Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 173227               January 20, 2009

SEBASTIAN SIGA-AN, Petitioner,
vs.
ALICIA VILLANUEVA, Respondent.

DECISION

CHICO-NAZARIO, J.:

Before Us is a Petition1 for Review on Certiorari under Rule 45 of the Rules of Court seeking to set
aside the Decision,2 dated 16 December 2005, and Resolution,3 dated 19 June 2006 of the Court of
Appeals in CA-G.R. CV No. 71814, which affirmed in toto the Decision,4 dated 26 January 2001, of
the Las Pinas City Regional Trial Court, Branch 255, in Civil Case No. LP-98-0068.

The facts gathered from the records are as follows:

On 30 March 1998, respondent Alicia Villanueva filed a complaint 5 for sum of money against
petitioner Sebastian Siga-an before the Las Pinas City Regional Trial Court (RTC), Branch 255,
docketed as Civil Case No. LP-98-0068. Respondent alleged that she was a businesswoman
engaged in supplying office materials and equipments to the Philippine Navy Office (PNO) located at
Fort Bonifacio, Taguig City, while petitioner was a military officer and comptroller of the PNO from
1991 to 1996.

Respondent claimed that sometime in 1992, petitioner approached her inside the PNO and offered
to loan her the amount of ₱540,000.00. Since she needed capital for her business transactions with
the PNO, she accepted petitioner’s proposal. The loan agreement was not reduced in writing. Also,
there was no stipulation as to the payment of interest for the loan. 6

On 31 August 1993, respondent issued a check worth ₱500,000.00 to petitioner as partial payment
of the loan. On 31 October 1993, she issued another check in the amount of ₱200,000.00 to
petitioner as payment of the remaining balance of the loan. Petitioner told her that since she paid a
total amount of ₱700,000.00 for the ₱540,000.00 worth of loan, the excess amount of ₱160,000.00
would be applied as interest for the loan. Not satisfied with the amount applied as interest, petitioner
pestered her to pay additional interest. Petitioner threatened to block or disapprove her transactions
with the PNO if she would not comply with his demand. As all her transactions with the PNO were
subject to the approval of petitioner as comptroller of the PNO, and fearing that petitioner might
block or unduly influence the payment of her vouchers in the PNO, she conceded. Thus, she paid
additional amounts in cash and checks as interests for the loan. She asked petitioner for receipt for
the payments but petitioner told her that it was not necessary as there was mutual trust and
confidence between them. According to her computation, the total amount she paid to petitioner for
the loan and interest accumulated to ₱1,200,000.00. 7

Thereafter, respondent consulted a lawyer regarding the propriety of paying interest on the loan
despite absence of agreement to that effect. Her lawyer told her that petitioner could not validly
collect interest on the loan because there was no agreement between her and petitioner regarding
payment of interest. Since she paid petitioner a total amount of ₱1,200,000.00 for the ₱540,000.00
worth of loan, and upon being advised by her lawyer that she made overpayment to petitioner, she
sent a demand letter to petitioner asking for the return of the excess amount of ₱660,000.00.
Petitioner, despite receipt of the demand letter, ignored her claim for reimbursement. 8

Respondent prayed that the RTC render judgment ordering petitioner to pay respondent (1)
₱660,000.00 plus legal interest from the time of demand; (2) ₱300,000.00 as moral damages; (3)
₱50,000.00 as exemplary damages; and (4) an amount equivalent to 25% of ₱660,000.00 as
attorney’s fees.9

In his answer10 to the complaint, petitioner denied that he offered a loan to respondent. He averred
that in 1992, respondent approached and asked him if he could grant her a loan, as she needed
money to finance her business venture with the PNO. At first, he was reluctant to deal with
respondent, because the latter had a spotty record as a supplier of the PNO. However, since
respondent was an acquaintance of his officemate, he agreed to grant her a loan. Respondent paid
the loan in full.11

Subsequently, respondent again asked him to give her a loan. As respondent had been able to pay
the previous loan in full, he agreed to grant her another loan. Later, respondent requested him to
restructure the payment of the loan because she could not give full payment on the due date. He
acceded to her request. Thereafter, respondent pleaded for another restructuring of the payment of
the loan. This time he rejected her plea. Thus, respondent proposed to execute a promissory note
wherein she would acknowledge her obligation to him, inclusive of interest, and that she would issue
several postdated checks to guarantee the payment of her obligation. Upon his approval of
respondent’s request for restructuring of the loan, respondent executed a promissory note dated 12
September 1994 wherein she admitted having borrowed an amount of ₱1,240,000.00, inclusive of
interest, from petitioner and that she would pay said amount in March 1995. Respondent also issued
to him six postdated checks amounting to ₱1,240,000.00 as guarantee of compliance with her
obligation. Subsequently, he presented the six checks for encashment but only one check was
honored. He demanded that respondent settle her obligation, but the latter failed to do so. Hence, he
filed criminal cases for Violation of the Bouncing Checks Law (Batas Pambansa Blg. 22) against
respondent. The cases were assigned to the Metropolitan Trial Court of Makati City, Branch 65
(MeTC).12

Petitioner insisted that there was no overpayment because respondent admitted in the latter’s
promissory note that her monetary obligation as of 12 September 1994 amounted to ₱1,240,000.00
inclusive of interests. He argued that respondent was already estopped from complaining that she
should not have paid any interest, because she was given several times to settle her obligation but
failed to do so. He maintained that to rule in favor of respondent is tantamount to concluding that the
loan was given interest-free. Based on the foregoing averments, he asked the RTC to dismiss
respondent’s complaint.

After trial, the RTC rendered a Decision on 26 January 2001 holding that respondent made an
overpayment of her loan obligation to petitioner and that the latter should refund the excess amount
to the former. It ratiocinated that respondent’s obligation was only to pay the loaned amount of
₱540,000.00, and that the alleged interests due should not be included in the computation of
respondent’s total monetary debt because there was no agreement between them regarding
payment of interest. It concluded that since respondent made an excess payment to petitioner in the
amount of ₱660,000.00 through mistake, petitioner should return the said amount to respondent
pursuant to the principle of solutio indebiti.13
The RTC also ruled that petitioner should pay moral damages for the sleepless nights and wounded
feelings experienced by respondent. Further, petitioner should pay exemplary damages by way of
example or correction for the public good, plus attorney’s fees and costs of suit.

The dispositive portion of the RTC Decision reads:

WHEREFORE, in view of the foregoing evidence and in the light of the provisions of law and
jurisprudence on the matter, judgment is hereby rendered in favor of the plaintiff and against the
defendant as follows:

(1) Ordering defendant to pay plaintiff the amount of ₱660,000.00 plus legal interest of 12%
per annum computed from 3 March 1998 until the amount is paid in full;

(2) Ordering defendant to pay plaintiff the amount of ₱300,000.00 as moral damages;

(3) Ordering defendant to pay plaintiff the amount of ₱50,000.00 as exemplary damages;

(4) Ordering defendant to pay plaintiff the amount equivalent to 25% of ₱660,000.00 as
attorney’s fees; and

(5) Ordering defendant to pay the costs of suit.14

Petitioner appealed to the Court of Appeals. On 16 December 2005, the appellate court promulgated
its Decision affirming in toto the RTC Decision, thus:

WHEREFORE, the foregoing considered, the instant appeal is hereby DENIED and the assailed
decision [is] AFFIRMED in toto.15

Petitioner filed a motion for reconsideration of the appellate court’s decision but this was
denied.16 Hence, petitioner lodged the instant petition before us assigning the following errors:

I.

THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO INTEREST WAS DUE
TO PETITIONER;

II.

THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE PRINCIPLE OF SOLUTIO
INDEBITI.17

Interest is a compensation fixed by the parties for the use or forbearance of money. This is referred
to as monetary interest. Interest may also be imposed by law or by courts as penalty or indemnity for
damages. This is called compensatory interest.18 The right to interest arises only by virtue of a
contract or by virtue of damages for delay or failure to pay the principal loan on which interest is
demanded.19

Article 1956 of the Civil Code, which refers to monetary interest, 20 specifically mandates that no
interest shall be due unless it has been expressly stipulated in writing. As can be gleaned from the
foregoing provision, payment of monetary interest is allowed only if: (1) there was an express
stipulation for the payment of interest; and (2) the agreement for the payment of interest was
reduced in writing. The concurrence of the two conditions is required for the payment of monetary
interest. Thus, we have held that collection of interest without any stipulation therefor in writing is
prohibited by law.21

It appears that petitioner and respondent did not agree on the payment of interest for the loan.
Neither was there convincing proof of written agreement between the two regarding the payment of
interest. Respondent testified that although she accepted petitioner’s offer of loan amounting to
₱540,000.00, there was, nonetheless, no verbal or written agreement for her to pay interest on the
loan.22

Petitioner presented a handwritten promissory note dated 12 September 1994 23 wherein respondent
purportedly admitted owing petitioner "capital and interest." Respondent, however, explained that it
was petitioner who made a promissory note and she was told to copy it in her own handwriting; that
all her transactions with the PNO were subject to the approval of petitioner as comptroller of the
PNO; that petitioner threatened to disapprove her transactions with the PNO if she would not pay
interest; that being unaware of the law on interest and fearing that petitioner would make good of his
threats if she would not obey his instruction to copy the promissory note, she copied the promissory
note in her own handwriting; and that such was the same promissory note presented by petitioner as
alleged proof of their written agreement on interest. 24 Petitioner did not rebut the foregoing testimony.
It is evident that respondent did not really consent to the payment of interest for the loan and that
she was merely tricked and coerced by petitioner to pay interest. Hence, it cannot be gainfully said
that such promissory note pertains to an express stipulation of interest or written agreement of
interest on the loan between petitioner and respondent.

Petitioner, nevertheless, claims that both the RTC and the Court of Appeals found that he and
respondent agreed on the payment of 7% rate of interest on the loan; that the agreed 7% rate of
interest was duly admitted by respondent in her testimony in the Batas Pambansa Blg. 22 cases he
filed against respondent; that despite such judicial admission by respondent, the RTC and the Court
of Appeals, citing Article 1956 of the Civil Code, still held that no interest was due him since the
agreement on interest was not reduced in writing; that the application of Article 1956 of the Civil
Code should not be absolute, and an exception to the application of such provision should be made
when the borrower admits that a specific rate of interest was agreed upon as in the present case;
and that it would be unfair to allow respondent to pay only the loan when the latter very well knew
and even admitted in the Batas Pambansa Blg. 22 cases that there was an agreed 7% rate of
interest on the loan.25

We have carefully examined the RTC Decision and found that the RTC did not make a ruling therein
that petitioner and respondent agreed on the payment of interest at the rate of 7% for the loan. The
RTC clearly stated that although petitioner and respondent entered into a valid oral contract of loan
amounting to ₱540,000.00, they, nonetheless, never intended the payment of interest
thereon.26 While the Court of Appeals mentioned in its Decision that it concurred in the RTC’s ruling
that petitioner and respondent agreed on a certain rate of interest as regards the loan, we consider
this as merely an inadvertence because, as earlier elucidated, both the RTC and the Court of
Appeals ruled that petitioner is not entitled to the payment of interest on the loan. The rule is that
factual findings of the trial court deserve great weight and respect especially when affirmed by the
appellate court.27 We found no compelling reason to disturb the ruling of both courts.

Petitioner’s reliance on respondent’s alleged admission in the Batas Pambansa Blg. 22 cases that
they had agreed on the payment of interest at the rate of 7% deserves scant consideration. In the
said case, respondent merely testified that after paying the total amount of loan, petitioner ordered
her to pay interest.28 Respondent did not categorically declare in the same case that she and
respondent made an express stipulation in writing as regards payment of interest at the rate of 7%.
As earlier discussed, monetary interest is due only if there was an express stipulation in writing for
the payment of interest.

There are instances in which an interest may be imposed even in the absence of express stipulation,
verbal or written, regarding payment of interest. Article 2209 of the Civil Code states that if the
obligation consists in the payment of a sum of money, and the debtor incurs delay, a legal interest of
12% per annum may be imposed as indemnity for damages if no stipulation on the payment of
interest was agreed upon. Likewise, Article 2212 of the Civil Code provides that interest due shall
earn legal interest from the time it is judicially demanded, although the obligation may be silent on
this point.

All the same, the interest under these two instances may be imposed only as a penalty or damages
for breach of contractual obligations. It cannot be charged as a compensation for the use or
forbearance of money. In other words, the two instances apply only to compensatory interest and not
to monetary interest.29 The case at bar involves petitioner’s claim for monetary interest.

Further, said compensatory interest is not chargeable in the instant case because it was not duly
proven that respondent defaulted in paying the loan. Also, as earlier found, no interest was due on
the loan because there was no written agreement as regards payment of interest.

Apropos the second assigned error, petitioner argues that the principle of solutio indebiti does not
apply to the instant case. Thus, he cannot be compelled to return the alleged excess amount paid by
respondent as interest.30

Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has been no
stipulation therefor, the provisions of the Civil Code concerning solutio indebiti shall be applied.
Article 2154 of the Civil Code explains the principle of solutio indebiti. Said provision provides that if
something is received when there is no right to demand it, and it was unduly delivered through
mistake, the obligation to return it arises. In such a case, a creditor-debtor relationship is created
under a quasi-contract whereby the payor becomes the creditor who then has the right to demand
the return of payment made by mistake, and the person who has no right to receive such payment
becomes obligated to return the same. The quasi-contract of solutio indebiti harks back to the
ancient principle that no one shall enrich himself unjustly at the expense of another. 31 The principle
of solutio indebiti applies where (1) a payment is made when there exists no binding relation
between the payor, who has no duty to pay, and the person who received the payment; and (2) the
payment is made through mistake, and not through liberality or some other cause. 32 We have held
that the principle of solutio indebiti applies in case of erroneous payment of undue interest. 33

It was duly established that respondent paid interest to petitioner. Respondent was under no duty to
make such payment because there was no express stipulation in writing to that effect. There was no
binding relation between petitioner and respondent as regards the payment of interest. The payment
was clearly a mistake. Since petitioner received something when there was no right to demand it, he
has an obligation to return it.

We shall now determine the propriety of the monetary award and damages imposed by the RTC and
the Court of Appeals.

Records show that respondent received a loan amounting to ₱540,000.00 from

petitioner.34 Respondent issued two checks with a total worth of ₱700,000.00 in favor of petitioner as
payment of the loan.35 These checks were subsequently encashed by petitioner. 36 Obviously, there
was an excess of ₱160,000.00 in the payment for the loan. Petitioner claims that the excess of
₱160,000.00 serves as interest on the loan to which he was entitled. Aside from issuing the said two
checks, respondent also paid cash in the total amount of ₱175,000.00 to petitioner as
interest.37 Although no receipts reflecting the same were presented because petitioner refused to
issue such to respondent, petitioner, nonetheless, admitted in his Reply-Affidavit 38 in the Batas
Pambansa Blg. 22 cases that respondent paid him a total amount of ₱175,000.00 cash in addition to
the two checks. Section 26 Rule 130 of the Rules of Evidence provides that the declaration of a
party as to a relevant fact may be given in evidence against him. Aside from the amounts of
₱160,000.00 and ₱175,000.00 paid as interest, no other proof of additional payment as interest was
presented by respondent. Since we have previously found that petitioner is not entitled to payment of
interest and that the principle of solutio indebiti applies to the instant case, petitioner should return to
respondent the excess amount of ₱160,000.00 and ₱175,000.00 or the total amount of
₱335,000.00. Accordingly, the reimbursable amount to respondent fixed by the RTC and the Court
of Appeals should be reduced from ₱660,000.00 to ₱335,000.00.

As earlier stated, petitioner filed five (5) criminal cases for violation of Batas Pambansa Blg. 22
against respondent. In the said cases, the MeTC found respondent guilty of violating Batas
Pambansa Blg. 22 for issuing five dishonored checks to petitioner. Nonetheless, respondent’s
conviction therein does not affect our ruling in the instant case. The two checks, subject matter of
this case, totaling ₱700,000.00 which respondent claimed as payment of the ₱540,000.00 worth of
loan, were not among the five checks found to be dishonored or bounced in the five criminal cases.
Further, the MeTC found that respondent made an overpayment of the loan by reason of the interest
which the latter paid to petitioner. 39

Article 2217 of the Civil Code provides that moral damages may be recovered if the party underwent
physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation and similar injury. Respondent testified that she experienced
sleepless nights and wounded feelings when petitioner refused to return the amount paid as interest
despite her repeated demands. Hence, the award of moral damages is justified. However, its
corresponding amount of ₱300,000.00, as fixed by the RTC and the Court of Appeals, is exorbitant
and should be equitably reduced. Article 2216 of the Civil Code instructs that assessment of
damages is left to the discretion of the court according to the circumstances of each case. This
discretion is limited by the principle that the amount awarded should not be palpably excessive as to
indicate that it was the result of prejudice or corruption on the part of the trial court. 40 To our mind,
the amount of ₱150,000.00 as moral damages is fair, reasonable, and proportionate to the injury
suffered by respondent.

