Credit - Interest

Castelo VS CA and Dela Rosa 1995

Facts: On October 15, 1982, Petitioners Catelo and others entered into a Contract of Conditional Sale
with private respondent Dela Rosa involving a parcel of land. Respondent paid down payment leaving a
balance of P163,408. Under the contract, it is stipulated that the balance shall be paid on or before
December 31, 1982, without interest and penalty. In the event that the balance is not paid on the date
provided, the vendors agree to give 6 months grace period or up to June 30, 1983 with the payment of
interest rate 12% per annum and 1% penalty charge a month. Respondent failed to pay so petitioners
filed an action for specific performance.

RTC rendered a decision ordering the rescission of the contract. On appeal, CA ordered respondent to
pay the balance and the interest, Sheriff computed as follows:

Principal P163,408.00

Plus 12% int 34, 315.68

As per contract

From Nov. 21, 1986

To Sep. 2, 1988 -----------------------

P 197, 723.683

( Nov. 21 nagrender ng decision yung CA. Sep.2, 1988 yung issuance ng writ of execution)

Petitioners filed a motion for reconsideration contending that the sum of P197,723.68, based on the
Sheriff’s own computation, was erroneous. They argued that the obligation of respondent to pay 12%
interest per annum and 1% per month penalty should be from January 1, 1983, amounting to
P398,814.88. They also claimed that the amount arrived at by the Sheriff was inconsistent with the CA’s
decision and to the stipulations of the contract.

Issue: What is the correct interpretation in the CA’s decision on Nov. 21, “to pay interest”?

Held: The established doctrine is that when the dispositive portion of a judgment, which has become
final and executory, contains a clerical error or an ambiguity arising from an inadvertent omission, such
error or ambiguity may be clarified by reference to the body of the decision itself.

SC believe and so hold that the phrase “to pay interest,” found in the dispositive portion of the CA
decision must, under applicable law, refer to the interest stipulated by the parties in the Deed of
Conditional Sale which they had entered into on 15 October 1982. SC note, in the first place, that the
phrase “to pay interest” comes close upon the heels of the preceding phrase "to comply with her
obligation under the conditional sale to pay the balance — of P163,408.00." A strong inference thus
arises that the "interest" required to be paid is the interest stipulated as part of the “obligation [of
private respondent dela Rosa] under the conditional sale [agreement] to pay the balance of [the
purchase price of the land.
In the computation for the amount to be paid, The question is whether, during the period of 1 January
1983 up to 30 June 1983, 12% interest per annum plus 1% penalty charge a month was payable "on the
remaining diminishing balance;" or whether during the period from 1 January 1983 to 30 June
1983, only 12% per annum interest was payable while the 1% per month penalty charge would in
addition begin to accrue on any balance remaining unpaid as of 1 July 1983.

SC believed the parties intended the latter view. The interpretation SC adopted is also supported by the
principle that in case of ambiguity in contract language, that interpretation which establishes a less
onerous transmission of rights or imposition of lesser burdens which permits greater reciprocity
between the parties, is to be adopted (Art. 1378).

WHEREFORE, the writ of certiorari is hereby GRANTED.

“xxx xx xx

(2)ordering the defendant to comply with her obligation under the conditional sale to pay the balance of
the conditional sale in the amount of P163,408.00, to pay interest on the amount of the balance
remaining unpaid during the period from 1 January 1983 to 30 June 1983 at the rate of 12% per annum;
and, from 1 July 1983 until full payment of the amount due, to pay interest at the rate of 12% per
annum plus another 12% per annum (i.e., 1% penalty charge per month), or a total of 24% per annum,
on the balance remaining unpaid; and

(3)in default thereof, the rescission of the "Deed of Conditional Sale" is the alternative."
Liam Law VS Olympic Sawmill and Elino Lee Chi 1984

Facts: Liam Law loaned P10,000, without interest, to respondent Olympic Sawmill and Chi, as the
managing partner. The loan became due on January 31, 1960, but was not paid. The parties executed
another loan agreement extending the payment on April 30, 1960, but the obligation was increased by
P6,000, forming part of the principal obligation to answer for attorney's fees, legal interest, and other
cost. Olympic Sawmill, again failed to pay. Hence, petitioner instituted this collection case.

Defendants claimed that P6,000 constituted usurious interest.

Issue: WON there is usurious interest.

Held: No. Under Article 1354 of the Civil Code, in regards to the agreement of the parties relative to the
P6,000.00 obligation, "it is presumed that it exists and is lawful, unless the debtor proves the contrary".
No evidentiary hearing having been held, it has to be concluded that defendants had not proven that
the P6,000.00 obligation was illegal. 

Moreover, for sometime now, usury has been legally non-existent. Interest can now be charged as
lender and borrower may agree upon.  The Rules of Court in regards to allegations of usury, procedural
in nature, should be considered repealed with retroactive effect.
Nacar VS Gallery Frames and Felipe Bordey Jr. 2013

Facts: Dario Nacar filed a labor case against Gallery Frames and its owner Felipe Bordey, Jr. Nacar
alleged that he was dismissed without cause by Gallery Frames on January 24, 1997. On October 15,
1998, the Labor Arbiter (LA) found Gallery Frames guilty of illegal dismissal hence the Arbiter awarded
Nacar P158,919.92 in damages consisting of backwages and separation pay.

Gallery Frames appealed all the way to the Supreme Court (SC). The Supreme Court affirmed the
decision of the Labor Arbiter and the decision became final on May 27, 2002.

