G.R. NO.

115324
FEBRUARY 19, 2003
PRODUCERS BANK OF THE PHILIPPINES
VS. HON. COURT OF APPEALS AND FRANKLIN VIVES

FACTS:
Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and friend Angeles Sanchez to help her
friend and townmate, Col. Arturo Doronilla, in incorporating his business, the Sterela Marketing and Services (“Sterela” for
brevity). Specifically, Sanchez asked private respondent to deposit in a bank a certain amount of money in the bank
account of Sterela for purposes of its incorporation. She assured private respondent that he could withdraw his money
from said account within a month’s time. With this, Mrs. Vivies, Sanchez and a certain Estrella Dumagpi, secretary of
Doronilla, went to the bank to open an account with Mrs. Vives and Sanchez as signatories. A passbook was then issued
to Mrs. Vives. Subsequently, private respondent learned that part of the money was withdrawn without presentment of the
passbook as it was his wife got hold of such. Mrs. Vives could not also withdraw said remaining amount because it had to
answer for some postdated checks issued by Doronilla who opened a current account for Sterela and authorized the bank
to debit savings.

Private respondent referred the matter to a lawyer, who made a written demand upon Doronilla for the return of his client’s
money. Doronilla issued another check for P212,000.00 in private respondent’s favor but the check was again dishonored
for insufficiency of funds.

Private respondent instituted an action for recovery of sum of money in the Regional Trial Court (RTC) in Pasig, Metro
Manila against Doronilla, Sanchez, Dumagpi and petitioner. The RTC ruled in favor of the private respondent which was
also affirmed in toto by the CA. Hence this petition.

ISSUE:
WON THE TRANSACTION BETWEEN THE DORONILLA AND RESPONDENT VIVES WAS ONE OF SIMPLE LOAN.

DECISION:
NO. A circumspect examination of the records reveals that the transaction between them was a commodatum.
Article 1933 of the Civil Code distinguishes between the two kinds of loans in this wise:

By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter
may use the same for a certain time and return it, in which case the contract is called a commodatum; or
money or other consumable thing, upon the condition that the same amount of the same kind and quality shall
be paid, in which case the contract is simply called a loan or mutuum.

Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay interest. In
commodatum, the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the
borrower.

The foregoing provision seems to imply that if the subject of the contract is a consumable thing, such as money, the
contract would be a mutuum. However, there are some instances where a commodatum may have for its object a
consumable thing. Article 1936 of the Civil Code provides:

Consumable goods may be the subject of commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for exhibition.

Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of the parties is to lend
consumable goods and to have the very same goods returned at the end of the period agreed upon, the loan is a
commodatum and not a mutuum.

The rule is that the intention of the parties thereto shall be accorded primordial consideration in determining the actual
character of a contract. In case of doubt, the contemporaneous and subsequent acts of the parties shall be considered in
such determination.

As correctly pointed out by both the Court of Appeals and the trial court, the evidence shows that private respondent
agreed to deposit his money in the savings account of Sterela specifically for the purpose of making it appear
"that said firm had sufficient capitalization for incorporation, with the promise that the amount shall be returned
within thirty (30) days. Private respondent merely "accommodated" Doronilla by lending his money without
consideration, as a favor to his good friend Sanchez. It was however clear to the parties to the transaction that the
money would not be removed from Sterela’s savings account and would be returned to private respondent after thirty (30)
days.
Doronilla’s attempts to return to private respondent the amount of P200,000.00 which the latter deposited in Sterela’s
account together with an additional P12,000.00, allegedly representing interest on the mutuum, did not convert the
transaction from a commodatum into a mutuum because such was not the intent of the parties and because the additional
P12,000.00 corresponds to the fruits of the lending of the P200,000.00. Article 1935 of the Civil Code expressly states
that" [t]he bailee in commodatum acquires the use of the thing loaned but not its fruits ." Hence, it was only proper
for Doronilla to remit to private respondent the interest accruing to the latter’s money deposited with petitioner.

QUESTIONS:
1. What kind of contract is this? COMMODATUM
2. What is the basis for this determination by the Supreme Court? Article 1933 and 1936 of the Civil Code
 G.R. NO. 146364
JUNE 3, 2004
COLITO T. PAJUYO
VS. COURT OF APPEALS AND EDDIE GUEVARRA

FACTS:
In June 1979, petitioner Colito T. Pajuyo (Pajuyo) paid P400 to a certain Pedro Perez for the rights over a 250- square
meter lot in Barrio Payatas, Quezon City. Pajuyo then constructed a house made of light materials on the lot. Pajuyo and
his family lived in the house from 1979 to 7 December 1985.

On 8 December 1985, Pajuyo and private respondent Eddie Guevarra (Guevarra) executed a Kasunduan or agreement.
Pajuyo, as owner of the house, allowed Guevarra to live in the house for free provided Guevarra would maintain the
cleanliness and orderliness of the house. Guevarra promised that he would voluntarily vacate the premises on Pajuyos
demand.

In September 1994, Pajuyo informed Guevarra of his need of the house and demanded that Guevarra vacate the house.
Guevarra refused.

Pajuyo filed an ejectment case against Guevarra with the Metropolitan Trial Court of Quezon City, Branch 31 (MTC).

In his Answer, Guevarra claimed that Pajuyo had no valid title or right of possession over the lot where the house stands
because the lot is within the 150 hectares set aside by Proclamation No. 137 for socialized housing. Guevarra pointed out
that from December 1985 to September 1994, Pajuyo did not show up or communicate with him. Guevarra insisted that
neither he nor Pajuyo has valid title to the lot.

MTC: The MTC ruled that the subject of the agreement between Pajuyo and Guevarra is the house and not the lot. Pajuyo
is the owner of the house, and he allowed Guevarra to use the house only by tolerance. Thus, Guevarras refusal to
vacate the house on Pajuyos demand made Guevarras continued possession of the house illegal.

RTC: The RTC upheld the Kasunduan, which established the landlord and tenant relationship between Pajuyo and
Guevarra. The terms of the Kasunduan bound Guevarra to return possession of the house on demand.

The RTC rejected Guevarras claim of a better right under Proclamation No. 137, the Revised National Government
Center Housing Project Code of Policies and other pertinent laws. In an ejectment suit, the RTC has no power to decide
Guevarras rights under these laws. The RTC declared that in an ejectment case, the only issue for resolution is material
or physical possession, not ownership.

CA: Pajuyo and Guevarra are squatters. Pajuyo and Guevarra illegally occupied the contested lot which the government
owned.

Perez, the person from whom Pajuyo acquired his rights, was also a squatter. Perez had no right or title over the lot
because it is public land. Pajuyo and Guevarra are in pari delicto or in equal fault. The court will leave them where they
are.

Kasunduan is not a lease contract but a commodatum because the agreement is not for a price certain.

Since Pajuyo admitted that he resurfaced only in 1994 to claim the property, the appellate court held that Guevarra has a
better right over the property under Proclamation No. 137. President Corazon C. Aquino issued Proclamation No. 137 on
7 September 1987. At that time, Guevarra was in physical possession of the property. Under Article VI of the Code of
Policies Beneficiary Selection and Disposition of Homelots and Structures in the National Housing Project (the Code), the
actual occupant or caretaker of the lot shall have first priority as beneficiary of the project. The Court of Appeals
concluded that Guevarra is first in the hierarchy of priority.

ISSUE:
Was CA wrong in ruling that the Kasunduan voluntarily entered into by the parties was a commodatum, instead of a
Contract of Lease?

DECISION:
The Court do not subscribe to the CA’s theory that the Kasunduan is one of commodatum.

In a contract of commodatum, one of the parties delivers to another something not consumable so that the latter
may use the same for a certain time and return it. An essential feature of commodatum is that it is gratuitous. Another
feature of commodatum is that the use of the thing belonging to another is for a certain period.
Thus, the bailor cannot demand the return of the thing loaned until after expiration of the period stipulated, or
after accomplishment of the use for which the commodatum is constituted. If the bailor should have urgent need of
the thing, he may demand its return for temporary use. If the use of the thing is merely tolerated by the bailor, he can
demand the return of the thing at will, in which case the contractual relation is called a precarium. Under the Civil Code,
precarium is a kind of commodatum.

The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not essentially gratuitous . While
the Kasunduan did not require Guevarra to pay rent, it obligated him to maintain the property in good condition. The
imposition of this obligation makes the Kasunduan a contract different from a commodatum . The effects of the Kasunduan
are also different from that of a commodatum. Case law on ejectment has treated relationship based on tolerance as
one that is akin to a landlord-tenant relationship where the withdrawal of permission would result in the
termination of the lease. The tenants withholding of the property would then be unlawful. This is settled jurisprudence.

QUESTIONS:
1. Is the Kasunduan a contract of commodatum? NO. (Refer above)
 G.R. NO. L-80294-95
SEPTEMBER 21, 1988
CATHOLIC VICAR APOSTOLIC V. CA

DOCTRINE:
The bailees’ failure to return the subject matter of commodatum to the bailor does not mean adverse possession on the
part of the borrower. The bailee held in trust the property subject matter of commodatum.

FACTS:
Catholic Vicar Apostolic of the Mountain Province (VICAR for brevity) filed an application for registration of title over Lots
1, 2, 3, and 4, said Lots being the sites of the Catholic Church building, convents, high school building, school
gymnasium, school dormitories, social hall, stonewalls, etc. The Heirs of Juan Valdez and the Heirs of Egmidio Octaviano
filed their Answer/Opposition on Lots Nos. 2 and 3, respectively, asserting ownership and title thereto since their
predecessors’ house was borrowed by petitioner Vicar after the church and the convent were destroyed.. After trial on the
merits, the land registration court promulgated its Decision confirming the registrable title of VICAR to Lots 1, 2, 3, and 4.

The Heirs of Juan Valdez appealed the decision of the land registration court to the then Court of Appeals, The Court of
Appeals reversed the decision. Thereupon, the VICAR filed with the Supreme Court a petition for review on certiorari of
the decision of the Court of Appeals dismissing his application for registration of Lots 2 and 3.

ISSUE:
1. Is the contract in this instance commodatum? YES.
2. Does the failure to return the subject matter of commodatum constitute an adverse possession on the part of the
owner? NO.

HELD:
1. Private respondents were able to prove that their predecessors' house was borrowed by petitioner Vicar after the
church and the convent were destroyed. They never asked for the return of the house, but when they
allowed its free use, they became bailors in commodatum and the petitioner the bailee. The bailees'
failure to return the subject matter of commodatum to the bailor did not mean adverse possession on the
part of the borrower. The bailee held in trust the property subject matter of commodatum. The adverse
claim of petitioner came only in 1951 when it declared the lots for taxation purposes. The action of petitioner Vicar
by such adverse claim could not ripen into title by way of ordinary acquisitive prescription because of the absence
of just title.

The Court of Appeals found that the predecessors-in-interest and private respondents were possessors under
claim of ownership in good faith from 1906; that petitioner Vicar was only a bailee in commodatum; and that the
adverse claim and repudiation of trust came only in 1951.

