CREDIT TRANSACTIONS – PART 2: LOAN (Articles 1933 – 1961) III.
Mutuum & Usury Law – PART III: DEPOSIT (Articles 1962 – 2009) I. Deposit
in General
Cases
G.R. No. 183360               September 8, 2014
ROLANDO C. DE LA PAZ,* Petitioner,
vs.
L & J DEVELOPMENT COMPANY, Respondent.
DECISION
DEL CASTILLO, J.:
"No interest shall be due unless it has been expressly
stipulated in writing."1
This is a Petition for Review on Certiorari2 assailing the
February 27, 2008 Decision3 of the Court of Appeals (CA) in
CA-G.R. SP No. 100094, which reversed and set aside the
Decision4 dated April 19, 2007 of the Regional Trial Court
(RTC), Branch 192, Marikina City in Civil Case No. 06-1145-
MK. The said RTC Decision affirmed in all respects the
Decision5 dated June 30, 2006 of the Metropolitan Trial
Court (MeTC), Branch 75, Marikina City in Civil Case No. 05-
7755, which ordered respondent L & J Development
Company (L&J) to pay petitioner Architect Rolando C. De La
Paz (Rolando) its principal obligation of ₱350,000.00, plus
12% interest per annumreckoned from the filing of the
Complaint until full payment of the obligation.
Likewise assailed is the CA’s June 6, 2008 Resolution6
which denied Rolando’s Motion for Reconsideration.
Factual Antecedents
On December 27, 2000, Rolando lent ₱350,000.00 without
any security to L&J, a property developer with Atty. Esteban
Salonga (Atty. Salonga) as its President and General
Manager. The loan, with no specified maturity date, carried a
6% monthly interest, i.e., ₱21,000.00. From December 2000
to August 2003, L&J paid Rolando a total of ₱576,000.007
representing interest charges.
As L&J failed to pay despite repeated demands, Rolando
filed a Complaint8 for Collection of Sum of Money with
Damages against L&J and Atty. Salonga in his personal
capacity before the MeTC, docketed as Civil Case No. 05-
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
7755. Rolando alleged, amongothers, that L&J’s debtas of
January 2005, inclusive of the monthly interest, stood at
₱772,000.00; that the 6% monthly interest was upon Atty.
Salonga’s suggestion; and, that the latter tricked him into
parting with his money without the loan transaction being
reduced into writing.
In their Answer,9 L&J and Atty. Salonga denied Rolando’s
allegations. While they acknowledged the loan as a
corporate debt, they claimed that the failure to pay the same
was due to a fortuitous event, that is, the financial difficulties
brought about by the economic crisis. They further argued
that Rolando cannot enforce the 6% monthly interest for
being unconscionable and shocking to the morals. Hence,
the payments already made should be applied to the
₱350,000.00 principal loan.
During trial, Rolando testified that he had no communication
with Atty. Salonga prior to the loan transaction but knew him
as a lawyer, a son of a former Senator, and the owner of L&J
which developed Brentwood Subdivision in Antipolo where
his associate Nilo Velasco (Nilo) lives. When Nilo told him
that Atty. Salonga and L&J needed money to finish their
projects, heagreed to lend them money. He personally met
withAtty. Salonga and their meeting was cordial.
He narrated that when L&J was in the process of borrowing
the ₱350,000.00 from him, it was Arlene San Juan (Arlene),
the secretary/treasurer of L&J, who negotiated the terms and
conditions thereof.She said that the money was to finance
L&J’s housing project. Rolando claimed that it was not he
who demanded for the 6% monthly interest. It was L&J and
Atty. Salonga, through Arlene, who insisted on paying the
said interest as they asserted that the loan was only a short-
term one.
Ruling of the Metropolitan Trial Court
The MeTC, in its Decision10 of June 30, 2006, upheld the
6% monthly interest. In so ruling, it ratiocinated that since
L&J agreed thereto and voluntarily paid the interest at
suchrate from 2000 to 2003, it isalready estopped from
impugning the same. Nonetheless, for reasons of equity, the
saidcourt reduced the interest rate to 12% per annumon the
remaining principal obligation of ₱350,000.00. With regard to
Rolando’s prayer for moral damages, the MeTC denied the
same as it found no malice or bad faith on the part ofL&J in
not paying the obligation. It likewise relieved Atty. Salonga of
any liability as it found that he merely acted in his official
capacity in obtaining the loan. The MeTC disposed of the
case as follows:
WHEREFORE, premises considered, judgment is hereby
rendered in favor of the plaintiff, Arch. Rolando C. Dela Paz,
and against the defendant, L & J Development Co., Inc., as
follows:
a) ordering the defendant L & J Development Co.,
Inc. to pay plaintiff the amount of Three Hundred
Fifty Thousand Pesos (₱350,000.00) representing
the principal obligation, plus interest at the legal
rate of 12% per annum to be computed from
January 20, 2005, the date of the filing of the
complaint, until the whole obligation is fully paid;
b) ordering the defendant L & J Development Co.,
Inc. to pay plaintiff the amount of Five Thousand
Pesos (₱5,000.00) as and for attorney’s fees; and
c) to pay the costs of this suit.
SO ORDERED.11
Ruling of the Regional Trial Court
L&J appealed to the RTC. It asserted in its appeal
memorandum12 that from December 2000 to March 2003, it
paid monthly interest of ₱21,000.00 based on the agreed-
upon interest rate of 6%monthly and from April 2003 to
August 2003, interest paymentsin various amounts.13 The
total of interest payments made amounts to ₱576,000.00 –
an amount which is even more than the principal obligation
of ₱350,000.00
L&J insisted that the 6% monthly interest rate is
unconscionable and immoral. Hence, the 12% per
annumlegal interest should have been applied from the time
of the constitution of the obligation. At 12% per annum
interest rate, it asserted that the amount of interestit ought to
pay from December 2000 to March 2003 and from April 2003
to August 2003, only amounts to ₱105,000.00. If this amount
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CREDIT TRANSACTIONS – PART 2: LOAN (Articles 1933 – 1961) III. Mutuum & Usury Law – PART III: DEPOSIT (Articles 1962 – 2009) I. Deposit
in General
Cases
is deducted from the total interest paymentsalready made,
which is ₱576,000.00, the amount of ₱471,000.00 appears
to have beenpaid over and above what is due. Applying the
rule on compensation, the principal loan of ₱350,000.00
should be set-off against the ₱471,000.00, resulting in the
complete payment of the principal loan.
Unconvinced, the RTC, inits April 19, 2007 Decision,14
affirmed the MeTC Decision, viz: WHEREFORE, premises
considered, the Decision appealed from is hereby
AFFIRMED in all respects, with costs against the appellant.
SO ORDERED.15
Ruling of the Court of Appeals
Undaunted, L&J went to the CA and echoed its arguments
and proposed computation as proffered before the RTC.
In a Decision16 dated February 27, 2008, the CAreversed
and set aside the RTC Decision. The CA stressed that the
parties failedto stipulate in writing the imposition of interest
on the loan. Hence, no interest shall be due thereon
pursuant to Article 1956 of the Civil Code.17 And even if
payment of interest has been stipulated in writing, the 6%
monthly interest is still outrightly illegal and unconscionable
because it is contrary to morals, if not against the law. Being
void, this cannot be ratified and may be set up by the debtor
as defense. For these reasons, Rolando cannot collect any
interest even if L&J offered to pay interest. Consequently, he
has to return all the interest payments of ₱576,000.00 to
L&J.
Considering further that Rolando and L&J thereby became
creditor and debtor of each other, the CA applied the
principle of legal compensation under Article 1279 of the Civil
Code.18 Accordingly, it set off the principal loan of
₱350,000.00 against the ₱576,000.00 total interest
payments made, leaving an excess of ₱226,000.00, which
the CA ordered Rolando to pay L&J plus interest. Thus:
WHEREFORE, the DECISION DATED APRIL 19, 2007 is
REVERSED and SET ASIDE.
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
CONSEQUENT TO THE FOREGOING, respondent Rolando
C. Dela Paz is ordered to pay to the petitioner the amount of
₱226,000.00,plus interest of 12% per annumfrom the finality
of this decision.
Costs of suit to be paid by respondent Dela Paz.
SO ORDERED.19
In his Motion for Reconsideration,20 Rolando argued thatthe
circumstances exempt both the application of Article 1956
and of jurisprudence holding that a 6% monthly interest is
unconscionable, unreasonable, and exorbitant. He alleged
that Atty. Salonga, a lawyer, should have taken it upon
himself to have the loan and the stipulated rate of interest
documented but, by way of legal maneuver, Atty. Salonga,
whom he fully trusted and relied upon, tricked him into
believing that the undocumented and uncollateralized loan
was withinlegal bounds. Had Atty. Salonga told him that the
stipulated interest should be in writing, he would have readily
assented. Furthermore, Rolando insisted that the 6%
monthly interest ratecould not be unconscionable as in the
first place, the interest was not imposed by the creditor but
was in fact offered by the borrower, who also dictated all the
terms of the loan. He stressed that in cases where interest
rates were declared unconscionable, those meant to be
protected by such declaration are helpless borrowers which
is not the case here.
Still, the CA denied Rolando’s motion in its Resolution21 of
June 6, 2008.
Hence, this Petition.
The Parties’ Arguments
Rolando argues that the 6%monthly interest rateshould not
have been invalidated because Atty. Salonga took
advantage of his legal knowledge to hoodwink him into
believing that no document was necessaryto reflect the
interest rate. Moreover, the cases anent unconscionable
interest rates that the CA relied upon involve lenders who
imposed the excessive rates,which are totally different from
the case at bench where it is the borrower who decided on
the high interest rate. This case does not fall under a
scenariothat ‘enslaves the borrower or that leads to the
hemorrhaging of his assets’ that the courts seek to prevent.
L&J, in controverting Rolando’s arguments, contends that the
interest rate is subject of negotiation and is agreedupon by
both parties, not by the borrower alone. Furthermore,
jurisprudence has nullified interestrates on loans of 3% per
month and higher as these rates are contrary to moralsand
public interest. And while Rolando raises bad faithon Atty.
Salonga’s part, L&J avers thatsuch issue is a question of
fact, a matter that cannot be raised under Rule 45.
Issue
The Court’s determination of whether to uphold the judgment
of the CA that the principal loan is deemed paid isdependent
on the validity of the monthly interest rate imposed. And in
determining such validity, the Court must necessarily delve
into matters regarding a) the form of the agreement of
interest under the law and b) the alleged unconscionability of
the interest rate. Our Ruling
The Petition is devoid of merit.
The lack of a written stipulation to pay interest on the loaned
amount disallows a creditor from charging monetary interest.
Under Article 1956 of the Civil Code, no interest shall bedue
unless it has been expressly stipulated in writing.
Jurisprudence on the matter also holds that for interest to be
due and payable, two conditions must concur: a) express
stipulation for the payment of interest; and b) the agreement
to pay interest is reduced in writing.
Here, it is undisputed that the parties did not put down in
writing their agreement. Thus, no interest is due. The
collection of interest without any stipulation in writing is
prohibited by law.22
But Rolando asserts that his situation deserves an exception
to the application of Article 1956. He blames Atty. Salonga
for the lack of a written document, claiming that said lawyer
used his legal knowledge to dupe him. Rolando thus imputes
bad faith on the part of L&J and Atty. Salonga. The Court,
however, finds no deception on the partof L&J and Atty.
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CREDIT TRANSACTIONS – PART 2: LOAN (Articles 1933 – 1961) III. Mutuum & Usury Law – PART III: DEPOSIT (Articles 1962 – 2009) I. Deposit
in General
Cases
Salonga. For one, despite the lack of a document stipulating
the payment of interest, L&J nevertheless devotedly paid
interests on the loan. It only stopped when it suffered from
financial difficulties that prevented it from continuously
paying the 6% monthly rate. For another,regardless of Atty.
Salonga’s profession, Rolando who is an architect and an
educated man himself could have been a more reasonably
prudent person under the circumstances. To top it all, he
admitted that he had no prior communication with Atty.
Salonga. Despite Atty. Salonga being a complete stranger,
he immediately trusted him and lent his company
₱350,000.00, a significant amount. Moreover, as the
creditor,he could have requested or required that all the
terms and conditions of the loan agreement, which include
the payment of interest, be put down in writing to ensure that
he and L&J are on the same page. Rolando had a choice of
not acceding and to insist that their contract be put in written
form as this will favor and safeguard him as a lender.
Unfortunately, he did not. It must be stressed that "[c]ourts
cannot follow one every step of his life and extricate him from
bad bargains, protect him from unwise investments, relieve
him from one-sided contracts,or annul the effects of foolish
acts. Courts cannotconstitute themselves guardians of
persons who are not legally incompetent."23
It may be raised that L&J is estopped from questioning the
interest rate considering that it has been paying Rolando
interest at such ratefor more than two and a half years. In
fact, in its pleadings before the MeTCand the RTC, L&J
merely prayed for the reduction of interest from 6% monthly
to 1% monthly or 12% per annum. However, in Ching v.
Nicdao,24 the daily payments of the debtor to the lender
were considered as payment of the principal amount of the
loan because Article 1956 was not complied with. This was
notwithstanding the debtor’s admission that the payments
made were for the interests due. The Court categorically
stated therein that "[e]stoppel cannot give validity to an act
that is prohibited by law or one thatis against public policy."
Even if the payment of interest has been reduced in writing,
a 6% monthly interest rate on a loan is unconscionable,
regardless of who between the parties proposed the rate.
Indeed at present, usury has been legally non-existent in
view of the suspension of the Usury Law25 by Central Bank
Circular No. 905 s. 1982.26 Even so, not all interest rates
levied upon loans are permitted by the courts as they have
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
the power to equitably reduce unreasonable interest rates. In by the CA, Rolando is bound to return the excess payment of
Trade & Investment Development Corporation of the ₱226,000.00 to L&J following the principle of solutio
Philippines v. Roblett Industrial Construction Corporation,27 indebiti.35
we said:
However, pursuant to Central Bank Circular No. 799 s. 2013
While the Court recognizes the right of the parties to enter which took effect on July 1, 2013,36 the interest imposed by
into contracts and who are expectedto comply with their the CA must be accordingly modified. The ₱226,000.00
terms and obligations, this rule is not absolute. Stipulated which Rolando is ordered to pay L&J shall earn an interest of
interest rates are illegal if they are unconscionable and the 6% per annumfrom the finality of this Decision.
Court is allowed to temper interest rates when necessary. In
exercising this vested power to determine what is iniquitous
WHEREFORE, the Decision dated February 27, 2008 of the
and unconscionable, the Court must consider the
Court of Appeals in CA-G.R. SP No. 100094 is hereby
circumstances of each case. What may be iniquitous and
AFFIRMED with modification that petitioner Rolando C. De
unconscionable in onecase, may be just in another. x x x28
La Paz is ordered to pay respondent L&J Development
Company the amount of ,₱226,000.00, plus interest of 6o/o
Time and again, it has been ruled in a plethora of cases per annum from the finality of this Decision until fully paid.
that stipulated interest rates of 3% per month and
higher, are excessive, iniquitous, unconscionable and
SO ORDERED.
exorbitant. Such stipulations are void for being contrary
to morals, if not against the law.29 The Court, however,
stresses that these rates shall be invalidated and shall G.R. No. 154129. July 8, 2005
be reduced only in cases where the terms of the loans
are open-ended, and where the interest rates are applied TERESITA DIO, Petitioners, 
for an indefinite period. Hence, the imposition of a vs.
specific sum of ₱40,000.00 a month for six months on a SPOUSES VIRGILIO and LUZ ROCES JAPOR and
₱1,000,000.00 loan is not considered unconscionable.30 MARTA1 JAPOR, Respondents.
In the case at bench, there is no specified period as to the DECISION
payment of the loan. Hence, levying 6% monthly or 72%
interest per annumis "definitely outrageous and
inordinate."31 The situation that it was the debtor who QUISUMBING, J.:
insisted on the interest rate will not exempt Rolando from a
ruling that the rate is void. As this Court cited in Asian For review on certiorari is the Decision,2 dated February 22,
Cathay Finance and Leasing Corporation v. Gravador,32 2002, of the Court of Appeals, in the consolidated cases CA-
"[t]he imposition of an unconscionable rate of interest on a G.R. CV No. 51521 and CA-G.R. SP No. 40457. The
money debt, even if knowingly and voluntarily assumed, is decretal portion read:
immoral and unjust. It is tantamount to a repugnant spoliation
and an iniquitous deprivation of property, repulsive to the
WHEREFORE, premises considered, in CA-G.R. CV No.
common sense of man."33 Indeed, "voluntariness does
51521, the decision of the trial court is AFFIRMED with
notmake the stipulation on [an unconscionable] interest
MODIFICATION. Judgment is rendered as follows: 
valid."34
1. Declaring the Real Estate Mortgage to be valid;
As exhaustibly discussed,no monetary interest isdue
Rolando pursuant to Article 1956.1âwphi1 The CA thus
2. Fixing the interest at 12% per annum and an additional 1%
correctly adjudged that the excess interest payments made
penalty charge per month such that plaintiffs-appellants’
by L&J should be applied to its principal loan. As computed
3
CREDIT TRANSACTIONS – PART 2: LOAN (Articles 1933 – 1961) III. Mutuum & Usury Law – PART III: DEPOSIT (Articles 1962 – 2009) I. Deposit
in General
Cases
contractual obligation under the deed of real estate mortgage
would amount to ₱1,252,674.00;
3. Directing defendant-appellee Dio to give the surplus of
₱2,247,326.00 to plaintiffs-appellants; and
4. Affirming the dissolution of the writ of preliminary
injunction previously issued by the trial court.
No pronouncement as to costs.
The Petition in CA-G.R. SP No. 40457 is DENIED for being
moot and academic.
SO ORDERED.3
Equally assailed in this petition is the Resolution,4 dated
July 2, 2002, of the appellate court, denying Teresita
Dio’s Motion for Partial Reconsideration of March 19,
2002 and the Spouses Japor and Marta Japor’s Motion for
Reconsideration dated March 20, 2002.
The antecedent facts are as follows:
Herein respondents Spouses Virgilio Japor and Luz Roces
Japor were the owners of an 845.5 square-meter residential
lot including its improvements, situated in Barangay Ibabang
Mayao, Lucena City, as shown by Transfer Certificate of Title
(TCT) No. T-39514. Adjacent to the Japor’s lot is another lot
owned by respondent Marta Japor, which consisted of 325.5
square meters and titled under TCT No. T-15018.  action for Fixing of Contractual Obligation with Prayer for
On August 23, 1982, the respondents obtained a loan of
₱90,000 from the Quezon Development Bank (QDB), and as
security therefor, they mortgaged the lots covered by TCT
Nos. T-39514 and T-15018 to QDB, as evidenced by a Deed
of Real Estate Mortgage duly executed by and between the
respondents and QDB.
On December 6, 1983, respondents and QDB amended the
Deed of Real Estate Mortgage increasing respondents’ loan
to ₱128,000.
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
The respondents failed to pay their aforesaid loans.
However, before the bank could foreclose on the mortgage,
respondents, thru their broker, one Lucia G. Orian, offered to
mortgage their properties to petitioner Teresita Dio.
Petitioner prepared a Deed of Real Estate Mortgage,
whereby respondents mortgaged anew the two properties
already mortgaged with QDB to secure the timely payment of
a ₱350,000 loan that respondents had from petitioner Dio.
The Deed of Real Estate Mortgage, though dated January
1989, was actually executed on February 13, 1989 and
notarized on February 17, 1989.
Under the terms of the deed, respondents agreed to pay the
petitioner interest at the rate of five percent (5%) a month,
within a period of two months or until April 14, 1989. In the
event of default, an additional interest equivalent to five
percent (5%) of the amount then due, for every month of
delay, would be charged on them.
The respondents failed to settle their obligation to petitioner
on April 14, 1989, the agreed deadline for settlement.
On August 27, 1991, petitioner made written demands upon
the respondents to pay their debt.
Despite repeated demands, respondents did not pay, hence
petitioner applied for extrajudicial foreclosure of the
mortgage. The auction of the unredeemed properties was set
for February 26, 1992.
Meanwhile, on February 24, 1992, respondents filed an
Preliminary Mandatory Injunction/Restraining Order,
docketed as Civil Case No. 92-26, with the Regional Trial
Court (RTC) of Lucena City. Respondents prayed that
"judgment be rendered fixing the contractual obligations of
plaintiffs with the defendant Dio plus legal or allowable
interests thereon."5
The trial court issued an Order enjoining the auction sale of
the aforementioned mortgaged properties.
On June 15, 1992, the Japors filed a Motion to Admit
Amended Complaint with an attached copy of
their Amended Complaint praying that the Deed of Real
Estate Mortgage dated February 13, 1989 be declared null
and void, but reiterating the plea that the trial court fix the
contractual obligations of the Japors with Dio. The trial court
denied the motion.
On September 27, 1994, respondents filed with the appellate
court, a petition for certiorari, docketed as CA-G.R. SP No.
35315, praying that the Court of Appeals direct the trial court
to admit their Amended Complaint. The appellate court
denied said petition.6
On December 11, 1995, the trial court handed down the
following judgment:
WHEREFORE, in view of the foregoing considerations,
judgment is rendered:
1. Dismissing the complaint for failure of the plaintiffs to
substantiate their affirmative allegations;
2. Declaring the Real Estate Mortgage (Exhs. "A" to "A-
13"/Exhs. "3" to "3-D") to be valid and binding as between
the parties, more particularly the plaintiffs Virgilio Japor, Luz
Japor and Marta Japor or the latter’s substituted heir or heirs,
as the case may be;
3. Dissolving the writ of preliminary injunction previously
issued by this Court; and
4. To pay the cost of this suit.
SO ORDERED.7
On January 17, 1996, respondents filed their notice of
appeal. On April 26, 1996, they also filed a Petition for
Temporary Restraining Order And/Or Mandatory
Injunction in Aid of Appellate Jurisdiction with the Court
of Appeals.
On May 8, 1996, petitioner Dio as the sole bidder in an
auction purchased the properties for ₱3,500,000.
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CREDIT TRANSACTIONS – PART 2: LOAN (Articles 1933 – 1961) III. Mutuum & Usury Law – PART III: DEPOSIT (Articles 1962 – 2009) I. Deposit
in General
Cases
On May 9, 1996, the Court of Appeals denied respondents’
application for a temporary restraining order.8
On October 9, 1996, the appellate court consolidated CA-
G.R. CV No. 51521 and CA-G.R. SP No. 40457.
As stated at the outset, the appellate court affirmed the
decision of the trial court with respect to the validity of the
Deed of Real Estate Mortgage, but modified the interest and
penalty rates for being unconscionable and exorbitant.
Before us, petitioner assigns the following errors allegedly
committed by the appellate court:
I Court of Appeals 12 to reduce the interest rate to 12% per
THE ALLEGED INIQUITY OF THE STIPULATED
INTEREST AND PENALTY WAS NOT RAISED BEFORE
THE TRIAL COURT NOR ASSIGNED AS AN ERROR IN
RESPONDENTS’ APPEAL.
II
THE STIPULATED INTEREST AND PENALTY ARE NOT
"EXCESSIVE, INIQUITOUS, UNCONSCIONABLE,
EXORBITANT AND CONTRARY TO MORAL[S]".
III
PAYMENT OF THE "SURPLUS" OF ₱2,247,326.00 TO
RESPONDENTS WOULD RESULT IN THEIR UNJUST
ENRICHMENT.
IV
RESPONDENTS’ APPEAL SHOULD HAVE BEEN
DISMISSED DUE TO FORUM SHOPPING.9
Simply stated, the issue is: Did the Court of Appeals err
when it held that the stipulations on interest and penalty in
the Deed of Real Estate Mortgage is contrary to morals, if
not illegal? Corollarily, were respondents entitled to any
"surplus" on the auction sale price?
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
On the main issue, petitioner contends that The Usury
Law10 has been rendered ineffective by Central Bank Circular
No. 905, series of 1982 and accordingly, usury has become
legally non-existent in this jurisdiction, thus, interest rates
may accordingly be pegged at such levels or rates as the
lender and the borrower may agree upon. Petitioner avers
she has not violated any law considering she is not engaged
in the business of money-lending. Moreover, she claims she
has suffered inconveniences and incurred expenses for
some 13 years now as a result of respondents’ failure to pay
her. Petitioner further points out that the 5% interest rate was
proposed by the respondents and have only themselves to
blame if the interests and penalties ballooned to its present
amount due to their willful delay and default in payment. The
appellate court thus erred, petitioner now insists, in
applying Sps. Almeda v. Court of Appeals11 and Medel v.
annum and the penalty to 1% per month.
Respondents admit they owe petitioner ₱350,000 and do not
question any lawful interest on their loan but they maintain
that the Deed of Real Estate Mortgage is null and void since
it did not state the true intent of the parties, which limited the
5% interest rate to only two (2) months from the date of the
loan and which did not provide for penalties and other
charges in the event of default or delay. Respondents
vehemently contend that they never consented to the said
stipulations and hence, should not be bound by them.
On the first issue, we are constrained to rule against the
petitioner’s contentions.
Central Bank Circular No. 905, which took effect on January
1, 1983, effectively removed the ceiling on interest rates for
both secured and unsecured loans, regardless of maturity.
However, nothing in said Circular grants lenders carte
blanche authority to impose interest rates which would result
in the enslavement of their borrowers or to the hemorrhaging
of their assets.13 While a stipulated rate of interest may not
technically and necessarily be usurious under Circular No.
905, usury now being legally non-existent in our
jurisdiction,14 nonetheless, said rate may be equitably
reduced should the same be found to be iniquitous,
unconscionable, and exorbitant, and hence, contrary to
morals (contra bonos mores), if not against the law.15 What is
iniquitous, unconscionable, and exorbitant shall depend upon
the factual circumstances of each case.
In the instant case, the Court of Appeals found that the 5%
interest rate per month and 5% penalty rate per month for
every month of default or delay is in reality interest rate at
120% per annum. This Court has held that a stipulated
interest rate of 5.5% per month or 66% per annum is void for
being iniquitous or unconscionable.16 We have likewise ruled
that an interest rate of 6% per month or 72% per annum is
outrageous and inordinate.17 Conformably to these precedent
cases, a combined interest and penalty rate at 10% per
month or 120% per annum, should be deemed iniquitous,
unconscionable, and inordinate. Hence, we sustain the
appellate court when it found the interest and penalty rates in
the Deed of Real Estate Mortgage in the present case
excessive, hence legally impermissible. Reduction is legally
called for now in rates of interest and penalty stated in the
mortgage contract.
What then should the interest and penalty rates be?
The evidence shows that it was indeed the respondents who
proposed the 5% interest rate per month for two (2) months.
Having agreed to said rate, the parties are now estopped
from claiming otherwise. For the succeeding period after the
two months, however, the Court of Appeals correctly reduced
the interest rate to 12% per annum and the penalty rate to
1% per month, in accordance with Article 2227 18 of the Civil
Code.
But were respondents entitled to the "surplus" of
₱2,247,32619 as a result of the "overpricing" in the auction?
We note that the "surplus" was the result of the computation
by the Court of Appeals of respondents’ outstanding liability
based on a reduced interest rate of 12% per annum and the
reduced penalty rate of 1% per month. The court a quo then
proceeded to apply our ruling in Sulit v. Court of
Appeals,20 to the effect that in case of surplus in the
purchase price, the mortgagee is liable for such surplus as
actually comes into his hands, but where he sells on credit
instead of cash, he must still account for the proceeds as if
the price were paid in cash, for such surplus stands in the
place of the land itself with respect to liens thereon or vested
rights therein particularly those of the mortgagor or his
assigns.
5
CREDIT TRANSACTIONS – PART 2: LOAN (Articles 1933 – 1961) III. Mutuum & Usury Law – PART III: DEPOSIT (Articles 1962 – 2009) I. Deposit
in General
Cases
In the instant case, however, there is no "surplus" to speak
of. In adjusting the interest and penalty rates to equitable and
conscionable levels, what the Court did was merely to reflect
the true price of the land in the foreclosure sale. The amount
of the petitioner’s bid merely represented the true amount of
the mortgage debt. No surplus in the purchase price was
thus created to which the respondents as the mortgagors
have a vested right.
WHEREFORE, the Decision dated February 22, 2002, of the
Court of Appeals in the consolidated cases CA-G.R. CV No.
51521 and CA-G.R. SP No. 40457 is hereby AFFIRMED with
MODIFICATION. The interest rate for the subject loan owing
to QDB, or whoever is now the party mortgagee, is hereby
fixed at five percent (5%) for the first two (2) months
following the date of execution of the Deed of Real Estate
Mortgage, and twelve percent (12%) for the succeeding
period. The penalty rate thereafter shall be fixed at one
percent (1%) per month. Petitioner Teresita Dio is declared
free of any obligation to return to the respondents, the
Spouses Virgilio Japor and Luz Roces Japor and Marta
Japor, any surplus in the foreclosure sale price. There being
no surplus, after the court below had applied our ruling
in Sulit,21 respondents could not legally claim any overprice
from the petitioner, much less the amount of ₱2,247,326.00.
SO ORDERED.
SOLIDBANK CORPORATION, G.R. No. 171925
(now Metropolitan Bank and Trust Company),
Petitioner,
Present:
CARPIO, J., Chairperson,
NACHURA,
- versus - PERALTA,
DEL CASTILLO,* and
ABAD, JJ.
 