Article 2232 of the Civil Code states that in a quasi-contract, such as solutio indebiti, exemplary
damages may be imposed if the defendant acted in an oppressive manner. Petitioner acted
oppressively when he pestered respondent to pay interest and threatened to block her transactions
with the PNO if she would not pay interest. This forced respondent to pay interest despite lack of
agreement thereto. Thus, the award of exemplary damages is appropriate. The amount of
₱50,000.00 imposed as exemplary damages by the RTC and the Court is fitting so as to deter
petitioner and other lenders from committing similar and other serious wrongdoings. 41

Jurisprudence instructs that in awarding attorney’s fees, the trial court must state the factual, legal or
equitable justification for awarding the same.42 In the case under consideration, the RTC stated in its
Decision that the award of attorney’s fees equivalent to 25% of the amount paid as interest by
respondent to petitioner is reasonable and moderate considering the extent of work rendered by
respondent’s lawyer in the instant case and the fact that it dragged on for several years. 43 Further,
respondent testified that she agreed to compensate her lawyer handling the instant case such
amount.44 The award, therefore, of attorney’s fees and its amount equivalent to 25% of the amount
paid as interest by respondent to petitioner is proper.
Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest on the amount
refundable to respondent computed from 3 March 1998 until its full payment. This is erroneous.

We held in Eastern Shipping Lines, Inc. v. Court of Appeals, 45 that 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 rate of 6% per annum. We further declared that when the judgment
of the court awarding a sum of money becomes final and executory, the rate of legal interest,
whether it is a loan/forbearance of money or not, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed equivalent to a forbearance of credit.

In the present case, petitioner’s obligation arose from a quasi-contract of solutio indebiti and not from
a loan or forbearance of money. Thus, an interest of 6% per annum should be imposed on the
amount to be refunded as well as on the damages awarded and on the attorney’s fees, to be
computed from the time of the extra-judicial demand on 3 March 1998, 46 up to the finality of this
Decision. In addition, the interest shall become 12% per annum from the finality of this Decision up
to its satisfaction.

WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 71814, dated 16 December
2005, is hereby AFFIRMED with the following MODIFICATIONS: (1) the amount of ₱660,000.00 as
refundable amount of interest is reduced to THREE HUNDRED THIRTY FIVE THOUSAND PESOS
(₱335,000.00); (2) the amount of ₱300,000.00 imposed as moral damages is reduced to ONE
HUNDRED FIFTY THOUSAND PESOS (₱150,000.00); (3) an interest of 6% per annum is imposed
on the ₱335,000.00, on the damages awarded and on the attorney’s fees to be computed from the
time of the extra-judicial demand on 3 March 1998 up to the finality of this Decision; and (4) an
interest of 12% per annum is also imposed from the finality of this Decision up to its satisfaction.
Costs against petitioner.

SO ORDERED.

MINITA V. CHICO-NAZARIO
Associate Justice

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 90676             June 19, 1991

STATE INVESTMENT HOUSE, INC., petitioner,

vs.
THE HONORABLE COURT OF APPEALS, HON. JUDGE PERLITA J. TRIA TIRONA, Presiding
Judge of the Regional Trial Court of Quezon City, Branch CII and SPS. RAFAEL and REFUGIO
AQUINO, respondents.

Padilla Law Office for petitioner.

Rodolfo T. Galing and Chaves, Hechanova & Lim Law Offices for private respondents.
FELICIANO, J.:

On 5 April 1982, respondent spouses Rafael and Refugio Aquino pledged certain shares of stock to
petitioner State Investment House, Inc. ("State") in order to secure a loan of P120,000.00 designated
as Account No. IF-82-0631-AA. Prior to the execution of the pledge, respondent-spouses, as an
accommodation to and together with the spouses Jose and Marcelina Aquino, signed an agreement
(Account No. IF-82-1379-AA) with petitioner State for the latter's purchase of receivables amounting
to P375,000.00. When Account No. IF-82-0631-AA fell due, respondent spouses paid the same
partly with their own funds and partly from the proceeds of another loan which they obtained also
from petitioner State designated as Account No. IF-82-0904-AA. This new loan was secured by the
same pledge agreement executed in relation to Account No. IF-820631-AA. When the new loan
matured, State demanded payment. Respondents expressed willingness to pay, requesting that
upon payment, the shares of stock pledged be released. Petitioner State denied the request on the
ground that the loan which it had extended to the spouses Jose and Marcelina Aquino (Account No.
IF-82-1379- AA) had remained unpaid.

On 29 June 1984, Atty. Rolando Salonga sent to respondent spouses a Notice of Notarial Sale
stating that upon request of State and by virtue of the pledge agreement, he would sell at public
auction the shares of stock pledged to State. This prompted respondents to file a case before the
Regional Trial Court of Quezon City alleging that the intended foreclosure sale was illegal because
from the time the obligation under Account No. IF-82-0904-AA became due, they had been able and
willing to pay the same, but petitioner had insisted that respondents pay even the loan account of
Jose and Marcelina Aquino which had not been secured by the pledge. It was further alleged that
their failure to pay their loan (Account No. IF-82-0904-AA) was excused because the petitioner State
itself had prevented the satisfaction of the obligation.

The trial court, in a decision dated 14 December 1984 rendered by Judge Willelmo Fortun, initially
dismissed the complaint. Respondent spouses filed a motion for reconsideration praying for a new
decision ordering petitioner State to release the shares upon payment of respondents' loan "without
interest," as the latter had not been in delay in the performance of their obligation. State countered
that the pledge executed by respondent spouses also covered the loan extended to Jose and
Marcelina Aquino, which too should be paid before the shares may be released.

Acting on the motion for reconsideration, Judge Fortun set aside his original decision and rendered a
new judgment dated 29 January 1985, ordering State to immediately release the pledge and to
deliver to respondents the share of stock "upon payment of the loan under Code No. 82-0904-AA."

On appeal, the Court of Appeals affirmed in toto the new decision of the trial court, holding that the
loan extended to Jose and Marcelina Aquino, having been executed prior to the pledge was not
covered by the pledge which secured only loans executed subsequently. Thus, upon payment of the
loan under Code No. IF-0904-AA, the shares of stock should be released. The decisions of the Court
of Appeals and of Judge Fortun became final and executory.

Upon remand of the records of the case to the trial court for execution, there developed
disagreement over the amount which respondent spouses Rafael and Refugio Aquino should pay to
secure the release of the shares of stock — petitioner State contending that respondents should also
pay interest and respondents arguing they should not. Respondent spouses then filed a motion with
the trial court to clarify the Fortun decision praying that an order issue clarifying the phrase "upon
payment of plaintiffs' loan" to mean upon payment of plaintiff' loan in the principal amount of
P110,000.00 alone, "without interest, penalties and other charges."
On 17 February 1989, the trial court, speaking this time through Judge Perlita Tria Tirona, rendered
a decision purporting to clarify the decision of Judge Fortun and ruling that petitioner State shall
release respondents' shares of stock upon payment by respondents of the principal of the loan as
set forth in PN No. 82-0904-AA in the amount of P110,000.00, without interest, penalties and other
charges.

Petitioner State appealed Judge Tirona's decision to the Court of Appeals; the appeal was
dismissed. The Court of Appeals agreed with Judge Tirona that no interest need be paid and added
that the clarificatory (Tirona) decision of the trial court merely restated what had been provided for in
the earlier (Fortun) decision; that the Tirona decision did not go beyond what had been adjudged in
the earlier decision. The motion for reconsideration filed by petitioner was accordingly denied.

Hence, this Petition for Review contending that no manifest ambiguity existed in the decision penned
by Judge Fortun; that the trial court through Judge Tirona, erred in clarifying the decision of Judge
Fortun; and that the amendment sought to be introduced in the Fortun decision by respondents may
not be made as the same was substantial in nature and the Fortun decision had become final.

We begin by noting that the trial court has asserted authority to issue the clarificatory order in
respect of the decision of Judge Fortun, even though that judgment had become final and executory.
In Reinsurance Company of the Orient, Inc. v. Court of Appeals,  this Court had occasion to deal
1

with the applicable doctrine to some extent:

- - - [E]ven a judgment which has become final and executory may be clarified under certain
circumstances. The dispositive portion of the judgment may, for instance, contain an error
clearly clerical in nature (perhaps best illustrated by an error in arithmetical computation) or
an ambiguity arising from inadvertent omission, which error may be rectified or ambiguity
clarified and the omission supplied by reference primarily to the body of the decision itself
Supplementary reference to the pleadings previously filed in the case may also be resorted
to by way of corroboration of the existence of the error or of the ambiguity in the dispositive
part of the judgment. In Locsin, et al. v. Parades, et al., this Court allowed a judgment which
had become final and executory to be clarified by supplying a word which had been
inadvertently omitted and which, when supplied, in effect changed the literal import of the
original phraseology:

. . . it clearly appears from the allegations of the complaint, the promissory note
reproduced therein and made a part thereof, the prayer and the conclusions of fact
and of law contained in the decision of the respondent judge, that the obligation
contracted by the petitioners is joint and several and that the parties as well as the
trial judge so understood it. Under the juridical rule that the judgment should be in
accordance with the allegations, the evidence and the conclusions of fact and law,
the dispositive part of the judgment under consideration should have ordered that the
debt be paid 'severally' and in omitting the word or adverb 'severally' inadvertently,
said judgment became ambiguous. This ambiguity may be clarified at any time after
the decision is rendered and even after it had become final (34 Corpus Juris, 235,
326). This respondent judge did not, therefore, exceed his jurisdiction in clarifying the
dispositive part of the judgment by supplying the omission. (Emphasis supplied)

In Filipino Legion Corporation vs. Court of Appeals, et al., the applicable principle was set out in the
following terms:

[W]here there is ambiguity caused by an omission or mistake in the dispositive portion of a decision,
the court may clarify such ambiguity by an amendment even after the judgment had become
final, and for this purpose it may resort to the pleadings filed by the parties, the court's findings of
facts and conclusions of law as expressed in the body of the decision. (Emphasis supplied)

In Republic Surety and Insurance Company, Inc. v. Intermediate Appellate Court, the Court, in
applying the above doctrine, said:

. . . We clarify, in other words, what we did affirm. That is involved here is not what is ordinarily
regarded as a clerical error in the dispositive part of the decision of the Court of First Instance, . . . At
the same time, what is involved here is not a correction of an erroneous judgment or dispositive
portion of a judgment. What we believe is involved here is in the nature of an inadvertent omission
on the part of the Court of First Instance (which should have been noticed by private respondents'
counsel who had prepared the complaint), of what might be described as a logical follow-through of
something set forth both in the body of the decision and in the dispositive portion thereof; the
inevitable follow-through, or translation into, operational or behavioral terms, of the annulment of the
Deed of Sale with Assumption of Mortgage, from which petitioners' title or claim of title embodied in
TCT 133153 flows. (Emphasis supplied)  (Underscoring in the original; citations omitted)
2

The question we must resolve is thus whether or not there is an ambiguity or clerical error or
inadvertent omission in the dispositive portion of the decision of Judge Fortun which may be
legitimately clarified by referring to the body of the decision and perhaps even the pleadings filed
before him. The decision of Judge Fortun disposing of the motion for reconsideration filed by
respondent spouses Rafael and Refugio Aquino consisted basically of quoting practically the whole
motion for reconsideration. In its dispositive portion, Judge Fortun's decision stated:

WHEREFORE, plaintiffs "Motion for Reconsideration" dated January 3, 1985, is granted and
the decision of this Court dated December 14, 1984 is hereby revoked and set aside and
another judgment is hereby rendered in favor of plaintiffs as follows:

(1) Ordering defendants to immediately release the pledge on, and to deliver to plaintiffs, the
shares of stocks enumerated and described in paragraph 4 of plaintiffs' complaint dated July
17, 1984, upon payment of plaintiffs loan under Code No. 82-0904-AA to defendants;

(2) Ordering defendant State Investment House, Inc. to pay to plaintiffs P10,000.00 as moral
damages, P5,000.00 as exemplary damages, P6,000.00 as attorney's fees, plus costs;

(3) Dismissing defendants' counterclaim, for lack of merit and making the preliminary
injunction permanent.

SO ORDERED. 3

Judge Fortun evidently meant to act favorably on the motion for reconsideration of the respondent
Aquino spouses and in effect accepted respondent spouses' argument that they
had not incurred mora considering that their failure to pay PN No. IF82-0904-AA on time had been
due to petitioner State's unjustified refusal to release the shares pledged to it. It is not, however,
clear to what precise extent Judge Fortun meant to grant the motion for reconsideration. The
promissory note in Account No. IF-82-0904-AA had three (3) components: (a) principal of the loan in
the amount of P110,000.00; (b) regular interest in the amount of seventeen percent (17%) per
annum; and (c) additional or penalty interest in case of non-payment at maturity, at the rate of two
percent (2%) per month or twenty-four percent (24%) per annum. In the dispositive part of his
resolution, Judge Fortun did not specify which of these components of the loan he was ordering
respondent spouses to pay and which component or components he was in effect deleting. We
cannot assume that Judge Fortun meant to grant the relief prayed for by respondent spouses in all
its parts. For one thing, respondent spouses in their motion for reconsideration asked for "at least
P50,000.00" for moral damages and "at least P50,000.00" for exemplary damages, as well as
P20,000.00 by way of attorney's fees and litigation expenses. Judge Fortun granted respondent
spouses only P10,000.00 as moral damages and P5,000.00 as exemplary damages, plus P6,000.00
as attorney's fees and costs. For another, respondent spouses asked Judge Fortun to order the
release of the shares pledged "upon payment of [respondent spouses'] loan under Code No. 82-
0904-AA without interest, as plaintiffs were not in delay in accordance with Article 69 of the New Civil
Code –– " (Emphasis supplied). In other words, respondent spouses did not themselves become
very clear what they were asking Judge Fortun to grant them; they did not apparently distinguish
between regular interest or "monetary interest" in the amount of seventeen percent (17%) per
annum and penalty charges or "compensatory interest" in the amount of two percent (2%) per month
or twenty-four percent (24%) per annum.

It thus appears that the Fortun decision was ambiguous in the sense that it was cryptic. We believe
that in these circumstances, we must assume that Judge Fortun meant to decide in accordance with
law, that we cannot fairly assume that Judge Fortun was grossly ignorant of the law, or that he
intended to grant the respondent spouses relief to which they were not entitled under law. Thus, the
ultimate question which arises is: if respondent Aquino spouses were not in delay, what should they
have been held liable for in accordance with law?

We believe and so hold that since respondent Aquino spouses were held not to have been in delay,
they were properly liable only for: (a) the principal of the loan or P110,000.00; and (b) regular or
monetary interest in the amount of seventeen percent (17%) per annum. They were not liable for
penalty or compensatory interest, fixed by the promissory note in Account No. IF-82-0904-AA at two
percent (2%) per month or twenty-four (24%) per annum. It must be stressed in this connection that
under Article 2209 of the Civil Code which provides that

. . . [i]f the obligation consists in the payment of a sum of money, and the debtor incurs in
delay. the indemnity for damages, there being no stimulation to the contrary. shall be the
payment of the interest agreed upon, and in the absence of stipulation, the legal interest,
which is six per cent per annum.

the appropriate measure for damages in case of delay in discharging an obligation consisting of the
payment of a sum or money, is the payment of penalty interest at the rate agreed upon; and in the
absence of a stipulation of a particular rate of penalty interest, then the payment of additional interest
at a rate equal to the regular monetary interest; and if no regular interest had been agreed upon,
then payment of legal interest or six percent (6%) per annum. 4

The fact that the respondent Aquino spouses were not in default did not mean that they, as a matter
of law, were relieved from the payment not only of penalty or compensatory interest at the rate of
twenty-four percent (24%) per annum but also of regular or monetary interest of seventeen percent
(17%) per annum. The regular or monetary interest continued to accrue under the terms of the
relevant promissory note until actual payment is effected. The payment of regular interest constitutes
the price or cost of the use of money and thus, until the principal sum due is returned to the creditor,
regular interest continues to accrue since the debtor continues to use such principal amount. The
relevant rule is set out in Article 1256 of the Civil Code which provides as follows:

Art. 1256. If the creditor to whom tender of payment has been made refuses without just
cause to accept it, the debtor shall be released from responsibility by the consignation of the
thing or sum due.