2. No. The bailees’ failure to return the subject matter of commodatum to the bailor did not mean adverse
possession on the part of the borrower. The bailee held in trust the property subject matter of commodatum.
Petitioner repudiated the trust by declaring the properties in its name for taxation purposes.
 G.R. NO. 194201
NOVEMBER 27, 2013
SPOUSES BAYANI H. ANDAL AND GRACIA G. ANDAL
VS. PHILIPPINE NATIONAL BANK REGISTER OF DEEDS OF BATANGAS CITY JOSE C. CORALES

FACTS:
On September 7, 1995, spouses Andal obtained a loan from PNB for ₱21,805,000.00, for which they executed twelve (12)
promissory notes with the undertaking to pay the principal loan with varying interest rates of 17.5% to 27% per interest
period. It was agreed upon by the parties that the rate of interest may be increased or decreased for the subsequent
interest periods, with prior notice to spouses Andal, in the event of changes in interest rates prescribed by law or the
Monetary Board or in the bank’s overall cost of funds.

To secure the payment of the said loan, spouses Andal executeda real estate mortgage with a collateral of five (5) parcels
of land including all improvements.

Subsequently, PNB advised spouses Andal to pay their loan obligation or the former will declare the latter’s loan due and
demandable. The spouses paid ₱14,800,000.00 to PNB to avoid foreclosure of the properties. However, despite payment
PNB proceeded to foreclose three (3) parcels of land and put them in public auction.

This prompted spouses to file a complaint. Spouses Andal alleged that they tried to religiously pay their loan obligation,
but the exorbitant rate of interest unilaterally determined and imposed by the latter prevented the former from paying their
obligation. They alleged that the unilateral increase of interest rates and exorbitant penalty charges are akin to unjust
enrichment at their expense. PNB denied the allegations in the complaint.

ISSUE:
Should interest be imposed on their loan? YES.

DECISION:
We cannot subscribe to the contention of petitioners-spouses that no interest should be due on the loan they obtained
from respondent bank, or that, at the very least, interest should be computed only from the finality of the judgment
declaring the foreclosure sale null and void, on account of the exorbitant rate of interest imposed on their loan.

It is clear from the contract of loan between petitioners-spouses and respondent bank that petitioners-spouses, as
borrowers, agreed to the payment of interest on their loan obligation. That the rate of interest was subsequently
declared illegal and unconscionable does not entitle petitioners-spouses to stop payment of interest. It should be
emphasized that only the rate of interest was declared void. The stipulation requiring petitioners-spouses to pay
interest on their loan remains valid and binding. They are, therefore, liable to pay interest from the time they defaulted in
payment until their loan is fully paid.

It is worth mentioning that both the RTC and the CA are one in saying that "[petitioners-spouses] cannot be
considered in default for their inability to pay the arbitrary, illegal and unconscionable interest rates and penalty charges
unilaterally imposed by [respondent] bank."

This is precisely the reason why the foreclosure proceedings involving petitioners-spouses’ properties were
invalidated. As pointed out by the CA, "since the interest rates are null and void, [respondent] bank has no right to
foreclose [petitioners-spouses’] properties and any foreclosure thereof is illegal.

Thus, for the purpose of computing the amount of liability of petitioners-spouses, they are considered in default from
the date the Resolution of the Court in G.R. No. 194164 (Philippine National Bank v. Spouses Bayani H. Andal and
Gracia G. Andal) – which is the appeal interposed by respondent bank to the Supreme Court from the judgment
of the CA – became final and executory. Based on the records of G.R. No. 194164, the Court denied herein respondent
bank’s appeal in a Resolution dated 10 January 2011. The Resolution became final and executory on 20 May 2011.

In addition, pursuant to Circular No. 799, series of 2013, issued by the Office of the Governor of the Bangko Sentral ng
Pilipinas on 21 June 2013, and in accordance with the ruling of the Supreme Court in the recent case of Dario Nacar v.
Gallery Frames and/or Felipe Bordey, Jr., effective 1 July 2013, 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.

Accordingly, the rate of interest of 12% per annum on petitioners-spouses’ obligation shall apply from 20 May 2011 – the
date of default – until 30 June 2013 only. From 1 July 2013 until fully paid, the legal rate of 6% per annum shall be
applied to petitioners-spouses’ unpaid obligation.
QUESTIONS:

1. What is a re-pricing floating interest rate?

Any instance of an interest rate being reset—either due to maturities or floating interest rate resets—is called a
repricing. The date on which it occurs is called the repricing date. A floating interest rate, also known as a variable
or adjustable rate, refers to any type of debt instrument, such as a loan, bond, mortgage, or credit, that does not
have a fixed rate of interest over the life of the instrument.

Such imposition of the increased interest without the consent of the borrower is null and void pursuant to Article
1956 of the Civil Code and as held in the pronouncement of the Supreme Court in several cases and C.B. Circular
No. 1191 that the interest rate for each re-pricing period under the floating rate of interest is subject to
mutual agreement in writing. Art. 1956 states that no interest is due unless it has been expressly
stipulated and agreed to in writing.

Any stipulation where the fixing of interest rate is the sole prerogative of the creditor/mortgagee, belongs to the
class of potestative condition which is null and void under Art. 1308 of the New Civil Code. The fulfillment of a
condition cannot be left to the sole will of [one of] the contracting parties.

2. If the interest rate is void, does that mean that no interest rate may be collected? NO.

It is clear from the contract of loan between petitioners-spouses and respondent bank that petitioners-spouses, as
borrowers, agreed to the payment of interest on their loan obligation. That the rate of interest was subsequently
declared illegal and unconscionable does not entitle petitioners-spouses to stop payment of interest.1âwphi1 It
should be emphasized that only the rate of interest was declared void. The stipulation requiring petitioners-
spouses to pay interest on their loan remains valid and binding. They are, therefore, liable to pay interest from the
time they defaulted in payment until their loan is fully paid.

3. What is the principle of mutuality of contracts?

Article 1308 of the Civil Code: The contract must bind both contracting parties; its validity or compliance cannot be
left to the will of one of them. The Court further notes that in the case at bar, PNB imposed different rates in the
twelve (12) promissory notes: interest rate of 18% in five (5) promissory notes; 17.5% in two (2) promissory
notes; 23% in one (1) promissory note; and 27% in three (3) promissory notes. Obviously, the interest rates are
excessive and arbitrary. Thus, the foregoing interest rates imposed on [petitioners-spouses’] loan
obligation without their knowledge and consent should be disregarded, not only for being iniquitous and
exorbitant, but also for being violative of the principle of mutuality of contracts.

4. When is there default?

Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extra-judicially
demands from them the fulfilment of their obligation. In reciprocal obligations, neither party incurs in delay if the
other does not comply in a proper manner with what is incumbent upon him. From the moment one of the parties
fulfills his obligations, delay by the other begins. (Art. 1169, NCC)

1. Mora solvendi – default on the part of the debtor/obligor

a. Ex re – default in real obligations (to give)
b. Ex personae – default in personal obligations (to do)
2. Mora accipiendi – default on the part of the creditor/obligee
3. Compensatio morae – default on the part of both the debtor and creditor in reciprocal obligations

5. Is the foreclosure valid? NO.

This is precisely the reason why the foreclosure proceedings involving petitioners-spouses’ properties were
invalidated. As pointed out by the CA, "since the interest rates are null and void, [respondent] bank has no
right to foreclose [petitioners-spouses’] properties and any foreclosure thereof is illegal.

WHY? SPOUSES ARE NOT IN DEFAULT. It is worth mentioning that both the RTC and the CA are one in saying
that "[petitioners-spouses] cannot be considered in default for their inability to pay the arbitrary, illegal and
unconscionable interest rates and penalty charges unilaterally imposed by [respondent] bank."
 G.R. No. 195166
July 08, 2015
SPOUSES SALVADOR ABELLA AND ALMA ABELLA
VS. SPOUSES ROMEO ABELLA AND ANNIE ABELLA

FACTS:
On July 31, 2002, petitioners Spouses Salvador and Alma Abella filed a Complaint for sum of money and damages with
prayer for preliminary attachment against respondents Spouses Romeo and Annie Abella before the Regional Trial Court,
Branch 8, Kalibo, Aklan.

In their Complaint, petitioners alleged that respondents obtained a loan from them in the amount of P500,000.00, payable
within one (1) year. Petitioners added that respondents were able to pay a total of P200,000.00—P100,000.00 paid on
two separate occasions—leaving an unpaid balance of P300,000.00.

In their Answer (with counterclaim and motion to dismiss), respondents alleged that the amount involved did not pertain to
a loan they obtained from petitioners but was part of the capital for a joint venture involving the lending of money.

Specifically, respondents claimed that they were approached by petitioners, who proposed that if respondents were to
"undertake the management of whatever money [petitioners] would give them, [petitioners] would get 2.5% a month with a
2.5% service fee to [respondents]." The 2.5% that each party would be receiving represented their sharing of the 5%
interest that the joint venture was supposedly going to charge against its debtors. Respondents further alleged that the
one year averred by petitioners was not a deadline for payment but the term within which they were to return the money
placed by petitioners should the joint venture prove to be not lucrative. Moreover, they claimed that the entire amount of
P500,000.00 was disposed of in accordance with their agreed terms and conditions and that petitioners terminated the
joint venture, prompting them to collect from the joint venture's borrowers. They were, however, able to collect only to the
extent of P200,000.00; hence, the P300,000.00 balance remained unpaid.

ISSUE:
Whether or not the Court of Appeals erred in completely striking off interest despite the parties’ written agreement
stipulating it, as well as in ordering them to reimburse and pay interest to respondents.

DECISION:
Yes. As noted by the Court of Appeals and the Regional Trial Court, respondents entered into a simple loan or mutuum,
rather than a joint venture, with petitioners.

Articles 1933 and 1953 of the Civil Code provide the guideposts that determine if a contractual relation is one of simple
loan or mutuum:

Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that
the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or
money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be
paid, in which case the contract is simply called a loan or mutuum.

Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay interest. In
commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower.

Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and
is bound to pay to the creditor an equal amount of the same kind and quality.

The acknowledgment receipt attests to: first, respondents’ receipt of the sum of P500,000.00; second, respondents’ duty
to pay tack this amount within one (1) year; and third, respondents’ duty to pay interest. Consistent with what typifies a
simple loan, petitioners delivered to respondents with the corresponding condition that respondents shall pay the same
amount to petitioners within one (1) year.

Article 1956 of the Civil Code spells out the basic rule that “[n]o interest shall be due unless it has been expressly
stipulated in writing.” The acknowledgment receipt attests to the contracting parties’ intent to subject to interest the loan
extended by petitioners to respondents.

Our intervening Decision in Nacar v. Gallery Frames recognized that the legal rate of interest has been reduced to 6% per
annum:

Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796 dated May 16,
2013, approved the amendment of Section 2 of Circular No. 905, Series of 1982 and, accordingly, issued Circular No.
799, Series of 2013, effective July 1, 2013, 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.

Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that would govern the
parties, the rate of legal interest for loans or forbearance of any money, goods or credits and the rate allowed in
judgments shall no longer be twelve percent (12%) per annum — as reflected in the case of Eastern Shipping
Lines and the Manual of Regulations for Banks and 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. (Emphasis
supplied, citations omitted)

It is a basic precept in legal interpretation and construction that a rule or provision that treats a subject with
specificity prevails over a rule or provision that treats a subject in general terms. The rule spelled out in Security
Bank and Spouses Toring is anchored on Article 1956 of the Civil Code and specifically governs simple loans or
mutuum. Mutuum is a type of nominate contract that is specifically recognized by the Civil Code and for which
the Civil Code provides a specific set of governing rules: Articles 1953 to 1961. In contrast, Article 11371 is
among the Civil Code provisions generally dealing with contracts. As this case particularly involves a simple
loan, the specific rule spelled out in Security Bank and Spouses Toring finds preferential application as against
Article 1371.

In sum, Article 1956 of the Civil Code, read in light of established jurisprudence, prevents the application of any
interest rate other than that specifically provided for by the parties in their loan document or, in lieu of it, the legal
rate. Here, as the contracting parties failed to make a specific stipulation, the legal rate must apply. Moreover, the rate
that petitioners adverted to is unconscionable. The conventional interest due on the principal amount loaned by
respondents from petitioners is held to be 12% per annum.

Apart from respondents’ liability for conventional interest at the rate of 12% per annum, outstanding conventional interest
—if any is due from respondents—shall itself earn legal interest from the time judicial demand was made by petitioners,
i.e., on July 31, 2002, when they filed their Complaint. This is consistent with Article 2212 of the Civil Code, which
provides:

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

QUESTIONS:

1. Was there an overpayment? YES.

Proceeding from these premises, we find that respondents made an overpayment in the amount of P3,379.17.
Application of payments must be in accordance with Article 1253 of the Civil Code, which reads:

Art. 1253. If the debt produces interest, payment of the principal shall not be deemed to have been made until the
interests have been covered.

Thus, the payments respondents made must first be reckoned as interest payments. Thereafter, any excess payments
shall be charged against the principal. Thus, by June 21, 2002, respondents had not only fully paid the principal and all
the conventional interest that had accrued on their loan. By this date, they also overpaid P3,379.17. Moreover, while
hypothetically, interest on conventional interest would not have run from July 31, 2002, no such interest accrued since
there was no longer any conventional interest due from respondents by then.

2. Is the imposition of interest rate of 2.5% per month conscionable? YES.

Even if it can be shown that the parties have agreed to monthly interest at the rate of 2.5%, this is unconscionable. As
emphasized in Castro v. Tan, the willingness of the parties to enter into a relation involving an unconscionable
interest rate is inconsequential to the validity of the stipulated rate.

The imposition of an unconscionable interest rate is void ab initio for being "contrary to morals, and the law.

3. What effect does paties’ context play in determining the validity of the interest rate?
In determining whether the rate of interest is unconscionable, the mechanical application of pre-established floors
would be wanting. The lowest rates that have previously been considered unconscionable need not be an impenetrable
minimum. What is more crucial is a consideration of the parties' contexts. Moreover, interest rates must be
appreciated in light of the fundamental nature of interest as compensation to the creditor for money lent to
another, which he or she could otherwise have used for his or her own purposes at the time it was lent. It is not
the default vehicle for predatory gain. As such, interest need only be reasonable. It ought not be a supine
mechanism for the creditor's unjust enrichment at the expense of another.

299 SCRA 481; GR NO. 131622

 NOVEMBER 27, 1998
MEDEL VS COURT OF APPEALS

FACTS:
Defendants obtained a loan from Plaintiff in the amount P50, 000.00, payable in 2 months and executed a promissory
note. Plaintiff gave only the amount of P47, 000.00 to the borrowers and retained P3, 000.00 as advance interest for 1
month at 6% per month.

Defendants obtained another loan from Defendant in the amount of P90, 000.00, payable in 2 months, at 6% interest per
month. They executed a promissory note to evidence the loan and received only P84, 000.00 out of the proceeds of the
loan.

For the third time, Defendants secured from Plaintiff another loan in the amount of P300, 000.00, maturing in 1 month,
and secured by a real estate mortgage. They executed a promissory note in favor of the Plaintiff. However, only the sum
of P275, 000.00, was given to them out of the proceeds of the loan.

Upon maturity of the three promissory notes, Defendants failed to pay the indebtedness.

Defendants consolidated all their previous unpaid loans totalling P440, 000.00, and sought from Plaintiff another loan in
the amount of P60, 000.00, bringing their indebtedness to a total of P50,000.00. They executed another promissory note
in favor of Plaintiff to pay the sum of P500, 000.00 with a 5.5% interest per month plus 2% service charge per annum, with
an additional amount of 1% per month as penalty charges.

On maturity of the loan, the Defendants failed to pay the indebtedness which prompt the Plaintiffs to file with the RTC a
complaint for collection of the full amount of the loan including interests and other charges.

Declaring that the due execution and genuineness of the four promissory notes has been duly proved, the RTC ruled that
although the Usury Law had been repealed, the interest charged on the loans was unconscionable and “revolting to the
conscience” and ordered the payment of the amount of the first 3 loans with a 12% interest per annum and 1% per month
as penalty.

On appeal, Plaintiff-appellants argued that the promissory note, which consolidated all the unpaid loans of the defendants,
is the law that governs the parties.

The Court of Appeals ruled in favor of the Plaintiff-appellants on the ground that the Usury Law has become legally
inexistent with the promulgation by the Central Bank in 1982 of Circular No. 905, the lender and the borrower could agree
on any interest that may be charged on the loan, and ordered the Defendants to pay the Plaintiffs the sum of P500,000,
plus 5.5% per month interest and 2& service charge per annum , and 1% per month as penalty charges.

Defendants filed the present case via petition for review on certiorari.

ISSUE:
WON the stipulated 5.5% interest rate per month on the loan in the sum of P500, 000.00 is usurious. NO.

DECISION:
The SC 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. However, SC cannot consider the rate "usurious" because it
has consistently held that Circular No. 905 of the Central Bank, adopted on December 22, 1982, has expressly removed
the interest ceilings prescribed by the Usury Law and that the Usury Law is now "legally inexistent".

In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61 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 cannot repeal a law. Only a law can repeal another law." In the recent case
of Florendo vs. Court of Appeals, 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."

Nevertheless, SC 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. The stipulation is void. The courts shall reduce equitably liquidated damages, whether intended as an
indemnity or a penalty if they are iniquitous or unconscionable.

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.
Law: Article 2227, Civil Code

The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are
iniquitous or unconscionable.

Note: While the Usury Law ceiling on interest rates was lifted by the CB Circular 905, nothing in the said circular could
possibly be read as granting carte blanche authority to lenders to raise interest rates to levels which would either enslave
their borrowers or lead to a haemorrhaging of their assets (Almeda vs. CA, 256 SCRA 292 [1996]).

QUESTIONS:
1. How much is the interest rate? 5.5% interest rate per month on the loan in the sum of P500, 000.00
2. Based on the facts of the case, is this valid? NO. Refer above.

G.R. NO. 168782

OCTOBER 10, 2008
SPOUSES JOVENAL TORING AND CECILIA ESCALONA-TORING
 VS. SPOUSES ROSALIE GANZON-OLAN AND GILBERT OLAN, AND ROWENA OLAN

FACTS:
On September 4, 1998, petitioner Jovenal Toring obtained from respondents a loan amounting to P6,000,000 at 3%
interest per month. The loan was secured by a mortgage on a parcel of land.

On September 23, 1998, the parties executed a Deed of Absolute Sale conveying the mortgaged property in favor of
respondents. Subsequently, respondents gave petitioners an exclusive option to repurchase the land for P10,000,000.
This was embodied in a document denominated as an Option to Buy dated September 28, 1998. On this same document,
respondents acknowledged receipt of a total sum of P10,000,000 as consideration for the purchase of the land. The
Option to Buy provided that if the option is exercised after December 5, 1998, the purchase price shall increase at the rate
of P300,000 or 3% of the purchase price every month until September 5, 1999 and thereafter at the rate of P381,000 or
3.81% of the purchase price every month, with the fifth of every month as the cut-off date for said increases.

On July 28, 2000, petitioners filed a Complaint for reformation of instruments, abuse of rights and damages against
respondents. Petitioners filed a complaint on the ground that the interest of 3% & 3.81% are unconscionable. The Trial
Court and the Court of Appeals upheld the said stipulated interest rates.

ISSUE:
Were the interests unconscionable? YES.

DECISION:
In a loan or forbearance of money, according to the Civil Code, the interest due should be that stipulated in writing,20 and
in the absence thereof, the rate shall be 12% per annum.

The first time that the parties in this case entered into a loan transaction was on September 4, 1998 when petitioners
obtained the P6,000,000 loan from respondents. Based on the Deed of Real Estate Mortgage dated September 8, 1998
embodying the promissory note dated September 4, 1998, the parties agreed on an interest rate of 3% per month. (36%)

While the parties are free to stipulate on the interest to be imposed on monetary obligations, the Court will temper interest
rates if they are unconscionable. Even if the Usury Law has been suspended by Central Bank Circular No. 905-82, and
parties to a loan agreement have been given wide latitude to agree on any interest rate, we have held that stipulated
interest rates are illegal if they are unconscionable. Consequently, in our view, the Court of Appeals erred in sustaining
the trial court's decision upholding the stipulated interest of 3% and 3.81%. Thus, we are unanimous now in our ruling to
reduce the above stipulated interest rates to 1% per month, in conformity with our ruling in Ruiz v. Court of Appeals.
For as well stressed in that case:

... Nothing in the said circular [CB Circular No. 905, s. 1982] 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.

QUESTIONS:

1. What kind of mortgage is involved? EQUITABLE MORTGAGE

2. How much is the interest rate and is it valid? NO. (Refer above)
3. Do rules on interest rate apply to equitable mortgage? YES.

Article 1602 of the Civil Code governing equitable mortgages provides that any money, fruits or other benefit to be
received by the vendee as rent or otherwise shall be considered as interest which shall be subject to the usury
laws.

ART. 1602. The contract shall be presumed to be an equitable mortgage, in any of the following cases:
(1) When the price of a sale with right to repurchase is unusually inadequate;
(2) When the vendor remains in possession as lessee or otherwise;
(3) When upon or after the expiration of the right to repurchase another instrument extending the period of
redemption or granting a new period is executed;
(4) When the purchaser retains for himself a part of the purchase price;
(5) When the vendor binds himself to pay the taxes on the thing sold;
(6) In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall
secure the payment of a debt or the performance of any other obligation.

In any of the foregoing cases, any money, fruits or other benefit to be received by the vendee as rent or
otherwise shall be considered as interest which shall be subject to the usury laws.
G.R. NO. 149004
APRIL 14, 2004
RESTITUTA M. IMPERIAL
 VS. ALEX A. JAUCIAN

FACTS:
Petitioner obtained six (6) separate loans amounting to P 320,000.00 from the respondent. In the written agreement, they
agreed upon the 16% interest per month plus penalty charge of 5% per month and the 25% attorney’s fee, failure to pay
the said loans on the stipulated date.

Petitioner executed six (6) separate promissory notes and issued several checks as guarantee for payment. When the
said loans become overdue and unpaid, especially when the petitioner’s checks issued were dishonored, respondent
made repeated oral and written demands for payment.

The petitioner was able to pay only P 116,540.00 as found by the RTC. Although she alleged that she had already paid
the amount of P 441,780.00 and the excess of P 121,780.00 is more than the interest that could be legally charged, the
Court affirms the findings of RTC that petitioner is still indebted to the respondent.