After the finality of the SC decision, Nacar filed a motion before the LA for recomputation as he alleged
that his backwages should be computed from the time of his illegal dismissal (January 24, 1997) until the
finality of the SC decision (May 27, 2002) with interest. The LA denied the motion as he ruled that the
reckoning point of the computation should only be from the time Nacar was illegally dismissed (January
24, 1997) until the decision of the LA (October 15, 1998). The LA reasoned that the said date should be
the reckoning point because Nacar did not appeal hence as to him, that decision became final and
executory.

ISSUE: Whether or not the Labor Arbiter is correct.

HELD: No. Petition is meritorious. There are two parts of a decision when it comes to illegal dismissal
cases (referring to cases where the dismissed employee wins, or loses but wins on appeal). The first part
is the ruling that the employee was illegally dismissed. This is immediately final even if the employer
appeals – but will be reversed if employer wins on appeal. The second part is the ruling on the award of
backwages and/or separation pay. For backwages, it will be computed from the date of illegal dismissal
until the date of the decision of the Labor Arbiter. But if the employer appeals, then the end date shall
be extended until the day when the appellate court’s decision shall become final. Hence, as a
consequence, the liability of the employer, if he loses on appeal, will increase – this is just but a risk that
the employer cannot avoid when it continued to seek recourses against the Labor Arbiter’s decision.
This is also in accordance with Article 279 of the Labor Code.

Anent the issue of award of interest in the form of actual or compensatory damages, the Supreme Court
ruled that the old case of Eastern Shipping Lines vs CA is already modified by the promulgation of the
Bangko Sentral ng Pilipinas Monetary Board Resolution No. 796 which lowered the legal rate of interest
from 12% to 6%. Specifically, the rules on interest are now as follows:

1. Monetary Obligations ex. Loans:

a. If stipulated in writing:

a.1. shall run from date of judicial demand (filing of the case)

a.2. rate of interest shall be that amount stipulated

b. If not stipulated in writing

b.1. shall run from date of default (either failure to pay upon extra-judicial demand or upon judicial
demand whichever is appropriate and subject to the provisions of Article 1169 of the Civil Code)

b.2. rate of interest shall be 6% per annum

2.    Non-Monetary Obligations (such as the case at bar)

a. If already liquidated, rate of interest shall be 6% per annum, demandable from date of judicial or
extra-judicial      demand (Art. 1169, Civil Code)

b. If unliquidated, no interest

Except: When later on established with certainty. Interest shall still be 6% per annum demandable from
the date of judgment because such on such date, it is already deemed that the amount of damages is
already ascertained.

3. Compounded Interest

– This is applicable to both monetary and non-monetary obligations

– 6% per annum computed against award of damages (interest) granted by the court. To be computed
from the date when the court’s decision becomes final and executory until the award is fully satisfied by
the losing party.

4. The 6% per annum rate of legal interest shall be applied prospectively:

– Final and executory judgments awarding damages prior to July 1, 2013 shall apply the 12% rate;

– Final and executory judgments awarding damages on or after July 1, 2013 shall apply the 12% rate for
unpaid obligations until June 30, 2013; unpaid obligations with respect to said judgments on or after July
1, 2013 shall still incur the 6% rate.
Sps. Andal VS PNB 2013

Facts: Petitioner spouses obtained a loan from PNB in the amount of P21, 805,000, with varying interest
rates of 17.5% to 27% per interest period. It was agreed upon by the parties that the rate of interest
may be increased or decreased for the subsequent interest periods, with prior notice to [petitioners-
spouses], in the event of changes in interest rates prescribed by law or the Monetary Board, or in the
bank’s overall cost of funds.

To secure the payment of the loan, petitioners executed a real estate mortgage using as collateral 5
parcels of land. Petitioners paid P14,800,000 to avoid foreclosure of properties. The bank executed a
release of real estate mortgage of 2 properties, however, despite payment, bank proceeded to foreclose
the remaining 3 properties. A public auction sale proceeded and the bank emerged as the highest
bidder. This prompted petitioners to file a complaint for the annulment of mortgage and declaration of
nullity of the increased rates and penalty charges and damages. They alleged that they tried to
religiously pay their loan obligation to [respondent bank], but the exorbitant rate of interest unilaterally
determined and imposed by the latter prevented the former from paying their obligation.

RTC rendered a decision ordering that the interest rate be reduced to 6% in accordance with Article
2209 of the Civil Code and declared the foreclosure sales illegal and void. CA affirmed the RTC decision
with modification that the interest rate be 12% per annum instead of 6%. Stipulations in the contract
have the force of law between the parties so long as they are not contrary to law, morals, good customs,
public order and public policy. Since the parties expressly stipulated in the promissory notes that a rate
of interest would be applied, the petitioners are bound thereby.

The CA finds it more credible that the petitioners had signed blank promissory notes which respondent
bank filled with high interest rates. This violates the principle of mutuality in contracts. Since the interest
rates were void, the rate of interest of 12% is applicable.

Petitioners insist that no interest is due when the potestative interest is declared null and void.

Issue: WON interest should be imposed on the loan.

Held: Yes. Since the parties agreed to pay interest in their loan obligation, the subsequent declaration
that the rate was illegal does not entitle them to stop payment of interest. Only the rate was declared
void, but the stipulation requiring them to pay interest remains valid and binding. They are liable to pay
interest from the time they have defaulted.