PERMANENT HOMES, Promulgated:
INCORPORATED,
Respondent. July 23, 2010
 
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
 
 
DECISION
 
CARPIO, J.:
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
G.R. No. 171925 is a petition for review [1] assailing the
Decision[2] promulgated on 29 June 2005 by the Court of
Appeals (appellate court) as well as the
Resolution[3] promulgated on 14 March 2006 in CA-G.R.
CV No. 75926. The appellate court granted the petition filed
by Permanent Homes, Incorporated (Permanent) and
reversed the decision of the Regional Trial Court of Makati
City, Branch 58 (trial court) dated 5 July 2002 in Civil Case
No. 98-654. The appellate court ordered Solidbank
Corporation (Solidbank) and Permanent to enter into an
express agreement about the applicable interest rates on
Permanents loan. Solidbank was also ordered to render an
accounting of Permanents payments, not to impose interest
on interest upon Permanents loans, and to release the
remaining amount available under Permanents omnibus
credit line.
The Facts
The appellate court narrated the facts as follows:
 
The records disclose that PERMANENT HOMES is a real
estate development company, and to finance its housing
project known as the Buena Vida Townhomes located within
Merville Subdivision, Paraaque City, it applied and was
subsequently granted by SOLIDBANK with an Omnibus Line
credit facility in the total amount of SIXTY MILLION
PESOS. Of the entire loan, FIFTY NINE MILLION as [sic]
time loan for a term of up to three hundred sixty (360) days,
with interest thereon at prevailing market rates, and subject
to monthly repricing. The remaining ONE MILLION was
available for domestic bills purchase.
 
To secure the aforesaid loan, PERMANENT HOMES initially
mortgaged three (3) townhouse units within the Buena Vida
project in Paraaque. At the time, however, the instant
complaint was filed against SOLIDBANK, a total of thirty six
(36) townhouse units were mortgaged with said bank.
 
Of the 60 million available to PERMANENT HOMES, it
availed of a total of 41.5 million pesos, covered by three (3)
promissory notes, which contain the following provisions,
thus:
 
xxx
 
5. We/I irrevocably authorize Solidbank to increase or
decrease at any time the interest rate agreed in this Note or
Loan on the basis of, among others, prevailing rates in the
local or international capital markets. For this purpose, We/I
authorize Solidbank to debit any deposit or placement
account with Solidbank belonging to any one of us. The
adjustment of the interest rate shall be effective from the
date indicated in the written notice sent to us by the bank, or
if no date is indicated, from the time the notice was sent.
 
6. Should We/I disagree to the interest rate adjustment, We/I
shall prepay all amounts due under this Note or Loan within
thirty (30) days from the receipt by anyone of us of the
written notice. Otherwise, We/I shall be deemed to have
given our consent to the interest rate adjustment.
 
Contrary, however, to the specific provisions as afore-
quoted, there was a standing agreement by the parties that
any increase or decrease in interest rates shall be subject to
the mutual agreement of the parties.
For the first loan availment of PERMANENT HOMES on
March 20, 1997, in the amount of 19.6 MILLION, from the
initial interest rate of 14.25% per annum (p.a.), the same was
increased 15% p.a. effective May 19, 1997; it was again
increased to 26% p.a. effective July 18, 1997. It was
thereafter reduced to 20% p.a. effective August 18, 1997,
and then increased to 24% p.a. effective September 17,
1997. The rate was increased further to 30% p.a. effective
October 17, 1997, then decreased to27% p.a. on November
17, 1997, and again increased to 34% p.a. effective
December 17, 1997. The rate then decreased to 30% p.a. on
January 16, 1998.
 
For the second loan availment in the amount of 18 million,
the rate was initially pegged at 15.75% p.a. on June 24,
1997. A month later, the rate increased to 23.5% p.a. It
thereafter decreased to 20% p.a. effective August 24, 1997,
but again increased to 22.5% p.a. effective September 24,
1997. For the next month, the rate surged to 30% p.a., and
decreased to 27% p.a. for the month of November. The rate
again surged to 34% p.a. for the month of December, and
was decreased to 30% p.a. from January 22, 1998 to
February 20, 1998.
 
For the third loan availment on July 15, 1997, in the amount
of 3.9 million, the interest rate was initially pegged at 35%
p.a., but this was decreased to 21% p.a. from August 14 until
September 11, 1997. The rate increased slightly to 23%
p.a. on September 12, 1997, and surged to 27% p.a. on
6
CREDIT TRANSACTIONS – PART 2: LOAN (Articles 1933 – 1961) III. Mutuum & Usury Law – PART III: DEPOSIT (Articles 1962 – 2009) I. Deposit
in General
Cases
October 13, 1997. The rate went down slightly to 27%
p.a. for the month of November, and to 26% p.a. for the
month of December. The rate, however, again surged
to 30% p.a. on January 12, 1998 before settling at 29%
p.a. for the month of February.
 
It is [Permanents] stand that SOLIDBANK unilaterally and
arbitrarily accelerated the interest rates without any declared
basis of such increases, of which PERMANENT HOMES had
not agreed to, or at the very least, been informed of. This is
contrary to their earlier agreement that any interest rate
changes will be subject to mutual agreement of the parties.
PERMANENT HOMES further admits that it was not able to
protest such arbitrary increases at the time they were
imposed by SOLIDBANK, for fear that SOLIDBANK might
cut off the credit facility it extended to PERMANENT
HOMES. Permanent was then in the midst of the
construction of its project in Merville, Paraaque City, and
SOLIDBANK knew that it was relying substantially on the
credit facility the latter extended to it.
[Permanent] thus filed a case before the trial court seeking
the following: (1) the annulment of the increases in interest
rates on the loans it obtained from SOLIDBANK, on the
ground that it was violative of the principle of mutuality of
agreement of the parties, as enunciated in Article 1409 of the
New Civil Code, (2) the fixing of the interest rates at the
applicable interest rate, and (3) for the trial court to order
SOLIDBANK to make an accounting of the payments it
made, so as to determine the amount of refund
PERMANENT is entitled to, as well as to order SOLIDBANK
to release the remaining available balance of the loan it
extended to PERMANENT. In addition, [Permanent] prays
for the payment of compensatory, moral and exemplary
damages.
 
SOLIDBANK, on the other hand, avers that PERMANENT
HOMES has no cause of action against it, in view of the
pertinent provisions of the Omnibus Credit Line and the
promissory notes agreed to and signed by PERMANENT
HOMES. Thus, in accordance with said provisions,
SOLIDBANK was authorized to, upon due notice, periodically
adjust the interest rates on PERMANENT HOMES loan
availments during the monthly interest repricing dates,
depending on the changes in prevailing interest rates in the
local and international capital markets. In fact, SOLIDBANK
avers that four (4) days before July 15, 1997, the Bangko
Sentral ng Pilipinas (BSP) declared that it could no longer
support the Philippine currency from external speculative
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
forces, hence, the local currency was allowed to seek its own
exchange rate level. As a result of the volatile exchange rate
ratio, banks were then hesitant to extend loans, and in some
instances that it granted loans, they had to ensure that they
will not be at the losing end of the deal, so to speak, by the
repricing of the interest rates every month. SOLIDBANK
insists that PERMANENT HOMES should not be allowed to
renege on its contractual obligations, as it freely and
voluntarily bound itself to the provisions of the Omnibus
Credit Line and the promissory notes.
PERMANENT HOMES presented as witnesses Jacqueline
S. Lim, its Vice President and Chief Financial Officer, Engr.
Rey A. Romasanta, its Executive Vice President and Chief
Operating Officer, and Martha Julia Flores, its Treasury
Officer.
 
On March 24, 1998, the trial court issued a temporary
restraining order (TRO), after a summary hearing, which
enjoined SOLIDBANK from implementing and collecting the
increases in interest rates and from initiating any action,
including the foreclosure of the mortgaged properties.
 
Ms. Lims testimony centered on PERMANENT HOMES
allegations that the repricing of the interest rates was done
by SOLIDBANK without any written agreement entered into
between the parties. In fact, Ms. Lim accounted that
SOLIDBANK will merely advise them of the interest rate for
the period, after said period had already commenced, and at
times very late in the period, by fax messages. When
PERMANENT HOMES called SOLIDBANKs attention to the
seemingly surging rates it imposed on its loan, SOLIDBANK
will merely answer that it was the banks policy, without
offering any basis for such increase. Furthermore, Ms. Lim
also mentioned SOLIDBANKs alleged practice of imposing
interest on unpaid interest, at the highest rate of 30%
p.a.. Ms. Lim also presented a tabulation, which presents the
number of days their billing statements were sent late, from
the time the interest period started. It is PERMANENT
HOMES stand that since the purpose of the billing
statements was to inform them beforehand of the applicable
interest rate for the period, the late billings will clearly show
SOLIDBANKs arbitrary imposition of the repriced interest
rates, as well as its indifference to PERMANENT HOMES
plight.
 
To illustrate, for the first loan availment in the amount
of P19.6 million, the billing statements which should have
notified PERMANENT HOMES of the repriced interest rates
were faxed to PERMANENT HOMES between eighteen (18)
to thirty-three (33) days late. For the second loan availment
in the amount of P18 million, the faxed billings were late
between six (6) to twenty-one (21) days, and one instance
where PERMANENT HOMES received no billing at all. For
the third loan availment in the amount of P3.9 million, the
faxed billings were late between seven (7) to twenty-nine
(29) days, and also an instance where PERMANENT
HOMES received no billing at all.
This practice, according to Ms. Lim, clearly affected its
operations, as the completion of its construction project was
unnecessarily delayed, to its prejudice and its buyers. This
was the import of the testimony of PERMANENT HOMES
second witness, Engr. Rey A. Romasanta. According to
Engr. Rey, the target date of completion was August 1997,
but in view of the shortage of funds by reason of
SOLIDBANKs refusal for PERMANENT HOMES to make
further availments on its omnibus credit line, the project was
completed only on February 1998.
 
PERMANENT HOMES third and final witness was Martha
Julia Flores, its Treasury Officer, who explained that as such,
it was her who received the late billings from
SOLIDBANK. She would also call up SOLIDBANK to ask
what the repriced interest rate for the coming interest period,
to no avail, as SOLIDBANK will merely fax its billings almost
always, as abovementioned, late in the period. Ms. Flores
admitted that she prepared the tabulation presented before
the court, which showed how late SOLIDBANKs billings were
sent to PERMANENT HOMES, as well as the computation of
interest rates that SOLIDBANK had allegedly overcharged
on its loan, vis-a-vis the average of the high and the low
published lending rates of SOLIDBANK.
 
SOLIDBANK, to establish its defense, presented its lone
witness, Mr. Cesar Lugtu, who testified to the effect that,
contrary to PERMANENT HOMES assertions that it was not
promptly informed of the repriced interest rates,
SOLIDBANKs officers verbally advised PERMANENT
HOMES of the repriced rates at the start of the period, and
even added that their transaction[s] were based on
trust. Aside from these allegations, however, no written
memorandum or note was presented by SOLIDBANK to
support their assertion that PERMANENT HOMES was
timely advised of the repriced interests.[4]
 
7
CREDIT TRANSACTIONS – PART 2: LOAN (Articles 1933 – 1961) III. Mutuum & Usury Law – PART III: DEPOSIT (Articles 1962 – 2009) I. Deposit
in General
Cases
The Trial Courts Ruling
 
On 5 July 2002, the trial court promulgated its Decision in
favor of Solidbank. The trial court ratiocinated and ruled thus:
It becomes crystal clear that there is sufficient proof to show
that the instant case was instituted by [Permanent] as an
after-thought and as an obvious subterfuge intended to
completely lay on the defendant the blame for the debacle of
its Buena Vida project. An afterthought because the records
of the case show that the complaint was filed in March 16,
1998, already after it was having difficulty making the
amortization payments, the last of which being in February
1998. A subterfuge because plaintiff, instead of blaming itself
and its own business judgment that went sour, would rather
put the blame on [Solidbank], taking advantage of every
conceivable gray area of its contract with [Solidbank] to avoid
its own liabilities. In fact, this complaint was made the very
basis for [Permanent] to altogether stop the payment of its
loan from [Solidbank] including the interest payment (TSN,
May 07, 1998, p. 60).
 
xxxx
 
WHEREFORE, finding the complaint not impressed with
merit, judgment is hereby rendered dismissing the said
complaint. The Counterclaim is likewise dismissed for lack of
evidence to support the same.
 
