G.R. No. 160545               March 9, 2010 The CA decided the appeal on May 5, 2003.

The CA decided the appeal on May 5, 2003. The CA found that the parties agreed to
PRISMA CONSTRUCTION & DEVELOPMENT CORPORATION and ROGELIO S.
PANTALEON, Petitioners,
vs.
ARTHUR F. MENCHAVEZ, Respondent.
DECISION
BRION, J.:
We resolve in this Decision the petition for review on certiorari1 filed by petitioners
Prisma Construction & Development Corporation (PRISMA) and Rogelio S.
Pantaleon (Pantaleon) (collectively, petitioners) who seek to reverse and set aside
the Decision2 dated May 5, 2003 and the Resolution3 dated October 22, 2003 of the
Former Ninth Division of the Court of Appeals (CA) in CA-G.R. CV No. 69627. The
assailed CA Decision affirmed the Decision of the Regional Trial Court (RTC),
Branch 73, Antipolo City in Civil Case No. 97-4552 that held the petitioners liable for
payment of ₱3,526,117.00 to respondent Arthur F. Menchavez (respondent), but
modified the interest rate from 4% per month to 12% per annum, computed from the
filing of the complaint to full payment. The assailed CA Resolution denied the
petitioners’ Motion for Reconsideration.
FACTUAL BACKGROUND
The facts of the case, gathered from the records, are briefly summarized below.
On December 8, 1993, Pantaleon, the President and Chairman of the Board of
PRISMA, obtained a ₱1,000,000.004 loan from the respondent, with a monthly
interest of ₱40,000.00 payable for six months, or a total obligation of ₱1,240,000.00
to be paid within six (6) months,5 under the following schedule of payments:
January 8, 1994 …………………. ₱40,000.00
February 8, 1994 ………………... ₱40,000.00
March 8, 1994 …………………... ₱40,000.00
April 8, 1994 ……………………. ₱40,000.00
May 8, 1994 …………………….. ₱40,000.00
March 8, 1994 …………………... ₱40,000.00
a 4% monthly interest principally based on the board resolution that authorized
April 8, 1994 ……………………. ₱40,000.00 Pantaleon to transact a loan with an approved interest of not more than 4% per
month. The appellate court, however, noted that the interest of 4% per month, or
48% per annum, was unreasonable and should be reduced to 12% per annum. The
May 8, 1994 …………………….. ₱40,000.00
CA affirmed the RTC’s finding that PRISMA was a mere instrumentality of Pantaleon
that justified the piercing of the veil of corporate fiction. Thus, the CA modified the
June 8, 1994 ………………… ₱1,040,000.00
RTC Decision by imposing a 12% per annum interest, computed from the filing of the
complaint until finality of judgment, and thereafter, 12% from finality until fully paid.17
The checks corresponding to the above amounts are hereby acknowledged.8
After the CA's denial18 of their motion for reconsideration,19 the petitioners filed the
present petition for review on certiorari under Rule 45 of the Rules of Court.
and six (6) postdated checks corresponding to the schedule of payments. Pantaleon
signed the promissory note in his personal capacity,9 and as duly authorized by the
Board of Directors of PRISMA.10 The petitioners failed to completely pay the loan THE PETITION
within the stipulated six (6)-month period.
The petitioners submit that the CA mistakenly relied on their board resolution to
From September 8, 1994 to January 4, 1997, the petitioners paid the following conclude that the parties agreed to a 4% monthly interest because the board
amounts to the respondent: resolution was not an evidence of a loan or forbearance of money, but merely an
authorization for Pantaleon to perform certain acts, including the power to enter into a
contract of loan. The expressed mandate of Article 1956 of the Civil Code is that
September 8, 1994 ……………… ₱320,000.00 interest due should be stipulated in writing, and no such stipulation exists. Even
assuming that the loan is subject to 4% monthly interest, the interest covers the six
October 8, 1995…………………. ₱600,000.00 (6)-month period only and cannot be interpreted to apply beyond it. The petitioners
also point out the glaring inconsistency in the CA Decision, which reduced the
November 8, 1995……………. ₱158,772.00 interest from 4% per month or 48% per annum to 12% per annum, but failed to
consider that the amount of ₱3,526,117.00 that the RTC ordered them to pay
January 4, 1997 …………………. ₱30,000.0011 includes the compounded 4% monthly interest.
As of January 4, 1997, the petitioners had already paid a total of ₱1,108,772.00. THE CASE FOR THE RESPONDENT
However, the respondent found that the petitioners still had an outstanding balance
of ₱1,364,151.00 as of January 4, 1997, to which it applied a 4% monthly
The respondent counters that the CA correctly ruled that the loan is subject to a 4%
interest.12 Thus, on August 28, 1997, the respondent filed a complaint for sum of
monthly interest because the board resolution is attached to, and an integral part of,
money with the RTC to enforce the unpaid balance, plus 4% monthly interest,
the promissory note based on which the petitioners obtained the loan. The
₱30,000.00 in attorney’s fees, ₱1,000.00 per court appearance and costs of suit.13
respondent further contends that the petitioners are estopped from assailing the 4%
monthly interest, since they agreed to pay the 4% monthly interest on the principal
amount under the promissory note and the board resolution.
In their Answer dated October 6, 1998, the petitioners admitted the loan of
₱1,240,000.00, but denied the stipulation on the 4% monthly interest, arguing that
the interest was not provided in the promissory note. Pantaleon also denied that he
THE ISSUE
made himself personally liable and that he made representations that the loan would
be repaid within six (6) months.14
The core issue boils down to whether the parties agreed to the 4% monthly interest
on the loan. If so, does the rate of interest apply to the 6-month payment period only
THE RTC RULING
or until full payment of the loan?

June 8, 1994 ………………… ₱1,040,000.006 The RTC rendered a Decision on October 27, 2000 finding that the respondent
OUR RULING
issued a check for ₱1,000,000.00 in favor of the petitioners for a loan that would earn
Total ₱1,240,000.00 an interest of 4% or ₱40,000.00 per month, or a total of ₱240,000.00 for a 6-month
period. It noted that the petitioners made several payments amounting to We find the petition meritorious.
₱1,228,772.00, but they were still indebted to the respondent for ₱3,526,117.00 as of
To secure the payment of the loan, Pantaleon issued a promissory note7 that states: February 11,15 1999 after considering the 4% monthly interest. The RTC observed
that PRISMA was a one-man corporation of Pantaleon and used this circumstance to Interest due should be stipulated in writing; otherwise, 12% per annum
justify the piercing of the veil of corporate fiction. Thus, the RTC ordered the
I, Rogelio S. Pantaleon, hereby acknowledge the receipt of ONE MILLION TWO
petitioners to jointly and severally pay the respondent the amount of ₱3,526,117.00
HUNDRED FORTY THOUSAND PESOS (P1,240,000), Philippine Currency, from Obligations arising from contracts have the force of law between the contracting
plus 4% per month interest from February 11, 1999 until fully paid.16
Mr. Arthur F. Menchavez, representing a six-month loan payable according to the parties and should be complied with in good faith.20 When the terms of a contract are
following schedule: clear and leave no doubt as to the intention of the contracting parties, the literal
The petitioners elevated the case to the CA via an ordinary appeal under Rule 41 of meaning of its stipulations governs.21 In such cases, courts have no authority to alter
the Rules of Court, insisting that there was no express stipulation on the 4% monthly the contract by construction or to make a new contract for the parties; a court's duty
January 8, 1994 …………………. ₱40,000.00 interest. is confined to the interpretation of the contract the parties made for themselves
without regard to its wisdom or folly, as the court cannot supply material stipulations
February 8, 1994 ………………... ₱40,000.00 or read into the contract words the contract does not contain.22 It is only when the
THE CA RULING
contract is vague and ambiguous that courts are permitted to resort to the
interpretation of its terms to determine the parties’ intent.