Consignation alone shall produce the same effect in the following cases:
 (1) When the creditor is absent or unknown, or does not appear at the place of payment;

(2) When he is incapacitated to receive the payment at the time it is due;

(3) When, without just cause, he refuses to give a receipt;

(4) When two or more persons claim the same right to collect;

(5) When the title of the obligation has been lost. (Emphasis supplied)

Where the creditor unjustly refuses to accept payment, the debtor desirous of being released from
his obligation must comply with two (2) conditions: (a) tender of payment; and (b) consignation of the
sum due. Tender of payment must be accompanied or followed by consignation in order that the
effects of payment may be produced. Thus, in Llamas v. Abaya,  the Supreme Court stressed that a
5

written tender of payment alone, without consignation in court of the sum due, does not suspend the
accruing of regular or monetary interest.

In the instant case, respondent spouses Aquino, while they are properly regarded as having made a
written tender of payment to petitioner State, failed to consign in court the amount due at the time of
the maturity of Account No. IF-820904-AA. It follows that their obligation to pay principal-cum-regular
or monetary interest under the terms and conditions of Account No. IF-82-0904-AA
was not extinguished by such tender of payment alone.

For the respondent spouses to continue in possession of the principal of the loan amounting to
P110,000.00 and to continue to use the same after maturity of the loan without payment of regular or
monetary interest, would constitute unjust enrichment on the part of the respondent spouses at the
expense of petitioner State even though the spouses had not been guilty of mora. It is precisely this
unjust enrichment which Article 1256 of the Civil Code prevents by requiring, in addition to tender of
payment, the consignation of the amount due in court which amount would thereafter be deposited
by the Clerk of Court in a bank and earn interest to which the creditor would be entitled.

WHEREFORE, the Petition for Review is hereby GRANTED DUE COURSE. The Decision of the
Court of Appeals dated 30 August 1989 in C.A.-G.R. No. 17954 and the Decision of the Regional
Trial Court dated 17 February 1989 in Civil Case No. Q-42188 are hereby REVERSED and SET
ASIDE. The dispositive portion of the decision of Judge Fortun is hereby clarified so as to read as
follows:

(1) Ordering defendants to immediately release the pledge and to deliver to the plaintiff spouses
Rafael and Refugio Aquino the shares of stock enumerated and described in paragraph 4 of said
spouses' complaint dated 17 July 1984, upon full payment of the amount of P110,000.00 plus
seventeen percent (17%) per annum regular interest computed from the time of maturity of the
plaintiffs' loan (Account No. IF-82-0904-AA) and until full payment of such principal and interest to
defendants;

(2) Ordering defendant State Investment House, Inc. to pay to the plaintiff spouses Rafael and
Refugio Aquino P10,000.00 as moral damages, P5,000.00 as exemplary damages, P6,000.00 as
attorney's fees, plus costs; and

(3) Dismissing defendants' counterclaim for lack of merit and making the preliminary injunction
permanent."
No pronouncement as to costs.

SO ORDERED.

Fernan, C.J., Gutierrez, Jr., Bidin and Davide, Jr., JJ., concur.

LETICIA Y. MEDEL DR. RAFAEL MEDEL and SERVANDO

FRANCO, Petitioners, v. 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.

DECISION

PARDO, J.:

The case before the Court is a petition for review

on certiorari,  under Rule 45 of the Revised Rules of Court, seeking
to set aside the decision of the Court of Appeals,1 and its resolution
denying reconsideration,2 the dispositive portion of which decision
reads as follows:

"WHEREFORE, the appealed judgment is hereby

MODIFIED such that defendants are hereby ordered to
pay the plaintiff: the sum of P500,000.00, plus 5.5% per
month interest and 2% service charge per annum
effective July 23, 1986, plus 1% per month of the total
amount due and demandable as penalty charges
effective August 23, 1986, until the entire amount is
fully paid.
"The award to the plaintiff of P50,000.00 as attorney's
fees is affirmed. And so is the imposition of costs against
the defendants.

SO ORDERED."3 cräläwvirtualibräry

The Court required the respondents to comment on the

petition,4 which was filed on April 3, 1998,5 and the petitioners to
reply thereto, which was filed on May 29, 1998.6 We now resolve to
give due course to the petition and decide the case.
The facts of the case, as found by the Court of Appeals in its
decision, which are considered binding and conclusive on the parties
herein, as the appeal is limited to questions of law, are as follows:

On November 7, 1985, Servando Franco and Leticia Medel

(hereafter Servando and Leticia) obtained a loan from Veronica R.
Gonzales (hereafter Veronica), who was engaged in the money
lending business under the name "Gonzales Credit Enterprises", in
the amount of P50,000.00, payable in two months. Veronica gave
only the amount of P47,000.00, to the borrowers, as she
retained P3,000.00, as advance interest for one month at 6% per
month. Servado and Leticia executed a promissory note
for P50,000.00, to evidence the loan, payable on January 7, 1986.

On November 19, 1985, Servando and Leticia obtained from

Veronica another loan in the amount of P90,000.00, payable in two
months, at 6% interest per month. They executed a promissory
note to evidence the loan, maturing on January 19, 1986. They
received only P84,000.00, out of the proceeds of the loan.

On maturity of the two promissory notes, the borrowers failed to

pay the indebtedness.

On June 11, 1986, Servando and Leticia secured from Veronica still
another loan in the amount of P300,000.00, maturing in one month,
secured by a real estate mortgage over a property belonging to
Leticia Makalintal Yaptinchay, who issued a special power of
attorney in favor of Leticia Medel, authorizing her to execute the
mortgage. Servando and Leticia executed a promissory note in favor
of Veronica to pay the sum of P300,000.00, after a month, or on
July 11, 1986. However, only the sum of P275,000.00, was given to
them out of the proceeds of the loan.

Like the previous loans, Servando and Medel failed to pay the third
loan on maturity.

On July 23, 1986, Servando and Leticia with the latter's husband,
Dr. Rafael Medel, consolidated all their previous unpaid loans
totaling P440,000.00, and sought from Veronica another loan in the
amount of P60,000.00, bringing their indebtedness to a total
of P500,000.00, payable on August 23, 1986. The executed a
promissory note, reading as follows:

"Baliwag, Bulacan July 23, 1986

"Maturity Date August 23, 1986

"P500,000.00

"FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to

the order of VERONICA R. GONZALES doing business in the
business style of GONZALES CREDIT ENTERPRISES, Filipino, of legal
age, married to Danilo G. Gonzales, Jr., of Baliwag Bulacan, the
sum of PESOS ........ FIVE HUNDRED THOUSAND ..... (P500,000.00)
Philippine
Currency with interest thereon at the rate of 5.5 PER CENT per mon
th plus 2% service charge per annum from date hereof until fully
paid according to the amortization schedule contained herein.
(Underscoring supplied)

"Payment will be made in full at the maturity date.

"Should I/WE fail to pay any amortization or portion hereof when du
e, all the other installments together with all interest accrued shall
immediately be due and payable and I/WE hereby agree to pay
an additional amount equivalent to one per cent (1%) per month of 
the amount due and demandable as penalty charges in the form of l
iquidated damages until fully paid; and the
further sum of TWENTY FIVE PER CENT (25%) thereon in full,
without deductions as Attorney's Fee whether actually incurred or
not, of the total amount due and demandable, exclusive of costs
and judicial or extra judicial expenses. (Underscoring supplied)

"I, WE further agree that in the event the present rate of interest on
loan is increased by law or the Central Bank of the Philippines, the
holder shall have the option to apply and collect the increased
interest charges without notice although the original interest have
already been collected wholly or partially unless the contrary is
required by law.
"It is also a special condition of this contract that the parties herein
agree that the amount of peso-obligation under this agreement is
based on the present value of peso, and if there be any change in
the value thereof, due to extraordinary inflation or deflation, or any
other cause or reason, then the peso-obligation herein contracted
shall be adjusted in accordance with the value of the peso then
prevailing at the time of the complete fulfillment of obligation.

"Demand and notice of dishonor waived. Holder may accept partial

payments and grant renewals of this note or extension of payments,
reserving rights against each and all indorsers and all parties to this
note.

"IN CASE OF JUDICIAL Execution of this obligation, or any part of it,

the debtors waive all his/their rights under the provisions of Section
12, Rule 39, of the Revised Rules of Court."

On maturity of the loan, the borrowers failed to pay the

indebtedness of P500,000.00, plus interests and penalties,
evidenced by the above-quoted promissory note.

On February 20, 1990, Veronica R. Gonzales, joined by her husband

Danilo G. Gonzales, filed with the Regional Trial Court of Bulacan,
Branch 16, at Malolos, Bulacan, a complaint for collection of the full
amount of the loan including interests and other charges.

In his answer to the complaint filed with the trial court on April 5,
1990, defendant Servando alleged that he did not obtain any loan
from the plaintiffs; that it was defendants Leticia and Dr. Rafael
Medel who borrowed from the plaintiffs the sum of P500,000.00,
and actually received the amount and benefited therefrom; that the
loan was secured by a real estate mortgage executed in favor of the
plaintiffs, and that he (Servando Franco) signed the promissory note
only as a witness.

In their separate answer filed on April 10,1990, defendants Leticia

and Rafael Medel alleged that the loan was the transaction of Leticia
Yaptinchay, who executed a mortgage in favor of the plaintiffs over
a parcel of real estate situated in San Juan, Batangas; that the
interest rate is excessive at 5.5% per month with additional service
charge of 2% per annum, and penalty charge of 1% per month;
that the stipulation for attorney's fees of 25% ofthe amount due is
unconscionable, illegal and excessive, and that substantial
payments made were applied to interest, penalties and other
charges.

After due trial, the lower court declared that the due execution and
genuineness of the four promissory notes had been duly proved,
and ruled that although the Usury Law had been repealed, the
interest charged by the plaintiffs on the loans was unconscionable
and "revolting to the conscience". Hence, the trial court applied "the
provision of the New [Civil] Code" that the "legal rate of interest for
loan or forbearance of money, goods or credit is 12% per
annum."7 cräläwvirtualibräry

Accordingly, on December 9, 1991, the trial court rendered

judgment, the dispositive portion of which reads as follows:

"WHEREFORE, premises considered, judgment is hereby rendered,

as follows:

"1. Ordering the defendants Servando Franco and Leticia Medel,

jointly and severally, to pay plaintiffs the amount of P47,000.00
plus 12% interest per annum from November 7, 1985 and 1% per
month as penalty, until the entire amount is paid in full.

"2. Ordering the defendants Servando Franco and Leticia Y. Medel to

plaintiffs, jointly and severally the amount of P84,000.00 with 12%
interest per annum and 1% per cent per month as penalty from
November 19,1985 until the whole amount is fully paid;

"3. Ordering the defendants to pay the plaintiffs, jointly and

severally, the amount of P285,000.00 plus 12% interest per annum
and 1% per month as penalty from July 11, 1986, until the whole
amount is fully paid;

"4. Ordering the defendants to pay plaintiffs, jointly and severally,

the amount of P50,000.00 as attorney's fees;

"5. All counterclaims are hereby dismissed.

"With costs against the defendants."8 cräläwvirtualibräry

In due time, both plaintiffs and defendants appealed to the Court of

Appeals.

In their appeal, plaintiffs-appellants argued that the promissory

note, which consolidated all the unpaid loans of the defendants, is
the law that governs the parties. They further argued that Circular
No. 416 of the Central Bank prescribing the rate of interest for loans
or forbearance of money, goods or credit at 12% per annum,
applies only in the absence of a stipulation on interest rate, but not
when the parties agreed thereon.

The Court of Appeals sustained the plaintiffs-appellants' contention.

It ruled that "the Usury Law having become 'legally inexistent' with
the promulgation by the Central Bank in 1982 of Circular No. 905,
the lender and borrower could agree on any interest that may be
charged on the loan".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".10 cräläwvirtualibräry

Accordingly, on March 21, 1997, the Court of Appeals promulgated

it decision reversing that of the Regional Trial Court, disposing as
follows:

"WHEREFORE, the appealed judgment is hereby

MODIFIED such that defendants are hereby ordered to
pay the plaintiffs the sum of P500,000.00, plus 5.5%
per month interest and 2% service charge per annum
effective July 23, 1986, plus 1% per month of the total
amount due and demandable as penalty charges
effective August 24, 1986, until the entire amount is
fully paid.
"The award to the plaintiffs of P50,000.00 as
attorney's fees is affirmed. And so is the imposition of
costs against the defendants.
"SO OREDERED."11 cräläwvirtualibräry
On April 15, 1997, defendants-appellants filed a motion for
reconsideration of the said decision. By resolution dated November
25, 1997, the Court of Appeals denied the motion.12 cräläwvirtualibräry

Hence, defendants interposed the present recourse via  petition for

review on certiorari.13
cräläwvirtualibräry

We find the petition meritorious.

Basically, the issue revolves on the validity of the interest rate

stipulated upon. Thus, the question presented is whether or not the
stipulated rate of interest at 5.5% per month on the loan in the sum
of P500,000.00, that plaintiffs extended to the defendants is
usurious. In other words, is the Usury Law still effective, or has it
been repealed by Central Bank Circular No. 905, adopted on
December 22, 1982, pursuant to its powers under P.D. No. 116, as
amended by P.D. No. 1684?

We agree with petitioners that the stipulated rate of interest at

5.5% per month on the P500,000.00 loan is excessive, iniquitous,
unconscionable and exorbitant.13 However, we can not consider the
rate "usurious" because this Court has consistently held that Circulr
No. 905 of the Central Bank, adopted on December 22, 1982, has
expressly removed the interest ceilings prescribed by the Usury
Law14 and that the Usury Law is now "legally inexistent".15 cräläwvirtualibräry

In Security Bank and Trust Company vs.  Regional Trial Court of

Makati, Branch 6116 the Court held that CB Circular No. 905 "did not
repeal nor in anyway amend the Usury Law but simply suspended
the latter's effectivity." Indeed, we have held that "a Central Bank
Circular can not repeal a law. Only a law can repeal another
law."17 In the recent case of Florendo vs. Court of Appeals18, the
Court reiterated the ruling that "by virtue of CB Circular 905, the
Usury Law has been rendered ineffective". "Usury has been legally
non-existent in our jurisdiction. Interest can now be charged as
lender and borrower may agree upon."19 cräläwvirtualibräry

Nevertheless, we find the interest at 5.5% per month, or 66% per

annum, stipulated upon by the parties in the promissory note
iniquitous or unconscionable, and, hence, contrary to morals
("contra bonos mores"), if not against the law.20 The stipulation is
void.21 The courts shall reduce equitably liquidated damages,
whether intended as an indemnity or a penalty if they are iniquitous
or unconscionable.22 cräläwvirtualibräry

Consequently, the Court of Appeals erred in upholding the

stipulation of the parties. Rather, we agree with the trial court that,
under the circumstances, interest at 12% per annum, and an
additional 1% a month penalty charge as liquidated damages may
be more reasonable.

WHEREFORE, the Court hereby REVERSES and SETS ASIDE the

decision of the Court of Appeals promulgated on March 21, 1997,
and its resolution dated November 25, 1997. Instead, we render
judgment REVIVING and AFFIRMING the decision dated December
9, 1991, of the Regional Trial Court of Bulacan, Branch 16, Malolos,
Bulacan, in Civil Case No. 134-M-90, involving the same parties.

No pronouncement as to costs in this instance

SO ORDERED.
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.:

The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a
shipment of goods can be a solidary, or joint and several, liability of the common carrier, the arrastre
operator and the customs broker; (b) whether the payment of legal interest on an award for loss or
damage is to be computed from the time the complaint is filed or from the date the decision
appealed from is rendered; and (c) whether the applicable rate of interest, referred to above, is
twelve percent (12%) or six percent (6%).

The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed
facts that have led to the controversy are hereunder reproduced:
 This is an action against defendants shipping company, arrastre operator and broker-
forwarder for damages sustained by a shipment while in defendants' custody, filed by
the insurer-subrogee who paid the consignee the value of such losses/damages.

On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama,
Japan for delivery vessel "SS EASTERN COMET" owned by defendant Eastern
Shipping Lines under Bill of Lading
No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance
Policy No. 81/01177 for P36,382,466.38.

Upon arrival of the shipment in Manila on December 12, 1981, it was discharged
unto the custody of defendant Metro Port Service, Inc. The latter excepted to one
drum, said to be in bad order, which damage was unknown to plaintiff.

On January 7, 1982 defendant Allied Brokerage Corporation received the shipment

from defendant Metro Port Service, Inc., one drum opened and without seal (per
"Request for Bad Order Survey." Exh. D).

