executory, the “interim period from the finality
of judgment awarding a monetary claim and until payment thereof, is deemed to be equivalent to a forbearance of
credit.” Thus, in accordance with the pronouncement in Eastern Shipping the rate of 12% p.a. should be imposed,
and to be computed from the time the judgment became final and executory until fully satisfied. The actual base
for the computation of this 12% interest after the judgment in this damage suit became final shall be the amount
adjudged (P98,691.90).
The facts are stated in the resolution of the Court.
The Chief Legal Counsel and Odilon A. Diaz for petitioner.
Ananias C. Ona for private respondent.
RESOLUTION
FRANCISCO,J.:
As payments for the purchase of medicines, the Province of Isabela issued several checks drawn
against its account with petitioner Philippine National Bank (PNB) in favor of the seller, Lyndon
Pharmaceuticals Laboratories, a business operated by private respondent Ibarrola. The checks were
delivered to the seller’s agents who turned them over to Ibarrola, except 23 checks amounting to
1
P98,691.90, which the agents appropriated after negotiating them with PNB. For her failure to
receive the full payment for the medicines, Ibarrola filed on November 6, 1974 before the Regional
Trial Court (RTC) an “action for a sum of money and damages,”
_______________
1 Manuel Flores and Demetrio Perez.
769

1996
Philippine National Bank vs. Court
of Appeals
docketed as Civil Case 4226-P, against the Province of Isabela, its Treasurer, the two agents and
2
PNB.
In its decision dated September 29, 1987, the trial court ordered all the defendants in said civil
case, except the treasurer who died in the meantime, to “jointly and solidarily” pay Ibarrola several
amounts, among which is:
P98,691.90“(1) with interest thereon at the legal rate from the date of the filing of the complaint until the entire
amount is fully paid;” (Italics supplied.)
3
PNB’s appeal to the Court of Appeals (CA) and later to the Supreme Court were denied and
4 5
dismissed, respectively. All the three courts, however, did not specify whether the legal rate of
interest referred to in the judgment is 6% or 12%. The judgment in Civil Case 4226-P became final
and executory on November 26, 1993. At the execution stage, the sheriff computed the interest
mentioned in the judgment at the rate of 12% which PNB opposed insisting that the rate should only
be 6%. Ibarrola sought clarification from the same RTC which promulgated the decision. On August
4, 1994 said court issued an order clarifying that the rate is 12%. PNB’s direct appeal to this court
from that order was referred to the CA which affirmed the RTC order. Hence, this petition for review
under Rule 45 where two legal issues are raised: (1) whether in an action for damages, the legal rate
of interest is 6% as provided by Article 2209 of the New Civil Code or 12% as
6
_______________
2 Rollo, p. 13.
3 RTC Decision, p. 6; Rollo, p. 39.
4 CA Decision promulgated June 25, 1993, Annex “C.”

5 SC Resolution dated October 18, 1993, Annex “D.”
6 “If the obligation consist 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 the interest agreed upon, and in the absence of stipulation, the legal interest, which
is six percent per annum.”
770

0
provided by CB Circular 416 series of 1974, and (2) whether such rate shall be computed from the
7
filing of the complaint until fully paid?

The issues are not new. In the case of Eastern Shipping Lines, Inc. v. CA, this Court had provided 8
a rule “of thumb for future guidance,” to wit: 9
“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.” (Italics ours.)
10
The case at bench does not involve a loan, forbearance of money or judgment involving a loan or
forbearance of money as it arose from a contract of sale whereby Ibarrola did not receive full
payment for her merchandise. When an obligation
_______________
7 “By virtue of the authority granted to it under Section 1 of Act 2655, as amended, otherwise known as the ‘Usury Law’ the Monetary
Board in its Resolution No. 1622 dated July 29, 1974, has prescribed 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 express contract as to such rate of interest, shall be twelve (12%) per
cent per annum. This Circular shall take effect immediately.”
8 234 SCRA 78.
9 Id., at p. 96.
10 Eastern Shipping Lines, Inc. v. Court of Appeals, 234 SCRA 88.
771

1996
Philippine National Bank vs. Court
of Appeals
arises “from a contract of purchase and sale and not from a contract of loan or mutuum,” the
applicable rate is 6% per annum as provided in Article 2209 of the NCC and not the rate of 12% per
annum as provided in (CB) Cir. No. 416.” Indeed, PNB’s liability is based only on the RTC’s
11
judgment where it was held solidarily liable with the other defendants due to its negligence when it
“failed to assure itself” if the Provincial Treasurer was “properly authorized” by Ibarrola to “make
endorsements” of said checks. 12
The rate of 12% interest referred to in Cir. 416 applies only to:
“[L]oan or forbearance of money, or to cases where money is transferred from one person to another and the
obligation to return the same or a portion thereof is adjudged. Any other monetary judgment which does not
involve or which has nothing to do with loans or forbearance of any money, goods or credit does not fall within its
coverage for such imposition is not within the ambit of the authority granted to the Central Bank. When an
obligation not constituting a loan or forbearance of money is breached then an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate of 6% per annum in accordance with Art. 2209
of the Civil Code. Indeed, the monetary judgment in favor of private respondent does not involve a loan or
forbearance of money, hence the proper imposable rate of interest is six (6%) per cent.” (Italics ours.)
13
Applying the aforequoted rule, therefore, the proper rate of interest referred to in the judgment
under execution is only 6%. This interest according to Eastern Shipping shall be computed from the
time of the filing of the complaint considering that the amount adjudged (P98,691.90) can be
established with reasonable certainty. Said amount being merely the uncollected balance of the
purchase price covered by the 23 checks encashed and appropriated by Ibarrola’s agents.
_______________
11 Pilipinas Bank v. CA, 225 SCRA 268.
12 Rollo, p. 38.
13 Food Terminal, Inc. v. CA and TAO Development, Inc., G.R. 120097, September 23, 1996.
772

2
However, once the judgment becomes final and executory, the “interim period from the finality of
judgment awarding a monetary claim and until payment thereof, is deemed to be equivalent to a
forbearance of credit.” Thus, in accordance with the pronouncement in Eastern Shippingthe rate of
14
12% p.a. should be imposed, and to be computed from the time the judgment became final and
executory until fully satisfied. The actual base for the computation of this 12% interest after the
judgment in this damage suit became final shall be the amount adjudged (P98,691.90).
ACCORDINGLY, the appealed decision is REVERSED. The rate of interest shall be 6% p.a.
computed from the time of the filing of the complaint until its full payment before finality of
judgment. Thereafter, if the amount adjudged remains unpaid, the interest rate shall be 12% p.a.
computed from the time the judgment became final and executory on November 26, 1993 until fully
satisfied.
SO ORDERED.
Narvasa (C.J., Chairman), Davide, Jr., Melo andPanganiban, JJ., concur.
Judgment reversed.
Notes.—Under the Civil Service Law, lending money at usurious rates of interest is specifically
listed as ground for disciplinary action. (RTC Makati Movement Against Graft and Corruption vs.
Dumlao, 247 SCRA 108 [1995])
Galloping increases in interest rate unilaterally imposed by a bank on a customer’s loan, over the
latter’s vehement protests, are arbitrary. (Almeda vs. Court of Appeals, 256 SCRA 292 [1996])
——o0o——
G.R. No. 131622. November 27, 1998. *
LETICIA Y. MEDEL, DR. RAFAEL MEDEL and SERVANDO FRANCO, petitioners, vs. COURT OF
APPEALS, SPOUSES VERONICA R. GONZALES and DANILO G. GONZALES, JR. doing lending
business under the trade name and style “GONZALES CREDIT ENTERPRISES,” respondents.
Loans; Usury Law; Interest Rates; A stipulated rate of interest at 5.5% per month on a P500,000.00 loan is
excessive, iniquitous, unconscionable and exorbitant; The Usury Law is now “legally inexistent.”—We agree with
petitioners that the stipulated rate of interest
__________________
* THIRD DIVISION.
482

2 ANNOTATED
Medel vs. Court of Appeals
at 5.5% per month on the P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant. However,
we can not consider the rate “usurious” because this Court has consistently held that Circular No. 905 of the
Central Bank, adopted on December 22, 1982, has expressly removed the interest ceilings prescribed by the
Usury Law and that the Usury Law is now “legally inexistent.”
Same; Same; Same; C.B. Circular No. 905 “did not repeal nor in any way amend the Usury Law but simply
suspended the latter’s effectivity.”—In Security Bank and Trust Company vs. Regional Trial Court of Makati,
Branch 61 the Court held that CB Circular No. 905 “did not repeal nor in any way amend the Usury Law but
simply suspended the latter’s effectivity.” Indeed, we have held that “a Central Bank Circular can not repeal a
law. Only a law can repeal another law.” In the recent case of Florendo vs. Court of Appeals, the Court reiterated
the ruling that “by virtue of CB Circular No. 905, the Usury Law has been rendered ineffective.” “Usury has been
legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon.”
Same; Same; Same; The courts shall reduce equitably liquidated damages, whether intended as an
indemnity or a penalty if they are iniquitous or unconscionable.—We find the interest at 5.5% per month, or 66%
per annum, stipulated upon by the parties in the promissory note iniquitous or unconscionable, and, hence,
contrary to morals (“contra bonos mores”), if not against the law. The stipulation is void. The courts shall reduce
equitably liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or
unconscionable.

De Castro & Cagampang Law Offices for petitioners.
Leopoldo C. Sta. Maria for private respondents.
PARDO, J.:
The case before the Court is a petition for review on certiorari, under Rule 45 of the Revised Rules of
Court, seeking to
483
VOL. 299, NOVEMBER 27, 48

1998 3
set aside the decision of the Court of Appeals, and its resolution denying reconsideration, the
1 2
dispositive portion of which decision reads as follows:

“WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are hereby ordered to pay the
plaintiff: the sum of P500,000.00, plus 5.5% per month interest and 2% service charge per annum effective July
23, 1986, plus 1% per month of the total amount due and demandable as penalty charges effective August 23,
1986, until the entire amount is fully paid.
“The award to the plaintiff of P50,000.00 as attorney’s fees is affirmed. And so is the imposition of costs
against the defendants. SO ORDERED.” 3
The Court required the respondents to comment on the petition, which was filed on April 3,
4
1998, and the petitioners to reply thereto, which was filed on May 29, 1998. We now resolve to give
5 6
due course to the petition and decide the case.

The facts of the case, as found by the Court of Appeals in its decision, which are considered
binding and conclusive on the parties herein, as the appeal is limited to questions of law, are as
follows:
On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia)
obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was engaged in the money
lending business under the name “Gonzales Credit Enterprises,” in the amount of P50,000.00,
payable in two months. Veronica gave only the amount of P47,000.00, to the borrowers, as she
retained P3,000.00, as advance interest for one month at 6% per month. Servando and Leticia
executed a
___________________
1 CA-G.R. CV No. 36096, promulgated on March 21, 1997.
2 Issued on November 25, 1995.
3 Rollo, pp. 22-28.
4 Resolution dated February 23, 1998, p. 44, Rollo.
5 Rollo, pp. 45-48.
6 Rollo, pp. 53-56.
484

4
promissory note for P50,000.00, to evidence the loan, payable on January 7, 1986.
On November 19, 1985, Servando and Leticia obtained from Veronica another loan in the amount
of P90,000.00, payable in two months, at 6% interest per month. They executed a promissory note to
evidence the loan, maturing on January 19, 1986. They received only P84,000.00, out of the proceeds
of the loan.
On maturity of the two promissory notes, the borrowers failed to pay the indebtedness.
On June 11, 1986, Servando and Leticia secured from Veronica still another loan in the amount of
P300,000.00, maturing in one month, secured by a real estate mortgage over a property belonging to
Leticia Makalintal Yaptinchay, who issued a special power of attorney in favor of Leticia Medel,
authorizing her to execute the mortgage. Servando and Leticia executed a promissory note in favor of
Veronica to pay the sum of P300,000.00, after a month, or on July 11, 1986. However, only the sum of
P275,000.00, was given to them out of the proceeds of the loan.
Like the previous loans, Servando and Medel failed to pay the third loan on maturity.
On July 23, 1986, Servando and Leticia with the latter’s husband, Dr. Rafael Medel, consolidated
all their previous unpaid loans totaling P440,000.00, and sought from Veronica another loan in the
amount of P60,000.00, bringing their indebtedness to a total of P500,000.00, payable on August 23,
1986. They executed a promissory note, reading as follows:
“Baliwag, Bulacan July 23,
1986
“Maturity Date August 23, 1986
“P500,000.00
“FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of VERONICA R.
GONZALES doing business in the business style of GONZALES CREDIT ENTERPRISES, Filipino,
of legal age, married to Danilo G. Gonzales, Jr., of Baliwag, Bulacan, the sum of PESOS . . . . . FIVE
HUNDRED THOUSAND . . . . . (P500,000.00) Philippine Currency with interest thereon at the
485

1998 5
rate of 5.5 PER CENT per month plus 2% service charge per annum from date hereof until fully paid
according to the amortization schedule contained herein. (Italics supplied)
“Payment will be made in full at the maturity date.
“Should I/WE fail to pay any amortization or portion hereof when due, all the other installments
together with all interest accrued shall immediately be due and payable and I/WE hereby agree to
pay an additional amount equivalent to one per cent (1%) per month of the amount due and
demandable as penalty charges in the form of liquidated damages until fully paid; and the
further sum of TWENTY FIVE PER CENT (25%) thereof in full, without deductions as Attorney’s
Fee whether actually incurred or not, of the total amount due and demandable, exclusive of costs and
judicial or extra judicial expenses. (Italics supplied)
“I, WE further agree that in the event the present rate of interest on loan is increased by law or
the Central Bank of the Philippines, the holder shall have the option to apply and collect the
increased interest charges without notice although the original interest have already been collected
wholly or partially unless the contrary is required by law.
“It is also a special condition of this contract that the parties herein agree that the amount of
peso-obligation under this agreement is based on the present value of the peso, and if there be any
change in the value thereof, due to extraordinary inflation or deflation, or any other cause or reason,
then the peso-obligation herein contracted shall be adjusted in accordance with the value of the peso
then prevailing at the time of the complete fulfillment of the obligation.
“Demand and notice of dishonor waived. Holder may accept partial payments and grant renewals
of this note or extension of payments, reserving rights against each and all indorsers and all parties
to this note.
“IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors waive all
his/their rights under the provisions of Section 12, Rule 39, of the Revised Rules of Court.”
On maturity of the loan, the borrowers failed to pay the indebtedness of P500,000.00, plus
interests and penalties, evidenced by the above-quoted promissory note.
486

6
On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G. Gonzales, filed with
the Regional Trial Court of Bulacan, Branch 16, at Malolos, Bulacan, a complaint for collection of the
full amount of the loan including interests and other charges.
In his answer to the complaint filed with the trial court on April 5, 1990, defendant Servando
alleged that he did not obtain any loan from the plaintiffs; that it was defendants Leticia and Dr.
Rafael Medel who borrowed from the plaintiffs the sum of P500,000.00, and actually received the
amount and benefited therefrom; that the loan was secured by a real estate mortgage executed in
favor of the plaintiffs, and that he (Servando Franco) signed the promissory note only as a witness.
In their separate answer filed on April 10, 1990, defendants Leticia and Rafael Medel alleged that
the loan was the transaction of Leticia Yaptinchay, who executed a mortgage in favor of the plaintiffs
over a parcel of real estate situated in San Juan, Batangas; that the interest rate is excessive at 5.5%
per month with additional service charge of 2% per annum, and penalty charge of 1% per month; that
the stipulation for attorney’s fees of 25% of the amount due is unconscionable, illegal and excessive,
and that substantial payments made were applied to interest, penalties and other charges.
After due trial, the lower court declared that the due execution and genuineness of the four
promissory notes had been duly proved, and ruled that although the Usury Law had been repealed,
the interest charged by the plaintiffs on the loans was unconscionable and “revolting to the
conscience.” Hence, the trial court applied “the provision of the New [Civil] Code” that the “legal rate
of interest for loan or forbearance of money, goods or credit is 12% per annum.” 7
Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive portion of
which reads as follows:
___________________
7 Petition, Rollo, pp. 8-21, 17.
487

1998 7
“WHEREFORE, premises considered, judgment is hereby rendered, as follows:
1. “1.Ordering the defendants Servando Franco and Leticia Medel, jointly and severally, to pay plaintiffs
the amount of P47,000.00 plus 12% interest per annum from November 7, 1985 and 1% per month as
penalty, until the entire amount is paid in full;
2. “2.Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly and severally
the amount of P84,000.00 with 12% interest per annum and 1% per cent per month as penalty from
November 19, 1985 until the whole amount is fully paid;
3. “3.Ordering the defendants to pay the plaintiffs, jointly and severally, the amount of P285,000.00 plus
12% interest per annum and 1% per month as penalty from July 11, 1986, until the whole amount is fully
paid;
4. “4.Ordering the defendants to pay plaintiffs, jointly and severally, the amount of P50,000.00 as
attorney’s fees;
5. “5.All counterclaims are hereby dismissed.

“With costs against the defendants.” 8
In due time, both plaintiffs and defendants appealed to the Court of Appeals.
In their appeal, plaintiffs-appellants argued that the promissory note, which consolidated all the
unpaid loans of the defendants, is the law that governs the parties. They further argued that
Circular No. 416 of the Central Bank prescribing the rate of interest for loans or forbearance of
money, goods or credit at 12% per annum, applies only in the absence of a stipulation on interest rate,
but not when the parties agreed thereon.
The Court of Appeals sustained the plaintiffs-appellants’ contention. It ruled that “the Usury Law
having become ‘legally inexistent’ with the promulgation by the Central Bank in 1982 of Circular No.
905, the lender and borrower could agree on any interest that may be charged on the loan.” The 9
_________________
8 Rollo, pp. 36-A-43.
9 Citing Verdejo v. Court of Appeals, 157 SCRA 743 (1988); Liam Law v. Olympic Sawmill Co., 129 SCRA 439 (1984).
488

8
Court of Appeals further held that “the imposition of ‘an additional amount equivalent to 1% per
month of the amount due and demandable as penalty charges in the form of liquidated damages
until fully paid’ was allowed by law.” 10
Accordingly, on March 21, 1997, the Court of Appeals promulgated its decision reversing that of
the Regional Trial Court, disposing as follows:
“WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are hereby ordered to pay the
plaintiffs the sum of P500,000.00, plus 5.5% per month interest and 2% service charge per annum effective July
23, 1986, plus 1% per month of the total amount due and demandable as penalty charges effective August 24,
1986, until the entire amount is fully paid.
“The award to the plaintiffs of P50,000.00 as attorney’s fees is affirmed. And so is the imposition of costs
against the defendants.
“SO ORDERED.” 11
On April 15, 1997, defendants-appellants filed a motion for reconsideration of the said decision. By
resolution dated November 25, 1997, the Court of Appeals denied the motion. 12
Hence, defendants interposed the present recourse viapetition for review on certiorari. 13
We find the petition meritorious.

Basically, the issue revolves on the validity of the interest rate stipulated upon. Thus, the
question presented is whether or not the stipulated rate of interest at 5.5% per month on the loan in
the sum of P500,000.00, that plaintiffs extended to the defendants is usurious. In other words, is the
Usury Law still effective, or has it been repealed by Central Bank Circular No. 905, adopted on
December 22, 1982, pursuant to its powers under P.D. No. 116, as amended by P.D. No. 1684?
___________________
10 Citing Article 2209, Civil Code, and State Investment House, Inc. v. Court of Appeals, 198 SCRA 390.
11 Rollo, p. 27.
12 Rollo, p. 36.
13 Rollo, pp. 8-21.
489

1998 9
We agree with petitioners that the stipulated rate of interest at 5.5% per month on the P500,000.00
loan is excessive, iniquitous, unconscionable and exorbitant. However, we can not consider the rate
14
“usurious” because this Court has consistently held that Circular No. 905 of the Central Bank,
adopted on December 22, 1982, has expressly removed the interest ceilings prescribed by the Usury
Law and that the Usury Law is now “legally inexistent.”
15 16
In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61 the Court 17
held that CB Circular No. 905 “did not repeal nor in any way amend the Usury Law but simply
suspended the latter’s effectivity.” Indeed, we have held that “a Central Bank Circular can not repeal
a law. Only a law can repeal another law.” In the recent case of Florendo vs. Court of Appeals, the
18 19
Court reiterated the ruling that “by virtue of CB Circular 905, the Usury Law has been rendered
ineffective.” “Usury has been legally non-existent in our jurisdiction. Interest can now be charged as
lender and borrower may agree upon.” 20
Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the
parties in the promissory note iniquitous or unconscionable, and, hence, contrary to morals (“contra
bonos mores”), if not against the law. The stipulation is void. The courts shall reduce equitably
21 22
liqui-
____________________
14 Petition, pp. 15-17, Rollo.
15 People v. Dizon, 329 Phil. 687 [1996].
16 Liam Law v. Olympic Sawmill Co., 129 SCRA 439, 442.
17 331 Phil. 787 [1996].
18 Palanca v. Court of Appeals, 238 SCRA 593, 601 [1994].
19 333 Phil. 535 [1996].
20 People v. Dizon, supra, citing other cases.
21 Article 1306, Civil Code.
22 Cf. Ibarra v. Aveyro, 37 Phil. 274; Almeda v. Court of Appeals, 256 SCRA 292 [1996].
490

0
dated damages, whether intended as an indemnity or a penalty if they are iniquitous or
unconscionable. 23
Consequently, the Court of Appeals erred in upholding the stipulation of the parties. Rather, we
agree with the trial court that, under the circumstances, interest at 12% per annum, and an
additional 1% a month penalty charge as liquidated damages may be more reasonable.
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of
Appeals promulgated on March 21, 1997, and its resolution dated November 25, 1997. Instead, we
render judgment REVIVING and AFFIRMING the decision dated December 9, 1991, of the Regional
Trial Court of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No. 134-M-90, involving the same
parties.
No pronouncement as to costs in this instance.
SO ORDERED.
Narvasa (C.J., Chairman), Romero, Kapunan and Purisima, JJ., concur.
Judgment and resolution reversed and set aside, that of the Regional Trial Court of Bulacan, Br.
16 revived and affirmed.
Notes.—Under the Civil Service Law, lending money at usurious rates of interest is specifically
listed as ground for disciplinary action; Courts are not lending institutions. (RTC Makati Movement
Against Graft and Corruption vs. Dumlao, 247 SCRA 108 [1995])
While the Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the
said circular could possibly be read as granting carte blanche authority to lenders to
_____________________
23 Article 2227, Civil Code; Joe’s Radio and Electrical Supply v. Alto Electronics Corp., 104 Phil. 33 [1958]; Social Security Commission v.
Almeda, 168 SCRA 474 [1988]; Palmares v. Court of Appeals, G.R. No. 126490, March 31, 1998, reported in The Court Systems Journal,
Special Edition 1, October, 1998, pp. 79-93.
491
VOL. 299, DECEMBER 2, 491

