Case No.

G.R. No. 192986 January 15, 2013

ADVOCATES FOR TRUTH IN LENDING, INC. and EDUARDO B. OLAGUER, Petitioners,
vs.
BANGKO SENTRAL MONETARY BOARD, represented by its Chairman, GOVERNOR ARMANDO M.
TETANGCO, JR., and its incumbent members: JUANITA D. AMATONG, ALFREDO C. ANTONIO, PETER
FA VILA, NELLY F. VILLAFUERTE, IGNACIO R. BUNYE and CESAR V. PURISIMA, Respondents.
DECISION
REYES, J.:

PRINCIPLE: CB Circular No. 905 merely upheld the parties’ freedom of contract to agree freely on the rate of
interest. It cited Article 1306 of the New Civil Code, under which the contracting parties may establish such
stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to
law, morals, good customs, public order, or public policy.

FACTS:

Petitioner "Advocates for Truth in Lending, Inc." (AFTIL) is a non-profit, non-stock corporation
organized to engage in pro bono concerns and activities relating to money lending issues. It was incorporated
on July 9, 2010,2 and a month later, it filed this petition, joined by its founder and president, Eduardo B.
Olaguer, suing as a taxpayer and a citizen.

R.A. No. 265, which created the Central Bank (CB) of the Philippines on June 15, 1948, empowered
the CB-MB to, among others, set the maximum interest rates which banks may charge for all types of loans
and other credit operations, within limits prescribed by the Usury Law. Section 109 of R.A. No. 265 reads:
In its Resolution No. 2224 dated December 3, 1982,3 the CB-MB issued CB Circular No. 905, Series of 1982,
effective on January 1, 1983. Section 1 of the Circular, under its General Provisions, removed the ceilings on
interest rates on loans or forbearance of any money, goods or credits, to wit:

Sec. 1. The rate of interest, including commissions, premiums, fees and other charges, on a
loan or forbearance of any money, goods, or credits, regardless of maturity and whether secured or
unsecured, that may be charged or collected by any person, whether natural or juridical, shall not be
subject to any ceiling prescribed under or pursuant to the Usury Law, as amended. (Underscoring and
emphasis ours)

On June 14, 1993, President Fidel V. Ramos signed into law R.A. No. 7653 establishing the Bangko
Sentral ng Pilipinas (BSP) to replace the CB. The repealing clause thereof, Section 135, reads:

Sec. 135. Repealing Clause. — Except as may be provided for in Sections 46 and 132 of this
Act, Republic Act No. 265, as amended, the provisions of any other law, special charters, rule or
regulation issued pursuant to said Republic Act No. 265, as amended, or parts thereof, which may be
inconsistent with the provisions of this Act are hereby repealed. Presidential Decree No. 1792 is
likewise repealed.

AFTIL questioned the said law and petition for Certiorari before the Supreme Court.

ISSUE:
Whether the CB-MB exceeded its authority when it issued CB Circular No. 905, which removed all
interest ceilings and thus suspended Act No. 2655 as regards usurious interest rates;
HELD:
The petition must fail.

The CB-MB merely suspended the effectivity of the Usury Law when it issued CB Circular No. 905.

1
 The power of the CB to effectively suspend the Usury Law pursuant to P.D. No. 1684 has long been
recognized and upheld in many cases. As the Court explained in the landmark case of Medel v. CA,36 citing
several cases, CB Circular No. 905 "did not repeal nor in anyway amend the Usury Law but simply suspended
the latter’s effectivity;"37 that "a CB Circular cannot repeal a law, [for] only a law can repeal another law;"38 that
"by virtue of CB Circular No. 905, the Usury Law has been rendered ineffective;" 39 and "Usury has been legally
non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon."40

C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding any
subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or
credits. In fine, they can agree to adjust, upward or downward, the interest previously stipulated. Thus,
according to the Court, by lifting the interest ceiling, CB Circular No. 905 merely upheld the parties’ freedom of
contract to agree freely on the rate of interest. It cited Article 1306 of the New Civil Code, under which the
contracting parties may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

The lifting of the ceilings for interest rates does not authorize stipulations charging excessive,
unconscionable, and iniquitous interest.

It is settled that nothing in CB Circular No. 905 grants lenders a carte blanche authority to raise interest
rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets. 48 As held in
Castro v. Tan:49

The imposition of an unconscionable rate of interest on a money debt, even if knowingly and
voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous
deprivation of property, repulsive to the common sense of man. It has no support in law, in principles of
justice, or in the human conscience nor is there any reason whatsoever which may justify such
imposition as righteous and as one that may be sustained within the sphere of public or private
morals.50

Stipulations authorizing iniquitous or unconscionable interests have been invariably struck down for
being contrary to morals, if not against the law.51 Indeed, under Article 1409 of the Civil Code, these contracts
are deemed inexistent and void ab initio, and therefore cannot be ratified, nor may the right to set up their
illegality as a defense be waived.

Nonetheless, the nullity of the stipulation of usurious interest does not affect the lender’s right to
recover the principal of a loan, nor affect the other terms thereof.52 Thus, in a usurious loan with mortgage, the
right to foreclose the mortgage subsists, and this right can be exercised by the creditor upon failure by the
debtor to pay the debt due. The debt due is considered as without the stipulated excessive interest, and a legal
interest of 12% per annum will be added in place of the excessive interest formerly imposed,

WHEREFORE, premises considered, the Petition for certiorari is DISMISSED. SO ORDERED.

2
Case No. 11
G.R. No. 97412 July 12, 1994
EASTERN SHIPPING LINES, INC., petitioner,
vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents.
Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.
Zapa Law Office for private respondent.
VITUG, J.:

PRINCIPLE: 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.
FACTS:

On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for delivery
vessel "SS EASTERN COMET" owned by Eastern Shipping Lines under Bill of Lading. The shipment was
insured METRO PORT’s Marine Insurance Policy for P36,382,466.38.

Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the custody of
Metro Port Service, Inc. The latter accepted to one drum, said to be in bad order, which damage was unknown
to EASTERN. On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from Metro
Port Service, Inc., one drum opened and without seal.

On January 8 and 14, 1982, Allied Brokerage Corporation made deliveries of the shipment to the
consignee's warehouse. The latter accepted to one drum which contained spillages, while the rest of the
contents was adulterated/fake. EASTERN 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 METRO PORT. Claims
were presented against MERCANTILE INSURANCE, who failed and refused to pay the same. As a
consequence of the losses sustained, METRO PORT 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 MERCANTILE.

Thus, an action against EASTERN company, ARRASTRE operator and broker-forwarder for damages
sustained by a shipment while in METRO PORT’s custody, was filed by the insurer-subrogee, METRO POINT
who paid the consignee the value of such losses/damages.

RTC: Ruled against EASTERN, METRO PORT, and ALLIED BROKERAGE

The report went on to state that when the drums reached the consignee, one drum was found with
adulterated/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

CA: affirmed in toto the judgment of the court a quo.

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.
The CA held that the grant of the interest on the claim of MERCANTILE INSURANCE should commence from
the date of the filing of the complaint at the rate of 12% per annum instead of from the date of the decision of
the TRIAL COURT and only at the rate of 6% per annum, MERCANTILE INSURAN’s claim being indisputably
unliquidated.
ISSUE:

3
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 whether the applicable rate of
interest, referred to above, is twelve percent (12%) or six percent (6%).

HELD: Ruled partly in favor of EATERN

It is over the issue of legal interest adjudged by the appellate court that deserves more than just a
passing remark.

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 23 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 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.

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 court a 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.

4
Case No. 12

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.
PARDO, J.:

PRINCIPLE:
 Circular No. 905 of the Central Bank, has expressly removed the interest ceilings prescribed by
the Usury Law and that the Usury Law is now "legally inexistent";
 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.

FACTS:

On November 7, 1985, Servando Franco and Leticia Medel (FRANCO and MEDEL) obtained a loan from
Veronica R. Gonzales (GONZALES), 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. GONZALES 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 promissory note for P50,000.00, to evidence the loan, payable on
January 7, 1986.