In the present case, the respondent issued a check for ₱1,000,000.00.23 In turn,
Pantaleon, in his personal capacity and as authorized by the Board, executed the
promissory note quoted above. Thus, the ₱1,000,000.00 loan shall be payable within
six (6) months, or from January 8, 1994 up to June 8, 1994. During this period, the
loan shall earn an interest of ₱40,000.00 per month, for a total obligation of
₱1,240,000.00 for the six-month period. We note that this agreed sum can be
computed at 4% interest per month, but no such rate of interest was stipulated
in the promissory note; rather a fixed sum equivalent to this rate was agreed
upon.
Article 1956 of the Civil Code specifically mandates that "no interest shall be due
unless it has been expressly stipulated in writing." Under this provision, the payment
of interest in loans or forbearance of money is allowed only if: (1) there was an
express stipulation for the payment of interest; and (2) the agreement for the
payment of interest was reduced in writing. The concurrence of the two conditions is
required for the payment of interest at a stipulated rate. Thus, we held in Tan v.
Valdehueza24 and Ching v. Nicdao25 that collection of interest without any stipulation
in writing is prohibited by law.1avvphi1
Applying this provision, we find that the interest of ₱40,000.00 per month
corresponds only to the six (6)-month period of the loan, or from January 8, 1994 to
June 8, 1994, as agreed upon by the parties in the promissory note. Thereafter, the
interest on the loan should be at the legal interest rate of 12% per annum, consistent
with our ruling in Eastern Shipping Lines, Inc. v. Court of Appeals:26
When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 12% per 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." (Emphasis supplied)
loan; in Ruiz v. Court of Appeals,36 of 3% per month or 36% per annum interest on a
₱3,000,000.00 loan; in Imperial v. Jaucian,37 of 16% per month or 192% per annum
interest on a ₱320,000.00 loan; in Arrofo v. Quiño,38 of 7% interest per month or 84%
per annum interest on a ₱15,000.00 loan; in Bulos, Jr. v. Yasuma,39 of 4% per month
or 48% per annum interest on a ₱2,500,000.00 loan; and in Chua v. Timan,40 of 7%
and 5% per month for loans totalling ₱964,000.00. We note that in all these cases,
the terms of the loans were open-ended; the stipulated interest rates were applied for
an indefinite period.
Medel finds no application in the present case where no other stipulation exists for
the payment of any extra amount except a specific sum of ₱40,000.00 per
month on the principal of a loan payable within six months. Additionally, no issue on
the excessiveness of the stipulated amount of ₱40,000.00 per month was ever put in
issue by the petitioners;41 they only assailed the application of a 4% interest rate,
since it was not agreed upon.
It is a familiar doctrine in obligations and contracts that the parties are bound by the
stipulations, clauses, terms and conditions they have agreed to, which is the law
between them, the only limitation being that these stipulations, clauses, terms and
conditions are not contrary to law, morals, public order or public policy.42 The
payment of the specific sum of money of ₱40,000.00 per month was voluntarily
agreed upon by the petitioners and the respondent. There is nothing from the records
and, in fact, there is no allegation showing that petitioners were victims of fraud when
they entered into the agreement with the respondent.
Therefore, as agreed by the parties, the loan of ₱1,000,000.00 shall earn ₱40,000.00
per month for a period of six (6) months, or from December 8, 1993 to June 8, 1994,
for a total principal and interest amount of ₱1,240,000.00. Thereafter, interest at the
rate of 12% per annum shall apply. The amounts already paid by the petitioners
during the pendency of the suit, amounting to ₱1,228,772.00 as of February 12,
1999,43 should be deducted from the total amount due, computed as indicated above.
We remand the case to the trial court for the actual computation of the total amount
due.
Doctrine of Estoppel not applicable
The doctrine of piercing the corporate veil applies only in three (3) basic instances,
namely: a) when the separate and distinct corporate personality defeats public
convenience, as when the corporate fiction is used as a vehicle for the evasion of an
existing obligation; b) in fraud cases, or when the corporate entity is used to justify a
wrong, protect a fraud, or defend a crime; or c) is used in alter ego cases, i.e., where
a corporation is essentially a farce, since it is a mere alter ego or business conduit of
a person, or where the corporation is so organized and controlled and its affairs so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation.46 In the absence of malice, bad faith, or a specific provision of
law making a corporate officer liable, such corporate officer cannot be made
personally liable for corporate liabilities.47
In the present case, we see no competent and convincing evidence of any wrongful,
fraudulent or unlawful act on the part of PRISMA to justify piercing its corporate veil.
While Pantaleon denied personal liability in his Answer, he made himself accountable
in the promissory note "in his personal capacity and as authorized by the Board
Resolution" of PRISMA.48 With this statement of personal liability and in the absence
of any representation on the part of PRISMA that the obligation is all its own because
of its separate corporate identity, we see no occasion to consider piercing the
corporate veil as material to the case.
WHEREFORE, in light of all the foregoing, we hereby REVERSE and SET
ASIDE the Decision dated May 5, 2003 of the Court of Appeals in CA-G.R. CV No.
69627. The petitioners’ loan of ₱1,000,000.00 shall bear interest of ₱40,000.00 per
month for six (6) months from December 8, 1993 as indicated in the promissory note.
Any portion of this loan, unpaid as of the end of the six-month payment period, shall
thereafter bear interest at 12% per annum. The total amount due and unpaid,
including accrued interests, shall bear interest at 12% per annum from the finality of
this Decision. Let this case be REMANDED to the Regional Trial Court, Branch 73,
Antipolo City for the proper computation of the amount due as herein directed, with
due regard to the payments the petitioners have already remitted. Costs against the
respondent.
SO ORDERED.

We reiterated this ruling in Security Bank and Trust Co. v. RTC-Makati, Br. 61,27 Sulit
v. Court of Appeals,28 Crismina Garments, Inc. v. Court of Appeals, 29 Eastern
Assurance and Surety Corporation v. Court of Appeals, 30 Sps. Catungal v.
Hao, 31 Yong v. Tiu,32 and Sps. Barrera v. Sps. Lorenzo.33 Thus, the RTC and the CA
misappreciated the facts of the case; they erred in finding that the parties agreed to a
4% interest, compounded by the application of this interest beyond the promissory
note’s six (6)-month period. The facts show that the parties agreed to the payment of
a specific sum of money of ₱40,000.00 per month for six months, not to a 4% rate
of interest payable within a six (6)-month period.
Medel v. Court of Appeals not applicable
The CA misapplied Medel v. Court of Appeals34 in finding that a 4% interest per
month was unconscionable.
In Medel, the debtors in a ₱500,000.00 loan were required to pay an interest of 5.5%
per month, a service charge of 2% per annum, and a penalty charge of 1% per
month, plus attorney’s fee equivalent to 25% of the amount due, until the loan is fully
paid. Taken in conjunction with the stipulated service charge and penalty, we found
the interest rate of 5.5% to be excessive, iniquitous, unconscionable, exorbitant and
hence, contrary to morals, thereby rendering the stipulation null and void.
The respondent submits that the petitioners are estopped from disputing the 4%
monthly interest beyond the six-month stipulated period, since they agreed to pay
this interest on the principal amount under the promissory note and the board
resolution.
We disagree with the respondent’s contention.