1998
Sta. Ines Melale Forest Products
Corporation vs. Macaraig, Jr.
raise interest rates to levels which would either enslave their borrowers or lead to a hemorrhaging of
their assets. (Almeda vs. Court of Appeals, 256 SCRA 292 [1996])
——o0o——
December 8, 2010.G.R. No. 172139. *
JOCELYN M. TOLEDO, petitioner, vs. MARILOU M. HYDEN, respondent.
Civil Law; Contracts; Interest Rates; In view of Central Bank Circular No. 905 s. 1982 which suspended the
Usury Law ceiling on interest effective January 1, 1983, parties to a loan agreement have wide latitude to stipulate
interest rates; Such stipulated interest rates may be declared as illegal if the same is unconscionable.—In view of
Central Bank Circular No. 905 s. 1982, which suspended the Usury Law ceiling on interest effective January 1,
1983, parties to a loan agreement have wide latitude to stipulate interest rates. Nevertheless, such stipulated
interest rates may be declared as illegal if the same is unconscionable. There is certainly nothing in said circular
which 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. In fact, in Medel v. Court of Appeals, 299 SCRA 481 (1998),
we annulled a stipulated 5.5% per month or 66% per annuminterest with additional service charge of 2% per
annum and penalty charge of 1% per month on a P500,000.00 loan for being excessive, iniquitous, unconscionable
and exorbitant.
Same; Same; Same; A litigant may be denied relief by a court of equity on the ground that has been
inequitable, unfair, and dishonest or fraudulent or deceitful as to the controversy in issue.—After years of
benefiting from the proceeds of the loans bearing an interest rate of 6% to 7% per month and paying for the same,
Jocelyn cannot now go to court to have the said interest rate annulled on the ground that it is excessive,
iniquitous, unconscionable, exorbitant, and absolutely revolting to the conscience of man. “This is so because
among the maxims of equity are (1) he who seeks equity must do equity, and (2) he who comes into equity must
come with clean hands. The latter is a frequently stated maxim which is also expressed in the principle that he
who has done inequity shall not have equity. It signifies that a litigant may be denied relief by a court of equity on
the ground that his conduct has been inequitable, unfair and dishonest, or fraudulent, or deceitful as to the
controversy in issue.”
Same; Same; Estoppel; Essential Elements of Estoppel.—The essential elements of estoppel are: (1) conduct
amounting to false representation or
_______________
* FIRST DIVISION.
541

2010 1
Toledo vs. Hyden
concealment of material facts or at least calculated to convey the impression that the facts are otherwise
than, and inconsistent with, those which the party subsequently attempts to assert; (2) intent, or at least
expectation, that this conduct shall be acted upon by, or at least influence, the other party; and, (3) knowledge,
actual or constructive, of the real facts.
Same; Same; Same; A party to a contract cannot deny the validity thereof after enjoying its benefits without
outrage to one’s sense of justice and fairness; Courts have no power to relieve parties from obligations voluntarily
assumed, simply because their contracts turned out to be disastrous or unwise investments.—Jocelyn already
availed herself of the benefits of the “Acknowledgment of Debt,” the validity of which she now impugns. As aptly
found by the RTC and the CA, Jocelyn was making a business out of the loaned amounts. She was actually using
the money to make advance payments for her prospective clients so that her sales production would increase.
Accordingly, she did not mind the 6% to 7% interest per month as she was getting a 50% rebate on her sales.
Clearly, by her own acts, Jocelyn is estopped from impugning the validity of the “Acknowledgment of Debt.” “[A]
party to a contract cannot deny the validity thereof after enjoying its benefits without outrage to one’s sense of
justice and fairness.” “It is a long established doctrine that the law does not relieve a party from the effects of an
unwise, foolish or disastrous contract, entered into with all the required formalities and with full awareness of
what she was doing. Courts have no power to relieve parties from obligations voluntarily assumed, simply
because their contracts turned out to be disastrous or unwise investments.”
PETITION for review on certiorari of the decision and resolution of the Court of Appeals.
Hernan M. Morante for petitioner.
Manuel S. Paradela for respondent.
DEL CASTILLO,J.:
It is true that the imposition of an unconscionable rate of interest on a money debt is immoral and
unjust and the court may come to the aid of the aggrieved party to that contract. However, before
doing so, courts have to consider the settled principle that the law will not
542

2
Toledo vs. Hyden
relieve a party from the effects of an unwise, foolish or disastrous contract if such party had full
awareness of what she was doing.
This Petition for Review on Certiorari assails the Decision dated August 24, 2005 of the Court of
1 2
Appeals (CA) in CA-G.R. CV No. 79805, which affirmed the Decision dated March 10, 2003 of the 3
Regional Trial Court (RTC), Branch 22, Cebu City in Civil Case No. CEB-22867. Also assailed is the
Resolution dated March 8, 2006 denying the motion for reconsideration.
Factual Antecedents
Petitioner Jocelyn M. Toledo (Jocelyn), who was then the Vice-President of the College Assurance
Plan (CAP) Phils., Inc., obtained several loans from respondent Marilou M. Hyden (Marilou). The
transactions are briefly summarized below:
August 15,19931) ……… P
30,000.00
April 21, 19942) ……… 100,000.00 with 6%
monthly
October 2, 19953) ……… 30,000.00 interest
October 9, 19954) ……… 30,000.00
May 22, 19975) ……… _100,000.0 with 7%
0 monthly
TOTAL AMOUNT ……… P290,000.0 interest
OF LOAN 0 4
From August 15, 1993 up to December 31, 1997, Jocelyn had been religiously paying Marilou the
stipulated monthly interest by issuing checks and depositing sums of money in the bank account of
the latter. However, the total principal amount of P290,000.00 remained unpaid. Thus, in April 1998,
Marilou visited Jocelyn in her office at CAP in Cebu City and asked Jocelyn and the other employees
who were likewise indebted to her to acknowledge their debts. A document
_______________
1 Rollo, pp. 3-26.
2 CA Rollo, pp. 65-75; penned by Associate Justice Mercedes Gozo-Dadole and concurred in by Associate Justices Isaias P. Dicdican and
Ramon M. Bato, Jr.
3 Records, pp. 341-349; penned by Judge Pampio A. Abarintos.
4 Id., at p. 342.
543
2010 3
Toledo vs. Hyden
entitled “Acknowledgment of Debt” for the amount of P290,000.00 was signed by Jocelyn with two of
5
her subordinates as witnesses. The said amount represents the principal consolidated amount of the
aforementioned previous debts due on December 25, 1998. Also on said occasion, Jocelyn issued five
checks to Marilou representing renewal payment of her five previous loans, viz.:
Check No. 0010761 dated ......... P
September 2, 1998 30,000.00
Check No. 0010762 dated ......... 30,000.00
September 9, 1998
Check No. 0010763 dated ......... 30,000.00
September 15, 1998
Check No. 0010764 dated ......... 100,000.00
September 22, 1998
Check No. 0010765 dated ......... 100,000.00
September 25, 1998
TOTAL P290,000.0
0
In June 1998, Jocelyn asked Marilou for the recall of Check No. 0010761 in the amount of
P30,000.00 and replaced the same with six checks, in staggered amounts, namely:
Check No. 0010494 dated July 2, . . . . . . . . . P
1998 6,625.00
Check No. 0010495 dated August ......... 6,300.00
2, 1998
Check No. 0010496 dated ......... 5,975.00
September 2, 1998
Check No. 0010497 dated October ......... 6,500.00
2, 1998
Check No. 0010498 dated ......... 5,325.00
November 2, 1998
Check No. 0010499 dated ......... 5,000.00
December 2, 1998
TOTAL P35,725.0
0
After honoring Check Nos. 0010494, 0010495 and 0010496, Jocelyn ordered the stop payment on
the remaining checks and on October 27, 1998, filed with the RTC of Cebu City a complaint against
6
Marilou for Declaration of Nullity and Payment, Annulment, Sum of Money, Injunction and
Damages.
_______________
5 Id., at p. 8.
6 Id., at pp. 1-9.

544

4
Toledo vs. Hyden
Jocelyn averred that Marilou forced, threatened and intimidated her into signing the
“Acknowledgment of Debt” and at the same time forced her to issue the seven postdated checks. She
claimed that Marilou even threatened to sue her for violation of Batas Pambansa (BP) Blg. 22 or the
Bouncing Checks Law if she will not sign the said document and draw the above-mentioned checks.
Jocelyn further claimed that the application of her total payment of P528,550.00 to interest alone is
illegal, unfounded, unjust, oppressive and contrary to law because there was no written agreement to
pay interest.
On November 23, 1998, Marilou filed an Answer with Special Affirmative Defenses and
7
Counterclaim alleging that Jocelyn voluntarily obtained the said loans knowing fully well that the
interest rate was at 6% to 7% per month. In fact, a 6% to 7% advance interest was already deducted
from the loan amount given to Jocelyn.
Ruling of the Regional Trial Court
The court a quo did not find any showing that Jocelyn was forced, threatened, or intimidated in
signing the document referred to as “Acknowledgment of Debt” and in issuing the postdated checks.
Thus, in its March 10, 2003 Decision the trial court ruled in favor of Marilou, viz.:
“WHEREFORE, premised on the foregoing, the Court hereby declares the document “Acknowledgment of
Debt” valid and binding. PLAINTIFF is indebted to DEFENDANT [for] the amount of TWO HUNDRED NINETY
THOUSAND (P290,000.00) PESOS since December 25, 1998 less the amount of EIGHTEEN THOUSAND NINE
HUNDRED (P18,900.00) PESOS, equivalent to the three checks made good (P6,625.00 dated 07-02-1998;
P6,300.00 dated 08-02-1998; and P5,975.00 dated 09-02-1998).
Consequently, PLAINTIFF is hereby ordered to pay DEFENDANT the amount of TWO HUNDRED
SEVENTY ONE THOUSAND ONE HUNDRED (P271,100.00) PESOS due on December 25, 1998 with a 12%
interest per annum or 1% interest per month until such time that the said amount shall have been fully paid.
No pronouncement as to costs.
_______________
7 Id., at pp. 12-24.
545

2010 5
Toledo vs. Hyden
SO ORDERED.” 8
On March 26, 2003, Jocelyn filed an Earnest Motion for Reconsideration, which was denied by the
9
trial court in its Order dated April 29, 2003 stating that it finds no sufficient reason to disturb its
10
March 10, 2003 Decision.

Ruling of the Court of Appeals
On appeal, Jocelyn asserts that she had made payments in the total amount of P778,000.00 for a
principal amount of loan of only P290,000.00. What is appalling, according to Jocelyn, was that such
payments covered only the interest because of the excessive, iniquitous, unconscionable and
exorbitant imposition of the 6% to 7% monthly interest.
On August 24, 2005, the CA issued its Decision which provides:
“WHEREFORE, premises considered, the Decision dated March 10, 2003 and the Order dated April 29, 2003,
of the Regional Trial Court, 7th Judicial Region, Branch 22, Cebu City, in Civil Case No. CEB-22867 are
hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED.” 11
The Motion for Reconsideration filed by Jocelyn was denied by the CA through its
12
Resolution dated March 8, 2006.

13
Issues
Hence, this petition raising the following issues:
I.
_______________
8 Id., at p. 349.
9 Id., at pp. 350-354.
10 Id., at pp. 364-365.
11 CA Rollo, p. 75.
12 Id., at pp. 76-90.
13 Id., at pp. 113-114.
546

6
Toledo vs. Hyden
Whether the CA gravely erred when it held that the imposition of interest at the rate of six percent (6%) to seven
percent (7%) is not contrary to law, morals, good customs, public order or public policy.
II.
Whether the CA gravely erred when it failed to declare that the “Acknowledgment of Debt” is an inexistent
contract that is void from the very beginning pursuant to Article 1409 of the New Civil Code.
Petitioner’s Arguments
Jocelyn posits that the CA erred when it held that the imposition of interest at the rates of 6% to 7%
per month is not contrary to law, not unconscionable and not contrary to morals. She likewise
contends that the CA erred in ruling that the “Acknowledgment of Debt” is valid and binding.
According to Jocelyn, even assuming that the execution of said document was not attended with force,
threat and intimidation, the same must nevertheless be declared null and void for being contrary to
law and public policy. This is borne out by the fact that the payments in the total amount of
P778,000.00 was applied to interest payment alone. This only proves that the transaction was
iniquitous, excessive, oppressive and unconscionable.
Respondent’s Arguments
On the other hand, Marilou would like this Court to consider the fact that the document referred
to as “Acknowledgment of Debt” was executed in the safe surroundings of the office of Jocelyn and it
was witnessed by two of her staff. If at all there had been coercion, then Jocelyn could have easily
prevented her staff from affixing their signatures to said document. In fact, petitioner had admitted
that she was the one who went to the tables of her staff to let them sign the said document.
Our Ruling
The petition is without merit.547
2010 7
Toledo vs. Hyden
The 6% to 7% interest per month paid
by Jocelyn is not excessive under the
circumstances of this case.
In view of Central Bank Circular No. 905 s. 1982, which suspended the Usury Law ceiling on
interest effective January 1, 1983, parties to a loan agreement have wide latitude to stipulate
interest rates. Nevertheless, such stipulated interest rates may be declared as illegal if the same is
unconscionable. There 14 is certainly nothing in said circular which 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. In fact, in Medel v. Court of Appeals, we annulled a stipulated 5.5%
15 16
per month or 66% per annum interest with additional service charge of 2% per annum and penalty
charge of 1% per month on a P500,000.00 loan for being excessive, iniquitous, unconscionable and
exorbitant.
In this case, however, we cannot consider the disputed 6% to 7% monthly interest rate to be
iniquitous or unconscionable vis-à-vis the principle laid down in Medel.Noteworthy is the fact that
in Medel, the defendant-spouses were never able to pay their indebtedness from the very beginning
and when their obligations ballooned into a staggering sum, the creditors filed a collection case
against them. In this case, there was no urgency of the need for money on the part of Jocelyn, the
debtor, which compelled her to enter into said loan transactions. She used the money from the loans
to make advance payments for prospective clients of educational plans offered by her employer. In
this way, her sales production would increase, thereby entitling her to 50% rebate on her sales. This
is the reason why she did not mind the 6% to 7% monthly interest. Notably too, a business
transaction of this nature between Jocelyn and Marilou continued for more than five years. Jocelyn
religiously paid the agreed amount of interest until she ordered for stop payment on some of the
checks
_______________
14 Ruiz v. Court of Appeals, 449 Phil. 419, 434; 401 SCRA 410 (2003).
15 Spouses Almeda v. Court of Appeals, 326 Phil. 309, 319; 256 SCRA 292, 302 (1996).
16 359 Phil. 820; 299 SCRA 481 (1998).
548

8
Toledo vs. Hyden
issued to Marilou. The checks were in fact sufficiently funded when she ordered the stop payment
and then filed a case questioning the imposition of a 6% to 7% interest rate for being allegedly
iniquitous or unconscionable and, hence, contrary to morals.
It was clearly shown that before Jocelyn availed of said loans, she knew fully well that the same
carried with it an interest rate of 6% to 7% per month, yet she did not complain. In fact, when she
availed of said loans, an advance interest of 6% to 7% was already deducted from the loan amount,
yet she never uttered a word of protest.
After years of benefiting from the proceeds of the loans bearing an interest rate of 6% to 7% per
month and paying for the same, Jocelyn cannot now go to court to have the said interest rate
annulled on the ground that it is excessive, iniquitous, unconscionable, exorbitant, and absolutely
revolting to the conscience of man. “This is so because among the maxims of equity are (1) he who
seeks equity must do equity, and (2) he who comes into equity must come with clean hands. The
latter is a frequently stated maxim which is also expressed in the principle that he who has done
inequity shall not have equity. It signifies that a litigant may be denied relief by a court of equity on
the ground that his conduct has been inequitable, unfair and dishonest, or fraudulent, or deceitful as
to the controversy in issue.” 17
We are convinced that Jocelyn did not come to court for equitable relief with equity or with clean
hands. It is patently clear from the above summary of the facts that the conduct of Jocelyn can by no
means be characterized as nobly fair, just, and reasonable. This Court likewise notes certain acts of
Jocelyn before filing the case with the RTC. In September 1998, she requested Marilou not to deposit
her checks as she can cover the checks only the following month. On the next month, Jocelyn again
requested for another extension of one month. It turned out that she was only sweet-talking Marilou
into believing that she had no money at that time. But as testified by Serapio Romarate, an employee 18
of the Bank of Commerce where

_______________
17 University of the Philippines v. Catungal, Jr., 338 Phil. 728, 743-744; 272 SCRA 221, 237 (1997).
18 TSN, January 15, 2002, p. 8.
549

2010 9
Toledo vs. Hyden
Jocelyn is one of their clients, there was an available balance of P276,203.03 in the latter’s account
and yet she ordered for the stop payments of the seven checks which can actually be covered by the
available funds in said account. She then caught Marilou by surprise when she surreptitiously filed a
case for declaration of nullity of the document and for damages.
The document “Acknowledgment of Debt” is
valid and binding.
Jocelyn seeks for the nullification of the document entitled “Acknowledgment of Debt” and wants
this Court to declare that she is no longer indebted to Marilou in the amount of P290,000.00 as she
had already paid a total amount of P778,000.00. She claims that said document is an inexistent
contract that is void from the very beginning as clearly provided for by Article 1409 of the New Civil 19
Code.
Jocelyn further claims that she signed the said document and issued the seven postdated checks
because Marilou threatened to sue her for violation of BP Blg. 22.
Jocelyn is misguided. Even if there was indeed such threat made by Marilou, the same is not
considered as threat that would vitiate consent. Article 1335 of the New Civil Code is very specific on
this matter. It provides:
There is violence when in order to wrest consent, serious or irresistible force is employed.1335.“Art.
xxxx
A threat to enforce one’s claim through competent authority, if the claim is just or legal, does not
vitiate consent.” (Emphasis supplied.)
Clearly, we cannot grant Jocelyn the relief she seeks.

_______________
19The following contracts are inexistent and void from the beginning: Art. 1409.
Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy;(1)
xxxx
550

0
Toledo vs. Hyden
As can be seen from the records of the case, Jocelyn has failed to prove her claim that she was
made to sign the document “Acknowledgment of Debt” and draw the seven Bank of Commerce checks
through force, threat and intimidation. As earlier stressed, said document was signed in the office of
Jocelyn, a high ranking executive of CAP, and it was Jocelyn herself who went to the table of her two
subordinates to procure their signatures as witnesses to the execution of said document. If indeed,
she was forced to sign said document, then Jocelyn should have immediately taken the proper legal
remedy. But she did not. Furthermore, it must be noted that after the execution of said document,
Jocelyn honored the first three checks before filing the complaint with the RTC. If indeed she was
forced she would never have made good on the first three checks.
It is provided, as one of the conclusive presumptions under Rule 131, Section 2(a), of the Rules of
Court that, “Whenever a party has, by his own declaration, act or omission, intentionally and
deliberately led another to believe a particular thing to be true, and to act upon such belief, he cannot,
in any litigation arising out of such declaration, act or omission, be permitted to falsify it.” This is
known as the principle of estoppel.
“The essential elements of estoppel are: (1) conduct amounting to false representation or
concealment of material facts or at least calculated to convey the impression that the facts are
otherwise than, and inconsistent with, those which the party subsequently attempts to assert; (2)
intent, or at least expectation, that this conduct shall be acted upon by, or at least influence, the
other party; and, (3) knowledge, actual or constructive, of the real facts.” 20
Here, it is uncontested that Jocelyn had in fact signed the “Acknowledgment of Debt” in April
1998 and two of her subordinates served as witnesses to its execution, knowing fully well the nature
of the contract she was entering into. Next, Jocelyn issued five checks in favor of Marilou
representing renewal payment of her loans amounting to P290,000.00. In June 1998, she asked to
recall Check No.
_______________
20 Philippine National Bank v. Court of Appeals, 367 Phil. 508, 516; 308 SCRA 229, 235-236 (1999).
551

2010 1
Toledo vs. Hyden
0010761 in the amount of P30,000.00 and replaced the same with six checks, in staggered amounts.
All these are indicia that Jocelyn treated the “Acknowledgment of Debt” as a valid and binding
contract.
More significantly, Jocelyn already availed herself of the benefits of the “Acknowledgment of
Debt,” the validity of which she now impugns. As aptly found by the RTC and the CA, Jocelyn was
making a business out of the loaned amounts. She was actually using the money to make advance
payments for her prospective clients so that her sales production would increase. Accordingly, she
did not mind the 6% to 7% interest per month as she was getting a 50% rebate on her sales.
Clearly, by her own acts, Jocelyn is estopped from impugning the validity of the “Acknowledgment
of Debt.” “[A] party to a contract cannot deny the validity thereof after enjoying its benefits without
outrage to one’s sense of justice and fairness.” “It is a long established doctrine that the law does not
21
relieve a party from the effects of an unwise, foolish or disastrous contract, entered into with all the
required formalities and with full awareness of what she was doing. Courts have no power to relieve
parties from obligations voluntarily assumed, simply because their contracts turned out to be
disastrous or unwise investments.” 22
WHEREFORE, the instant petition for review on certiorari is DENIED. The Decision of the Court
of Appeals in CA-G.R. CV No. 79805 dated August 24, 2005 affirming the Decision dated March 10,
2003 of the Regional Trial Court, Branch 22, Cebu City, in Civil Case No. CEB-22867 is AFFIRMED.
SO ORDERED.
Corona (C.J., Chairperson), Leonardo-De Castro, Abad and Perez, JJ., concur.
**
April 18, 2012.G.R. No. 175139. *
HERMOJINA ESTORES, petitioner, vs. SPOUSES ARTURO and LAURA SUPANGAN,

respondents.
Civil Law; Interest Rates; The general rule is that the applicable rate of interest “shall be computed in
accordance with the stipulation of the parties.” Absent any stipulation, the applicable rate of interest shall be 12%
per annum “when the obligation arises out of a loan or a forbearance of money, goods or credits. In other cases, it
shall be six percent (6%).”—Anent the interest rate, the general rule is that the applicable rate of interest “shall
be computed in accordance with the stipulation of the parties.” Absent any stipulation, the applicable rate of
interest shall be 12% per annum “when the obligation arises out of a loan or a forbearance of money, goods or
credits. In other cases, it shall be six percent (6%).” In this case, the parties did not stipulate as to the applicable
rate of interest. The only question remaining therefore is whether the 6% as provided under Article 2209 of the
Civil Code, or 12% under Central Bank Circular No. 416, is due.
Same; Same; 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.—In Crismina Garments, Inc. v. Court of Appeals, 304 SCRA 356 (1999), “forbearance” was 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.
_______________
* FIRST DIVISION.
96