On November 19, 1985, FRANCO and MEDEL obtained from GONZALES 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 Janaury 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, FRANCO and MEDEL secured from GONZALES 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 MEDEL, authorizing her to execute
the mortgage. FRANCO and MEDEL executed a promissory note in favor of GONZALES 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, FRANCO and MEDEL failed to pay the third loan on
maturity. The indebtedness to a total of P500,000.00, payable on August 23, 1986; in which they executed a
promissory note to pay in full at the maturity date. 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. Thus, a suit was filed against the borrowers before the RTC of Bulacan on basis of the 4
promissory note.

On FRANCO‘s defense, he alleged that he did not obtain any loan from the GONZALES; 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 GONZALES, and that he signed the promissory note only as a witness. However,
Leticia and Rafael Medel alleged that the loan was the transaction of Leticia Yaptinchay, who executed a
mortgage in favor of the GONZALES 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,

5
illegal and excessive, and that substantial payments made were applied to interest, penalties and other
charges.

RTC: Ruled in favor of GONZALES

The lower court ruled that the 4 promissory notes were indeed genuine; however, MENDEL’s stipulated
interests on the said loans were unconscionable. Thus, 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."

CA: Ruled in favor of GONZALES.

Both GONZALES and MEDEL appealed before the CA. 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". 9 The 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".

ISSUE: WON the stipulated interest rate valid.

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, pursuant to its powers under P.D. No. 116, as amended by P.D.
No. 1684?

HELD: The SC ruled in favor of the MEDEL

The SC agreed with MEDEL 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 cannot 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 14 and that the Usury Law is
now "legally inexistent".

Nevertheless, the SC finds 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.

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.

6
NO. 13 or 14?

[G.R. No. 130994. September 18, 2002]

SPOUSES FELIMON and MARIA BARRERA, petitioners,
vs. SPOUSES EMILIANO and MARIA CONCEPCION LORENZO, respondents.
D E C I S I O N: SANDOVAL-GUTIERREZ, J.:

 PRINCIPLE: When the obligation is breached, and it consists in the payment of a sum 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;
Eastern Shipping Lines, Inc. vs. Court of Appeals
 It is only when the contract is vague and ambiguous that courts are permitted to resort to
construction of its terms and determine the intention of the parties therein.

FACTS:

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

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

BARRERA failed to pay their loan in full on August 14, 1991, LORENZO allowed them to complete
their payment until December 23, 1993. On this date, they made a total payment of P687,000.00. On January
17, 1994, LORENZO’s wrote BARRERA’s demanding payment of P325,000.00, plus interest, otherwise they
would foreclose the mortgage. In turn, BARRERA’s responded, claiming that they have overpaid their
obligation and demanding the return of their land title and refund of their excess payment. This prompted
LORENZO to file a petition for extrajudicial foreclosure of mortgage with the Office of the Ex-Officio Sheriff,
Malolos, Bulacan. On the other hand, BARRERA’s filed a complaint before the RTC of Bulacan for a sum of
money and damages, with application for a temporary restraining order and preliminary injunction.

RTC: Ruled in favor of FELIMON and BARRERA.

The RTC Issued and order enjoining the sheriff from proceeding with the foreclosure of mortgage, upon
their posting of a bond in the amount of P543,622.00. The trial court held that the stipulated 5% monthly
interest to be paid by petitioners corresponds only to the period from May 14, 1991 up to August 14,
1991, the term of the loan. Thereafter, the monthly interest should be 12% per annum. The trial court
concluded that petitioners made an overpayment of P214,750.00.

CA: Reversed and ruled in favor of CONCEPCION LORENZO.

The law and jurisprudence clearly provide that if the debt produces interest, payment of the principal shall not
be deemed to have been made until the interests have been covered. (Article 1253, New Civil Code;
Gobonseng, Jr. vs. Court of Appeals, 246 SCRA 472). Once it is admitted that an obligation bears interest,
partial payments are to be applied first on account of the interest and then to reduce the principal. (San Jose
vs. Ortega, 11 Phil. 442; Sunico vs. Ramirez, 14 Phil. 500). The CA also do not agree that the stipulated
monthly interest of 5% was to apply only to the 3-month effectivity period of the loan. This is a flawed
and a grossly unfair interpretation of the terms and conditions of the agreement of the parties. To rule

7
in this wise is to sanction the irregular performance of one’s obligation. FELIMON and BARRERA will be
emboldened not to pay their loan within the agreed period of 3-months since on the fourth month and
thereafter, they do not have to pay anymore the 5% monthly interest, but only the 12% legal interest per
annum, or a measly 1% interest per month. Such an interpretation is totally unfair and unjust to the
creditors who could have used their money in some other ways. Until such time that FELIMON and
BARRERA have fully paid their total indebtedness, the 5% monthly interest subsists, there being no stipulation
to the contrary.

The CA held that it cannot change the terms of the loan agreement between FELIMON and BARRERA and
CONCEPCION LORENZO as the courts have no right to make contracts for the parties.(Tolentino and
Manio vs. Gonzales Sy Chian, 5 Phil. 577). A contract is the law between the parties which not even this
Court can interfere with. The only requirement is that the same be not contrary to law, morals and good
customs x x x (Article 1306, New Civil Code). We find the agreement to pay a 5% monthly interest until the
loan is fully paid to be reasonable and sanctioned by regular usage and practice. The FELIMON and
BARRERA should, therefore, be required to pay the balance of their indebtedness, including the interests
thereof. Failure to pay the same should warrant the foreclosure of their mortgaged property to satisfy their
obligation to the Lorenzo spouses.

ISSUE: Whether the 5% monthly interest on the loan was only for three (3) months, or from May 14, 1991 up
to August 14, 1991, as maintained by FELIMON and BARRERA, or until the loan was fully paid, as claimed by
CONCEPCION LORENZO.

HELD:
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 construction of its terms and determine the intention of the parties therein.

It is clear from the above stipulations that the loan shall be payable within three (3) months, or from
May 14, 1991 up to August 14, 1991. During such period, the loan shall earn an interest of 5% per
month. Furthermore, the contract shall have no force and effect once the loan shall have been fully
paid within the three-month period, otherwise, the mortgage shall be foreclosed extrajudicially under
Act No. 3135. Records show that upon maturity of the loan on August 14, 1991, FELIMON and BARRERA
failed to pay their entire obligation. Instead of exercising their right to have the mortgage foreclosed,
CONCEPCION LORENZO allowed payment on a monthly installment basis until December, 1993. It bears
emphasis that there is no written agreement between the parties that the loan will continue to bear 5%
monthly interest beyond the agreed three-month period.

Article 1956 of the Civil Code mandates that no interest shall be due unless it has been expressly
stipulated in writing. Applying this provision, the trial court correctly held that the monthly interest of 5%
corresponds only to the three-month period of the loan, or from May 14, 1991 to August 14, 1991, as
agreed upon by the parties in writing. Thereafter, the interest rate for the loan is 12% per annum.

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

8
NO. 13 or 14?
G.R. No. 144712 July 4, 2002
SPOUSES SILVESTRE and CELIA PASCUAL, petitioners,
vs. RODRIGO V. RAMOS, respondent.
D E C I S I O N: DAVIDE, JR., C.J.:

PRICIPLE:
 Medel v. Court of Appeals does not apply when the validity of the interest rates are not
questioned;
 It is only when the contract is vague and ambiguous that courts are permitted to resort to
construction of its terms and determine the intention of the parties therein.

FACTS:
Rodrigo V. Ramos, RAMOS, petitioned for consolidation of title or ownership filed on 5 July 1993 with the RTC
against Spouses Silvestre and Celia Pascual, PASCUALs. RAMOS alleged that on 3 June 1987, for and in
consideration of P150,000, the PASCUALs executed in his favor a Deed of Absolute Sale with Right to
Repurchase over two parcels of land and the improvements thereon located in Bambang, Bulacan. The
Transfer Certificate of Title (TCT) was annotated at the back. The PASCUALs did not exercise their right to
repurchase the property within the stipulated one-year period; hence, RAMOS prayed that the title or
ownership over the subject parcels of land and improvements thereon be consolidated in his favor.