On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries
of the shipment to the consignee's warehouse. The latter excepted to one drum
which contained spillages, while the rest of the contents was adulterated/fake (per
"Bad Order Waybill" No. 10649, Exh. E).

Plaintiff contended that due to the losses/damage sustained by said drum, the
consignee suffered losses totaling P19,032.95, due to the fault and negligence of
defendants. Claims were presented against defendants who failed and refused to
pay the same (Exhs. H, I, J, K, L).

As a consequence of the losses sustained, plaintiff was compelled to pay the

consignee P19,032.95 under the aforestated marine insurance policy, so that it
became subrogated to all the rights of action of said consignee against defendants
(per "Form of Subrogation", "Release" and Philbanking check, Exhs. M, N, and O).
(pp. 85-86, Rollo.)

There were, to be sure, other factual issues that confronted both courts. Here, the appellate court
said:

Defendants filed their respective answers, traversing the material allegations of the
complaint contending that: As for defendant Eastern Shipping it alleged that the
shipment was discharged in good order from the vessel unto the custody of Metro
Port Service so that any damage/losses incurred after the shipment was incurred
after the shipment was turned over to the latter, is no longer its liability (p. 17,
Record); Metroport averred that although subject shipment was discharged unto its
custody, portion of the same was already in bad order (p. 11, Record); Allied
Brokerage alleged that plaintiff has no cause of action against it, not having negligent
or at fault for the shipment was already in damage and bad order condition when
received by it, but nonetheless, it still exercised extra ordinary care and diligence in
the handling/delivery of the cargo to consignee in the same condition shipment was
received by it.

From the evidence the court found the following:

The issues are:

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

2. Whether or not these losses/damages were sustained while in the

custody of defendants (in whose respective custody, if determinable);

3. Whether or not defendant(s) should be held liable for the

losses/damages (see plaintiff's pre-Trial Brief, Records, p. 34; Allied's
pre-Trial Brief, adopting plaintiff's Records, p. 38).

As to the first issue, there can be no doubt that the shipment

sustained losses/damages. The two drums were shipped in good
order and condition, as clearly shown by the Bill of Lading and
Commercial Invoice which do not indicate any damages drum that
was shipped (Exhs. B and C). But when on December 12, 1981 the
shipment was delivered to defendant Metro Port Service, Inc., it
excepted to one drum in bad order.

Correspondingly, as to the second issue, it follows that the

losses/damages were sustained while in the respective and/or
successive custody and possession of defendants carrier (Eastern),
arrastre operator (Metro Port) and broker (Allied Brokerage). This
becomes evident when the Marine Cargo Survey Report (Exh. G),
with its "Additional Survey Notes", are considered. In the latter notes,
it is stated that when the shipment was "landed on vessel" to dock of
Pier # 15, South Harbor, Manila on December 12, 1981, it was
observed that "one (1) fiber drum (was) in damaged condition,
covered by the vessel's Agent's Bad Order Tally Sheet No. 86427."
The report further states that when defendant Allied Brokerage
withdrew the shipment from defendant arrastre operator's custody on
January 7, 1982, one drum was found opened without seal, cello bag
partly torn but contents intact. Net unrecovered spillages was
15 kgs. 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 (Art. 1738, NCC). Defendant Eastern Shipping's own
exhibit, the "Turn-Over Survey of Bad Order Cargoes" (Exhs. 3-
Eastern) states that on December 12, 1981 one drum was found
"open".

and thus held:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby

rendered:
 A. Ordering defendants to pay plaintiff, jointly and severally:

1. The amount of P19,032.95, with the present legal interest of

12% per annum from October 1, 1982, the date of filing of this
complaints, until fully paid (the liability of defendant Eastern Shipping,
Inc. shall not exceed US$500 per case or the CIF value of the loss,
whichever is lesser, while the liability of defendant Metro Port
Service, Inc. shall be to the extent of the actual invoice value of each
package, crate box or container in no case to exceed P5,000.00
each, pursuant to Section 6.01 of the Management Contract);

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

3. Costs.

B. Dismissing the counterclaims and crossclaim of

defendant/cross-claimant Allied Brokerage
Corporation.

SO ORDERED. (p. 207, Record).

Dissatisfied, defendant's recourse to US.

The appeal is devoid of merit.

After a careful scrutiny of the evidence on record. We find that the conclusion drawn
therefrom is correct. As there is sufficient evidence that the shipment sustained
damage while in the successive possession of appellants, and therefore they are
liable to the appellee, as subrogee for the amount it paid to the consignee. (pp. 87-
89, Rollo.)

The Court of Appeals thus affirmed in toto the judgment of the court

a quo.

In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse of
discretion on the part of the appellate court when —

I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE

ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF
PRIVATE RESPONDENT AS GRANTED IN THE QUESTIONED DECISION;

II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE

RESPONDENT SHOULD COMMENCE FROM THE DATE OF THE FILING OF THE
COMPLAINT AT THE RATE OF TWELVE PERCENT PER ANNUM INSTEAD OF
FROM THE DATE OF THE DECISION OF THE TRIAL COURT AND ONLY AT THE
RATE OF SIX PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING
INDISPUTABLY UNLIQUIDATED.

The petition is, in part, granted.

In this decision, we have begun by saying that the questions raised by petitioner carrier are not all
that novel. Indeed, we do have a fairly good number of previous decisions this Court can merely tack
to.

The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the
time the articles are surrendered to or unconditionally placed in the possession of, and received by,
the carrier for transportation until delivered to, or until the lapse of a reasonable time for their
acceptance by, the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court
of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods
shipped either are lost or arrive in damaged condition, a presumption arises against the carrier of its
failure to observe that diligence, and there need not be an express finding of negligence to hold it
liable (Art. 1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139 SCRA 87; Metro
Port Service vs. Court of Appeals, 131 SCRA 365). There are, of course, exceptional cases when
such presumption of fault is not observed but these cases, enumerated in Article 1734  of the Civil
1

Code, are exclusive, not one of which can be applied to this case.

The question of charging both the carrier and the arrastre operator with the obligation of properly
delivering the goods to the consignee has, too, been passed upon by the Court. In Fireman's Fund
Insurance vs. Metro Port Services (182 SCRA 455), we have explained, in holding the carrier and
the arrastre operator liable in solidum, thus:

The legal relationship between the consignee and the arrastre operator is akin to that
of a depositor and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5
[1967]. The relationship between the consignee and the common carrier is similar to
that of the consignee and the arrastre operator (Northern Motors, Inc. v. Prince Line,
et al., 107 Phil. 253 [1960]). Since it is the duty of the ARRASTRE to take good care
of the goods that are in its custody and to deliver them in good condition to the
consignee, such responsibility also devolves upon the CARRIER. Both the
ARRASTRE and the CARRIER are therefore charged with the obligation to deliver
the goods in good condition to the consignee.

We do not, of course, imply by the above pronouncement that the arrastre operator and the customs
broker are themselves always and necessarily liable solidarily with the carrier, or vice-versa, nor that
attendant facts in a given case may not vary the rule. The instant petition has been brought solely by
Eastern Shipping Lines, which, being the carrier and not having been able to rebut the presumption
of fault, is, in any event, to be held liable in this particular case. A factual finding of both the court a
quo and the appellate court, we take note, is that "there is sufficient evidence that the shipment
sustained damage while in the successive possession of appellants" (the herein petitioner among
them). Accordingly, the liability imposed on Eastern Shipping Lines, Inc., the sole petitioner in this
case, is inevitable regardless of whether there are others solidarily liable with it.

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

Let us first see a chronological recitation of the major rulings of this Court:

The early case of Malayan Insurance Co., Inc., vs. Manila Port

Service,  decided  on 15 May 1969, involved a suit for recovery of money arising out of short
2 3

deliveries and pilferage of goods. In this case, appellee Malayan Insurance (the plaintiff in the lower
court) averred in its complaint that the total amount of its claim for the value of the undelivered goods
amounted to P3,947.20. This demand, however, was neither established in its totality nor definitely
ascertained. In the stipulation of facts later entered into by the parties, in lieu of proof, the amount of
P1,447.51 was agreed upon. The trial court rendered judgment ordering the appellants (defendants)
Manila Port Service and Manila Railroad Company to pay appellee Malayan Insurance the sum of
P1,447.51 with legal interest thereon from the date the complaint was filed on 28 December 1962
until full payment thereof. The appellants then assailed, inter alia, the award of legal interest. In
sustaining the appellants, this Court ruled:

Interest upon an obligation which calls for the payment of money, absent a
stipulation, is the legal rate. Such interest normally is allowable from the date of
demand, judicial or extrajudicial. The trial court opted for judicial demand as the
starting point.

But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be
recovered upon unliquidated claims or damages, except when the demand can be
established with reasonable certainty." And as was held by this Court in Rivera
vs. Perez,  L-6998, February 29, 1956, if the suit were for damages, "unliquidated
4

and not known until definitely ascertained, assessed and determined by the courts
after proof (Montilla c. Corporacion de P.P. Agustinos, 25 Phil. 447; Lichauco
v. Guzman,
38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis
supplied)

The case of Reformina vs. Tomol,  rendered on 11 October 1985, was for "Recovery of Damages for
5

Injury to Person and Loss of Property." After trial, the lower court decreed:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party
defendants and against the defendants and third party plaintiffs as follows:

Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay
jointly and severally the following persons:

xxx xxx xxx

(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00
which is the value of the boat F B Pacita III together with its accessories, fishing gear
and equipment minus P80,000.00 which is the value of the insurance recovered and
the amount of P10,000.00 a month as the estimated monthly loss suffered by them
as a result of the fire of May 6, 1969 up to the time they are actually paid or
already the total sum of P370,000.00 as of June 4, 1972 with legal interest from the
filing of the complaint until paid and to pay attorney's fees of P5,000.00 with costs
against defendants and third party plaintiffs. (Emphasis supplied.)

On appeal to the Court of Appeals, the latter modified the amount of damages awarded but
sustained the trial court in adjudging legal interest from the filing of the complaint until fully
paid. When the appellate court's decision became final, the case was remanded to the lower
court for execution, and this was when the trial court issued its assailed resolution which
applied the 6% interest per annum prescribed in Article 2209 of the Civil Code. In their
petition for review on certiorari, the petitioners contended that Central Bank Circular
No. 416, providing thus —

By virtue of the authority granted to it under Section 1 of Act 2655, as amended,

Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that
the rate of interest for the loan, or forbearance of any money, goods, or credits and
 the rate allowed in judgments, in the absence of express contract as to such rate of
interest, shall be twelve (12%) percent per annum. This Circular shall take effect
immediately. (Emphasis found in the text) —

should have, instead, been applied. This Court  ruled:

6

The judgments spoken of and referred to are judgments in litigations involving loans
or forbearance of any money, goods or credits. Any other kind of monetary judgment
which has nothing to do with, nor involving loans or forbearance of any money,
goods or credits does not fall within the coverage of the said law for it is not within
the ambit of the authority granted to the Central Bank.

xxx xxx xxx

Coming to the case at bar, the decision herein sought to be executed is one
rendered in an Action for Damages for injury to persons and loss of property and
does not involve any loan, much less forbearances of any money, goods or credits.
As correctly argued by the private respondents, the law applicable to the said case is
Article 2209 of the New Civil Code which reads —

Art. 2209. — If the obligation consists in the payment of a sum of

money, and the debtor incurs in delay, the indemnity for damages,
there being no stipulation to the contrary, shall be the payment of
interest agreed upon, and in the absence of stipulation, the legal
interest which is six percent per annum.

The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz,  promulgated on 28 July
7

1986. The case was for damages occasioned by an injury to person and loss of property. The trial
court awarded private respondent Pedro Manabat actual and compensatory damages in the amount
of P72,500.00 with legal interest thereon from the filing of the complaint until fully paid. Relying on
the Reformina v. Tomol case, this Court  modified the interest award from 12% to 6% interest per
8

annum but sustained the time computation thereof, i.e., from the filing of the complaint until fully
paid.

In Nakpil and Sons vs. Court of Appeals,  the trial court, in an action for the recovery of damages
9

arising from the collapse of a building, ordered,

inter alia, the "defendant United Construction Co., Inc. (one of the petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from November
29, 1968, the date of the filing of the complaint until full payment . . . ." Save from the modification of
the amount granted by the lower court, the Court of Appeals sustained the trial court's decision.
When taken to this Court for review, the case, on 03 October 1986, was decided, thus:

WHEREFORE, the decision appealed from is hereby MODIFIED and considering the
special and environmental circumstances of this case, we deem it reasonable to
render a decision imposing, as We do hereby impose, upon the defendant and the
third-party defendants (with the exception of Roman Ozaeta) a solidary (Art. 1723,
Civil Code, Supra.
p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION
(P5,000,000.00) Pesos to cover all damages (with the exception to attorney's fees)
occasioned by the loss of the building (including interest charges and lost rentals)
and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for
attorney's fees, the total sum being payable upon the finality of this decision. Upon
 failure to pay on such finality, twelve (12%) per cent interest per annum shall be
imposed upon aforementioned amounts from finality until paid. Solidary costs against
the defendant and third-party defendants (Except Roman Ozaeta). (Emphasis
supplied)

A motion for reconsideration was filed by United Construction, contending that "the interest
of twelve (12%) per cent per annum imposed on the total amount of the monetary award was
in contravention of law." The Court  ruled out the applicability of the Reformina and
10

Philippine Rabbit Bus Lines cases and, in its resolution of 15 April 1988, it explained:

There should be no dispute that the imposition of 12% interest pursuant to Central
Bank Circular No. 416 . . . is applicable only in the following: (1) loans; (2)
forbearance of any money, goods or credit; and
(3) rate allowed in judgments (judgments spoken of refer to judgments involving
loans or forbearance of any money, goods or credits. (Philippine Rabbit Bus Lines
Inc. v. Cruz, 143 SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260
[1985]). It is true that in the instant case, there is neither a loan or a forbearance, but
then no interest is actually imposed provided the sums referred to in the judgment
are paid upon the finality of the judgment. It is delay in the payment of such final
judgment, that will cause the imposition of the interest.

It will be noted that in the cases already adverted to, the rate of interest is imposed
on the total sum, from the filing of the complaint until paid; in other words, as part of
the judgment for damages. Clearly, they are not applicable to the instant case.
(Emphasis supplied.)

The subsequent case of American Express International, Inc., vs. Intermediate Appellate Court  was 11

a petition for review on certiorari from the decision, dated 27 February 1985, of the then Intermediate
Appellate Court reducing the amount of moral and exemplary damages awarded by the trial court, to
P240,000.00 and P100,000.00, respectively, and its resolution, dated 29 April 1985, restoring the
amount of damages awarded by the trial court, i.e., P2,000,000.00 as moral damages and
P400,000.00 as exemplary damages with interest thereon at 12% per annum from notice of
judgment, plus costs of suit. In a decision of 09 November 1988, this Court, while recognizing the
right of the private respondent to recover damages, held the award, however, for moral damages by
the trial court, later sustained by the IAC, to be inconceivably large. The Court  thus set aside the
12

decision of the appellate court and rendered a new one, "ordering the petitioner to pay private
respondent the sum of One Hundred Thousand (P100,000.00) Pesos as moral damages, with
six (6%) percent interest thereon computed from the finality of this decision until paid. (Emphasis
supplied)

Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz  which arose from
13

a breach of employment contract. For having been illegally dismissed, the petitioner was awarded by
the trial court moral and exemplary damages without, however, providing any legal interest thereon.
When the decision was appealed to the Court of Appeals, the latter held:

WHEREFORE, except as modified hereinabove the decision of the CFI of Negros

Oriental dated October 31, 1972 is affirmed in all respects, with the modification that
defendants-appellants, except defendant-appellant Merton Munn, are ordered to pay,
jointly and severally, the amounts stated in the dispositive portion of the decision,
including the sum of P1,400.00 in concept of compensatory damages, with interest
at the legal rate from the date of the filing of the complaint until fully paid (Emphasis
supplied.)
 The petition for review to this Court was denied. The records were thereupon transmitted to
the trial court, and an entry of judgment was made. The writ of execution issued by the trial
court directed that only compensatory damages should earn interest at 6% per annum from
the date of the filing of the complaint. Ascribing grave abuse of discretion on the part of the
trial judge, a petition for certiorari assailed the said order. This Court said:

. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the
legal rate" from the time of the filing of the complaint. . . Said circular [Central Bank
Circular No. 416] does not apply to actions based on a breach of employment
contract like the case at bar. (Emphasis supplied)

The Court reiterated that the 6% interest per annum on the damages should be computed
from the time the complaint was filed until the amount is fully paid.