ISSUE:
Whether or not the stipulated interest of 16% per month, 5% per month for penalty charge and 25% attorney’s fee are
usurious.

DECISION:
YES. The rate must be equitably reduced for being iniquitous, unconscionable and exorbitant. While the Usury
Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the said circular grants lenders carte blanche
authority to raise interests rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their
assets.

When the agreed rate is iniquitous or unconscionable, it considered contrary to morals, if not against the law.
Such stipulation is void. Since the stipulation is void, it is as if there was no express contract thereon. Hence,
courts may reduce the interest rate as reason and equity demand.

The interest rate of 16% per month was reduced to 1.167% per month or 14% per annum and the penalty charge of 5%
per month was also reduced to 1.167% per month or 14% per annum.

The attorney’s fees here are in the nature of liquidated damages and the stipulation therefor is aptly called a
penal clause. So long as the stipulation does not contravene the law, morals, public order or public policy, it is binding
upon the obligor. Nevertheless, in the case at bar, petitioner’s failure to comply fully with her obligation was not motivated
by ill will or malice. The partial payments she made were manifestations of her good faith. Hence the attorney’s fees
were reduced to 10% of the total due and payable.

QUESTIONS:
1. How much is the interest rate? 16% PER MONTH, PENALTY CHARGE OF 5% PER MONTH
2. Based on the facts of the case, is this valid? NO. Refer above.

G.R. NO. 113926

OCTOBER 23, 1996
 SECURITY BANK AND TRUST COMPANY VS. RTC-MAKATI

FACTS:
On April 27, 1983, private respondent Magtanggol Eusebio executed 3 Promissory Notes from different dates in favor of
petitioner Security Bank and Trust Co. (SBTC) in the amounts of 100,000, 100,000, and 65,000. Respondent bound
himself to pay the said amounts in six (6) monthly installments plus 23% interest per annum. On all the mentioned
promissory notes, private respondent Leila Ventura had signed as co-maker. Upon maturity there were still principal
balance remaining on the notes. Eusebio refused to pay the balance payable, so SBTC filed a collection case against him.
The RTC rendered a judgment in favor of SBTC, although the rate of interest imposed by the RTC was 12% per annum
instead of the agreed upon 23% per annum. The court denied the motion filed by SBTC to apply the 23% per annum
instead of the 12% per annum.

ISSUE:
1. Should the rate of interest on a loan or forbearance of money, goods or credits, as stipulated in a contract, far in
excess of the ceiling prescribed under or pursuant to the Usury Law, prevail over Section 2 of Central Bank
Circular No. 905 which prescribes that the rate of interest thereof shall continue to be 12% per annum? Is the 23%
rate of interest per annum agreed upon by petitioner bank and respondents allowable and not against the Usury
Law?
2. Do the Courts have the discretion to arbitrarily override stipulated interest rates of promissory notes and stipulated
interest rates of promissory notes and thereby impose a 12% interest on the loans, in the absence of evidence
justifying the imposition of a higher rate?

DECISION:
1. Yes, the rate per contract prevails.

From the examination of the records, it appears that indeed the agreed rate of interest as stipulated on the
three (3) promissory notes is 23% per annum. The applicable provision of law is the Central Bank
Circular No. 905 which took effect on December 22, 1982:

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

Only in the absence of stipulations will the 12% rate be applied or if the stipulated rate is grossly
excessive.

Further, Eusebio never questioned the rate. He merely expressed to negotiate the terms and conditions.
The promissory notes were signed by both parties voluntarily. Therefore, stipulations therein are binding
between them.

2. NO. The rate of interest was agreed upon by the parties freely. Significantly, respondent did not question that
rate. It is not for respondent court a quo to change the stipulations in the contract where it is not illegal.
Furthermore, Article 1306 of the New Civil Code provides that contracting parties may establish such
stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary
to law, morals, good customs, public order, or public policy. We find no valid reason for the respondent court
a quo to impose a 12% rate of interest on the principal balance owing to petitioner by respondent in the presence
of a valid stipulation. In a loan or forbearance of money, the interest due should be that stipulated in writing, and in
the absence thereof, the rate shall be 12% per annum. Hence, only in the absence of a stipulation can the court
impose the 12% rate of interest.

All the promissory notes were signed in 1983 and, therefore, were already covered by CB Circular No. 905. Contrary to
the claim of respondent court, this circular did not repeal nor in anyway amend the Usury Law but simply suspended the
latter's effectivity.

QUESTIONS:
1. How much is the interest rate? 23% per annum (1.92% per month)
2. What made the conclusion from this case different from the case of Medel?
 MEDEL (1998) SBTC (1983)
Usurious No No
Iniquitous Yes (66% per annum) No (23% per annum)
Remedy of Court The stipulated rate of interest was The stipulated rate of interest
changed by the Court to 12% per remained binding to the parties.
annum or 1% per month.

Applied Section 2 of CBC No. 905:

Sec. 2. 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 continue to be twelve per cent
(12%) per annum.

3. Effect of not questioning it? The stipulated rate of interest is binding.

The promissory notes were signed by both parties voluntarily. Therefore, stipulations therein are binding between
them. Respondent Eusebio, likewise, did not question any of the stipulations therein. In fact, in the Comment filed
by respondent Eusebio to this court, he chose not to question the decision and instead expressed his desire to
negotiate with the petitioner bank for "terms within which to settle his obligation."

December 08, 2010

G.R. No. 172139
JOCELYN M. TOLEDO
 VS. MARILOU M. HYDEN

FACTS:
Petitioner Jocelyn M. Toledo (Jocelyn), who was then the Vice-President of the College Assurance Plan (CAP) Phils., Inc.,
obtained several loans from respondent Marilou M. Hyden (Marilou). From August 15, 1993 up to December 31, 1997,
Jocelyn had been religiously paying Marilou the stipulated monthly interest by issuing checks and depositing sums of
money in the bank account of the latter. However, the total principal amount of P290,000.00 remained unpaid.

Thus, in April 1998, Marilou visited Jocelyn in her office at CAP in Cebu City and asked Jocelyn and the other employees
who were likewise indebted to her to acknowledge their debts. A document entitled "Acknowledgment of Debt for the
amount of P290,000.00 was signed by Jocelyn with two of her subordinates as witnesses.

Also on said occasion, Jocelyn issued five checks to Marilou representing renewal payment of her five previous loans.
After honoring Check Nos. 0010494, 0010495 and 0010496, Jocelyn ordered the stop payment on the remaining checks
and filed with the RTC of Cebu City a complaint against Marilou for Declaration of Nullity and Payment, Annulment, Sum
of Money, Injunction and Damages.

Jocelyn averred that Marilou forced, threatened and intimidated her into signing the "Acknowledgment of Debt" and at the
same time forced her to issue the seven postdated checks. Marilou filed an Answer with Special Affirmative Defenses and
Counterclaim alleging that Jocelyn voluntarily obtained the said loans knowing fully well that the interest rate was at 6% to
7% per month. In fact, a 6% to 7% advance interest was already deducted from the loan amount given to Jocelyn.

The RTC ruled in favor of Marilou, finding no showing that Jocelyn was forced, threatened, or intimidated in signing the
document. On appeal, Jocelyn asserts that she had made payments in the total amount of P778,000.00 for a principal
amount of loan of only P290,000.00. What is appalling, according to Jocelyn, was that such payments covered only the
interest because of the excessive, iniquitous, unconscionable and exorbitant imposition of the 6% to 7% monthly interest.

The CA affirmed the decision. Jocelyn filed a motion for reconsideration but the same was denied. Hence, the present
petition.

ISSUE:
Did the CA gravely err when it held that the imposition of interest at the rate of six percent (6%) to seven percent (7%) is
not contrary to law, morals, good customs, public order or public policy?

DECISION:
The imposition of an unconscionable rate of interest on a money debt is immoral and unjust and the court may
come to the aid of the aggrieved party to that contract. However, before doing so, courts have to consider the
settled principle that the law will not relieve a party from the effects of an unwise, foolish or disastrous contract if
such party had full awareness of what she was doing.

We cannot consider the disputed 6% to 7% monthly interest rate to be iniquitous or unconscionable vis-vis the
principle laid down in Medel. Noteworthy is the fact that in Medel, the defendant-spouses were never able to pay their
indebtedness from the very beginning and when their obligations ballooned into a staggering sum, the creditors
filed a collection case against them.

In this case, there was no urgency of the need for money on the part of Jocelyn, the debtor, which compelled her
to enter into said loan transactions. She used the money from the loans to make advance payments for prospective
clients of educational plans offered by her employer. In this way, her sales production would increase, thereby entitling her
to 50% rebate on her sales. This is the reason why she did not mind the 6% to 7% monthly interest.

It was clearly shown that before Jocelyn availed of said loans, she knew fully well that the same carried with it an
interest rate of 6% to 7% per month, yet she did not complain. In fact, when she availed of said loans, an advance
interest of 6% to 7% was already deducted from the loan amount, yet she never uttered a word of protest.

After years of benefiting from the proceeds of the loans bearing an interest rate of 6% to 7% per month and paying for the
same, Jocelyn cannot now go to court to have the said interest rate annulled on the ground that it is excessive,
iniquitous, unconscionable, exorbitant, and absolutely revolting to the conscience of man.

We are convinced that Jocelyn did not come to court for equitable relief with equity or with clean hands. It is
patently clear from the above summary of the facts that the conduct of Jocelyn can by no means be characterized as
nobly fair, just, and reasonable.

A threat to enforce one's claim through competent authority, if the claim is just or legal, does not vitiate consent.

(#02 QUESTION)
As can be seen from the records of the case, Jocelyn has failed to prove her claim that she was made to sign the
document "Acknowledgment of Debt" and draw the seven Bank of Commerce checks through force, threat and
intimidation. As earlier stressed, said document was signed in the office of Jocelyn, a high ranking executive of CAP,
and it was Jocelyn herself who went to the table of her two subordinates to procure their signatures as witnesses
to the execution of said document. If indeed, she was forced to sign said document, then Jocelyn should have
immediately taken the proper legal remedy. But she did not. Furthermore, it must be noted that after the execution of said
document, Jocelyn honored the first three checks before filing the complaint with the RTC. If indeed she was forced
she would never have made good on the first three checks.

Whenever a party has, by his own declaration, act or omission, intentionally and deliberately led another to
believe a particular thing to be true, and to act upon such belief, he cannot, in any litigation arising out of such
declaration, act or omission, be permitted to falsify it.

Here, it is uncontested that Jocelyn had in fact signed the "Acknowledgment of Debt" in April 1998 and two of her
subordinates served as witnesses to its execution, knowing fully well the nature of the contract she was entering into.
Next, Jocelyn issued five checks in favor of Marilou representing renewal payment of her loans amounting to
P290,000.00. In June 1998, she asked to recall Check No. 0010761 in the amount of P30,000.00 and replaced the
same with six checks, in staggered amounts. All these are indicia that Jocelyn treated the "Acknowledgment of Debt"
as a valid and binding contract. Clearly, by her own acts, Jocelyn is estopped from impugning the validity of the
"Acknowledgment of Debt." DENIED.