PASCUALs admitted having signed the Deed of Absolute Sale with Right to Repurchase for a consideration
of P150,000 but averred that what the parties had actually agreed upon and entered into was a real estate
mortgage. They further alleged that there was no agreement limiting the period within which to exercise the
right to repurchase and that they had even overpaid RAMOS. By way of counterclaim, the PASCUALs prayed
that RAMOS be ordered to execute a Deed of Cancellation, Release or Discharge of the Deed of Absolute
Sale with Right to Repurchase or a Deed of Real Estate Mortgage; deliver to them the TCT; return the amount
they had overpaid; and pay each of them moral damages and exemplary damages in the amounts of P200,000
and P50,000, respectively, plus attorney’s fees of P100,000; appearance fee of P1,500 per hearing; litigation
expenses; and costs of suit. During trial, among the documents offered in evidence by RAMOS during the trial
on the merits was a document denominated as Sinumpaang Salaysay signed by RAMOS and Silvestre
Pascual, but not notarized. On the other hand, PASCUALs presented documentary evidence consisting of
acknowledgment receipts to prove the payments they had made.

RTC: Ruled In favor of the PASCUALs.

The transaction between the parties was actually a loan in the amount of P150,000, the payment of which was
secured by a mortgage of the property. It also found that the PASCUALs had made payments in the total sum
of P344,000, and that with interest at 7% per annum, the PASCUALs had overpaid the loan by P141,500.

RTC ON MR: Reversed its decision and ruled in favor of RAMOS

RAMOS moved for the reconsideration in which the PASCUALs did not oppose. RAMOS alleged that the trial
court erred in using an interest rate of 7% per annum in the computation of the total amount of obligation
because what was expressly stipulated in the Sinumpaang Salaysay was 7% per month. The total
interest due from 3 June 1987 to 3 April 1995 was P987,000. Deducting therefrom the interest payments
made in the sum of P344,000, the amount of P643,000 was still due as interest. Adding the latter to the
principal sum of P150,000, the total amount due from the PASCUALs as of 3 April 1995 was P793,000. It
noted that during trial, the PASCUALs never disputed the stipulated interest rate.

However, the court declared that the 7% per month interest is too burdensome and onerous. Invoking the
protective mantle of Article 24 of the Civil Code, which mandates the courts to be vigilant for the protection of a
party at a disadvantage due to his moral dependence, ignorance, indigence, mental weakness, tender age or
other handicap, the trial court unilaterally reduced the interest rate from 7% per month to 5% per month.
Thus, the interest due from 3 June 1987 to 3 April 1995 was P705,000. Deducting therefrom the
payments made by the PASCUALs in the amount of P344,000, the net interest due wasP361,000.
Adding thereto the loan principal of P150,000, the total amount due from the PASCUALs was P511,000.

9
CA: affirmed in toto the trial court’s Orders.
In the course of the trial, receipts were presented by the PASCUALs evidencing the payments they had made.
Taken in conjunction with the Sinumpaang Salaysay which specified the interest rate at 7% per month, a
mathematical computation readily leads to the conclusion that there is still a balance due from the
PASCUALs, even at a reduced interest rate of 5% interest per month.

ISSUE: WON PASCUALs are liable for 5% interest per month from 3 June 1987 to 3 April 1995

HELD: Ruled in favor of RAMOS.

PASCUALs, in invoking the decision in Medel v. Court of Appeals, are actually raising as issue the validity of
the stipulated interest rate. It must be stressed that they never raised as a defense or as basis for their
counterclaim the nullity of the stipulated interest. While overpayment was alleged in the Answer, no
ultimate facts which constituted the basis of the overpayment was alleged. In their pre-trial brief, the
PASCUALs made a long list of issues, but not one of them touched on the validity of the stipulated
interest rate. Their own evidence clearly shows that they have agreed on, and have in fact paid interest
at, the rate of 7% per month.

After the trial court sustained petitioners’ claim that their agreement with RAMOS was actually a loan with real
estate mortgage, the PASCUALs should not be allowed to turn their back on the stipulation in that
agreement to pay interest at the rate of 7% per month. The PASCUALs should accept not only the
favorable aspect of the court’s declaration that the document is actually an equitable mortgage but also the
necessary consequence of such declaration, that is, that interest on the loan as stipulated by the parties in that
same document should be paid. Besides, when RAMOS moved for a reconsideration of the 15 March 1995
Decision of the trial court pointing out that the interest rate to be used should be 7% per month, the
PASCUALs never lifted a finger to oppose the claim.

The ruling in Medel v. Court of Appeals is not applicable; because in that case, the excessiveness of the
stipulated interest at the rate of 5.5 % per month was put in issue by the defendants in the Answer.
Considering the variance in the factual circumstances of the Medel case and the instant case, the SC is not
prepared to apply the former lest it be construed that we can strike down anytime interest rates agreed
upon by parties in a loan transaction. The interest rate of 7% per month was voluntarily agreed upon by
RAMOS and the PASCUALs. There is nothing from the records and, in fact, there is no allegation showing
that PASCUALs were victims of fraud when they entered into the agreement with RAMOS. Neither is there a
showing that in their contractual relations with RAMOS, the PASCUALs were at a disadvantage on
account of their moral dependence, ignorance, mental weakness, tender age or other handicap, which
would entitle them to the vigilant protection of the courts as mandated by Article 24 of the Civil Code.

WHEREFORE, in view of all the foregoing, the petition is DENIED. The assailed decision of the Court of
Appeals in CA-G.R. CV No. 52848 is AFFIRMED in toto. Costs against petitioners. SO ORDERED.

10
No. 15
G.R. No. 160533 January 12, 2005
FIRST FIL-SIN LENDING CORPORATION, petitioner,
vs. GLORIA D. PADILLO, respondent.
D E C I S I O N: YNARES-SANTIAGO, J.:

PRINCIPLE: When the terms of the agreement are clear and explicit that they do not justify an attempt to
read into it any alleged intention of the parties, the terms are to be understood literally just as they appear
on the face of the contract. It is only in instances when the language of a contract is ambiguous or
obscure that courts ought to apply certain established rules of construction in order to ascertain the
supposed intent of the parties

FACTS:

On July 22, 1997, Gloria D. Padillo, PADILLO obtained a P500,000.00 loan from petitioner First Fil-Sin
Lending Corp., FIL-SIN. On September 7, 1997, PADILLO obtained another P500,000.00 loan from FIL-SIN.
In both instances, PADILLO executed a promissory note and disclosure statement. For the first loan,
PADILLO made 13 monthly interest payments of P22,500.00 each before she settled the P500,000.00
outstanding principal obligation on February 2, 1999. As regards the second loan, PADILLO made 11 monthly
interest payments of P25,000.00 each before paying the principal loan of P500,000.00 on February 2, 1999. In
sum, PADILLO paid a total of P792,500.00 for the first loan and P775,000.00 for the second loan.

On January 27, 2000, PADILLO filed an action for sum of money against herein FIL-SIN before the RTC of
Manila. Alleging that she only agreed to pay interest at the rates of 4.5% and 5% per annum, respectively, for
the two loans, and not 4.5% and 5% per month, PADILLO sought to recover the amounts she allegedly paid in
excess of her actual obligations.

RTC: Ruled in favor of FIL-SIN.

The lower court ordered PADILLO to pay FIL-SIN P311,125.00 with legal interest from February 3, 1999 until
fully paid plus 10% of the amount due as attorney’s fees and costs of the suit. The trial court ruled that by
issuing checks representing interest payments at 4.5% and 5% monthly interest rates, PADILLO is now
estopped from questioning the provisions of the promissory notes.

CA: Reversed the decision and ruled in favor of PADILLO.

CA ruled, based on the disclosure statements executed by PADILLO, the interest rates should be imposed on
a monthly basis but only for the 3-month term of the loan. Thereafter, the legal interest rate will apply. The CA
also found the penalty charges pegged at 1% per day of delay highly unconscionable as it would
translate to 365% per annum. Thus, it was reduced to 1% per month or 12% per annum.

ISSUE: WON the interest rate agreement was on a monthly or annual basis.

HELD: Ruled in favor of PADILLO.

Perusal of the promissory notes and the disclosure statements pertinent to the July 22, 1997 and September 7,
1997 loan obligations of PADILLO clearly and unambiguously provide for interest rates of 4.5% per annum and
5% per annum, respectively. Nowhere was it stated that the interest rates shall be applied on a monthly basis.
Thus, when the terms of the agreement are clear and explicit that they do not justify an attempt to read
into it any alleged intention of the parties, the terms are to be understood literally just as they appear
on the face of the contract. It is only in instances when the language of a contract is ambiguous or
obscure that courts ought to apply certain established rules of construction in order to ascertain the
supposed intent of the parties. However, these rules will not be used to make a new contract for the parties
or to rewrite the old one, even if the contract is inequitable or harsh. They are applied by the court merely to
resolve doubts and ambiguities within the framework of the agreement.