12% interest rate per annum shall be applied from the date of default until June 30, 2013, after which
date and until fully paid, the obligation shall earn interest at 6% per annum.
First United Constructors Corp and Blue Star Construction VS Bayanihan Automotive 2014

Facts: Petitioner First United and Blue Star were associate construction firms sharing financial resources,
equipment and technical personnel. FUCC ordered from respondent one unit of Hino Prime Mover and
after 10 days, ordered another unit of Isuzu Mixer. FUCC partially paid in cash, and the balance through
post-dated checks. Upon presentment of the checks for payment, respondent learned that FUCC had
ordered the payment stopped. The respondent immediately demanded the full settlement of their
obligation from the petitioners, but to no avail. Instead, the petitioners informed the respondent that
they were withholding payment of the checks due to the breakdown of one of the dump trucks they had
earlier purchased from respondent.

Respondent commenced this collection case. In their answer, the petitioners averred that they had
stopped the payment on the two checks worth ₱735,000.00 because of the respondent’s refusal to
repair the second dump truck; and that they had informed the respondent of the defects in that unit but
the respondent had refused to comply with its warranty, compelling them to incur expenses for the
repair and spare parts. They prayed that the respondent return the price of the defective dump truck
worth ₱830,000.00 minus the amounts of their two checks worth ₱735,000.00, with 12% per annum
interest on the difference of ₱90,000.00 from May 1993 until the same is fully paid; that the respondent
should also reimburse them the sum of ₱247,950.00 as their expenses for the repair of the dump truck,
with 12% per annum interest from December 16, 1992, the date of demand, until fully paid.

RTC found petitioners liable. Petitioners appealed stating that they could justifiably stop the payment of
the checks in the exercise of their right of recoupment because of the respondent’s refusal to settle
their claim for breach of warranty as to the purchase of the second dump truck. CA affirmed the RTC’s
decision holding that the remedy of recoupment could not be properly invoked by the petitioners
because the transactions were different.

Issue: WON CA erred In not upholding the right of petitioners of recoupment and not holding
respondent liable to pay legal interest.

Held: NO. Petitioners could not validly resort to recoupment against respondent. Recoupment
(reconvencion) is the act of rebating or recouping a part of a claim upon which one is sued by means of a
legal or equitable right resulting from a counterclaim arising out of the same transaction.7 It is the
setting up of a demand arising from the same transaction as the plaintiff’s claim, to abate or reduce that
claim.

However, petitioners may claim legal interest. With petitioners’ expenses for the repair of the dump
truck being already established and determined with certainty by the lower courts, it follows that legal
compensation could take place because all the requirements were present. The legal interest rate to be
imposed from February 11, 1993, the time of the extrajudicial demand by respondent, should be 6% per
annum in the absence of any stipulation in writing in accordance with Article 2209 of the Civil Code,
which provides:

Article 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.
Vitug VS Abuda 2016

Facts: Abuda loaned P250,000 to Vitug and his wife. As security for the loan, Vitug mortgage to Abuda
his property. The property was then subject of a conditional Contract to Sell between the National
Housing Authority and Vitug. Thereafter, the parties executed a restructured mortgage contract on the
property to secure the amount of P600,000 representing the original P250,000.00 loan, additional loans,
and subsequent credit accommodations given by Abuda to Vitug with an interest of five (5) percent per
month. By then, the property was covered by TCT under Vitug’s name. Spouses Vitug failed to pay so
Abuda filed a complaint for foreclosure. The RTC rendered a decision in favor of Abuda.

On appeal, Vitug contended that the real estate mortgage contract he and Abuda entered into was void
on the grounds of fraud and lack of consent; that he was only tricked into signing the mortgage contract,
whose terms he did not really understand. CA partially granted the appeal ordering that the interest rate
be 1% per month or 12% per annum. Petitioner argues that not all the requisites for a valid mortgage
was present since he did not have free disposal of his property when he mortgaged it to Abuda. His
transfer certificate of title had an annotation by the National Housing Authority, which restricted his
right to dispose or encumber the property.

Issue: WON there is a valid mortgage contract

Held: Yes. All the elements of a valid mortgage contract were present. For a mortgage contract to be
valid, the absolute owner of a property must have free disposal of the property. That property must be
used to secure the fulfillment of an obligation.

As to the interest, The Court of Appeals correctly found that the interest rates of 5% or 10% per month
imposed on petitioner's loan were unconscionable.

Parties are free to stipulate interest rates in their loan contracts in view of the suspension of the
implementation of the Usury Law ceiling on interest effective January 1, 1983. The freedom to stipulate
interest rates is granted under the assumption that we have a perfectly competitive market for loans
where a borrower has many options from whom to borrow. It assumes that parties are on equal footing
during bargaining and that neither of the parties has a relatively greater bargaining power to command
a higher or lower interest rate. It assumes that the parties are equally in control of the interest rate and
equally have options to accept or deny the other party's proposals. In other words, the freedom is
granted based on the premise that parties arrive at interest rates that they are willing but are not
compelled to take either by force of another person or by force of circumstances.

In stipulating interest rates, parties must ensure that the rates are neither iniquitous nor
unconscionable. Iniquitous or unconscionable interest rates are illegal and, therefore, void for being
against public morals.