After years of benefiting from the proceeds of the loans bearing an interest rate of 6% to 7% per month and
paying for the same, Jocelyn cannot now go to court to have the said interest rate annulled on the ground that it
is excessive, iniquitous, unconscionable, exorbitant, and absolutely revolting to the conscience of man. This is so
because among the maxims of equity are (1) he who seeks equity must do equity, and (2) he who comes into equity must
come with clean hands. The latter is a frequently stated maxim which is also expressed in the principle that he who has
done inequity shall not have equity. It signifies that a litigant may be denied relief by a court of equity on the ground that
his conduct has been inequitable, unfair and dishonest, or fraudulent, or deceitful as to the controversy in issue (Jocelyn
M. Toledo Vs. Marilou M. Hyden, G.R. No. 172139. December 8, 2010).

MEDEL V. TOLEDO
On the other hand, despite rulings that interest rates of 3% and 5% per month are unconscionable, this court in Toledo v.
Hydenu found that the interest rate of 6% to 7% per month was not unconscionable. This court noted circumstances that
differentiated that case from Medel and found that the borrower in Toledo was not in dire need of money when she
obtained a loan; this implied that the interest rates were agreed upon by the parties on equal footing. This court also found
that it was the borrower in Toledo who was guilty of inequitable acts: (Florante Vitug Vs. Evangeline A. Abuda, G.R. No.
201264. January 16, 2016).

QUESTIONS:
1. How much is the interest rate and is this higher than other cases? YES. Higher than Medel (6%).
2. What facts lead to a different conclusion than from the case of Medel? Refer above.
3. Can estoppel be raised as a defense in issues involving an unconscionable interest rate? YES.

It is provided, as one of the conclusive presumptions under Rule 131, Section 2(a), of the Rules of Court that,
"Whenever a party has, by his own declaration, act or omission, intentionally and deliberately led another
to believe a particular thing to be true, and to act upon such belief, he cannot, in any litigation arising out
of such declaration, act or omission, be permitted to falsify it." This is known as the principle of estoppel.

"The essential elements of estoppel are: (1) conduct amounting to false representation or concealment of
material facts or at least calculated to convey the impression that the facts are otherwise than, and
inconsistent with, those which the party subsequently attempts to assert; (2) intent, or at least
expectation, that this conduct shall be acted upon by, or at least influence, the other party; and, (3)
knowledge, actual or constructive, of the real facts."

G.R. No. 160545

March 9, 2010
PRISMA CONSTRUCTION & DEVELOPMENT CORPORATION and ROGELIO S. PANTALEON
 VS. ARTHUR F. MENCHAVEZ

FACTS:
On December 8, 1993, Pantaleon, President and Chairman of the Board of PRISMA, obtained a P1M loan from the
respondent, with monthly interest of P40,000.00 payable for 6 months, or a total obligation of P1,240,000.00 payable
within 6 months. To secure the payment of the loan, Pantaleon issued a promissory note. Pantaleon signed the
promissory note in his personal capacity and as duly authorized by the Board of Directors of PRISMA. The petitioners
failed to completely pay the loan within the 6-month period.

As of January 4, 1997, respondent found that the petitioners still had an outstanding balance of P1,364,151.00, to which
respondent applied a 4% monthly interest (48% per annum).

On August 28, 1997, respondent filed a complaint for sum of money to enforce the unpaid balance, plus 4% monthly
interest. In their Answer, the petitioners admitted the loan of P1,240,000.00, 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
made himself personally liable and that he made representations that the loan would be repaid within six (6) months.

RTC found that the respondent issued a check for P1M in favor of the petitioners for a loan that would earn an interest of
4% or P40,000.00 per month, or a total of P240,000.00 for a 6-month period. RTC ordered the petitioners to jointly and
severally pay the respondent the amount of P3,526,117.00 plus 4% per month interest from February 11, 1999 until fully
paid.

Petitioners appealed to CA insisting that there was no express stipulation on the 4% monthly interest. CA favored
respondent but noted that the interest of 4% per month, or 48% per annum, was unreasonable and should be reduced to
12% per annum. Hence this petition.

ISSUE:
Whether the parties agreed to the 4% monthly interest on the loan. YES.
If so, does the rate of interest apply to the 6-month payment period only or until full payment of the loan? For 6 months;
Legal Interest applies to the succeeding periods.

DECISION:
Petition is meritorious. Interest due should be stipulated in writing; otherwise, 12% per annum

Obligations arising from contracts have the force of law between the contracting parties and should be complied with in
good faith. 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. Courts have no authority to alter the contract by construction or to make a new
contract for the parties; a court’s duty 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 or read into the contract words the
contract does not contain. It is only when the 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 P1M. In turn, Pantaleon, in his personal capacity and as
authorized by the Board, executed the promissory note. Thus, the P1M loan shall be payable within 6 months. The loan
shall earn an interest of P40,000.00 per month, for a total obligation of P1,240,000.00 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.” 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. The collection of interest
without any stipulation in writing is prohibited by law.

The interest of P40,000.00 per month corresponds only to the six-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.

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.

The facts show that the parties agreed to the payment of a specific sum of money of P40,000.00 per month for six
months, not to a 4% rate of interest payable within a 6-month period.

No issue on the excessiveness of the stipulated amount of P40,000.00 per month was ever put in issue by the petitioners;
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. The payment of the specific sum of
money of P40,000.00 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 P1M shall earn P40,000.00 per month for a period of 6 months, for
a total principal and interest amount of P1,240,000.00. 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 toP1,228,772.00 as of February
12, 1999, 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.

WHEREFORE, in light of all the foregoing, we hereby REVERSE and SET ASIDE the Decision CA.

QUESTIONS:
1. May a fixed interest rate be considered unconscionable? YES. If it is against law, morals, public order or public
policy

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. 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, 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.

2. What is the interest rate to be imposed upon the lapse of the period for the fixed interest rate?

The interest of P40,000.00 per month corresponds only to the six-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.

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.

G.R. NO. 109563

JULY 9, 1996
 PHILIPPINE NATIONAL BANK
VS. COURT OF APPEALS, MARIA AMOR BASCOS AND MARCIANO BASCOS

FACTS:
On June 4, 1979, private respondent spouses Maria Amor and Marciano Bascos obtained a loan from the Philippine
National Bank in the amount of P15,000.00 evidenced by a promissory note and secured by a real estate mortgage.

The promissory note stipulated that the respondents are solidarily liable for P15,000.00 with interest of 12% per annum
until paid which the bank may raise within limits allowed by law. The note is to be paid within 365 days.

On the reverse side of the note, it was stamped that all short-term loans to be granted starting January 1, 1978 shall
be made with the condition that any and/or all extensions with any portion of the amount still unpaid after 730
days shall automatically convert the outstanding balance into a medium or long-term obligation and give the
Bank the right to charge the interest rates prescribed under its policies from the date the account was originally
granted.

To secure payment of the loan, the parties executed a real estate mortgage contract which provided that the obligation
secured by the mortgage and its interest may be subjected to an increase within the rate allowed by law and as
prescribed by the mortgagee.

On December 12, 1980, PNB extended the period of payment of the loan to June 5, 1981, thus converting the loan from a
short-term to a medium-term loan, i.e., a loan which matured over two to five years. PNB also increased the rate of
interest per annum.

Private respondents brought suit against PNB, its Branch Manager Jetro Godoy, and the Provincial Sheriff of Nueva Ecija
Numeriano Y. Galang alleging that the increase of interests was contrary to the Usury Law, good morals, public policy,
customs and traditions, social justice, due process and the equal protection clause of the Constitution and were contrary
to Art. 1959 of the Civil Code which provides that interest due and unpaid shall not earn interest.

The RTC invalidated the stipulations in the promissory note and the real estate mortgage, which authorized PNB to
increase the interest rate, on the ground that there was no corresponding stipulation that the interest rate would be
reduced in the event the law reduced the applicable maximum rate,

PNB appealed. However, the Court of Appeals affirmed the trial court’s decision. The appellate court held that the
escalation clause in the promissory note could not be given effect because of the absence of a provision for a de-
escalation in the event a reduction of interest was ordered by law. In addition it held that pursuant to the
escalation clause any increase in interest must be within "the limits allowed by law" but C.B. circulars, on the
basis of which PNB increased the interest, could not be considered "laws."

ISSUE:
Is the escalation clause valid?

DECISION:
No.
It was decided in Banco Filipino Savings & Mortgage Bank v. Navarro that although P.D. 1684 is not to be retroactively
applied to loans granted before its effectivity, there must nevertheless be a de-escalation clause to mitigate the one-
sideness of the escalation clause. It is a settled rule that any increase in the rate of interest made pursuant to an
escalation clause must be result of agreement between the parties.

In this case, two 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." The real estate mortgage likewise provided the same concept.

Pursuant to these clauses, PNB successively increased the interest from 18% to 32%, then to 41% and then to
48%. This Court declared the increases unilaterally imposed by PNB to be in violation of the principle of mutuality
as embodied in Art. 1308 of the Civil Code, which provides that" [t]he contract must bind both contracting
parties; its validity or compliance cannot be left to the will of one of them."

The escalation clause at bench does not give an unbridled right to unilaterally upwardly adjust the interest on private
respondents’ loan. That would completely take away from private respondents the right to assent to an important
modification in their agreement, and would negate the element of mutuality in contracts.

In this case no attempt was made by PNB to secure the conformity of private respondents to the successive
increases in the interest rate. Private respondents’ assent to the increases cannot be implied from their lack of
response to the letters sent by PNB, informing them of the increases.

JULY 2, 2014
G.R. NO. 181045
 SPOUSES EDUARDO AND LYDIA SILOS
VS. PHILIPPINE NATIONAL BANK

FACTS:
Spouses Eduardo and Lydia Silos (petitioners) have been in business for about two decades of operating a department
store and buying and selling of ready-to-wear apparel. Respondent Philippine National Bank (PNB) is a banking
corporation organized and existing under Philippine laws.

To secure a one-year revolving credit line of ₱150,000.00 obtained from PNB, petitioners constituted in August 1987 a
Real Estate Mortgage over a 370-square meter lot in Kalibo, Aklan. In July 1988, the credit line was increased to ₱1.8
million and the mortgage was correspondingly increased to ₱1.8 million.

In July 1989, a Supplement to the Existing Mortgage was executed to cover the same credit line, which was increased to
₱2.5 million. In addition, petitioners issued eight Promissory Notes and signed a Credit Agreement.

This July 1989 Credit Agreement contained a stipulation on interest which provides that the loan have an interest rate of
19.5% per annum. Interest shall be payable in advance every one hundred twenty days at the rate prevailing at the time of
the renewal. The Bank may modify the interest rate in the Loan depending on whatever policy the Bank may adopt in the
future, including without limitation, the shifting from the floating interest rate system to the fixed interest rate system, or
vice versa.

In 1997, petitioners faltered when the interest rates soared due to the Asian financial crisis. Petitioners’ sole outstanding
promissory note for ₱2.5 million – PN 9707237 executed in July 1997 and due 120 days later or on October 28, 1997 –
became past due, and despite repeated demands, petitioners failed to make good on the note.

Incidentally, PN 9707237 provided for the penalty equivalent to 24% per annum in case of default.