11
The lower court and the CA mistook the Loan Transactions Summary for the Disclosure Statement. The former
was prepared exclusively by petitioner and merely summarizes the payments made by respondent and the
income earned by petitioner. There was no mention of any interest rates and having been prepared
exclusively by petitioner, the same is self serving. On the contrary, the Disclosure Statements were
signed by both parties and categorically stated that interest rates were to be imposed annually, not
monthly.

WHEREFORE, in view of the foregoing, the October 16, 2003 decision of the Court of Appeals in CA-G.R.
CV No. 75183 is AFFIRMED with the MODIFICATION that the interest rates on the July 22, 1997 and
September 7, 1997 loan obligations of respondent Gloria D. Padillo from petitioner First Fil-Sin Lending
Corporation be imposed and computed on a per annum basis, and upon their respective maturities, the interest
rate of 12% per annum shall be imposed until full payment. In addition, the penalty at the rate of 12% per
annum shall be imposed on the outstanding obligations from date of default until full payment. SO ORDERED.

12
No. 16
G.R. No. 175139 April 18, 2012
HERMOJINA ESTORES, Petitioner,
vs. SPOUSES ARTURO and LAURA SUPANGAN, Respondents.
D E C I S I O N: DEL CASTILLO, J.:

PRINCIPLE: 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%)."

FACTS:
On October 3, 1993, petitioner Hermojina Estores, ESTORES and spouses Arturo and Laura Supangan,
SUPANGANs entered into a Conditional Deed of Sale5 whereby petitioner offered to sell, and SUPANGANs
offered to buy, a parcel of land covered by a Transfer Certificate of Title located at Naic, Cavite for the sum
ofP4.7 million.

In several provisions of the contract; ESTORES, must return the payment made by the buyer, SUPANGANs if
the conditions are not fulfilled, such as full and complete payment.

After almost seven years from the time of the execution of the contract and notwithstanding payment of
P3.5 million on the part of SUPANGANs, ESTORES still failed to comply with her obligation as expressly
provided in the contract. Hence, in a letter7 dated September 27, 2000, SUPANGANs demanded the return of
the amount of P3.5 million within 15 days from receipt of the letter. In reply, ESTORES acknowledged receipt
of the P3.5 million and promised to return the same within 120 days. SUPANGANs were amenable to the
proposal provided an interest of 12% compounded annually shall be imposed on the P3.5 million. When
ESTORES still failed to return the amount despite demand, SUPANGANs were constrained to file a Complaint
for sum of money before the RTC of Malabon against herein ESTORES as well as Roberto U. Arias, ARIAS,
who allegedly acted as ESTORES’s agent.

In their Answer with Counterclaim, ESTORES and ARIAS averred that they are willing to return 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 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.

RTC on Pre-Trial: noted that "the parties agreed that the principal amount of 3.5 million pesos should be
returned to SUPANGANs by ESTORES and the issue remaining is whether SUPANGANs are entitled to legal
interest thereon, damages and attorney’s fees.

RTC: Ruled in favor of SUPANGANs

The lower court found SUPANGANs to be entitled to interest but only at the rate of 6% per annum and not
12% as prayed by them.20 It also found respondent-spouses entitled to attorney’s fees as they were
compelled to litigate to protect their interest.

CA: Affirmed the RTC and ruled in favor of SUPANGANs

The RTC finding the imposition of 6% interest proper. However, the same shall start to run only from
September 27, 2000 when SUPANGANs formally demanded the return of their money and not from October
1993 when the contract was executed as held by the RTC. The CA also modified the RTC’s ruling as regards
the liability of ARIAS. It held that ARIAS could not be held solidarily liable with ESTORES because he merely
acted as agent of the latter.

ISSUE:

HELD: Sustained the CA and RTC, ruled in favor of SUPANGANs

13
Interest may be imposed even in the absence of stipulation in the contract.
It is proper to impose interest notwithstanding the absence of stipulation in the contract. Article 2210 of the
Civil Code expressly provides that "interest may, in the discretion of the court, be allowed upon damages
awarded for breach of contract." In this case, there is no question that ESTORES is legally obligated to
return the P3.5 million because of her failure to fulfill the obligation under the Conditional Deed of 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. ESTORES enjoyed the use of the money from the time it
was given to her until now. Thus, she is already in default of 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 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.

The contract involved in this case is admittedly not a loan but a Conditional Deed of Sale. However, the
contract provides that the seller, ESTORES, must return the payment made by the buyer, SUPANGANs if the
conditions are not fulfilled. There is no question that they have in fact, not been fulfilled as the seller ESTORES
has admitted this. Notwithstanding demand by the SUPANGANs, ESTORES has failed to return the money
and 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, the stipulation governing the return of the money is to be
considered as a forbearance of money which required payment of interest at the rate of 12%.

Considering the circumstances of the instant case, The SC finds SUPANGANs 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 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 toP50,000.00. SO ORDERED.

14
No. 17
G.R. No. 175490 September 17, 2009
ILEANA DR. MACALINAO, Petitioner,
vs. BANK OF THE PHILIPPINE ISLANDS, Respondent.
D E C I S I O N: VELASCO, JR., J.:

PRINCIPLE: 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

FACTS:

Ileana Macalinao, MACALINAO, was an approved cardholder of BPI Mastercard, one of the credit card
facilities of Bank of the Philippine Islands, BPI. MACALINAO made some purchases through the use of the
said credit card and defaulted in paying for said purchases. She subsequently received a letter dated January
5, 2004 from BPI, demanding payment of the amount of one hundred forty-one thousand five hundred eighteen
pesos and thirty-four centavos (PhP 141,518.34).

Under the Terms and Conditions Governing the Issuance and Use of the BPI Credit and BPI Mastercard, the
charges or balance thereof remaining unpaid after the payment due date indicated on the monthly Statement
of Accounts shall bear interest at the rate of 3% per month and an additional penalty fee equivalent to another
3% per month. For failure of MACALINAO to settle her obligations, BPI filed with the MeTC of Makati City a
complaint for a sum of money against her and her husband, Danilo SJ. Macalinao.

In said complaint, BPI prayed for the payment of the amount of one hundred fifty-four thousand six hundred
eight pesos and seventy-eight centavos (PhP 154,608.78) plus 3.25% finance charges and late payment
charges equivalent to 6% of the amount due from February 29, 2004 and an amount equivalent to 25% of the
total amount due as attorney’s fees, and of the cost of suit.

MeTC: Ruled in favor of BPI

It ordered the MACALINAOs to pay the amount of PhP 141,518.34 plus interest and penalty charges
of 2% per month

RTC: RTC affirmed in toto the decision of the MeTC; and ruled in favor of BPI
The sum of P141,518.34 adjudged by the trial court appeared to be the result of a recomputation at the
reduced rate of 2% per month. Note that the total amount sought by the BPI was P154,608.75 exclusive of
finance charge of 3.25% per month and late payment charge of 6% per month.

CA: AFFIRMED but MODIFIED the decision of the RTC; and ruled in favor of BPI
The CA held that the amount of PhP 141,518.34 (the amount sought to be satisfied in the demand letter of
respondent BPI) is clearly not the result of the re-computation at the reduced interest rate as previous higher
interest rates were already incorporated in the said amount. Thus, the said amount should not be made as
basis in computing the total obligation of MACALINAOs. Further, the CA also emphasized that BPI
should not compound the interest in the instant case absent a stipulation to that effect. The CA also
held, however, that the MeTC erred in modifying the amount of interest rate from 3% monthly to only 2%
considering that petitioner Macalinao freely availed herself of the credit card facility offered by BPI to
the general public. It explained that contracts of adhesion are not invalid per se and are not entirely
prohibited.

ISSUE:
WON the rate charged by the BPI should be used.
HELD: Ruled in favor of BPI but reduced the interest.