SO ORDERED.[5]
 
Permanent filed an appeal before the appellate court.
 
 
The Appellate Courts Ruling
 
The appellate court granted Permanents appeal, and set
aside the trial courts ruling. The appellate court not only
recognized the validity of escalation clauses, but also
underscored the necessity of a basis for the increase in
interest rates and of the principle of mutuality of contracts.
The dispositive portion of the appellate courts decision
reads, thus:
 
THE FOREGOING CONSIDERED, the instant appeal is
hereby GRANTED, the assailed decision dated July 5, 2002
is REVERSED and SET ASIDE, and a new one is hereby
entered as follows:
 
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
(1) Unless the parties herein subsequently enter into
an express agreement regarding the applicable interest
rates on PERMANENT HOMES loan availments subsequent
to the initial thirty-day (30) period, the legal rate of twelve
percent (12%) per annum is hereby FIXED, to be applied on
the outstanding balance of the loan;
 
(2) SOLIDBANK is ordered to render an accounting of all the
payments made by PERMANENT HOMES, and in case
there is excess payment by reason of the wrongful imposition
of the repriced interest rates, to apply such amount to the
interest payment at the legal rate, and thereafter to the
outstanding principal amount;
 
(3) SOLIDBANK is directed not to impose penalties,
particularly interest on interest, upon PERMANENT HOMES
loan, there being no evidence that the latter was in default on
its payments;
 
(4) SOLIDBANK is hereby ordered to release the remaining
amount available under the omnibus credit line, subject,
however, to availability of funds on the part of SOLIDBANK.
 
No pronouncement as to costs.
 
SO ORDERED.[6]
 
The appellate court resolved to deny Solidbanks Motion for
Reconsideration for lack of merit.[7]
 
The Issues
 
Solidbank raised the following issues in their petition:
(A) Whether the Honorable Court of Appeals was correct
in ruling that the increases in the interest rates on
[Permanents] loans are void for having been unilaterally
imposed without basis.
 
(B) Whether the Honorable Court of Appeals was correct in
ordering the parties to enter into an express agreement
regarding the applicable interest rates on Permanents loan
availments subsequent to the initial thirty-day (30) period.
 
(C) Whether the Honorable Court of Appeals was correct in
ruling that [Permanent] is entitled to attorneys fees
notwithstanding the absence of bad faith or malice on the
part of [Solidbank].[8]
 
The Courts Ruling
 
The petition has merit.
 
The Usury Law had been rendered legally ineffective by
Resolution No. 224 dated 3 December 1982 of the Monetary
Board of the Central Bank, and later by Central Bank Circular
No. 905 which took effect on 1 January 1983.These circulars
removed the ceiling on interest rates for secured and
unsecured loans regardless of maturity. The effect of these
circulars is to allow the parties to agree on any interest that
may be charged on a loan. The virtual repeal of
the Usury Law is within the range of judicial notice which
courts are bound to take into account. [9] Although interest
rates are no longer subject to a ceiling, the lender still
does not have an unbridled license to impose increased
interest rates. The lender and the borrower should agree
on the imposed rate, and such imposed rate should be
in writing.
 
The three promissory notes between Solidbank and
Permanent all contain the following provisions:
 
5. We/I irrevocably authorize Solidbank to increase or
decrease at any time the interest rate agreed in this Note or
Loan on the basis of, among others, prevailing rates in the
local or international capital markets. For this purpose, We/I
authorize Solidbank to debit any deposit or placement
account with Solidbank belonging to any one of us. The
adjustment of the interest rate shall be effective from the
date indicated in the written notice sent to us by the bank, or
if no date is indicated, from the time the notice was sent.
6. Should We/I disagree to the interest rate adjustment, We/I
shall prepay all amounts due under this Note or Loan within
thirty (30) days from the receipt by anyone of us of the
written notice. Otherwise, We/I shall be deemed to have
given our consent to the interest rate adjustment.
 
The stipulations on interest rate repricing are valid
because (1) the parties mutually agreed on said
stipulations; (2) repricing takes effect only upon
Solidbanks written notice to Permanent of the new
interest rate; and (3)Permanent has the option to prepay
its loan if Permanent and Solidbank do not agree on the
new interest rate. The phrases irrevocably authorize, at
any time and adjustment of the interest rate shall be
8
CREDIT TRANSACTIONS – PART 2: LOAN (Articles 1933 – 1961) III. Mutuum & Usury Law – PART III: DEPOSIT (Articles 1962 – 2009) I. Deposit
in General
Cases
effective from the date indicated in the written notice Oct. 22, 32.0% 29.0% 30.0%   verbally advised Permanents officers over the phone at the
sent to us by the bank, or if no date is indicated, from 1997 start of the period. Solidbank did not present any written
the time the notice was sent, emphasize that Permanent memorandum to support its allegation that it promptly
should receive a written notice from Solidbank as a Nov. 12, 28.0% 25.0% 27.0%   advised Permanent of the change in interest rates.
condition for the adjustment of the interest rates. 1997 [13]
 Solidbank advised Permanent on the repriced interest rate
  applicable for the 30-day interest period only after the period
Nov. 17, 28.0% 25.0% 27.0%  
In order that obligations arising from contracts may have the had begun. Permanent presented a tabulation which showed
1997
force of law between the parties, there must be a mutuality that Solidbank either did not send a billing statement, or sent
between the parties based on their essential equality.[10] A Nov. 21, 27.0% 24.0% 27.0%   a billing statement 6 to 33 days late. [14] We reproduce the
contract containing a condition which makes its fulfillment 1997 tabulation below:
dependent exclusively upon the uncontrolled will of one of  
the contracting parties is void. [11] There was no showing Dec. 12, 25.0% 23.0% 26.0% 2.0%
1997 PN #435 P19.6MM
that either Solidbank or Permanent coerced each other
to enter into the loan agreements. The terms of the Dec. 17, 25.0% 23.0% 34.0% 10.0% Reference Interest Period Date Billing Number of
Omnibus Line Agreement and the promissory notes 1997 No. Statements days Billing
were mutually and freely agreed upon by the parties. were faxed Statement
  Dec. 22, 25.0% 23.0% 32.0% 8.0% to was Late
Moreover, Solidbanks range of lending rates were consistent 1997 Permanent
with prevailing rates in the local or international capital
Jan. 12, 26.0% 24.0% 30.0% 5.0% 1 03/20/97 04/18/97 04/17/97 28
markets. Permanent presented a tabulation [12] of the range of
1998
Solidbanks lending rates, as reported to Bangko Sentral ng 2 04/18/97 05/19/97 05/16/97 28
Pilipinas and compared the lending rates with the interest Jan. 16, 28.0% 25.0% 30.0% 3.5%
rates charged by Solidbank on Permanents loans, thus: 1998   05/19/97 06/19/97   no
  statement
Jan. 22, 28.0% 25.0% 30.0% 3.5% received
  Solidbanks range of     1998
lending rates as per 3 06/19/97 07/18/97 07/12/97 23
BSP records Feb. 9, 27.0% 24.0% 30.0% 3.5%
1998 4 07/18/97 08/18/97 08/05/97 18
  High Low Interest rates Excess
Feb. 11, 27.0% 24.0% 29.0% 4.5% 5 08/18/97 09/17/97 09/10/97 23
charged by Interest
Solidbank on Rate Over 1998 6 09/17/97 10/17/97 10/06/97 19
Permanents the
Feb. 12, 27.0% 24.0% 30.0% 4.5% 7 10/17/97 11/17/97 11/11/97 25
loans Average of
1998
High and 8 11/17/97 12/17/97 12/12/97 25
Low Rates  
The repriced interest rates from 12 September to 21 9 12/17/97 01/16/98 01/09/98 23
Sept. 25.0% 22.0% 23.0%   November 1997 conformed to the range of Solidbanks
12, 1997 lending rates to other borrowers. The 12 December 1997 to 14 01/16/98 02/20/98 02/18/98 33
12 February 1998 repriced interest rates were not  
Sept. 27.0% 24.0% 24.0%  
unconscionably out of line with the upper range of lending PN #969 P18MM
17, 1997
rates to other borrowers. The interest rate repricing
Sept. 26.0% 23.0% 22.5%   happened at the height of the Asian financial crises in late Reference Interest Period Date Billing Number of
22, 1997 1997, when banks clamped down on lendings because of No. Statements days Billing
higher credit risks across industries, particularly the real were faxed Statement
Oct. 13, 29.0% 26.0% 28.0%   to was Late
estate industry.
1997 Permanent
 
Oct. 17, 30.0% 27.0% 30.0%   We also recognize that Solidbank admitted that it did not
3 06/24/97 07/24/97 07/12/97 18
1997 promptly send Permanent written repriced rates, but rather

Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman 9
CREDIT TRANSACTIONS – PART 2: LOAN (Articles 1933 – 1961) III. Mutuum & Usury Law – PART III: DEPOSIT (Articles 1962 – 2009) I. Deposit
in General
Cases
4 07/24/97 08/22/97 08/05/97 12 WHEREFORE, we GRANT the petition in part. We SET The Case
ASIDE the Decision of the Court of Appeals promulgated on
5 08/22/97 09/22/97 09/10/97 19 29 June 2005 as well as the Resolution promulgated on 14 PAN PACIFIC SERVICE CONTRACTORS, INC. AND
March 2006 in CA-G.R. CV No. 75926 and AFFIRM the RICARDO F. DEL ROSARIO (PETITIONERS) FILED THIS
6 09/22/97 10/22/97 10/06/97 14
decision of the Regional Trial Court of Makati City, Branch 58 PETITION FOR REVIEW[1]ASSAILING THE COURT OF
7 10/22/97 11/21/97 11/11/97 20 dated 5 July 2002 in Civil Case No. 98-654 with APPEALS (CA) DECISION[2]DATED 30 JUNE 2005 IN CA-
the MODIFICATION that the repricing of the interest rates G.R. CV NO. 63966 AS WELL AS THE
8 11/21/97 12/22/97 12/12/97 21 should take effect only upon Permanent Homes, RESOLUTION[3]DATED 5 OCTOBER 2005 DENYING THE
9 12/22/97 01/22/98 01/09/98 18 Incorporateds receipt of the written notice from Solidbank MOTION FOR RECONSIDERATION. IN THE ASSAILED
Corporation of the adjustment in interest rate. The records of DECISION, THE CA MODIFIED THE 12 APRIL 1999
  01/22/98 02/12/97   no this case are therefore remanded to the trial court for the DECISION[4]OF THE REGIONAL TRIAL COURT OF
statement computation of the proper interest payments based on the MAKATI CITY, BRANCH 59 (RTC) BY ORDERING
received dates of receipt of written notice. EQUITABLE PCI BANK[5](RESPONDENT) TO PAY
  PETITIONERS P1,516,015.07 WITH INTEREST AT THE
14 02/12/98 02/20/98 02/18/98 6
SO ORDERED. LEGAL RATE OF 12% PER ANNUM STARTING 6 MAY
    1994 UNTIL THE AMOUNT IS FULLY PAID.
PN #1077 P3.9MM PAN PACIFIC SERVICE G.R. No. 169975
CONTRACTORS, INC.   The Facts
Reference Interest Period Date Billing Number of and Present:
No. Statements days Billing RICARDO F. DEL   Pan Pacific Service Contractors, Inc. (Pan Pacific) is
were faxed Statement ROSARIO, CARPIO, J., Chairperson, engaged in contracting mechanical works
to was Late Petitioners, BRION, on airconditioning system. On 24 November 1989, Pan
Permanent   DEL CASTILLO, Pacific, through its President, Ricardo F. Del Rosario (Del
10 07/15/97 08/14/97 08/14/97 30   ABAD, and Rosario), entered into a contract of mechanical works
  PEREZ, JJ. (Contract) with respondent for P20,688,800. Pan Pacific and
11 08/14/97 08/26/97 08/26/97 12 - versus -   respondent also agreed on nine change orders
    for P2,622,610.30. Thus, the total consideration for the whole
5 08/26/97 09/12/97 09/10/97 15
    project was P23,311,410.30.[6]The Contract stipulated,
6 09/12/97 10/13/97 10/06/97 24   Promulgated: among others, that Pan Pacific shall be entitled to a price
EQUITABLE PCI BANK   adjustment in case of increase in labor costs and prices of
7 10/13/97 11/12/97 11/11/97 29 (formerly THE March 18, 2010 materials under paragraphs 70.1[7]and 70.2[8]of the General
12 11/12/97 12/12/97 12/10/97 28 PHILIPPINE Conditions for the Construction of PCIB Tower II Extension
COMMERCIAL (the escalation clause).[9]
9 12/12/97 01/12/98 01/09/98 28 INTERNATIONAL  
BANK),  
13 01/12/98 02/09/98 02/09/98 28
Respondent. Pursuant to the contract, Pan Pacific commenced the
  02/09/98 02/11/98   no mechanical works in the project site, the PCIB Tower II
statement extension building in Makati City. The project was completed
received X-------------------------- --------------- in June 1992. Respondent accepted the project on 9 July
-X 1992.[10]
14 02/11/98 03/13/98 02/18/98 7
 
  In 1990, labor costs and prices of materials escalated. On 5
 
We rule that Solidbanks computation of the interest due April 1991, in accordance with the escalation clause, Pan
DECISION
from Permanent should be adjusted to take effect only Pacific claimed a price adjustment of P5,165,945.52.
 
upon Permanents receipt of the written notice from Respondents appointed project engineer, TCGI Engineers,
 
Solidbank. asked for a reduction in the price adjustment. To show
CARPIO, J.:
  goodwill, Pan Pacific reduced the price adjustment
 
to P4,858,548.67.[11]

Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman 10
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in General
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On 28 April 1992, TCGI Engineers recommended to
respondent that the price adjustment should be pegged
at P3,730,957.07. TCGI Engineers based their evaluation of
the price adjustment on the following factors:
1. Labor Indices of the Department of Labor and
Employment.
2.      PRICE INDEX OF THE NATIONAL STATISTICS
OFFICE.
PD 1594 AND ITS IMPLEMENTING RULES AND
REGULATIONS AS AMENDED, 15 MARCH 1991.
SHIPPING DOCUMENTS SUBMITTED BY PPSCI.
SUB-CLAUSE 70.1 OF THE GENERAL CONDITIONS OF
THE CONTRACT DOCUMENTS.[12]
 
Pan Pacific contended that with this recommendation,
respondent was already estopped from disclaiming liability of
at least P3,730,957.07 in accordance with the escalation
clause.[13]
Due to the extraordinary increases in the costs of labor
and materials, Pan Pacifics operational capital was
becoming inadequate for the project. However,
respondent withheld the payment of the price
adjustment under the escalation clause despite Pan
Pacifics repeated demands.[14]Instead, respondent offered
Pan Pacific a loan of P1.8 million. Against its will and on the
strength of respondents promise that the price adjustment
would be released soon, Pan Pacific, through Del Rosario,
was constrained to execute a promissory note in the amount
of P1.8 million as a requirement for the loan. Pan Pacific also
posted a surety bond. The P1.8 million was released directly
to laborers and suppliers and not a single centavo was given
to Pan Pacific.[15]
Pan Pacific made several demands for payment on the price
adjustment but respondent merely kept on promising to
release the same. Meanwhile, the P1.8 million loan matured
and respondent demanded payment plus interest and
penalty. Pan Pacific refused to pay the loan. Pan Pacific
insisted that it would not have incurred the loan if respondent
released the price adjustment on time. Pan Pacific alleged
that the promissory note did not express the true agreement
of the parties. Pan Pacific maintained that the P1.8 million
was to be considered as an advance payment on the price
adjustment. Therefore, there was really no consideration for
the promissory note; hence, it is null and void from the
beginning.[16]
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
Respondent stood firm that it would not release any amount
of the price adjustment to Pan Pacific but it would offset the
price adjustment with Pan Pacifics outstanding balance
of P3,226,186.01, representing the loan, interests, penalties
and collection charges.[17]
Pan Pacific refused the offsetting but agreed to receive the
reduced amount of P3,730,957.07 as recommended by the
TCGI Engineers for the purpose of extrajudicial settlement,
less P1.8 million and P414,942 as advance payments.[18]
 
On 6 May 1994, petitioners filed a complaint for declaration
of nullity/annulment of the promissory note, sum of money,
and damages against the respondent with the RTC
of Makati City, Branch 59. On 12 April 1999, the RTC
rendered its decision, the dispositive portion of which reads:
WHEREFORE, PREMISES CONSIDERED, JUDGMENT IS
HEREBY RENDERED IN FAVOR OF THE PLAINTIFFS
AND AGAINST THE DEFENDANT AS FOLLOWS:
1.      DECLARING THE PROMISSORY NOTE (EXHIBIT B)
NULL AND VOID;
ORDERING THE DEFENDANT TO PAY THE PLAINTIFFS
THE FOLLOWING AMOUNTS:
A.     P1,389,111.10 REPRESENTING UNPAID BALANCE
OF THE ADJUSTMENT PRICE, WITH INTEREST
THEREON AT THE LEGAL RATE OF TWELVE (12%)
PERCENT PER ANNUM STARTING MAY 6, 1994, THE
DATE WHEN THE COMPLAINT WAS FILED, UNTIL THE
AMOUNT IS FULLY PAID;
P100,000.00 REPRESENTING MORAL DAMAGES;
P50,000.00 REPRESENTING EXEMPLARY DAMAGES;
AND
P50,000.00 AS AND FOR ATTORNEYS FEES.
2.      DISMISSING DEFENDANTS COUNTERCLAIM, FOR
LACK OF MERIT; AND
WITH COSTS AGAINST THE DEFENDANT.
SO ORDERED.[19]
 
On 23 May 1999, petitioners partially appealed the RTC
Decision to the CA. On 26 May 1999, respondent appealed
the entire RTC Decision for being contrary to law and
evidence. In sum, the appeals of the parties with the CA are
as follows:
1.  WITH RESPECT TO THE PETITIONERS, WHETHER
THE RTC ERRED IN DEDUCTING THE AMOUNT
OF P126,903.97 FROM THE BALANCE OF THE
ADJUSTED PRICE AND IN AWARDING ONLY 12%
ANNUAL INTEREST ON THE AMOUNT DUE, INSTEAD OF
THE BANK LOAN RATE OF 18% COMPOUNDED
ANNUALLY BEGINNING SEPTEMBER 1992.
2. With respect to respondent, whether the RTC erred in
declaring the promissory note void and in awarding moral
and exemplary damages and attorneys fees in favor of
petitioners and in dismissing its counterclaim.
In its decision dated 30 June 2005, the CA modified the RTC
decision, with respect to the principal amount due to
petitioners. The CA removed the deduction
of P126,903.97 because it represented the final payment on
the basic contract price. Hence, the CA ordered respondent
to pay P1,516,015.07 to petitioners, with interest at the legal
rate of 12% per annum starting 6 May 1994.[20]
On 26 July 2005, petitioners filed a Motion for Partial
Reconsideration seeking a reconsideration of the CAs
Decision imposing the legal rate of 12%. Petitioners claimed
that the interest rate applicable should be the 18% bank
lending rate. Respondent likewise filed a Motion for
Reconsideration of the CAs decision. In a Resolution dated 5
October 2005, the CA denied both motions.
AGGRIEVED BY THE CAS DECISION, PETITIONERS
ELEVATED THE CASE BEFORE THIS COURT.
 
The Issue
 
Petitioners submit this sole issue for our consideration:
Whether the CA, in awarding the unpaid balance of the price
adjustment, erred in fixing the interest rate at 12% instead of
the 18% bank lending rate.
 
Ruling of the Court
 
We grant the petition.
 