We cannot apply the doctrine of estoppel in the present case since the facts and
circumstances, as established by the record, negate its application. Under the
promissory note,44 what the petitioners agreed to was the payment of a specific sum
of ₱40,000.00 per month for six months – not a 4% rate of interest per
month for six (6) months – on a loan whose principal is ₱1,000,000.00, for the
total amount of ₱1,240,000.00. Thus, no reason exists to place the petitioners in
estoppel, barring them from raising their present defenses against a 4% per month
interest after the six-month period of the agreement. The board resolution,45 on the
other hand, simply authorizes Pantaleon to contract for a loan with a monthly interest
of not more than 4%. This resolution merely embodies the extent of Pantaleon’s
authority to contract and does not create any right or obligation except as between
Pantaleon and the board. Again, no cause exists to place the petitioners in estoppel.
Piercing the corporate veil unfounded

Applying Medel, we invalidated and reduced the stipulated interest in Spouses We find it unfounded and unwarranted for the lower courts to pierce the corporate
Solangon v. Salazar35 of 6% per month or 72% per annum interest on a ₱60,000.00 veil of PRISMA.
G.R. No. 183360               September 8, 2014
ROLANDO C. DE LA PAZ,* Petitioner,
vs.
L & J DEVELOPMENT COMPANY, Respondent.
DECISION
DEL CASTILLO, J.:
"No interest shall be due unless it has been expressly stipulated in
writing."1
This is a Petition for Review on Certiorari2 assailing the February 27, 2008
Decision3 of the Court of Appeals (CA) in CA-G.R. SP No. 100094, which
reversed and set aside the Decision4 dated April 19, 2007 of the Regional
Trial Court (RTC), Branch 192, Marikina City in Civil Case No. 06-1145-
MK. The said RTC Decision affirmed in all respects the Decision5 dated
June 30, 2006 of the Metropolitan Trial Court (MeTC), Branch 75, Marikina
City in Civil Case No. 05-7755, which ordered respondent L & J
Development Company (L&J) to pay petitioner Architect Rolando C. De La
Paz (Rolando) its principal obligation of ₱350,000.00, plus 12% interest
per annumreckoned from the filing of the Complaint until full payment of
the obligation.
Likewise assailed is the CA’s June 6, 2008 Resolution6 which denied
Rolando’s Motion for Reconsideration.
Factual Antecedents
On December 27, 2000, Rolando lent ₱350,000.00 without any security to
L&J, a property developer with Atty. Esteban Salonga (Atty. Salonga) as
its President and General Manager. The loan, with no specified maturity
date, carried a 6% monthly interest, i.e., ₱21,000.00. From December
2000 to August 2003, L&J paid Rolando a total of
₱576,000.007 representing interest charges.
As L&J failed to pay despite repeated demands, Rolando filed a
Complaint8 for Collection of Sum of Money with Damages against L&J and
Atty. Salonga in his personal capacity before the MeTC, docketed as Civil
Case No. 05-7755. Rolando alleged, amongothers, that L&J’s debtas of
January 2005, inclusive of the monthly interest, stood at ₱772,000.00; that
the 6% monthly interest was upon Atty. Salonga’s suggestion; and, that
the latter tricked him into parting with his money without the loan
transaction being reduced into writing.
In their Answer,9 L&J and Atty. Salonga denied Rolando’s allegations.
While they acknowledged the loan as a corporate debt, they claimed that
the failure to pay the same was due to a fortuitous event, that is, the
financial difficulties brought about by the economic crisis. They further
argued that Rolando cannot enforce the 6% monthly interest for being
unconscionable and shocking to the morals. Hence, the payments already
made should be applied to the ₱350,000.00 principal loan.
During trial, Rolando testified that he had no communication with Atty.
Salonga prior to the loan transaction but knew him as a lawyer, a son of a
former Senator, and the owner of L&J which developed Brentwood
Subdivision in Antipolo where his associate Nilo Velasco (Nilo) lives.
When Nilo told him that Atty. Salonga and L&J needed money to finish
their projects, heagreed to lend them money. He personally met withAtty. L&J insisted that the 6% monthly interest rate is unconscionable and
Salonga and their meeting was cordial. immoral. Hence, the 12% per annumlegal interest should have been
applied from the time of the constitution of the obligation. At 12% per
annum interest rate, it asserted that the amount of interestit ought to pay
He narrated that when L&J was in the process of borrowing the
from December 2000 to March 2003 and from April 2003 to August 2003,
₱350,000.00 from him, it was Arlene San Juan (Arlene), the
only amounts to ₱105,000.00. If this amount is deducted from the total
secretary/treasurer of L&J, who negotiated the terms and conditions
interest paymentsalready made, which is ₱576,000.00, the amount of
thereof.She said that the money was to finance L&J’s housing project.
₱471,000.00 appears to have beenpaid over and above what is due.
Rolando claimed that it was not he who demanded for the 6% monthly
Applying the rule on compensation, the principal loan of ₱350,000.00
interest. It was L&J and Atty. Salonga, through Arlene, who insisted on
should be set-off against the ₱471,000.00, resulting in the complete
paying the said interest as they asserted that the loan was only a short-
payment of the principal loan.
term one.
Unconvinced, the RTC, inits April 19, 2007 Decision,14 affirmed the MeTC
Ruling of the Metropolitan Trial Court
Decision, viz: WHEREFORE, premises considered, the Decision appealed
from is hereby AFFIRMED in all respects, with costs against the appellant.
The MeTC, in its Decision10 of June 30, 2006, upheld the 6% monthly
interest. In so ruling, it ratiocinated that since L&J agreed thereto and
SO ORDERED.15
voluntarily paid the interest at suchrate from 2000 to 2003, it isalready
estopped from impugning the same. Nonetheless, for reasons of equity,
the saidcourt reduced the interest rate to 12% per annumon the remaining Ruling of the Court of Appeals
principal obligation of ₱350,000.00. With regard to Rolando’s prayer for
moral damages, the MeTC denied the same as it found no malice or bad
Undaunted, L&J went to the CA and echoed its arguments and proposed
faith on the part ofL&J in not paying the obligation. It likewise relieved Atty.
computation as proffered before the RTC.
Salonga of any liability as it found that he merely acted in his official
capacity in obtaining the loan. The MeTC disposed of the case as follows:
In a Decision16 dated February 27, 2008, the CAreversed and set aside
the RTC Decision. The CA stressed that the parties failedto stipulate in
WHEREFORE, premises considered, judgment is hereby rendered in
writing the imposition of interest on the loan. Hence, no interest shall be
favor of the plaintiff, Arch. Rolando C. Dela Paz, and against the
due thereon pursuant to Article 1956 of the Civil Code.17 And even if
defendant, L & J Development Co., Inc., as follows:
payment of interest has been stipulated in writing, the 6% monthly interest
is still outrightly illegal and unconscionable because it is contrary to
a) ordering the defendant L & J Development Co., Inc. to pay morals, if not against the law. Being void, this cannot be ratified and may
plaintiff the amount of Three Hundred Fifty Thousand Pesos be set up by the debtor as defense. For these reasons, Rolando cannot
(₱350,000.00) representing the principal obligation, plus interest collect any interest even if L&J offered to pay interest. Consequently, he
at the legal rate of 12% per annum to be computed from has to return all the interest payments of ₱576,000.00 to L&J.
January 20, 2005, the date of the filing of the complaint, until the
whole obligation is fully paid;
Considering further that Rolando and L&J thereby became creditor and
debtor of each other, the CA applied the principle of legal compensation
b) ordering the defendant L & J Development Co., Inc. to pay under Article 1279 of the Civil Code.18 Accordingly, it set off the principal
plaintiff the amount of Five Thousand Pesos (₱5,000.00) as and loan of ₱350,000.00 against the ₱576,000.00 total interest payments
for attorney’s fees; and made, leaving an excess of ₱226,000.00, which the CA ordered Rolando
to pay L&J plus interest. Thus:
c) to pay the costs of this suit.