15
BPI originally imposed the interest and penalty charges at the rate of 9.25% (3.25% + 6%) per month or
111% per annum. This was declared as unconscionable by the lower courts for being clearly excessive,
and was thus reduced to 2% per month or 24% per annum. On appeal, the CA modified the rate of
interest and penalty charge and increased them to 3% per month or 36% per annum based on the
Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, which governs the
transaction between petitioner Macalinao and respondent BPI.

The Interest Rate and Penalty Charge of 3% Per Month or 36% Per Annum Should Be Reduced to 2%
Per Month or 24% Per Annum.

Indeed, in the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, there was a
stipulation on the 3% interest rate. Nevertheless, it should be noted that this is not the first time that this Court
has considered the interest rate of 36% per annum as excessive and unconscionable. (Chua vs. Timan:
interest rates of 7% and 5% per month must be equitably reduced to 1% per month or 12% per annum.
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)

Since the stipulation on the interest rate is void, it is as if there was no express contract thereon.
Hence, courts may reduce the interest rate as reason and equity demand. The same is true with respect
to the penalty charge. Notably, under the Terms and Conditions Governing the Issuance and Use of the BPI
Credit Card, it was also stated therein that BPI shall impose an additional penalty charge of 3% per month.
Pertinently, Article 1229 of the Civil Code states:

Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty
may also be reduced by the courts if it is iniquitous or unconscionable.

In exercising this power to determine what is iniquitous and unconscionable, courts must consider the
circumstances of each case since what may be iniquitous and unconscionable in one may be totally just and
equitable in another.

16
No. 18
G.R. No. 189871 August 13, 2013
DARIO NACAR, PETITIONER,
vs. GALLERY FRAMES AND/OR FELIPE BORDEY, JR., RESPONDENTS.
D E C I S I O N: PERALTA, J.:

PRINCIPLE: 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.
FACTS:
Petitioner Dario Nacar, NACAR, filed a complaint for constructive dismissal before the Arbitration Branch of the
National Labor Relations Commission (NLRC) against respondents Gallery Frames (GF) and/or Felipe Bordey,
Jr..

LA: Ruled in favor of NACAR. OCT 15, 1998

The LA found that NACAR was dismissed from employment without a valid or just cause. Thus, NACAR was
awarded backwages and separation pay in lieu of reinstatement in the amount of P158,919.92.

NLRC: Ruled in favor of NACAR.

CA: Ruled in favor of NACAR.
SC: Ruled in favor of NACAR; finding that there was no error made by the CA. Thus, the case was
referred back to the LA.

Few months later, NACAR filed a Motion for Correct Computation, praying that his backwages be computed
from the date of his dismissal on January 24, 1997 up to the finality of the Resolution of the Supreme Court on
May 27, 2002. Upon recomputation, the Computation and Examination Unit of the NLRC arrived at an updated
amount in the sum of P471,320.31.

Eventually, the LA issued a Writ of Execution, ordering the Sheriff to collect from respondents the total
amount of P471,320.31. However, GF filed a Motion to Quash Writ of Execution, arguing, among other
things, that since the Labor Arbiter awarded separation pay of P62,986.56 and limited backwages of
P95,933.36, no more recomputation is required to be made of the said awards. They claimed that after
the decision becomes final and executory, the same cannot be altered or amended anymore.

LA: Denied GF’s motion

NLRC: Ruled in favor of GF and ordered the recomputation of the judgment award.
Thus, the LA issued an Alias Writ of Execution, to satisfy the judgment award that was due to NACAR in the
amount of P147,560.19, which he eventually received.

Afterwards, NACAR then filed a Manifestation and Motion praying for the re-computation of the monetary
award to include the appropriate interests. The LA granted the motion but only up to P11,459.73; stating that, it
is the first decision that should be enforced considering that it was the one that became final and executory.
Furthermore, that since the decision states that the separation pay and backwages are computed only up to
the promulgation of the said decision, it is the amount of P158,919.92 that should be executed. Thus, since
petitioner already received P147,560.19, NACAR is only entitled to the balance of P11,459.73.

NLRC: Ruled in favor of GF

CA: Ruled in favor of GF
The CA said that since NACAR did not appeal the first LA decision, which became final and executory, a
belated correction thereof is no longer allowed. The CA stated that there is nothing left to be done except to
enforce the said judgment. Consequently, it can no longer be modified in any respect, except to correct clerical
errors or mistakes.

ISSUE:

17
  WON the reckoning point of computation was of the backwages and separation pay should be on the
date of the decision of SC, May 27, 2002, because such decision was final and executory; and
 WON NACAR is entitled to the payment of interest from the finality of the decision until full payment by
the respondents.

HELD: Ruled in favor of NACAR.

RE: RE-COMPUTATION
In the case of Session Delights Ice Cream and Fast Foods v. Court of Appeals; the SC ruled that: the question
is whether a re-computation in the course of execution of the labor arbiter's original computation of the awards
made, pegged as of the time the decision was rendered and confirmed with modification by a final CA decision,
is legally proper. The question is posed, given that the petitioner did not immediately pay the awards stated in
the original labor arbiter's decision; it delayed payment because it continued with the litigation until final
judgment at the CA level. A decision consists of 2 parts. The first is that part of the decision that cannot now
be disputed because it has been confirmed with finality. This is the finding of the illegality of the dismissal and
the awards of separation pay in lieu of reinstatement, backwages, attorney's fees, and legal interests. The
second part is the computation of the awards made. On its face, the computation the labor arbiter made
shows that it was time-bound as can be seen from the figures used in the computation. This part,
being merely a computation of what the first part of the decision established and declared, can, by its
nature, be re-computed. In this case, NACAR motioned for a prayer of recomputation in which was granted
and resulted to a higher amount.

RE: PAYMENT OF LEGAL INTEREST

In the case of Eastern Shipping Lines, Inc. v. Court of Appeals; the guidelines regarding the manner of
computing legal interest are:
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 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.

However, according to the Circular No. 905, 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. 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.

18
WHEREFORE, premises considered, the Decision dated September 23, 2008 of the Court of Appeals in CA-
G.R. SP No. 98591, and the Resolution dated October 9, 2009 are REVERSED and SET ASIDE.
Respondents are Ordered to Pay petitioner;

(1) backwages computed from the time petitioner was illegally dismissed on January 24, 1997 up
to May 27, 2002, when the Resolution of this Court in G.R. No. 151332 became final and
executory;

(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one month pay per
year of service; and

(3) interest of twelve percent (12%) per annum of the total monetary awards, computed from
May 27, 2002 to June 30, 2013 and six percent (6%) per annum from July 1, 2013 until their full
satisfaction.

The Labor Arbiter is hereby ORDERED to make another recomputation of the total monetary benefits
awarded and due to petitioner in accordance with this Decision.

SO ORDERED.

19
NO. 19
G.R. No. 212689 August 6, 2014
ECE REALTY and DEVELOPMENT, INC., Petitioner,
vs. HAYDYN HERNANDEZ, Respondent.
R E S O L U T I O N: REYES, J.:

PRINCIPLE:
 Since July 1, 2013 which is the effectivity date of Circular no 905, the rate of twelve percent (12%)
per annum from finality of the judgment until satisfaction has been brought back to six percent
(6%).
 Article 2209 of the New Civil Code provides that "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 percent per annum."

FACTS:
ECE and EMIR were engaged in condominium development and marketing, respectively, and sold
HERNANDEZ a 30-square meter condominium unit in the "Harrison Mansion". HERNANDEZ paid the
reservation fee of P35,000.00, and later on paid P104,063.65 to complete the downpayment. In the parties’
Contract to Sell, EMIR and ECE promised that said Unit would be ready for occupancy by December 31,
1999. However when December 31, 1999 came, ECE and EMIR, failed to deliver the unit; and
HERNANDEZ’s payment already accumulated to P452,551.65. Furthermore, HERNANDEZ, discovered that
the unit is only 26-sqm and not the agreed 30sqm. Thus, he asked for a corresponding reduction in the price
by P120,000.00, based on the price per sq m of P30,000.00. Instead, EMIR and ECE demanded that he settle
all his amortizations in arrears with interest. Sometime in 2005, the HERNANDEZ learned that EMIR and ECE
had sold the unit to a third party. This forced HERNANDEZ, to file a Complaint for specific performance,
with damages, against Emir Realty and Development Corporation (EMIR) and ECE Realty and Development
Incorporated (ECE) before the Housing and Land Use Regulatory Board Expanded National Capital Region
Field Office (HLURB-Regional Office).

