USURIOUS TRANSACTIONS AND INTEREST

Meaning of usurios transactions- involving exaction of excessive interest under the old Usury Law.

Issuance of Central Bank Circular 905 – Usury law had long been rendered “inoperative” or “suspended”.
(not really repealed) .

TWO KINDS OF INTEREST

1. Moratory (monetary interest) – given for the compensation or consideration for the use of the
money. (e.g. as consideration for a loan transaction or mutuum) {it accrues on the date stipulated/ due
and demandable on the date stipulated}

2. Compensatory interest – given by way of damages to compensate the damage caused. {it accrues

(Siga-an Case)

Legal Interest Rate: will apply if there was no stipulation regarding the interest

Parties can now agree on any interest.

In view of the suspension of usury law, stipulation concerning interest will now govern the parties. They
can agree on the interest rate (1159) provided that it is reduced in writing.

Stipulations of parties are still limited by Art. 1306 ( contrary to Law, morals, public policy, customs)

Exorbitant, morally shocking, unconscionable interest rates are not allowed.

Cauton v. CA: parties to loan agreement have been given wide latitude to agree on any rate. However
nothing in the said circular grants lenders carte blanche authority to raise interest rate

Medel v. CA abd Spouses v. Salazar, the court annulled a stipulated 66% per annum interest rate

CONTRA BONOS MORES- Stipulations authorizing iniquitous or unconscionable interests are contrary to
morals. (Ex. Credit cardcompany charged excessive interest rate)

Under Article 1409 of the CIVIL CODE, these contracts are inexistent and void from the beginning. They
cannot be ratified nor the right to set up their illegality as a defense be waived.

If the interest rate declared excessive, unconscionable, exorbitant the court will reduce it and apply the
legal rate. What is declared void is the interest rate, that’s why the court will reduce the rate to legal
rate.

Eastern Shipping lines ------ NACAR--------Lara’s gift and Décor, Inc. vs. Midtown (August 28, 2019) read
these cases.

Principle Eastern Shipping Lines :

1. Legal rate: 6% per annum effective July 1, 2013.

Computation of legal interest:

2. Decisions before July 1, 2013 that have become final and executory: they shall not be disturbed.

The same computation will be applied based on the

Legal rate will be applied:

1. WHEN THERE IS NO STIPULATED INTEREST BETWEEN THE PARTY.

3. The framework on the types of obligations that covered by the rules on interest.

There were 3 types of obligations covered.

1. Loan of forebeareance of money, the interest : When the obligation was breached and it consists in
the payment of sum of money.

TWO TYPES OF LOAN

1. LOAN OF MONEY -

2. FOREBEARANCE OF MONEY -

Fungible goods- capable of replacement (loans other than money)

Mutuum – loan of money

Commodatum- borrowing of an item to be returned exactly the same.

Eastern shipping lines:

1st category:Creditor-debtor relationship – obligation to pay money

2nd category: when an obligation, not constituting a loan or forbearance of money, os breached, an
interest on the amount of damages may be imposed at the discretion of the court at the rate of 6% per
annum.

3rd: Judgement of the court awarding a sum of money becomes final and executory, the rate of legal
interest.

Eastern Shipping lines formula:

1. When the obligation of breached and it consists in the payment of a sum of money loan or
forbearance of the money, the interest due should be that which may have been stipulated in writing.Int
he absence of stipulation the rate of interest shall be 12% per annum to be computed from default
from judicial or extrajudicial demand.

Interest due earns legal interest from the time it is judicially demanded.

2. Not constituting loan or forbearance of money – 6% per annum and discretionary on the part of the
court, No interest however, shall be adjudged on the unliquidated claims or damages except when or
until the demand can be established with reasonable certainty. Where the demand is established with
reasonable certainty, the interest shall begin to run from the rime the claim is made judicially or
extrajudicially.

3. Satisfying a judgement. – When the judgement of the court awarding a sum of pomonet becomes
final and executorym the rate of legal interest, whetehr the case falls nder the par. 1 or par. 2, above
nshall be 12% per annum form such finality intil its satisfactiom

NACAR FORMULA

1 Loan or forbearance of money – the interest due should be that which may have been stipulated in
writing. In absence of stipulation, the rate of interest shall be 6% per annul to be computed from
default.

2. Not constituting loan or forbearance of money: 6% per annum, No interest shall be adjudged on
inliquidated claims or damages, except when or until the demand can be established with reasonable
certainty.

3. Judgment of the court: reduced to 6% interest.

DAVID V. CA – 2212 of the Civil Code which stipulated: Interest due shall earn legal unterest frim the
time it is judicially demanded, although the obligation may be silent upon this pint, contempolated the
presence of stipulared or conventional interest which has accrued when demand was judicially

Forebearance of money, goods or credits – arrangements other than loan agreements where a person
acquiesces to the temporary use of his oney, goods or credits pending the happening of certain events
or fulfillment.

Application of NACAR Formula:

Obligation Loan /FOM (FORBEARANCE OF Not loan/not FOM

MONEY)
a. Due and demandable Stipulated/accrues
b. extrajudicial demand Legal interest accrues 6% accrues or
c. Judicial demand a. Interest in A earns legal 6% accrues or
interest
b. in the absence of B, legal
interest accrues
d. decision (Trial Court) 6% of judgment
e. Finality X + x (legal i) where x =
judgment

CLARIFICATION IN LARA’S GIFT CASE

1. When the obligation is breached and it consists on the payment of sum of money, a loan or
forbearance of money, goods , credits or judgments , the interest due shall be that which is stipulated by
the parties in writing , provided it is not excessive and unconscionable, which, in the absence of a
stipulated reckoning date, shall be computed from default, i.e. from extrajudicial or judicial demand in
accordance with Aticle 1169 of the civil code, UNTIL Full payment, without compounding any interest
unless compounded interest is expressly stipulated by the parties, by law or regulation, interest due on
the principal amount accruing as of judicial demand shall SEPARATELY earn legal interest at the
prevailing rate prescribed by BSP, from the time of judicial demand until full payment.

LARA’S GIFT FORMULA

Obligations Loan/FOM NOT LOAN/FOM

a. Due and demandable Stipulated accrues
b. extrajudicial demand Legal/accrues 6% accrues
c. Judicial demand a. I in B earns legal i
b. In the absence of c, legal
interest
d. decision (Trial Court)
E. fINALITY