This Court notes that respondent did not appeal the decision
of the CA. Hence, there is no longer any issue as to the
principal amount of the unpaid balance on the price
adjustment, which the CA correctly computed
at P1,516,015.07. The only remaining issue is the interest
rate applicable for respondents delay in the payment of the
balance of the price adjustment.
The CA denied petitioners claim for the application of the
bank lending rate of 18% compounded annually reasoning,
to wit:
Anent the 18% interest rate compounded annually, while
it is true that the contract provides for an interest at the
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current bank lending rate in case of delay in payment by
the Owner, and the promissory note charged an interest
of 18%, the said proviso does not authorize plaintiffs to
unilaterally raise the interest rate without the other
partys consent. Unlike their request for price adjustment on
the basic contract price, plaintiffs never informed nor sought
the approval of defendant for the imposition of 18% interest
on the adjusted price. To unilaterally increase the interest
rate of the adjusted price would be violative of the principle of
mutuality of contracts. Thus, the Court maintains the legal
rate of twelve percent per annum starting from the date of
judicial demand. Although the contract provides for the
period when the recommendation of the TCGI Engineers as
to the price adjustment would be binding on the parties, it
was established, however, that part of the adjusted price
demanded by plaintiffs was already disbursed as early as 28
February 1992 by defendant bank to their suppliers and
laborers for their account.[21]
 
In this appeal, petitioners allege that the contract between
the parties consists of two parts, the Agreement [22]and the
General Conditions,[23]both of which provide for interest at the
bank lending rate on any unpaid amount due under the
contract. Petitioners further claim that there is nothing in the
contract which requires the consent of the respondent to be
given in order that petitioners can charge the bank lending
rate.[24]Specifically, petitioners invoke Section 2.5 of the
Agreement and Section 60.10 of the General Conditions as
follows:
Agreement
2.5    IF ANY PAYMENT IS DELAYED, THE
CONTRACTOR MAY CHARGE INTEREST THEREON AT
THE CURRENT BANK LENDING RATES, WITHOUT
PREJUDICE TO OWNERS RECOURSE TO ANY OTHER
REMEDY AVAILABLE UNDER EXISTING LAW.[25]
GENERAL CONDITIONS
60.10 TIME FOR PAYMENT
THE AMOUNT DUE TO THE CONTRACTOR UNDER ANY
INTERIM CERTIFICATE ISSUED BY THE ENGINEER
PURSUANT TO THIS CLAUSE, OR TO ANY TERM OF
THE CONTRACT, SHALL, SUBJECT TO CLAUSE 47, BE
PAID BY THE OWNER TO THE CONTRACTOR WITHIN 28
DAYS AFTER SUCH INTERIM CERTIFICATE HAS BEEN
DELIVERED TO THE OWNER, OR, IN THE CASE OF THE
FINAL CERTIFICATE REFERRED TO IN SUB-CLAUSE
60.8, WITHIN 56 DAYS, AFTER SUCH FINAL
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
CERTIFICATE HAS BEEN DELIVERED TO THE OWNER.
IN THE EVENT OF THE FAILURE OF THE OWNER TO
MAKE PAYMENT WITHIN THE TIMES STATED, THE
OWNER SHALL PAY TO THE CONTRACTOR INTEREST
AT THE RATE BASED ON BANKING LOAN RATES
PREVAILING AT THE TIME OF THE SIGNING OF THE
CONTRACT UPON ALL SUMS UNPAID FROM THE DATE
BY WHICH THE SAME SHOULD HAVE BEEN PAID. THE
PROVISIONS OF THIS SUB-CLAUSE ARE WITHOUT
PREJUDICE TO THE CONTRACTORS ENTITLEMENT
UNDER CLAUSE 69.[26](EMPHASIS SUPPLIED)
 
Petitioners thus submit that it is automatically entitled to the
bank lending rate of interest from the time an amount is
determined to be due thereto, which respondent should have
paid. Therefore, as petitioners have already proven their
entitlement to the price adjustment, it necessarily follows that
the bank lending interest rate of 18% shall be applied.[27]
On the other hand, respondent insists that under the
provisions of 70.1 and 70.2 of the General Conditions, it is
stipulated that any additional cost shall be determined by the
Engineer and shall be added to the contract price after due
consultation with the Owner, herein respondent. Hence,
there being no prior consultation with the respondent
regarding the additional cost to the basic contract price, it
naturally follows that respondent was never consulted or
informed of the imposition of 18% interest rate compounded
annually on the adjusted price.[28]
A perusal of the assailed decision shows that the CA made a
distinction between the consent given by the owner of the
project for the liability for the price adjustments, and the
consent for the imposition of the bank lending rate. Thus,
while the CA held that petitioners consulted respondent for
price adjustment on the basic contract price, petitioners,
nonetheless, are not entitled to the imposition of 18% interest
on the adjusted price, as petitioners never informed or
sought the approval of respondent for such imposition.[29]
We disagree.
It is settled that the agreement or the contract between the
parties is the formal expression of the parties rights, duties,
and obligations. It is the best evidence of the intention of the
parties. Thus, when the terms of an agreement have been
reduced to writing, it is considered as containing all the terms
agreed upon and there can be, between the parties and their
successors in interest, no evidence of such terms other than
the contents of the written agreement.[30]
The escalation clause of the contract provides:
CHANGES IN COST AND LEGISLATION
70.1 Increase or Decrease of Cost
There shall be added to or deducted from the Contract Price
such sums in respect of rise or fall in the cost of labor and/or
materials or any other matters affecting the cost of the
execution of the Works as may be determined.
 
70.2 Subsequent Legislation
If, after the date 28 days prior to the latest date of
submission of tenders for the Contract there occur in the
country in which the Works are being or are to be executed
changes to any National or State Statute, Ordinance, Decree
or other Law or any regulation or bye-law (sic) of any local or
other duly constituted authority, or the introduction of any
such State Statute, Ordinance, Decree, Law, regulation or
bye-law (sic) which causes additional or reduced cost to the
contractor, other than under Sub-Clause 70.1, in the
execution of the Contract, such additional or reduced cost
shall, after due consultation with the Owner and Contractor,
be determined by the Engineer and shall be added to or
deducted from the Contract Price and the Engineer shall
notify the Contractor accordingly, with a copy to the Owner.
[31]
 
In this case, the CA already settled that petitioners consulted
respondent on the imposition of the price adjustment, and
held respondent liable for the balance of P1,516,015.07.
Respondent did not appeal from the decision of the CA;
hence, respondent is estopped from contesting such fact.
 
However, the CA went beyond the intent of the parties by
requiring respondent to give its consent to the imposition of
interest before petitioners can hold respondent liable for
interest at the current bank lending rate. This is erroneous. A
review of Section 2.6 of the Agreement and Section 60.10 of
the General Conditions shows that the consent of the
respondent is not needed for the imposition of interest at the
current bank lending rate, which occurs upon any delay in
payment.
 
When the terms of a contract are clear and leave no doubt
as to the intention of the contracting parties, the literal
meaning of its stipulations governs. In these cases, courts
have no authority to alter a contract by construction or to
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make a new contract for the parties. The Courts duty is
confined to the interpretation of the contract which the parties
have made for themselves without regard to its wisdom or
folly as the court cannot supply material stipulations or read
into the contract words which it does not contain. It is only
when the contract is vague and ambiguous that courts are
permitted to resort to construction of its terms and determine
the intention of the parties.[32]
 
The escalation clause must be read in conjunction with
Section 2.5 of the Agreement and Section 60.10 of the
General Conditions which pertain to the time of payment.
Once the parties agree on the price adjustment after due
consultation in compliance with the provisions of the
escalation clause, the agreement is in effect an amendment
to the original contract, and gives rise to the liability of
respondent to pay the adjusted costs. Under Section 60.10
of the General Conditions, the respondent shall pay such
liability to the petitioner within 28 days from issuance of the
interim certificate. Upon respondents failure to pay within the
time provided (28 days), then it shall be liable to pay the
stipulated interest.
 
This is the logical interpretation of the agreement of the
parties on the imposition of interest. To provide a contrary
interpretation, as one requiring a separate consent for the
imposition of the stipulated interest, would render the
intentions of the parties nugatory.
 
Article 1956 of the Civil Code, which refers to monetary
interest, specifically mandates that no interest shall be due
unless it has been expressly stipulated in writing. Therefore,
payment of monetary interest is allowed only if:
(1) there was an express stipulation for the payment of
interest; and
(2) the agreement for the payment of interest was reduced in
writing. The concurrence of the two conditions is required for
the payment of monetary interest.[33]
We agree with petitioners interpretation that in case of
default, the consent of the respondent is not needed in order
to impose interest at the current bank lending rate.
 
Applicable Interest Rate
Under Article 2209 of the Civil Code, the appropriate
measure for damages in case of delay in discharging an
obligation consisting of the payment of a sum of money is the
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
payment of penalty interest at the rate agreed upon in the
contract of the parties. In the absence of a stipulation of a
particular rate of penalty interest, payment of additional
interest at a rate equal to the regular monetary interest
becomes due and payable. Finally, if no regular interest
had been agreed upon by the contracting parties, then
the damages payable will consist of payment of legal
interest which is 6%, or in the case of loans or
forbearances of money, 12% per annum.[34]It is only
when the parties to a contract have failed to fix the rate
of interest or when such amount is unwarranted that the
Court will apply the 12% interest per annum on a loan or
forbearance of money.[35]
The written agreement entered into between petitioners and
respondent provides for an interest at the current bank
lending rate in case of delay in payment and the promissory
note charged an interest of 18%.
 
To prove petitioners entitlement to the 18% bank lending
rate of interest, petitioners presented the promissory
note[36]prepared by respondent bank itself. This
promissory note, although declared void by the lower
courts because it did not express the real intention of
the parties, is substantial proof that the bank lending
rate at the time of default was 18% per annum. Absent
any evidence of fraud, undue influence or any vice of
consent exercised by petitioners against the
respondent, the interest rate agreed upon is binding on
them.[37]
WHEREFORE, we GRANT the petition. We SET ASIDE the
Decision and Resolution of the Court of Appeals in CA-G.R.
CV No. 63966. We ORDER respondent to pay
petitioners P1,516,015.07 with interest at the bank lending
rate of 18% per annum starting 6 May 1994 until the amount
is fully paid.
 
SO ORDERED.
G.R. No. 189871               August 13, 2013
DARIO NACAR, PETITIONER, 
vs.
GALLERY FRAMES AND/OR FELIPE BORDEY,
JR., RESPONDENTS.
DECISION
PERALTA, J.:
This is a petition for review on certiorari assailing the
Decision1 dated September 23, 2008 of the Court of Appeals
(CA) in CA-G.R. SP No. 98591, and the Resolution 2 dated
October 9, 2009 denying petitioner’s motion for
reconsideration.
The factual antecedents are undisputed.
Petitioner Dario Nacar filed a complaint for constructive
dismissal before the Arbitration Branch of the National Labor
Relations Commission (NLRC) against respondents Gallery
Frames (GF) and/or Felipe Bordey, Jr., docketed as NLRC
NCR Case No. 01-00519-97.
On October 15, 1998, the Labor Arbiter rendered a
Decision3 in favor of petitioner and found that he was
dismissed from employment without a valid or just cause.
Thus, petitioner was awarded backwages and separation
pay in lieu of reinstatement in the amount of ₱158,919.92.
The dispositive portion of the decision, reads:
With the foregoing, we find and so rule that respondents
failed to discharge the burden of showing that complainant
was dismissed from employment for a just or valid cause. All
the more, it is clear from the records that complainant was
never afforded due process before he was terminated. As
such, we are perforce constrained to grant complainant’s
prayer for the payments of separation pay in lieu of
reinstatement to his former position, considering the strained
relationship between the parties, and his apparent reluctance
to be reinstated, computed only up to promulgation of this
decision as follows:
SEPARATION PAY
Date Hired = August 1990
Rate = ₱198/day
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Date of Decision = Aug. 18, 1998 All other claims are hereby dismissed for lack of merit. Order15 denying the motion. Thus, an Alias Writ of
Execution16 was issued on January 14, 2003.
SO ORDERED.4
Length of Service = 8 yrs. & 1 month
Respondents again appealed before the NLRC, which on
June 30, 2003 issued a Resolution 17 granting the appeal in
Respondents appealed to the NLRC, but it was dismissed for
₱198.00 x 26 days x 8 months = ₱41,184.00 favor of the respondents and ordered the recomputation of
lack of merit in the Resolution5 dated February 29, 2000.
the judgment award.
Accordingly, the NLRC sustained the decision of the Labor
BACKWAGES Arbiter. Respondents filed a motion for reconsideration, but it
was denied.6 On August 20, 2003, an Entry of Judgment was issued
declaring the Resolution of the NLRC to be final and
Date Dismissed = January 24, 1997
executory. Consequently, another pre-execution conference
Dissatisfied, respondents filed a Petition for Review on
was held, but respondents failed to appear on time.
Certiorari before the CA. On August 24, 2000, the CA issued
Rate per day = ₱196.00 Meanwhile, petitioner moved that an Alias Writ of Execution
a Resolution dismissing the petition. Respondents filed a
be issued to enforce the earlier recomputed judgment award
Motion for Reconsideration, but it was likewise denied in a
in the sum of ₱471,320.31.18
Date of Decisions = Aug. 18, 1998 Resolution dated May 8, 2001. 7

The records of the case were again forwarded to the

a) 1/24/97 to 2/5/98 = 12.36 mos.
₱196.00/day x 12.36 mos.
Respondents then sought relief before the Supreme Court,
Computation and Examination Unit for recomputation, where
docketed as G.R. No. 151332. Finding no reversible error on
the judgment award of petitioner was reassessed to be in the
the part of the CA, this Court denied the petition in the
= ₱62,986.56 total amount of only ₱147,560.19.
Resolution dated April 17, 2002.8

b) 2/6/98 to 8/18/98 = 6.4 months
Prevailing Rate per day = ₱62,986.00
₱198.00 x 26 days x 6.4 mos. = ₱32,947.20
TOTAL = ₱95.933.76
xxxx
WHEREFORE, premises considered, judgment is hereby
rendered finding respondents guilty of constructive dismissal
and are therefore, ordered:
To pay jointly and severally the complainant the amount of
sixty-two thousand nine hundred eighty-six pesos and
56/100 (₱62,986.56) Pesos representing his separation pay;
To pay jointly and severally the complainant the amount of
nine (sic) five thousand nine hundred thirty-three and 36/100
(₱95,933.36) representing his backwages; and
An Entry of Judgment was later issued certifying that the
resolution became final and executory on May 27, 2002. 9The
case was, thereafter, referred back to the Labor Arbiter. A
pre-execution conference was consequently scheduled, but
respondents failed to appear.10
On November 5, 2002, petitioner filed a Motion for Correct
Computation, praying that his backwages be computed from
the date of his dismissal on January 24, 1997 up to the
finality of the Resolution of the Supreme Court on May 27,
2002.11 Upon recomputation, the Computation and
Examination Unit of the NLRC arrived at an updated amount
in the sum of ₱471,320.31.12
On December 2, 2002, a Writ of Execution 13 was issued by
the Labor Arbiter ordering the Sheriff to collect from
respondents the total amount of ₱471,320.31. Respondents
filed a Motion to Quash Writ of Execution, arguing, among
other things, that since the Labor Arbiter awarded separation
pay of ₱62,986.56 and limited backwages of ₱95,933.36, no
more recomputation is required to be made of the said
awards. They claimed that after the decision becomes final
and executory, the same cannot be altered or amended
anymore.14 On January 13, 2003, the Labor Arbiter issued an
Petitioner then moved that a writ of execution be issued
ordering respondents to pay him the original amount as
determined by the Labor Arbiter in his Decision dated
October 15, 1998, pending the final computation of his
backwages and separation pay.
On January 14, 2003, the Labor Arbiter issued an Alias Writ
of Execution to satisfy the judgment award that was due to
petitioner in the amount of ₱147,560.19, which petitioner
eventually received.
Petitioner then filed a Manifestation and Motion praying for
the re-computation of the monetary award to include the
appropriate interests.19
On May 10, 2005, the Labor Arbiter issued an
Order20 granting the motion, but only up to the amount of
₱11,459.73. The Labor Arbiter reasoned that it is the
October 15, 1998 Decision that should be enforced
considering that it was the one that became final and
executory. However, the Labor Arbiter reasoned that since
the decision states that the separation pay and backwages
are computed only up to the promulgation of the said
decision, it is the amount of ₱158,919.92 that should be