Quite recently, the Court had another occasion to rule on the matter. National Power Corporation
vs. Angas,  decided on 08 May 1992, involved the expropriation of certain parcels of land. After
14

conducting a hearing on the complaints for eminent domain, the trial court ordered the petitioner to
pay the private respondents certain sums of money as just compensation for their lands so
expropriated "with legal interest thereon . . . until fully paid." Again, in applying the 6% legal
interest per annum under the Civil Code, the Court  declared:
15

. . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods

or credits but expropriation of certain parcels of land for a public purpose, the
payment of which is without stipulation regarding interest, and the interest adjudged
by the trial court is in the nature of indemnity for damages. The legal interest required
to be paid on the amount of just compensation for the properties expropriated is
manifestly in the form of indemnity for damages for the delay in the payment thereof.
Therefore, since the kind of interest involved in the joint judgment of the lower court
sought to be enforced in this case is interest by way of damages, and not by way of
earnings from loans, etc. Art. 2209 of the Civil Code shall apply.

Concededly, there have been seeming variances in the above holdings. The cases can perhaps be
classified into two groups according to the similarity of the issues involved and the corresponding
rulings rendered by the court. The "first group" would consist of the cases of Reformina
v. Tomol (1985), Philippine Rabbit Bus Lines v. Cruz (1986), Florendo v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second group" would be Malayan
Insurance Company v. Manila Port Service (1969), Nakpil and Sons v. Court of
Appeals (1988), and American Express International v. Intermediate Appellate Court (1988).

In the "first group", the basic issue focuses on the application of either the 6% (under the Civil Code)
or 12% (under the Central Bank Circular) interest per annum. It is easily discernible in these cases
that there has been a consistent holding that the Central Bank Circular imposing the 12%
interest per annum applies only to loans or forbearance  of money, goods or credits, as well as to
16

judgments involving such loan or forbearance of money, goods or credits, and that the 6% interest
under the Civil Code governs when the transaction involves the payment of indemnities in the
concept of damage arising from the breach or a delay in the performance of obligations in general.
Observe, too, that in these cases, a common time frame in the computation of the 6% interest per
annum has been applied, i.e., from the time the complaint is filed until the adjudged amount is fully
paid.

The "second group", did not alter the pronounced rule on the application of the 6% or 12%
interest per annum,  depending on whether or not the amount involved is a loan or forbearance, on
17
the one hand, or one of indemnity for damage, on the other hand. Unlike, however, the "first group"
which remained consistent in holding that the running of the legal interest should be from the time of
the filing of the complaint until fully paid, the "second group" varied on the commencement of the
running of the legal interest.

Malayan held that the amount awarded should bear legal interest from the date of the decision of the
court a quo, explaining that "if the suit were for damages, 'unliquidated and not known until definitely
ascertained, assessed and determined by the courts after proof,' then, interest 'should be from the
date of the decision.'" American Express International v. IAC, introduced a different time frame for
reckoning the 6% interest by ordering it to be "computed from the finality of (the) decision until paid."
The Nakpil and Sons case ruled that 12% interest per annum should be imposed from the finality of
the decision until the judgment amount is paid.

The ostensible discord is not difficult to explain. The factual circumstances may have called for
different applications, guided by the rule that the courts are vested with discretion, depending on the
equities of each case, on the award of interest. Nonetheless, it may not be unwise, by way of
clarification and reconciliation, to suggest the following rules of thumb for future guidance.

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-
delicts  is breached, the contravenor can be held liable for damages.  The provisions under Title
18 19

XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages. 20

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

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in
writing.  Furthermore, the interest due shall itself earn legal interest from the time it is judicially
21

demanded.  In the absence of stipulation, the rate of interest shall be 12% per annum to be
22

computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions
of Article 1169  of the Civil Code.
23

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
24

6% per annum.  No interest, however, shall be adjudged on unliquidated claims or damages except
25

when or until the demand can be established with reasonable certainty.  Accordingly, where the
26

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.

Narvasa, C.J., Cruz, Feliciano, Padilla, Bidin, Regalado, Davide, Jr., Romero, Bellosillo,
Melo, Quiason, Puno and Kapunan, JJ., concur.

Mendoza, J., took no part.

#Footnotes

1 Art. 1734. Common carriers are responsible for the loss, destruction, or
deterioration of the goods, unless the same is due to any of the following causes
only:

(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;

(2) Act of the public enemy in war, whether international or civil;

(3) Act or omission of the shipper or owner of the goods;

(4) The character of the goods or defects in the packing or in the containers;

(5) Order or act of competent public authority.

2 28 SCRA 65.

3 Penned by Justice Conrado Sanchez, concurred in by Justices Jose B.L. Reyes,

Arsenio Dizon, Querube Makalintal, Calixto Zaldivar, Enrique Fernando, Francisco
Capistrano, Claudio Teehankee and Antonio Barredo, Chief Justice Roberto
Concepcion and Justice Fred Ruiz Castro were on official leave.

4 The correct caption of the case is "Claro Rivera vs. Amadeo Matute, L-6998,
29 February 1956," 98 Phil. 516.

5 139 SCRA 260, 265.

6 Penned by Justice Serafin Cuevas, concurred in by Justices Hermogenes

Concepcion, Jr., Vicente Abad Santos, Ameurfina Melencio-Herrera, Venicio Escolin,
Lorenzo Relova, Hugo Gutierrez, Jr., Buenaventura de la Fuente, Nestor Alampay
and Lino Patajo. Justice Ramon Aquino concurred in the result. Justice Efren Plana
filed a concurring and dissenting opinion, concurred in by Justice Claudio Teehankee
while Chief Justice Felix Makasiar concurred with the separate opinion of Justice
Plana.

7 143 SCRA 158.

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

9 160 SCRA 334.

10 Penned by Justice Edgardo Paras, with the concurrence of Justices Marcelo

Fernan, Teodoro Padilla, Abdulwahid Bidin, and Irene Cortes. Justice Hugo
Gutierrez, Jr., took no part because he was the ponente in the Court of Appeals.

11 167 SCRA 209.

12 Rendered per curiam with the concurrence of then Chief Justice Marcelo Fernan,

Justices Andres Narvasa, Isagani A. Cruz, Emilio Gancayco, Teodoro Padilla,
Abdulwahid Bidin, Abraham Sarmiento, Irene Cortes, Carolina Griño-Aquino, Leo
Medialdea and Florenz Regalado. Justices Ameurfina Melencio-Herrera and Hugo
Gutierrez, Jr., took no part because they did not participate in the deliberations.
Justices Edgardo Paras and Florentino Feliciano also took no part.

13 170 SCRA 461.

14 208 SCRA 542.

15 Penned by Justice Edgardo Paras with the concurrence of Justices Ameurfina

Melencio-Herrera, Teodoro Padilla, Florenz Regalado and Rodolfo Nocon.

16 Black's Law Dictionary (1990 ed., 644) citing the case of Hafer v. Spaeth,
22 Wash. 2d 378, 156 P.2d 408, 411 defines the word forbearance, within the
context of usury law, as a contractual obligation of lender or creditor to refrain, during
given period of time, from requiring borrower or debtor to repay loan or debt then due
and payable.

17 In the case of Malayan Insurance, the application of the 6% and 12% interest per
annum has no bearing considering that this case was decided upon before the
issuance of Circular No. 416 by the Central Bank.

18 Art. 1157. Obligations arise from.

(1) Law;

(2) Contracts;

(3) Quasi-contracts;

(4) Acts or omissions punished by law; and

(5) Qausi-delicts."

19 Art. 1170. Those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof, are
liable for damages.
20 Art. 2195. The provisions of this Title (on Damages) shall be respectively
applicable to all obligations mentioned in article 1157.

21 Art. 1956. No interest shall be due unless it has been expressly stipulated in
writing.

22 Art. 2212. Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point.

23 Art. 1169. Those obliged to deliver or to do something incur in delay from the time
the obligee judicially or extrajudicially demands from them the fulfillment of their
obligation.

"However, the demand by the creditor shall not be necessary in order that
delay may exist:

(1) When the obligation or the law expressly so declare; or

(2) When from the nature and the circumstances of the obligation it appears
that the designation of the time when the thing is to be delivered or the
service is to be rendered was a controlling motive for the establishment of the
contract; or

(3) When demand would be useless, as when the obligor has rendered it
beyond his power to perform.

"In reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is incumbent
upon him. From the moment one of the parties fulfills his obligation, delay by
the other begins."

24 Art. 2210. Interest may, in the discretion of the court, be allowed upon damages
awarded for breach of contract.

Art. 2211. In crimes and quasi-delicts, interest as a part of the damages may, in a
proper case, be adjudicated in the discretion of the court.

25 Art. 2209. If the obligation consists in the payment of a sum of money, and the
debtor incurs in delay, the indemnity for damages, there being no stipulation to the
contrary, shall be the payment of the interest agreed upon, and in the absence of
stipulation, the legal interest, which is six per cent per annum.

26 Art. 2213. Interest cannot be recovered upon unliquidated claims or damages,

except when the demand can be established with reasonable certainty.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC
G.R. No. 189871               August 13, 2013

DARIO NACAR, PETITIONER,
vs.
GALLERY FRAMES AND/OR FELIPE BORDEY, JR., RESPONDENTS.

DECISION

PERALTA, J.:

This is a petition for review on certiorari assailing the Decision 1 dated September 23, 2008 of the
Court of Appeals (CA) in CA-G.R. SP No. 98591, and the Resolution 2 dated October 9, 2009
denying petitioner’s motion for reconsideration.

The factual antecedents are undisputed.

Petitioner Dario 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., docketed as NLRC NCR Case No. 01-00519-97.

On October 15, 1998, the Labor Arbiter rendered a Decision 3 in favor of petitioner and found that he
was dismissed from employment without a valid or just cause. Thus, petitioner was awarded
backwages and separation pay in lieu of reinstatement in the amount of ₱158,919.92. The
dispositive portion of the decision, reads:

With the foregoing, we find and so rule that respondents failed to discharge the burden of showing
that complainant was dismissed from employment for a just or valid cause. All the more, it is clear
from the records that complainant was never afforded due process before he was terminated. As
such, we are perforce constrained to grant complainant’s prayer for the payments of separation pay
in lieu of reinstatement to his former position, considering the strained relationship between the
parties, and his apparent reluctance to be reinstated, computed only up to promulgation of this
decision as follows:

SEPARATION PAY
Date Hired = August 1990
Rate = ₱198/day
Date of Decision = Aug. 18, 1998
Length of Service = 8 yrs. & 1 month
₱198.00 x 26 days x 8 months = ₱41,184.00
BACKWAGES
Date Dismissed = January 24, 1997
Rate per day = ₱196.00
Date of Decisions = Aug. 18, 1998
a) 1/24/97 to 2/5/98 = 12.36 mos.
 ₱196.00/day x 12.36 mos. = ₱62,986.56
b) 2/6/98 to 8/18/98 = 6.4 months
Prevailing Rate per day = ₱62,986.00
₱198.00 x 26 days x 6.4 mos. = ₱32,947.20
TOTAL = ₱95.933.76

xxxx

WHEREFORE, premises considered, judgment is hereby rendered finding respondents guilty of

constructive dismissal and are therefore, ordered:

To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred eighty-
six pesos and 56/100 (₱62,986.56) Pesos representing his separation pay;

To pay jointly and severally the complainant the amount of nine (sic) five thousand nine hundred
thirty-three and 36/100 (₱95,933.36) representing his backwages; and

All other claims are hereby dismissed for lack of merit.

SO ORDERED.4

Respondents appealed to the NLRC, but it was dismissed for lack of merit in the Resolution 5 dated
February 29, 2000. Accordingly, the NLRC sustained the decision of the Labor Arbiter. Respondents
filed a motion for reconsideration, but it was denied. 6

Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On August 24,
2000, the CA issued a Resolution dismissing the petition. Respondents filed a Motion for
Reconsideration, but it was likewise denied in a Resolution dated May 8, 2001. 7

Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332. Finding
no reversible error on the part of the CA, this Court denied the petition in the Resolution dated April
17, 2002.8

An Entry of Judgment was later issued certifying that the resolution became final and executory on
May 27, 2002.9 The case was, thereafter, referred back to the Labor Arbiter. A pre-execution
conference was consequently scheduled, but respondents failed to appear. 10

On November 5, 2002, petitioner 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, 2002.11 Upon recomputation, the Computation and Examination
Unit of the NLRC arrived at an updated amount in the sum of ₱471,320.31. 12

On December 2, 2002, a Writ of Execution13 was issued by the Labor Arbiter ordering the Sheriff to
collect from respondents the total amount of ₱471,320.31. Respondents filed a Motion to Quash Writ
of Execution, arguing, among other things, that since the Labor Arbiter awarded separation pay of
₱62,986.56 and limited backwages of ₱95,933.36, 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.14 On January 13, 2003, the Labor Arbiter issued an Order 15 denying
the motion. Thus, an Alias Writ of Execution16 was issued on January 14, 2003.

Respondents again appealed before the NLRC, which on June 30, 2003 issued a
Resolution17 granting the appeal in favor of the respondents and ordered the recomputation of the
judgment award.

On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the NLRC to be
final and executory. Consequently, another pre-execution conference was held, but respondents
failed to appear on time. Meanwhile, petitioner moved that an Alias Writ of Execution be issued to
enforce the earlier recomputed judgment award in the sum of ₱471,320.31. 18

The records of the case were again forwarded to the Computation and Examination Unit for
recomputation, where the judgment award of petitioner was reassessed to be in the total amount of
only ₱147,560.19.

Petitioner then moved that a writ of execution be issued ordering respondents to pay him the original
amount as determined by the Labor Arbiter in his Decision dated October 15, 1998, pending the final
computation of his backwages and separation pay.

On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the judgment
award that was due to petitioner in the amount of ₱147,560.19, which petitioner eventually received.

Petitioner then filed a Manifestation and Motion praying for the re-computation of the monetary
award to include the appropriate interests.19

On May 10, 2005, the Labor Arbiter issued an Order 20 granting the motion, but only up to the amount
of ₱11,459.73. The Labor Arbiter reasoned that it is the October 15, 1998 Decision that should be
enforced considering that it was the one that became final and executory. However, the Labor
Arbiter reasoned 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 ₱158,919.92 that
should be executed. Thus, since petitioner already received ₱147,560.19, he is only entitled to the
balance of ₱11,459.73.

Petitioner then appealed before the NLRC,21 which appeal was denied by the NLRC in its
Resolution22 dated September 27, 2006. Petitioner filed a Motion for Reconsideration, but it was
likewise denied in the Resolution23 dated January 31, 2007.

Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No. 98591.

On September 23, 2008, the CA rendered a Decision24 denying the petition. The CA opined that
since petitioner no longer appealed the October 15, 1998 Decision of the Labor Arbiter, which
already 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.

Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution 25 dated October 9,
2009.

Hence, the petition assigning the lone error:

 I

WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED,

COMMITTED GRAVE ABUSE OF DISCRETION AND DECIDED CONTRARY TO LAW IN
UPHOLDING THE QUESTIONED RESOLUTIONS OF THE NLRC WHICH, IN TURN, SUSTAINED
THE MAY 10, 2005 ORDER OF LABOR ARBITER MAGAT MAKING THE DISPOSITIVE PORTION
OF THE OCTOBER 15, 1998 DECISION OF LABOR ARBITER LUSTRIA SUBSERVIENT TO AN
OPINION EXPRESSED IN THE BODY OF THE SAME DECISION.26

Petitioner argues that notwithstanding the fact that there was a computation of backwages in the
Labor Arbiter’s decision, the same is not final until reinstatement is made or until finality of the
decision, in case of an award of separation pay. Petitioner maintains that considering that the
October 15, 1998 decision of the Labor Arbiter did not become final and executory until the April 17,
2002 Resolution of the Supreme Court in G.R. No. 151332 was entered in the Book of Entries on
May 27, 2002, the reckoning point for the computation of the backwages and separation pay should
be on May 27, 2002 and not when the decision of the Labor Arbiter was rendered on October 15,
1998. Further, petitioner posits that he is also entitled to the payment of interest from the finality of
the decision until full payment by the respondents.

On their part, respondents assert that since only separation pay and limited backwages were
awarded to petitioner by the October 15, 1998 decision of the Labor Arbiter, no more recomputation
is required to be made of said awards. Respondents insist that since the decision clearly stated that
the separation pay and backwages are "computed only up to [the] promulgation of this decision,"
and considering that petitioner no longer appealed the decision, petitioner is only entitled to the
award as computed by the Labor Arbiter in the total amount of ₱158,919.92. Respondents added
that it was only during the execution proceedings that the petitioner questioned the award, long after
the decision had become final and executory. Respondents contend that to allow the further
recomputation of the backwages to be awarded to petitioner at this point of the proceedings would
substantially vary the decision of the Labor Arbiter as it violates the rule on immutability of
judgments.