An interest rate is not inherently conscionable or unconscionable. Interest rates become unconscionable
in light of the context in which they were imposed or applied. In Medel v. Court of Appeals, this Court
ruled that the stipulated interest of 5.5% or 66% per annum was unconscionable and contrary to morals.
It was declared void. This court reduced the interest rate to 1% per month or 12% per annum.
This court also ruled that the interest rates of 3%, 5%, and 10% per month were unconscionable, thus
justifying the need to reduce the interest rates to 12% per annum.
Abella VS Abella 2015

Facts: Petitioners alleged that respondents obtained a loan from them in the amount of P500,000.00.
The loan was evidenced by an acknowledgment receipt dated March 22, 1999 and was payable within
one (1) year. Petitioners added that respondents were able to pay a total of P200,000.00 - P100,000.00
paid on two separate occasions — leaving an unpaid balance of P300,000.00.

On March 22, 1999, respondents executed an acknowledgment receipt to petitioners, which states: This
is to acknowledge receipt of the Amount of Five Hundred Thousand (P500,000.00) Pesos from Mrs. Alma
R. Abella, payable within one (1)year from date hereof with
interest. Annie C. Abella (sgd.) Romeo M. Abella (sgd. In their Answer, respondents alleged that the
amount involved did not pertain to a loan they obtained from petitioners but was part of the capital fora
joint venture involving the lending of money. Specifically, respondents claimed that they were
approached by petitioners, who proposed that if respondents were to "undertake the management of
whatever money [petitioners] would give them, [petitioners] would get 2.5% a month with a 2.5%
service fee to [respondents]." The 2.5% that each party would be receiving represented their sharing of
the 5% interest that the joint venture was supposedly going to charge against its debtors. Respondents
further alleged that the one year averred by petitioners was not a deadline for payment but the term
within which they were to return the money placed by petitioners should the joint venture prove to be
not lucrative. Moreover, they claimed that the entire amount of P500,000.00was disposed of in
accordance with their agreed terms and conditions and that petitioners terminated the joint venture,
prompting them to collect from the joint venture's borrowers. They were, however, able to collect only
to the extent of P200,000.00; hence, the P300,000.00 balance remained unpaid.

Trial Court ruled in favor of petitioners. Ordering respondents to pay the petitioner the sum of P300,000
with interest of 30% per annum. The CA ruled that while respondents had indeed entered into a simple
loan with petitioners, respondents were no longer liable to pay the outstanding amount of
P300,000.00. CA noted that while the acknowledgement receipt showed that interest was to be
charged, no particular interest rate was specified. Thus, at the time respondents were making interest
payments of 2.5% per month, these interest payments were invalid for not being properly stipulated by
the parties. Since petitioners' charging of interest was invalid, the Court of Appeals reasoned that all
payments respondents made by way of interest should be deemed payments for the principal amount
of P500,000.00. The Court of Appeals further noted that respondents made a total payment of
P648,500.00, which, as against the principal amount of P500,000.00, entailed an overpayment of
P148,500.00.Applying the principle of solutio indebiti, the Court of Appeals concluded that petitioners
were liable to reimburse respondents for the overpaid amount of P148,500.

Issue: 1. WON the party entered into a simple loan or mutuum as agreement

2. WON interest accrued on respondent’s loan from petitioners. If so, what rate?

Held: As noted by the CA and RTC, respondents entered into a simple loan or mutuum, rather than a
joint venture, with petitioners. 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 acertain 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 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 anequal amount of the same kind and quality.

2. 12% per annum. In a loan or forbearance of money, according to the Civil Code, the interest due
should be that stipulated in writing, and in theabsence thereof, the rate shall be 12% per annum.

Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796
dated May 16, 2013, approved the amendment of Section 2 of Circular No. 905, Series of 1982 and,
accordingly, issued Circular No. 799, Series of 2013, effective July 1, 2013. Thus,  from the foregoing, in
the absence of an express stipulation as to the rate of interest that would govern the parties, the rate of
legal interest for loans or forbearance of any money, goods or credits and the rate allowed in judgments
shall no longer be twelve percent (12%) per annum — as reflected in the case of Eastern Shipping Lines
and Subsection X305.1 of the Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3 and
4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions, before its amendment by BSP-
MB Circular No. 799 — but will now be six percent (6%) per annum effective July 1, 2013. It should be
noted, nonetheless, that the new rate could only be applied prospectively and not retroactively.
Consequently, the twelve percent (12%) per annum legal interest shall apply only until June 30, 2013.
Come July 1, 2013 the new rate of six percent (6%) per annum shall be the prevailing rate of interest
when applicable.42(Emphasis supplied, citations omitted)
Juico VS Chinabanking 2013

Facts: Spouses Juico obtained a loan from China Banking as evidenced by 2 promissory notes. The loan
was secured by by a real estate mortgage over petitioners’ property. Respondent demanded the full
payment of the outstanding balance with accrued interests. As of February 23, 2001, the amount due on
the promissory notes amounted to P19,201,776. On the same day, the mortgaged property was sold at a
public auction with respondent bank as the highest bidder. Respondent prayed that judgment be
rendered ordering petitioners to pay P8,901,776.63, representing the amount of deficiency, plus
interests and legal rate from Feb 23, 2001 until fully paid, penalty of 1% per day until fully paid and 10%
for attorney’s fees.

Yu, the Senior Loans Assitant, reiterated that the interest rate changes every month based on the
prevailing market rate. That she notified petitioners of the prevailing rate monthly.

RTC rendered a decision ordering spouses to pay the bank 9 million plus interest which amounted to
15M. CA affirmed. Petitioners insist that the increased rates were unilaterally imposed by the bank thus
violate principle of mutuality in contracts.

Issue: WON the increase violate the mutuality in contracts.