WHEREFORE, the DECISION DATED APRIL 19, 2007 is REVERSED
and SET ASIDE.
SO ORDERED. 11
CONSEQUENT TO THE FOREGOING, respondent Rolando C. Dela Paz
Ruling of the Regional Trial Court
is ordered to pay to the petitioner the amount of ₱226,000.00,plus interest
of 12% per annumfrom the finality of this decision.
L&J appealed to the RTC. It asserted in its appeal memorandum12 that
from December 2000 to March 2003, it paid monthly interest of
Costs of suit to be paid by respondent Dela Paz.
₱21,000.00 based on the agreed-upon interest rate of 6%monthly and
from April 2003 to August 2003, interest paymentsin various
amounts.13 The total of interest payments made amounts to ₱576,000.00 – SO ORDERED.19
an amount which is even more than the principal obligation of
₱350,000.00
In his Motion for Reconsideration,20 Rolando argued thatthe circumstances
exempt both the application of Article 1956 and of jurisprudence holding
that a 6% monthly interest is unconscionable, unreasonable, and
exorbitant. He alleged that Atty. Salonga, a lawyer, should have taken it
upon himself to have the loan and the stipulated rate of interest
documented but, by way of legal maneuver, Atty. Salonga, whom he fully
trusted and relied upon, tricked him into believing that the undocumented
and uncollateralized loan was withinlegal bounds. Had Atty. Salonga told
him that the stipulated interest should be in writing, he would have readily
assented. Furthermore, Rolando insisted that the 6% monthly interest
ratecould not be unconscionable as in the first place, the interest was not
imposed by the creditor but was in fact offered by the borrower, who also
dictated all the terms of the loan. He stressed that in cases where interest
rates were declared unconscionable, those meant to be protected by such
declaration are helpless borrowers which is not the case here.
Still, the CA denied Rolando’s motion in its Resolution21 of June 6, 2008.
Hence, this Petition.
The Parties’ Arguments
Rolando argues that the 6%monthly interest rateshould not have been
invalidated because Atty. Salonga took advantage of his legal knowledge
to hoodwink him into believing that no document was necessaryto reflect
the interest rate. Moreover, the cases anent unconscionable interest rates
that the CA relied upon involve lenders who imposed the excessive
rates,which are totally different from the case at bench where it is the
borrower who decided on the high interest rate. This case does not fall
under a scenariothat ‘enslaves the borrower or that leads to the
hemorrhaging of his assets’ that the courts seek to prevent.
L&J, in controverting Rolando’s arguments, contends that the interest rate
is subject of negotiation and is agreedupon by both parties, not by the
borrower alone. Furthermore, jurisprudence has nullified interestrates on
loans of 3% per month and higher as these rates are contrary to
moralsand public interest. And while Rolando raises bad faithon Atty.
Salonga’s part, L&J avers thatsuch issue is a question of fact, a matter
that cannot be raised under Rule 45.
Issue
The Court’s determination of whether to uphold the judgment of the CA
that the principal loan is deemed paid isdependent on the validity of the
monthly interest rate imposed. And in determining such validity, the Court
must necessarily delve into matters regarding a) the form of the
agreement of interest under the law and b) the alleged unconscionability of
the interest rate. Our Ruling
The Petition is devoid of merit.
The lack of a written stipulation to pay interest on the loaned amount
disallows a creditor from charging monetary interest.
Under Article 1956 of the Civil Code, no interest shall bedue unless it has
been expressly stipulated in writing. Jurisprudence on the matter also
holds that for interest to be due and payable, two conditions must concur:
a) express stipulation for the payment of interest; and b) the agreement to
pay interest is reduced in writing.
Here, it is undisputed that the parties did not put down in writing their
agreement. Thus, no interest is due. The collection of interest without any
stipulation in writing is prohibited by law.22
But Rolando asserts that his situation deserves an exception to the
application of Article 1956. He blames Atty. Salonga for the lack of a
written document, claiming that said lawyer used his legal knowledge to
dupe him. Rolando thus imputes bad faith on the part of L&J and Atty.
Salonga. The Court, however, finds no deception on the partof L&J and
Atty. Salonga. For one, despite the lack of a document stipulating the
payment of interest, L&J nevertheless devotedly paid interests on the loan.
It only stopped when it suffered from financial difficulties that prevented it
from continuously paying the 6% monthly rate. For another,regardless of
Atty. Salonga’s profession, Rolando who is an architect and an educated
man himself could have been a more reasonably prudent person under
the circumstances. To top it all, he admitted that he had no prior
communication with Atty. Salonga. Despite Atty. Salonga being a
complete stranger, he immediately trusted him and lent his company
₱350,000.00, a significant amount. Moreover, as the creditor,he could
have requested or required that all the terms and conditions of the loan
agreement, which include the payment of interest, be put down in writing
to ensure that he and L&J are on the same page. Rolando had a choice of
not acceding and to insist that their contract be put in written form as this
will favor and safeguard him as a lender. Unfortunately, he did not. It must
be stressed that "[c]ourts cannot follow one every step of his life and
extricate him from bad bargains, protect him from unwise investments,
relieve him from one-sided contracts,or annul the effects of foolish acts.
Courts cannotconstitute themselves guardians of persons who are not
legally incompetent."23
It may be raised that L&J is estopped from questioning the interest rate
considering that it has been paying Rolando interest at such ratefor more
than two and a half years. In fact, in its pleadings before the MeTCand the
RTC, L&J merely prayed for the reduction of interest from 6% monthly to
1% monthly or 12% per annum. However, in Ching v. Nicdao,24 the daily
payments of the debtor to the lender were considered as payment of the
principal amount of the loan because Article 1956 was not complied with.
This was notwithstanding the debtor’s admission that the payments made
were for the interests due. The Court categorically stated therein that
"[e]stoppel cannot give validity to an act that is prohibited by law or one
thatis against public policy."
Even if the payment of interest has been reduced in writing, a 6% monthly
interest rate on a loan is unconscionable, regardless of who between the
parties proposed the rate.
Indeed at present, usury has been legally non-existent in view of the
suspension of the Usury Law25 by Central Bank Circular No. 905 s.