6 ANNOTATED
Estores vs. Supangan
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.
Fidel Angelito I. Arias for petitioner.
Rudy T. Tasarra Law Office for respondents.
DEL CASTILLO,J.:
The only issue posed before us is the propriety of the imposition of interest and attorney’s fees.
Assailed in this Petition for Review filed under Rule 45 of the Rules of Court is the May 12, 2006
1
Decision of the Court

2
_______________
1 Rollo, pp. 11-18.
2 CA Rollo, pp. 82-104; penned by Associate Justice Jose L. Sabio, Jr. and concurred in by Associate Justices Rosalinda
Asuncion-Vicente and Arturo G. Tayag.
97
VOL. 670, APRIL 18, 9

2012 7
of Appeals (CA) in CA-G.R. CV No. 83123, the dispositive portion of which reads:
“WHEREFORE, the appealed decision is MODIFIED. The rate of interest shall be six percent (6%) per annum,
computed from September 27, 2000 until its full payment before finality of the judgment. If the adjudged
principal and the interest (or any part thereof) remain unpaid thereafter, the interest rate shall be adjusted to
twelve percent (12%) per annum, computed from the time the judgment becomes final and executory until it is
fully satisfied. The award of attorney’s fees is hereby reduced to P100,000.00. Costs against the
defendants-appellants.
SO ORDERED.” 3
Also assailed is the August 31, 2006 Resolution denying the motion for reconsideration.
4
Factual Antecedents
On October 3, 1993, petitioner Hermojina Estores and respondent-spouses Arturo and Laura
Supangan entered into a Conditional Deed of Sale whereby petitioner offered to sell, and
5
respondent-spouses offered to buy, a parcel of land covered by Transfer Certificate of Title No. TCT
No. 98720 located at Naic, Cavite for the sum of P4.7 million. The parties likewise stipulated, among
others, to wit:
“x x x x
Vendor will secure approved clearance from DAR requirements of which are (1.sic):
Letter requesta)
Titleb)
Tax Declarationc)
Affidavit of Aggregate Landholding – Vendor/Vendeed)
_______________
3 Id., at p. 103.
4 Id., at p. 118.
5 Records, pp. 8-9.
98

8 ANNOTATED
Certification from the Prov’l. Assessor’s as to Landholdings of Vendor/Vendeee)
Affidavit of Non-Tenancyf)
Deed of Absolute Saleg)
xxxx
Vendee shall be informed as to the status of DAR clearance within 10 days upon signing of the documents.4.
xxxx
Regarding the house located within the perimeter of the subject [lot] owned by spouses [Magbago], said house shall be moved
outside the perimeter of this subject property to the 300 sq. m. area allocated for [it]. Vendor hereby accepts the responsibility
of seeing to it that such agreement is carried out before full payment of the sale is made by vendee.6.
If and after the vendor has completed all necessary documents for registration of the title and the vendee fails to complete
payment as per agreement, a forfeiture fee of 25% or downpayment, shall be applied. However, if the vendor fails to complete
necessary documents within thirty days without any sufficient reason, or without informing the vendee of its status, vendee
has the right to demand return of full amount of down payment.7.
xxxx
As to the boundaries and partition of the lots (15,018 sq. m. and 300 sq. m.) Vendee shall be informed immediately of its
approval by the LRC.9.
The vendor assures the vendee of a peaceful transfer of ownership.10.
x x x x” 6
After almost seven years from the time of the execution of the contract and notwithstanding
payment of P3.5 million on the part of respondent-spouses, petitioner still failed to com-
_______________
6 Id.
99
VOL. 670, APRIL 18, 9

2012 9
ply with her obligation as expressly provided in paragraphs 4, 6, 7, 9 and 10 of the contract. Hence, in
a letter dated September 27, 2000, respondent-spouses demanded the return of the amount of P3.5
7
million within 15 days from receipt of the letter. In reply, petitioner acknowledged receipt of the
8
P3.5 million and promised to return the same within 120 days. Respondent-spouses were amenable
to the proposal provided an interest of 12% compounded annually shall be imposed on the P3.5
million. When petitioner still failed to return the amount despite demand, respondent-spouses were
9
constrained to file a Complaint for sum of money before the Regional Trial Court (RTC) of Malabon
10
against herein petitioner as well as Roberto U. Arias (Arias) who allegedly acted as petitioner’s agent.
The case was docketed as Civil Case No. 3201-MN and raffled off to Branch 170. In their complaint,
respondent-spouses prayed that petitioner and Arias be ordered to:
Pay the principal amount of P3,500,000.00 plus interest of 12% compounded annually starting October 1, 1993 or an
estimated amount of P8,558,591.65;“1.
Pay the following items of damages: 2.
Moral damages in the amount of P100,000.00;a)
Actual damages in the amount of P100,000.00;b)
Exemplary damages in the amount of P100,000.00;c)
[Attorney’s] fee in the amount of P50,000.00 plus 20% of recoverable amount from the [petitioner].d)
[C]ost of suit.”e) 11
_______________
7 Id., at p. 11.
8 See letter dated October 13, 2000; id., at p. 13.
9 See letter dated October 20, 2000; id., at p. 22.
10 Id., at pp. 2-7.
11 Id., at p. 6.
100

0
In their Answer with Counterclaim, petitioner and Arias averred that they are willing to return
12
the principal amount of P3.5 million but without any interest as the same was not agreed upon. In
their Pre-Trial Brief, they reiterated that the only remaining issue between the parties is the
13
imposition of interest. They argued that since the Conditional Deed of Sale provided only for the
return of the downpayment in case of breach, they cannot be held liable to pay legal interest as well. 14
In its Pre-Trial Order dated June 29, 2001, the RTC noted that “the parties agreed that the
15
principal amount of 3.5 million pesos should be returned to the [respondent-spouses] by the
[petitioner] and the issue remaining [is] whether x x x [respondent-spouses] are entitled to legal
interest thereon, damages and attorney’s fees.” 16
Trial ensued thereafter. After the presentation of the respondent-spouses’ evidence, the trial court
set the presentation of Arias and petitioner’s evidence on September 3, 2003. However, despite 17
several postponements, petitioner and Arias failed to appear hence they were deemed to have waived
the presentation of their evidence. Consequently, the case was deemed submitted for decision. 18
Ruling of the Regional Trial Court

On May 7, 2004, the RTC rendered its Decision finding respondent-spouses entitled to interest
19
but only at the rate of

_______________
12 Id., at pp. 18-20.
13 Id., at pp. 40-42.
14 Id., at p. 40.
15 Id., at pp. 80-81.
16 Id., at p. 81.
17 See Order dated July 30, 2003; id., at p. 120.
18 See Order dated November 21, 2003; id., at p. 181.
19 Id., at pp. 253-257; penned by Judge Benjamin T. Antonio.
101
VOL. 670, APRIL 18, 10

2012 1
6% per annum and not 12% as prayed by them. It also found respondent-spouses entitled to
20
attorney’s fees as they were compelled to litigate to protect their interest. 21
The dispositive portion of the RTC Decision reads:

“WHEREFORE, premises considered, judgment is hereby rendered in favor of the [respondent-spouses] and
ordering the [petitioner and Roberto Arias] to jointly and severally:
Pay [respondent-spouses] the principal amount of Three Million Five Hundred Thousand pesos (P3,500,000.00)
with an interest of 6% compounded annually starting October 1, 1993 and attorney’s fee in the amount of Fifty
Thousand pesos (P50,000.00) plus 20% of the recoverable amount from the defendants and cost of the suit.1.
The Compulsory Counter Claim is hereby dismissed for lack of factual evidence.
SO ORDERED.” 22
Ruling of the Court of Appeals

Aggrieved, petitioner and Arias filed their notice of appeal. The CA noted that the only issue
23
submitted for its resolution is “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.” 24
On May 12, 2006, the CA rendered the assailed Decision affirming the ruling of the RTC finding
the imposition of 6% interest proper. However, the same shall start to run only from September 27,
25
2000 when respondent-spouses formally demanded the return of their money and not from October
1993 when the contract was executed as held by the RTC. The
_______________
20 Id., at p. 256.
21 Id.
22 Id., at pp. 256-257.
23 Id., at p. 258.
24 CA Rollo, p. 82.
25 Id., at p. 98.
102

2
CA also modified the RTC’s ruling as regards the liability of Arias. It held that Arias could not be
held solidarily liable with petitioner because he merely acted as agent of the latter. Moreover, there
was no showing that he expressly bound himself to be personally liable or that he exceeded the limits
of his authority. More importantly, there was even no showing that Arias was authorized to act as
agent of petitioner. Anent the award of attorney’s fees, the CA found the award by the trial court
26
(P50,000.00 plus 20% of the recoverable amount) excessive and thus reduced the same to
27
P100,000.00. 28
The dispositive portion of the CA Decision reads:

“WHEREFORE, the appealed decision is MODIFIED. The rate of interest shall be six percent (6%) per annum,
computed from September 27, 2000 until its full payment before finality of the judgment. If the adjudged
principal and the interest (or any part thereof) remain[s] unpaid thereafter, the interest rate shall be adjusted to
twelve percent (12%) per annum, computed from the time the judgment becomes final and executory until it is
fully satisfied. The award of attorney’s fees is hereby reduced to P100,000.00. Costs against the [petitioner].
SO ORDERED.” 29
Petitioner moved for reconsideration which was denied in the August 31, 2006 Resolution of the
CA.
Hence, this petition raising the sole issue of whether the imposition of interest and attorney’s fees
is proper.
Petitioner’s Arguments
Petitioner insists that she is not bound to pay interest on the P3.5 million because the Conditional
Deed of Sale only
_______________
26 Id., at pp. 100-101.
27 Id., at p. 102.
28 Id., at p. 103.
29 Id.
103
VOL. 670, APRIL 18, 10

2012 3
provided for the return of the downpayment in case of failure to comply with her obligations.
Petitioner also argues that the award of attorney’s fees in favor of the respondent-spouses is
unwarranted because it cannot be said that the latter won over the former since the CA even
sustained her contention that the imposition of 12% interest compounded annually is totally
uncalled for.
Respondent-spouses’ Arguments
Respondent-spouses aver that it is only fair that interest be imposed on the amount they paid
considering that petitioner failed to return the amount upon demand and had been using the P3.5
million for her benefit. Moreover, it is undisputed that petitioner failed to perform her obligations to
relocate the house outside the perimeter of the subject property and to complete the necessary
documents. As regards the attorney’s fees, they claim that they are entitled to the same because they
were forced to litigate when petitioner unjustly withheld the amount. Besides, the amount awarded
by the CA is even smaller compared to the filing fees they paid.
Our Ruling
The petition lacks merit.

Interest may be imposed even in
the absence of stipulation in the
contract.
We sustain the ruling of both the RTC and the CA that it is proper to impose interest
notwithstanding 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
104

4
Sale, despite demand. She has in fact admitted that the conditions were not fulfilled and that she
was willing to return the full amount of P3.5 million but has not actually done so. Petitioner enjoyed
the use of the money from the time it was given to her until now. Thus, she is already in default of
30
her obligation from the date of demand, i.e., on September 27, 2000.
The interest at the rate of 12% is
applicable in the instant case.
Anent the interest rate, the general rule is that the applicable rate of interest “shall be computed
in accordance with the stipulation of the parties.” Absent any stipulation, the applicable rate of
31
interest shall be 12% per annum “when the obligation arises out of a loan or a forbearance of money,
goods or credits. In other cases, it shall be six percent (6%).” In this case, the parties did not
32
stipulate as to the applicable rate of interest. The only question remaining therefore is whether the 6%
as provided under Article 2209 of the Civil Code, or 12% under Central Bank Circular No. 416, is
due.
The contract involved in this case is admittedly not a loan but a Conditional Deed of Sale.
However, the contract provides that the seller (petitioner) must return the payment made by the
buyer (respondent-spouses) if the conditions are not fulfilled. There is no question that they have in
fact, not been fulfilled as the seller (petitioner) has admitted this. Notwithstanding demand by the
buyer (respondent-spouses), the seller (petitioner) has failed to return the money and
_______________
30 P1,500,000 on October 1, 1993; P1,500,000 on April 14, 1994; P300,000 on October 7, 1998 and P200,000 on November 2,
1998; see records, p. 10.
31 Crismina Garments, Inc. v. Court of Appeals, 363 Phil. 701, 703; 304 SCRA 356, 358 (1999).
32 Id.
105
VOL. 670, APRIL 18, 10

2012 5
should be considered in default from the time that demand was made on September 27, 2000.
Even if the transaction involved a Conditional Deed of Sale, can the stipulation governing the
return of the money be considered as a forbearance of money which required payment of interest at
the rate of 12%? We believe so.
In Crismina Garments, Inc. v. Court of Appeals, “forbearance” was defined as a “contractual
33
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
34
loan agreements, where a person acquiesces to the temporary use of his money, goods or credits
pending happening
_______________
33 Id., at p. 709. Emphasis supplied.
34 Article 1933 of the Civil Code provides:
By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for
a certain time and return it, in which case the contract is called a1933.Art. commodatum; or money or other consumable thing, upon the
condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower.
106

6
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.
Petitioner’s unwarranted withholding of the money which rightfully pertains to
respondent-spouses amounts to forbearance of money which can be considered as an involuntary
loan. Thus, the applicable rate of interest is 12% per annum. In Eastern Shipping Lines, Inc. v. Court
of Appeals, cited in Crismina Garments, Inc. v. Court of Appeals, the Court suggested the following
35 36
guidelines:
When an obligation, regardless of its source,“I. 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
_______________
35 G.R. No. 97412, July 12, 1994, 234 SCRA 78.
36 Supra note 31.
107
VOL. 670, APRIL 18, 10

2012 7
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.
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%2. 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.
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%3. per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.” 37
_______________
37 Eastern Shipping Lines, Inc. v. Court of Appeals, supra note 35 at pp. 95-97. Emphasis supplied.
108

8
Eastern Shipping Lines, Inc. v. Court of Appeals and its predecessor case, Reformina v. Tomol,
38
Jr. both involved torts cases and hence, there was no forbearance of money, goods, or credits.
39
Further, the amount claimed (i.e., damages) could not be established with reasonable certainty at
the time the claim was made. Hence, we arrived at a different ruling in those cases.
Since the date of demand which is September 27, 2000 was satisfactorily established during trial,
then the interest rate of 12% should be reckoned from said date of demand until the principal
amount and the interest thereon is fully satisfied.
The award of attorney’s fees
is warranted.
Under Article 2208 of the Civil Code, attorney’s fees may be recovered:
“x x x x
When the defendant’s act or omission has compelled the plaintiff to litigate with third persons or to incur
expenses to protect his interest;(2)
xxxx
In any other case where the court deems it just and equitable that attorney’s fees and expenses of litigation
should be recovered.(11)
In all cases, the attorney’s fees and expenses of litigation must be reasonable.”
Considering the circumstances of the instant case, we find respondent-spouses entitled to recover
attorney’s fees. There is no doubt that they were forced to litigate to protect their interest, i.e., to
recover their money. However, we find the
_______________
38 Id.
39 223 Phil. 472; 139 SCRA 260 (1985).
109
VOL. 670, APRIL 18, 10

2012 9
amount of P50,000.00 more appropriate in line with the policy enunciated in Article 2208 of the Civil
Code that the award of attorney’s fees must always be reasonable.
WHEREFORE, the Petition for Review is DENIED. The May 12, 2006 Decision of the Court of
Appeals in CA-G.R. CV No. 83123 is AFFIRMED with MODIFICATIONS that the rate of interest
shall be twelve percent (12%) per annum, computed from September 27, 2000 until fully satisfied.
The award of attorney’s fees is further reduced to P50,000.00.
SO ORDERED.
Corona (C.J., Chairperson), Leonardo-De Castro, Bersamin and Villarama, Jr., JJ., concur.
Petition denied, judgment affirmed with modifications.
Notes.—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, and 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. (Reyes vs. Century Canning Corporation, 612 SCRA 562 [2010])
Forbearance of money refers to the obligation of the creditor to desist for a fixed period from
requiring the debtor to repay the debt then due and for which 12% per annum is imposed as interest
rate. (Rural Bank of Toboso, Inc. vs. Agtoto, 646 SCRA 288 [2011])
——o0o——
March 18, 2010.G.R. No. 169975. *
PAN PACIFIC SERVICE CONTRACTORS, INC. and RICARDO F. DEL ROSARIO,

petitioners, vs. EQUITABLE PCI BANK (formerly THE PHILIPPINE COMMERCIAL
INTERNATIONAL BANK), respondent.
Contracts; Parol Evidence Rule; The agreement or the contract between the parties is the best evidence of the
intention of the parties.—It is settled that the agreement or the contract between the parties is the formal
expression of the parties’ rights, duties, and obligations. It is the best evidence of the intention of the parties.
Thus, when the terms of an agreement have been reduced to writing, it is considered as containing all the terms
agreed upon and there can be, between the parties and their successors in interest, no evidence of such terms
other than the contents of the written agreement.
Same; Same; 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.—The CA went beyond the intent of the parties by requiring
respondent to give its consent to the imposition of interest before petitioners can hold respondent liable for
interest at the current bank lending rate. This is erroneous. A review of Section 2.6 of the Agreement and Section
60.10 of the General Conditions shows that the consent of the respondent is not needed for the imposition of
interest at the current bank lending rate, which occurs upon any delay in payment. 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. In these cases, courts have no authority to alter a contract by construction or to make a new contract for
the parties. The Court’s duty is confined to the interpretation of the contract which the parties 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. 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.
_______________
* SECOND DIVISION.
103
VOL. 616, MARCH 18, 103

2010
Pan Pacific Service Contractors, Inc. vs.
Equitable PCI Bank
Same; Interest Rates; No interest shall be due unless it has been expressly stipulated in writing.—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. Therefore, 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.
Lameyra Law Office for petitioner.
Balane, Tamase, Alampay Law Office for respondent.
CARPIO,J.:
The Case
Pan Pacific Service Contractors, Inc. and Ricardo F. Del Rosario (petitioners) filed this Petition for
Review assailing the Court of Appeals’ (CA) Decision dated 30 June 2005 in CA-G.R. CV No. 63966
1 2
as well as the Resolution dated 5 October 2005 denying the Motion for Reconsideration. In the
3
assailed decision, the CA modified the 12 April 1999 Decision of the Regional Trial Court of Makati
4
City, Branch 59 (RTC)

_______________
1 Under Rule 45 of the Rules of Court.
2 Penned by Associate Justice Josefina Guevara-Salonga with Associate Justices Ruben T. Reyes, and Fernanda Lampas-Peralta,
concurring.
3 Penned by Associate Justice Josefina Guevara-Salonga with Associate Justices Ruben T. Reyes, and Fernanda Lampas-Peralta,
concurring.
4 Penned by RTC Judge Lucia Violago-Isnani.
104

4
Pan Pacific Service Contractors, Inc. vs. Equitable PCI
Bank
by ordering Equitable PCI Bank (respondent) to pay petitioners P1,516,015.07 with interest at the
5
legal rate of 12% per annum starting 6 May 1994 until the amount is fully paid.
The Facts
Pan Pacific Service Contractors, Inc. (Pan Pacific) is engaged in contracting mechanical works on
airconditioning system. On 24 November 1989, Pan Pacific, through its President, Ricardo F. Del
Rosario (Del Rosario), entered into a contract of mechanical works (Contract) with respondent for
P20,688,800. Pan Pacific and respondent also agreed on nine change orders for P2,622,610.30. Thus,
the total consideration for the whole project was P23,311,410.30. The Contract stipulated, among6
others, that Pan Pacific shall be entitled to a price adjustment in case of increase in labor costs and
prices of materials under paragraphs 70.1 and 70.2 of the “General
7 8
_______________
5 Formerly The Philippine Commercial International Bank and now Banco De Oro Universal Bank.
6 Rollo, p. 23.
7 Changes in Cost and Legislation
Increase or Decrease of Cost70.1
There shall be added to or deducted from the Contract Price such sums in respect of rise or fall in the cost of labour and/or materials or
any other matters affecting the cost of the execution of the Works as may be determined.
8Subsequent Legislation 70.2
If, after the date 28 days prior to the latest date of submission of tenders for the Contract there occur in the country in which the Works
are being or are to be executed changes to any National or State Statute, Ordinance, Decree or other Law or any regulation or by-law of any
local or other duly constituted authority, or the introduction of any such State Statute, Ordinance, Decree, Law, regulation or by-law which
causes additional or reduced cost to the contractor, other than under Sub-Clause 70.1, in the execution of the Contract, such additional or
reduced cost shall, after due consultation with the Owner and Contractor, be determined by the Engineer and
105
VOL. 616, MARCH 18, 105
2010
Pan Pacific Service Contractors,
Inc. vs. Equitable PCI Bank
Conditions for the Construction of PCIB Tower II Extension” (the escalation clause). 9
Pursuant to the contract, Pan Pacific commenced the mechanical works in the project site, the
PCIB Tower II extension building in Makati City. The project was completed in June 1992.
Respondent accepted the project on 9 July 1992. In 1990, labor costs and prices of materials
10
escalated. On 5 April 1991, in accordance with the escalation clause, Pan Pacific claimed a price
adjustment of P5,165,945.52. Respondent’s appointed project engineer, TCGI Engineers, asked for a
reduction in the price adjustment. To show goodwill, Pan Pacific reduced the price adjustment to
P4,858,548.67. 11
On 28 April 1992, TCGI Engineers recommended to respondent that the price adjustment should
be pegged at P3,730,957.07. TCGI Engineers based their evaluation of the price adjustment on the
following factors:
Labor Indices of the Department of Labor and Employment.1.
Price Index of the National Statistics Office.2.
PD 1594 and its Implementing Rules and Regulations as amended, 15 March 1991.3.
Shipping Documents submitted by PPSCI.4.
Sub-clause 70.1 of the General Conditions of the Contract Documents.5. 12
_______________
shall be added to or deducted from the Contract Price and the Engineer shall notify the Contractor accordingly, with a copy to the
Owner.
9 Rollo, p. 20.
10 Id., at p. 21.
11 Id.
12 Records, Vol. 1, p. 340.
106