The petition is meritorious.

The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v. Court of
Appeals (Sixth Division),27 wherein the issue submitted to the Court for resolution was the propriety
of the computation of the awards made, and whether this violated the principle of immutability of
judgment. Like in the present case, it was a distinct feature of the judgment of the Labor Arbiter in
the above-cited case that the decision already provided for the computation of the payable
separation pay and backwages due and did not further order the computation of the monetary
awards up to the time of the finality of the judgment. Also in Session Delights, the dismissed
employee failed to appeal the decision of the labor arbiter. The Court clarified, thus:

In concrete terms, 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 source of misunderstanding in implementing the final decision in this case proceeds from the way
the original labor arbiter framed his decision. The decision consists essentially of two 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. This is the part, too, that the petitioner now posits should no
longer be re-computed because the computation is already in the labor arbiter's decision that the CA
had affirmed. The public and private respondents, on the other hand, posit that a re-computation is
necessary because the relief in an illegal dismissal decision goes all the way up to reinstatement if
reinstatement is to be made, or up to the finality of the decision, if separation pay is to be given in
lieu reinstatement.

That the labor arbiter's decision, at the same time that it found that an illegal dismissal had taken
place, also made a computation of the award, is understandable in light of Section 3, Rule VIII of the
then NLRC Rules of Procedure which requires that a computation be made. This Section in part
states:

[T]he Labor Arbiter of origin, in cases involving monetary awards and at all events, as far as
practicable, shall embody in any such decision or order the detailed and full amount awarded.

Clearly implied from this original computation is its currency up to the finality of the labor arbiter's
decision. As we noted above, this implication is apparent from the terms of the computation itself,
and no question would have arisen had the parties terminated the case and implemented the
decision at that point.

However, the petitioner disagreed with the labor arbiter's findings on all counts - i.e., on the finding of
illegality as well as on all the consequent awards made. Hence, the petitioner appealed the case to
the NLRC which, in turn, affirmed the labor arbiter's decision. By law, the NLRC decision is final,
reviewable only by the CA on jurisdictional grounds.

The petitioner appropriately sought to nullify the NLRC decision on jurisdictional grounds through a
timely filed Rule 65 petition for certiorari. The CA decision, finding that NLRC exceeded its authority
in affirming the payment of 13th month pay and indemnity, lapsed to finality and was subsequently
returned to the labor arbiter of origin for execution.

It was at this point that the present case arose. Focusing on the core illegal dismissal portion of the
original labor arbiter's decision, the implementing labor arbiter ordered the award re-computed; he
apparently read the figures originally ordered to be paid to be the computation due had the case
been terminated and implemented at the labor arbiter's level. Thus, the labor arbiter re-computed the
award to include the separation pay and the backwages due up to the finality of the CA decision that
fully terminated the case on the merits. Unfortunately, the labor arbiter's approved computation went
beyond the finality of the CA decision (July 29, 2003) and included as well the payment for awards
the final CA decision had deleted - specifically, the proportionate 13th month pay and the indemnity
awards. Hence, the CA issued the decision now questioned in the present petition.

We see no error in the CA decision confirming that a re-computation is necessary as it essentially

considered the labor arbiter's original decision in accordance with its basic component parts as we
discussed above. To reiterate, the first part contains the finding of illegality and its monetary
consequences; the second part is the computation of the awards or monetary consequences of the
illegal dismissal, computed as of the time of the labor arbiter's original decision. 28
Consequently, from the above disquisitions, under the terms of the decision which is sought to be
executed by the petitioner, no essential change is made by a recomputation as this step is a
necessary consequence that flows from the nature of the illegality of dismissal declared by the Labor
Arbiter in that decision.29 A recomputation (or an original computation, if no previous computation has
been made) is a part of the law – specifically, Article 279 of the Labor Code and the established
jurisprudence on this provision – that is read into the decision. By the nature of an illegal dismissal
case, the reliefs continue to add up until full satisfaction, as expressed under Article 279 of the Labor
Code. The recomputation of the consequences of illegal dismissal upon execution of the decision
does not constitute an alteration or amendment of the final decision being implemented. The illegal
dismissal ruling stands; only the computation of monetary consequences of this dismissal is
affected, and this is not a violation of the principle of immutability of final judgments. 30

That the amount respondents shall now pay has greatly increased is a consequence that it cannot
avoid as it is the risk that it ran when it continued to seek recourses against the Labor Arbiter's
decision. Article 279 provides for the consequences of illegal dismissal in no uncertain terms,
qualified only by jurisprudence in its interpretation of when separation pay in lieu of reinstatement is
allowed. When that happens, the finality of the illegal dismissal decision becomes the reckoning
point instead of the reinstatement that the law decrees. In allowing separation pay, the final decision
effectively declares that the employment relationship ended so that separation pay and backwages
are to be computed up to that point.31

Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines, Inc. v.
Court of Appeals,32 the Court laid down the guidelines regarding the manner of computing legal
interest, to wit:

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

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

2. When an obligation, not constituting a loan or forbearance of money, is breached, an

interest on the amount of damages awarded may be imposed at the discretion of the court at
the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or
damages except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code)
but when such certainty cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date 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. 33
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No.
796 dated May 16, 2013, approved the amendment of Section 234 of Circular No. 905, Series of 1982
and, accordingly, issued Circular No. 799,35 Series of 2013, effective July 1, 2013, the pertinent
portion of which reads:

The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following revisions
governing the rate of interest in the absence of stipulation in loan contracts, thereby amending
Section 2 of Circular No. 905, Series of 1982:

Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the
rate allowed in judgments, in the absence of an express contract as to such rate of interest, shall be
six percent (6%) per annum.

Section 2. In view of the above, Subsection X305.136 of the Manual of Regulations for Banks and
Sections 4305Q.1,37 4305S.338 and 4303P.139 of the Manual of Regulations for Non-Bank Financial
Institutions are hereby amended accordingly.

This Circular shall take effect on 1 July 2013.

Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that
would govern the parties, the rate of legal interest for loans or forbearance of any money, goods or
credits and the rate allowed in judgments shall no longer be twelve percent (12%) per annum - as
reflected in the case of Eastern Shipping Lines 40 and Subsection X305.1 of the Manual of
Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations
for Non-Bank Financial Institutions, before its amendment by BSP-MB Circular No. 799 - but will now
be six percent (6%) per annum effective July 1, 2013. It should be noted, nonetheless, that the new
rate could only be applied prospectively and not retroactively. Consequently, the twelve percent
(12%) per annum legal interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate
of six percent (6%) per annum shall be the prevailing rate of interest when applicable.

Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B. Olaguer v.
Bangko Sentral Monetary Board,41 this Court affirmed the authority of the BSP-MB to set interest
rates and to issue and enforce Circulars when it ruled that "the BSP-MB may prescribe the maximum
rate or rates of interest for all loans or renewals thereof or the forbearance of any money, goods or
credits, including those for loans of low priority such as consumer loans, as well as such loans made
by pawnshops, finance companies and similar credit institutions. It even authorizes the BSP-MB to
prescribe different maximum rate or rates for different types of borrowings, including deposits and
deposit substitutes, or loans of financial intermediaries."

Nonetheless, with regard to those judgments that have become final and executory prior to July 1,
2013, said judgments shall not be disturbed and shall continue to be implemented applying the rate
of interest fixed therein.
1awp++i1

To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping
Lines42 are accordingly modified to embody BSP-MB Circular No. 799, as follows:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts is breached, the contravenor can be held liable for damages. The provisions
under Title XVIII on "Damages" of the Civil Code govern in determining the measure of
recoverable damages. 1âwphi1
 II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

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 6% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the
Civil Code.

When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages, except when or
until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.

When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.

And, in addition to the above, judgments that have become final and executory prior to July 1, 2013,
shall not be disturbed and shall continue to be implemented applying the rate of interest fixed
therein.

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.

DIOSDADO M. PERALTA
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 187678               April 10, 2013

SPOUSES IGNACIO F. JUICO and ALICE P. JUICO, Petitioners,

vs.
CHINA BANKING CORPORATION, Respondent.

DECISION

VILLARAMA, JR., J.:

Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as
amended, assailing the February 20, 2009 Decision1 and April 27, 2009 Resolution2 of the Court of
Appeals (CA) in CA G.R. CV No. 80338. The CA affirmed the April 14, 2003 Decision 3 of the
Regional Trial Court (RTC) of Makati City, Branch 147.

The factual antecedents:

Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a loan from China Banking
Corporation (respondent) as evidenced by two Promissory Notes both dated October 6, 1998 and
numbered 507-001051-34 and 507-001052-0,5 for the sums of !!6,216,000 and ₱4, 139,000,
respectively. The loan was secured by a Real Estate Mortgage (REM) over petitioners’ property
located at 49 Greensville St., White Plains, Quezon City covered by Transfer Certificate of Title
(TCT) No. RT-103568 (167394) PR-412086 of the Register of Deeds of Quezon City.

When petitioners failed to pay the monthly amortizations due, respondent demanded the full
payment of the outstanding balance with accrued monthly interests. On September 5, 2000,
petitioners received respondent’s last demand letter 7 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 respondent as highest bidder for the amount of
₱10,300,000.

On May 8, 2001, petitioners received8 a demand letter9 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, respondent filed a collection suit in
the trial court. In its Complaint, 10 respondent prayed that judgment be rendered ordering the
petitioners 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.

In their Answer,11 petitioners admitted the existence of the debt but interposed, by way of special and
affirmative defense, that the complaint states no cause of action considering that the principal of the
loan was already paid when the mortgaged property was extrajudicially foreclosed and sold for
₱10,300,000. Petitioners contended that should they be held liable for any deficiency, it should be
only for ₱55,000 representing the difference between the total outstanding obligation of ₱10,355,000
and the bid price of ₱10,300,000. Petitioners also argued that even assuming there is a cause of
action, such deficiency cannot be enforced by respondent because it consists only of the penalty
and/or compounded interest on the accrued interest which is generally not favored under the Civil
Code. By way of counterclaim, petitioners prayed that respondent be ordered to pay ₱100,000 in
attorney’s fees and costs of suit.

At the trial, respondent presented Ms. Annabelle Cokai Yu, its Senior Loans Assistant, as witness.
She testified that she handled the account of petitioners and assisted them in processing their loan
application. She called them monthly to inform them of the prevailing rates to be used in computing
interest due on their loan. As of the date of the public auction, petitioners’ outstanding balance was
₱19,201,776.6312 based on the following statement of account which she prepared:

STATEMENT OF ACCOUNT
As of FEBRUARY 23, 2001
IGNACIO F. JUICO

PN# 507-0010520 due on 04-07-2004

1âwphi1

Principal balance of PN# 5070010520. . . . . . . . . . . . . . 4,139,000.00

Interest on ₱4,139,000.00 fr. 04-Nov-99

04-Nov-2000 366 days @ 15.00%. . . . . . . . . . . . . . . . . 622,550.96

Interest on ₱4,139,000.00 fr. 04-Nov-2000

04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . . 83,346.99

Interest on ₱4,139,000.00 fr. 04-Dec-2000

04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . . 75,579.27

Interest on ₱4,139,000.00 fr. 04-Jan-2001

04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . . 68,548.64

Interest on ₱4,139,000.00 fr. 04-Feb-2001

23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . . 38,781.86

Penalty charge @ 1/10 of 1% of the total amount due
(₱4,139,000.00 from 11-04-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . . 1,974,303.00
 Sub-total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,002,110.73
PN# 507-0010513 due on 04-07-2004
Principal balance of PN# 5070010513. . . . . . . . . . . . . . 6,216,000.00
Interest on ₱6,216,000.00 fr. 06-Oct-99
04-Nov-2000 395 days @ 15.00%. . . . . . . . . . . . . . . . . 1,009,035.62
Interest on ₱6,216,000.00 fr. 04-Nov-2000
04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . . 125,171.51
Interest on ₱6,216,000.00 fr. 04-Dec-2000
04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . . 113,505.86
Interest on ₱6,216,000.00 fr. 04-Jan-2001
04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . . 102,947.18
Interest on ₱6,216,000.00 fr. 04-Feb-2001
23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . . 58,243.07
Penalty charge @ 1/10 of 1% of the total amount due
(₱6,216,000.00 from 10-06-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . . 3,145,296.00

Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,770,199.23

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,772,309.96

Less: A/P applied to balance of principal (55,000.00)

Less: Accounts payable L & D (261,149.39) 17,456,160.57

Add: 10% Attorney’s Fee 1,745,616.06

Total amount due 19,201,776.63

Less: Bid Price 10,300,000.00

TOTAL DEFICIENCY AMOUNT AS OF
FEB. 23, 2001 8,901,776.63 13

Petitioners thereafter received a demand letter14 dated May 2, 2001 from respondent’s counsel for
the deficiency amount of ₱8,901,776.63. Ms. Yu further testified that based on the Statement of
Account15 dated March 15, 2002 which she prepared, the outstanding balance of petitioners was
₱15,190,961.48.16

On cross-examination, Ms. Yu reiterated that the interest rate changes every month based on the
prevailing market rate and she notified petitioners of the prevailing rate by calling them monthly
before their account becomes past due. When asked if there was any written authority from
petitioners for respondent to increase the interest rate unilaterally, she answered that petitioners
signed a promissory note indicating that they agreed to pay interest at the prevailing rate. 17

Petitioner Ignacio F. Juico testified that prior to the release of the loan, he was required to sign a
blank promissory note and was informed that the interest rate on the loan will be based on prevailing
market rates. Every month, respondent informs him by telephone of the prevailing interest rate. At
first, he was able to pay his monthly amortizations but when he started to incur delay in his
payments due to the financial crisis, respondent pressured him to pay in full, including charges and
interests for the delay. His property was eventually foreclosed and was sold at public auction. 18

On cross-examination, petitioner testified that he is a Doctor of Medicine and also engaged in the
business of distributing medical supplies. He admitted having read the promissory notes and that he
is aware of his obligation under them before he signed the same. 19

In its decision, the RTC ruled in favor of respondent. The fallo of the RTC decision reads:

WHEREFORE, premises considered, the Complaint is hereby sustained, and Judgment is rendered
ordering herein defendants to pay jointly and severally to plaintiff, the following:

1. ₱8,901,776.63 representing the amount of the deficiency owing to the plaintiff, plus
interest thereon at the legal rate after February 23, 2001;

2. An amount equivalent to 10% of the total amount due as and for attorney’s fees, there
being stipulation therefor in the promissory notes;

3. Costs of suit.

SO ORDERED.20

The trial court agreed with respondent 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 Ignacio’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 petitioners 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 that interest will be at the prevailing rates. All of
these details, the trial court added, were within the knowledge of the petitioners.

When the case was elevated to the CA, the latter affirmed the trial court’s decision. The CA
recognized respondent’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 petitioners are bound by the stipulations
contained therein.

Petitioners are now before this Court raising the sole issue of whether the interest rates imposed
upon them by respondent are valid. Petitioners contend that the interest rates imposed by
respondent are not valid as they were not by virtue of any law or Bangko Sentral ng Pilipinas (BSP)
regulation or any regulation that was passed by an appropriate government entity. They insist that
the interest rates were unilaterally imposed by the bank and thus violate the principle of mutuality of
contracts. They argue that the escalation clause in the promissory notes does not give respondent
the unbridled authority to increase the interest rate unilaterally. Any change must be mutually agreed
upon.

Respondent, for its part, points out that petitioners failed to show that their case falls under any of
the exceptions wherein findings of fact of the CA may be reviewed by this Court. It contends that an
inquiry as to whether the interest rates imposed on the loans of petitioners were supported by
appropriate regulations from a government agency or the Central Bank requires a reevaluation of the
evidence on records. Thus, the Court would in effect, be confronted with a factual and not a legal
issue.

The appeal is 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 weighed in favor of one of the parties so as to lead to an
unconscionable result is void. Any stipulation regarding the validity or compliance of the contract
which is left solely to the will of one of the parties, is likewise, invalid. 21

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. 22 Hence, such stipulations are not void per se.23

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. 25

In Banco Filipino Savings & Mortgage Bank v. Navarro, 26 the escalation clause stated: "I/We hereby
authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract
without advance notice to me/us in the event a law should be enacted increasing the lawful rates of
interest that may be charged on this particular kind of loan." While escalation clauses in general are
considered valid, we ruled that Banco Filipino may not increase the interest on respondent
borrower’s loan, pursuant to Circular No. 494 issued by the Monetary Board on January 2, 1976,
because said circular is not a law although it has the force and effect of law and the escalation
clause has no provision for reduction of the stipulated interest "in the event that the applicable
maximum rate of interest is reduced by law or by the Monetary Board" (de-escalation clause).