Held: Yes. Escalation clauses refer to stipulations allowing an increase in the interest rate agreed upon
by the contracting parties. This Court has long recognized that there is nothing inherently wrong with
escalation clauses which are valid stipulations in commercial contracts to maintain fiscal stability and to
retain the value of money in long term contracts. Hence, such stipulations are not void per se.
Nevertheless, an escalation clause "which grants the creditor an unbridled right to adjust the interest
independently and upwardly, completely depriving the debtor of the right to assent to an important
modification in the agreement" is void. A stipulation of such nature violates the principle of mutuality of
contracts. Thus, this Court has previously nullified the unilateral determination and imposition by
creditor banks of increases in the rate of interest provided in loan contracts.

More recently in Solidbank Corporation v. Permanent Homes, Incorporated, we upheld as valid an

escalation clause which required a written notice to and conformity by the borrower to the increased
interest rate. Thus:

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.

This notwithstanding, we hold that the escalation clause is still void because it grants respondent the
power to impose an increased rate of interest without a written notice to petitioners and their written
consent. Respondent’s monthly telephone calls to petitioners advising them of the prevailing interest
rates would not suffice. A detailed billing statement based on the new imposed interest with
corresponding computation of the total debt should have been provided by the respondent to enable
petitioners to make an informed decision. An appropriate form must also be signed by the petitioners to
indicate their conformity to the new rates. Compliance with these requisites is essential to preserve the
mutuality of contracts. For indeed, one-sided impositions do not have the force of law between the
parties, because such impositions are not based on the parties’ essential equality.

Modifications in the rate of interest for loans pursuant to an escalation clause must be the result of an
agreement between the parties. Unless such important change in the contract terms is mutually agreed
upon, it has no binding effect.

SC ordered Petitioners Spouses Ignacio F. Juico and Alice P. Juico are hereby ORDERED to pay jointly and
severally respondent China Banking Corporation ₱4, 7 61 ,865. 79 representing the amount of deficiency
inclusive of interest, penalty charge and attorney's fees. Said amount shall bear interest at 12% per
annum, reckoned from the time of the filing of the complaint until its full satisfaction.

Concurring Opinion: Sereno, J.

I fully concur with the majority that the increases in interest rates unilaterally imposed by China Bank
without petitioners' assent violates the principle of mutuality of contracts. This principle renders void a
contract containing a provision that makes its fulfillment exclusively dependent upon the uncontrolled
will of one of the contracting parties.

Evidently, the point of difference in the cited escalation clauses lies in the use of the phrase "any
increase or decrease in the interest rate" without reference to the prevailing market rate actually
imposed by the regulations of the Central Bank. It is thus not enough to state, as akin to China Bank's
provision, that the bank may increase or decrease the interest rate in the event a law or a Central Bank
regulation is passed. To adopt that stance will necessarily involve a determination of the interest rate by
the creditor since the provision spells a vague condition - it only requires that any change in the
imposable interest must conform to the upward or downward movement of borrowing rates.

And if that determination is not subjected to the mutual agreement of the contracting parties, then the
resulting interest rates to be imposed by the creditor would be unilaterally determined. Consequently,
the escalation clause violates the principle of mutuality of contracts.
Spouses LimSo VS PNB and Register of Deed Davao 2016

Facts: In 1993, Spouses Limso and Davao Sunrise Investment took out a loan secured by 4 real estate
mortgages from PNB, amounting to 700M. 3 parcels were under the name of Davao Sunrise and one
under the name of the Spouses. In 1995, Spouses Limso sold the property under their name to Davao
Sunrise. Spouses Limso and Davao Sunrise had difficulty in paying their loan. In 1999, they requested
that their loan be restructured. After negotiations, Spouses Limso, Davao Sunrise, and Philippine
National Bank executed a Conversion, Restructuring and Extension Agreement. The principal obligation
in the restructured agreement totalled ₱1.067 billion. This included ₱217.15 million unpaid interest. The
restructured loan was divided into two (2) parts. Loan I was for the principal amount of ₱583.18 million,
while Loan II was for the principal amount of ₱483.78 million.9 The restructured loan was secured by the
same real estate mortgage over four (4) parcels of land in the original loan agreement. All the properties
were registered in the name of Davao Sunrise.

Spouses and Davao were still unable to pay prompting PNB to file a petition for extrajudicial foreclosure.
Auction sale was held and PNB was declared the highest bidder. After the auction sale but before the
sheriff could issue Provisional Certificate of Sale, Spouses and Davao Sunrise filed a complaint for
reformation or annulment of contract. They prayed for the eclaration of nullity of unilateral imposition
and increases of interest rates, crediting of illegal interests collected to [Spouses Limso and Davao
Sunrise’s] account; elimination of all uncollected illegal interests; reimposition of new interest rates at
12% per annum only from date of filing of Complaint.

Issue: Whether the provision under the loan contract regarding the unilateral imposition and increases
of interest rates violates the principle of mutuality of contract.

Held: Yes. The SC held that the interest on the principal loan obligation shall be at the rate of 12% per
annum and computed from January 28, 1999, the date of the execution of the Conversion, Restructuring
and Extension Agreement. Interest rate on the conventional interest shall be at the rate of 12% per
annum from the date of judicial demand, to June 30, 2013. From July 1, 2013 until full satisfaction, the
interest rate on the conventional interest shall be computed at 6% per annum in view of this court's
ruling in Nacar v. Gallery Frames.