HERNANDEZ, prayed that EMIR and ECE be ordered to accept his payment of the balance of the
price the unit, less P120,000.00, without interest; and to pay him moral damages ofP500,000.00,
actual damages of P100,000.00, exemplary damages of P100,000.00, and attorney’s fees
ofP50,000.00 plus P2,000.00 per appearance fee. If Unit 808 is no longer available, the
HERNANDEZ asked that EMIR and ECE reimburse him the amount of P452,551.65 he paid, plus
legal interest. EMIR and ECE filed an Answer with Counterclaim stating that EMIR should be dropped
as defendant because it has no contractual relations and that; HERNANDEZ unjustifiably refused to
accept the turn-over of the unit, that he was duly given a Grace Period Notice that he was in arrears in his
monthly amortizations, but the HERNANDEZ let the said period lapse without settling his past-due
amortizations. Thus, ECE was compelled to cancel his contract to sell.

HLURB: Ruled in favor of HERNANDEZ.

It ordered EMIR and ECE to reimburse the HERNANDEZ the amount ofP452,551.65, plus legal interest, from
the filing of the complaint, and to pay the respondent P50,000.00 as moral damages, P50,000.00 as attorney’s
fees, and P50,000.00 as exemplary damage with 12% legal interest.

HLURB COMMISIONERS: dropped EMIR as a defendant.

CA: Ruled in favor of HERNANDEZ
The CA found that HERNANDEZ was duly notified ECE that he was suspending his subsequent amortizations
because of the delayed delivery of the Unit. The CA then ruled that under P.D. No. 957, when the owner of the
subdivision or condominium fails to develop the same according to the plan within the period agreed, the
buyer, after notifying the owner, may desist from paying the balance, and may demand the reimbursement of
all that he has paid. ECE failed to deliver the Unit on or before December 31, 1999, even as the said unit
measured only 26 sq m, not 30 sqm as agreed.

20
ISSUE: WON the legal interest to be applied is 6% or 12%
HELD:
Article 2209 of the New Civil Code provides that "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 percent per annum."
There is no doubt that ECE incurred in delay in delivering the subject condominium unit, for which reason the
trial court was justified in awarding interest to the respondent from the filing of his complaint. There being no
stipulation as to interest, under Article 2209 the imposable rate is six percent (6%) by way of damages.

To clarify, since July 1, 2013 which is the effectivity date of Circular no 905, the rate of twelve percent
(12%) per annum from finality of the judgment until satisfaction has been brought back to six percent
(6%).

WHEREFORE, the decision of the Court of Appeals in CA-G.R. SP No. 120738 is AFFIRMED with
MODIFICATION. Petitioner ECE Realty and Development, Inc. is hereby ordered to pay respondent Haydyn
Hernandez the amount of P452,551.65 representing the total amount he paid to petitioner ECE Realty and
Development Incorporated, plus six percent (6%) interest per annum from September 7, 2006 until finality
hereof by way of actual and compensatory damages. From finality until full satisfaction, the total amount
due now compounded with interest due from September 7, 2006 up to finality, shall likewise earn interest at six
percent (6%) per annum until fully paid. SO ORDERED.

21
NO. 20 –
[G.R. No. 88880. April 30, 1991.]
PHILIPPINE NATIONAL BANK, Petitioner,
v. THE HON. COURT OF APPEALS and AMBROSIO PADILLA, Respondents.
D E C I S I O N: GRIÑO-AQUINO, J.:

PRINCIPLE:

FACT:
In July 1982, the PADILLA applied for, and was granted by PNB, a credit line of 321.8 million, secured by a
real estate mortgage, for a term of two (2) years, with 18% interest per annum. PADILLA executed in favor of
the PNB a Credit Agreement, two (2) promissory notes in the amount of P900,000.00 each, and a Real Estate
Mortgage Contract.

The Credit Agreement states that the borrowers agreed to be bound by the rules and regulations of the central
bank and the current general policies of the Bank and those which the Bank may adopt in the future; that
promptly upon receipt of a written request from the Bank, the Borrowers shall execute and deliver such
documents and instruments, in form and substance satisfactory to the Bank, in order to effectuate or otherwise
comply with such rules, regulations and policies.

The Promissory Notes, in turn, uniformly authorized the PNB to increase the stipulated 18% interest per
annum "within the limits allowed by law at any time depending on whatever policy it [PNB] may adopt
in the future; Provided, that, the interest rate on this note shall be correspondingly decreased in the
event that the applicable maximum interest rate is reduced by law or by the Monetary Board."

The Real Estate Mortgage Contract likewise provided that:

The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount
which may have been advanced by the MORTGAGEE, shall be subject during the life of this contract to such
an increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its
debtors

On June 20, 1984, PNB informed the PADILLA that (1) his credit line of P1.8 million "will expire on July 4,
1984," (2)" if renewal of the line for another year is intended, please submit soonest possible your
request," and (3) the "present policy of the Bank requires at least 30% reduction of principal before your
line can be renewed." Complying, PADILLA on June 25, 1984, paid PNB P540,000 00 (30% of P1.8 million)
and requested that "the balance of P1,260,000.00 be renewed for another period of two (2) years under the
same arrangement" and that "the increase of the interest rate of my mortgage loan be from 18% to 21%.
PADILLA paid PNB P360,000.00. and thereafter reiterated in writing his request that "the increase in the rate
of interest from 18% be fixed at 21% of 24%. Few days after PADILLA further paid PNB P150,000.00. In a
letter dated August 24, 1984 to PNB, PADILLA announced that he would "continue making further payments,
and instead of a ‘loan of more than one year,’ I shall pay the said loan before the lapse of one year or before
July 4, 1985. . . . I reiterate my request that the increase of my rate of interest from 18% ‘be fixed at 21% or
24%.’"

On September 12, 1984, PADILLA paid PNB P160,000.00. In letters dated September 12, 1984 and
September 13, 1984, PNB informed PADILLA that "the interest rate on your outstanding line/loan is
hereby adjusted from 32% p.a. to 41% p.a. (35% prime rate + 6%) effective September 6, 1984;" and
further explained "why we can not grant your request for a lower rate of 21% or 24%."
PADILLA protested to the increase to the interest rates, thus he reiterated his request that the interest rate
should not be increased from 18% to 32% and from 32% to 41%. He also attached (as payment) a check for
P140,000.00. Like rubbing salt on the private respondent’s wound, the petitioner informed private respondent

22
on October 29, 1984, that "the interest rate on your outstanding line/loan is hereby adjusted from 41% p.a. to
48% p.a. (42% prime rate plus 6% spread) effective 25 October 1984." In November 1984, PADILLA paid
PNB P50,000.00 thus reducing his principal loan obligation to P300,000.00.

PADILLA filed in the Regional Trial Court of Manila a complaint against PNB praying that judgment be
rendered, among others, Declaring that the unilateral increase of interest rates from 18% to 32%, then to 41%
and again to 48% are illegal, not valid nor binding on plaintiff, and that an adjustment of his interest rate from
18% to 24% is reasonable, fair and just.

RTC: Ruled in favor of PNB; increases of interest were properly made.

CA: Ruled in favor of PADILLA;

ISSUE: WON the bank, within the term of the loan which it granted to the private respondent, may unilaterally
change or increase the interest rate stipulated therein at will and as often as it pleased.

HELD: Ruled in favor of PADILLA

Although Section 2, PD. No. 116 of January 29, 1973, authorizes the Monetary Board to prescribe the
maximum rate or rates of interest for loans or renewal thereof and to change such rate or rates
whenever warranted by prevailing economic and social conditions, it expressly provides that "such
changes shall not be made oftener than once every twelve months."

PNB, over the objection of the PADILLA, and without authority from the Monetary Board, within a period of
only four (4) months, increased the 18% interest rate on the PADILLA loan obligation three (3) times: (a) to
32% in July 1984; (b) to 41% in October 1984; and (c) to 48% in November 1984. Those increases were null
and void, for if the Monetary Board itself was not authorized to make such changes oftener than once a
year, even less so may a bank which is subordinate to the Board.