1982.26 Even so, not all interest rates levied upon loans are permitted by
the courts as they have the power to equitably reduce unreasonable
interest rates. In Trade & Investment Development Corporation of the
Philippines v. Roblett Industrial Construction Corporation,27 we said:
While the Court recognizes the right of the parties to enter into contracts
and who are expectedto comply with their terms and obligations, this rule
is not absolute. Stipulated interest rates are illegal if they are
unconscionable and the Court is allowed to temper interest rates when
necessary. In exercising this vested power to determine what is iniquitous
and unconscionable, the Court must consider the circumstances of each
case. What may be iniquitous and unconscionable in onecase, may be just
in another. x x x28
Time and again, it has been ruled in a plethora of cases that stipulated
interest rates of 3% per month and higher, are excessive, iniquitous,
unconscionable and exorbitant. Such stipulations are void for being
contrary to morals, if not against the law.29 The Court, however, stresses
that these rates shall be invalidated and shall be reduced only in cases
where the terms of the loans are open-ended, and where the interest rates
are applied for an indefinite period. Hence, the imposition of a specific sum
of ₱40,000.00 a month for six months on a ₱1,000,000.00 loan is not
considered unconscionable.30
In the case at bench, there is no specified period as to the payment of the
loan. Hence, levying 6% monthly or 72% interest per annumis "definitely
outrageous and inordinate."31 The situation that it was the debtor who
insisted on the interest rate will not exempt Rolando from a ruling that the
rate is void. As this Court cited in Asian Cathay Finance and Leasing
Corporation v. Gravador,32 "[t]he imposition of an unconscionable rate of
interest on a money debt, even if knowingly and voluntarily assumed, is
immoral and unjust. It is tantamount to a repugnant spoliation and an
iniquitous deprivation of property, repulsive to the common sense of
man."33 Indeed, "voluntariness does notmake the stipulation on [an
unconscionable] interest valid."34
As exhaustibly discussed,no monetary interest isdue Rolando pursuant to
Article 1956.1âwphi1 The CA thus correctly adjudged that the excess
interest payments made by L&J should be applied to its principal loan. As
computed by the CA, Rolando is bound to return the excess payment of
₱226,000.00 to L&J following the principle of solutio indebiti.35
However, pursuant to Central Bank Circular No. 799 s. 2013 which took
effect on July 1, 2013,36 the interest imposed by the CA must be
accordingly modified. The ₱226,000.00 which Rolando is ordered to pay
L&J shall earn an interest of 6% per annumfrom the finality of this
Decision.
WHEREFORE, the Decision dated February 27, 2008 of the Court of
Appeals in CA-G.R. SP No. 100094 is hereby AFFIRMED with
modification that petitioner Rolando C. De La Paz is ordered to pay
respondent L&J Development Company the amount of ,₱226,000.00, plus
interest of 6o/o per annum from the finality of this Decision until fully paid.
SO ORDERED.
G.R. No. 154129. July 8, 2005
TERESITA DIO, Petitioners,
vs.
SPOUSES VIRGILIO and LUZ ROCES JAPOR and
MARTA1 JAPOR, Respondents.
DECISION
QUISUMBING, J.:
For review on certiorari is the Decision,2 dated February 22, 2002, of the
Court of Appeals, in the consolidated cases CA-G.R. CV No. 51521 and
CA-G.R. SP No. 40457. The decretal portion read:
WHEREFORE, premises considered, in CA-G.R. CV No. 51521, the
decision of the trial court is AFFIRMED with MODIFICATION. Judgment is
rendered as follows:
1. Declaring the Real Estate Mortgage to be valid;
2. Fixing the interest at 12% per annum and an additional 1% penalty
charge per month such that plaintiffs-appellants’ contractual obligation
under the deed of real estate mortgage would amount to ₱1,252,674.00;
3. Directing defendant-appellee Dio to give the surplus of ₱2,247,326.00
to plaintiffs-appellants; and
4. Affirming the dissolution of the writ of preliminary injunction previously
issued by the trial court.
No pronouncement as to costs.
The Petition in CA-G.R. SP No. 40457 is DENIED for being moot and
academic.
SO ORDERED.3
Equally assailed in this petition is the Resolution,4 dated July 2, 2002, of
the appellate court, denying Teresita Dio’s Motion for Partial
Reconsideration of March 19, 2002 and the Spouses Japor and Marta
Japor’s Motion for Reconsideration dated March 20, 2002.
The antecedent facts are as follows:
Herein respondents Spouses Virgilio Japor and Luz Roces Japor were the
owners of an 845.5 square-meter residential lot including its
improvements, situated in Barangay Ibabang Mayao, Lucena City, as
shown by Transfer Certificate of Title (TCT) No. T-39514. Adjacent to the
Japor’s lot is another lot owned by respondent Marta Japor, which
consisted of 325.5 square meters and titled under TCT No. T-15018.
On August 23, 1982, the respondents obtained a loan of ₱90,000 from the
Quezon Development Bank (QDB), and as security therefor, they
mortgaged the lots covered by TCT Nos. T-39514 and T-15018 to QDB,
as evidenced by a Deed of Real Estate Mortgage duly executed by and
between the respondents and QDB.
On December 6, 1983, respondents and QDB amended the Deed of Real
Estate Mortgage increasing respondents’ loan to ₱128,000.
The respondents failed to pay their aforesaid loans. However, before the
bank could foreclose on the mortgage, respondents, thru their broker, one
Lucia G. Orian, offered to mortgage their properties to petitioner Teresita
Dio. Petitioner prepared a Deed of Real Estate Mortgage, whereby
respondents mortgaged anew the two properties already mortgaged with
QDB to secure the timely payment of a ₱350,000 loan that respondents
had from petitioner Dio. The Deed of Real Estate Mortgage, though dated
January 1989, was actually executed on February 13, 1989 and notarized
on February 17, 1989.
Under the terms of the deed, respondents agreed to pay the petitioner
interest at the rate of five percent (5%) a month, within a period of two
months or until April 14, 1989. In the event of default, an additional interest
equivalent to five percent (5%) of the amount then due, for every month of
delay, would be charged on them.
The respondents failed to settle their obligation to petitioner on April 14,
1989, the agreed deadline for settlement.
On August 27, 1991, petitioner made written demands upon the
respondents to pay their debt.
Despite repeated demands, respondents did not pay, hence petitioner
applied for extrajudicial foreclosure of the mortgage. The auction of the
unredeemed properties was set for February 26, 1992.
Meanwhile, on February 24, 1992, respondents filed an action for Fixing
of Contractual Obligation with Prayer for Preliminary Mandatory
Injunction/Restraining Order, docketed as Civil Case No. 92-26, with the
Regional Trial Court (RTC) of Lucena City. Respondents prayed that
"judgment be rendered fixing the contractual obligations of plaintiffs with
the defendant Dio plus legal or allowable interests thereon."5
The trial court issued an Order enjoining the auction sale of the
aforementioned mortgaged properties.
On June 15, 1992, the Japors filed a Motion to Admit Amended
Complaint with an attached copy of their Amended Complaint praying
that the Deed of Real Estate Mortgage dated February 13, 1989 be
declared null and void, but reiterating the plea that the trial court fix the
contractual obligations of the Japors with Dio. The trial court denied the
motion.
On September 27, 1994, respondents filed with the appellate court, a
petition for certiorari, docketed as CA-G.R. SP No. 35315, praying that the
Court of Appeals direct the trial court to admit their Amended Complaint.
The appellate court denied said petition.6
On December 11, 1995, the trial court handed down the following
judgment:
WHEREFORE, in view of the foregoing considerations, judgment is
rendered:
1. Dismissing the complaint for failure of the plaintiffs to substantiate their
affirmative allegations;
2. Declaring the Real Estate Mortgage (Exhs. "A" to "A-13"/Exhs. "3" to "3-
D") to be valid and binding as between the parties, more particularly the
plaintiffs Virgilio Japor, Luz Japor and Marta Japor or the latter’s
substituted heir or heirs, as the case may be;
3. Dissolving the writ of preliminary injunction previously issued by this
Court; and
4. To pay the cost of this suit.
SO ORDERED.7
On January 17, 1996, respondents filed their notice of appeal. On April 26,
1996, they also filed a Petition for Temporary Restraining Order
And/Or Mandatory Injunction in Aid of Appellate Jurisdiction with the
Court of Appeals.
On May 8, 1996, petitioner Dio as the sole bidder in an auction purchased
the properties for ₱3,500,000.
On May 9, 1996, the Court of Appeals denied respondents’ application for
a temporary restraining order.8
On October 9, 1996, the appellate court consolidated CA-G.R. CV No.
51521 and CA-G.R. SP No. 40457.