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executed. Thus, since petitioner already received
₱147,560.19, he is only entitled to the balance of
₱11,459.73.
Petitioner then appealed before the NLRC,21 which appeal
was denied by the NLRC in its Resolution 22 dated September
27, 2006. Petitioner filed a Motion for Reconsideration, but it
was likewise denied in the Resolution 23dated January 31,
2007.
Aggrieved, petitioner then sought recourse before the CA,
docketed as CA-G.R. SP No. 98591.
On September 23, 2008, the CA rendered a
Decision24 denying the petition. The CA opined that since
petitioner no longer appealed the October 15, 1998 Decision
of the Labor Arbiter, which already became final and
executory, a belated correction thereof is no longer allowed.
The CA stated that there is nothing left to be done except to
enforce the said judgment. Consequently, it can no longer be
modified in any respect, except to correct clerical errors or
mistakes.
Petitioner filed a Motion for Reconsideration, but it was
denied in the Resolution25 dated October 9, 2009.
Hence, the petition assigning the lone error:
I because the computation is already in the labor arbiter's
WITH DUE RESPECT, THE HONORABLE COURT OF
APPEALS SERIOUSLY ERRED, COMMITTED GRAVE
ABUSE OF DISCRETION AND DECIDED CONTRARY TO
LAW IN UPHOLDING THE QUESTIONED RESOLUTIONS
OF THE NLRC WHICH, IN TURN, SUSTAINED THE MAY
10, 2005 ORDER OF LABOR ARBITER MAGAT MAKING
THE DISPOSITIVE PORTION OF THE OCTOBER 15, 1998
DECISION OF LABOR ARBITER LUSTRIA SUBSERVIENT
TO AN OPINION EXPRESSED IN THE BODY OF THE
SAME DECISION.26
Petitioner argues that notwithstanding the fact that there was
a computation of backwages in the Labor Arbiter’s decision,
the same is not final until reinstatement is made or until
finality of the decision, in case of an award of separation pay.
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
Petitioner maintains that considering that the October 15,
1998 decision of the Labor Arbiter did not become final and
executory until the April 17, 2002 Resolution of the Supreme
Court in G.R. No. 151332 was entered in the Book of Entries
on May 27, 2002, the reckoning point for the computation of
the backwages and separation pay should be on May 27,
2002 and not when the decision of the Labor Arbiter was
rendered on October 15, 1998. Further, petitioner posits that
he is also entitled to the payment of interest from the finality
of the decision until full payment by the respondents.
On their part, respondents assert that since only separation
pay and limited backwages were awarded to petitioner by the
October 15, 1998 decision of the Labor Arbiter, no more
recomputation is required to be made of said awards.
Respondents insist that since the decision clearly stated that
the separation pay and backwages are "computed only up to
[the] promulgation of this decision," and considering that
petitioner no longer appealed the decision, petitioner is only
entitled to the award as computed by the Labor Arbiter in the
total amount of ₱158,919.92. Respondents added that it was
only during the execution proceedings that the petitioner
questioned the award, long after the decision had become
final and executory. Respondents contend that to allow the
further recomputation of the backwages to be awarded to
petitioner at this point of the proceedings would substantially
vary the decision of the Labor Arbiter as it violates the rule
on immutability of judgments.
The petition is meritorious.
The instant case is similar to the case of Session Delights
Ice Cream and Fast Foods v. Court of Appeals (Sixth
Division),27 wherein the issue submitted to the Court for
resolution was the propriety of the computation of the awards
made, and whether this violated the principle of immutability
of judgment. Like in the present case, it was a distinct
feature of the judgment of the Labor Arbiter in the
above-cited case that the decision already provided for
the computation of the payable separation pay and
backwages due and did not further order the
computation of the monetary awards up to the time of
the finality of the judgment. Also in Session Delights, the
dismissed employee failed to appeal the decision of the labor
arbiter. The Court clarified, thus:
In concrete terms, the question is whether a re-
computation in the course of execution of the labor
arbiter's original computation of the awards made,
pegged as of the time the decision was rendered and
confirmed with modification by a final CA decision, is
legally proper. The question is posed, given that the
petitioner did not immediately pay the awards stated in the
original labor arbiter's decision; it delayed payment because
it continued with the litigation until final judgment at the CA
level.
A source of misunderstanding in implementing the final
decision in this case proceeds from the way the original labor
arbiter framed his decision. The decision consists essentially
of two parts.
The first is that part of the decision that cannot now be
disputed because it has been confirmed with finality. This is
the finding of the illegality of the dismissal and the awards of
separation pay in lieu of reinstatement, backwages,
attorney's fees, and legal interests.
The second part is the computation of the awards made. On
its face, the computation the labor arbiter made shows that it
was time-bound as can be seen from the figures used in the
computation. This part, being merely a computation of what
the first part of the decision established and declared, can,
by its nature, be re-computed. This is the part, too, that the
petitioner now posits should no longer be re-computed
decision that the CA had affirmed. The public and private
respondents, on the other hand, posit that a re-computation
is necessary because the relief in an illegal dismissal
decision goes all the way up to reinstatement if reinstatement
is to be made, or up to the finality of the decision, if
separation pay is to be given in lieu reinstatement.
That the labor arbiter's decision, at the same time that it
found that an illegal dismissal had taken place, also made a
computation of the award, is understandable in light of
Section 3, Rule VIII of the then NLRC Rules of Procedure
which requires that a computation be made. This Section in
part states:
[T]he Labor Arbiter of origin, in cases involving monetary
awards and at all events, as far as practicable, shall embody
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in any such decision or order the detailed and full amount
awarded.
Clearly implied from this original computation is its currency
up to the finality of the labor arbiter's decision. As we noted
above, this implication is apparent from the terms of the
computation itself, and no question would have arisen had
the parties terminated the case and implemented the
decision at that point.
However, the petitioner disagreed with the labor arbiter's
findings on all counts - i.e., on the finding of illegality as well
as on all the consequent awards made. Hence, the petitioner
appealed the case to the NLRC which, in turn, affirmed the
labor arbiter's decision. By law, the NLRC decision is final,
reviewable only by the CA on jurisdictional grounds.
The petitioner appropriately sought to nullify the NLRC
decision on jurisdictional grounds through a timely filed Rule
65 petition for certiorari. The CA decision, finding that NLRC
exceeded its authority in affirming the payment of 13th month
pay and indemnity, lapsed to finality and was subsequently
returned to the labor arbiter of origin for execution.
It was at this point that the present case arose. Focusing on
the core illegal dismissal portion of the original labor arbiter's
decision, the implementing labor arbiter ordered the award
re-computed; he apparently read the figures originally
ordered to be paid to be the computation due had the case
been terminated and implemented at the labor arbiter's level.
Thus, the labor arbiter re-computed the award to include the
separation pay and the backwages due up to the finality of
the CA decision that fully terminated the case on the merits.
Unfortunately, the labor arbiter's approved computation went
beyond the finality of the CA decision (July 29, 2003) and
included as well the payment for awards the final CA
decision had deleted - specifically, the proportionate 13th
month pay and the indemnity awards. Hence, the CA issued
the decision now questioned in the present petition.
We see no error in the CA decision confirming that a re-
computation is necessary as it essentially considered the
labor arbiter's original decision in accordance with its basic
component parts as we discussed above. To reiterate, the
first part contains the finding of illegality and its monetary
consequences; the second part is the computation of the
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
awards or monetary consequences of the illegal dismissal,
computed as of the time of the labor arbiter's original
decision.28
Consequently, from the above disquisitions, under the terms
of the decision which is sought to be executed by the
petitioner, no essential change is made by a recomputation
as this step is a necessary consequence that flows from the
nature of the illegality of dismissal declared by the Labor
Arbiter in that decision. 29 A recomputation (or an original
computation, if no previous computation has been made) is a
part of the law – specifically, Article 279 of the Labor Code
and the established jurisprudence on this provision – that is
read into the decision. By the nature of an illegal dismissal
case, the reliefs continue to add up until full satisfaction, as
expressed under Article 279 of the Labor Code. The
recomputation of the consequences of illegal dismissal upon
execution of the decision does not constitute an alteration or
amendment of the final decision being implemented. The
illegal dismissal ruling stands; only the computation of
monetary consequences of this dismissal is affected, and
this is not a violation of the principle of immutability of final
judgments.30
That the amount respondents shall now pay has greatly
increased is a consequence that it cannot avoid as it is the
risk that it ran when it continued to seek recourses against
the Labor Arbiter's decision. Article 279 provides for the
consequences of illegal dismissal in no uncertain terms,
qualified only by jurisprudence in its interpretation of when
separation pay in lieu of reinstatement is allowed. When that
happens, the finality of the illegal dismissal decision
becomes the reckoning point instead of the reinstatement
that the law decrees. In allowing separation pay, the final
decision effectively declares that the employment
relationship ended so that separation pay and backwages
are to be computed up to that point. 31
Finally, anent the payment of legal interest. In the landmark
case of Eastern Shipping Lines, Inc. v. Court of
Appeals,32 the Court laid down the guidelines regarding the
manner of computing legal interest, to wit:
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it consists
in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be
that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall
be 12% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the
Civil Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed
at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or
until the demand can be established with
reasonable certainty. Accordingly, where the
demand is established with reasonable certainty,
the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169,
Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is
made, the interest shall begin to run only from the
date the judgment of the court is made (at which
time the quantification of damages may be
deemed to have been reasonably ascertained).
The actual base for the computation of legal
interest shall, in any case, be on the amount finally
adjudged.
3. When the judgment of the court awarding a sum
of money becomes final and executory, the rate of
legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12%
per annum from such finality until its satisfaction,
this interim period being deemed to be by then an
equivalent to a forbearance of credit.33
Recently, however, the Bangko Sentral ng Pilipinas
Monetary Board (BSP-MB), in its Resolution No. 796 dated
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May 16, 2013, approved the amendment of Section 234 of
Circular No. 905, Series of 1982 and, accordingly, issued
Circular No. 799, 35 Series of 2013, effective July 1, 2013, the
pertinent portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May
2013, approved the following revisions governing the rate of
interest in the absence of stipulation in loan contracts,
thereby amending Section 2 of Circular No. 905, Series of
1982:
Section 1. The rate of interest for the loan or forbearance of
any money, goods or credits and the rate allowed in
judgments, in the absence of an express contract as to such
rate of interest, shall be six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.1 36 of the
Manual of Regulations for Banks and Sections
4305Q.1,37 4305S.338 and 4303P.139 of the Manual of
Regulations for Non-Bank Financial Institutions are hereby
amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express
stipulation as to the rate of interest that would govern the
parties, the rate of legal interest for loans or forbearance of
any money, goods or credits and the rate allowed in
judgments shall no longer be twelve percent (12%) per
annum - as reflected in the case of Eastern Shipping
Lines40and Subsection X305.1 of the Manual of Regulations
for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of
the Manual of Regulations for Non-Bank Financial
Institutions, before its amendment by BSP-MB Circular No.
799 - but will now be six percent (6%) per annum
effective July 1, 2013. It should be noted, nonetheless,
that the new rate could only be applied prospectively
and not retroactively. Consequently, the twelve percent
(12%) per annum legal interest shall apply only until
June 30, 2013. Come July 1, 2013 the new rate of six
percent (6%) per annum shall be the prevailing rate of
interest when applicable.
Corollarily, in the recent case of Advocates for Truth in
Lending, Inc. and Eduardo B. Olaguer v. Bangko Sentral
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
Monetary Board,41 this Court affirmed the authority of the
BSP-MB to set interest rates and to issue and enforce
Circulars when it ruled that "the BSP-MB may prescribe the
maximum rate or rates of interest for all loans or renewals
thereof or the forbearance of any money, goods or credits,
including those for loans of low priority such as consumer
loans, as well as such loans made by pawnshops, finance
companies and similar credit institutions. It even authorizes
the BSP-MB to prescribe different maximum rate or rates for
different types of borrowings, including deposits and deposit
substitutes, or loans of financial intermediaries."
Nonetheless, with regard to those judgments that have
become final and executory prior to July 1, 2013, said
judgments shall not be disturbed and shall continue to be
implemented applying the rate of interest fixed
therein.1awp++i1
To recapitulate and for future guidance, the guidelines laid
down in the case of Eastern Shipping Lines 42 are accordingly
modified to embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e.,
law, contracts, quasi-contracts, delicts or quasi-
delicts is breached, the contravenor can be held
liable for damages. The provisions under Title
XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable
damages.1âwphi1
II. With regard particularly to an award of interest
in the concept of actual and compensatory
damages, the rate of interest, as well as the
accrual thereof, is imposed, as follows:
When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 6%
per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of
Article 1169 of the Civil Code.
When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the
rate of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages, except when
or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code), but when such certainty cannot be so
reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment of
the court is made (at which time the quantification of
damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.
When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2,
above, shall be 6% per annum from such finality until its
satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become
final and executory prior to July 1, 2013, shall not be
disturbed and shall continue to be implemented applying the
rate of interest fixed therein.
WHEREFORE, premises considered, the Decision dated
September 23, 2008 of the Court of Appeals in CA-G.R. SP
No. 98591, and the Resolution dated October 9, 2009 are
REVERSED and SET ASIDE. Respondents are Ordered to
Pay petitioner:
(1) backwages computed from the time petitioner
was illegally dismissed on January 24, 1997 up to
May 27, 2002, when the Resolution of this Court in
G.R. No. 151332 became final and executory;
(2) separation pay computed from August 1990 up
to May 27, 2002 at the rate of one month pay per
year of service; and
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CREDIT TRANSACTIONS – PART 2: LOAN (Articles 1933 – 1961) III. Mutuum & Usury Law – PART III: DEPOSIT (Articles 1962 – 2009) I. Deposit
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(3) interest of twelve percent (12%) per annum of
the total monetary awards, computed from May 27,
2002 to June 30, 2013 and six percent (6%) per
annum from July 1, 2013 until their full satisfaction.
The Labor Arbiter is hereby ORDERED to make another
recomputation of the total monetary benefits awarded and
due to petitioner in accordance with this Decision.
SO ORDERED.
G.R. No. 195166
SPOUSES SALVADOR ABELLA AND ALMA
ABELLA, Petitioners,  Petitioners added that respondents were able to pay a total
vs.
SPOUSES ROMEO ABELLA AND ANNIE
ABELLA, Respondents.
DECISION
LEONEN, J.:
This resolves a Petition for Review on Certiorari under Rule
45 of the Rules of Court praying that judgment be rendered
reversing and setting aside the September 30, 2010
Decision1 and the January 4, 2011 Resolution 2 of the Court
of Appeals Nineteenth Division in CA-G.R. CV No. 01388.
The Petition also prays that respondents Spouses Romeo
and Annie Abella be ordered to pay petitioners Spouses
Salvador and Alma Abella 2.5% monthly interest plus the
remaining balance of the amount loaned.
The assailed September 30, 2010 Decision of the Court of
Appeals reversed and set aside the December 28, 2005
Decision3 of the Regional Trial Court, Branch 8, Kalibo,
Aklan in Civil Case No. 6627. It directed petitioners to pay
respondents P148,500.00 (plus interest), which was the
amount respondents supposedly overpaid. The assailed
January 4, 2011 Resolution of the Court of Appeals denied
petitioners’ Motion for Reconsideration.
The Regional Trial Court’s December 28, 2005 Decision
ordered respondents to pay petitioners the supposedly
unpaid loan balance of P300,000.00 plus the allegedly
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
stipulated interest rate of 30% per annum, as well as
litigation expenses and attorney’s fees.4
On July 31, 2002, petitioners Spouses Salvador and Alma
Abella filed a Complaint 5 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. The case was docketed as
Civil Case No. 6627. 6
In their Complaint, petitioners alleged that respondents
obtained a loan from them in the amount of P500,000.00.
The loan was evidenced by an acknowledgment receipt
dated March 22, 1999 and was payable within one (1) year.
of P200,000.00— P100,000.00 paid on two separate
occasions—leaving an unpaid balance of P300,000.00.7
In their Answer8 (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.9
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]." 10 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.11
In the Decision12 dated December 28, 2005, the Regional
Trial Court ruled in favor of petitioners. It noted that the terms
of the acknowledgment receipt executed by respondents
clearly showed that: (a) respondents were indebted to the
extent of P500,000.00; (b) this indebtedness was to be paid
within one (1) year; and (c) the indebtedness was subject to
interest. Thus, the trial court concluded that respondents
obtained a simple loan, although they later invested its
proceeds in a lending enterprise. 13 The Regional Trial Court
adjudged respondents solidarily liable to petitioners. The
dispositive portion of its Decision reads:
WHEREFORE, premises considered, judgment is hereby
rendered:
1. Ordering the defendants jointly and severally to
pay the plaintiffs the sum of P300,000.00 with
interest at the rate of 30% per annum from the
time the complaint was filed on July 31, 2002 until
fully paid;
2. Ordering the defendants to pay the plaintiffs the
sum of P2,227.50 as reimbursement for litigation
expenses, and another sum of P5,000.00 as
attorney’s fees.
For lack of legal basis, plaintiffs’ claim for moral and
exemplary damages has to be denied, and for lack of merit
the counter-claim is ordered dismissed.14
In the Order dated March 13, 2006, 15 the Regional Trial
Court denied respondents’ Motion for Reconsideration.
On respondents’ appeal, the Court of Appeals ruled that
while respondents had indeed entered into a simple loan with
petitioners, respondents were no longer liable to pay the
outstanding amount of P300,000.00.16
The Court of Appeals reasoned that the loan could not have
earned interest, whether as contractually stipulated interest
or as interest in the concept of actual or compensatory
damages. As to the loan’s not having earned stipulated
interest, the Court of Appeals anchored its ruling on Article
1956 of the Civil Code, which requires interest to be
stipulated in writing for it to be due. 17 The Court of Appeals
noted that while the acknowledgement receipt showed that
interest was to be charged, no particular interest rate was
specified.18 Thus, at the time respondents were making
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CREDIT TRANSACTIONS – PART 2: LOAN (Articles 1933 – 1961) III. Mutuum & Usury Law – PART III: DEPOSIT (Articles 1962 – 2009) I. Deposit
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interest payments of 2.5% per month, these interest
payments were invalid for not being properly stipulated by
the parties. As to the loan’s not having earned interest in the
concept of actual or compensatory damages, the Court of
Appeals, citing Eusebio-Calderon v. People,19 noted that
interest in the concept of actual or compensatory damages
accrues only from the time that demand (whether judicial or
extrajudicial) is made. It reasoned that since respondents
received petitioners’ demand letter only on July 12, 2002,
any interest in the concept of actual or compensatory
damages due should be reckoned only from then. Thus, the
payments for the 2.5% monthly interest made after the
perfection of the loan in 1999 but before the demand was
made in 2002 were invalid.20
Since petitioners’ charging of interest was invalid, the Court
of Appeals reasoned that all payments respondents made by
way of interest should be deemed payments for the principal
amount of P500,000.00.21
The Court of Appeals further noted that respondents made a
total payment of P648,500.00, which, as against the principal
amount of P500,000.00, entailed an overpayment of
P148,500.00. Applying the principle of solutio indebiti, the
Court of Appeals concluded that petitioners were liable to
reimburse respondents for the overpaid amount of
P148,500.00.22 The dispositive portion of the assailed Court
of Appeals Decision reads:
WHEREFORE, the Decision of the Regional Trial Court is
hereby REVERSED and SET ASIDE, and a new one issued,
finding that the Spouses Salvador and Alma Abella
are DIRECTED to jointly and severally pay Spouses Romeo
and Annie Abella the amount of P148,500.00, with interest of
6% interest (sic) per annum to be computed upon receipt of
this decision, until full satisfaction thereof. Upon finality of
this judgment, an interest as the rate of 12% per annum,
instead of 6%, shall be imposed on the amount due, until full
payment thereof.23
In the Resolution24 dated January 4, 2011, the Court of
Appeals denied petitioners’ Motion for Reconsideration.
Aggrieved, petitioners filed the present appeal 25 where they
claim that the Court of Appeals erred in completely striking
off interest despite the parties’ written agreement stipulating
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
it, as well as in ordering them to reimburse and pay interest the document attesting to the relation of the parties. "If the
to respondents. terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its
stipulations shall control."32
In support of their contentions, petitioners cite Article 1371 of
the Civil Code,26 which calls for the consideration of the
contracting parties’ contemporaneous and subsequent acts Articles 1933 and 1953 of the Civil Code provide the
in determining their true intention. Petitioners insist that guideposts that determine if a contractual relation is one of
respondents’ consistent payment of interest in the year simple loan or mutuum:
following the perfection of the loan showed that interest at
2.5% per month was properly agreed upon despite its not
Art. 1933. By the contract of loan, one of the parties delivers
having been expressly stated in the acknowledgment receipt.
to another, either something not consumable so that the
They add that during the proceedings before the Regional
latter may use the same for a certain time and return it, in
Trial Court, respondents admitted that interest was due on
which case the contract is called a commodatum;
the loan.27
or money or other consumable thing, upon the condition that
the same amount of the same kind and quality shall be paid,
In their Comment,28 respondents reiterate the Court of in which case the contract is simply called a loan or mutuum.
Appeals’ findings that no interest rate was ever stipulated by
the parties and that interest was not due and demandable at
Commodatum is essentially gratuitous.
the time they were making interest payments.29
Simple loan may be gratuitous or with a stipulation to pay
In their Reply,30 petitioners argue that even though no
interest.
interest rate was stipulated in the acknowledgment receipt,
the case fell under the exception to the Parol Evidence Rule.
In commodatum the bailor retains the ownership of the thing
They also argue that there exists convincing and sufficiently
loaned, while in simple loan, ownership passes to the
credible evidence to supplement the imperfection of the
borrower.
acknowledgment receipt.31
For resolution are the following issues: ....
First, whether interest accrued on respondents’ loan Art. 1953. A person who receives a loan of money or any
from petitioners. If so, at what rate? other fungible thing acquires the ownership thereof, and is
bound to pay to the creditor an equal amount of the same
kind and quality. (Emphasis supplied)
Second, whether petitioners are liable to reimburse
respondents for the latter’s supposed excess payments
and for interest. On March 22, 1999, respondents executed an
acknowledgment receipt to petitioners, which states:
I
Batan, Aklan
As noted by the Court of Appeals and the Regional Trial
Court, respondents entered into a simple loan or mutuum, March 22, 1999
rather than a joint venture, with petitioners.
This is to acknowledge receipt of the Amount of Five
Respondents’ claims, as articulated in their testimonies Hundred Thousand (P500,000.00) Pesos from Mrs. Alma
before the trial court, cannot prevail over the clear terms of
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R. Abella, payable within one (1) year from date
hereof with interest.
Annie C. Abella (sgd.) Romeo M. Abella (sgd.) 33 (Emphasis
supplied)
The text of the acknowledgment receipt is
uncomplicated and straightforward. It attests to: first,
respondents’ receipt of the sum of P500,000.00 from
petitioner Alma Abella; second, respondents’ duty to
pay back this amount within one (1) year from March 22,
1999; 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.
II
Although we have settled the nature of the contractual
relation between petitioners and respondents, controversy
persists over respondents’ duty to pay conventional interest,
i.e., interest as the cost of borrowing money.34
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."
On the matter of interest, the text of the
acknowledgment receipt is simple, plain, and
unequivocal. It attests to the contracting parties’ intent
to subject to interest the loan extended by petitioners to
respondents. The controversy, however, stems from the
acknowledgment receipt’s failure to state the exact rate
of interest.
Jurisprudence is clear about the applicable interest rate if a
written instrument fails to specify a rate. In Spouses Toring
v. Spouses Olan,35 this court clarified the effect of Article
1956 of the Civil Code and noted that the legal rate of
interest (then at 12%) is to apply: "In a loan or forbearance of
money, according to the Civil Code, the interest due should
be that stipulated in writing, and in the absence thereof, the
rate shall be 12% per annum."36
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
Spouses Toring cites and restates (practically verbatim)
what this court settled in Security Bank and Trust Company
v. Regional Trial Court of Makati, Branch 61: "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."37
Security Bank also refers to Eastern Shipping Lines, Inc. v.
Court of Appeals, which, in turn, stated:38
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 12%
per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of
Article 1169 of the Civil Code.39 (Emphasis supplied)
The rule is not only definite; it is cast in mandatory language.
From Eastern Shipping to Security Bank to Spouses
Toring, jurisprudence has repeatedly used the word "shall," a
term that has long been settled to denote something
imperative or operating to impose a duty. 40 Thus, the rule
leaves no room for alternatives or otherwise does not allow
for discretion. It requires the application of the legal rate of
interest.
Our intervening Decision in Nacar v. Gallery
Frames41 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.
Section 2. In view of the above, Subsection X305.1 of the
Manual of Regulations for Banks and Sections 4305Q.1,
4305S.3 and 4303P.1 of the Manual of Regulations for
Non-Bank Financial Institutions are hereby amended
accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express
stipulation as to the rate of interest that would govern
the parties,  the rate of legal interest for loans or
forbearance of any money, goods or credits and the rate
allowed in judgments shall no longer be twelve percent
(12%) per annum  — as reflected in the case of Eastern
Shipping Lines and Subsection X305.1 of the Manual of
Regulations for Banks and Sections 4305Q.1,= 4305S.3
and 4303P.1 of the Manual of Regulations for Non- Bank
Financial Institutions, before its amendment by BSP-MB
Circular No. 799 —  but will now be six percent (6%) per
annum effective July 1, 2013. It should be noted,
nonetheless, that the new rate could only be applied
prospectively and not retroactively. Consequently, the
twelve percent (12%) per annum legal interest shall
apply only until June 30, 2013. Come July 1, 2013 the
new rate of six percent (6%) per annum shall be the
prevailing rate of interest when applicable. 42  (Emphasis
supplied, citations omitted)
Nevertheless, both Bangko Sentral ng Pilipinas Circular No.
799, Series of 2013 and Nacar retain the definite and
mandatory framing of the rule articulated in Eastern
Shipping, Security Bank, and Spouses Toring. Nacar even
restates Eastern Shipping:
To recapitulate and for future guidance, the guidelines laid
down in the case of Eastern Shipping Lines are accordingly
modified to embody BSP-MB Circular No. 799, as follows:
20
CREDIT TRANSACTIONS – PART 2: LOAN (Articles 1933 – 1961) III. Mutuum & Usury Law – PART III: DEPOSIT (Articles 1962 – 2009) I. Deposit
in General
Cases
....
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 6%
per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of
Article 1169 of the Civil Code. 43 (Emphasis supplied, citations
omitted)
Thus, it remains that where interest was stipulated in
writing by the debtor and creditor in a simple loan or
mutuum, but no exact interest rate was mentioned, the
legal rate of interest shall apply. At present, this is 6%
per annum, subject to Nacar’s qualification on
prospective application.
Applying this, the loan obtained by respondents from
petitioners is deemed subjected to conventional interest
at the rate of 12% per annum, the legal rate of interest at
the time the parties executed their agreement.
Moreover, should conventional interest still be due as of
July 1, 2013, the rate of 12% per annum shall persist as
the rate of conventional interest.
This is so because interest in this respect is used as a
surrogate for the parties’ intent, as expressed as of the
time of the execution of their contract. In this sense, the
legal rate of interest is an affirmation of the contracting
parties’ intent; that is, by their contract’s silence on a
specific rate, the then prevailing legal rate of interest
shall be the cost of borrowing money. This rate, which
by their contract the parties have settled on, is deemed
to persist regardless of shifts in the legal rate of interest.
Stated otherwise, the legal rate of interest, when applied
as conventional interest, shall always be the legal rate at
the time the agreement was executed and shall not be
susceptible to shifts in rate.
Petitioners, however, insist on conventional interest at the
rate of 2.5% per month or 30% per annum. They argue that
the acknowledgment receipt fails to show the complete and
accurate intention of the contracting parties. They rely on
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
Article 1371 of the Civil Code, which provides that the
contemporaneous and subsequent acts of the contracting
parties shall be considered should there be a need to
ascertain their intent.44 In addition, they claim that this case
falls under the exceptions to the Parol Evidence Rule, as
spelled out in Rule 130, Section 9 of the Revised Rules on
Evidence.45
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.46
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
1371 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.
Contrary to petitioners’ assertions, there is no room for
entertaining extraneous (or parol) evidence. In Spouses
Bonifacio and Lucia Paras v. Kimwa Construction and
Development Corporation,47 we spelled out the requisites for
the admission of parol evidence:
In sum, two (2) things must be established for parol evidence
to be admitted: first, that the existence of any of the four (4)
exceptions has been put in issue in a party’s pleading or has
not been objected to by the adverse party; and second, that
the parol evidence sought to be presented serves to form the
basis of the conclusion proposed by the presenting party.48
The issue of admitting parol evidence is a matter that is
proper to the trial, not the appellate, stage of a case.
Petitioners raised the issue of applying the exceptions to the
Parol Evidence Rule only in the Reply they filed before this
court. This is the last pleading that either of the parties has
filed in the entire string of proceedings culminating in this
Decision. It is, therefore, too late for petitioners to harp on
this rule. In any case, what is at issue is not admission of
evidence per se, but the appreciation given to the evidence
adduced by the parties. In the Petition they filed before this
court, petitioners themselves acknowledged that checks
supposedly attesting to payment of monthly interest at the
rate of 2.5% were admitted by the trial court (and marked as
Exhibits "2," "3," "4," "5," "6," "7," and "8"). 49 What petitioners
have an issue with is not the admission of these pieces of
evidence but how these have not been appreciated in a
manner consistent with the conclusions they advance.
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,50 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 rate of interest on a
money debt, even if knowingly and voluntarily assumed, is
immoral and unjust. It is tantamount to a repugnant spoliation
and an iniquitous deprivation of property, repulsive to the
common sense of man. It has no support in law, in principles
of justice, or in the human conscience nor is there any
reason whatsoever which may justify such imposition as
righteous and as one that may be sustained within the
sphere of public or private morals.51
The imposition of an unconscionable interest rate is void ab
initio for being "contrary to morals, and the law."52
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.
Petitioners here insist upon the imposition of 2.5% monthly
or 30% annual interest. Compounded at this rate,
21
CREDIT TRANSACTIONS – PART 2: LOAN (Articles 1933 – 1961) III. Mutuum & Usury Law – PART III: DEPOSIT (Articles 1962 – 2009) I. Deposit
in General
Cases
respondents’ obligation would have more than doubled—
increased to 219.7% of the principal—by the end of the third
year after which the loan was contracted if the entire
principal remained unpaid. By the end of the ninth year, it
would have multiplied more than tenfold (or increased to