CA, while the PADILLA did agree in the Deed of Real Estate Mortgage that the interest rate may be increased
during the life of the contract "to such increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe" or "within the limits allowed by law" (Promissory Notes, Ex’s. 2, 3, and 4), no
law was ever passed in July to November 1984 increasing the interest rates on loans or renewals
thereof to 32%, 41% and 48% (per annum), and no documents were executed and delivered by the
debtor to effectuate the increases.

Violating PD. 116, the unilateral action of the PNB in increasing the interest rate on the private respondent’s
loan, violated the mutuality of contracts ordained in Article 1308 of the Civil Code: "ART. 1308. The contract
must bind both contracting parties; its validity or compliance cannot be left to the will of one of them."
PNB’S successive increases of the interest rate on the private respondent’s loan, over the latter’s protest, were
arbitrary as they violated an express provision of the Credit Agreement (Exh. 1) Section 9.01 that its terms
"may be amended only by an instrument in writing signed by the party to be bound as burdened by such
amendment." The increases imposed by PNB also contravene Art. 1956 of the Civil Code which provides that
"no interest shall be due unless it has been expressly stipulated in writing." The debtor herein never agreed in
writing to pay the interest increases fixed by the PNB beyond 24% per annum, hence, he is not bound to pay a
higher rate than that. That an increase in the interest rate from 18% to 48% within a period of four (4) months is
excessive, as found by the Court of Appeals, is indisputable.

WHEREFORE, finding no reversible error in the decision of the Court of Appeals in CA-G.R. CV No.
09791, the Court resolved to deny the petition for review for lack of merit, with costs against the petitioner.SO
ORDERED.

23
NO. 21
G.R. No. 101771 December 17, 1996
SPOUSES MARIANO and GILDA FLORENDO, petitioners,
vs.COURT OF APPEALS and LAND BANK OF THE PHILIPPINES, respondents.
PANGANIBAN, J.:p

PRINCIPLE:
FACTS:
GILDA FLORENDO was an employee of LAND BANK from May 17, 1976 until August 16, 1984 when she
voluntarily resigned. However, before her resignation, she applied for a housing loan of P148,000.00, payable
within 25 years from LAND BANK’s Provident Fund on July 20, 1983; thus, the FLORENDOs and the LAND
BANK executed a Housing Loan Agreement. The FLORENDOs also executed a Real Estate Mortgage
supported by a Promissory Note in favor of LAND BANK.

Thereafter, a Memorandum Circular within LAND BANK was implemented resulting to an increase in the
interest rate on the FLORENDOs’ loan from 9% per annum to 17%. Few months later, the bank informed the
spouses through a letter with the attached copy of the Memorandum Circular and their Statement of Account.

The FLORENDOs protested the increase. However, the bank kept on demanding that the spouses pay the
increased interest or the new monthly installments based on the increased interest rate. The FLORENDOs
vehemently maintained that the said increase is unlawful and unjustifiable. Because of LAND BANK’s repeated
demands, the spouses were forced to file a suit for Injunction and Damages.

As a defense, LAND BANK relied on its escalation clause in the Housing Loan Agreement and the Real Estate
Mortgage which provides that:

for as long as the loan or any portion thereof or any sum that may be due and payable under the
said loan agreement remains outstanding, the borrower shall – comply with the rules and regulation of
the lender, LAND BANK; as well as those rules and regulation by the Central Bank of the Philippines.

- And –

The rate of interest charged on the obligation secured by this mortgage., shall be subject, during
the life of this contract, to such an increase/decrease in accordance with prevailing rules, regulations
and circulars of the Central Bank of the Philippines as the Provident Fund Board of Trustees of the
Mortgagee may prescribe for its debtors and subject to the condition that the increase/decrease shall
only take effect on the date of effectivity of said increase/decrease and shall only apply to the remaining
balance of the loan.

RTC:
The trial court held that the bank was vested with authority to increase the interest rate (and the corresponding
monthly amortizations) pursuant to said escalation provisions in the housing loan agreement and the mortgage
contract.

CA: affirmed the RTC decision

A contract is binding on the parties no matter that a provision thereof later proves onerous and which on
hindsight, a party feels he should not have agreed to in the first place.

ISSUE: WON LAND BANK bank have a valid and legal basis to impose an increased interest rate on the
FLORENDOs housing loan

HELD: Ruled in favor of the FLORENDOs

The Housing Loan Agreement does not have an escalation clause as it does not make any reference to
increases or decreases in the interest rate on loans; however, the Mortgage contract has a clearly and
indubitably escalation provision. Therefore, the parties were and are bound by the said stipulation.

24
In the case at bar, the loan was perfected on July 20, 1983. PD No. 116 became effective on January 29,
1973. CB Circular No. 416 was issued on July 29, 1974. CB Circ. 504 was issued February 6, 1976. CB Circ.
706 was issued December 1, 1979. CB Circ. 905, lifting any interest rate ceiling prescribed under or pursuant
to the Usury Law, as amended, was promulgated in 1982. These and other relevant CB issuances had
already come into existence prior to the perfection of the housing loan agreement and mortgage
contract, and thus it may be said that these regulations had been taken into consideration by the
contracting parties when they first entered into their loan contract. In light of the CB issuances in force at
that time, LAND BANK was fully aware that it could have imposed an interest rate higher than 9% per annum
rate for the housing loans of its employees, but it did not. In the subject loan, the LAND BANK knowingly
agreed that the interest rate on petitioners' loan shall remain at 9% p.a. unless a CB issuance is passed
authorizing an increase (or decrease) in the rate on such employee loans and the Provident Fund Board of
Trustees acts accordingly. Thus, as far as the parties were concerned, all other onerous factors, such as
employee resignations, which could have been used to trigger an application of the escalation clause
were considered barred or waived. If the intention were otherwise, they — especially LAND BANK—
should have included such factors in their loan agreement.

On the other hand, it will not be amiss to point out that the unilateral determination and imposition of
increased interest rates by the herein respondent bank is obviously violative of the principle of
mutuality of contracts ordained in Article 1308 of the Civil Code.

The LAND BANK tried to sidestep this difficulty by averring that Gilda Florendo as a former bank employee
was very knowledgeable concerning respondent bank's lending rates and procedures, and therefore, the
FLORENDOs were "on an equal footing" with LAND BANK as far as the subject loan contract was concerned.
That may have been true insofar as entering into the original loan agreement and mortgage contract
was concerned. However, that does not hold true when it comes to the determination and imposition of
escalated rates of interest as unilaterally provided in the ManCom Resolution, where she had no voice
at all in its preparation and application.

Let it be clear that this Court understands LAND BANK’s position that the concessional interest rate was really
intended as a means to remunerate its employees and thus an escalation due to resignation would have been
a valid stipulation. But no such stipulation was in fact made, and thus the escalation provision could not be
legally applied and enforced as against the FLORENDOs.

WHEREFORE, the petition is hereby GRANTED. The Court hereby REVERSES and SETS ASIDE the
challenged Decision of the Court of Appeals. The interest rate on the subject housing loan remains at nine (9)
percent per annum and the monthly amortization at P1,248.72. SO ORDERED.

25
NO. 22
G.R. No. 187678 April 10, 2013
SPOUSES IGNACIO F. JUICO and ALICE P. JUICO, Petitioners,
vs. CHINA BANKING CORPORATION, Respondent.
D E C I S I O N: VILLARAMA, JR., J.:

PRINCIPLE:
 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 weighted 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.

 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

FACTS:
Spouses Ignacio F. Juico and Alice P. Juico JUICOs obtained a loan from China Banking Corporation, CHINA
BANK, as supported by two Promissory Notes both dated October 6, 1998 for the sums of P6,216,000 and ₱4,
139,000, respectively. The loan was secured by a Real Estate Mortgage (REM) over JUICOs’ property located
in White Plains, Quezon City. When JUICOs failed to pay the monthly amortizations due, CHINA BANK
demanded the full payment of the outstanding balance with accrued monthly interests.