As stated at the outset, the appellate court affirmed the decision of the trial
court with respect to the validity of the Deed of Real Estate Mortgage, but
modified the interest and penalty rates for being unconscionable and
exorbitant.
Before us, petitioner assigns the following errors allegedly committed by
the appellate court:
I On the first issue, we are constrained to rule against the petitioner’s
THE ALLEGED INIQUITY OF THE STIPULATED INTEREST AND
PENALTY WAS NOT RAISED BEFORE THE TRIAL COURT NOR
ASSIGNED AS AN ERROR IN RESPONDENTS’ APPEAL.
II
THE STIPULATED INTEREST AND PENALTY ARE NOT "EXCESSIVE,
INIQUITOUS, UNCONSCIONABLE, EXORBITANT AND CONTRARY TO
MORAL[S]".
III
PAYMENT OF THE "SURPLUS" OF ₱2,247,326.00 TO RESPONDENTS
WOULD RESULT IN THEIR UNJUST ENRICHMENT.
IV
RESPONDENTS’ APPEAL SHOULD HAVE BEEN DISMISSED DUE TO
FORUM SHOPPING.9
Simply stated, the issue is: Did the Court of Appeals err when it held that
the stipulations on interest and penalty in the Deed of Real Estate
Mortgage is contrary to morals, if not illegal? Corollarily, were respondents
entitled to any "surplus" on the auction sale price?
On the main issue, petitioner contends that The Usury Law10 has been
rendered ineffective by Central Bank Circular No. 905, series of 1982 and
accordingly, usury has become legally non-existent in this jurisdiction,
thus, interest rates may accordingly be pegged at such levels or rates as
the lender and the borrower may agree upon. Petitioner avers she has not
violated any law considering she is not engaged in the business of money-
lending. Moreover, she claims she has suffered inconveniences and
incurred expenses for some 13 years now as a result of respondents’
failure to pay her. Petitioner further points out that the 5% interest rate was
proposed by the respondents and have only themselves to blame if the
interests and penalties ballooned to its present amount due to their willful
delay and default in payment. The appellate court thus erred, petitioner
now insists, in applying Sps. Almeda v. Court of Appeals11 and Medel v.
Court of Appeals12 to reduce the interest rate to 12% per annum and the
penalty to 1% per month.
Respondents admit they owe petitioner ₱350,000 and do not question any
lawful interest on their loan but they maintain that the Deed of Real Estate
Mortgage is null and void since it did not state the true intent of the parties,
which limited the 5% interest rate to only two (2) months from the date of
the loan and which did not provide for penalties and other charges in the
event of default or delay. Respondents vehemently contend that they
never consented to the said stipulations and hence, should not be bound
by them.
the Court did was merely to reflect the true price of the land in the
contentions. foreclosure sale. The amount of the petitioner’s bid merely represented the
true amount of the mortgage debt. No surplus in the purchase price was
thus created to which the respondents as the mortgagors have a vested
Central Bank Circular No. 905, which took effect on January 1, 1983,
right.
effectively removed the ceiling on interest rates for both secured and
unsecured loans, regardless of maturity. However, nothing in said Circular
grants lenders carte blanche authority to impose interest rates which WHEREFORE, the Decision dated February 22, 2002, of the Court of
would result in the enslavement of their borrowers or to the hemorrhaging Appeals in the consolidated cases CA-G.R. CV No. 51521 and CA-G.R.
of their assets.13 While a stipulated rate of interest may not technically and SP No. 40457 is hereby AFFIRMED with MODIFICATION. The interest
necessarily be usurious under Circular No. 905, usury now being legally rate for the subject loan owing to QDB, or whoever is now the party
non-existent in our jurisdiction,14 nonetheless, said rate may be equitably mortgagee, is hereby fixed at five percent (5%) for the first two (2) months
reduced should the same be found to be iniquitous, unconscionable, and following the date of execution of the Deed of Real Estate Mortgage, and
exorbitant, and hence, contrary to morals (contra bonos mores), if not twelve percent (12%) for the succeeding period. The penalty rate
against the law.15 What is iniquitous, unconscionable, and exorbitant shall thereafter shall be fixed at one percent (1%) per month. Petitioner Teresita
depend upon the factual circumstances of each case. Dio is declared free of any obligation to return to the respondents, the
Spouses Virgilio Japor and Luz Roces Japor and Marta Japor, any surplus
in the foreclosure sale price. There being no surplus, after the court below
In the instant case, the Court of Appeals found that the 5% interest rate
had applied our ruling in Sulit,21 respondents could not legally claim any
per month and 5% penalty rate per month for every month of default or
overprice from the petitioner, much less the amount of ₱2,247,326.00.
delay is in reality interest rate at 120% per annum. This Court has held
that a stipulated interest rate of 5.5% per month or 66% per annum is void
for being iniquitous or unconscionable.16 We have likewise ruled that an SO ORDERED.
interest rate of 6% per month or 72% per annum is outrageous and
inordinate.17 Conformably to these precedent cases, a combined interest
and penalty rate at 10% per month or 120% per annum, should be
deemed iniquitous, unconscionable, and inordinate. Hence, we sustain the
appellate court when it found the interest and penalty rates in the Deed of
Real Estate Mortgage in the present case excessive, hence legally
impermissible. Reduction is legally called for now in rates of interest and
penalty stated in the mortgage contract.
What then should the interest and penalty rates be?
The evidence shows that it was indeed the respondents who proposed the
5% interest rate per month for two (2) months. Having agreed to said rate,
the parties are now estopped from claiming otherwise. For the succeeding
period after the two months, however, the Court of Appeals correctly
reduced the interest rate to 12% per annum and the penalty rate to 1%
per month, in accordance with Article 222718 of the Civil Code.
But were respondents entitled to the "surplus" of ₱2,247,32619 as a result
of the "overpricing" in the auction?
We note that the "surplus" was the result of the computation by the Court
of Appeals of respondents’ outstanding liability based on a reduced
interest rate of 12% per annum and the reduced penalty rate of 1% per
month. The court a quo then proceeded to apply our ruling in Sulit v. Court
of Appeals,20 to the effect that in case of surplus in the purchase price, the
mortgagee is liable for such surplus as actually comes into his hands, but
where he sells on credit instead of cash, he must still account for the
proceeds as if the price were paid in cash, for such surplus stands in the
place of the land itself with respect to liens thereon or vested rights therein
particularly those of the mortgagor or his assigns.
In the instant case, however, there is no "surplus" to speak of. In adjusting
the interest and penalty rates to equitable and conscionable levels, what
G.R. No. 169975               March 18, 2010
PAN PACIFIC SERVICE CONTRACTORS, INC. and RICARDO F. DEL
ROSARIO, Petitioners,
vs.
EQUITABLE PCI BANK (formerly THE PHILIPPINE COMMERCIAL
INTERNATIONAL BANK), Respondent.
DECISION
CARPIO, J.:
The Case
Pan Pacific Service Contractors, Inc. and Ricardo F. Del Rosario (petitioners) filed
this Petition for Review1 assailing the Court of Appeals’ (CA) Decision2 dated 30 June
2005 in CA-G.R. CV No. 63966 as well as the Resolution3 dated 5 October 2005
denying the Motion for Reconsideration. In the assailed decision, the CA modified the
12 April 1999 Decision4 of the Regional Trial Court of Makati City, Branch 59 (RTC)
by ordering Equitable PCI Bank5 (respondent) to pay petitioners ₱1,516,015.07 with
interest at the legal rate of 12% per annum starting 6 May 1994 until the amount is
fully paid.