6
Bank
Pan Pacific contended that with this recommendation, respondent was already estopped from
disclaiming liability of at least P3,730,957.07 in accordance with the escalation clause. 13
Due to the extraordinary increases in the costs of labor and materials, Pan Pacific’s operational
capital was becoming inadequate for the project. However, respondent withheld the payment of the
price adjustment under the escalation clause despite Pan Pacific’s repeated demands. Instead, 14
respondent offered Pan Pacific a loan of P1.8 million. Against its will and on the strength of
respondent’s promise that the price adjustment would be released soon, Pan Pacific, through Del
Rosario, was constrained to execute a promissory note in the amount of P1.8 million as a
requirement for the loan. Pan Pacific also posted a surety bond. The P1.8 million was released
directly to laborers and suppliers and not a single centavo was given to Pan Pacific. 15
Pan Pacific made several demands for payment on the price adjustment but respondent merely
kept on promising to release the same. Meanwhile, the P1.8 million loan matured and respondent
demanded payment plus interest and penalty. Pan Pacific refused to pay the loan. Pan Pacific
insisted that it would not have incurred the loan if respondent released the price adjustment on time.
Pan Pacific alleged that the promissory note did not express the true agreement of the parties. Pan
Pacific maintained that the P1.8 million was to be considered as an advance payment on the price
adjustment. Therefore, there was really no consideration for the promissory note; hence, it is null
and void from the beginning. 16
Respondent stood firm that it would not release any amount of the price adjustment to Pan Pacific
but it would offset the price adjustment with Pan Pacific’s outstanding
_______________
13 Rollo, p. 21.
14 Id.
15 Id.
16 Id.
107
VOL. 616, MARCH 18, 107

2010
balance of P3,226,186.01, representing the loan, interests, penalties and collection charges. 17
Pan Pacific refused the offsetting but agreed to receive the reduced amount of P3,730,957.07 as
recommended by the TCGI Engineers for the purpose of extrajudicial settlement, less P1.8 million
and P414,942 as advance payments. 18
On 6 May 1994, petitioners filed a complaint for declaration of nullity/annulment of the

promissory note, sum of money, and damages against the respondent with the RTC of Makati City,
Branch 59. On 12 April 1999, the RTC rendered its decision, the dispositive portion of which reads:
“WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and
against the defendant as follows:
Declaring the promissory note (Exhibit “B”) null and void;1.
Ordering the defendant to pay the plaintiffs the following amounts:2.
P1,389,111.10 representing unpaid balance of the adjustment price, with interest thereon
at the legal rate of twelve (12%) percenta. per annum starting May 6, 1994, the date when
the complaint was filed, until the amount is fully paid;
P100,000.00 representing moral damages;b.
P50,000.00 representing exemplary damages; andc.
P50,000.00 as and for attorney’s fees.d.
Dismissing defendant’s counterclaim, for lack of merit; and3.
With costs against the defendant.4.
SO ORDERED.” 19
_______________
17 Id., at p. 23.
18 Id., at p. 22.
19 Id., at p. 52.
108

8
Bank
On 23 May 1999, petitioners partially appealed the RTC Decision to the CA. On 26 May 1999,
respondent appealed the entire RTC Decision for being contrary to law and evidence. In sum, the
appeals of the parties with the CA are as follows:
With respect to the petitioners, whether the RTC erred in deducting the amount of
P126,903.97 from the balance of the adjusted price and in awarding only 12% annual interest
on the amount due, instead of the bank loan rate of 18% compounded annually beginning
September 1992.1.
With respect to respondent, whether the RTC erred in declaring the promissory note void
and in awarding moral and exemplary damages and attorney’s fees in favor of petitioners and
in dismissing its counterclaim.2.
In its decision dated 30 June 2005, the CA modified the RTC decision, with respect to the principal
amount due to petitioners. The CA removed the deduction of P126,903.97 because it represented the
final payment on the basic contract price. Hence, the CA ordered respondent to pay P1,516,015.07 to
petitioners, with interest at the legal rate of 12% per annum starting 6 May 1994. 20
On 26 July 2005, petitioners filed a Motion for Partial Reconsideration seeking a reconsideration
of the CA’s Decision imposing the legal rate of 12%. Petitioners claimed that the interest rate
applicable should be the 18% bank lending rate. Respondent likewise filed a Motion for
Reconsideration of the CA’s decision. In a Resolution dated 5 October 2005, the CA denied both
motions.
Aggrieved by the CA’s Decision, petitioners elevated the case before this Court.
_______________
20 Id., at pp. 33-34.
109
VOL. 616, MARCH 18, 109

2010
The Issue
Petitioners submit this sole issue for our consideration: Whether the CA, in awarding the unpaid
balance of the price adjustment, erred in fixing the interest rate at 12% instead of the 18% bank
lending rate.
Ruling of the Court
We grant the petition.

This Court notes that respondent did not appeal the decision of the CA. Hence, there is no longer
any issue as to the principal amount of the unpaid balance on the price adjustment, which the CA
correctly computed at P1,516,015.07. The only remaining issue is the interest rate applicable for
respondent’s delay in the payment of the balance of the price adjustment.
The CA denied petitioners’ claim for the application of the bank lending rate of 18% compounded
annually reasoning, to wit:
“Anent the 18% interest rate compounded annually, while it is true that the contract provides for an interest
at the current bank lending rate in case of delay in payment by the Owner, and the promissory note charged an
interest of 18%, the said proviso does not authorize plaintiffs to unilaterally raise the interest rate without the
other party’s consent. Unlike their request for price adjustment on the basic contract price, plaintiffs never
informed nor sought the approval of defendant for the imposition of 18% interest on the adjusted price. To
unilaterally increase the interest rate of the adjusted price would be violative of the principle of mutuality of
contracts. Thus, the Court maintains the legal rate of twelve percent per annum starting from the date of judicial
demand. Although the contract provides for the period when the recommendation of the TCGI Engineers as to the
price adjustment would be binding on the parties, it was established, however, that part of the adjusted price
demanded by plaintiffs was already disbursed as early as 28 Febru-
110

0
Bank
ary 1992 by defendant bank to their suppliers and laborers for their account.” 21
In this appeal, petitioners allege that the contract between the parties consists of two parts, the
Agreement and the General Conditions, both of which provide for interest at the bank lending rate
22 23
on any unpaid amount due under the contract. Petitioners further claim that there is nothing in the
contract which requires the consent of the respondent to be given in order that petitioners can charge
the bank lending rate. Specifically, petitioners invoke Section 2.5 of the Agreement and Section
24
60.10 of the General Conditions as follows:

Agreement
2.5If any payment is delayed, the CONTRACTOR may charge interest thereon
at the current bank lending rates, without prejudice to OWNER’S recourse to any
other remedy available under existing law. 25
General Conditions
60.10Time for payment
The amount due to the Contractor under any interim certificate issued by the Engineer
pursuant to this Clause, or to any term of the Contract, shall, subject to clause 47, be paid by
the Owner to the Contractor within 28 days after such interim certificate has been delivered to
the Owner, or, in the case of the Final Certificate referred to in Sub-Clause 60.8, within 56 days,
after such Final Certificate has been delivered to the Owner. In the event of the failure of the
Owner to make payment within the times stated, the Owner shall pay to the Con-
_______________
21 Id., at p. 33.
22 Records, Vol. 1, pp. 41-56. Agreement for the Construction of PCIB Tower II Extension (Mechanical Works).
23 Id., at pp. 57-114. General Conditions for the Construction of PCIB Tower II Extension.
24 Rollo, p. 10.
111
VOL. 616, MARCH 18, 111

2010
tractor interest at the rate based on banking loan rates prevailing at the time of the signing of the
contract upon all sums unpaid from the date by which the same should have been paid. The
provisions of this Sub-Clause are without prejudice to the Contractor’s entitlement under Clause
69. (Emphasis supplied)
26
Petitioners thus submit that it is automatically entitled to the bank lending rate of interest from
the time an amount is determined to be due thereto, which respondent should have paid. Therefore,
as petitioners have already proven their entitlement to the price adjustment, it necessarily follows
that the bank lending interest rate of 18% shall be applied. 27
On the other hand, respondent insists that under the provisions of 70.1 and 70.2 of the General
Conditions, it is stipulated that any additional cost shall be determined by the Engineer and shall be
added to the contract price after due consultation with the Owner, herein respondent. Hence, there
being no prior consultation with the respondent regarding the additional cost to the basic contract
price, it naturally follows that respondent was never consulted or informed of the imposition of 18%
interest rate compounded annually on the adjusted price. 28
A perusal of the assailed decision shows that the CA made a distinction between the consent given
by the owner of the project for the liability for the price adjustments, and the consent for the
imposition of the bank lending rate. Thus, while the CA held that petitioners consulted respondent
for price adjustment on the basic contract price, petitioners, nonetheless, are not entitled to the
imposition of 18% interest on the adjusted price, as petitioners never informed or sought the
approval of respondent for such imposition. 29
_______________
26 Id., at p. 101.
27 Rollo, p. 11.
28 Id., at pp. 66-67.
29 Id., at p. 33.
112

2
Bank
We disagree.
It is settled that the agreement or the contract between the parties is the formal expression of the
parties’ rights, duties, and obligations. It is the best evidence of the intention of the parties. Thus,
when the terms of an agreement have been reduced to writing, it is considered as containing all the
terms agreed upon and there can be, between the parties and their successors in interest, no
evidence of such terms other than the contents of the written agreement. 30
The escalation clause of the contract provides:

CHANGES IN COST AND LEGISLATION
Increase or Decrease of Cost70.1
There shall be added to or deducted from the Contract Price such sums in respect of rise or fall in the cost of
labor and/or materials or any other matters affecting the cost of the execution of the Works as may be
determined.
Subsequent Legislation70.2
If, after the date 28 days prior to the latest date of submission of tenders for the Contract there occur in the
country in which the Works are being or are to be executed changes to any National or State Statute,
Ordinance, Decree or other Law or any regulation or bye-law (sic) of any local or other duly constituted
authority, or the introduction of any such State Statute, Ordinance, Decree, Law, regulation or bye-law (sic)
which causes additional or reduced cost to the contractor, other than under Sub-Clause 70.1, in the
execution of the Contract, such additional or reduced cost shall, after due consultation with the Owner and
Contractor, be determined by the Engineer and shall be added to or deducted from the Contract Price and
the Engineer shall notify the Contractor accordingly, with a copy to the Owner. 31
_______________
30 Section 9, Rule 130, Rules of Court.
113
VOL. 616, MARCH 18, 113

2010
In this case, the CA already settled that petitioners consulted respondent on the imposition of the
price adjustment, and held respondent liable for the balance of P1,516,015.07. Respondent did not
appeal from the decision of the CA; hence, respondent is estopped from contesting such fact.
However, the CA went beyond the intent of the parties by requiring respondent to give its consent
to the imposition of interest before petitioners can hold respondent liable for interest at the current
bank lending rate. This is erroneous. A review of Section 2.6 of the Agreement and Section 60.10 of
the General Conditions shows that the consent of the respondent is not needed for the imposition of
interest at the current bank lending rate, which occurs upon any delay in payment.
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. In these cases, courts have no authority to
alter a contract by construction or to make a new contract for the parties. The Court’s duty is
confined to the interpretation of the contract which the parties 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. 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. 32
The escalation clause must be read in conjunction with Section 2.5 of the Agreement and Section
60.10 of the General Conditions which pertain to the time of payment. Once the parties agree on the
price adjustment after due consultation in compliance with the provisions of the escalation clause,
the agreement is in effect an amendment to the original contract, and gives rise to the liability of
respondent to pay the adjusted costs. Under Section 60.10 of the General Conditions,
_______________
32 Spouses Barrera v. Spouses Lorenzo, 438 Phil. 42, 49-50; 389 SCRA 329, 333 (2002).
114

4
Bank
the respondent shall pay such liability to the petitioner within 28 days from issuance of the interim
certificate. Upon respondent’s failure to pay within the time provided (28 days), then it shall be liable
to pay the stipulated interest.
This is the logical interpretation of the agreement of the parties on the imposition of interest. To
provide a contrary interpretation, as one requiring a separate consent for the imposition of the
stipulated interest, would render the intentions of the parties nugatory.
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. Therefore, payment of
monetary interest is allowed only if:
there was an express stipulation for the payment of interest; and(1)
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.(2) 33
We agree with petitioners’ interpretation that in case of default, the consent of the respondent is
not needed in order to impose interest at the current bank lending rate.
Applicable Interest Rate
Under Article 2209 of the Civil Code, the appropriate measure for damages in case of delay in
discharging an obligation consisting of the payment of a sum of money is the payment of penalty
interest at the rate agreed upon in the contract of the parties. In the absence of a stipulation of a
particular rate of penalty interest, payment of additional interest at a rate equal to the regular
monetary interest becomes due and payable. Finally, if no regular interest had
_______________
33 Siga-an v. Villanueva, G.R. No. 173227, 20 January 2009, 576 SCRA 696, 704-705.
115
VOL. 616, MARCH 18, 115

2010
been agreed upon by the contracting parties, then the damages payable will consist of payment of
legal interest which is 6%, or in the case of loans or forbearances of money, 12% per annum. It is 34
only when the parties to a contract have failed to fix the rate of interest or when such amount is
unwarranted that the Court will apply the 12% interest per annum on a loan or forbearance of
money. 35
The written agreement entered into between petitioners and respondent provides for an interest
at the current bank lending rate in case of delay in payment and the promissory note charged an
interest of 18%.
To prove petitioners’ entitlement to the 18% bank lending rate of interest, petitioners presented
the promissory note prepared by respondent bank itself. This promissory note, although declared
36
void by the lower courts because it did not express the real intention of the parties, is substantial
proof that the bank lending rate at the time of default was 18% per annum. Absent any evidence of
fraud, undue influence or any vice of consent exercised by petitioners against the respondent, the
interest rate agreed upon is binding on them. 37
WHEREFORE, we GRANT the petition. We SET ASIDE the Decision and Resolution of the Court
of Appeals in CA-G.R. CV No. 63966. We ORDER respondent to pay petitioners P1,516,015.07 with
interest at the bank lending rate of 18% per annum starting 6 May 1994 until the amount is fully
paid.
SO ORDERED.
Brion, Del Castillo, Abad and Perez, JJ., concur.
March 9, 2010.G.R. No. 160545. *
PRISMA CONSTRUCTION & DEVELOPMENT CORPORATION and ROGELIO S. PANTALEON,

petitioners, vs. ARTHUR F. MENCHAVEZ, respondent.
Civil Law; Contracts; Interpretation of Contracts; 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; It is only when the
contract is vague and ambiguous that courts are permitted to resort to the interpretation of its terms to determine
the parties’ intent.—Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith. 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. In such cases, courts have no
authority to alter the contract by construction or to make a new contract for the parties; a court’s duty is confined
to the interpretation of the contract the parties made for themselves without regard to its wisdom or folly, as the
court cannot supply material stipulations or read into the contract words the contract does not contain. It is only
when the
_______________
* SECOND DIVISION.
591
VOL. 614, March 9, 591

2010
Prisma Construction & Development
Corporation vs. Menchavez
contract is vague and ambiguous that courts are permitted to resort to the interpretation of its terms to
determine the parties’ intent.
Same; Same; Interest Rates; Two conditions for the payment of interest in loans of forbearance of money;
Collection of interest without any stipulation in writing is prohibited by law.—Article 1956 of the Civil Code
specifically mandates that “no interest shall be due unless it has been expressly stipulated in writing.” Under this
provision, the payment of interest in loans or forbearance of money 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 interest at a stipulated rate. Thus, we held
in Tan v. Valdehueza, 66 SCRA 61 (1975) and Ching v. Nicdao, 522 SCRA 316 (2007) that collection of interest
without any stipulation in writing is prohibited by law.
Same; Same; It is a familiar doctrine in obligations and contracts that the parties are bound by the
stipulations, clauses, terms and conditions they have agreed to, which is the law between them, the only limitation
being that these stipulation, clauses, terms and conditions are not contrary to law, morals, public order or public
policy.—It is a familiar doctrine in obligations and contracts that the parties are bound by the stipulations,
clauses, terms and conditions they have agreed to, which is the law between them, the only limitation being that
these stipulations, clauses, terms and conditions are not contrary to law, morals, public order or public policy.
The payment of the specific sum of money of P40,000.00 per month was voluntarily agreed upon by the
petitioners and the respondent. There is nothing from the records and, in fact, there is no allegation showing that
petitioners were victims of fraud when they entered into the agreement with the respondent.
Corporation Law; Doctrine of Piercing the Corporate Veil; Three instances when the doctrine applies; In the
absence of malice, bad faith, or a specific provision of law making a corporate officer liable, such corporate officer
cannot be made personally liable for corporate liabilities.—The doctrine of piercing the corporate veil applies only
in three (3) basic instances, namely: a) when the separate and distinct corporate personality defeats public
convenience, as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; b) in fraud
cases, or when the corporate entity is used to justify
592

2 ANNOTATED
Prisma Construction & Development Corporation vs.
Menchavez
a wrong, protect a fraud, or defend a crime; or c) is used in alter ego cases, i.e., where a corporation is
essentially a farce, since it is a mere alter ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation. In the absence of malice, bad faith, or a specific provision of law making a
corporate officer liable, such corporate officer cannot be made personally liable for corporate liabilities.
PETITION for review on certiorari of the decision and resolution of the Court of Appeals Former
Ninth Division.
Cordova, Perez and Rigoroso Law Offices for petitioners.
Yulo & Bello Law Offices for respondent.
BRION,J.:
We resolve in this Decision the petition for review on certiorari filed by petitioners Prisma
1
Construction & Development Corporation (PRISMA) and Rogelio S. Pantaleon (Pantaleon)

(collectively, petitioners) who seek to reverse and set aside the Decision dated May 5, 2003 and the
2
Resolution dated October 22, 2003 of the Former Ninth Division of the Court of Appeals (CA) in
3
CA-G.R. CV No. 69627. The assailed CA Decision affirmed the Decision of the Regional Trial Court
(RTC), Branch 73, Antipolo City in Civil Case No. 97-4552 that held the petitioners liable for
payment of P3,526,117.00 to respondent Arthur F. Menchavez (respondent), but modified the
interest rate from 4% per month to 12% per annum, computed from the filing of the complaint to full
payment. The assailed CA Resolution denied the petitioners’ Motion for Reconsideration.
_______________
1 Filed under Rule 45 of the 1997 Rules of Civil Procedure.
2 Penned by Associate Justice Jose L. Sabio, Jr. (retired), with Associate Justice B.A. Adefuin-De La Cruz (retired) and Associate
Justice Hakim S. Abdulwahid concurring. See Rollo, pp. 29-38.
3 Id., at pp. 52-53.
593
VOL. 614, March 9, 593

2010
Prisma Construction ###
Development Corporation vs.
Menchavez
Factual Background
The facts of the case, gathered from the records, are briefly summarized below.
On December 8, 1993, Pantaleon, the President and Chairman of the Board of PRISMA, obtained
a P1,000,000.004 loan from the respondent, with a monthly interest of P40,000.00 payable
for six months, or a total obligation of P1,240,000.00 to be paid within six (6) months,5 under the
following schedule of payments:
January 8, 1994.......................P40,000.00
February 8, 1994......................P40,000.00
March 8, 1994..........................P40,000.00
April 8, 1994.............................P40,000.00
May 8, 1994............................. P40,000.00
June 8, 1994....................... P1,040,000.00 6
Total P1,240,000.00
To secure the payment of the loan, Pantaleon issued a promissory note that states: 7
“I, Rogelio S. Pantaleon, hereby acknowledge the receipt of ONE MILLION TWO HUNDRED FORTY
THOUSAND PESOS (P1,240,000), Philippine Currency, from Mr. Arthur F. Menchavez, representing a
six-month loan payable according to the following schedule:
January 8, 1994.........................P40,000.00
February 8, 1994........................P40,000.00
_______________
4 Exhibit “A,” Folder II, Exhibits “A” to “E” and Submarkings (for the Plaintiff), p. 1; TSN, Testimony of Arthur F. Menchavez, April 12,
1999, pp. 2-4.
5 TSN, Testimony of Arthur F. Menchavez, April 12, 1999, pp. 9-10.
6 Original Records, p. 8.
7 Exhibit “C,” Folder II, Exhibits “A” to “E” and Submarkings (for the Plaintiff), p. 5.
594

4
Menchavez
March 8, 1994............................P40,000.00
April 8, 1994.............................. P40,000.00
May 8, 1994................................P40,000.00
June 8, 1994............................P1,040,000.00
The checks corresponding to the above amounts are hereby acknowledged. 8
and six (6) postdated checks corresponding to the schedule of payments. Pantaleon signed the
promissory note in his personal capacity, and as duly authorized by the Board of Directors of
9
PRISMA. The petitioners failed to completely pay the loan within the stipulated six (6)-month
10
period.
From September 8, 1994 to January 4, 1997, the petitioners paid the following amounts to the
respondent:
September 8, 1994..................P320,000.00
October 8, 1995......................P600,000.00
November 8, 1995..................P158,772.00
30,000.00January 4, 1997.....................P 11
As of January 4, 1997, the petitioners had already paid a total of P1,108,772.00. However, the
respondent found that the petitioners still had an outstanding balance of P1,364,151.00 as of
January 4, 1997, to which it applied a 4% monthly interest. Thus, on August 28, 1997, the 12
respondent filed a complaint for sum of money with the RTC to enforce the unpaid balance, plus 4%
monthly interest, P30,000.00 in attorney’s fees, P1,000.00 per court appearance and costs of suit. 13
_______________
9 Ibid.
10 Exhibit “B,” Folder II, Exhibits “A” to “E” and Submarkings (for the Plaintiff), p. 2.
11 Exhibit “E,” Folder II, Exhibits “A” to “E” and Submarkings (for the Plaintiff), p. 2.
12 Ibid.
13 Original Records, pp. 1-7.
595
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2010
Menchavez
In their Answer dated October 6, 1998, the petitioners admitted the loan of P1,240,000.00, but
denied the stipulation on the 4% monthly interest, arguing that the interest was not provided in the
promissory note. Pantaleon also denied that he made himself personally liable and that he made
representations that the loan would be repaid within six (6) months. 14
The RTC Ruling
The RTC rendered a Decision on October 27, 2000 finding that the respondent issued a check for
P1,000,000.00 in favor of the petitioners for a loan that would earn an interest of 4% or P40,000.00
per month, or a total of P240,000.00 for a 6-month period. It noted that the petitioners made several
payments amounting to P1,228,772.00, but they were still indebted to the respondent for
P3,526,117.00 as of February 11, 1999 after considering the 4% monthly interest. The RTC observed
15
that PRISMA was a one-man corporation of Pantaleon and used this circumstance to justify the
piercing of the veil of corporate fiction. Thus, the RTC ordered the petitioners to jointly and severally
pay the respondent the amount of P3,526,117.00 plus 4% per month interest from February 11, 1999
until fully paid. 16
The petitioners elevated the case to the CA via an ordinary appeal under Rule 41 of the Rules of
Court, insisting that there was no express stipulation on the 4% monthly interest.
The CA Ruling
The CA decided the appeal on May 5, 2003. The CA found that the parties agreed to a 4% monthly
interest principally based on the board resolution that authorized Pantaleon to
_______________
14 Id., at pp. 29-31.
15 The date of the last payment made by the petitioners should be “February 12, 1999,” per Exhibit “E,” Folder II, Exhibits “A” to “E”
and Submarkings (for the Plaintiff), p. 2.
16 Id., at pp. 99-106.
596

6
Prisma Construction ### Development Corporation vs.
Menchavez
transact a loan with an approved interest of not more than 4% per month. The appellate court,
however, noted that the interest of 4% per month, or 48% per annum, was unreasonable and should
be reduced to 12% per annum. The CA affirmed the RTC’s finding that PRISMA was a mere
instrumentality of Pantaleon that justified the piercing of the veil of corporate fiction. Thus, the CA
modified the RTC Decision by imposing a 12% per annum interest, computed from the filing of the
complaint until finality of judgment, and thereafter, 12% from finality until fully paid. 17
After the CA’s denial of their motion for reconsideration, the petitioners filed the present
18 19
petition for review on certiorari under Rule 45 of the Rules of Court.