On September 5, 2000, JUICOs received the bank’s last demand letter dated August 29, 2000. As of February
23, 2001, the amount due on the two promissory notes totaled ₱19,201,776.63 representing the principal,
interests, penalties and attorney’s fees. On the same day, the mortgaged property was sold at public auction,
with CHINA BANK as highest bidder for the amount of ₱10,300,000. On May 8, 2001, JUICOs received a
demand letter dated May 2, 2001 from respondent for the payment of ₱8,901,776.63, the amount of deficiency
after applying the proceeds of the foreclosure sale to the mortgage debt. As its demand remained unheeded,
CHINA BANK filed a collection suit in the trial court. In its Complaint, the bank prayed that judgment be
rendered ordering the JUICOs to pay jointly and severally: (1) ₱8,901,776.63 representing the amount of
deficiency, plus interests at the legal rate, from February 23, 2001 until fully paid; (2) an additional amount
equivalent to 1/10 of 1% per day of the total amount, until fully paid, as penalty; (3) an amount equivalent to
10% of the foregoing amounts as attorney’s fees; and (4) expenses of litigation and costs of suit.

RTC: Ruled in favor of CHINA BANK

The trial court agreed with CHINA BANK that when the mortgaged property was sold at public auction on
February 23, 2001 for ₱10,300,000 there remained a balance of ₱8,901,776.63 since before foreclosure, the
total amount due on the two promissory notes aggregated to ₱19,201,776.63 inclusive of principal, interests,
penalties and attorney’s fees. It ruled that the amount realized at the auction sale was applied to the
interest, conformably with Article 1253 of the Civil Code which provides that if the debt produces
interest, payment of the principal shall not be deemed to have been made until the interests have been
covered. This being the case, petitioners’ principal obligation subsists but at a reduced amount of
₱8,901,776.63. The trial court further held that MR JUICO’s claim that he signed the promissory notes in blank
cannot negate or mitigate his liability since he admitted reading the promissory notes before signing them. It
also ruled that considering the substantial amount involved, it is unbelievable that JUICOs threw all caution to
the wind and simply signed the documents without reading and understanding the contents thereof. It noted
that the promissory notes, including the terms and conditions, are pro forma and what appears to have been
left in blank were the promissory note number, date of the instrument, due date, amount of loan, and condition

26
that interest will be at the prevailing rates. All of these details, the trial court added, were within the knowledge
of the JUICOs.

CA: Affirmed the trial court.

The CA recognized CHINA BANK’s right to claim the deficiency from the debtor where the proceeds of the sale
in an extrajudicial foreclosure of mortgage are insufficient to cover the amount of the debt. Also, it found as
valid the stipulation in the promissory notes that interest will be based on the prevailing rate. It noted that the
parties agreed on the interest rate which was not unilaterally imposed by the bank but was the rate offered
daily by all commercial banks as approved by the Monetary Board. Having signed the promissory notes, the
CA ruled that JUICOs are bound by the stipulations contained therein.

ISSUE: whether the interest rates imposed upon them by respondent are valid

HELD: Partly meritorious

The principle of mutuality of contracts is expressed in Article 1308 of the Civil Code, which provides:
Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the
will of one of them. Article 1956 of the Civil Code likewise ordains that "no interest shall be due unless it
has been expressly stipulated in writing."

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 weighted 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.

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.24 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. It is now settled that an escalation clause is void where the creditor unilaterally
determines and imposes an increase in the stipulated rate of interest without the express conformity of the
debtor. Such unbridled right given to creditors to adjust the interest independently and upwardly would
completely take away from the debtors the right to assent to an important modification in their agreement and
would also negate the element of mutuality in their contracts. While a ceiling on interest rates under the Usury
Law was already lifted under Central Bank Circular No. 905, nothing therein "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."

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. In the absence of consent on the part of the petitioners to the modifications in
the interest rates, the adjusted rates cannot bind them. Hence, we consider as invalid the interest rates in
excess of 15%, the rate charged for the first year.

WHEREFORE, the petition for review on certiorari is PARTLY GRANTED. The February 20, 2009 · Decision
and April 27, 2009 Resolution of the Court of Appeals in CA G.R. CV No. 80338 are hereby MODIFIED.
Spouses Juico are hereby ORDERED to pay jointly and severally China Bank ₱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. No pronouncement as to costs. SO ORDERED.

27
23 – DEPOSIT; 1962

NO. 24 - DEPOSIT; 1962

G.R. No. L-66826 August 19, 1988
BANK OF THE PHILIPPINE ISLANDS, petitioner,
vs. THE INTERMEDIATE APPELLATE COURT and ZSHORNACK respondents.
CORTES, J.:

PRINCIPLE:
FACTS:
The original parties to this case were Rizaldy T. Zshornack and the Commercial Bank and Trust Company of
the Philippines [hereafter referred to as "COMTRUST." In 1980, the Bank of the Philippine Islands, BPI,
absorbed COMTRUST through a corporate merger, and was substituted as party to the case. Zshornack
initiated proceedings on June 28,1976 by filing in the Court of First Instance of Rizal — Caloocan City a
complaint against COMTRUST alleging four causes of action. Except for the third cause of action, the CFI
ruled in favor of Zshornack. The bank appealed to the Intermediate Appellate Court which modified the
CFI decision absolving the bank from liability on the fourth cause of action.

ISSUE:

HELD:

On October 27, 1975, an application for a dollar draft was accomplished by Virgilio V. Garcia, Assistant
Branch Manager of COMTRUST Quezon City, payable to a certain Leovigilda D. Dizon in the amount of
$1,000.00.

In the application, Garcia indicated that the amount was to be charged to Dollar Savings Acct., of the
Zshornacks; the charges for commission, documentary stamp tax and others totalling P17.46 were to be
charged to Current Acct., again, the current account of the Zshornacks. There was no indication of the name of
the purchaser of the dollar draft.

On the same date, October 27,1975, COMTRUST, under the signature of Virgilio V. Garcia, issued a check
payable to the order of Leovigilda D. Dizon in the sum of US $1,000 drawn on the Chase Manhattan Bank,
New York, with an indication that it was to be charged to Dollar Savings Acct. When Zshornack noticed the
withdrawal of US$1,000.00 from his account, he demanded an explanation from the bank.

In answer, COMTRUST claimed that the peso value of the withdrawal was given to Atty. Ernesto
Zshornack, Jr., brother of Rizaldy, on October 27, 1975 when he (Ernesto) encashed with COMTRUST a
cashier's check for P8,450.00 issued by the Manila Banking Corporation payable to Ernesto.

Upon consideration of the foregoing facts, this Court finds no reason to disturb the ruling of both the trial court
and the Appellate Court on the first cause of action. PNB must be held liable for the unauthorized withdrawal of
US$1,000.00 from private respondent's dollar account. In its desperate attempt to justify its act of
withdrawing from its depositor's savings account, the bank has adopted inconsistent theories. First, it still
maintains that the peso value of the amount withdrawn was given to Atty. Ernesto Zshornack, Jr. when the
latter encashed the Manilabank Cashier's Check. At the same time, the bank claims that the withdrawal was
made pursuant to an agreement where Zshornack allegedly authorized the bank to withdraw from his dollar
savings account such amount which, when converted to pesos, would be needed to fund his peso current
account. If indeed the peso equivalent of the amount withdrawn from the dollar account was credited to the
peso current account, why did the bank still have to pay Ernesto?

28
At any rate, both explanations are unavailing. With regard to the first explanation, petitioner bank has not
shown how the transaction involving the cashier's check is related to the transaction involving the dollar draft in
favor of Dizon financed by the withdrawal from Rizaldy's dollar account. The two transactions appear entirely
independent of each other. Moreover, Ernesto Zshornack, Jr., possesses a personality distinct and separate
from Rizaldy Zshornack. Payment made to Ernesto cannot be considered payment to Rizaldy.
As to the second explanation, even if we assume that there was such an agreement, the evidence do not show
that the withdrawal was made pursuant to it. Instead, the record reveals that the amount withdrawn was used
to finance a dollar draft in favor of Leovigilda D. Dizon, and not to fund the current account of the Zshornacks.
There is no proof whatsoever that peso Current Account No. 210-465-29 was ever credited with the peso
equivalent of the US$1,000.00 withdrawn on October 27, 1975 from Dollar Savings Account No. 25-4109.

WHEREFORE, the decision appealed from is hereby MODIFIED. Petitioner is ordered to restore to the dollar
savings account of private respondent the amount of US$1,000.00 as of October 27, 1975 to earn interest at
the rate fixed by the bank for dollar savings deposits. Petitioner is further ordered to pay private respondent the
amount of P8,000.00 as damages. The other causes of action of private respondent are ordered dismissed.
SO ORDERED.

29