 According to the SC, there was no mutuality of contract between the parties since the interest rates
imposed were based on the sole discretion of Philippine National Bank. Further, the escalation clauses in
the real estate mortgage "[did] not specify a fixed or base interest[.]" Thus, the interest rates are invalid.

 The principle of mutuality of contracts is stated in Article 1308 of the Civil Code as follows:

 Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be left
to the will of one of them. 

The importance of the principle of mutuality of contracts was discussed in Juico v. China Banking
Corporation: The binding effect of any agreement between parties to a contract is premised on two
settled principles: (1) that any obligation arising from contract has the force of law between the parties;
and (2) that there must be mutuality between the parties based on their essential equality. Any contract
which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable
result is void. Any stipulation regarding the validity or compliance of the contract which is left solely to
the will of one of the parties, is likewise, invalid.
When there is no mutuality between the parties to a contract, it means that the parties were not on
equal footing when the terms of the contract were negotiated. Thus, the principle of mutuality of
contracts dictates that a contract must be rendered void when the execution of its terms is skewed in
favor of one party.

 The Court of Appeals also noted that since the interest rates imposed were at the sole discretion of
Philippine National Bank, and that Spouses Limso and Davao Sunrise were merely notified when there
were changes in the interest rates, Philippine National Bank violated the principle of mutuality of
contracts. The Court of Appeals ruled that:

 We cannot subscribe to appellant bank’s allegation that plaintiffs-appellees agreed to these interest
rates by receiving various letters from PNB. Those letters cannot be construed as agreements as a simple
reading of those letters would show that they are mere notices informing plaintiffs-appellees that the
bank, through its top management, had already imposed interest rates on their loan. The uniform
wordings of the said letters go this way:

 This refers to your existing credit facility in the principal amount of P850.0 MM granted by the
Philippine National Bank by and under the terms and conditions of that Credit Agreement dated 12.2.97
(Renewal of Credit Facility).

We wish to advise you that the top management has approved an interest rate of 20.756% which will be
used in computing the interest due on your existing peso and redenominated availments against the
credit facility for the period July 20 to August 19, 1998.

If you are amenable to this arrangement, please signify your conformity on the space provided below
and return to us the original copy of the document. If we receive no written objection by the end of 10
days from date of receipt of this letter, we will take it to mean that you agree to the new interest rate
we quote. On the other hand, if you disagree with the quoted rate, you will have to pay the loan in full
within the same ten-day period otherwise, the entire loan will be considered due and demandable.

The contents of the letter quoted by the Court of Appeals show that there was no room for negotiation
among Philippine National Bank, Spouses Limso, and Davao Sunrise when it came to the applicable
interest rate. Since there was no room for negotiations between the parties with regard to the increases
of the rates of interest, the principle of mutuality of contracts was violated. There was no meeting of the
minds between Spouses Limso, Davao Sunrise, and Philippine National Bank because the increases in the
interest rates were imposed on them unilaterally.
Mambulao Lumber VS PNB and Anacleto Heraldo 1968

Facts: Petitioner Mambulao filed an industrial loan of P155,000 with PNB but only P100,000 was
approved. It executed a real estate mortgage over a parcel of land, together with the buildings and
improvements existing thereon. Petitioner failed to pay the amortization on the amounts released to
and received by it. PNB found that petitioner had already stopped operation. PNB sent a letter to the
Provincial Sheriff of Camarines Norte requesting him to take possession of the parcel of land, together
with the improvements existing thereon, and to sell it at public auction. According to the notice, the
mortgaged property would be sold at public auction on November 21, 1961. On November 6, 1961, the
PNB sent a letter to the Provincial Sheriff requesting him to take possession of the chattels mortgaged to
it by the plaintiff and sell them at public auction also on November 21, 1961, for the satisfaction of the
sum of P57,646.59, plus 6% annual interest therefore from September 23, 1961, attorney's fees
equivalent to 10% of the amount due and the costs and expenses of the sale, which was to be sold also
on November 21, 1961.

The foreclosure sale over the parcel of land was held and the same was sold to PNB. Petitioner sent a
bank draft for P738.59 to PNB, allegedly in full settlement of the balance of the obligation of the plaintiff
after the application thereto of the sum of P56,908.00 representing the proceeds of the foreclosure sale
of parcel of land. However, on December 18, 1961, the attorney of PNB wrote to petitioner that s of that
date the balance of the account of the plaintiff was P9,161.76, to which should be added the expenses
of guarding the mortgaged chattels at the rate of P4.00 a day beginning December 19, 1961. It was
further explained in said letter that the sum of P57,646.59, which was stated in the request for the
foreclosure of the real estate mortgage, did not include the 10% attorney's fees and expenses of the
sale. Accordingly, the plaintiff was advised that the foreclosure sale scheduled on the 21st of said month
would be stopped if a remittance of P9,161.76, plus interest thereon and guarding fees, would be made.

On December 21, 1961, the foreclosure sale of the mortgaged chattels was held and they were awarded
to PNB.

Issue: Di ko alam issue, ang labo ng case.