Without need for notice or demand, failure to pay this note or any installment thereon shall constitute. The outstanding
principal of this note, at the option of the Bank and without prior notice of demand, shall immediately become due and
payable and shall be subject to a penalty charge of twenty four percent (24%) per annum based on the defaulted principal
amount.

Despite demand, petitioners failed to pay the foregoing amount. Thus, PNB foreclosed on the mortgage and the
properties were sold at auction.

Petitioners filed a complaint for the foreclosure sale and an accounting of the PNB credit, alleging that because the
interest rates were fixed by PNB without their prior consent, these rates are void, and as a result, petitioners should only
be made liable for interest at the legal rate of 12%.

PNB denied that it unilaterally imposed or fixed interest rates. They argued that petitioners agreed that even without prior
notice, PNB may modify interest rates depending on future policy adopted by it; and that the imposition of penalties was
agreed upon in the Credit Agreement.

ISSUE:
Was the modification of interest valid? NO.

DECISION:
In loan agreements, it cannot be denied that the rate of interest is a principal condition, if not the most important
component. Thus, any modification thereof must be mutually agreed upon; otherwise, it has no binding effect.
Moreover, the Court cannot consider a stipulation granting a party the option to prepay the loan if said party is not
agreeable to the arbitrary interest rates imposed. Premium may not be placed upon a stipulation in a contract which
grants one party the right to choose whether to continue with or withdraw from the agreement if it discovers that
what the other party has been doing all along is improper or illegal.

Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the parties
must meet as to the proposed modification, especially when it affects an important aspect of the agreement. In the case of
loan contracts, it cannot be gainsaid that the rate of interest is always a vital component, for it can make or break a capital
venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of any binding effect. We cannot
countenance petitioner bank’s posturing that the escalation clause at bench gives it unbridled right to
unilaterally upwardly adjust the interest on private respondents’ loan. That would completely take away from private
respondents the right to assent to an important modification in their agreement, and would negate the element of mutuality
in contracts. In Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held —

x x x The unilateral action of the PNB in increasing the interest rate on the private respondent’s loan violated the
mutuality of contracts ordained in Article 1308 of the Civil Code:

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

In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality
between the parties based on their essential equality. A contract containing a condition which makes its fulfillment
dependent exclusively upon the uncontrolled will of one of the contracting parties is void. Hence, even assuming that
the loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there
was none) to increase the interest rate at will during the term of the loan, that license would have been null and
void for being violative of the principle of mutuality essential in contracts. It would have invested the loan
agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker
party’s (the debtor) participation being reduced to the alternative "to take it or leave it". Such a contract is a veritable trap
for the weaker party whom the courts of justice must protect against abuse and imposition.

QUESTIONS:
1. What is a revolving credit line?

A revolving line of credit refers to a type of loan offered by a financial institution. Borrowers pay the debt as they
would any other. However, with a revolving line of credit, as soon as the debt is repaid, the user can borrow up to
her credit limit again without going through another loan approval process.

When a lender issues a revolving credit account, they assign the borrower a specific credit limit. This limit is
based on the client's credit score, income, and credit history. Once the account is open, the borrower is able to
use and reuse the account at their discretion. As such, the account remains open until either the lender or the
borrower decides to close it.

2. Is the fixing of the interest rate valid?

General rule: Yes, as long as it is agreed upon by the parties and is not against law, morals, or customs.

NO. Clearly, respondent’s method of fixing interest rates based on one-sided, indeterminate, and
subjective criteria such as profitability, cost of money, bank costs, etc. is arbitrary for there is no fixed
standard or margin above or below these considerations.

3. Can courts still reduce interest rate despite suspension of Usury Law? YES.

Courts have the authority to strike down or to modify provisions in promissory notes that grant the lenders
unrestrained power to increase interest rates, penalties and other charges at the latter’s sole discretion and
without giving prior notice to and securing the consent of the borrowers. This unilateral authority is anathema to
the mutuality of contracts and enable lenders to take undue advantage of borrowers. Although the Usury Law has
been effectively repealed, courts may still reduce iniquitous or unconscionable rates charged for the use of
money. Furthermore, excessive interests, penalties and other charges not revealed in disclosure statements
issued by banks, even if stipulated in the promissory notes, cannot be given effect under the Truth in Lending
Act.73

4. What is the effect of failing to raise issue of interest rate at the earliest time? No effect.

Given the above supposition, the Court cannot subscribe to respondent’s argument that in every repricing of
petitioners’ loan availment, they are given the right to question the interest rates imposed. The import of
respondent’s line of reasoning cannot be other than that if one out of every hundred borrowers questions
respondent’s practice of unilaterally fixing interest rates, then only the loan arrangement with that lone
complaining borrower will enjoy the benefit of review or re-negotiation; as to the 99 others, the questionable
practice will continue unchecked, and respondent will continue to reap the profits from such unscrupulous
practice. The Court can no more condone a view so perverse. This is exactly what the Court meant in the
immediately preceding cited case when it said that "the belated discovery of the true cost of credit does not
reverse the ill effects of an already consummated business decision;" as to the borrowers who did not or
could not complain, the illegal act shall have become a fait accompli– to their detriment, they have
already suffered the oppressive rates.

Besides, that petitioners are given the right to question the interest rates imposed is, under the circumstances,
irrelevant; we have a situation where the petitioners do not stand on equal footing with the respondent. It is
doubtful that any borrower who finds himself in petitioners’ position would dare question respondent’s power to
arbitrarily modify interest rates at any time. In the second place, on what basis could any borrower question such
power, when the criteria or standards – which are really one-sided, arbitrary and subjective – for the exercise of
such power are precisely lost on him?

G.R. No. 225433

August 28, 2019
 LARA'S GIFTS & DECORS, INC., PETITIONER
VS. MIDTOWN INDUSTRIAL SALES, INC.

FACTS:
Petitioner Lara's Gifts & Decors, Inc. (petitioner) is engaged in the business of manufacturing, selling, and exporting
handicraft products. Respondent Midtown Industrial Sales, Inc. (respondent) is engaged in the business of selling
industrial and construction materials, and petitioner is one of respondent's customers.

Respondent alleged that from January 2007 up to December 2007, petitioner purchased from respondent various
industrial and construction materials in the total amount of P1,263,104.22. The purchases were on a sixty (60)-day credit
term, with the condition that 24% interest per annum would be charged on all accounts overdue, as stated in the sales
invoices. Petitioner paid for its purchases by issuing several Chinabank postdated checks in favor of respondent.
However, when respondent deposited the Chinabank checks on their maturity dates, the checks bounced.

After repeated demands from respondent, petitioner replaced the bounced checks with new postdated Export and
Industry Bank checks. However, when respondent deposited the replacement checks on their maturity dates, the checks
were likewise dishonored for being "Drawn Against Insufficient Funds," and subsequently, for "Account Closed."
Respondent sent a demand letter dated 21 January 2008, which was received by petitioner on 22 January 2008,
informing petitioner of the bounced checks and demanding that petitioner settle its accounts. Still petitioner failed to pay,
prompting respondent to file on 5 February 2008 a Complaint for Sum of Money with Prayer for Attachment against
petitioner.

In its Answer, petitioner admitted that from January 2007 to December 2007, petitioner purchased from respondent, on a
60-day credit term, various industrial and construction materials in the total amount of P1,263,104.22. However, petitioner
claimed that most of the deliveries made were substandard and of poor quality. Petitioner alleged that the checks it issued
for payment were not for value because not all of the materials delivered by respondent were received in good order and
condition. Thus, when petitioner used the raw materials, the finished product allegedly did not pass the standards required
by petitioner's buyers from the United States (US) who rejected the products. Furthermore, due to the economic recession
in the US, subsequent orders made by petitioner's US buyers were canceled. Petitioner claimed that on 19 February
2008, a fire razed its factory and office, destroying its equipment, machineries, and inventories, including those rejected
by the US buyers.

ISSUE:
Whether or not the interest rate fixed at 24% per annum is void. No.

DECISION:

The rates of interest stated in the guidelines on the imposition of interests, as laid down in the landmark case of
Eastern Shipping Lines, Inc. v. Court of Appeals have already been modified in Bangko Sentral ng Pilipinas
Monetary Board (BSP-MB) Circular No. 799, Series of 2013, which reduced the rate of legal interest from twelve
percent (12%) per annum to six percent (6%) per annum.

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.

However, if the rate of interest is stipulated, such stipulated interest shall apply and not the legal interest, provided the
stipulated interest is not excessive and unconscionable. The stipulated interest shall be applied until full payment of the
obligation because that is the law between the parties.

The legal interest only applies in the absence of stipulated interest. This is in accord with Article 2209 of the Civil Code,
which states:
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 percent per annum. (Boldfacing and
italicization supplied)

To repeat, the stipulated interest is the law between the parties, and should be applied until full payment of the obligation.
Article 1159 of the Civil Code provides that "[o]bligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith." Article 1956 of the Civil Code also states that "[n]o interest
shall be due unless it has been expressly stipulated in writing." Furthermore, the contracting parties may establish such
stipulations as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or
public policy,29 and the parties are bound to fulfill what has been expressly stipulated.30Thus, unless the stipulated
interest is excessive and unconscionable, there is no legal basis for the reduction of the stipulated interest at any time
until full payment of the principal amount. The stipulated interest remains in force until the obligation is satisfied. In the
absence of stipulated interest, the prevailing legal interest prescribed by the Bangko Sentral ng Pilipinas shall apply.

Moreover, there should be no compounding of interest, whether stipulated or legal, unless compounding is expressly
agreed upon in writing by the parties or mandated by law or regulation.

Articles 2210 and 2211 of the Civil Code Apply to Obligations Other Than Loans or Forbearance of Money, Goods
or Credits

Articles 2210 and 2211 of the Civil Code provide:

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.

Under these articles, when the obligation, other than loans or forbearance of money, goods or credits, is
breached, the court may in its discretion impose an interest on the damages awarded. The interest imposed in
the discretion of the court will be the prevailing legal interest prescribed by the Bangko Sentral ng Pilipinas.

This case involves a forbearance of credit wherein petitioner was granted a 60-day credit term on its purchases,
with the condition that a 24% interest per annum would be charged on all accounts overdue. Since there was an
extrajudicial demand before the complaint was filed, interest on the amount due begins to run not from the filing of the
complaint but from the date of such extrajudicial demand.62 Thus, the unpaid principal obligation of P1,263,104.22 shall
earn the stipulated interest of 24% per annum from the date of extrajudicial demand on 22 January 2008 until full
payment.

Furthermore, in accordance with Article 2212 of the Civil Code, the 24% interest per annum due on the principal
amount accruing as of the judicial demand shall earn legal interest at the rate of 12% per annum from the date of
judicial demand on 5 February 2008 until 30 June 2013, and thereafter at the rate of 6% per annum from 1 July
2013 until full payment. From the date of judicial demand on 5 February 2008 until 30 June 2013, the prevailing rate of
legal interest was 12% per annum. The 6% per annum legal interest prescribed under BSP-MB Circular No. 799 took
effect on 1 July 2013 and could only be applied prospectively. The P50,000.00 attorney's fees shall also earn legal
interest at the rate of 6% per annum from the finality of this Decision until full payment.