The Facts
Pan Pacific Service Contractors, Inc. (Pan Pacific) is engaged in contracting
mechanical works on airconditioning system. On 24 November 1989, Pan Pacific,
through its President, Ricardo F. Del Rosario (Del Rosario), entered into a contract of
mechanical works (Contract) with respondent for ₱20,688,800. Pan Pacific and
respondent also agreed on nine change orders for ₱2,622,610.30. Thus, the total
consideration for the whole project was ₱23,311,410.30.6 The Contract stipulated,
among others, that Pan Pacific shall be entitled to a price adjustment in case of
increase in labor costs and prices of materials under paragraphs 70.17 and 70.28 of
the "General Conditions for the Construction of PCIB Tower II Extension" (the
escalation clause).9
Pursuant to the contract, Pan Pacific commenced the mechanical works in the
project site, the PCIB Tower II extension building in Makati City. The project was
completed in June 1992. Respondent accepted the project on 9 July 1992.10
In 1990, labor costs and prices of materials escalated. On 5 April 1991, in
accordance with the escalation clause, Pan Pacific claimed a price adjustment of
₱5,165,945.52. Respondent’s appointed project engineer, TCGI Engineers, asked for
a reduction in the price adjustment. To show goodwill, Pan Pacific reduced the price
adjustment to ₱4,858,548.67.11
On 28 April 1992, TCGI Engineers recommended to respondent that the price
adjustment should be pegged at ₱3,730,957.07. TCGI Engineers based their
evaluation of the price adjustment on the following factors:
1. Labor Indices of the Department of Labor and Employment.
2. Price Index of the National Statistics Office.
PD 1594 and its Implementing Rules and Regulations as amended, 15 March 1991.
Shipping Documents submitted by PPSCI.
Sub-clause 70.1 of the General Conditions of the Contract Documents.12
Pan Pacific contended that with this recommendation, respondent was already
estopped from disclaiming liability of at least ₱3,730,957.07 in accordance with the
escalation clause.13
Due to the extraordinary increases in the costs of labor and materials, Pan Pacific’s
operational capital was becoming inadequate for the project. However, respondent
withheld the payment of the price adjustment under the escalation clause despite
Pan Pacific’s repeated demands.14 Instead, respondent offered Pan Pacific a loan of
₱1.8 million. Against its will and on the strength of respondent’s promise that the
price adjustment would be released soon, Pan Pacific, through Del Rosario, was
constrained to execute a promissory note in the amount of ₱1.8 million as a
requirement for the loan. Pan Pacific also posted a surety bond. The ₱1.8 million was
released directly to laborers and suppliers and not a single centavo was given to Pan
Pacific.15
Pan Pacific made several demands for payment on the price adjustment but
respondent merely kept on promising to release the same. Meanwhile, the ₱1.8
million loan matured and respondent demanded payment plus interest and penalty.
Pan Pacific refused to pay the loan. Pan Pacific insisted that it would not have
incurred the loan if respondent released the price adjustment on time. Pan Pacific
alleged that the promissory note did not express the true agreement of the parties.
Pan Pacific maintained that the ₱1.8 million was to be considered as an advance
payment on the price adjustment. Therefore, there was really no consideration for the
promissory note; hence, it is null and void from the beginning.16
Respondent stood firm that it would not release any amount of the price adjustment
to Pan Pacific but it would offset the price adjustment with Pan Pacific’s outstanding
balance of ₱3,226,186.01, representing the loan, interests, penalties and collection
charges.17
Pan Pacific refused the offsetting but agreed to receive the reduced amount of
₱3,730,957.07 as recommended by the TCGI Engineers for the purpose of
extrajudicial settlement, less ₱1.8 million and ₱414,942 as advance payments.18
On 6 May 1994, petitioners filed a complaint for declaration of nullity/annulment of
the promissory note, sum of money, and damages against the respondent with the
RTC of Makati City, Branch 59. On 12 April 1999, the RTC rendered its decision, the
dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the
plaintiffs and against the defendant as follows:
1. Declaring the promissory note (Exhibit "B") null and void;
Ordering the defendant to pay the plaintiffs the following amounts:
a. ₱1,389,111.10 representing unpaid balance of the
adjustment price, with interest thereon at the legal rate of
twelve (12%) percent per annum starting May 6, 1994, the
date when the complaint was filed, until the amount is fully
paid;
₱100,000.00 representing moral damages;
₱50,000.00 representing exemplary damages;
and
₱50,000.00 as and for attorney’s fees.
2. Dismissing defendant’s counterclaim, for lack of merit; and
With costs against the defendant.
SO ORDERED.19
On 23 May 1999, petitioners partially appealed the RTC Decision to the CA. On 26
May 1999, respondent appealed the entire RTC Decision for being contrary to law
and evidence. In sum, the appeals of the parties with the CA are as follows:
1. With respect to the petitioners, whether the RTC erred in deducting the
amount of ₱126,903.97 from the balance of the adjusted price and in
awarding only 12% annual interest on the amount due, instead of the
bank loan rate of 18% compounded annually beginning September 1992.
2. With respect to respondent, whether the RTC erred in declaring the
promissory note void and in awarding moral and exemplary damages and
attorney’s fees in favor of petitioners and in dismissing its counterclaim.
In its decision dated 30 June 2005, the CA modified the RTC decision, with respect
to the principal amount due to petitioners. The CA removed the deduction of
₱126,903.97 because it represented the final payment on the basic contract price.
Hence, the CA ordered respondent to pay ₱1,516,015.07 to petitioners, with interest
at the legal rate of 12% per annum starting 6 May 1994.20
On 26 July 2005, petitioners filed a Motion for Partial Reconsideration seeking a
reconsideration of the CA’s Decision imposing the legal rate of 12%. Petitioners
claimed that the interest rate applicable should be the 18% bank lending rate.
Respondent likewise filed a Motion for Reconsideration of the CA’s decision. In a
Resolution dated 5 October 2005, the CA denied both motions.
Aggrieved by the CA’s Decision, petitioners elevated the case before this Court.
The Issue
Petitioners submit this sole issue for our consideration: Whether the CA, in awarding
the unpaid balance of the price adjustment, erred in fixing the interest rate at 12%
instead of the 18% bank lending rate.
Ruling of the Court
We grant the petition.
This Court notes that respondent did not appeal the decision of the CA. Hence, there
is no longer any issue as to the principal amount of the unpaid balance on the price
adjustment, which the CA correctly computed at ₱1,516,015.07. The only remaining
issue is the interest rate applicable for respondent’s delay in the payment of the
balance of the price adjustment.
The CA denied petitioners’ claim for the application of the bank lending rate of 18%
compounded annually reasoning, to wit:
Anent the 18% interest rate compounded annually, while it is true that the contract
provides for an interest at the current bank lending rate in case of delay in payment
by the Owner, and the promissory note charged an interest of 18%, the said proviso
does not authorize plaintiffs to unilaterally raise the interest rate without the other
party’s consent. Unlike their request for price adjustment on the basic contract price,
plaintiffs never informed nor sought the approval of defendant for the imposition of
18% interest on the adjusted price. To unilaterally increase the interest rate of the
adjusted price would be violative of the principle of mutuality of contracts. Thus, the
Court maintains the legal rate of twelve percent per annum starting from the date of
judicial demand. Although the contract provides for the period when the
recommendation of the TCGI Engineers as to the price adjustment would be binding
on the parties, it was established, however, that part of the adjusted price demanded
by plaintiffs was already disbursed as early as 28 February 1992 by defendant bank
to their suppliers and laborers for their account.21
In this appeal, petitioners allege that the contract between the parties consists of two
parts, the Agreement22 and the General Conditions,23 both of which provide for
interest at the bank lending rate on any unpaid amount due under the contract.