Subsequently, in Insular Bank of Asia and America v. Spouses Salazar 27 we reiterated that
escalation clauses are valid stipulations but their enforceability are subject to certain conditions. The
increase of interest rate from 19% to 21% per annum made by petitioner bank was disallowed
because it did not comply with the guidelines adopted by the Monetary Board to govern interest rate
adjustments by banks and non-banks performing quasi-banking functions.

In the 1991 case of Philippine National Bank v. Court of Appeals, 28 the promissory notes authorized
PNB to increase the stipulated interest per annum "within the limits allowed by law at any time
depending on whatever policy 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." This Court declared the increases (from 18% to 32%,
then to 41% and then to 48%) unilaterally imposed by PNB to be in violation of the principle of
mutuality essential in contracts.29

A similar ruling was made in a 1994 case30 also involving PNB where the credit agreement provided
that "PNB reserves the right to increase the interest rate within the limits allowed by law at any time
depending on whatever policy it may adopt in the future: Provided, that the interest rate on this
accommodation shall be correspondingly decreased in the event that the applicable maximum
interest is reduced by law or by the Monetary Board x x x".

Again, in 1996, the Court invalidated escalation clauses authorizing PNB to raise the stipulated
interest rate at any time without notice, within the limits allowed by law. The Court observed that
there was no attempt made by PNB to secure the conformity of respondent borrower to the
successive increases in the interest rate. The borrower’s assent to the increases cannot be implied
from their lack of response to the letters sent by PNB, informing them of the increases. 31

In the more recent case of Philippine Savings Bank v. Castillo, 32 we sustained the CA in declaring as
unreasonable the following escalation clause: "The rate of interest and/or bank charges herein
stipulated, during the terms of this promissory note, its extensions, renewals or other modifications,
may be increased, decreased or otherwise changed from time to time within the rate of interest and
charges allowed under present or future law(s) and/or government regulation(s) as the PSBank may
prescribe for its debtors." Clearly, the increase or decrease of interest rates under such clause
hinges solely on the discretion of petitioner as it does not require the conformity of the maker before
a new interest rate could be enforced. We also said that respondents’ assent to the modifications in
the interest rates cannot be implied from their lack of response to the memos sent by petitioner,
informing them of the amendments, nor from the letters requesting for reduction of the rates. Thus:

… the validity of the escalation clause did not give petitioner the unbridled right to unilaterally adjust
interest rates. The adjustment should have still been subjected to the mutual agreement of the
contracting parties. In light of the absence of consent on the part of respondents to the modifications
in the interest rates, the adjusted rates cannot bind them notwithstanding the inclusion of a de-
escalation clause in the loan agreement.33

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. 34 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."35

The two promissory notes signed by petitioners provide:

I/We hereby authorize the CHINA BANKING CORPORATION to increase or decrease as the case
may be, the interest rate/service charge presently stipulated in this note without any advance notice
to me/us in the event a law or Central Bank regulation is passed or promulgated by the Central Bank
of the Philippines or appropriate government entities, increasing or decreasing such interest rate or
service charge.36

Such escalation clause is similar to that involved in the case of Floirendo, Jr. v. Metropolitan Bank
and Trust Company37 where this Court ruled:

The provision in the promissory note authorizing respondent bank to increase, decrease or
otherwise change from time to time the rate of interest and/or bank charges "without advance notice"
to petitioner, "in the event of change in the interest rate prescribed by law or the Monetary Board of
the Central Bank of the Philippines," does not give respondent bank unrestrained freedom to charge
any rate other than that which was agreed upon. Here, the monthly upward/downward adjustment of
interest rate is left to the will of respondent bank alone. It violates the essence of mutuality of the
contract.38

More recently in Solidbank Corporation v. Permanent Homes, Incorporated, 39 we upheld as valid an
escalation clause which required a written notice to and conformity by the borrower to the increased
interest rate. Thus:

The Usury Law had been rendered legally ineffective by Resolution No. 224 dated 3 December 1982
of the Monetary Board of the Central Bank, and later by Central Bank Circular No. 905 which took
effect on 1 January 1983. These circulars removed the ceiling on interest rates for secured and
unsecured loans regardless of maturity. The effect of these circulars is to allow the parties to agree
on any interest that may be charged on a loan. The virtual repeal of the Usury Law is within the
range of judicial notice which courts are bound to take into account. Although interest rates are no
longer subject to a ceiling, the lender still does not have an unbridled license to impose increased
interest rates. The lender and the borrower should agree on the imposed rate, and such imposed
rate should be in writing.

The three promissory notes between Solidbank and Permanent all contain the following provisions:

"5. We/I irrevocably authorize Solidbank to increase or decrease at any time the interest rate agreed
in this Note or Loan on the basis of, among others, prevailing rates in the local or international
capital markets. For this purpose, We/I authorize Solidbank to debit any deposit or placement
account with Solidbank belonging to any one of us. The adjustment of the interest rate shall be
effective from the date indicated in the written notice sent to us by the bank, or if no date is indicated,
from the time the notice was sent.

6. Should We/I disagree to the interest rate adjustment, We/I shall prepay all amounts due under this
Note or Loan within thirty (30) days from the receipt by anyone of us of the written notice. Otherwise,
We/I shall be deemed to have given our consent to the interest rate adjustment."
The stipulations on interest rate repricing are valid because (1) the parties mutually agreed on said
stipulations; (2) repricing takes effect only upon Solidbank’s written notice to Permanent of the new
interest rate; and (3) Permanent has the option to prepay its loan if Permanent and Solidbank do not
agree on the new interest rate. The phrases "irrevocably authorize," "at any time" and "adjustment of
the interest rate shall be effective from the date indicated in the written notice sent to us by the bank,
or if no date is indicated, from the time the notice was sent," emphasize that Permanent should
receive a written notice from Solidbank as a condition for the adjustment of the interest rates.
(Emphasis supplied.)

In this case, the trial and appellate courts, in upholding the validity of the escalation clause,
underscored the fact that there was actually no fixed rate of interest stipulated in the promissory
notes as this was made dependent on prevailing rates in the market. The subject promissory notes
contained the following condition written after the first paragraph:

With one year grace period on principal and thereafter payable in 54 equal monthly instalments to
start on the second year. Interest at the prevailing rates payable quarterly in arrears. 40

In Polotan, Sr. v. CA (Eleventh Div.),41 petitioner cardholder assailed the trial and appellate courts in
ruling for the validity of the escalation clause in the Cardholder’s Agreement. On petitioner’s
contention that the interest rate was unilaterally imposed and based on the standards and rate
formulated solely by respondent credit card company, we held:

The contractual provision in question states that "if there occurs any change in the prevailing market
rates, the new interest rate shall be the guiding rate in computing the interest due on the outstanding
obligation without need of serving notice to the Cardholder other than the required posting on the
monthly statement served to the Cardholder." This could not be considered an escalation clause for
the reason that it neither states an increase nor a decrease in interest rate. Said clause simply states
that the interest rate should be based on the prevailing market rate.

Interpreting it differently, while said clause does not expressly stipulate a reduction in interest rate, it
nevertheless provides a leeway for the interest rate to be reduced in case the prevailing market rates
dictate its reduction.

Admittedly, the second paragraph of the questioned proviso which provides that "the Cardholder
hereby authorizes Security Diners to correspondingly increase the rate of such interest in the event
of changes in prevailing market rates x x x" is an escalation clause. However, it cannot be said to be
dependent solely on the will of private respondent as it is also dependent on the prevailing market
rates.

Escalation clauses are not basically wrong or legally objectionable as long as they are not solely
potestative but based on reasonable and valid grounds. Obviously, the fluctuation in the market
rates is beyond the control of private respondent. 42 (Emphasis supplied.)

In interpreting a contract, its provisions should not be read in isolation but in relation to each other
and in their entirety so as to render them effective, having in mind the intention of the parties and the
purpose to be achieved. The various stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that sense which may result from all of them taken jointly. 43

Here, the escalation clause in the promissory notes authorizing the respondent to adjust the rate of
interest on the basis of a law or regulation issued by the Central Bank of the Philippines, should be
read together with the statement after the first paragraph where no rate of interest was fixed as it
would be based on prevailing market rates. While the latter is not strictly an escalation clause, its
clear import was that interest rates would vary as determined by prevailing market rates. Evidently,
the parties intended the interest on petitioners’ loan, including any upward or downward adjustment,
to be determined by the prevailing market rates and not dictated by respondent’s policy. It may also
be mentioned that since the deregulation of bank rates in 1983, the Central Bank has shifted to a
market-oriented interest rate policy.44

There is no indication that petitioners were coerced into agreeing with the foregoing provisions of the
promissory notes. In fact, petitioner Ignacio, a physician engaged in the medical supply business,
admitted having understood his obligations before signing them. At no time did petitioners protest
the new rates imposed on their loan even when their property was foreclosed by respondent.

This notwithstanding, we hold that the escalation clause is still void because it grants respondent the
power to impose an increased rate of interest without a written notice to petitioners and their written
consent. Respondent’s monthly telephone calls to petitioners advising them of the prevailing interest
rates would not suffice. A detailed billing statement based on the new imposed interest with
corresponding computation of the total debt should have been provided by the respondent to enable
petitioners to make an informed decision. An appropriate form must also be signed by the petitioners
to indicate their conformity to the new rates. Compliance with these requisites is essential to
preserve the mutuality of contracts. For indeed, one-sided impositions do not have the force of law
between the parties, because such impositions are not based on the parties’ essential equality. 45

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.46 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.

Based on the August 29, 2000 demand letter of China Bank, petitioners’ total principal obligation
under the two promissory notes which they failed to settle is ₱10,355,000. However, due to China
Bank’s unilateral increases in the interest rates from 15% to as high as 24.50% and penalty charge
of 1/10 of 1% per day or 36.5% per annum for the period November 4, 1999 to February 23, 2001,
petitioners’ balance ballooned to ₱19,201,776.63. Note that the original amount of principal loan
almost doubled in only 16 months. The Court also finds the penalty charges imposed excessive and
arbitrary, hence the same is hereby reduced to 1% per month or 12% per annum. 1âwphi1

Petitioners’ Statement of Account, as of February 23, 2001, the date of the foreclosure proceedings,
should thus be modified as follows:

Principal ₱10,355,000.00
Interest at 15% per annum
₱10,355,000 x .15 x 477 days/365 days 2,029,863.70
Penalty at 12% per annum 1,623 ,890. 96
₱10,355,000 x .12 x 477days/365 days
Sub-Total 14,008,754.66
Less: A/P applied to balance of principal (55,000.00)
Less: Accounts payable L & D (261,149.39)
13,692,605.27
 Add: Attorney's Fees 1,369,260.53
Total Amount Due 15,061,865.79
Less: Bid Price 10,300,000.00

TOTAL DEFICIENCY AMOUNT 4,761,865.79

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

No pronouncement as to costs.

SO ORDERED.

MARTIN S. VILLARAMA, JR.

G.R. No. 171925 : July 23, 2010

SOLIDBANK CORPORATION, (now Metropolitan Bank and Trust

Company), Petitioner, v. ERMANENT HOMES, INCORPORATED, Respondent.

DECISION

CARPIO, J.:

G.R. No. 171925 is a petition for review1  assailing the Decision2  promulgated on 29 June 2005 by the
cralaw cralaw

Court of Appeals (appellate court) as well as the Resolution3  promulgated on 14 March 2006 in CA-
cralaw

G.R. CV No. 75926. The appellate court granted the petition filed by Permanent Homes, Incorporated
(Permanent) and reversed the decision of the Regional Trial Court of Makati City, Branch 58 (trial
court) dated 5 July 2002 in Civil Case No. 98-654. The appellate court ordered Solidbank Corporation
(Solidbank) and Permanent to enter into an express agreement about the applicable interest rates on
Permanent's loan. Solidbank was also ordered to render an accounting of Permanent's payments, not
to impose interest on interest upon Permanent's loans, and to release the remaining amount available
under Permanent's omnibus credit line.

The Facts

The appellate court narrated the facts as follows:

The records disclose that PERMANENT HOMES is a real estate development company, and to finance
its housing project known as the "Buena Vida Townhomes" located within Merville Subdivision,
Parañaque City, it applied and was subsequently granted by SOLIDBANK with an "Omnibus Line"
credit facility in the total amount of SIXTY MILLION PESOS. Of the entire loan, FIFTY NINE MILLION as
[sic] time loan for a term of up to three hundred sixty (360) days, with interest thereon at prevailing
market rates, and subject to monthly repricing. The remaining ONE MILLION was available for
domestic bills purchase.
To secure the aforesaid loan, PERMANENT HOMES initially mortgaged three (3) townhouse units within
the Buena Vida project in Parañaque. At the time, however, the instant complaint was filed against
SOLIDBANK, a total of thirty six (36) townhouse units were mortgaged with said bank.

Of the 60 million available to PERMANENT HOMES, it availed of a total of 41.5 million pesos, covered
by three (3) promissory notes, which contain the following provisions, thus:

"xxx

5. We/I irrevocably authorize Solidbank to increase or decrease at any time the interest rate agreed in
this Note or Loan on the basis of, among others, prevailing rates in the local or international capital
markets. For this purpose, We/I authorize Solidbank to debit any deposit or placement account with
Solidbank belonging to any one of us. The adjustment of the interest rate shall be effective from the
date indicated in the written notice sent to us by the bank, or if no date is indicated, from the time the
notice was sent.

6. Should We/I disagree to the interest rate adjustment, We/I shall prepay all amounts due under this
Note or Loan within thirty (30) days from the receipt by anyone of us of the written notice. Otherwise,
We/I shall be deemed to have given our consent to the interest rate adjustment."

Contrary, however, to the specific provisions as afore-quoted, there was a standing agreement by the
parties that any increase or decrease in interest rates shall be subject to the mutual agreement of the
parties.

For the first loan availment of PERMANENT HOMES on March 20, 1997, in the amount of 19.6
MILLION, from the initial interest rate of 14.25% per annum (p.a.), the same was
increased 15% p.a. effective May 19, 1997; it was again increased to 26% p.a. effective July 18,
1997. It was thereafter reduced to 20% p.a. effective August 18, 1997, and then increased to 24%
p.a. effective September 17, 1997. The rate was increased further to 30% p.a. effective October 17,
1997, then decreased to 27% p.a. on November 17, 1997, and again increased to 34%
p.a. effective December 17, 1997. The rate then decreased to 30% p.a. on January 16, 1998.

For the second loan availment in the amount of 18 million, the rate was initially pegged at 15.75%
p.a. on June 24, 1997. A month later, the rate increased to 23.5% p.a. It thereafter decreased
to 20% p.a. effective August 24, 1997, but again increased to 22.5% p.a. effective September 24,
1997. For the next month, the rate surged to 30% p.a., and decreased to 27% p.a. for the month of
November. The rate again surged to 34% p.a. for the month of December, and was decreased
to 30% p.a. from January 22, 1998 to February 20, 1998.

For the third loan availment on July 15, 1997, in the amount of 3.9 million, the interest rate was
initially pegged at 35% p.a., but this was decreased to 21% p.a. from August 14 until September
11, 1997. The rate increased slightly to 23% p.a. on September 12, 1997, and surged to 27%
p.a. on October 13, 1997. The rate went down slightly to 27% p.a. for the month of November, and
to 26% p.a. for the month of December. The rate, however, again surged to 30% p.a. on January
12, 1998 before settling at 29% p.a. for the month of February.

It is [Permanent's] stand that SOLIDBANK unilaterally and arbitrarily accelerated the interest rates
without any declared basis of such increases, of which PERMANENT HOMES had not agreed to, or at
the very least, been informed of. This is contrary to their earlier agreement that any interest rate
changes will be subject to mutual agreement of the parties. PERMANENT HOMES further admits that it
was not able to protest such arbitrary increases at the time they were imposed by SOLIDBANK, for
fear that SOLIDBANK might cut off the credit facility it extended to PERMANENT HOMES. Permanent
was then in the midst of the construction of its project in Merville, Parañaque City, and SOLIDBANK
knew that it was relying substantially on the credit facility the latter extended to it.
[Permanent] thus filed a case before the trial court seeking the following: (1) the annulment of the
increases in interest rates on the loans it obtained from SOLIDBANK, on the ground that it was
violative of the principle of mutuality of agreement of the parties, as enunciated in Article 1409 of the
New Civil Code, (2) the fixing of the interest rates at the applicable interest rate, and (3) for the trial
court to order SOLIDBANK to make an accounting of the payments it made, so as to determine the
amount of refund PERMANENT is entitled to, as well as to order SOLIDBANK to release the remaining
available balance of the loan it extended to PERMANENT. In addition, [Permanent] prays for the
payment of compensatory, moral and exemplary damages.