QUESTIONS:

1. What is a compensatory interest rate?

Thus, the 24% interest rate is a compensatory interest, imposed as indemnity for damages caused by the delay in
the payment of the raw materials' purchase price, pursuant to Article 2209.

Compensatory interest, like monetary interest, is also subject to the unconscionability standard. Articles 1229 and
2227 of the Civil Code allow the reduction of penalty charges or damages that are unconscionable:

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

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

2. What is forbearance?

The term "forbearance" in the context of the Usury Law has been defined as "a contractual obligation of lender or
creditor to refrain, during a given period of time, from requiring the borrower or debtor to repay a loan or debt then
due and payable."42 In consideration of this forbearance, the parties often agree on the payment of interest on
the amount due.

In Estores v. Spouses Supangan,43 the Court ruled that "forbearance of money, goods or credits" has a
"separate meaning from a loan." The Court then reiterated, citing Crismina Garments, Inc. v. Court of Appeals,44
that "forbearance of money, goods or credits" refers to "arrangements other than loan agreements, where a
person acquiesces to the temporary use of his money, goods or credits pending happening of certain events or
fulfillment of certain conditions." The Court explained in Estores:

The contract involved in this case is admittedly not a loan but a Conditional Deed of Sale. However, the
contract provides that the seller (petitioner) must return the payment made by the buyer (respondent-
spouses) if the conditions are not fulfilled. There is no question that they have in fact, not been fulfilled as
the seller (petitioner) has admitted this. Notwithstanding demand by the buyer (respondent-spouses), the
seller (petitioner) has failed to return the money and should be considered in default from the time that
demand was made on September 27, 2000.

Even if the transaction involved a Conditional Deed of Sale, can the stipulation governing the return of the
money be considered as a forbearance of money which required payment of interest at the rate of 12%?
We believe so.

In Crismina Garments, Inc. v. Court of Appeals, "forbearance" was defined as a "contractual obligation of lender
or creditor to refrain during a given period of time, from requiring the borrower or debtor to repay a loan or debt
then due and payable." This definition describes a loan where a debtor is given a period within which to pay a
loan or debt. In such case, "forbearance of money, goods or credits" will have no distinct definition from a loan.
We believe, however, that the phrase "forbearance of money, goods or credits" is meant to have a separate
meaning from a loan, otherwise there would have been no need to add that phrase as a loan is already sufficiently
defined in the Civil Code. Forbearance of money, goods or credits should therefore refer to arrangements other
than loan agreements, where a person acquiesces to the temporary use of his money, goods or credits pending
happening of certain events or fulfillment of certain conditions. In this case, the respondent-spouses parted with
their money even before the conditions were fulfilled. They have therefore allowed or granted forbearance to the
seller (petitioner) to use their money pending fulfillment of the conditions. They were deprived of the use of their
money for the period pending fulfillment of the conditions and when those conditions were breached, they are
 entitled not only to the return of the principal amount paid, but also to compensation for the use of their money.
And the compensation for the use of their money, absent any stipulation, should be the same rate of legal interest
applicable to a loan since the use or deprivation of funds is similar to a loan.45 (Emphasis supplied)

The Court further stressed in Reformina v. Judge Tomol, Jr.46 that Act No. 2655 or the Usury Law deals with
"interest on (1) loans; (2) forbearance of any money, goods or credits; and (3) the rate allowed in judgments."47
The Court clarified that the term "judgments" refers to judgments in litigations involving loans or forbearance of
any money, goods or credits.48 As declared in Eastern Shipping Lines, the "finality [of judgment] until its
satisfaction xxx [is a] period being deemed to be by then an equivalent to a forbearance of credit"49or a
forbearance of money.

Forbearance of goods includes the sale of goods on installment, requiring periodic payment of money to the
creditor. Forbearance of credits includes the sale of anything on credit, where the full amount due can be paid at a
date after the sale.

As previously discussed, the general rule is that the interest stipulated by the parties shall apply, provided it is not
excessive and unconscionable. Absent any stipulation, the Court has consistently held that the prevailing legal
interest prescribed by the Bangko Sentral ng Pilipinas applies to loans or forbearance of money, goods or credits,
as well as to judgments.

3. How did the Supreme Court modify the rules on the imposition of compensatory interest rate?

With regard 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, goods, credits or judgments, the interest due shall be that which is stipulated by the parties in
writing,51provided it is not excessive and unconscionable, which, in the absence of a stipulated reckoning
date,52shall be computed from default, i.e., from extrajudicial or judicial demand in accordance with Article
116953of the Civil Code, UNTIL FULL PAYMENT, without compounding any interest unless compounded
interest is expressly stipulated by the parties, by law or regulation. Interest due on the principal amount
accruing as of judicial demand shall SEPARATELY earn legal interest54at the prevailing rate prescribed by
the Bangko Sentral ng Pilipinas,55from the time of judicial demand UNTIL FULL PAYMENT.

2. In the absence of stipulated interest, in a loan or forbearance of money, goods, credits or judgments, the rate
of interest on the principal amount shall be the prevailing legal interest prescribed by the Bangko Sentral ng
Pilipinas, which shall be computed from default, i.e., from extrajudicial or judicial demand in accordance with
Article 1169 of the Civil Code, UNTIL FULL PAYMENT, without compounding any interest unless
compounded interest is expressly stipulated by law or regulation. Interest due on the principal amount
accruing as of judicial demand shall SEPARATELY earn legal interest at the prevailing rate prescribed by the
Bangko Sentral ng Pilipinas,57from the time of judicial demand UNTIL FULL PAYMENT.

3. When the obligation, not constituting a loan or forbearance of money, goods, credits or judgments, is
breached, an interest on the amount of damages awarded may be imposed in the discretion of the court at
the prevailing legal interest prescribed by the Bangko Sentral ng Pilipinas, pursuant to Articles 2210 and 2011
of the Civil Code.59No interest, however, shall be adjudged on unliquidated claims or damages until the
demand can be established with reasonable certainty.60Accordingly, where the amount of the claim or
damages is established with reasonable certainty, the prevailing legal interest shall begin to run from the time
the claim is made extrajudicially or judicially (Art. 1169, Civil Code) UNTIL FULL PAYMENT, but when such
certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run
only from the date of the judgment of the trial court (at which time the quantification of damages may be
deemed to have been reasonably ascertained) UNTIL FULL PAYMENT. The actual base for the computation
of the interest shall, in any case, be on the principal amount finally adjudged, without compounding any
interest unless compounded interest is expressly stipulated by law or regulation.

4. When should the reckoning period for the interest rates?

In Piczon v. Piczon [158 Phil. 726 (1974)], involving the delay of the payment of a sum of money under a loan
agreement, the Court applied Article 2209 of the Civil Code and held that appellees were liable for the stipulated
interest of 12% per annum to be reckoned from the date stipulated by the parties under the loan agreement.

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

Paragraph 3 of the ponencia, on the other hand, holds that interest on the unliquidated claims is to be reckoned
from the date of the judgment of the trial court because it is at that point that the damages may be reasonably
established. Nevertheless, the ponencia imposes interest on the principal amount as finally adjudged.143 It would
seem that the ponencia itself recognizes that the amount awarded in the "judgment of the trial court" is not the
liquidated claim implied in Article 2213 of the Civil Code. Rather, the liquidated claim implied refers to the amount
"finally adjudged". Thus, interest should only commence to run from the time the unliquidated and unknown claim
becomes final and executory, i.e., the amount finally adjudged, as it is at this point that unliquidated claims are
established with reasonable certainty, thus liquidated. Further, as in the previous paragraph, the basis for applying
compounded interest as expressly stipulated by law or regulation was not provided.

G.R. NO. 176381

DECEMBER 15, 2010
PCI LEASING AND FINANCE, INC.,
 VS. TROJAN METAL INDUSTRIES INCORPORATED, WALFRIDO DIZON, ELIZABETH DIZON, AND JOHN DOE

FACTS:
Sometime in 1997, Trojan Metal Industries, Inc. (TMI) came to PCI Leasing and Finance, Inc. (PCILF) to seek a loan.
Instead of extending a loan, PCILF offered to buy various equipment TMI owned. Hard-pressed for money, TMI agreed.
PCILF and TMI immediately executed deeds of sale evidencing TMIs sale to PCILF of the various equipment.

PCILF and TMI then entered into a lease agreement , whereby the latter leased from the former the various equipment it
previously owned. Pursuant to the lease agreement, TMI issued postdated checks representing 24 monthly installments.

The lease agreement required TMI to give PCILF a guaranty deposit which would serve as security for the timely
performance of TMIs obligations under the lease agreement, to be automatically forfeited should TMI return the leased
equipment before the expiration of the lease agreement. Further, spouses Dizon, as TMIs President and Vice-President,
executed in favor of PCILF a Continuing Guaranty of Lease Obligations. Under the continuing guaranty, the Dizon
spouses agreed to immediately pay whatever obligations would be due PCILF in case TMI failed to meet its obligations
under the lease agreement.

To obtain additional loan from another financing company, TMI used the leased equipment as temporary collateral. PCILF
considered the second mortgage a violation of the lease agreement. PCILF sent TMI a demand letter for the payment of
the latter’s outstanding obligation. PCILFs demand remained unheeded.

RTC ruled that the lease agreement must be presumed valid as the law between the parties even if some of its provisions
constituted unjust enrichment on the part of PCILF. On appeal, the CA reversed the RTCs decision.

ISSUES:
I. Whether the sale with lease agreement the parties entered into was a financial lease or a loan secured by chattel
mortgage.
II. Whether PCILF should pay TMI, by way of refund

DECISION:
Petition DENIED.

First issue:
In the present case, since the transaction between PCILF and TMI involved equipment already owned by TMI, it cannot
be considered as one of financial leasing, as defined by law, but simply a loan secured by the various equipment owned
by TMI.

Hence, had the true transaction between the parties been expressed in a proper instrument, it would have been a simple
loan secured by a chattel mortgage, instead of a simulated financial leasing. Thus, upon TMIs default, PCILF was entitled
to seize the mortgaged equipment, not as owner but as creditor-mortgagee for the purpose of foreclosing the chattel
mortgage. PCILFs sale to a third party of the mortgaged equipment and collection of the proceeds of the sale can be
deemed in the exercise of its right to foreclose the chattel mortgage as creditor-mortgagee.

Second issue:
Section 14 of the Chattel Mortgage Law expressly entitles the debtor-mortgagor to the balance of the proceeds, upon
satisfaction of the principal loan and costs. Prevailing jurisprudence also holds that the Chattel Mortgage Law bars the
creditor-mortgagee from retaining the excess of the sale proceeds.

TMIs right to the refund accrued from the time PCILF received the proceeds of the sale of the mortgaged equipment.
However, since TMI never made a counterclaim or demand for refund due on the resulting overpayment after offsetting
the proceeds of the sale against the remaining balance on the principal loan plus applicable interest, no interest applies
on the amount of refund due. Nonetheless, in accord with prevailing jurisprudence, the excess amount PCILF must refund
to TMI is subject to interest at 12% per annum from finality of this Decision until fully paid.

QUESTIONS:
1. What is finance leasing?