1,060.45%). In 2015, this would have multiplied by more than
66 times (or increased to 6,654.17%). Thus, from an initial
loan of only P500,000.00, respondents would be obliged to
pay more than P33 million. This is grossly unfair, especially
since up to the fourth year from when the loan was obtained,
respondents had been assiduously delivering payment. This
reduces their best efforts to satisfy their obligation into a
protracted servicing of a rapacious loan.
The legal rate of interest is the presumptive reasonable
compensation for borrowed money. While parties are free to
deviate from this, any deviation must be reasonable and fair.
Any deviation that is far-removed is suspect. Thus, in cases
where stipulated interest is more than twice the prevailing
legal rate of interest, it is for the creditor to prove that this
rate is required by prevailing market conditions. Here,
petitioners have articulated no such justification.
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.
III
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.
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
So, too, Nacar states that "the interest due shall itself earn
legal interest from the time it is judicially demanded."53
Consistent with Nacar, as well as with our ruling in Rivera v.
Spouses Chua,54 the interest due on conventional interest
shall be at the rate of 12% per annum from July 31, 2002 to
June 30, 2013. Thereafter, or starting July 1, 2013, this shall
be at the rate of 6% per annum.
IV
Proceeding from these premises, we find that respondents
made an overpayment in the amount of P3,379.17.
As acknowledged by petitioner Salvador Abella, respondents
paid a total of P200,000.00, which was charged against the
principal amount of P500,000.00. The first payment of
P100,000.00 was made on June 30, 2001, 55 while the
second payment of P100,000.00 was made on December
30, 2001.56
The Court of Appeals’ September 30, 2010 Decision stated
that respondents paid P6,000.00 in March 1999. 57
The Pre-Trial Order dated December 2, 2002,58 stated that
the parties admitted that "from the time the principal sum of
P500,000.00 was borrowed from [petitioners], [respondents]
ha[d] been religiously paying" 59 what was supposedly interest
"at the rate of 2.5% per month."60
From March 22, 1999 (after the loan was perfected) to June
22, 2001 (before respondents’ payment of P100,000.00 on
June 30, 2001, which was deducted from the principal
amount of P500,000.00), the 2.5% monthly "interest" was
pegged to the principal amount of P500,000.00. These
monthly interests, thus, amounted to P12,500.00 per month.
Considering that the period from March 1999 to June 2001
spanned twenty seven (27) months, respondents paid a total
of P337,500.00.61
From June 22, 2001 up to December 22, 2001 (before
respondents’ payment of another P100,000.00 on December
30, 2001, which was deducted from the remaining principal
amount of P400,000.00), the 2.5% monthly "interest" was
pegged to the remaining principal amount of P400,000.00.
These monthly interests, thus, amounted to P10,000.00 per
month. Considering that this period spanned six (6) months,
respondents paid a total of P60,000.00. 62
From after December 22, 2001 up to June 2002 (when
petitioners filed their Complaint), the 2.5% monthly "interest"
was pegged to the remaining principal amount of
P300,000.00. These monthly interests, thus, amounted to
P7,500.00 per month. Considering that this period spanned
six (6) months, respondents paid a total of P45,000.00. 63
Applying these facts and the properly applicable interest rate
(for conventional interest, 12% per annum; for interest on
conventional interest, 12% per annum from July 31, 2002 up
to June 30, 2013 and 6% per annum henceforth), the
following conclusions may be drawn:
By the end of the first year following the perfection of the
loan, or as of March 21, 2000, P560,000.00 was due from
respondents. This consisted of the principal of P500,000.00
and conventional interest of P60,000.00.
Within this first year, respondents made twelve (12) monthly
payments totalling P150,000.00 (P12,500.00 each from April
1999 to March 2000). This was in addition to their initial
payment of P6,000.00 in March 1999.
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. As
respondents paid a total of P156,000.00 within the first year,
the conventional interest of P60,000.00 must be deemed
fully paid and the remaining amount that respondents paid
(i.e., P96,000.00) is to be charged against the principal. This
yields a balance of P404,000.00. By the end of the second
year following the perfection of the loan, or as of March 21,
2001, P452,480.00 was due from respondents. This
22
CREDIT TRANSACTIONS – PART 2: LOAN (Articles 1933 – 1961) III. Mutuum & Usury Law – PART III: DEPOSIT (Articles 1962 – 2009) I. Deposit
in General
Cases
consisted of the outstanding principal of P404,000.00 and
conventional interest of P48,480.00.
Within this second year, respondents completed another
round of twelve (12) monthly payments totaling P150,000.00.
Consistent with Article 1253 of the Civil Code, as
respondents paid a total of P156,000.00 within the second
year, the conventional interest of P48,480.00 must be
deemed fully paid and the remaining amount that
respondents paid (i.e., P101,520.00) is to be charged against
the principal. This yields a balance of P302,480.00.
By the end of the third year following the perfection of the
loan, or as of March 21, 2002, P338,777.60 was due from
respondents. This consists of the outstanding principal of
P302,480.00 and conventional interest of P36,297.60.
Within this third year, respondents paid a total of
P320,000.00, as follows:
(a) Between March 22, 2001 and June 30, 2001,
respondents completed three (3) monthly
payments of P12,500.00 each, totaling
P37,500.00.
(b) On June 30, 2001, respondents paid
P100,000.00, which was charged as principal
payment.
(c) Between June 30, 2001 and December 30,
2001, respondents delivered monthly payments of
P10,000.00 each. At this point, the monthly
payments no longer amounted to P12,500.00 each
because the supposed monthly interest payments
were pegged to the supposedly remaining principal
of P400,000.00. Thus, during this period, they paid
a total of six (6) monthly payments totaling
P60,000.00.
(d) On December 30, 2001, respondents paid
P100,000.00, which, like the June 30, 2001
payment, was charged against the principal.
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
(e) From the end of December 2002 to the end of
February 2002, respondents delivered monthly
payments of P7,500.00 each. At this point, the
supposed monthly interest payments were now
pegged to the supposedly remaining principal of
P300,000.00. Thus, during this period, they
delivered three (3) monthly payments totaling
P22,500.00.
Consistent with Article 1253 of the Civil Code, as
respondents paid a total of P320,000.00 within the third year,
the conventional interest of P36,927.50 must be deemed
fully paid and the remaining amount that respondents paid
(i.e., P283,702.40) is to be charged against the principal.
This yields a balance of P18,777.60.
By the end of the fourth year following the perfection of the
loan, or as of March 21, 2003, P21,203.51 would have been
due from respondents. This consists of: (a) the outstanding
principal of P18,777.60, (b) conventional interest of
P2,253.31, and (c) interest due on conventional interest
starting from July 31, 2002, the date of judicial demand, in
the amount of P172.60. The last (i.e., interest on interest)
must be pro-rated. There were only 233 days from July 31,
2002 (the date of judicial demand) to March 21, 2003 (the
end of the fourth year); this left 63.83% of the fourth year,
within which interest on interest might have accrued. Thus,
the full annual interest on interest of 12% per annum could
not have been completed, and only the proportional amount
of 7.66% per annum may be properly imposed for the
remainder of the fourth year.
From the end of March 2002 to June 2002, respondents
delivered three (3) more monthly payments of P7,500.00
each. Thus, during this period, they delivered three (3)
monthly payments totalling P22,500.00.
At this rate, however, payment would have been completed
by respondents even before the end of the fourth
year. Thus, for precision, it is more appropriate to
reckon the amounts due as against payments made on a
monthly, rather than an annual, basis.
By April 21, 2002, _18,965.38 (i.e., remaining principal of
P18,777.60 plus pro-rated monthly conventional interest at
1%, amounting to P187.78) would have been due from
respondents. Deducting the monthly payment of P7,500.00
for the preceding month in a manner consistent with Article
1253 of the Civil Code would yield a balance of P11,465.38.
By May 21, 2002, _11,580.03 (i.e., remaining principal of
P11,465.38 plus pro-rated monthly conventional interest at
1%, amounting to P114.65) would have been due from
respondents. Deducting the monthly payment of P7,500.00
for the preceding month in a manner consistent with Article
1253 of the Civil Code would yield a balance of P4,080.03.
By June 21, 2002, P4,120.83 (i.e., remaining principal of
P4,080.03 plus pro-rated monthly conventional interest at
1%, amounting to P40.80) would have been due from
respondents. Deducting the monthly payment of P7,500.00
for the preceding month in a manner consistent with Article
1253 of the Civil Code would yield a negative balance of
P3,379.17.
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.
V
As respondents made an overpayment, the principle
of solutio indebiti as provided by Article 2154 of the Civil
Code64 applies. Article 2154 reads:
Article 2154. If something is received when there is no right
to demand it, and it was unduly delivered through mistake,
the obligation to return it arises.
In Moreno-Lentfer v. Wolff,65 this court explained the
application of solutio indebiti:
The quasi-contract of solutio indebiti harks back to the
ancient principle that no one shall enrich himself unjustly at
the expense of another. It applies where (1) a payment is
made when there exists no binding relation between the
payor, who has no duty to pay, and the person who received
23
CREDIT TRANSACTIONS – PART 2: LOAN (Articles 1933 – 1961) III. Mutuum & Usury Law – PART III: DEPOSIT (Articles 1962 – 2009) I. Deposit
in General
Cases
the payment, and (2) the payment is made through mistake,
and not through liberality or some other cause.66
As respondents had already fully paid the principal and all
conventional interest that had accrued, they were no longer
obliged to make further payments.1awp++i1 Any further
payment they made was only because of a mistaken
impression that they were still due. Accordingly, petitioners
are now bound by a quasi-contractual obligation to return
any and all excess payments delivered by respondents.
Nacar provides that "[w]hen an obligation, not
constituting a loan or forbearance of money, is
breached, an interest on the amount of damages
awarded may be imposed at the discretion of the
court at the rate of 6% per annum."67This applies to
obligations arising from quasi-contracts such as solutio
indebiti.
Further, Article 2159 of the Civil Code provides:
Art. 2159. Whoever in bad faith accepts an undue payment,
shall pay legal interest if a sum of money is involved, or shall
be liable for fruits received or which should have been
received if the thing produces fruits.
He shall furthermore be answerable for any loss or
impairment of the thing from any cause, and for damages to
the person who delivered the thing, until it is recovered.
Consistent however, with our finding that the excess
payment made by respondents were borne out of a mere
mistake that it was due, we find it in the better interest of
equity to no longer hold petitioners liable for interest arising
from their quasi-contractual obligation.
Nevertheless, Nacar also provides:
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2,
above, shall be 6% per annum from such finality until its
satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.68
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
Thus, interest at the rate of 6% per annum may be
properly imposed on the total judgment award. This
shall be reckoned from the finality of this Decision until
its full satisfaction.
WHEREFORE, the assailed September 30, 2010 Decision
and the January 4, 2011 Resolution of the Court of Appeals
Nineteenth Division in CA-G.R. CV No. 01388 are SET
ASIDE. Petitioners Spouses Salvador and Alma Abella
are DIRECTED to jointly and severally reimburse
respondents Spouses Romeo and Annie Abella the amount
of P3,379.17, which respondents have overpaid.
A legal interest of 6% per annum shall likewise be
imposed on the total judgment award from the finality of
this Decision until its full satisfaction.
SO ORDERED.
G.R. No. 116285            October 19, 2001
ANTONIO TAN, petitioner, 
vs.
COURT OF APPEALS and the CULTURAL CENTER OF
THE PHILIPPINES, respondents.
DE LEON, JR., J.:
Before us is a petition for review of the Decision1 dated
August 31, 1993 and Resolution 2 dated July 13, 1994 of the
Court of Appeals affirming the Decision 3 dated May 8, 1991
of the Regional Trial Court (RTC) of Manila, Branch 27.
The facts are as follows:
On May 14, 1978 and July 6, 1978, petitioner Antonio Tan
obtained two (2) loans each in the principal amount of Two
Million Pesos (P2,000,000.00), or in the total principal
amount of Four Million Pesos (P4,000,000.00) from
respondent Cultural Center of the Philippines (CCP, for
brevity) evidenced by two (2) promissory notes with maturity
dates on May 14, 1979 and July 6, 1979, respectively.
Petitioner defaulted but after a few partial payments he had
the loans restructured by respondent CCP, and petitioner
accordingly executed a promissory note (Exhibit "A") on
August 31, 1979 in the amount of Three Million Four
Hundred Eleven Thousand Four Hundred Twenty-One
Pesos and Thirty-Two Centavos (P3,411,421.32) payable in
five (5) installments. Petitioner Tan failed to pay any
installment on the said restructured loan of Three Million
Four Hundred Eleven Thousand Four Hundred Twenty-One
Pesos and Thirty-Two Centavos (P3,411,421.32), the last
installment falling due on December 31, 1980. In a letter
dated January 26, 1982, petitioner requested and proposed
to respondent CCP a mode of paying the restructured loan,
i.e., (a) twenty percent (20%) of the principal amount of the
loan upon the respondent giving its conformity to his
proposal; and (b) the balance on the principal obligation
payable in thirty-six (36) equal monthly installments until fully
paid. On October 20, 1983, petitioner again sent a letter to
respondent CCP requesting for a moratorium on his loan
obligation until the following year allegedly due to a
substantial deduction in the volume of his business and on
account of the peso devaluation. No favorable response was
made to said letters. Instead, respondent CCP, through
counsel, wrote a letter dated May 30, 1984 to the petitioner
demanding full payment, within ten (10) days from receipt of
said letter, of the petitioner’s restructured loan which as of
April 30, 1984 amounted to Six Million Eighty-Eight
Thousand Seven Hundred Thirty-Five Pesos and Three
Centavos (P6,088,735.03).
On August 29, 1984, respondent CCP filed in the RTC of
Manila a complaint for collection of a sum of money,
docketed as Civil Case No. 84-26363, against the petitioner
after the latter failed to settle his said restructured loan
obligation. The petitioner interposed the defense that he
merely accommodated a friend, Wilson Lucmen, who
allegedly asked for his help to obtain a loan from respondent
CCP. Petitioner claimed that he has not been able to locate
Wilson Lucmen. While the case was pending in the trial
court, the petitioner filed a Manifestation wherein he
proposed to settle his indebtedness to respondent CCP by
proposing to make a down payment of One Hundred Forty
Thousand Pesos (P140,000.00) and to issue twelve (12)
checks every beginning of the year to cover installment
payments for one year, and every year thereafter until the
balance is fully paid. However, respondent CCP did not
agree to the petitioner’s proposals and so the trial of the case
ensued.
On May 8, 1991, the trial court rendered a decision, the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in
favor of plaintiff and against defendant, ordering
24
CREDIT TRANSACTIONS – PART 2: LOAN (Articles 1933 – 1961) III. Mutuum & Usury Law – PART III: DEPOSIT (Articles 1962 – 2009) I. Deposit
in General
Cases
defendant to pay plaintiff, the amount of
P7,996,314.67, representing defendant’s
outstanding account as of August 28, 1986, with
the corresponding stipulated interest and charges
thereof, until fully paid, plus attorney’s fees in an
amount equivalent to 25% of said outstanding
account, plus P50,000.00, as exemplary damages,
plus costs.
Defendant’s counterclaims are ordered dismissed,
for lack of merit.
SO ORDERED.4
The trial court gave five (5) reasons in ruling in favor of
respondent CCP. First, it gave little weight to the petitioner’s
contention that the loan was merely for the accommodation
of Wilson Lucmen for the reason that the defense
propounded was not credible in itself. Second,
assuming, arguendo, that the petitioner did not personally
benefit from the said loan, he should have filed a third party
complaint against Wilson Lucmen, the alleged
accommodated party but he did not. Third, for three (3) times
the petitioner offered to settle his loan obligation with
respondent CCP. Fourth, petitioner may not avoid his liability
to pay his obligation under the promissory note (Exh. "A")
which he must comply with in good faith pursuant to Article
1159 of the New Civil Code. Fifth, petitioner is estopped from
denying his liability or loan obligation to the private
respondent.
The petitioner appealed the decision of the trial court to the
Court of Appeals insofar as it charged interest, surcharges,
attorney’s fees and exemplary damages against the
petitioner. In his appeal, the petitioner asked for the
reduction of the penalties and charges on his loan obligation.
He abandoned his alleged defense in the trial court that he
merely accommodated his friend, Wilson Lucmen, in
obtaining the loan, and instead admitted the validity of the
same. On August 31, 1993, the appellate court rendered a
decision, the dispositive portion of which reads:
WHEREFORE, with the foregoing modification, the
judgment appealed from is hereby AFFIRMED.
SO ORDERED.5
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
In affirming the decision of the trial court imposing
surcharges and interest, the appellate court held that:
We are unable to accept appellant’s (petitioner’s)
claim for modification on the basis of alleged
partial or irregular performance, there being none.
Appellant’s offer or tender of payment cannot be
deemed as a partial or irregular performance of the
contract, not a single centavo appears to have
been paid by the defendant.
However, the appellate court modified the decision of the trial
court by deleting the award for exemplary damages and
reducing the amount of awarded attorney’s fees to five
percent (5%), by ratiocinating as follows: 
Given the circumstances of the case, plus the fact
that plaintiff was represented by a government
lawyer, We believe the award of 25% as attorney’s
fees and P500,000.00 as exemplary damages is
out of proportion to the actual damage caused by
the non-performance of the contract and is
excessive, unconscionable and iniquitous.
In a Resolution dated July 13, 1994, the appellate court
denied the petitioner’s motion for reconsideration of the said
decision.
Hence, this petition anchored on the following assigned
errors:
I
THE HONORABLE COURT OF APPEALS COMMITTED A
MISTAKE IN GIVING ITS IMPRIMATUR TO THE DECISION
OF THE TRIAL COURT WHICH COMPOUNDED
INTEREST ON SURCHARGES.
II
THE HONORABLE COURT OF APPEALS ERRED IN NOT
SUSPENDING IMPOSITION OF INTEREST FOR THE
PERIOD OF TIME THAT PRIVATE RESPONDENT HAS
FAILED TO ASSIST PETITIONER IN APPLYING FOR
RELIEF OF LIABILITY THROUGH THE COMMISSION ON
AUDIT AND THE OFFICE OF THE PRESIDENT.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT
DELETING AWARD OF ATTORNEY’S FEES AND IN
REDUCING PENALTIES.
Significantly, the petitioner does not question his liability for
his restructured loan under the promissory note marked
Exhibit "A". The first question to be resolved in the case at
bar is whether there are contractual and legal bases for the
imposition of the penalty, interest on the penalty and
attorney’s fees.
The petitioner imputes error on the part of the appellate court
in not totally eliminating the award of attorney’s fees and in
not reducing the penalties considering that the petitioner,
contrary to the appellate court’s findings, has allegedly made
partial payments on the loan. And if penalty is to be awarded,
the petitioner is asking for the non-imposition of interest on
the surcharges inasmuch as the compounding of interest on
surcharges is not provided in the promissory note marked
Exhibit "A". The petitioner takes exception to the computation
of the private respondent whereby the interest, surcharge
and the principal were added together and that on the total
sum interest was imposed. Petitioner also claims that there is
no basis in law for the charging of interest on the surcharges
for the reason that the New Civil Code is devoid of any
provision allowing the imposition of interest on surcharges.
We find no merit in the petitioner’s contention. Article 1226 of
the New Civil Code provides that:
In obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the
payment of interests in case of non-compliance, if
there is no stipulation to the contrary.
Nevertheless, damages shall be paid if the obligor
refuses to pay the penalty or is guilty of fraud in
the fulfillment of the obligation.
The penalty may be enforced only when it is
demandable in accordance with the provisions of
this Code.
In the case at bar, the promissory note (Exhibit "A")
expressly provides for the imposition of both interest and
penalties in case of default on the part of the petitioner in the
payment of the subject restructured loan. The
25
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pertinent6 portion of the promissory note (Exhibit "A")
imposing interest and penalties provides that:
For value received, I/We jointly and severally promise to pay
to the CULTURAL CENTER OF THE PHILIPPINES at its
office in Manila, the sum of THREE MILLION FOUR
HUNDRED ELEVEN THOUSAND FOUR HUNDRED +
PESOS (P3,411,421.32) Philippine Currency, xxx.
xxx           xxx           xxx
With interest at the rate of FOURTEEN per cent
(14%) per annum from the date hereof until paid.
PLUS THREE PERCENT (3%) SERVICE
CHARGE. 
In case of non-payment of this note at maturity/on
demand or upon default of payment of any portion
of it when due, I/We jointly and severally agree to
pay additional penalty charges at the rate of TWO
per cent (2%) per month on the total amount due
until paid, payable and computed monthly. Default
of payment of this note or any portion thereof when
due shall render all other installments and all
existing promissory notes made by us in favor of
the CULTURAL CENTER OF THE PHILIPPINES
immediately due and demandable. (Underscoring
supplied)  cannot be considered inasmuch as there is a contractual
xxx           xxx           xxx
The stipulated fourteen percent (14%) per annum interest
charge until full payment of the loan constitutes the monetary
interest on the note and is allowed under Article 1956 of the
New Civil Code. 7 On the other hand, the stipulated two
percent (2%) per month penalty is in the form of penalty
charge which is separate and distinct from the monetary
interest on the principal of the loan.
Penalty on delinquent loans may take different forms.
In Government Service Insurance System v. Court of
Appeals,8 this Court has ruled that the New Civil Code
permits an agreement upon a penalty apart from the
monetary interest. If the parties stipulate this kind of
agreement, the penalty does not include the monetary
interest, and as such the two are different and distinct from
each other and may be demanded separately.
Quoting Equitable Banking Corp. v. Liwanag,9 the GSIS case
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
went on to state that such a stipulation about payment of an
additional interest rate partakes of the nature of a penalty
clause which is sanctioned by law, more particularly under
Article 2209 of the New Civil Code which provides that:
If the obligation consists in the payment of a sum
of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation
to the contrary, shall be the payment of the interest
agreed upon, and in the absence of stipulation, the
legal interest, which is six per cent per annum.
The penalty charge of two percent (2%) per month in the
case at bar began to accrue from the time of default by the
petitioner. There is no doubt that the petitioner is liable for
both the stipulated monetary interest and the stipulated
penalty charge. The penalty charge is also called penalty or
compensatory interest. Having clarified the same, the next
issue to be resolved is whether interest may accrue on the
penalty or compensatory interest without violating the
provisions of Article 1959 of the New Civil Code, which
provides that:
Without prejudice to the provisions of Article 2212,
interest due and unpaid shall not earn interest.
However, the contracting parties may by
stipulation capitalize the interest due and unpaid,
which as added principal, shall earn new interest.
According to the petitioner, there is no legal basis for the
imposition of interest on the penalty charge for the reason
that the law only allows imposition of interest on monetary
interest but not the charging of interest on penalty. He claims
that since there is no law that allows imposition of interest on
penalties, the penalties should not earn interest. But as we
have already explained, penalty clauses can be in the form
of penalty or compensatory interest. Thus, the compounding
of the penalty or compensatory interest is sanctioned by and
allowed pursuant to the above-quoted provision of Article
1959 of the New Civil Code considering that:
First, there is an express stipulation in the promissory
note (Exhibit "A") permitting the compounding of
interest. The fifth paragraph of the said promissory note
provides that: "Any interest which may be due if not paid
shall be added to the total amount when due and shall
become part thereof, the whole amount to bear interest
at the maximum rate allowed by law." 10 Therefore, any
penalty interest not paid, when due, shall earn the legal
interest of twelve percent (12%) per annum,11 in the
absence of express stipulation on the specific rate of
interest, as in the case at bar.
Second, Article 2212 of the New Civil Code provides that
"Interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be
silent upon this point." In the instant case, interest
likewise began to run on the penalty interest upon the
filing of the complaint in court by respondent CCP on
August 29, 1984. Hence, the courts a quo did not err in
ruling that the petitioner is bound to pay the interest on
the total amount of the principal, the monetary interest
and the penalty interest.
The petitioner seeks the elimination of the compounded
interest imposed on the total amount based allegedly on the
case of National Power Corporation v. National
Merchandising Corporation,12 wherein we ruled that the
imposition of interest on the damages from the filing of the
complaint is unjust where the litigation was prolonged for
twenty-five (25) years through no fault of the defendant.
However, the ruling in the said National Power
Corporation (NPC) case is not applicable to the case at bar
inasmuch as our ruling on the issue of interest in that NPC
case was based on equitable considerations and on the fact
that the said case lasted for twenty-five (25) years "through
no fault of the defendant." In the case at bar, however, equity
stipulation in the promissory note whereby the petitioner
expressly agreed to the compounding of interest in case of
failure on his part to pay the loan at maturity. Inasmuch as
the said stipulation on the compounding of interest has the
force of law between the parties and does not appear to be
inequitable or unjust, the said written stipulation should be
respected.
The private respondent’s Statement of Account (marked
Exhibits "C" to "C-2")13 shows the following breakdown of the
petitioner’s indebtedness as of August 28, 1986:
Principal P2,838,454.68
Interest P 576,167.89
Surcharge P4,581,692.10
P7,996,314.67
26
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in General
Cases
The said statement of account also shows that the above
amounts stated therein are net of the partial payments
amounting to a total of Four Hundred Fifty-Two Thousand
Five Hundred Sixty-One Pesos and Forty-Three Centavos
(P452,561.43) which were made during the period from May
13, 1983 to September 30, 1983. 14 The petitioner now seeks
the reduction of the penalty due to the said partial payments.
The principal amount of the promissory note (Exhibit "A")
was Three Million Four Hundred Eleven Thousand Four
Hundred Twenty-One Pesos and Thirty-Two Centavos
(P3,411,421.32) when the loan was restructured on August
31, 1979. As of August 28, 1986, the principal amount of the
said restructured loan has been reduced to Two Million Eight
Hundred Thirty-Eight Thousand Four Hundred Fifty-Four
Pesos and Sixty-Eight Centavos (P2,838,454.68). Thus,
petitioner contends that reduction of the penalty is justifiable
pursuant to Article 1229 of the New Civil Code which
provides that: "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." Petitioner insists that the
penalty should be reduced to ten percent (10%) of the
unpaid debt in accordance with Bachrach Motor Company v.
Espiritu.15
There appears to be a justification for a reduction of the
penalty charge but not necessarily to ten percent (10%) of
the unpaid balance of the loan as suggested by petitioner.
Inasmuch as petitioner has made partial payments which
showed his good faith, a reduction of the penalty charge from
two percent (2%) per month on the total amount due,
compounded monthly, until paid can indeed be justified
under the said provision of Article 1229 of the New Civil
Code.
In other words, we find the continued monthly accrual of the
two percent (2%) penalty charge on the total amount due to
be unconscionable inasmuch as the same appeared to have
been compounded monthly.
Considering petitioner’s several partial payments and the fact
he is liable under the note for the two percent (2%) penalty
charge per month on the total amount due, compounded
monthly, for twenty-one (21) years since his default in 1980,
we find it fair and equitable to reduce the penalty charge to a
straight twelve percent (12%) per annum on the total amount
due starting August 28, 1986, the date of the last Statement
of Account (Exhibits "C" to "C-2"). We also took into
consideration the offers of the petitioner to enter into a
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
compromise for the settlement of his debt by presenting
proposed payment schemes to respondent CCP. The said
offers at compromise also showed his good faith despite
difficulty in complying with his loan obligation due to his
financial problems. However, we are not unmindful of the
respondent’s long overdue deprivation of the use of its
money collectible from the petitioner.
The petitioner also imputes error on the part of the appellate
court for not declaring the suspension of the running of the
interest during that period when the respondent allegedly
failed to assist the petitioner in applying for relief from
liability. In this connection, the petitioner referred to the
private respondent’s letter16 dated September 28, 1988
addressed to petitioner which partially reads:
Dear Mr. Tan:
xxx           xxx           xxx
With reference to your appeal for condonation of
interest and surcharge, we wish to inform you that
the center will assist you in applying for relief of
liability through the Commission on Audit and
Office of the President xxx.
While your application is being processed and
awaiting approval, the center will be accepting
your proposed payment scheme with the
downpayment of P160,000.00 and monthly
remittances of P60,000.00 xxx.
xxx           xxx           xxx
The petitioner alleges that his obligation to pay the interest
and surcharge should have been suspended because the
obligation to pay such interest and surcharge has become
conditional, that is dependent on a future and uncertain
event which consists of whether the petitioner’s request for
condonation of interest and surcharge would be
recommended by the Commission on Audit and the Office of
the President to the House of Representatives for approval
as required under Section 36 of Presidential Decree No.
1445. Since the condition has not happened allegedly due to
the private respondent’s reneging on its promise, his liability
to pay the interest and surcharge on the loan has not arisen.
This is the petitioner’s contention.
It is our view, however, that the running of the interest and
surcharge was not suspended by the private respondent’s
promise to assist the petitioners in applying for relief
therefrom through the Commission on Audit and the Office of
the President.
First, the letter dated September 28, 1988 alleged to have
been sent by the respondent CCP to the petitioner is not part
of the formally offered documentary evidence of either party
in the trial court. That letter cannot be considered evidence
pursuant to Rule 132, Section 34 of the Rules of Court which
provides that: "The court shall consider no evidence which
has not been formally offered xxx." Besides, the said letter
does not contain any categorical agreement on the part of
respondent CCP that the payment of the interest and
surcharge on the loan is deemed suspended while his
appeal for condonation of the interest and surcharge was
being processed.
Second, the private respondent correctly asserted that it was
the primary responsibility of petitioner to inform the
Commission on Audit and the Office of the President of his
application for condonation of interest and surcharge. It was
incumbent upon the petitioner to bring his administrative
appeal for condonation of interest and penalty charges to the
attention of the said government offices.
On the issue of attorney’s fees, the appellate court ruled
correctly and justly in reducing the trial court’s award of
twenty-five percent (25%) attorney’s fees to five percent (5%)
of the total amount due.
WHEREFORE, the assailed Decision of the Court of Appeals
is hereby AFFIRMED with MODIFICATION in that the
penalty charge of two percent (2%) per month on the total
amount due, compounded monthly, is hereby reduced to a
straight twelve percent (12%) per annum starting from
August 28, 1986. With costs against the petitioner.
SO ORDERED.
G.R. No. 210831               November 26, 2014
SPOUSES TAGUMPAY N. ALBOS and AIDA C.
ALBOS, Petitioners, 
vs.
SPOUSES NESTOR M. EMBISAN and ILUMINADA A.
27
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EMBISAN, DEPUTY SHERIFF MARINO V. CACHERO, and i.e. June 1986 onwards, will be compounded. This
the REGISTER OF DEEDS OF QUEZON stipulation, however, was not reduced in writing. On March 1 4,200.0 93,000.0
9 0 0
CITY, Respondents. February 9, 1987, respondent spouses addressed a
8
letter4 to petitioners demanding the payment of 5
₱234,021.90, representing the unpaid balance and
DECISION
interests from the loan. This was followed, on April 14,
April 1 4,200.0 97,200.0
1987, by another letter5 of the same tenor, but this time 9 0 0
VELASCO, JR., J.: demanding from the petitioners the obligation due amounting 8
to ₱258,009.15. 5
Nature of the Case
Obviously in a bid to prevent the foreclosure of their May 1 4,200.0 101,400.
mortgaged property, petitioners paid respondent spouses the 9 0 00
Before the Court is a Petition for Review on Certiorari under
sum of ₱44,500.00 on October 2, 1987. The respondent 8
Rule 45 of the Rules of Court seeking the reversal and the 5
setting aside of the Decision1 of the Court of Appeals (CA) spouses accepted the partial payment of the principal loan
dated May 29, 2013 and its Resolution dated January 13, amount owed to them, which, based on the Statement of
Account6 the respondent spouses prepared, by that time, June 1 4,200.0 105,600.
2014 in CA-G.R. CV No. 93667. Said rulings upheld the 9 0 00
validity of the extra-judicial foreclosure sale over the property has already ballooned to ₱296,658.70. As extrapolated from
8
that petitioners, spouses Tagumpay and Aida Albos, the Statement of Account:
5
mortgaged in favor of private respondents.
July 1 4,200.0 109,800.
Y
The Facts Payme 9 0 00
Month e Loan Interest Balance
nt 8
ar
5
On October 17, 1984, petitioners entered into an
agreement, denominated as "Loan with Real Estate October 1 84,000. 84,000.0
August 1 4,200.0 114,000.
Mortgage, "2with respondent spouses Nestor and 9 00 0
9 0 00
Iluminada Embisan (spouses Embisan) in the amount of 8
8
₱84,000.00 payable within 90 days with a monthly 4
5
interest rate of 5%. To secure the indebtedness, petitioners
mortgaged to the spouses Embisan a parcel of land in November 1 4,200.0 8,000.0 80,200.0
September 1 4,200.0 118,200.
Project 3, Quezon City, measuring around 207.6 square 9 0 0 0
9 0 00
8
meters and registered under their name, as evidenced by 8
4
Transfer Certificate Title No. 257697. 3 5