Petitioners further claim that there is nothing in the contract which requires the
consent of the respondent to be given in order that petitioners can charge the bank
lending rate.24 Specifically, petitioners invoke Section 2.5 of the Agreement and
Section 60.10 of the General Conditions as follows:
Agreement
2.5 If any payment is delayed, the CONTRACTOR may charge interest thereon at
the current bank lending rates, without prejudice to OWNER’S recourse to any other
remedy available under existing law.25
General Conditions
60.10 Time for payment
The amount due to the Contractor under any interim certificate issued by the
Engineer pursuant to this Clause, or to any term of the Contract, shall, subject to
clause 47, be paid by the Owner to the Contractor within 28 days after such interim
certificate has been delivered to the Owner, or, in the case of the Final Certificate
referred to in Sub-Clause 60.8, within 56 days, after such Final Certificate has been
delivered to the Owner. In the event of the failure of the Owner to make payment
within the times stated, the Owner shall pay to the Contractor interest at the rate
based on banking loan rates prevailing at the time of the signing of the contract upon
all sums unpaid from the date by which the same should have been paid. The
provisions of this Sub-Clause are without prejudice to the Contractor’s entitlement
under Clause 69.26 (Emphasis supplied)
Petitioners thus submit that it is automatically entitled to the bank lending rate of
interest from the time an amount is determined to be due thereto, which respondent
should have paid. Therefore, as petitioners have already proven their entitlement to
the price adjustment, it necessarily follows that the bank lending interest rate of 18%
shall be applied.27
On the other hand, respondent insists that under the provisions of 70.1 and 70.2 of
the General Conditions, it is stipulated that any additional cost shall be determined by
the Engineer and shall be added to the contract price after due consultation with the
Owner, herein respondent. Hence, there being no prior consultation with the
respondent regarding the additional cost to the basic contract price, it naturally
follows that respondent was never consulted or informed of the imposition of 18%
interest rate compounded annually on the adjusted price.28
A perusal of the assailed decision shows that the CA made a distinction between the
consent given by the owner of the project for the liability for the price adjustments,
and the consent for the imposition of the bank lending rate. Thus, while the CA held
that petitioners consulted respondent for price adjustment on the basic contract price,
petitioners, nonetheless, are not entitled to the imposition of 18% interest on the
adjusted price, as petitioners never informed or sought the approval of respondent for
such imposition.29
We disagree.
It is settled that the agreement or the contract between the parties is the formal
expression of the parties’ rights, duties, and obligations. It is the best evidence of the
intention of the parties. Thus, when the terms of an agreement have been reduced to
writing, it is considered as containing all the terms agreed upon and there can be,
between the parties and their successors in interest, no evidence of such terms other
than the contents of the written agreement.30
The escalation clause of the contract provides:
CHANGES IN COST AND LEGISLATION
70.1 Increase or Decrease of Cost
There shall be added to or deducted from the Contract Price such sums in respect of
rise or fall in the cost of labor and/or materials or any other matters affecting the cost
of the execution of the Works as may be determined.
70.2 Subsequent Legislation
If, after the date 28 days prior to the latest date of submission of tenders for the
Contract there occur in the country in which the Works are being or are to be
executed changes to any National or State Statute, Ordinance, Decree or other Law
or any regulation or bye-law (sic) of any local or other duly constituted authority, or
the introduction of any such State Statute, Ordinance, Decree, Law, regulation or
bye-law (sic) which causes additional or reduced cost to the contractor, other than
under Sub-Clause 70.1, in the execution of the Contract, such additional or reduced
cost shall, after due consultation with the Owner and Contractor, be determined by
the Engineer and shall be added to or deducted from the Contract Price and the
Engineer shall notify the Contractor accordingly, with a copy to the Owner.31
In this case, the CA already settled that petitioners consulted respondent on the
imposition of the price adjustment, and held respondent liable for the balance of
₱1,516,015.07. Respondent did not appeal from the decision of the CA; hence,
respondent is estopped from contesting such fact.
However, the CA went beyond the intent of the parties by requiring respondent to
give its consent to the imposition of interest before petitioners can hold respondent
liable for interest at the current bank lending rate. This is erroneous. A review of
Section 2.6 of the Agreement and Section 60.10 of the General Conditions shows
that the consent of the respondent is not needed for the imposition of interest at the
current bank lending rate, which occurs upon any delay in payment.
When the terms of a contract are clear and leave no doubt as to the intention of the
contracting parties, the literal meaning of its stipulations governs. In these cases,
courts have no authority to alter a contract by construction or to make a new contract
for the parties. The Court’s duty is confined to the interpretation of the contract which
the parties have made for themselves without regard to its wisdom or folly as the
court cannot supply material stipulations or read into the contract words which it does
not contain. It is only when the contract is vague and ambiguous that courts are
permitted to resort to construction of its terms and determine the intention of the
parties.32
The escalation clause must be read in conjunction with Section 2.5 of the Agreement
and Section 60.10 of the General Conditions which pertain to the time of payment.
Once the parties agree on the price adjustment after due consultation in compliance
with the provisions of the escalation clause, the agreement is in effect an amendment
to the original contract, and gives rise to the liability of respondent to pay the adjusted
costs. Under Section 60.10 of the General Conditions, the respondent shall pay such
liability to the petitioner within 28 days from issuance of the interim certificate. Upon
respondent’s failure to pay within the time provided (28 days), then it shall be liable to
pay the stipulated interest.1avvphi1
This is the logical interpretation of the agreement of the parties on the imposition of
interest. To provide a contrary interpretation, as one requiring a separate consent for
the imposition of the stipulated interest, would render the intentions of the parties
nugatory.
Article 1956 of the Civil Code, which refers to monetary interest, specifically
mandates that no interest shall be due unless it has been expressly stipulated in
writing. Therefore, payment of monetary interest is allowed only if:
(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.33
We agree with petitioners’ interpretation that in case of default, the consent of the
respondent is not needed in order to impose interest at the current bank lending rate.
Applicable Interest Rate
Under Article 2209 of the Civil Code, the appropriate measure for damages in case of
delay in discharging an obligation consisting of the payment of a sum of money is the
payment of penalty interest at the rate agreed upon in the contract of the parties. In
the absence of a stipulation of a particular rate of penalty interest, payment of
additional interest at a rate equal to the regular monetary interest becomes due and
payable. Finally, if no regular interest had been agreed upon by the contracting
parties, then the damages payable will consist of payment of legal interest which is
6%, or in the case of loans or forbearances of money, 12% per annum.34 It is only
when the parties to a contract have failed to fix the rate of interest or when such
amount is unwarranted that the Court will apply the 12% interest per annum on a
loan or forbearance of money.35
The written agreement entered into between petitioners and respondent provides for
an interest at the current bank lending rate in case of delay in payment and the
promissory note charged an interest of 18%.
To prove petitioners’ entitlement to the 18% bank lending rate of interest, petitioners
presented the promissory note36 prepared by respondent bank itself. This promissory
note, although declared void by the lower courts because it did not express the real
intention of the parties, is substantial proof that the bank lending rate at the time of
default was 18% per annum. Absent any evidence of fraud, undue influence or any
vice of consent exercised by petitioners against the respondent, the interest rate
agreed upon is binding on them.37
WHEREFORE, we GRANT the petition. We SET ASIDE the Decision and Resolution
of the Court of Appeals in CA-G.R. CV No. 63966. We ORDER respondent to pay
petitioners ₱1,516,015.07 with interest at the bank lending rate of 18% per annum
starting 6 May 1994 until the amount is fully paid.
SO ORDERED.