The Petition
The petitioners submit that the CA mistakenly relied on their board resolution to conclude that
the parties agreed to a 4% monthly interest because the board resolution was not an evidence of a
loan or forbearance of money, but merely an authorization for Pantaleon to perform certain acts,
including the power to enter into a contract of loan. The expressed mandate of Article 1956 of the
Civil Code is that interest due should be stipulated in writing, and no such stipulation exists. Even
assuming that the loan is subject to 4% monthly interest, the interest covers the six (6)-month period
only and cannot be interpreted to apply beyond it. The petitioners also point out the glaring
inconsistency in the CA Decision, which reduced the interest from 4% per month or 48% per
annum to 12% per annum, but failed to consider that the amount of P3,526,117.00 that the RTC
ordered them to pay includes the compounded 4% monthly interest.
_______________
17 Supra note 2.
18 Resolution of October 22, 2003; Rollo, pp. 52-53.
19 Id., at pp. 43-60.
597
VOL. 614, March 9, 597

2010
Prisma Construction &
Menchavez
The Case for the Respondent
The respondent counters that the CA correctly ruled that the loan is subject to a 4% monthly
interest because the board resolution is attached to, and an integral part of, the promissory note
based on which the petitioners obtained the loan. The respondent further contends that the
petitioners are estopped from assailing the 4% monthly interest, since they agreed to pay the 4%
monthly interest on the principal amount under the promissory note and the board resolution.
The Issue
The core issue boils down to whether the parties agreed to the 4% monthly interest on the loan. If
so, does the rate of interest apply to the 6-month payment period only or until full payment of the
loan?
Our Ruling
We find the petition meritorious.

Interest due should be stipulated
in writing; otherwise, 12% per
annum
Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith. When the terms of a contract are clear and leave no doubt as
20
to the intention of the contracting parties, the literal meaning of its stipulations governs. In such 21
cases, courts have no authority to alter the contract by construction or to make a new contract for the
parties; a court’s duty is confined to the interpretation of the contract the parties made
_______________
20 Article 1159, Civil Code; Dumlao v. Marlon Realty Corporation, G.R. 131491, August 17, 2007, 530 SCRA 427, 430.
21 Article 1370, Civil Code.
598

8
Menchavez
for themselves without regard to its wisdom or folly, as the court cannot supply material stipulations
or read into the contract words the contract does not contain. It is only when the contract is vague
22
and ambiguous that courts are permitted to resort to the interpretation of its terms to determine the
parties’ intent.
In the present case, the respondent issued a check for P1,000,000.00. In turn, Pantaleon, in his 23
personal capacity and as authorized by the Board, executed the promissory note quoted above. Thus,
the P1,000,000.00 loan shall be payable within six (6) months, or from January 8, 1994 up to June 8,
1994. During this period, the loan shall earn an interest of P40,000.00 per month, for a total
obligation of P1,240,000.00 for the six-month period. We note that this agreed sum can be
computed at 4%interest per month, but no such rate of interest was stipulated in the
promissory note; rather a fixed sum equivalent to this rate was agreed upon.
Article 1956 of the Civil Code specifically mandates that “no interest shall be due unless it has
been expressly stipulated in writing.” Under this provision, the payment of interest in loans or
forbearance of money 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 interest at a stipulated rate. Thus, we held
in Tan v. Valdehueza and Ching v. Nicdao that collection of interest without any stipulation in
24 25
writing is prohibited by law.

_______________
22 Cuison v. Court of Appeals, G.R. No. 102096, August 22, 1996, 260 SCRA 645, 667.
23 Exhibit “A,” Folder II, Exhibits “A” to “E” and Submarkings (for the Plaintiff), p. 1; TSN, Testimony of Arthur F. Menchavez, April 12,
1999, pp. 2-4.
24 160 Phil. 760, 767; 66 SCRA 61, 66 (1975).
25 G.R. No. 141181, April 27, 2007, 522 SCRA 316, 361.
599
VOL. 614, March 9, 599

2010
Menchavez
Applying this provision, we find that the interest of P40,000.00 per month corresponds only to the
six (6)-month period of the loan, or from January 8, 1994 to June 8, 1994, as agreed upon by the
parties in the promissory note. Thereafter, the interest on the loan should be at the legal interest
rate of 12% per annum, consistent with our ruling in Eastern Shipping Lines, Inc. v. Court of
Appeals: 26
“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 annumto 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)
We reiterated this ruling in Security Bank and Trust Co. v. RTC-Makati, Br. 61, Sulit v. Court of 27
Appeals, Crismina Garments, Inc. v. Court of Appeals, Eastern Assurance and Surety Corporation v.
28 29
Court of Appeals, Sps. Catungal v. Hao, Yong v. Tiu, and Sps. Barrera v. Sps. Lorenzo. Thus, the
30 31 32 33
RTC and the CA misappreciated the facts of the case; they erred in finding that the parties agreed to
a 4% interest, compounded by the application of this interest beyond the promissory note’s six
(6)-month period. The facts show that the parties agreed to the payment of a specific sum of
money of P40,000.00 per month for six months, not to a 4% rate of interest payable within a six
(6)-month period.
_______________
26 G.R. No. 97412, July 12, 1994, 234 SCRA 78.
27 331 Phil. 787; 263 SCRA 483 (1996).
28 335 Phil. 914; 268 SCRA 441 (1997).
29 363 Phil. 701; 304 SCRA 356 (1999).
30 379 Phil. 84; 322 SCRA 73 (2000).
31 407 Phil. 309; 355 SCRA 29 (2001).
32 426 Phil. 331; 375 SCRA 614 (2002).
33 438 Phil. 42; 389 SCRA 329 (2002).
600

0
Menchavez
Medel v. Court of Appeals
not applicable
The CA misapplied Medel v. Court of Appeals in finding that a 4% interest per month was
34
unconscionable.
In Medel, the debtors in a P500,000.00 loan were required to pay an interest of 5.5% per month, a
service charge of 2% per annum, and a penalty charge of 1% per month, plus attorney’s fee
equivalent to 25% of the amount due, until the loan is fully paid. Taken in conjunction with the
stipulated service charge and penalty, we found the interest rate of 5.5% to be excessive, iniquitous,
unconscionable, exorbitant and hence, contrary to morals, thereby rendering the stipulation null and
void.
Applying Medel, we invalidated and reduced the stipulated interest in Spouses Solangon v.
Salazar of 6% per month or 72% per annum interest on a P60,000.00 loan; in Ruiz v. Court of
35
Appeals, of 3% per month or 36% per annum interest on a P3,000,000.00 loan; in Imperial v.
36
Jaucian, of 16% per month or 192% per annum interest on a P320,000.00 loan; in Arrofo v.
37
Quiño, of 7% interest per month or 84% per annum interest on a P15,000.00 loan; in Bulos, Jr. v.
38
Yasuma, of 4% per month or 48% per annum interest on a P2,500,000.00 loan; and in Chua v.
39
Timan, of 7% and 5% per month for loans totalling P964,000.00. We note that in all these cases, the
40
terms of the loans were open-ended; the stipulated interest rates were applied for an indefinite
period.
Medel finds no application in the present case where no other stipulation exists for the payment of
any extra amount
_______________
34 359 Phil. 820; 299 SCRA 481 (1998).
35 412 Phil. 816; 360 SCRA 379 (2001).
36 449 Phil. 419; 401 SCRA 410(2003).
37 471 Phil. 484; 427 SCRA 517 (2004).

38 490 Phil. 179; 449 SCRA 284 (2005).
39 G.R. No. 139290, May 19, 2006, 490 SCRA 1.
40 G.R. No. 170452, August 13, 2008, 562 SCRA 146.
601
VOL. 614, March 9, 601

2010
Menchavez
except a specific sum of P40,000.00 per month on the principal of a loan payable within six
months. Additionally, no issue on the excessiveness of the stipulated amount of P40,000.00 per
month was ever put in issue by the petitioners; they only assailed the application of a 4% interest
41
rate, since it was not agreed upon.

It is a familiar doctrine in obligations and contracts that the parties are bound by the stipulations,
clauses, terms and conditions they have agreed to, which is the law between them, the only
limitation being that these stipulations, clauses, terms and conditions are not contrary to law,
morals, public order or public policy. The payment of the specific sum of money of P40,000.00 per
42
month was voluntarily agreed upon by the petitioners and the respondent. There is nothing from the
records and, in fact, there is no allegation showing that petitioners were victims of fraud when they
entered into the agreement with the respondent.
Therefore, as agreed by the parties, the loan of P1,000,000.00 shall earn P40,000.00 per month for
a period of six (6) months, or from December 8, 1993 to June 8, 1994, for a total principal and interest
amount of P1,240,000.00. Thereafter, interest at the rate of 12% per annum shall apply. The
amounts already paid by the petitioners during the pendency of the suit, amounting to P1,228,772.00
as of February 12, 1999, should be deducted from the total amount due, computed as indicated
43
above. We remand the case to the trial court for the actual computation of the total amount due.
_______________
41 See Sps. Pascual v. Ramos, 433 Phil. 449; 384 SCRA 105 (2002).
42 Barredo v. Leaño, G.R. No. 156627, June 4, 2004, 431 SCRA 106, 113-114; Odyssey Park, Inc. v. Court of Appeals, 345 Phil. 475, 485;
280 SCRA 253, 261 (2001).
43 Supra note 14.
602

2
Menchavez
Doctrine of Estoppel not applicable
The respondent submits that the petitioners are estopped from disputing the 4% monthly interest
beyond the six-month stipulated period, since they agreed to pay this interest on the principal
amount under the promissory note and the board resolution.
We disagree with the respondent’s contention.
We cannot apply the doctrine of estoppel in the present case since the facts and circumstances, as
established by the record, negate its application. Under the promissory note, what the petitioners 44
agreed to was the payment of a specific sum of P40,000.00 per month for six months—not a 4%
rate of interest per month for six (6) months—on a loan whose principal is P1,000,000.00,
for the total amount of P1,240,000.00. Thus, no reason exists to place the petitioners in estoppel,
barring them from raising their present defenses against a 4% per month interest after the
six-month period of the agreement. The board resolution, on the other hand, simply authorizes
45
Pantaleon to contract for a loan with a monthly interest of not more than 4%. This resolution merely
embodies the extent of Pantaleon’s authority to contract and does not create any right or obligation
except as between Pantaleon and the board. Again, no cause exists to place the petitioners in
estoppel.
Piercing the corporate veil unfounded
We find it unfounded and unwarranted for the lower courts to pierce the corporate veil of
PRISMA.
The doctrine of piercing the corporate veil applies only in three (3) basic instances, namely: a)
when the separate and
_______________
45 Exhibit “B,” Folder II, Exhibits “A” to “E” and Submarkings (for the Plaintiff), p. 2.
603
VOL. 614, March 9, 603

2010
Menchavez
distinct corporate personality defeats public convenience, as when the corporate fiction is used as a
vehicle for the evasion of an existing obligation; b) in fraud cases, or when the corporate entity is
used to justify a wrong, protect a fraud, or defend a crime; or c) is used in alter ego cases, i.e., where a
corporation is essentially a farce, since it is a mere alter ego or business conduit of a person, or where
the corporation is so organized and controlled and its affairs so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation. In the absence of malice, bad 46
faith, or a specific provision of law making a corporate officer liable, such corporate officer cannot be
made personally liable for corporate liabilities. 47
In the present case, we see no competent and convincing evidence of any wrongful, fraudulent or
unlawful act on the part of PRISMA to justify piercing its corporate veil. While Pantaleon denied
personal liability in his Answer, he made himself accountable in the promissory note “in his personal
capacity and as authorized by the Board Resolution” of PRISMA. With this statement of personal 48
liability and in the absence of any representation on the part of PRISMA that the obligation is all its
own because of its separate corporate identity, we see no occasion to consider piercing the corporate
veil as material to the case.
WHEREFORE, in light of all the foregoing, we hereby REVERSE and SET ASIDE the Decision
dated May 5, 2003 of the Court of Appeals in CA-G.R. CV No. 69627. The petitioners’ loan of
P1,000,000.00 shall bear interest of P40,000.00
_______________
46 General Credit Corporation v. Alsons Development and Investment Corporation, G.R. No. 154975, January 29, 2007, 513 SCRA 225,
235, 238, 239; PNB v. Ritratto Group, Inc., 414 Phil. 494, 505; 362 SCRA 216, 226 (2001).
47 McLeod v. National Labor Relations Commission, G.R. No. 146667, January 23, 2007, 512 SCRA 222, 253.
48 Exhibit “C,” Folder II, Exhibits “A” to “E” and Submarkings (for the Plaintiff), p. 5.
604

4
Menchavez
per month for six (6) months from December 8, 1993 as indicated in the promissory note. Any portion
of this loan, unpaid as of the end of the six-month payment period, shall thereafter bear interest at
12% per annum. The total amount due and unpaid, including accrued interests, shall bear interest at
12% per annum from the finality of this Decision. Let this case be REMANDED to the Regional Trial
Court, Branch 73, Antipolo City for the proper computation of the amount due as herein directed,
with due regard to the payments the petitioners have already remitted. Costs against the
respondent.
SO ORDERED.
Nachura, Del Castillo, Abad and Perez, JJ., concur.
**
Judgment reversed and set aside.
Note.—Jurisprudence empowers courts to equitably reduce interest rates. (Land Bank of the
Philippines vs. David, 563 SCRA 172 [2008])
——o0o——
G.R. No. 97873. August 12, 1993. *
PILIPINAS BANK, petitioner, vs. THE HON. COURT OF APPEALS, and LILIA R. ECHAUS,
respondents.
Obligations; Interest Rates; CB Circular No. 416.—Note that Circular No. 416, fixing the rate of interest at
12% per annum, deals with (1) loans; (2) forbearance of any money, goods or credit; and (3) judgments.
In Reformina v. Tomol, Jr., 139 SCRA 260 [1985], the Court held that the judgments spoken of and referred to in
Circular No. 416 are ‘judgments in litigation involving loans or forbearance of any money, goods or credits. Any
other kind of monetary judgment which has nothing to do with nor involving loans or forbearance of any money,
goods or credits does not fall within the coverage of the said law for it is not, within the ambit of the authority
granted to the Central Bank.”
Same; Same; Same; Civil Code, Art. 2209; Obligation arising from contract of purchase and sale.—What
then is the nature of the judgment ordering petitioner to pay private respondent the amount of P2,300,000.00?
The said amount was a portion of the P7,776,335.69 which petitioner was obligated to pay Greatland as
consideration for the sale of several parcels of land by Greatland to petitioner. The amount of P2,300,000.00 was
assigned by Greatland in favor of private respondent. The said obligation therefore arose from a contract of
purchase and sale and not from a contract of loan or mutuum. Hence, what is applicable is the rate of 6% per
annum as provided in Article 2209 of the Civil Code of the Philippines and not the rate of 12% per annum as
provided in Circular No. 416.
_______________
* FIRST DIVISION.
269
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1993 9
Pilipinas Bank vs. Court of Appeals
Same; Same; Same; Restitution contemplated by Sec. 5 of Rule 39, Rules of Court.—Under Section 5 of Rule
39 of the Revised Rules of Court where “the judgment executed is reversed totally or partially on appeal, the trial
court, on motion, after the case is remanded to it, may issue such orders of restitution, as equity and justice may
warrant under the circumstances.” It was to guarantee the restitution contemplated by Section 5 of Rule 39 of the
Revised Rules of Court that private respondent was required by the trial court to post a bond before the writ of
advance execution was issued. In the case before us, the excess amount ordered to be refunded by private
respondent falls within the ruling in Viloria and Buiser that Circular No. 416 applies to cases where money is
transferred from one person to another and the obligation to return the same or a portion thereof is subsequently
adjudged.
PETITION for certiorari to review the resolution of the Court of Appeals.

Gella, Reyes, Danguilan and Associates for the petitioner.
Manuel L. Melotindos for the respondents.
QUIASON, J.:
This is a petition for certiorari under Rule 45 of the Revised Rules of Court to review the Resolution
of the Court of Appeals in CA-G.R. CV No. 06017 promulgated on March 14, 1991. The Resolution
was rendered in response to private respondent’s motion for clarification of the decision of the Court
of Appeals in CA-G.R. No. 06017. The matters sought to be clarified arose in the course of the
execution of the decision of the Regional Trial Court, Branch 71, Antipolo, Rizal in Civil Case No.
239-A, as modified by the decision of the Court of Appeals in CA-G.R. CV No. 06017.
In Civil Case No. 239-A, private respondent filed a complaint against petitioner and its president,
Constantino Bautista, for collection of a sum of money. The complaint alleged: (1) that petitioner and
Greatland Realty Corporation (Greatland) executed a “Dacion en Pago,” wherein Greatland
conveyed to petitioner several parcels of land in consideration of the sum of P7,776,335.69; (2) that
Greatland assigned P2,300,000.00 out of
270

0
the total consideration of the Dacion en Pago, in favor of private respondent; and (3) that
notwithstanding her demand for payment, petitioner in bad faith, refused and failed to pay the said
amount assigned to her.
Petitioner, while admitting the execution of the Dacion en Pago, claimed: (1) that its former
president had no authority to enter into such agreement; (2) that it never ratified the same; and (3)
that assuming arguendo that the agreement was binding, the conditions stipulated therein were
never fulfilled.
Dismissing petitioner’s defenses as unmeritorious, the trial court ruled in favor of private
respondent. The trial court ordered petitioner and its co-defendant, jointly and severally, to pay
private respondent as follows:
1. “1)P2,300,000.00 the total amount assigned by Greatland in her favor out of the
P2,300,000.00 liability of defendant Pilipinas to Greatland plus legal interest from the dates
of assignments until fully paid;
2. 2)P3,217,707.00 representing the total actual damages suffered by the plaintiff plus legal
interest until fully paid;
3. 3)P1,000,000.00 in moral damages to partially assuage the extreme moral sufferings of

plaintiff inflicted upon her person considering the bad faith on the part of the defendants and
their failure to act with justice, and to give what is lawfully due her and observe honesty and
good faith;
4. 4)P100,000.00 exemplary and nominal damages to vindicate plaintiffs violated rights;
5. 5)Attorney’s fees equivalent to 15% of the total award in favor of the plaintiff;
6. 6)Costs of suit” (Rollo, p. 78).
On March 22, 1985, petitioner appealed the decision of the trial court to the Court of Appeals, which
docketed the appeal as CA-G.R. No. 06017. On the same day, private respondent filed a Motion for
Immediate Execution Pending Appeal. The trial court granted the motion for execution pending
appeal in an Order dated April 3, 1985. Petitioner challenged the Order dated April 3, 1985 before
the Court of Appeals in CA-G.R. No. SP No. 05909.
On October 30, 1986, the Court of Appeals modified the Order dated April 3, 1985, by limiting the
execution pending appeal against petitioner to P5,517,707.00 and deferring the execution of the
award for moral, exemplary and nominal damages to await
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VOL. 225, AUGUST 12, 27