HELD: There is merit to this claim. Examining the terms of the promissory note executed by the
appellant in favor of the PNB, we find that the agreed interest on the loan of P43,000.00 — P27,500.00
released on August 2, 1956 as per promissory note of even date (Exhibit C-3), and P15,500.00 released
on October 19, 1956, as per promissory note of the same date (Exhibit C-4) — was six per cent (6%) per
annum from the respective date of said notes "until paid". In the statement of account of the appellant
as of September 22, 1961, submitted by the PNB, it appears that in arriving at the total indebtedness of
P57,646.59 as of that date, the PNB had compounded the principal of the loan and the accrued 6%
interest thereon each time the yearly amortizations became due, and on the basis of these compounded
amounts charged additional delinquency interest on them up to September 22, 1961; and to this
erroneously computed total of P57,646.59, the trial court added 6% interest per annum from September
23, 1961 to November 21 of the same year. In effect, the PNB has claimed, and the trial court has
adjudicated to it, interest on accrued interests from the time the various amortizations of the loan
became due until the real estate mortgage executed to secure the loan was extra-judicially foreclosed
on November 21, 1961. This is an error. Section 5 of Act No. 2655 expressly provides that in computing
the interest on any obligation, promissory note or other instrument or contract, compound interest shall
not be reckoned, except by agreement, or in default thereof, whenever the debt is judicially claimed.
This is also the clear mandate of Article 2212 of the new Civil Code which provides that interest due shall
earn legal interest only from the time it is judicially demanded, and of Article 1959 of the same code
which ordains that interest due and unpaid shall not earn interest. Of course, the parties may, by
stipulation, capitalize the interest due and unpaid, which as added principal shall earn new interest; but
such stipulation is nowhere to be found in the terms of the promissory notes involved in this case.
Clearly therefore, the trial court fell into error when it awarded interest on accrued interests, without
any agreement to that effect and before they had been judicially demanded.
PNB VS CA and Padilla 1991

Facts: Private respondent (PR) Ambrosio Padilla, applied for and was granted a credit line
of 321.8million, by petitioner PNB. This was for a term of 2 years at 18% interest per annum and was
secured byreal estate mortgage and 2 promissory notes executed in favor of Petitioner by PR. The credit
agreementand the promissory notes, in effect, provide that PR agrees to be bound by “increases to the
interest ratestipulated, provided it is within the limits provided for by law”.Conflict in this case
arose when Petitioner unilaterally increased the interest rate from 18% to: (1) 32%[July 1984]; (2) 41%
[October 1984]; and (3) 48% [November 1984], or 3 times within the span of a singleyear. This was done
despite the numerous letters of request made by PR that the interest rate beincreased only to 21% or
24%.PR filed a complaint against Petitioner with the RTC. The latter dismissed the case for lack of
merit. Appeal by PR to CA resulted in his favor. Hence the petition for certiorari under Rule 45 of ROC
filed byPNB with SC.

Issue: Despite the removal of the Usury Law ceiling on interest, may the bank validly increase
thestipulated interest rate on loans contracted with third persons as often as necessary and against
theprotest of such persons.

Held: NO. Although under Sec. 2 of PD 116, the Monetary Board is authorized to prescribe the maximum
rate of interest for loans and to change such rates whenever warranted by prevailing economic and
social conditions, by express provision, it may not do so “oftener than once every 12 months”. If the
Monetary Board cannot, much less can PNB, effect increases on the interest rates more than once a
year. Based on the credit agreement and promissory notes executed between the parties, although PR
did agree to increase on the interest rates allowed by law, no law was passed warranting Petitioner to
effect increase on the interest rates on the existing loan of PR for the months of July to November of
1984.Neither there being any document executed and delivered by PR to effect such increase.

For escalation clauses to be valid and warrant the increase of the interest rates on loans, there must be:
(1) increase was made by law or by the Monetary Board; (2) stipulation must include a clause for the
reduction of the stipulated interest rate in the event that the maximum interest is lowered by law or by
the Monetary board. In this case, PNB merely relied on its own Board Resolutions, which are not laws
nor resolutions of the Monetary Board.

Despite the suspension of the Usury Law, imposing a ceiling on interest rates, this does not authorize
banks to unilaterally and successively increase interest rates in violation of Sec. 2 PD 116.

Increases unilaterally effected by PNB was in violation of the Mutuality of Contracts under Art.
1308. This provides that the validity and compliance of the parties to the contract cannot be left to
the will of one of the contracting parties. Increases made are therefore void.

Increase on the stipulated interest rates made by PNB also contravenes Art. 1956. It provides that, “no
interest shall be due unless it has been expressly stipulated in writing”. PR never agreed in writing to pay
interest imposed by PNB in excess of 24% per annum. Interest rate imposed by PNB, as correctly found
by CA, is indubitably excessive.
Ruiz VS Caneba 1990

Facts: Petitioners spouses Ruiz, leased the premises of common-law-spouses Sangalang and Cruz. Later
on, the co-owners decided to sell the leased promises to the lessees for and in consideration of 175K
payable in installments subject to such conditions as the continuation of payment of monthly rentals by
the lessee-buyers until the full amount is paid, and an stipulation that the contracts would be subject to
rescision in the event the lessee-buyers would default in the payment of the agreed price—upon
rescision, the supposed lessee-buyers should return the amount advanced to the lessor-sellers while the
former vacates the property. The petitioners defaulted payments so the parties rescinded the contract
but could not however agree as to the amount. The lessee-buyers asked for 24% per annum interests on
the amount advanced by them to the co-owners, while the latter, on the other hand, asked for the
additional rentals for another portion of the property which the petitioner had already been using since
the execution of the contract, these issues was however raised after judgment had been entered and
writ of execution issued.

Issue: Should awards by courts be subject to legal interests however the judgment did not provide for
such?