Since the lease agreement in this case was executed on 8 April 1997, Republic Act No. 5980 (RA 5980), otherwise known
as the Financing Company Act, governs as to what constitutes financial leasing. Section 1, paragraph (j) of the New Rules
and Regulations to Implement RA 598019 defines financial leasing as follows:

LEASING shall refer to financial leasing which is a mode of extending credit through a non-cancelable contract under
which the lessor purchases or acquires at the instance of the lessee heavy equipment, motor vehicles, industrial
machinery, appliances, business and office machines, and other movable property in consideration of the periodic
payment by the lessee of a fixed amount of money sufficient to amortize at least 70% of the purchase price or acquisition
cost, including any incidental expenses and a margin of profit, over the lease period. The contract shall extend over an
obligatory period during which the lessee has the right to hold and use the leased property and shall bear the cost of
repairs, maintenance, insurance, and preservation thereof, but with no obligation or option on the part of the lessee to
purchase the leased property at the end of the lease contract.

The above definition of financial leasing gained statutory recognition with the enactment of Republic Act No. 8556 (RA
8556), otherwise known as the Financing Company Act of 1998.20 Section 3(d) of RA 8556 defines financial leasing as:

a mode of extending credit through a non-cancelable lease contract under which the lessor purchases or acquires, at the
instance of the lessee, machinery, equipment, motor vehicles, appliances, business and office machines, and other
movable or immovable property in consideration of the periodic payment by the lessee of a fixed amount of money
sufficient to amortize at least seventy (70%) of the purchase price or acquisition cost, including any incidental expenses
and a margin of profit over an obligatory period of not less than two (2) years during which the lessee has the right to hold
and use the leased property with the right to expense the lease rentals paid to the lessor and bears the cost of repairs,
maintenance, insurance and preservation thereof, but with no obligation or option on his part to purchase the leased
property from the owner-lessor at the end of the lease contract.

Thus, in a true financial leasing, whether under RA 5980 or RA 8556, a finance company purchases on behalf of a cash-
strapped lessee the equipment the latter wants to buy but, due to financial limitations, is incapable of doing so. The
finance company then leases the equipment to the lessee in exchange for the latter’s periodic payment of a fixed amount
of rental.

2. Is this a financial lease or a loan with chattel mortgage?

In the present case, since the transaction between PCILF and TMI involved equipment already owned by TMI, it
cannot be considered as one of financial leasing, as defined by law, but simply a loan secured by the various
equipment owned by TMI.

Articles 1359 and 1362 of the Civil Code provide:

Art. 1359. When, there having been a meeting of the minds of the parties to a contract, their true intention is not
expressed in the instrument purporting to embody the agreement, by reason of mistake, fraud, inequitable
conduct, or accident, one of the parties may ask for the reformation of the instrument to the end that such true
intention may be expressed.

Art. 1362. If one party was mistaken and the other acted fraudulently or inequitably in such a way that the
instrument does not show their true intention, the former may ask for the reformation of the instrument.

Under Article 1144 of the Civil Code, the prescriptive period for actions based upon a written contract and for reformation
of an instrument is ten years.25 The right of action for reformation accrued from the date of execution of the lease
agreement on 8 April 1997. TMI timely exercised its right of action when it filed an answer26 on 14 February 2000 asking
for the reformation of the lease agreement.

Hence, had the true transaction between the parties been expressed in a proper instrument, it would have been a
simple loan secured by a chattel mortgage, instead of a simulated financial leasing. Thus, upon TMI’s default,
PCILF was entitled to seize the mortgaged equipment, not as owner but as creditor-mortgagee for the purpose of
foreclosing the chattel mortgage. PCILF’s sale to a third party of the mortgaged equipment and collection of the
proceeds of the sale can be deemed in the exercise of its right to foreclose the chattel mortgage as creditor-
mortgagee.

G.R. NO. 239092

JUNE 26, 2019
BANK OF THE PHILIPPINE ISLANDS
 VS. SPOUSES RAM M. SARDA AND JANE DOE SARDA

FACTS:
Petitioner Bank of the Philippine Islands (BPI) is a domestic commercial banking corporation. Among the services it offers
is the issuance of credit cards for the purchase of goods and services on credit through its credit card system.

On March 28, 2014, BPI filed a Complaint against spouses Ram M. Sarda (Mr. Sarda) and "Jane Doe" Sarda (collectively,
respondents). BPI alleged that it issued a credit card to Mr. Sarda under terms and conditions attached to the card upon
its delivery. Respondents availed of BPI's credit accommodations by using the said credit card and thereafter incurred an
outstanding obligation of P1,213,114.19 per BPI statement of account, dated September 22, 2013. Based on the bank's
records, Mr. Sarda's last payment prior to the cancellation of the BPI credit card was on March 15, 2013, as shown in the
March 20, 2013 statement of account. Despite demands for payment, Mr. Sarda refused to settle the obligation.

BPI thus prayed that judgment be rendered against respondents ordering them to pay the principal amount of
P1,213,114.19: P443,915.46 representing 3.25% finance charge per month and 6% late payment charges per month from
October 2013 to February 2014; finance charge at the rate of 3.25% per month and late payment charges amounting to
6% per month or a fraction of month's delay starting March 2014, until the obligation is fully paid; attorney's fees
equivalent to 25% of the total claims due and demandable, exclusive of appearance fee for every court hearing; and the
costs of suit.

In their Answer, respondents denied having applied for or having received the credit card issued by BPI. They asserted
that they had not used said credit card as they did not have physical possession of it. They likewise denied having signed
or agreed to the terms and conditions referred to in the complaint, and much less, incur an outstanding obligation of
P1,213,114.19. Accordingly, they prayed for the dismissal of the complaint and the grant of their counterclaim for
attorney's fees in the sum of P100,000.00.

At the trial, BPI presented documentary evidence consisting of Delivery Receipt,6 Terms and Conditions of Use of BPI
Express credit card,7 and original copies of statements of account pertaining to Mr. Sarda's credit card, as well as the
testimony of its witness, BPI's Account Specialist, Mr. Arlito M. Igos. For respondents, Mr. Sarda testified to refute BPI's
claims.

ISSUE:
Whether or not Mr. Sarda should be held liable to pay the total amounts due under the principal and supplementary credit
cards issued by BPI. NO.

DECISION:
First, on the question of whether Mr. Sarda actually received the credit card issued to him by BPI without his knowledge
and consent, BPI's witness, Mr. Igos, admitted that Mr. Sarda did not apply for nor request to be issued a credit
card, he being a pre-qualified client.

To prove Mr. Sarda's receipt of the credit card, BPI presented the delivery receipt with check marks on both boxes
indicating "Cardholder" and "Cousin," and signed by Ms. Tandogon who received the card. BPI, however, failed to
submit proof that Ms. Tandogon was authorized by Mr. Sarda to receive the credit card in his behalf. Such piece
of evidence is selfserving and insufficient to sustain BPI's claim, especially since the respondents denied being
related to Ms. Tandogon who was their former office clerk.

With the denial of respondents that they received and used the credit card issued to Mr. Sarda, it was incumbent
upon BPI to substantiate their claim that Mr. Sarda had used it in various transactions. BPI presented original
copies of the statements of account beginning September 21, 2009 to September 22, 2013. All these billings were sent to
Mr. Sarda at his office. However, respondents denied having received any of these monthly billings even as payments
were indicated to have been made for those purchases using the primary and supplementary cards. The submission of
statements of account is not enough to establish that the cardholder incurred the obligation to pay the purchases
appearing therein.

In relation to the duty imposed on banks to exercise a high degree of diligence in their business transactions, the
Bangko Sentral ng Pilipinas (BSP) issued Circular No. 702, Series of 2010 pursuant to Monetary Board Resolution No.
1728, dated December 2, 2010, which amended the provisions of the Manual of Regulations for Banks (MORB) and the
Manual of Regulations for Non-Bank Financial Institutions (MORNBFI). Banks, quasi-banks and credit card
companies are now prohibited from issuing pre approved credit cards. Before issuing credit cards, these entities “must
exercise proper diligence by ascertaining that applicants possess good credit standing and are financially capable of
fulfilling their credit commitments.”

Presently, the governing law is R.A. No. 10870, otherwise known as the Philippine Credit Card Industry
Regulation Law. Before issuing credit cards, issuers are now mandated to conduct "know-your-client"
procedures and to exercise proper diligence in ascertaining that applicants possess good credit standing and are
financially capable of fulfilling their credit commitments. Further, in the service level agreement between the
acquiring banks and their partner merchants, there shall be a provision requiring such merchants to perform due
diligence to establish the identity of the cardholders. Violations of the provisions of the new law, as well as existing
rules and regulations issued by the Monetary Board, are penalized with imprisonment or fine, or both.

In view of the foregoing, the Court finds that BPI failed to exercise proper diligence in the issuance of the primary
and supplementary cards and should thus bear the resulting loss or damage caused by its own acts and policies.
Even assuming that fraud attended the use of said cards, it was incumbent upon BPI to adduce clear and convincing
evidence that the respondents connived with Ms. Tandogon. BPI cannot simply rely on bare insinuations and
conjectures to establish respondents' liability for the outstanding amounts incurred under the subject credit card account.
QUESTIONS:
1. Who is a pre-qualified client?

When a client is classified as pre-qualified or pre-screened, the usual screening procedures for prospective
cardholders, such as filing of an application form and submission of other relevant documents prior to the
issuance of a credit card, are dispensed with and the credit card is issued outright. Upon receipt of the card, the
pre-screened client has the option to accept or to reject the credit card.

2. What is the degree of diligence expected of a bank? HIGH DEGREE OF DILIGENCE

In relation to the duty imposed on banks to exercise a high degree of diligence in their business
transactions, the Bangko Sentral ng Pilipinas (BSP) issued Circular No. 702, Series of 2010 pursuant to
Monetary Board Resolution No. 1728, dated December 2, 2010, which amended the provisions of the Manual of
Regulations for Banks (MORB) and the Manual of Regulations for Non-Bank Financial Institutions
(MORNBFI). Banks, quasi-banks and credit card companies are now prohibited from issuing pre approved credit
cards. Before issuing credit cards, these entities “must exercise proper diligence by ascertaining that applicants
possess good credit standing and are financially capable of fulfilling their credit commitments.”

3. Did the bank establish its claim based on its burden of proof? NO.

The burden of proof rests upon BPI, as plaintiff, to establish its case based on a preponderance of evidence. It
is well-settled that in civil cases, the party that alleges a fact has the burden of proving it. BPI failed to prove
the material allegations in its complaint that respondents availed of its credit accommodation by using
the subject cards.

Since BPI clearly failed to present adequate proof that it was respondents who made purchases and cash
advances using the cards, the CA did not err in dismissing its complaint.

4. What steps have been taken to avoid the repetition of the issue in this case?

Presently, the governing law is R.A. No. 10870, otherwise known as the Philippine Credit Card Industry
Regulation Law. Before issuing credit cards, issuers are now mandated to conduct "know-your-client"
procedures and to exercise proper diligence in ascertaining that applicants possess good credit standing
and are financially capable of fulfilling their credit commitments. Further, in the service level agreement
between the acquiring banks and their partner merchants, there shall be a provision requiring such
merchants to perform due diligence to establish the identity of the cardholders. Violations of the provisions
of the new law, as well as existing rules and regulations issued by the Monetary Board, are penalized with
imprisonment or fine, or both.