1993 1
Pilipinas Bank vs. Court of
Appeals
the final judgment of the main case in CA-G.R. No. 06017. On June 17, 1987, the Supreme Court in
G.R. No. L-76506 affirmed the Order dated October 30, 1986 of the Court of Appeals.
On July 1, 1988, the trial court granted the new motion for execution pending appeal filed by
private respondent pursuant to the Resolution of the Supreme Court dated June 17, 1987, upon the
filing of the required bond. Petitioner complied with the writ of execution pending appeal by issuing
two manager’s checks in the total amount of P5,517,707.00 (one for P4,965,936.30 payable to private
respondent and another for P551,770.70 payable to the Clerk of Court, RTC, Antipolo, Rizal).
The check payable to private respondent was encashed on July 15, 1988.
On June 28, 1990, the Court of Appeals rendered a decision in CA-G.R. No. CV-06017, which
modified the judgment of the trial court as follows:
1. “1.The defendant-appellant Pilipinas Bank, formerly known as Filipinas Manufacturers
Bank is ordered to pay the plaintiff-appellee the following:
1. (a)The sum of Two Million Three Hundred Thousand (2,300,000.00) Pesos, representing
the total amount assigned by Greatland to her, with interest at the legal rate starting July 24,
1981, date when demand was first made (Exh. “F” and “G”);
2. (b)The sum of One Hundred Thousand (P100,000.00) Pesos in moral damages, to assuage
moral sufferings and embarrassment of plaintiff-appellee as a consequence of
appellant-bank’s unwarranted acts;
3. (c)The sum of Twenty Five Thousand (P25,000.00) Pesos, as exemplary damages to serve as
an example or correction for the public good;
4. (d)The sum equivalent to ten (10) percent of the principal claim awarded, representing
attorney’s fees; and
1. 2.Constantino Bautista is absolved of personal liability” (Rollo, pp. 31-32).
Petitioner filed a motion for extension of time to file a Petition for Review on Certiorari with the
Supreme Court, which however was withdrawn on July 23, 1990. Private respondent, on her part,
filed a motion for reconsideration of the decision of the Court of Appeals in CA-G.R. No. 06017, which
likewise was
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2
withdrawn on August 13, 1990.
Hence, the decision of the Court of Appeals rendered in CA-G.R. No. 06017 became final and
executory.
On September 4, 1990, petitioner filed a motion in the trial court praying that private respondent
and Standard Insurance Co. (which furnished the bond required in the advance execution of the
decision of the trial court) to refund to her the excess payment of P1,898,623.67 with interests at 6%
(Rollo, pp. 83-84).
It must be recalled that while private respondent was able to collect P5,517,707.00 from petitioner
pursuant to the writ of advance execution allowed in CA-G.R. No. SP No. 05909, the final judgment
in the main case (CA-G.R. No. 06017) awarded to private respondent damages in the total amount of
only P2,655,000.00 (P2,300,000.00 representing the amount assigned by Greatland to private
respondent, P100,000.00 as moral damages; P25,000.00 as exemplary damages and attorney’s fees
equivalent to 10% of the P2,300,000.00), together “with interest on the amount of P2,300,000.00 at
the legal rate starting July 24, 1981, date when demand was first made (Exh. “F” and “G”).”
Private respondent opposed the motion of petitioner with respect to the rate of interest to be
charged on the amount of P2,300,000.00. According to private respondent, the legal interest on the
principal amount of P2,300,000.00 due her should be 12% per annum pursuant to CB Circular No.
416 and not 6% per annum as computed by petitioner.
On October 12, 1990, the trial court, while ordering the refund to petitioner of the excess payment,
fixed the interest rate due on the amount of P2,300,000.00 at 12% per annum as proposed by private
respondent instead of 6% per annum as proposed by petitioner.
On October 16, 1990, petitioner moved to reconsider the Order dated October 12, 1990 of the trial
court, which however could not be acted upon because on October 23, 1990, private respondent filed a
Motion for Clarification with the Court of Appeals in CA-G.R. CV No. 06017, regarding the following
matters:
1. “a)The ‘legal rate’ of interest on the principal award of P2,300,000.00 from July 24, 1981 (as
per decision) up to July 14, 1988 (date of actual payment made by defendant-appellant to
plaintiff-appellee per execution pending appeal);
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1993 3
Appeals
1. b)The imposition of such ‘legal rate’ of interest on the accrued interest’ from July 24, 1981
up to July 14, 1988;
2. c)The amount of the costs of suit will include premium on surety bond;
3. d)The discharge of the surety bond whether total or partial, depending on the computation
of the interest;
4. e)The award of attorney’s fees equivalent to 10% of the principal award, whether this
should totally go to plaintiff-appellee’s former counsel or to be shared on the basis
of quantum meruit with the undersigned counsel; and
5. f)Aside from this final award of 10% attorney’s fees chargeable against
defendant-appellant, whether or not former counsel of plaintiff-appellee can still collect from
her the balance of 15% out of the 25% attorney’s fees under Exh. ‘N’ ” (Rollo, p. 32).
In its Resolution promulgated on March 14, 1991, the Court of Appeals clarified that:
1. “a)The legal rate of interest on the principal award of P2,300,000.00 should be 12% per annum in
accordance with Circular No. 416 dated July 29, 1974 of the Central Bank.
2. b)The computation of compounding interest annually has no basis, therefore, not allowed in the
instant case;
3. c)The payment of premium on the bond in the sum of P259,813.50 as cost, being without legal and
factual basis, is denied;
4. d)The surety bond posted by plaintiff-appellee may be released after satisfaction of the decision; and
5. e)Payment/distribution of attorney’s fees may/shall be litigated in a separate proceeding if the parties

cannot settle their differences amicably.
SO ORDERED” (Rollo, pp. 35-36).
In this appeal, petitioner claims that the Court of Appeals erred:

1. (1)In ruling that the legal rate of interest on the amount of P2,300,000.00 adjudged to be
paid by petitioner to private respondent is 12% per annum.
2. (2)In not holding that the refund to which petitioner is entitled should earn interest at the
rate of 12% per annum.
3. (3)In not holding that the surety bond should only be released after actual refund (Rollo, p.
18).
The Court of Appeals was of the theory that the action in Civil
274
4
Case No. 239-A filed by private respondent against petitioner “involves forbearance of money, as the
principal award to plaintiff-appellee (private respondent) in the amount of P2,300,000.00 was the
overdue debt of defendant-appellant to her since July 1981. The case is, in effect, a simple collection
of the money due to plaintiff-appellee, as the unpaid creditor from the defendant bank, the debtor”
(Resolution, p. 3; Rollo, p. 33). Applying Central Bank Circular No. 416, the Court of Appeals held
that the applicable rate of interest is 12% per annum
Petitioner argues that the applicable law is Article 2209 of the Civil Code, not the Central Bank
Circular No. 416. Said Article 2209 provides:
“Art. 2209. 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 the interest agreed
upon, and in the absence of stipulation, the legal interest, which is six per cent per annum.”
Presidential Decree No. 116 authorized the Monetary Board to prescribe the maximum rate or rates
of interest for the loan or renewal thereof or the forbearance of any money, goods or credits and
amended the Usury Law (Act No. 2655) for that purpose.
As amended, the Usury Law now provides:
“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 express contract as to such rate of interest, shall be six per centum per annum or
such rate as may be prescribed by the Monetary Board of the Central Bank of the Philippines for that purpose in
accordance with the authority hereby granted.”
“SECTION 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest
for the loan or renewal thereof or the forbearance of any money, goods or credits, and to charge such rate or rates
whenever warranted by prevailing economic and social conditions: Provided, That such changes shall not be
made oftener than once every twelve months.
“In the exercise of the authority herein granted, the Monetary Board may prescribe higher maximum rates for
consumer loans or renewals thereof as well as such loans made by pawnshops, finance companies and other
similar credit institutions although the rates prescribed for these institutions need not necessarily be uniform.”
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1993 5
Appeals
Acting on the authority vested on it by the Usury Law, as amended by P.D. No. 116, the Monetary
Board of Central Bank issued Central Bank Circular No. 416, which provides:
“By virtue of the authority granted to it under Section 1 of Act 2655, as amended, otherwise known as the ‘Usury
Law’ the Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed 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
express contract as to such rate of interest, shall be twelve (12%) per cent per annum. This Circular shall take
effect immediately .” (italics supplied)
Note that Circular No. 416, fixing the rate of interest at 12% per annum, deals with (1) loans; (2)
forbearance of any money, goods or credit; and (3) judgments.
In Reformina v. Tomol, Jr., 139 SCRA 260 [1985], the Court held that the judgments spoken of
and referred to in Circular No. 416 are “judgments in litigation involving loans or forbearance of any
money, goods or credits. Any other kind of monetary judgment which has nothing to do with nor
involving loans or forbearance of any money, goods or credits does not fall within the coverage of the
said law for it is not, within the ambit of the authority granted to the Central Bank.”
Reformina was affirmed in Philippine Virginia Tobacco Administration v. Tensuan, 188 SCRA
628 [1990], which emphasized that the “judgments” contemplated in Circular No. 417 “are
judgments involving said loans or forbearance only and not in judgments in litigation that have
nothing to do with loans x x x.”
We held that Circular No. 416 does not apply to judgments involving damages (Reformina v.
Tomol, Jr., supra; Philippine Virginia Tobacco Administration v. Tensuan, supra)and compensation
in expropriation proceedings (National Power Corporation v. Angas, 208 SCRA 542 [1992]). We also
held that Circular No. 416 applies to judgments involving the payment of unliquidated cash
advances to an employee by his employer (Villarica v. Court of Appeals, 123 SCRA 259 [1983]) and
the return of money paid by a buyer of a leasehold right but which contract was voided due to the
fault of the seller (Buisier v. Court of Appeals, 154 SCRA 438 [1987]).
What then is the nature of the judgment ordering petitioner to pay private respondent the amount
of P2,300,000.00?
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6
The said amount was a portion of the P7,776,335.69 which petitioner was obligated to pay Greatland
as consideration for the sale of several parcels of land by Greatland to petitioner. The amount of
P2,300,000.00 was assigned by Greatland in favor of private respondent. The said obligation
therefore arose from a contract of purchase and sale and not from a contract of loan or mutuum.
Hence, what is applicable is the rate of 6% per annum as provided in Article 2209 of the Civil Code of
the Philippines and not the rate of 12% per annum as provided in Circular No. 416.
Petitioner next contends that, consistent with its thesis that Circular No. 416 applies only to
judgments involving the payment of loans or forbearance of money, goods and credit, the Court of
Appeals should have ordered private respondent to pay interest at the rate of 12% on the
overpayment collected by her pursuant to the advance execution of the judgment.
Again, we sustain petitioner’s contention as correct.
Private respondent was paid in advance the amount of P5,517,707.00 by petitioner pursuant to
the order for the execution pending appeal of the judgment of the trial court. On appeal, the Court of
Appeals reduced the total damages to P3,619,083.33, leaving a balance of P1,898,623.67 to be
refunded by private respondent to petitioner. In an execution pending appeal, funds are advanced by
the losing party to the prevailing party with the implied obligation of the latter to repay the former,
in case the appellate court cancels or reduces the monetary award.
Under Section 5 of Rule 39 of the Revised Rules of Court where “the judgment executed is
reversed totally or partially on appeal, the trial court, on motion, after the case is remanded to it,
may issue such orders of restitution, as equity and justice may warrant under the circumstances.” It
was to guarantee the restitution contemplated by Section 5 of Rule 39 of the Revised Rules of Court
that private respondent was required by the trial court to post a bond before the writ of advance
execution was issued.
In the case before us, the excess amount ordered to be refunded by private respondent falls within
the ruling in Viloria and Buiser that Circular No. 416 applies to cases where money is transferred
from one person to another and the obligation to return the same or a portion thereof is subsequently
adjudged.
Finally, petitioner questions as vague the ruling of the Court
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1993 7
Appeals
of Appeals that the surety bond given to secure the advance execution may be discharged “upon the
finality and satisfaction of the decision.” We believe that this ruling of the Court of Appeals is clear
enough in ordering that the surety bond shall be released only after private respondent has fully
refunded the overpayment to petitioner.
WHEREFORE, the petition is GRANTED. The Resolution of the Court of Appeals appealed from
is MODIFIED in that (1) the amount of P2,300,000.00 adjudged to be paid by petitioner to private
respondent shall earn interest of 6% per annum and (2) the amount of P1,898,623.67 to be refunded
by private respondent to petitioner shall earn interest of 12% per annum. Costs against private
respondent.
SO ORDERED.
Cruz (Chairman), Griño-Aquino, Davide, Jr. and Bellosillo, JJ., concur.
Petition granted. Appealed resolution modified.

Note.—The adjusted rate mentioned in Circular No. 416 of the Central Bank refers only to loans
or forbearance of money, goods or credits and court judgments thereon but not to court judgments for
damages arising from injury to persons and loss of property which does not involve a loan (Tio Khe
Chio vs. Court of Appeals, 202 SCRA 119).
——o0o——
July 23, 2010.G.R. No. 171925. *
SOLIDBANK CORPORATION, (now Metropolitan Bank and Trust Company), petitioner, vs.
PERMANENT HOMES, INCORPORATED, respondent.
Usury Law; Interest Rates; The Usury Law had been rendered legally ineffective by Resolution No. 224 dated
3 December 1982 of the Monetary Board of the Central Bank, and later by Central Bank Circular No. 905 which
took effect on 1 January 1983; These circulars removed the ceiling on interest rates for secured and unsecured loans
regardless of maturity; the effect of these circulars is to allow the parties to agree on any interest that may be
charged on a loan, the virtual repeal of the Usury Law is within the range of judicial notice which courts are bound
to take into account.—The Usury Law had been rendered legally ineffective by Resolution No. 224 dated 3
December 1982 of the Monetary Board of the Central Bank, and later by Central Bank Circular No. 905 which
took effect on 1 January 1983. These circulars removed the ceiling on interest rates for secured and unsecured
loans regardless of maturity. The effect of these circulars is to allow the parties to agree on any interest that may
be charged on a loan. The virtual repeal of the Usury Law is within the range of judicial notice which courts are
bound to take into account. Although interest rates are no longer subject to a ceiling, the lender still does not have
an unbridled license to impose increased interest rates. The lender and the borrower should agree on the imposed
rate, and such imposed rate should be in writing.
Civil Law; Obligations and Contracts; Obligations arising from contracts may have the force of law between
the parties, there must be a mutuality between the parties based on their essential equality; A contract containing a
condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting
parties is void.—In order that obligations arising from contracts may have the force of law between the parties,
there must be a mutuality between the parties based on their essential equality. A contract containing a
condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting
parties is
_______________
* SECOND DIVISION.
276

6 ANNOTATED
Solid Bank Corporation vs. Permanent Homes,
Incorporated
void. There was no showing that either Solidbank or Permanent coerced each other to enter into the loan
agreements. The terms of the Omnibus Line Agreement and the promissory notes were mutually and freely
agreed upon by the parties.
Epifanio C. Sedigo for petitioner.
Alberto II Borbon Reyes for respondent.
CARPIO,J.:
G.R. No. 171925 is a petition for review assailing the Decision promulgated on 29 June 2005 by
1 2
the Court of Appeals (appellate court) as well as the Resolution promulgated on 14 March 2006 in
3
CA-G.R. CV No. 75926. The appellate court granted the petition filed by Permanent Homes,
Incorporated (Permanent) and reversed the decision of the Regional Trial Court of Makati City,
Branch 58 (trial court) dated 5 July 2002 in Civil Case No. 98-654. The appellate court ordered
Solidbank Corporation (Solidbank) and Permanent to enter into an express agreement about the
applicable interest rates on Permanent’s loan. Solidbank was also ordered to render an accounting of
Permanent’s payments, not to impose interest on interest upon Permanent’s loans, and to release the
remaining amount available under Permanent’s omnibus credit line.
_______________
1 Under Rule 45 of the 1997 Rules of Civil Procedure.
2 Rollo, pp. 43-65. Penned by Associate Justice Danilo B. Pine, with Associate Justices Rodrigo V. Cosico and Arcangelita
Romilla-Lontok, concurring.
3 Id., at pp. 67-68. Penned by Associate Justice Rodrigo V. Cosico, with Associate Justices Josefina Guevara-Salonga and Arcangelita
Romilla-Lontok, concurring.
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2010
Solid Bank Corporation vs.
Permanent Homes, Incorporated
The Facts
The appellate court narrated the facts as follows:

“The records disclose that PERMANENT HOMES is a real estate development company, and to finance its
housing project known as the “Buena Vida Townhomes” located within Merville Subdivision, Parañaque City, it
applied and was subsequently granted by SOLIDBANK with an “Omnibus Line” credit facility in the total
amount of SIXTY MILLION PESOS. Of the entire loan, FIFTY NINE MILLION as [sic] time loan for a term of up
to three hundred sixty (360) days, with interest thereon at prevailing market rates, and subject to monthly
repricing. The remaining ONE MILLION was available for domestic bills purchase.
To secure the aforesaid loan, PERMANENT HOMES initially mortgaged three (3) townhouse units within the
Buena Vida project in Parañaque. At the time, however, the instant complaint was filed against SOLIDBANK, a
total of thirty six (36) townhouse units were mortgaged with said bank.
Of the 60 million available to PERMANENT HOMES, it availed of a total of 41.5 million pesos, covered by
three (3) promissory notes, which contain the following provisions, thus:
“xxx
We/I irrevocably authorize Solidbank to increase or decrease at any time the interest rate agreed in this
Note or Loan on the basis of, among others, prevailing rates in the local or international capital markets.
For this purpose, We/I authorize Solidbank to debit any deposit or placement account with Solidbank
belonging to any one of us. The adjustment of the interest rate shall be effective from the date indicated in
the written notice sent to us by the bank, or if no date is indicated, from the time the notice was sent.5.
Should We/I disagree to the interest rate adjustment, We/I shall prepay all amounts due under this Note
or Loan within thirty (30) days from the receipt by anyone of us of the written notice. Otherwise, We/I shall
be deemed to have given our consent to the interest rate adjustment.”6.
Contrary, however, to the specific provisions as afore-quoted, there was a standing agreement by the parties
that any increase or
278

8
Incorporated
decrease in interest rates shall be subject to the mutual agreement of the parties.
For the first loan availment of PERMANENT HOMES on March 20, 1997, in the amount of 19.6 MILLION,
from the initial interest rate of 14.25% per annum (p.a.), the same was increased 15% p.a. effective May 19, 1997;
it was again increased to 26% p.a. effective July 18, 1997. It was thereafter reduced to 20% p.a.effective August
18, 1997, and then increased to 24% p.a. effective September 17, 1997. The rate was increased further to 30%
p.a.effective October 17, 1997, then decreased to 27% p.a. on November 17, 1997, and again increased to 34%
p.a. effective December 17, 1997. The rate then decreased to 30% p.a. on January 16, 1998.
For the second loan availment in the amount of 18 million, the rate was initially pegged at 15.75% p.a. on
June 24, 1997. A month later, the rate increased to 23.5% p.a. It thereafter decreased to 20% p.a. effective
August 24, 1997, but again increased to 22.5% p.a. effective September 24, 1997. For the next month, the rate
surged to 30% p.a., and decreased to 27% p.a. for the month of November. The rate again surged to 34% p.a. for
the month of December, and was decreased to 30% p.a. from January 22, 1998 to February 20, 1998.
For the third loan availment on July 15, 1997, in the amount of 3.9 million, the interest rate was initially
pegged at 35% p.a., but this was decreased to 21% p.a. from August 14 until September 11, 1997. The rate
increased slightly to 23% p.a. on September 12, 1997, and surged to 27% p.a. on October 13, 1997. The rate went
down slightly to 27% p.a. for the month of November, and to 26% p.a. for the month of December. The rate,
however, again surged to 30% p.a. on January 12, 1998 before settling at 29% p.a. for the month of February.
It is [Permanent’s] stand that SOLIDBANK unilaterally and arbitrarily accelerated the interest rates without
any declared basis of such increases, of which PERMANENT HOMES had not agreed to, or at the very least, been
informed of. This is contrary to their earlier agreement that any interest rate changes will be subject to mutual
agreement of the parties. PERMANENT HOMES further admits that it was not able to protest such arbitrary
increases at the time they were imposed by SOLIDBANK, for fear that SOLIDBANK might cut off the credit
facility it extended to PERMANENT HOMES. Permanent was then in the midst of the construction of its
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2010
project in Merville, Parañaque City, and SOLIDBANK knew that it was relying substantially on the credit
facility the latter extended to it.
[Permanent] thus filed a case before the trial court seeking the following: (1) the annulment of the increases in
interest rates on the loans it obtained from SOLIDBANK, on the ground that it was violative of the principle of
mutuality of agreement of the parties, as enunciated in Article 1409 of the New Civil Code, (2) the fixing of the
interest rates at the applicable interest rate, and (3) for the trial court to order SOLIDBANK to make an
accounting of the payments it made, so as to determine the amount of refund PERMANENT is entitled to, as well
as to order SOLIDBANK to release the remaining available balance of the loan it extended to PERMANENT. In
addition, [Permanent] prays for the payment of compensatory, moral and exemplary damages.
SOLIDBANK, on the other hand, avers that PERMANENT HOMES has no cause of action against it, in view
of the pertinent provisions of the Omnibus Credit Line and the promissory notes agreed to and signed by
PERMANENT HOMES. Thus, in accordance with said provisions, SOLIDBANK was authorized to, upon due
notice, periodically adjust the interest rates on PERMANENT HOMES’ loan availments during the monthly
interest repricing dates, depending on the changes in prevailing interest rates in the local and international
capital markets. In fact, SOLIDBANK avers that four (4) days before July 15, 1997, the Bangko Sentral ng
Pilipinas (BSP) declared that it could no longer support the Philippine currency from external speculative forces,
hence, the local currency was allowed to seek its own exchange rate level. As a result of the volatile exchange rate
ratio, banks were then hesitant to extend loans, and in some instances that it granted loans, they had to ensure
that they will not be at the losing end of the deal, so to speak, by the repricing of the interest rates every month.
SOLIDBANK insists that PERMANENT HOMES should not be allowed to renege on its contractual obligations,
as it freely and voluntarily bound itself to the provisions of the Omnibus Credit Line and the promissory notes.
PERMANENT HOMES presented as witnesses Jacqueline S. Lim, its Vice President and Chief Financial
Officer, Engr. Rey A. Romasanta, its Executive Vice President and Chief Operating Officer, and Martha Julia
Flores, its Treasury Officer.380
0
Incorporated
On March 24, 1998, the trial court issued a temporary restraining order (TRO), after a summary hearing,
which enjoined SOLIDBANK from implementing and collecting the increases in interest rates and from initiating
any action, including the foreclosure of the mortgaged properties.
Ms. Lim’s testimony centered on PERMANENT HOMES’ allegations that the repricing of the interest rates
was done by SOLIDBANK without any written agreement entered into between the parties. In fact, Ms. Lim
accounted that SOLIDBANK will merely advise them of the interest rate for the period, after said period had
already commenced, and at times very late in the period, by fax messages. When PERMANENT HOMES called
SOLIDBANK’s attention to the seemingly surging rates it imposed on its loan, SOLIDBANK will merely answer
that it was the bank’s policy, without offering any basis for such increase. Furthermore, Ms. Lim also mentioned
SOLIDBANK’s alleged practice of imposing interest on unpaid interest, at the highest rate of 30% p.a. Ms. Lim
also presented a tabulation, which presents the number of days their billing statements were sent late, from the
time the interest period started. It is PERMANENT HOMES’ stand that since the purpose of the billing
statements was to inform them beforehand of the applicable interest rate for the period, the late billings will
clearly show SOLIDBANK’s arbitrary imposition of the repriced interest rates, as well as its indifference to
PERMANENT HOMES’ plight.
To illustrate, for the first loan availment in the amount of P19.6 million, the billing statements which should
have notified PERMANENT HOMES of the repriced interest rates were faxed to PERMANENT HOMES
between eighteen (18) to thirty-three (33) days late. For the second loan availment in the amount of P18 million,
the faxed billings were late between six (6) to twenty-one (21) days, and one instance where PERMANENT
HOMES received no billing at all. For the third loan availment in the amount of P3.9 million, the faxed billings
were late between seven (7) to twenty-nine (29) days, and also an instance where PERMANENT HOMES
received no billing at all.
This practice, according to Ms. Lim, clearly affected its operations, as the completion of its construction project
was unnecessarily delayed, to its prejudice and its buyers. This was the import of the testimony of PERMANENT
HOMES’ second witness, Engr. Rey A. Romasanta. According to Engr. Rey, the target date of completion
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2010
was August 1997, but in view of the shortage of funds by reason of SOLIDBANK’s refusal for PERMANENT
HOMES to make further availments on its omnibus credit line, the project was completed only on February 1998.
PERMANENT HOMES’ third and final witness was Martha Julia Flores, its Treasury Officer, who explained
that as such, it was her who received the late billings from SOLIDBANK. She would also call up SOLIDBANK to
ask what the repriced interest rate for the coming interest period, to no avail, as SOLIDBANK will merely fax its
billings almost always, as abovementioned, late in the period. Ms. Flores admitted that she prepared the
tabulation presented before the court, which showed how late SOLIDBANK’s billings were sent to PERMANENT
HOMES, as well as the computation of interest rates that SOLIDBANK had allegedly overcharged on its
loan, vis-a-vis the average of the high and the low published lending rates of SOLIDBANK.
SOLIDBANK, to establish its defense, presented its lone witness, Mr. Cesar Lugtu, who testified to the effect
that, contrary to PERMANENT HOMES’ assertions that it was not promptly informed of the repriced interest
rates, SOLIDBANK’s officers verbally advised PERMANENT HOMES of the repriced rates at the start of the
period, and even added that their transaction[s] were based on trust. Aside from these allegations, however, no
written memorandum or note was presented by SOLIDBANK to support their assertion that PERMANENT
HOMES was timely advised of the repriced interests.” 4
The Trial Court’s Ruling
On 5 July 2002, the trial court promulgated its Decision in favor of Solidbank. The trial court
ratiocinated and ruled thus:
“It becomes crystal clear that there is sufficient proof to show that the instant case was instituted by
[Permanent] as an after-thought and as an obvious subterfuge intended to completely lay on the defendant the
blame for the debacle of its Buena Vida project. An afterthought because the records of the case show that the
complaint
_______________
4 Id., at pp. 43-49.
282

2
Incorporated
was filed in March 16, 1998, already after it was having difficulty making the amortization payments, the last
of which being in February 1998. A subterfuge because plaintiff, instead of blaming itself and its own business
judgment that went sour, would rather put the blame on [Solidbank], taking advantage of every conceivable gray
area of its contract with [Solidbank] to avoid its own liabilities. In fact, this complaint was made the very basis for
[Permanent] to altogether stop the payment of its loan from [Solidbank] including the interest payment (TSN,
May 07, 1998, p. 60).
xxxx
WHEREFORE, finding the complaint not impressed with merit, judgment is hereby rendered dismissing the
said complaint. The Counterclaim is likewise dismissed for lack of evidence to support the same.
SO ORDERED.” 5
Permanent filed an appeal before the appellate court.