Held: No. Anent the Ruizes' claim of interest as aforementioned, it has been held in the case of Santulan
v. Fule, 133 SCRA 762 (1984) that where the court judgment which did not provide for interest is already
final, there is no reason to add interest in the judgment. Interest was not demanded by the Ruizes when
the case was pending before the lower court, hence, there is no reason for Supreme Court to grant such
claim. As ruled by the Court, such claim is groundless since the decision and orders sought to be
enforced do not direct the payment of interest and have long become final (Canonizado v. Ordoñez-
Benitez, 149 SCRA 555 [1987]).

Finally, as to Sangalang's claim for P1,500.00 as monthly rental for Door No. 2, the records show that
such claim was never raised in the trial court. The issue of additional rentals was brought up by
Sangalang only when the motion for execution of par. 3 of the dispositive portion of the decision was
filed by the Ruiz spouses (Rollo, p. 189). It is a basic rule that an issue which was not raised in the court
below cannot be raised for the first time on appeal as it would be offensive to the basic rules of fair play,
justice and due process.
De Cortes VS Venturanza 1977

Facts: Petitioner Felix Cortes y Ochoa was the original owner of 9 parcels of land while petitioner Noel
Cortes was the owner of 24 parcels of land. Petitioners sold the parcels of land to respondents
amounting to 716, 573.90. The balance of 576, 573.90 was payable within 3 years from January 1, 1959
with interest rate of 6% per annum.
RCBC VS CA and Goyu Sons Inc. 1998

Facts: Goyu applied for credit facilities and accommodations with RCBC in the amount of 117M. As
security, Goyu executed two real estate mortgages and two chattel mortgages in favor of RCBC. Goyu
obtained in its name a total of 10 insurance policies from Malayan Insurance (MICO). GOYU’s buildings
were gutted by fire and it claimed indemnity from MICO but the latter denied the claim on the ground
that the insurance policies were either attached pursuant to writs of attachments/garnishments issued
by various courts or that the proceeds were also claimed by other creditors of GOYU. GOYU, alleging
better rights to the proceeds, filed for specific performance and damges before the RTC of Manila Br 3.
The trial court ruled in favor of GOYU for the fire loss claims but ordered it to pay RCBC its loan
obligations. On appeal to the CA, it affirmed the ruling with regard to the liabilities of MICO and RCBC.
The trial court and appellate courts both held that, since the endorsements do not bear the signature of
any officer of GOYU, they concluded that the endorsements are defective. The CA then ordered GOYU to
pay its obligation to RCBC without any interest, surcharges and penalties.

Issue:  Whether or not the ruling of the appellate court is correct.

The Court held in the negative. The essence or rationale for the payment of interest or cost of money is
separate and distinct from that of surcharges and penalties. What may justify a court in not allowing the
creditor to charge surcharges and penalties despite express stipulation therefor in a valid agreement,
may not equally justify non-payment of interest. The charging of interest for loans forms a very essential
and fundamental element of the banking business, which may truly be considered to be at the very core
of its existence or being. It is inconceivable for a bank to grant loans for which it will not charge any
interest at all. We fail to find justification for the Court of Appeals outright deletion of the payment of
interest as agreed upon in the respective promissory notes.This constitutes gross error.

For the computation of the interest due to be paid to RCBC, the following rules of thumb laid down by
this Court in Eastern Shipping Lines, Inc. vs. Court of Appeals shall apply, to wit:

When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts
is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on
Damages of the Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed
from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article
1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until
the demand can be established with reasonable certainty. Accordingly, where the demand is established
with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 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 of the judgment of the court
is made (at which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum
from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.

There being written stipulations as to the rate of interest owing on each specific promissory note, such
agreed interest rates must be followed.

On the issue of payment of surcharges and penalties, we partly agree that GOYUs pitiful situation must
be taken into account. We do not agree, however, that payment of any amount as surcharges and
penalties should altogether be deleted. Even assuming that RCBC, through its responsible officers,
herein petitioners Eli Lao and Uy Chun Bing, may have relayed its assurance for assistance to GOYU
immediately after the occurrence of the fire, we cannot accept the lower courts finding that RCBC had
thereby ipso facto effectively waived collection of any additional interests, surcharges, and penalties
from GOYU. Assurances of assistance are one thing, but waiver of additional interests, surcharges, and
penalties is another.

Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature of
liquidated damages, covered by Section 4, Chapter 3, Title XVIII of the Civil Code.Article 2227 thereof
provides:

ART. 2227. Liquidated damages, whether intended as a indemnity or penalty, shall be equitably reduced
if they are iniquitous and unconscionable.

In exercising this vested power to determine what is iniquitous and unconscionable, the Court must
consider the circumstances of each case. It should be stressed that the Court will not make any
sweeping ruling that surcharges and penalties imposed by banks for non-payment of the loans extended
by them are generally iniquitous and unconscionable. What may be iniquitous and unconscionable in
one case, may be totally just and equitable in another. This provision of law will have to be applied to
the established facts of any given case. Given the circumstances under which GOYU found itself after the
occurrence of the fire, the Court rules the surcharges rates ranging anywhere from 9% to 27%, plus the
penalty charges of 36%, to be definitely iniquitous and unconscionable. The Court tempers these rates
to 2% and 3%, respectively. Furthermore, in the light of GOYUs offer to pay the amount of
P116,301,992.60 to RCBC as March 1993 (See: Exhibit BB), which RCBC refused, we find it more in
keeping with justice and equity for RCBC not to charge additional interest, surcharges, and penalties
from that time onward.