SOLIDBANK, on the other hand, avers that PERMANENT HOMES has no cause of action against it, in
view of the pertinent provisions of the Omnibus Credit Line and the promissory notes agreed to and
signed by PERMANENT HOMES. Thus, in accordance with said provisions, SOLIDBANK was authorized
to, upon due notice, periodically adjust the interest rates on PERMANENT HOMES' loan availments
during the monthly interest repricing dates, depending on the changes in prevailing interest rates in
the local and international capital markets. In fact, SOLIDBANK avers that four (4) days before July
15, 1997, the Bangko Sentral ng Pilipinas (BSP) declared that it could no longer support the Philippine
currency from external speculative forces, hence, the local currency was allowed to seek its own
exchange rate level. As a result of the volatile exchange rate ratio, banks were then hesitant to extend
loans, and in some instances that it granted loans, they had to ensure that they will not be at the
losing end of the deal, so to speak, by the repricing of the interest rates every month. SOLIDBANK
insists that PERMANENT HOMES should not be allowed to renege on its contractual obligations, as it
freely and voluntarily bound itself to the provisions of the Omnibus Credit Line and the promissory
notes.

PERMANENT HOMES presented as witnesses Jacqueline S. Lim, its Vice President and Chief Financial
Officer, Engr. Rey A. Romasanta, its Executive Vice President and Chief Operating Officer, and Martha
Julia Flores, its Treasury Officer.

On March 24, 1998, the trial court issued a temporary restraining order (TRO), after a summary
hearing, which enjoined SOLIDBANK from implementing and collecting the increases in interest rates
and from initiating any action, including the foreclosure of the mortgaged properties.

Ms. Lim's testimony centered on PERMANENT HOMES' allegations that the repricing of the interest
rates was done by SOLIDBANK without any written agreement entered into between the parties. In
fact, Ms. Lim accounted that SOLIDBANK will merely advise them of the interest rate for the period,
after said period had already commenced, and at times very late in the period, by fax messages.
When PERMANENT HOMES called SOLIDBANK's attention to the seemingly surging rates it imposed on
its loan, SOLIDBANK will merely answer that it was the bank's policy, without offering any basis for
such increase. Furthermore, Ms. Lim also mentioned SOLIDBANK's alleged practice of imposing
interest on unpaid interest, at the highest rate of 30% p.a.. Ms. Lim also presented a tabulation, which
presents the number of days their billing statements were sent late, from the time the interest period
started. It is PERMANENT HOMES' stand that since the purpose of the billing statements was to inform
them beforehand of the applicable interest rate for the period, the late billings will clearly show
SOLIDBANK's arbitrary imposition of the repriced interest rates, as well as its indifference to
PERMANENT HOMES' plight.

To illustrate, for the first loan availment in the amount of P19.6 million, the billing statements which
should have notified PERMANENT HOMES of the repriced interest rates were faxed to PERMANENT
HOMES between eighteen (18) to thirty-three (33) days late. For the second loan availment in the
amount of P18 million, the faxed billings were late between six (6) to twenty-one (21) days, and one
instance where PERMANENT HOMES received no billing at all. For the third loan availment in the
amount of P3.9 million, the faxed billings were late between seven (7) to twenty-nine (29) days, and
also an instance where PERMANENT HOMES received no billing at all.

This practice, according to Ms. Lim, clearly affected its operations, as the completion of its
construction project was unnecessarily delayed, to its prejudice and its buyers. This was the import of
the testimony of PERMANENT HOMES' second witness, Engr. Rey A. Romasanta. According to Engr.
Rey, the target date of completion was August 1997, but in view of the shortage of funds by reason of
SOLIDBANK's refusal for PERMANENT HOMES to make further availments on its omnibus credit line,
the project was completed only on February 1998.

PERMANENT HOMES' third and final witness was Martha Julia Flores, its Treasury Officer, who
explained that as such, it was her who received the late billings from SOLIDBANK. She would also call
up SOLIDBANK to ask what the repriced interest rate for the coming interest period, to no avail, as
SOLIDBANK will merely fax its billings almost always, as abovementioned, late in the period. Ms.
Flores admitted that she prepared the tabulation presented before the court, which showed how late
SOLIDBANK's billings were sent to PERMANENT HOMES, as well as the computation of interest rates
that SOLIDBANK had allegedly overcharged on its loan, vis-a-vis the average of the high and the low
published lending rates of SOLIDBANK.

SOLIDBANK, to establish its defense, presented its lone witness, Mr. Cesar Lugtu, who testified to the
effect that, contrary to PERMANENT HOMES' assertions that it was not promptly informed of the
repriced interest rates, SOLIDBANK's officers verbally advised PERMANENT HOMES of the repriced
rates at the start of the period, and even added that their transaction[s] were based on trust. Aside
from these allegations, however, no written memorandum or note was presented by SOLIDBANK to
support their assertion that PERMANENT HOMES was timely advised of the repriced interests. 4 cra

The Trial Court's Ruling

On 5 July 2002, the trial court promulgated its Decision in favor of Solidbank. The trial court
ratiocinated and ruled thus:chan robles virtual law library

It becomes crystal clear that there is sufficient proof to show that the instant case was instituted by
[Permanent] as an after-thought and as an obvious subterfuge intended to completely lay on the
defendant the blame for the debacle of its Buena Vida project. An afterthought because the records of
the case show that the complaint was filed in March 16, 1998, already after it was having difficulty
making the amortization payments, the last of which being in February 1998. A subterfuge because
plaintiff, instead of blaming itself and its own business judgment that went sour, would rather put the
blame on [Solidbank], taking advantage of every conceivable gray area of its contract with
[Solidbank] to avoid its own liabilities. In fact, this complaint was made the very basis for [Permanent]
to altogether stop the payment of its loan from [Solidbank] including the interest payment (TSN, May
07, 1998, p. 60).

xxx

WHEREFORE, finding the complaint not impressed with merit, judgment is hereby rendered
dismissing the said complaint. The Counterclaim is likewise dismissed for lack of evidence to support
the same.

SO ORDERED. 5 cra

Permanent filed an appeal before the appellate court.

The Appellate Court's Ruling

The appellate court granted Permanent's appeal, and set aside the trial court's ruling. The appellate
court not only recognized the validity of escalation clauses, but also underscored the necessity of a
basis for the increase in interest rates and of the principle of mutuality of contracts.

The dispositive portion of the appellate court's decision reads, thus: chan robles virtual law library
THE FOREGOING CONSIDERED, the instant appeal is hereby GRANTED, the assailed decision dated
July 5, 2002 is REVERSED and SET ASIDE, and a new one is hereby entered as follows:

(1) Unless the parties herein subsequently enter into an express agreement regarding the applicable
interest rates on PERMANENT HOMES' loan availments subsequent to the initial thirty-day (30) period,
the legal rate of twelve percent (12%) per annum is hereby FIXED, to be applied on the outstanding
balance of the loan;

(2) SOLIDBANK is ordered to render an accounting of all the payments made by PERMANENT HOMES,
and in case there is excess payment by reason of the wrongful imposition of the repriced interest
rates, to apply such amount to the interest payment at the legal rate, and thereafter to the
outstanding principal amount;

(3) SOLIDBANK is directed not to impose penalties, particularly interest on interest, upon PERMANENT
HOMES' loan, there being no evidence that the latter was in default on its payments;

(4) SOLIDBANK is hereby ordered to release the remaining amount available under the omnibus credit
line, subject, however, to availability of funds on the part of SOLIDBANK.

No pronouncement as to costs.

SO ORDERED. 6 cra

The appellate court resolved to deny Solidbank's Motion for Reconsideration for lack of merit. 7
cra

The Issues

Solidbank raised the following issues in their petition:

(A) Whether the Honorable Court of Appeals was correct in ruling that the increases in the interest
rates on [Permanent's] loans are void for having been unilaterally imposed without basis.

(B) Whether the Honorable Court of Appeals was correct in ordering the parties to enter into an
express agreement regarding the applicable interest rates on Permanent's loan availments subsequent
to the initial thirty-day (30) period.

(C) Whether the Honorable Court of Appeals was correct in ruling that [Permanent] is entitled to
attorney's fees notwithstanding the absence of bad faith or malice on the part of [Solidbank]. 8
cra

The Court's Ruling

The petition has merit.

The Usury Law had been rendered legally ineffective by Resolution No. 224 dated 3 December 1982 of
the Monetary Board of the Central Bank, and later by Central Bank Circular No. 905 which took effect
on 1 January 1983. These circulars removed the ceiling on interest rates for secured and unsecured
loans regardless of maturity. The effect of these circulars is to allow the parties to agree on any
interest that may be charged on a loan. The virtual repeal of the Usury Law is within the range of
judicial notice which courts are bound to take into account. 9  Although interest rates are no longer
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subject to a ceiling, the lender still does not have an unbridled license to impose increased interest
rates. The lender and the borrower should agree on the imposed rate, and such imposed rate should
be in writing.

The three promissory notes between Solidbank and Permanent all contain the following provisions:
5. We/I irrevocably authorize Solidbank to increase or decrease at any time the interest rate agreed in
this Note or Loan on the basis of, among others, prevailing rates in the local or international capital
markets. For this purpose, We/I authorize Solidbank to debit any deposit or placement account with
Solidbank belonging to any one of us. The adjustment of the interest rate shall be effective from the
date indicated in the written notice sent to us by the bank, or if no date is indicated, from the time the
notice was sent.

6. Should We/I disagree to the interest rate adjustment, We/I shall prepay all amounts due under this
Note or Loan within thirty (30) days from the receipt by anyone of us of the written notice. Otherwise,
We/I shall be deemed to have given our consent to the interest rate adjustment.

The stipulations on interest rate repricing are valid because (1) the parties mutually agreed on said
stipulations; (2) repricing takes effect only upon Solidbank's written notice to Permanent of the new
interest rate; and (3) Permanent has the option to prepay its loan if Permanent and Solidbank do not
agree on the new interest rate. The phrases "irrevocably authorize," "at any time" and "adjustment of
the interest rate shall be effective from the date indicated in the written notice sent to us by the bank,
or if no date is indicated, from the time the notice was sent," emphasize that Permanent should
receive a written notice from Solidbank as a condition for the adjustment of the interest rates.

In order that obligations arising from contracts may have the force of law between the parties, there
must be a mutuality between the parties based on their essential equality. 10  A contract containing a
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condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties is void. 11  There was no showing that either Solidbank or Permanent coerced each
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other to enter into the loan agreements. The terms of the Omnibus Line Agreement and the
promissory notes were mutually and freely agreed upon by the parties.

Moreover, Solidbank's range of lending rates were consistent with "prevailing rates in the local or
international capital markets." Permanent presented a tabulation12  of the range of Solidbank's lending
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rates, as reported to Bangko Sentral ng Pilipinas and compared the lending rates with the interest
rates charged by Solidbank on Permanent's loans, thus:

  Solidbank's range Interest rates Excess

of lending rates as charged by Interest Rate
per BSP records Solidbank on Over the
Permanent's loans Average of
  High Low High and Low
Rates
Sept. 12, 25.0% 22.0% 23.0%  
1997
Sept. 17, 27.0% 24.0% 24.0%  
1997
Sept. 22, 26.0% 23.0% 22.5%  
1997
Oct. 13, 29.0% 26.0% 28.0%  
1997
Oct. 17, 30.0% 27.0% 30.0%  
1997
 Oct. 22, 32.0% 29.0% 30.0%  
1997
Nov. 12, 28.0% 25.0% 27.0%  
1997
Nov. 17, 28.0% 25.0% 27.0%  
1997
Nov. 21, 27.0% 24.0% 27.0%  
1997
Dec. 12, 25.0% 23.0% 26.0% 2.0%
1997
Dec. 17, 25.0% 23.0% 34.0% 10.0%
1997
Dec. 22, 25.0% 23.0% 32.0% 8.0%
1997
Jan. 12, 26.0% 24.0% 30.0% 5.0%
1998
Jan. 16, 28.0% 25.0% 30.0% 3.5%
1998
Jan. 22, 28.0% 25.0% 30.0% 3.5%
1998
Feb. 9, 1998 27.0% 24.0% 30.0% 3.5%
Feb. 11, 27.0% 24.0% 29.0% 4.5%
1998
Feb. 12, 27.0% 24.0% 30.0% 4.5%
1998

The repriced interest rates from 12 September to 21 November 1997 conformed to the range of
Solidbank's lending rates to other borrowers. The 12 December 1997 to 12 February 1998 repriced
interest rates were not unconscionably out of line with the upper range of lending rates to other
borrowers. The interest rate repricing happened at the height of the Asian financial crises in late 1997,
when banks clamped down on lendings because of higher credit risks across industries, particularly
the real estate industry.

We also recognize that Solidbank admitted that it did not promptly send Permanent written repriced
rates, but rather verbally advised Permanent's officers over the phone at the start of the period.
Solidbank did not present any written memorandum to support its allegation that it promptly advised
Permanent of the change in interest rates. 13  Solidbank advised Permanent on the repriced interest
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rate applicable for the 30-day interest period only after the period had begun. Permanent presented a
tabulation which showed that Solidbank either did not send a billing statement, or sent a billing
statement 6 to 33 days late. 14  We reproduce the tabulation below:
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PN #435 - P19.6MM
Reference Interest Period Date Billing Number of days
No. Statements were Billing
faxed to Statement was
Permanent Late
1 03/20/97 04/18/97 04/17/97 28
2 04/18/97 05/19/97 05/16/97 28
  05/19/97 06/19/97   no statement
received
3 06/19/97 07/18/97 07/12/97 23
4 07/18/97 08/18/97 08/05/97 18
5 08/18/97 09/17/97 09/10/97 23
6 09/17/97 10/17/97 10/06/97 19
7 10/17/97 11/17/97 11/11/97 25
8 11/17/97 12/17/97 12/12/97 25
9 12/17/97 01/16/98 01/09/98 23
14 01/16/98 02/20/98 02/18/98 33

PN #969 - P18MM
Reference Interest Period Date Billing Number of days
No. Statements were Billing
faxed to Statement was
Permanent Late
3 06/24/97 07/24/97 07/12/97 18
4 07/24/97 08/22/97 08/05/97 12
5 08/22/97 09/22/97 09/10/97 19
6 09/22/97 10/22/97 10/06/97 14
7 10/22/97 11/21/97 11/11/97 20
 8 11/21/97 12/22/97 12/12/97 21
9 12/22/97 01/22/98 01/09/98 18
  01/22/98 02/12/97   no statement
received
14 02/12/98 02/20/98 02/18/98 6

PN #1077 - P3.9MM
Reference Interest Period Date Billing Number of days
No. Statements were Billing
faxed to Statement was
Permanent Late
10 07/15/97 08/14/97 08/14/97 30
11 08/14/97 08/26/97 08/26/97 12
5 08/26/97 09/12/97 09/10/97 15
6 09/12/97 10/13/97 10/06/97 24
7 10/13/97 11/12/97 11/11/97 29
12 11/12/97 12/12/97 12/10/97 28
9 12/12/97 01/12/98 01/09/98 28
13 01/12/98 02/09/98 02/09/98 28
  02/09/98 02/11/98   no statement
received
14 02/11/98 03/13/98 02/18/98 7

We rule that Solidbank's computation of the interest due from Permanent should be adjusted to take
effect only upon Permanent's receipt of the written notice from Solidbank.

WHEREFORE, we GRANT the petition in part. We SET ASIDE the Decision of the Court of Appeals
promulgated on 29 June 2005 as well as the Resolution promulgated on 14 March 2006 in CA-G.R. CV
No. 75926 and AFFIRM the decision of the Regional Trial Court of Makati City, Branch 58 dated 5 July
2002 in Civil Case No. 98-654 with the MODIFICATION that the repricing of the interest rates should
take effect only upon Permanent Homes, Incorporated's receipt of the written notice from Solidbank
Corporation of the adjustment in interest rate. The records of this case are therefore remanded to the
trial court for the computation of the proper interest payments based on the dates of receipt of written
notice.

SO ORDERED.
 ANTONIO T. CARPIO
Associate Justice

WE CONCUR:

ANTONIO EDUARDO B. NACHURA

Associate Justice