The Appellate Court’s Ruling
The appellate court granted Permanent’s appeal, and set aside the trial court’s ruling. The
appellate court not only recognized the validity of escalation clauses, but also underscored the
necessity of a basis for the increase in interest rates and of the principle of mutuality of contracts.
The dispositive portion of the appellate court’s decision reads, thus:
“THE FOREGOING CONSIDERED, the instant appeal is hereby GRANTED, the assailed decision dated July
5, 2002 is REVERSED and SET ASIDE, and a new one is hereby entered as follows:
Unless the parties herein subsequently enter into an(1) express agreement regarding the applicable interest
rates on PERMANENT HOMES’ loan availments subsequent to the initial thirty-
_______________
5 Id., at pp. 164, 171.
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2010
day (30) period, the legal rate of twelve percent (12%) per annumis hereby FIXED, to be applied on the
outstanding balance of the loan;
SOLIDBANK is ordered to render an accounting of all the payments made by PERMANENT HOMES, and in
case there is excess payment by reason of the wrongful imposition of the repriced interest rates, to apply such
amount to the interest payment at the legal rate, and thereafter to the outstanding principal amount;(2)
SOLIDBANK is directed not to impose penalties, particularly interest on interest, upon PERMANENT
HOMES’ loan, there being no evidence that the latter was in default on its payments;(3)
SOLIDBANK is hereby ordered to release the remaining amount available under the omnibus credit line,
subject, however, to availability of funds on the part of SOLIDBANK.(4)
SO ORDERED.” 6
The appellate court resolved to deny Solidbank’s Motion for Reconsideration for lack of merit. 7
The Issues
Solidbank raised the following issues in their petition:

Whether the Honorable Court of Appeals was correct in ruling that the increases in the interest
rates on [Permanent’s] loans are void for having been unilaterally imposed without basis.“(A)
Whether the Honorable Court of Appeals was correct in ordering the parties to enter into an
express agreement regarding the applicable interest rates on Permanent’s loan availments
subsequent to the initial thirty-day (30) period.(B)
Whether the Honorable Court of Appeals was correct in ruling that [Permanent] is entitled to
attorney’s fees not-(C)
_______________
6 Id., at pp. 63-64.
7 Id., at pp. 67-68.
284

4
Incorporated
withstanding the absence of bad faith or malice on the part of [Solidbank].” 8
The Court’s Ruling
The petition has merit.

The Usury Law had been rendered legally ineffective by Resolution No. 224 dated 3 December
1982 of the Monetary Board of the Central Bank, and later by Central Bank Circular No. 905 which
took effect on 1 January 1983. These circulars removed the ceiling on interest rates for secured and
unsecured loans regardless of maturity. The effect of these circulars is to allow the parties to agree
on any interest that may be charged on a loan. The virtual repeal of the Usury Law is within the
range of judicial notice which courts are bound to take into account. Although interest rates are no
9
longer subject to a ceiling, the lender still does not have an unbridled license to impose increased
interest rates. The lender and the borrower should agree on the imposed rate, and such imposed rate
should be in writing.
The three promissory notes between Solidbank and Permanent all contain the following
provisions:
We/I irrevocably authorize Solidbank to increase or decrease at any time the interest rate agreed in this
Note or Loan on the basis of, among others, prevailing rates in the local or international capital markets.
For this purpose, We/I authorize Solidbank to debit any deposit or placement account with Solidbank
belonging to any one of us. The adjustment of the interest rate shall be effective from the date indicated in
the written notice sent to us by the bank, or if no date is indicated, from the time the notice was sent.“5.
Should We/I disagree to the interest rate adjustment, We/I shall prepay all amounts due under this Note or
Loan within6.
_______________
8 Id., at p. 18.
9 Philippine National Bank v. Spouses Encina, G.R. No. 174055, 12 February 2008, 544 SCRA 608.
285
VOL. 625, JULY 23, 285

2010
thirty (30) days from the receipt by anyone of us of the written notice. Otherwise, We/I shall be deemed to
have given our consent to the interest rate adjustment.”
The stipulations on interest rate repricing are valid because (1) the parties mutually agreed on
said stipulations; (2) repricing takes effect only upon Solidbank’s written notice to Permanent of the
new interest rate; and (3) Permanent has the option to prepay its loan if Permanent and Solidbank
do not agree on the new interest rate. The phrases “irrevocably authorize,” “at any time” and
“adjustment of the interest rate shall be effective from the date indicated in the written notice sent to
us by the bank, or if no date is indicated, from the time the notice was sent,” emphasize that
Permanent should receive a written notice from Solidbank as a condition for the adjustment of the
interest rates.
In order that obligations arising from contracts may have the force of law between the parties,
there must be a mutuality between the parties based on their essential equality. A contract 10
containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will
of one of the contracting parties is void. There was no showing that either Solidbank or Permanent
11
coerced each other to enter into the loan agreements. The terms of the Omnibus Line Agreement and
the promissory notes were mutually and freely agreed upon by the parties.
Moreover, Solidbank’s range of lending rates were consistent with “prevailing rates in the local or
international capital markets.” Permanent presented a tabulation of the range of Solidbank’s 12
lending rates, as reported to Bangko Sentral ng

_______________
10 Philippine National Bank v. Court of Appeals, G.R. No. 88880, 30 April 1991, 196 SCRA 536, 545.
11 See Garcia, et al. v. Rita Legarda, Inc., 128 Phil. 590; 21 SCRA 555 (1967).
12 Records, Vol. II, p. 95.
286

6
Incorporated
Pilipinas and compared the lending rates with the interest rates charged by Solidbank on
Permanent’s loans, thus:
Solidbank’s range
of lending rates as
per BSP records
High Low Interest rates Excess
charged by Interest Rate
Solidbank on Over the
Permanent’s Average of
loans High and
Low Rates
Sept. 25.0% 22.0% 23.0%
12,
1997
Sept. 27.0% 24.0% 24.0%
17,
1997
Sept. 26.0% 23.0% 22.5%
22,
1997
Oct. 29.0% 26.0% 28.0%
13,
1997
Oct. 30.0% 27.0% 30.0%
17,
1997
Oct. 32.0% 29.0% 30.0%
22,
1997
Nov. 28.0% 25.0% 27.0%
12,
1997
Nov. 28.0% 25.0% 27.0%
17,
1997
Nov. 27.0% 24.0% 27.0%
21,
1997
Dec. 25.0% 23.0% 26.0% 2.0%
12,
1997
Dec. 25.0% 23.0% 34.0% 10.0%
17,
1997
Dec. 25.0% 23.0% 32.0% 8.0%
22,
1997
Jan. 26.0% 24.0% 30.0% 5.0%
12,
1998
Jan. 28.0% 25.0% 30.0% 3.5%
16,
1998
Jan. 28.0% 25.0% 30.0% 3.5%
22,
1998
Feb. 27.0% 24.0% 30.0% 3.5%
9,
1998
Feb. 27.0% 24.0% 29.0% 4.5%
11,
1998
Feb. 27.0% 24.0% 30.0% 4.5%
12,
1998
The repriced interest rates from 12 September to 21 November 1997 conformed to the range of
Solidbank’s lending rates to other borrowers. The 12 December 1997 to 12 Febru-
287
VOL. 625, JULY 23, 287

2010
ary 1998 repriced interest rates were not unconscionably out of line with the upper range of lending
rates to other borrowers. The interest rate repricing happened at the height of the Asian financial
crises in late 1997, when banks clamped down on lendings because of higher credit risks across
industries, particularly the real estate industry.
We also recognize that Solidbank admitted that it did not promptly send Permanent written
repriced rates, but rather verbally advised Permanent’s officers over the phone at the start of the
period. Solidbank did not present any written memorandum to support its allegation that it
promptly advised Permanent of the change in interest rates. Solidbank advised Permanent on the
13
repriced interest rate applicable for the 30-day interest period only after the period had begun.
Permanent presented a tabulation which showed that Solidbank either did not send a billing
statement, or sent a billing statement 6 to 33 days late. We reproduce the tabulation below:
14
PN #435 – P19.6MM
Reference Interest Period Date Billing Number of
No. Statements days
were faxed Billing
to Permanent Statement
was Late
1 03/20/9 04/18/9 04/17/97 28
7 7
2 04/18/9 05/19/9 05/16/97 28
7 7
05/19/9 06/19/9 no
7 7 statement
received
3 06/19/9 07/18/9 07/12/97 23
7 7
4 07/18/9 08/18/9 08/05/97 18
7 7
5 08/18/9 09/17/9 09/10/97 23
7 7
_______________
13 Id., at p. 49.
14 Id., at p. 59; Records, Vol. II, p. 85.
288

ANNOTATED
Incorporated
6 09/17/97 10/17/9 10/06/9 19
7 7
7 10/17/97 11/17/9 11/11/9 25
7 7
8 11/17/97 12/17/9 12/12/9 25
7 7
9 12/17/97 01/16/9 01/09/9 23
8 8
14 01/16/98 02/20/9 02/18/9 33
8 8
PN #969 – P18MM
No. Statements days
were faxed Billing
was Late
3 06/24/9 07/24/9 07/12/97 18
7 7
4 07/24/9 08/22/9 08/05/97 12
7 7
5 08/22/9 09/22/9 09/10/97 19
7 7
6 09/22/9 10/22/9 10/06/97 14
7 7
7 10/22/9 11/21/9 11/11/97 20
7 7
8 11/21/9 12/22/9 12/12/97 21
7 7
9 12/22/9 01/22/9 01/09/98 18
7 8
01/22/9 02/12/9 no state-
8 7 ment re-
ceived
14 02/12/9 02/20/9 02/18/98 6
8 8
PN #1077 – P3.9MM
No. Statements days
were faxed Billing
was Late
10 07/15/9 08/14/9 08/14/97 30
7 7
11 08/14/9 08/26/9 08/26/97 12
7 7
289
VOL. 625, JULY 23, 2010 289

Incorporated
5 08/26/9 09/12/9 09/10/9 15
7 7 7
6 09/12/9 10/13/9 10/06/9 24
7 7 7
7 10/13/9 11/12/9 11/11/9 29
7 7 7
1 11/12/9 12/12/9 12/10/9 28
2 7 7 7
9 12/12/9 01/12/9 01/09/9 28
7 8 8
1 01/12/9 02/09/9 02/09/9 28
3 8 8 8
02/09/9 02/11/9 no statement
8 8 received
1 02/11/9 03/13/9 02/18/9 7
4 8 8 8
We rule that Solidbank’s computation of the interest due from Permanent should be adjusted to
take effect only upon Permanent’s receipt of the written notice from Solidbank.
WHEREFORE, we GRANT the petition in part. We SET ASIDE the Decision of the Court of
Appeals promulgated on 29 June 2005 as well as the Resolution promulgated on 14 March 2006 in
CA-G.R. CV No. 75926 and AFFIRM the decision of the Regional Trial Court of Makati City, Branch
58 dated 5 July 2002 in Civil Case No. 98-654 with the MODIFICATION that the repricing of the
interest rates should take effect only upon Permanent Homes, Incorporated’s receipt of the written
notice from Solidbank Corporation of the adjustment in interest rate. The records of this case are
therefore remanded to the trial court for the computation of the proper interest payments based on
the dates of receipt of written notice.
SO ORDERED.
Nachura, Peralta, Del Castillo and Abad, JJ., concur.
**
Petition granted in part, judgment and resolution set aside.
August 13, 2008.G.R. No. 170452. *
SALVADOR CHUA and VIOLETA CHUA, petitioners, vs.RODRIGO TIMAN, MA. LYNN TIMAN
and LYDIA TIMAN, respondents.
Civil Law; Contracts; Interests; Stipulated interest rates of 3% per month and higher are excessive, iniquitous,
unconscionable and exorbitant; Such stipulations are void for being contrary to morals, if not against the
law.—The stipulated interest rates of 7% and 5% per month imposed on respondents’ loans must be equitably
reduced to 1% per month or 12% per annum. We need not unsettle the principle we had affirmed in a plethora of
cases that stipulated interest rates of 3% per month and higher are excessive, iniquitous, unconscionable and
exorbitant. Such stipulations are void for being contrary to morals, if not against the law. While C.B. Circular No.
905-82, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for both secured
and unsecured loans, regardless of maturity, nothing in the said circular could possibly be read as granting carte
blanche authority to lenders to raise interest rates to levels which would either enslave their borrowers or lead to
a hemorrhaging of their assets.
Jose S. Santos, Jr. for petitioners.
Salonga, Hernandez & Mendoza for respondents.
QUISUMBING,J.:
Before us is a petition for review on certiorari assailing the Decision and Resolution dated March
1 2
9, 2005 and November

_______________
* SECOND DIVISION.
1 Rollo, pp. 28-34. Penned by Associate Justice Juan Q. Enriquez, Jr. with Associate Justices Portia Aliño-Hormachuelos and Vicente Q.
Roxas concurring.
2 Id., at pp. 36-37.
147
VOL. 562, AUGUST 13, 14

2008 7
Chua vs. Timabn
24, 2005, respectively, of the Court of Appeals in CA-G.R. CV No. 82865, which had affirmed the
Decision dated May 14, 2004 of the Regional Trial Court (RTC) of Quezon City, Branch 86, in Civil
3
Case No. Q-00-41276. The Court of Appeals reduced the stipulated original interest rates of 7% and 5%
per month to only 1% per month or 12% per annumand ordered petitioners to refund the excess
interest payments by respondents.
The pertinent facts are as follows:
In February and March 1999, petitioners Salvador and Violeta Chua granted respondents Rodrigo,
Ma. Lynn and Lydia Timan the following loans: a) P100,000; b) P200,000; c) P150,000; d) P107,000;
e) P200,000; and f) P107,000. These loans were evidenced by promissory notes with interest of 7%
per month, which was later reduced to 5% per month. Rodrigo and Ma. Lynn issued five (5) postdated
checks to secure the loans, except for the P150,000 loan which was secured by a postdated check
issued by Lydia.
Respondents paid the loans initially at 7% interest rate per month until September 1999 and then
at 5% interest rate per month from October to December 1999. Sometime in March 2000,
respondents offered to pay the principal amount of the loans through a Philippine National Bank
manager’s check worth P764,000, but petitioners refused to accept the same insisting that the
principal amount of the loans totalled P864,000.
On May 3, 2000, respondents deposited P864,000 with the Clerk of Court of the RTC of Quezon
City. Later, they filed a case for consignation and damages. Petitioners moved to dismiss the case,
but the RTC denied the motion, as well as the subsequent motion for reconsideration.
_______________
3 Id., at pp. 111-115. Penned by Judge Teodoro A. Bay.
148

8
Chua vs. Timabn
By virtue of an order of Partial Judgment dated October 16, 2002, the Clerk of Court of the RTC of
4
Quezon City released the amount of P864,000 to petitioners.

Trial on the validity of the stipulated interests on the subject loans, as well as on the issue of
damages, then proceeded.
On May 14, 2004, the RTC rendered a decision in favor of respondents. It ruled that the original
stipulated interest rates of 7% and 5% per month were excessive. It further ordered petitioners to
refund to respondents all interest payments in excess of the legal rate of 1% per month or 12% per
annum. However, the RTC denied petitioners’ claim for damages.
On appeal, the Court of Appeals affirmed the trial court’s decision. The Court of Appeals declared
illegal the stipulated interest rates of 7% and 5% per month for being excessive, iniquitous,
unconscionable and exorbitant. Accordingly, the Court of Appeals reduced the stipulated interest
rates of 7% and 5% per month (equivalent to 84% and 60% per annum, respectively) to a fair and
reasonable rate of 1% per month or 12% per annum. The Court of Appeals also ordered petitioners to
refund to respondents all interest payments in excess of 12% per annum. Petitioners sought
reconsideration, but it was denied.
Hence, this petition raising the lone issue of:
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR—OR
ACTED NOT IN ACCORD WITH THE LAW AND JURISPRUDENCE—WHEN IT AFFIRMED THE
JUDGMENT OF THE REGIONAL TRIAL COURT ORDERING THE RETURN OF THE EXCESS INTEREST
TO RESPONDENTS. 5
Essentially, the main issue is: (1) Did the Court of Appeals err in ruling that the original
stipulated interest rates of 7%
_______________
4 Id., at pp. 105-106.
5 Id., at p. 212.
149
VOL. 562, AUGUST 13, 14

2008 9
Chua vs. Timabn
and 5%, equivalent to 84% and 60% per annum, are unconscionable, and in ordering petitioners to
refund to respondents all payments of interest in excess of 12% per annum?
Petitioners aver that the stipulated interest of 5% monthly and higher cannot be considered
unconscionable because these rates are not usurious by virtue of Central Bank (C.B.) Circular No.
905-82 which had expressly removed the interest ceilings prescribed by the Usury Law. Petitioners
6
add that respondents were in pari delicto since they agreed on the stipulated interest rates of 7% and
5% per month. They further aver they honestly believed that the interest rates they imposed on
respondents’ loans were not usurious.
Respondents, invoking Medel v. Court of Appeals, counter that the stipulated interest rates of 7%
7
and 5% per month are iniquitous, unconscionable and exorbitant, thus, they are entitled to the
return of the excessive interest paid. They also contend that petitioners cannot raise the defense of in
pari delicto for the first time on appeal. They further contend that the defense of good faith is a
factual issue which cannot be raised by petitioners in a petition for review under Rule 45 of the Rules
of Civil Procedure.
The petition is patently devoid of merit.
The stipulated interest rates of 7% and 5% per month imposed on respondents’ loans must be
equitably reduced to 1% per month or 12% per annum. We need not unsettle the principle we had
8
affirmed in a plethora of cases that stipulated

_______________
6The 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.1. SECTION
7 G.R. No. 131622, November 27, 1998, 299 SCRA 481.
8 Ruiz v. Court of Appeals, G.R. No. 146942, April 22, 2003, 401 SCRA 410, 421.
150

0
Chua vs. Timabn
interest rates of 3% per month and higher are excessive, iniquitous, unconscionable and exorbitant.
9 10
Such stipulations are void for being contrary to morals, if not against the law. While C.B. Circular 11
No. 905-82, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for
both secured and unsecured loans, regardless of maturity, nothing in the said circular could possibly
12
be read as granting carte blanche authority to lenders to raise interest rates to levels which would
either enslave their borrowers or lead to a hemorrhaging of their assets. 13
Petitioners cannot also raise the defenses of in pari delicto and good faith. The defense of in pari
delicto was not raised in the RTC, hence, such an issue cannot be raised for the first time on appeal.
Petitioners must have seasonably raised it in the proceedings before the lower court, because
questions raised on appeal are confined only within the issues framed by the parties. The defense of 14
good faith must also fail because such an issue is a question of fact which may not be properly raised
15
in a petition for review under Rule 45 of the Rules of Civil Procedure which allows only questions of
law. 16
_______________
9 Id.
10 Solangon v. Salazar, G.R. No. 125944, June 29, 2001, 360 SCRA 379, 384-385; Imperial v. Jaucian, G.R. No. 149004, April 14, 2004,
427 SCRA 517, 525-526; Cuaton v. Salud, G.R. No. 158382, January 27, 2004, 421 SCRA 278, 282.
11 Medel v. Court of Appeals, supra note 7 at p. 489.
12 Dio v. Japor, G.R. No. 154129, July 8, 2005, 463 SCRA 170, 177.
13 Almeda v. Court of Appeals, G.R. No. 113412, April 17, 1996, 256 SCRA 292, 302.
14 Lim v. Queensland Tokyo Commodities, Inc., G.R. No. 136031, January 4, 2002, 373 SCRA 31, 41.
15 Abad v. Guimba, G.R. No. 157002, July 29, 2005, 465 SCRA 356, 366.
16 Kay Products, Inc. v. Court of Appeals, G.R. No. 162472, July 28, 2005, 464 SCRA 544, 553.
151
VOL. 562, AUGUST 13, 15

2008 1
Chua vs. Timabn
As well set forth in Medel: 17
“We agree … that the stipulated rate of interest at 5.5% per month on the P500,000.00 loan is excessive,
iniquitous, unconscionable and exorbitant. However, we can not consider the rate “usurious” because this Court
has consistently held that Circular No. 905 of the Central Bank, adopted on December 22, 1982, has expressly
removed the interest ceilings prescribed by the Usury Law and that the Usury Law is now “legally inexistent.”
In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61, the Court held that CB
Circular No. 905 “did not repeal nor in any way amend the Usury Law but simply suspended the latter’s
effectivity.” Indeed, we have held that “a Central Bank Circular can not repeal a law. Only a law can repeal
another law.” In the recent case of Florendo vs. Court of Appeals, the Court reiterated the ruling that “by virtue of
CB Circular 905, the Usury Law has been rendered ineffective.” “Usury has been legally non-existent in our
jurisdiction. Interest can now be charged as lender and borrower may agree upon.”
Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in the
promissory note iniquitous or unconscionable, and, hence, contrary to morals (“contra bonos mores”), if not
against the law. The stipulation is void.”
WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision and Resolution
dated March 9, 2005 and November 24, 2005, respectively, of the Court of Appeals in CA-G.R. CV No.
82865 are hereby AFFIRMED. Costs against petitioners.
SO ORDERED.
Corona, Carpio-Morales, Velasco, Jr. and Brion, JJ.,concur.
**
Petition denied, assailed decision and resolution affirmed.
G.R. No. 154129. July 8, 2005. *
TERESITA DIO, petitioner, vs. SPOUSES VIRGILIO and LUZ ROCES JAPOR and
MARTA JAPOR, respondents.
1
Loans; Interest Rates; Usury; While Central Bank Circular No. 905, which took effect on 1 January 1983,
effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless of maturity,
nothing in said Circular grants lenders carte blanche authority to impose interest rates which would result in
enslavement of their borrowers or to the hemorrhaging of their assets.—Central Bank Circular No. 905, which took
effect on January 1, 1983, effectively removed the ceiling on interest rates for both secured and unsecured loans,
regardless of maturity. However, nothing in said Circular grants lenders carte blancheauthority to impose
interest rates which would result in the enslavement of their borrowers or to the hemorrhaging of their assets.
While a stipulated rate of interest may not technically and necessarily be usurious under Circular No. 905, usury
now being legally non-existent in our jurisdiction, nonetheless, said rate may be equitably reduced should the
same be found to be iniquitous, unconscionable, and exorbitant, and hence, contrary to morals (contra bonos
mores), if not against the law. What is iniquitous, unconscionable, and exorbitant shall depend upon the factual
circumstances of each case.
Same; Same; Same; A combined interest and penalty rate at 10% per month or 120% per annum should be
deemed iniquitous, unconscionable, and inordinate.—In the instant case, the Court of
_______________
* FIRST DIVISION.
1 “Marita” elsewhere in the records.
171
VOL. 463, JULY 8, 17

2005 1
Dio vs. Japor
Appeals found that the 5% interest rate per month and 5% penalty rate per month for every month of default
or delay is in reality interest rate at 120% per annum. This Court has held that a stipulated interest rate of 5.5%
per month or 66% per annum is void for being iniquitous or unconscionable. We have likewise ruled that an
interest rate of 6% per month or 72% per annum is outrageous and inordinate. Conformably to these precedent
cases, a combined interest and penalty rate at 10% per month or 120% per annum, should be deemed iniquitous,
unconscionable, and inordinate. Hence, we sustain the appellate court when it found the interest and penalty
rates in the Deed of Real Estate Mortgage in the present case excessive, hence legally impermissible. Reduction is
legally called for now in rates of interest and penalty stated in the mortgage contract.

Castillo, Laman, Tan, Pantaleon & San Jose for petitioner.
QUISUMBING, J.:
For review on certiorari is the Decision, dated February 22, 2002, of the Court of Appeals, in the
2
consolidated cases CA-G.R. CV No. 51521 and CA-G.R. SP No. 40457. The decretal portion read:
“WHEREFORE, premises considered, in CA-G.R. CV No. 51521, the decision of the trial court is AFFIRMED
with MODIFICATION. Judgment is rendered as follows:
1. 1.Declaring the Real Estate Mortgage to be valid;
2. 2.Fixing the interest at 12% per annum and an additional 1% penalty charge per month such that
plaintiffs
_______________
2 CA Rollo, CA-G.R. CV No. 51521, pp. 316-330. Penned by Associate Justice Eliezer R. De Los Santos, with Associate Justices
Buenaventura J. Guerrero, and Rodrigo V. Cosico concurring.
172

2
Dio vs. Japor
appellants’ contractual obligation under the deed of real estate mortgage would amount to P1,252,674.00;
1. 3.Directing defendant-appellee Dio to give the surplus of P2,247,326.00 to plaintiffs-appellants; and
2. 4.Affirming the dissolution of the writ of preliminary injunction previously issued by the trial court.
The Petition in CA-G.R. SP No. 40457 is DENIED for being moot and academic.
SO ORDERED.” 3
Equally assailed in this petition is the Resolution, dated July 2, 2002, of the appellate court, denying
4
Teresita Dio’s Motion for Partial Reconsideration of March 19, 2002 and the Spouses Japor and
Marta Japor’s Motion for Reconsideration dated March 20, 2002.
The antecedent facts are as follows:
Herein respondents Spouses Virgilio Japor and Luz Roces Japor were the owners of an 845.5
square-meter residential lot including its improvements, situated in Barangay Ibabang Mayao,
Lucena City, as shown by Transfer Certificate of Title (TCT) No. T-39514. Adjacent to the Japor’s lot
is another lot owned by respondent Marta Japor, which consisted of 325.5 square meters and titled
under TCT No. T-15018.
On August 23, 1982, the respondents obtained a loan of P90,000 from the Quezon Development
Bank (QDB), and as security therefor, they mortgaged the lots covered by TCT Nos. T-39514 and
T-15018 to QDB, as evidenced by a Deed of Real Estate Mortgage duly executed by and between the
respondents and QDB.
On December 6, 1983, respondents and QDB amended the Deed of Real Estate Mortgage
increasing respondents’ loan to P128,000.
_______________
3 Id., at pp. 329-330.
4 Id., at pp. 492-494.
173
VOL. 463, JULY 8, 17

2005 3
Dio vs. Japor
The respondents failed to pay their aforesaid loans. However, before the bank could foreclose on the
mortgage, respondents, thru their broker, one Lucia G. Orian, offered to mortgage their properties to
petitioner Teresita Dio. Petitioner prepared a Deed of Real Estate Mortgage, whereby respondents
mortgaged anew the two properties already mortgaged with QDB to secure the timely payment of a
P350,000 loan that respondents had from petitioner Dio. The Deed of Real Estate Mortgage, though
dated January 1989, was actually executed on February 13, 1989 and notarized on February 17,
1989.
Under the terms of the deed, respondents agreed to pay the petitioner interest at the rate of five
percent (5%) a month, within a period of two months or until April 14, 1989. In the event of default,
an additional interest equivalent to five percent (5%) of the amount then due, for every month of
delay, would be charged on them.
The respondents failed to settle their obligation to petitioner on April 14, 1989, the agreed
deadline for settlement.
On August 27, 1991, petitioner made written demands upon the respondents to pay their debt.
Despite repeated demands, respondents did not pay, hence petitioner applied for extrajudicial
foreclosure of the mortgage. The auction of the unredeemed properties was set for February 26, 1992.
Meanwhile, on February 24, 1992, respondents filed an action for Fixing of Contractual
Obligation with Prayer for Preliminary Mandatory Injunction/Restraining Order, docketed as Civil
Case No. 92-26, with the Regional Trial Court (RTC) of Lucena City. Respondents prayed that
“judgment be rendered fixing the contractual obligations of plaintiffs with the defendant Dio plus
legal or allowable interests thereon.” 5
_______________
5 Records, p. 5.
174

4
Dio vs. Japor
The trial court issued an Order enjoining the auction sale of the aforementioned mortgaged
properties.
On June 15, 1992, the Japors filed a Motion to Admit Amended Complaint with an attached copy
of their Amended Complaint praying that the Deed of Real Estate Mortgage dated February 13, 1989
be declared null and void, but reiterating the plea that the trial court fix the contractual obligations
of the Japors with Dio. The trial court denied the motion.
On September 27, 1994, respondents filed with the appellate court, a petition for certiorari,
docketed as CA-G.R. SP No. 35315, praying that the Court of Appeals direct the trial court to admit
their Amended Complaint. The appellate court denied said petition. 6
On December 11, 1995, the trial court handed down the following judgment:
“WHEREFORE, in view of the foregoing considerations, judgment is rendered:
1. 1.Dismissing the complaint for failure of the plaintiffs to substantiate their affirmative allegations;
2. 2.Declaring the Real Estate Mortgage (Exhs. “A” to “A-13”/Exhs. “3” to “3-D”) to be valid and binding
as between the parties, more particularly the plaintiffs Virgilio Japor, Luz Japor and Marta Japor or the
latter’s substituted heir or heirs, as the case may be;
3. 3.Dissolving the writ of preliminary injunction previously issued by this Court; and
4. 4.To pay the cost of this suit.
SO ORDERED.” 7
_______________
6 Id., at pp. 918-927. Penned by Associate Justice Ma. Alicia Austria-Martinez (now a member of this Court), with Associate Justices
Pedro A. Ramirez, and Bernardo Ll. Salas concurring.
7 Id., at pp. 963-964.
175
VOL. 463, JULY 8, 17

2005 5
Dio vs. Japor
On January 17, 1996, respondents filed their notice of appeal. On April 26, 1996, they also filed
a Petition for Temporary Restraining Order And/Or Mandatory Injunction in Aid of Appellate
Jurisdiction with the Court of Appeals.
On May 8, 1996, petitioner Dio as the sole bidder in an auction purchased the properties for
P3,500,000.
On May 9, 1996, the Court of Appeals denied respondents’ application for a temporary restraining
order. 8
On October 9, 1996, the appellate court consolidated CA-G.R. CV No. 51521 and CA-G.R. SP No.
40457.
As stated at the outset, the appellate court affirmed the decision of the trial court with respect to
the validity of the Deed of Real Estate Mortgage, but modified the interest and penalty rates for
being unconscionable and exorbitant.
Before us, petitioner assigns the following errors allegedly committed by the appellate court:
I
THE ALLEGED INIQUITY OF THE STIPULATED INTEREST AND PENALTY WAS NOT RAISED BEFORE
THE TRIAL COURT NOR ASSIGNED AS AN ERROR IN RESPONDENTS’ APPEAL.
II
THE STIPULATED INTEREST AND PENALTY ARE NOT “EXCESSIVE, INIQUITOUS,

UNCONSCIONABLE, EXORBITANT AND CONTRARY TO MORAL[S].”
III
PAYMENT OF THE “SURPLUS” OF P2,247,326.00 TO RESPONDENTS WOULD RESULT IN THEIR

UNJUST ENRICHMENT.
IV
RESPONDENTS’ APPEAL SHOULD HAVE BEEN DISMISSED DUE TO FORUM SHOPPING. 9
_______________
8 CA Rollo, CA-G.R. SP No. 40457, p. 51.
9 Rollo, pp. 22-23.
176

6
Dio vs. Japor
Simply stated, the issue is: Did the Court of Appeals err when it held that the stipulations on interest
and penalty in the Deed of Real Estate Mortgage is contrary to morals, if not illegal? Corollarily,
were respondents entitled to any “surplus” on the auction sale price?
On the main issue, petitioner contends that The Usury Law has been rendered ineffective by
10
Central Bank Circular No. 905, series of 1982 and accordingly, usury has become legally
non-existent in this jurisdiction, thus, interest rates may accordingly be pegged at such levels or
rates as the lender and the borrower may agree upon. Petitioner avers she has not violated any law
considering she is not engaged in the business of money-lending. Moreover, she claims she has
suffered inconveniences and incurred expenses for some 13 years now as a result of respondents’
failure to pay her. Petitioner further points out that the 5% interest rate was proposed by the
respondents and have only themselves to blame if the interests and penalties ballooned to its present
amount due to their willful delay and default in payment. The appellate court thus erred, petitioner
now insists, in applying Sps. Almeda v. Court of Appeals and Medel v. Court of Appeals to reduce
11 12
the interest rate to 12% per annum and the penalty to 1% per month.
Respondents admit they owe petitioner P350,000 and do not question any lawful interest on their
loan but they maintain that the Deed of Real Estate Mortgage is null and void since it did not state
the true intent of the parties, which limited the 5% interest rate to only two (2) months from the date
of the loan and which did not provide for penalties and other charges in the event of default or delay.
Respondents
_______________
10 Act No. 2655 (1916), as amended.
11 G.R. No. 113412, 17 April 1996, 326 Phil. 309; 256 SCRA 292.
12 G.R. No. 131622, 27 November 1998, 359 Phil. 820; 299 SCRA 481.
177
VOL. 463, JULY 8, 17

2005 7
Dio vs. Japor
vehemently contend that they never consented to the said stipulations and hence, should not be
bound by them.
On the first issue, we are constrained to rule against the petitioner’s contentions.
Central Bank Circular No. 905, which took effect on January 1, 1983, effectively removed the
ceiling on interest rates for both secured and unsecured loans, regardless of maturity. However,
nothing in said Circular grants lenders carte blanche authority to impose interest rates which would
result in the enslavement of their borrowers or to the hemorrhaging of their assets. While a 13
stipulated rate of interest may not technically and necessarily be usurious under Circular No. 905,
usury now being legally non-existent in our jurisdiction, nonetheless, said rate may be equitably
14
reduced should the same be found to be iniquitous, unconscionable, and exorbitant, and hence,
contrary to morals (contra bonos mores), if not against the law. What is iniquitous, unconscionable,
15
and exorbitant shall depend upon the factual circumstances of each case.
In the instant case, the Court of Appeals found that the 5% interest rate per month and 5%
penalty rate per month for every month of default or delay is in reality interest rate at 120% per
annum. This Court has held that a stipulated interest rate of 5.5% per month or 66% per annum is
void for being iniquitous or unconscionable. We have likewise ruled that an interest rate of 6% per
16
month or 72% per annum is outrageous and inordinate. Conformably to these precedent cases, a
17
combined interest and penalty rate at 10% per month or 120% per annum, should be deemed
iniquitous, unconscion-
_______________
13 Spouses Solangon v. Salazar, G.R. No. 125944, 29 June 2001, 412 Phil. 816, 822; 360 SCRA 379, 384.
14 People v. Dizon, G.R. No. 120957, 22 August 1996, 329 Phil. 685, 696; 260 SCRA 851 and cases cited therein.
15 Supra, note 12 at p. 830; p. 490.
16 Ibid.
17 Supra, note 13 at p. 823; p. 385.
178

8
Dio vs. Japor
able, and inordinate. Hence, we sustain the appellate court when it found the interest and penalty
rates in the Deed of Real Estate Mortgage in the present case excessive, hence legally impermissible.
Reduction is legally called for now in rates of interest and penalty stated in the mortgage contract.
What then should the interest and penalty rates be?
The evidence shows that it was indeed the respondents who proposed the 5% interest rate per
month for two (2) months. Having agreed to said rate, the parties are now estopped from claiming
otherwise. For the succeeding period after the two months, however, the Court of Appeals correctly
reduced the interest rate to 12% per annum and the penalty rate to 1% per month, in accordance
with Article 2227 of the Civil Code.
18
But were respondents entitled to the “surplus” of P2,247,326 as a result of the “overpricing” in the
19
auction?
We note that the “surplus” was the result of the computation by the Court of Appeals of
respondents’ outstanding liability based on a reduced interest rate of 12% per annum and the
reduced penalty rate of 1% per month. The court a quo then proceeded to apply our ruling in Sulit v.
Court of Appeals, to the effect that in case of surplus in the purchase price, the mortgagee is liable
20
for such surplus as actually comes into his hands, but where he sells on credit instead of cash, he
must still account for the proceeds as if the price were paid in cash, for such surplus stands in the
place of the land itself with respect to liens thereon or vested rights therein particularly those of the
mortgagor or his assigns.
_______________
18 Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or
unconscionable.
19 Rollo, pp. 54-57.
20 G.R. No. 119247, 17 February 1997, 335 Phil. 914, 928-929; 268 SCRA 441, 445.
179
VOL. 463, JULY 8, 17

2005 9
Dio vs. Japor
In the instant case, however, there is no “surplus” to speak of. In adjusting the interest and penalty
rates to equitable and conscionable levels, what the Court did was merely to reflect the true price of
the land in the foreclosure sale. The amount of the petitioner’s bid merely represented the true
amount of the mortgage debt. No surplus in the purchase price was thus created to which the
respondents as the mortgagors have a vested right.
WHEREFORE, the Decision dated February 22, 2002, of the Court of Appeals in the consolidated
cases CA-G.R. CV No. 51521 and CA-G.R. SP No. 40457 is hereby AFFIRMED with
MODIFICATION. The interest rate for the subject loan owing to QDB, or whoever is now the party
mortgagee, is hereby fixed at five percent (5%) for the first two (2) months following the date of
execution of the Deed of Real Estate Mortgage, and twelve percent (12%) for the succeeding period.
The penalty rate thereafter shall be fixed at one percent (1%) per month. Petitioner Teresita Dio is
declared free of any obligation to return to the respondents, the Spouses Virgilio Japor and Luz
Roces Japor and Marta Japor, any surplus in the foreclosure sale price. There being no surplus, after
the court below had applied our ruling in Sulit, respondents could not legally claim any overprice
21
from the petitioner, much less the amount of P2,247,326.00.

SO ORDERED.
Davide, Jr. (C.J., Chairman), Ynares-Santiago and Azcuna, JJ., concur.
Carpio, J., On Official Leave.
Judgment affirmed with modification.

Notes.—Central Bank Circular No. 905 which took effect on January 1, 1983, and removed the
ceiling on interest rates
_______________
21 Ibid.
180

0
Orbeta vs. Sendiong
for secured and unsecured loans, regardless of maturity, cannot be made to retroactively apply to a
contract executed earlier while the Usury Law was in full force and effect. (First Metro Investment
Corporation vs. Este Del Sol Mountain Reserve, Inc., 369 SCRA 99 [2001])
A borrower’s accessory duty to pay interest does not give the lender unrestrained freedom to
charge any rate other than that which was agreed upon—it would be the zenith of farcicality to
specify and agree upon rates that could be subsequently upgraded at whim by only one party to the
agreement. The “unilateral determination and imposition” of increased rate is violative of the
principle of mutuality of contracts ordained in Article 1308 of the Civil Code. (New Sampaguita
Builders Construction, Inc. (NSBCI) vs. Philippine National Bank, 435 SCRA 565 [2004])
——o0o——

Yong Chan Kim vs. People of the Philippines: Technicality should not sacrifice justice

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G.R. No. 84719. January 25, 1991.

VOL. 193, JANUARY 25, 34

34 SUPREME COURT REPORTS

PETITION for certiorari to review the decision of the Court of Appeals.

The facts are stated in the opinion of the Court.

This petition seeks the review on certiorari of the following:

1 Annex “A”, pp. 32-51, Rollo.

2 Annex “B”, pp. 52-55, id.

3 Annex “C”, pp. 56-62, id.

4 Annex “D”, pp. 63-64, id.

VOL. 193, JANUARY 25, 34

34 SUPREME COURT REPORTS ANNOTATED

5 Rollo, pp. 50-51.

VOL. 193, JANUARY 25, 34

35 SUPREME COURT REPORTS ANNOTATED

10 Id., pp. 181-182.

VOL. 193, JANUARY 25, 35

2. II.WHETHER OR NOT THE DECISION OF THE HONORABLE COURT OF APPEALS

35 SUPREME COURT REPORTS ANNOTATED

11 Yam vs. Malic, 94 SCRA 30.

13 Yam vs. Malic, supra.

VOL. 193, JANUARY 25, 35

Since ownership of the money (cash advance) was transferred

14 Recommendation for Acquittal, pp. 10-11; Rollo, pp. 257-258.

35 SUPREME COURT REPORTS ANNOTATED

Decision set aside.

VOL. 377, FEBRUARY 15, 117

11 SUPREME COURT REPORTS

VOL. 377, FEBRUARY 15, 119

The facts are stated in the opinion of the Court.

writ of preliminary injunction by the private respondents against said petitioner.

and Antonio K. Litonjua.

12 SUPREME COURT REPORTS ANNOTATED

VOL. 377, FEBRUARY 15, 121

2. b)P50,000.00 as and for exemplary damages;

3. c)P50,000.00 as and for attorney’s fees and expenses of litigation.

2 RTC Records, p. 278.

12 SUPREME COURT REPORTS ANNOTATED

2. II.WHETHER OR NOT BPI SHOULD BE HELD LIABLE FOR MORAL AND

VOL. 377, FEBRUARY 15, 123

12 SUPREME COURT REPORTS ANNOTATED

misapplied Bonnevie. The contract in Bonneviedeclared by this Court as a perfected consensual

VOL. 377, FEBRUARY 15, 125

6 A. Tolentino, Civil Code of the Philippines, V. 5, p. 443 (1992).

7 Supra, note 3 at 30.

9 Art. 1169, Civil Code:

12 SUPREME COURT REPORTS ANNOTATED

appellate and trial courts.

VOL. 377, FEBRUARY 15, 127

12 SUPREME COURT REPORTS ANNOTATED

Judgment affirmed with modification.

G.R. No. 97412. July 12, 1994. *

VOL. 234, JULY 12, 79

8 SUPREME COURT REPORTS

VOL. 234, JULY 12, 81

PETITION for review of a decision of the Court of Appeals.

The facts are stated in the opinion of the Court.

8 SUPREME COURT REPORTS ANNOTATED

2. ‘1.Whether or not the shipment sustained losses/damages;

3. ‘2.Whether or not these losses/damages were sustained

VOL. 234, JULY 12, 83

8 SUPREME COURT REPORTS ANNOTATED

2. 2.P3,000.00 as attorney’s fees, and