December 1 4,200.0 84,400.0

October 1 4,200.0 122,400.
For failure to settle their account upon maturity, petitioner 9 0 0
9 0 00
Aida Albos requested and was given an extension of eleven 8
8
(11) months, or until December 17, 1985, within which to pay 4
5
the loan obligation. However, when the said deadline came
anew, petitioners once again defaulted and so, on January 1 4,200.0 4,000.0 84,600.0
November 1 4,200.0 126,600.
agreement of the parties, another extension of five (5) 9 0 0 0
9 0 00
months, or until May 17, 1986, was set. 8
8
5
5
May 17, 1986 came and went but the obligation remained February 1 4,200.0 88,800.0
unpaid. Thus, when the petitioners requested a third December 1 4,200.0 130,800.
9 0 0
extension, as will later be alleged by the respondent 9 0 00
8
spouses, anadditional eight (8) months was granted on 8
5
the condition that the monthly 5% interest from then on,

Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman 28
CREDIT TRANSACTIONS – PART 2: LOAN (Articles 1933 – 1961) III. Mutuum & Usury Law – PART III: DEPOSIT (Articles 1962 – 2009) I. Deposit
in General
Cases
5 October 1 9,22 192,7 7
9 5.69 39.50
January 1 4,200.0 135,000. 8 August 1 14,9 313,6
9 0 00 6 9 33.9 11.75
8 8 0
6 November 1 9,41 202,1 7
9 7.50 57.00
February 1 4,200.0 139,200. 8 September 1 15,6 329,2
9 0 00 6 9 80.6 92.35
8 8 0
6 December 1 10,1 212,2 7
9 07.7 64.75
March 1 4,200.0 143,400. 8 5 October 1 44,5 284,7
9 0 00 6 9 00.0 92.35
8 8 0
6 January 1 10,6 222,8 7
9 13.2 78.00
April 1 4,200.0 147,600. 8 5 Interest for 15 7,11 291,9
9 0 00 7 days 9.80 12.15
8
6 February 1 11,1 234,0 Interest for 10 4,74 296,6
9 43.9 21.90 days 6.55 58.70
May 1 4,200.0 151,800. 8 0
9 0 00 7
8 Due to petitioners’ failure to settle their indebtedness,
6 March 1 11,7 245,7 respondent spouses proceeded to extra-judicially foreclose
9 01.1 23.00 the mortgaged property on October 12, 1987. At the auction
June 1 7,590.0 159,390. 8 0 sale conducted by the respondent sheriff, respondent
9 0 00 7
spouses emerged as the highest bidders at ₱330,000.00 and
8 were later issued a Sheriff’s Certificate of Sale. 7
6 April 1 12,2 258,0
9 86.1 09.15
8 5 The property was never redeemed, and so the respondent
July 1 7,96 167,3 7 spouses executed an Affidavit of Consolidation 8 over the
9 9.50 59.50 property on November 23, 1988. The affidavit was
8 May 1 12,9 270,9 subsequently registered with the Registry of Deeds of
6 9 00.4 09.60 Quezon City, consolidating ownership to the spouses
8 5 Embisan. Petitioners alleged that afterwards, on February 4,
August 1 8,36 175,7 7 1989, they were pressured by the respondent spouses to
9 7.98 27.45 execute a Contract of Lease 9 over the property wherein the
8 June 1 13,5 284,4 petitioners, as lessees, are obligated to pay the respondent
6 9 45.4 55.10 spouses, as lessors, monthly rent in the amount of
8 8 ₱2,500.00.
September 1 8,78 184,5 7
9 6.37 13.82
8 July 1 14,2 298,6 On August 14, 1989, herein petitioners filed a complaint for
6 9 22.7 77.85 the annulment of the Loan with Real Estate Mortgage,
8 5 Certificate of Sale, Affidavit of Consolidation, Deed of Final
Sale, and Contract of Lease before the Regional Trial Court

Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman 29
CREDIT TRANSACTIONS – PART 2: LOAN (Articles 1933 – 1961) III. Mutuum & Usury Law – PART III: DEPOSIT (Articles 1962 – 2009) I. Deposit
in General
Cases
of Quezon City (RTC). In their complaint, docketed as Civil
Case No. 89-3246, and later raffled to Branch 99 of the
court, petitioners alleged that the foreclosure sale is void
because respondents only released ₱60,000.00 out of the
₱84,000.00 amount loaned, which has already been paid. As
petitioner Aida Albos testified during trial, she was able to
pay ₱50,000 out of the ₱60,000 principal loan released, and
also ₱4,500.00 monthly interests, as evidenced by receipts
dated December 19, 1984 and February 9, 1985. 10
In their Answer, the spouses Embisan countered that the
loan was legally and validly entered at arms length after a
series of meetings and negotiations; that petitioners agreed
to pay compounded interest in exchange for extending the
payment period the third time; that never during the life of the
mortgage did petitioners pay 50,000.00; and, that petitioners,
having defaulted, left the spouses Embisan with no other
option except to extrajudicially foreclose the property security
as stipulated in the mortgage.
Ruling of the Trial Court
Following trial, the RTC rendered a Decision 11 on December
15, 2008 dismissing the complaint for lack of merit, the
dispositive portion of which reads:
WHEREFORE, in view of the foregoing considerations, the
complaint filed by plaintiff is DISMISSEDfor lack of merit.
Defendants’ counterclaim is denied.
SO ORDERED.
In so doing, the trial court did notgive credence to petitioners’
claim that only ₱60,000.00 of the loaned amount was
released tothem. It also found that between October 17,
1984 to October 28, 1987, petitioners only paid the total
amount of ₱56,000.00, which is not sufficient to cover both
the principal loan and the accrued interest. In addition, the
trial court shrugged aside petitioners’ contention that they
wereforced to affix their signatures in the adverted Contract
of Lease, adding that having signed the lease agreement,
they were estopped from asserting title over the property.
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
Petitioners filed a Motion for Reconsideration, but the same
was denied by the trial court through a Resolution dated
January 13, 2014. Aggrieved, they elevated the case to the
CA.
Ruling of the Court of Appeals
On appeal, petitioners argued that the imposition by the
respondent spouses of a 5% compounded interest on the
loan, without the petitioners’ consent or knowledge, is
fraudulent and contrary to public morals. Respondents, on
the other hand, insisted that the compounding of the interest
was agreed upon as a condition for the third and final
extension of time given for the petitioners to make good their
promise to pay.
On May 29, 2013, the CA promulgated the assailed
Decision, affirming in toto the ruling of the trial
court.1âwphi1 The appellate court held that, under the
circumstances, inasmuch as the request for the third
extension––for another eight months––was made after the
expiration of one year and four months from when the
payment first became due, the agreement to compound the
interest was just and reasonable. It added that it was
precisely the petitioners’ repeated non-compliance which
prompted the imposition of a compounded interest rate and,
therefore, petitioners could no longer feign ignorance of its
imposition.
Through the challenged Resolution dated January 13, 2014,
the CA denied petitioners’ Motion for Reconsideration.
Hence, the instant petition.
The Issues
Petitioners anchor their plea for the reversal of the assailed
Decision on the following grounds: 12
I.
THERE IS NO DOCUMENTARY PROOF TO SHOW THAT
THE PETITIONERS AGREED IN WRITING TO THE
IMPOSITION OF THE 5% COMPOUNDED MONTHLY
INTEREST, CONTRARY TO ARTICLE 1956 OF THE CIVIL
CODE
II.
THE 5% COMPOUNDED MONTHLY INTEREST
UNILATERALLY IMPOSED BY RESPONDENT EMBISAN
ON THE PETITIONERS IS EXCESSIVE, EXORBITANT,
OPPRESSIVE, INIQUITOUS AND UNCONSCIONABLE,
THEREFORE, THE SAME IS VOID FOR BEING
CONTRARY TO LAW AND MORALS
III.
THE FORECLOSURE PROCEEDINGS INSTITUTED BY
THE RESPONDENT SPOUSES EMBISAN SHOULD BE
NULLIFIED FOR BEING BASED ON A WRONG
COMPUTATION OF THE OUTSTANDING LOAN OF THE
PETITIONERS WHICH WAS WRONGLY COMPUTED ON
THE BASIS OF A 5% COMPOUNDED MONTHLY
INTEREST
Succinctly put, the pivotal issue to be resolved is whether or
not the extra-judicial foreclosure proceedings should be
nullified for being based on an allegedly erroneous
computation of the loan’s interest.
Respondent spouses, in their Comment, contend that the
issues raised in the petition are questions of fact that cannot
be entertained by this Court; that parole evidence can be
introduced, as was properly appreciated by the RTC and CA,
to ascertain the true intention of the parties on how the
interest on the loan will accrue; and that petitioners’ cause of
action is barred by prescription, counting four (4) years from
the original due date of the loan, which was December 17,
1984.
The Court’s Ruling
The petition is meritorious.
The compounding of interest should be in writing.
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CREDIT TRANSACTIONS – PART 2: LOAN (Articles 1933 – 1961) III. Mutuum & Usury Law – PART III: DEPOSIT (Articles 1962 – 2009) I. Deposit
in General
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For academic purposes, We first determine whether or not
the stipulation compounding the interest charged should
specifically be indicated in a written agreement.
We rule in the affirmative.
Article 1956 of the New Civil Code, which refers to monetary
interest, provides:
Article 1956.No interest shall be due unless it has been
expressly stipulated in writing.
As mandated by the foregoing provision, payment of
monetary interest shall be due only if: (1) there was an
express stipulation for the payment of interest; and (2) the
agreement for such payment was reduced in writing. Thus,
We have held that collection of interest without any
stipulation thereof in writing is prohibited by law.13
In the case at bar, it is undisputed that the parties have
agreed for the loan to earn 5% monthly interest, the
stipulation to that effect put in writing. When the
petitioners defaulted, the period for payment was
extended, carrying over the terms of the original loan
agreement, including the 5% simple interest. However,
by the third extension of the loan, respondent spouses
decided to alter the agreement by changing the manner
of earning interest rate, compounding it beginning June
1986. This is apparent from the Statement of Account
prepared by the spouses Embisan themselves.
Given the circumstances, We rule that the first
requirement––that there be an express stipulation for
the payment of interest––is not sufficiently complied
with, for purposes of imposing compounded interest on
the loan. The requirement does not only entail reducing
in writing the interest rate to be earned but also the
manner of earning the same, if it is to be compounded.
Failure to specify the manner of earning interest,
however, shall not automatically render the stipulation
imposing the interest rate void since it is readily
apparent from the contract itself that the parties herein
agreed for the loan to bear interest. Instead, in default of
any stipulation on the manner of earning interest, simple
interest shall accrue.
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
Settled is the rule that ambiguities in a contract are As case law instructs, the imposition of an unconscionable
interpreted against the party that caused the ambiguity. Any rate of interest on a money debt, even if knowingly and
ambiguity in a contract whose terms are susceptible of voluntarily assumed, is immoral and unjust. It is tantamount
different interpretations must be read against the party who to a repugnant spoliation and an iniquitous deprivation of
drafted it.14 In the extant case, respondent spouses, having property, repulsive to the common sense of man. It has no
imposed, unilaterally at that, the compounded interest rate, support in law, in principles of justice, or in the human
had the correlative duty of clarifying and reducing in writing conscience nor is there any reason whatsoever which may
how the said interest shall be earned. Having failed to do so, justify such imposition as righteous and as one that may be
the silence of the agreement on the manner of earning sustained within the sphere of public or private morals.17
interest is a valid argument for prohibiting them from
charging interest at a compounded rate.
Summarizing the jurisprudential trend towards this direction
is the recent case of Castro v. Tan18 in which We held:
Further, by analogy, We have had the occasion to hold that,
when a final money judgment ordered the payment of "legal
While we agree with petitioners that parties to a loan
interest" without mention of payment of compound interest, a
agreement have wide latitude to stipulate on any interest
judge who orders payment of compound interest does so in
ratein view of the Central Bank Circular No. 905 s. 1982
excess of his authority.15 As held in Philippine American
which suspended the Usury Law ceiling on interest effective
Accident Insurance v. Flores:16
January 1, 1983, it is also worth stressing that interest rates
whenever unconscionable may still be declared illegal. There
The judgment which was sought to be executed ordered the is certainly nothing in said circular which grants lenders carte
payment of simple "legal interest" only. It said nothing about blanche authority to raise interest rates to levels which will
the payment of compound interest. Accordingly, when the either enslave their borrowers or lead to a hemorrhaging of
respondent judge ordered the payment of compound interest their assets.
he went beyond the confines of his own judgment which had
been affirmed by the Court of Appeals and which had
In several cases, we have ruled that stipulations authorizing
become final. x x x Therefore, in default of any unequivocal
iniquitous or unconscionable interests are contrary to morals,
wording in the contract, the legal interest stipulated by the
if not against the law. In Medel v. Court of Appeals, 19 we
parties should be understood to be simple, not compounded.
annulled a stipulated 5.5% per month or 66% per annum
interest on a ₱500,000.00 loan and a 6% per month or 72%
Imposing 5% monthly interest, whether compounded or per annum interest on a ₱60,000.00 loan, respectively, for
simple, is unconscionable being excessive, iniquitous, unconscionable and exorbitant.
In Ruiz v. Court of Appeals, 20 we declared a 3% monthly
interest imposed on four separate loans to be excessive.
Nevertheless, even if there was suchan agreement that
Inboth cases, the interest rates were reduced to 12% per
interest will be compounded, We agree with the
annum.
petitioners that the 5% monthly rate, be it simple or
compounded, written or verbal, is void for being too
exorbitant, thus running afoul of Article 1306 of the New
Civil Code, which provides:
Article 1306. The contracting parties may establish such
stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary tolaw,
morals, good customs, public order, or public policy.
(emphasis added)
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CREDIT TRANSACTIONS – PART 2: LOAN (Articles 1933 – 1961) III. Mutuum & Usury Law – PART III: DEPOSIT (Articles 1962 – 2009) I. Deposit
in General
Cases
In this case, the 5% monthly interest rate, or 60% per
annum, compounded monthly, stipulated in the Kasulatan is
even higher than the 3% monthly interest rate imposed in the
Ruiz case. Thus, we similarly hold the 5% monthly interest to
be excessive, iniquitous, unconscionable and exorbitant,
contrary to morals, and the law. It is therefore void ab initio
for being violative of Article 1306 of the Civil Code. With this,
and in accord with the Medel and Ruiz cases, we hold that
the Court of Appeals correctly imposed the legal interest of
12% per annum in place of the excessive interest stipulated
in the Kasulatan. (emphasis added)
As can be gleaned, jurisprudence on the nullity of
excessive interest rates is both clear and consistent.
Wefind no cogent reason to deviate therefrom. As the
lender in Castro, respondent spouses herein similarly
imposed a 5% monthly interest in the loan contracted by
petitioners. Following the judicial pronouncement in the
said cases, the interest rate so imposed herein is
nullified for being unconscionable. In lieu thereof, a
simple interest of 12% per annum should be imposed.
The foreclosure sale should be Nullified
In view of the above disquisitions, We are constrained to
nullify the foreclosure proceedings with respect to the
mortgaged property in this case, following the doctrine in
Heirs of Zoilo and Primitiva Espiritu v. Landrito. 21
In Heirs of Espiritu, the spouses Maximo and Paz Landrito,
sometime in 1986, borrowed from the spouses Zoilo and
Primitiva Espiritu the amount of ₱350,000.00, secured by a
real estatemortgage. Because of the Landritos’ continued
inability to pay the loan, the due date for payment was
extended on the condition that the interest that has already
accrued shall, from then on, form part of the principal. As
such, after the third extension, the principal amounted to
₱874,125.00 in only two years. Despite the extensions,
however, the debt remained unpaid, prompting the spouses
Espiritu to foreclose the mortgaged property.
The foreclosure proceeding in Heirs of Espiritu, however,
was eventually nullified by this Court because the Landritos
were deprived of the opportunity to settle the debt, in viewof
the overstated amount demanded from them. As held:
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
Since the Spouses Landrito, the debtors in this case,
were not given an opportunity to settle their debt, at the
correct amount and without the iniquitous interest
imposed, no foreclosure proceedings may be instituted.
A judgment ordering a foreclosure sale is conditioned
upon a finding on the correct amount of the unpaid
obligation and the failure of the debtor to pay the said
amount. In this case, it has notyet been shown that the
Spouses Landrito had already failed to pay the correct
amount of the debt and, therefore, a foreclosure sale
cannot be conducted in order to answer for the unpaid
debt. x x x
As a result, the subsequent registration of the foreclosure
sale cannot transfer any rights over the mortgaged property
to the Spouses Espiritu. The registration of the foreclosure
sale, herein declared invalid, cannot vest title over the
mortgaged property. x x x
Applying Espiritu, the extra-judicial foreclosure of the
mortgaged property dated October 12, 1987 is declarednull,
void, and of no legal effect.
WHEREFORE, in view of the foregoing, the petition is
GRANTED. The Decision and Resolution of the Court of
Appeals, dated May 29, 2013 and January 13, 2014,
respectively, in CA-G.R. CV No. 93667 are hereby
REVERSED and SET ASIDE. Let a new Decision be
entered, the dispositive portion of which reads:
1. The stipulation in the Loan with Real Estate
Mortgage imposing an interest of 5% monthly is
declared void.
2. In view of the nullity of the interest imposed on
the loan which affected the total arrearages upon
which foreclosure was based, the foreclosure of
mortgage, Certificate of Sale, Affidavit of
Consolidation, Deed of Final Sale, and Contract of
Lease are declared void.
3. The case is remanded to the Regional Trial
Court to compute the current arrearages of
petitioners taking into account the partial payments
made by them and the imposition of the simple
interest rate of 12% per annum.
SO ORDERED.
G.R. No. 173227               January 20, 2009
SEBASTIAN SIGA-AN, Petitioner, 
vs.
ALICIA VILLANUEVA, Respondent.
DECISION
CHICO-NAZARIO, J.:
Before Us is a Petition 1 for Review on Certiorari under Rule
45 of the Rules of Court seeking to set aside the
Decision,2 dated 16 December 2005, and Resolution, 3 dated
19 June 2006 of the Court of Appeals in CA-G.R. CV No.
71814, which affirmed in toto the Decision,4 dated 26
January 2001, of the Las Pinas City Regional Trial Court,
Branch 255, in Civil Case No. LP-98-0068.
The facts gathered from the records are as follows:
On 30 March 1998, respondent Alicia Villanueva filed a
complaint5 for sum of money against petitioner Sebastian
Siga-an before the Las Pinas City Regional Trial Court
(RTC), Branch 255, docketed as Civil Case No. LP-98-0068.
Respondent alleged that she was a businesswoman
engaged in supplying office materials and equipments to the
Philippine Navy Office (PNO) located at Fort Bonifacio,
Taguig City, while petitioner was a military officer and
comptroller of the PNO from 1991 to 1996. 
Respondent claimed that sometime in 1992, petitioner
approached her inside the PNO and offered to loan her the
amount of ₱540,000.00. Since she needed capital for her
business transactions with the PNO, she accepted
petitioner’s proposal. The loan agreement was not reduced
in writing. Also, there was no stipulation as to the payment of
interest for the loan.
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CREDIT TRANSACTIONS – PART 2: LOAN (Articles 1933 – 1961) III. Mutuum & Usury Law – PART III: DEPOSIT (Articles 1962 – 2009) I. Deposit
in General
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On 31 August 1993, respondent issued a check worth
₱500,000.00 to petitioner as partial payment of the loan. On
31 October 1993, she issued another check in the amount of
₱200,000.00 to petitioner as payment of the remaining
balance of the loan. Petitioner told her that since she paid a
total amount of ₱700,000.00 for the ₱540,000.00 worth of
loan, the excess amount of ₱160,000.00 would be applied as
interest for the loan. Not satisfied with the amount applied
as interest, petitioner pestered her to pay additional
interest. Petitioner threatened to block or disapprove her
transactions with the PNO if she would not comply with
his demand. As all her transactions with the PNO were
subject to the approval of petitioner as comptroller of
the PNO, and fearing that petitioner might block or
unduly influence the payment of her vouchers in the
PNO, she conceded. Thus, she paid additional amounts in
cash and checks as interests for the loan. She asked
petitioner for receipt for the payments but petitioner told her
that it was not necessary as there was mutual trust and
confidence between them. According to her computation, the
total amount she paid to petitioner for the loan and interest
accumulated to ₱1,200,000.00.7
Thereafter, respondent consulted a lawyer regarding the
propriety of paying interest on the loan despite absence of
agreement to that effect. Her lawyer told her that petitioner
could not validly collect interest on the loan because there
was no agreement between her and petitioner regarding
payment of interest. Since she paid petitioner a total amount
of ₱1,200,000.00 for the ₱540,000.00 worth of loan, and
upon being advised by her lawyer that she made
overpayment to petitioner, she sent a demand letter to
petitioner asking for the return of the excess amount of
₱660,000.00. Petitioner, despite receipt of the demand letter,
ignored her claim for reimbursement.8
Respondent prayed that the RTC render judgment ordering
petitioner to pay respondent (1) ₱660,000.00 plus legal
interest from the time of demand; (2) ₱300,000.00 as moral
damages; (3) ₱50,000.00 as exemplary damages; and (4) an
amount equivalent to 25% of ₱660,000.00 as attorney’s
fees.9
In his answer 10 to the complaint, petitioner denied that he
offered a loan to respondent. He averred that in 1992,
respondent approached and asked him if he could grant her
a loan, as she needed money to finance her business
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
venture with the PNO. At first, he was reluctant to deal with
respondent, because the latter had a spotty record as a
supplier of the PNO. However, since respondent was an
acquaintance of his officemate, he agreed to grant her a
loan. Respondent paid the loan in full.11
Subsequently, respondent again asked him to give her a
loan. As respondent had been able to pay the previous loan
in full, he agreed to grant her another loan. Later, respondent
requested him to restructure the payment of the loan
because she could not give full payment on the due date. He
acceded to her request. Thereafter, respondent pleaded for
another restructuring of the payment of the loan. This time he
rejected her plea. Thus, respondent proposed to execute a
promissory note wherein she would acknowledge her
obligation to him, inclusive of interest, and that she would
issue several postdated checks to guarantee the payment of
her obligation. Upon his approval of respondent’s request for
restructuring of the loan, respondent executed a promissory
note dated 12 September 1994 wherein she admitted having
borrowed an amount of ₱1,240,000.00, inclusive of interest,
from petitioner and that she would pay said amount in March
1995. Respondent also issued to him six postdated checks
amounting to ₱1,240,000.00 as guarantee of compliance
with her obligation. Subsequently, he presented the six
checks for encashment but only one check was honored. He
demanded that respondent settle her obligation, but the latter
failed to do so. Hence, he filed criminal cases for Violation of
the Bouncing Checks Law (Batas Pambansa Blg. 22) against
respondent. The cases were assigned to the Metropolitan
Trial Court of Makati City, Branch 65 (MeTC).12
Petitioner insisted that there was no overpayment because
respondent admitted in the latter’s promissory note that her
monetary obligation as of 12 September 1994 amounted to
₱1,240,000.00 inclusive of interests. He argued that
respondent was already estopped from complaining that she
should not have paid any interest, because she was given
several times to settle her obligation but failed to do so. He
maintained that to rule in favor of respondent is tantamount
to concluding that the loan was given interest-free. Based on
the foregoing averments, he asked the RTC to dismiss
respondent’s complaint.
After trial, the RTC rendered a Decision on 26 January 2001
holding that respondent made an overpayment of her loan
obligation to petitioner and that the latter should refund the
excess amount to the former. It ratiocinated that
respondent’s obligation was only to pay the loaned amount
of ₱540,000.00, and that the alleged interests due should not
be included in the computation of respondent’s total
monetary debt because there was no agreement between
them regarding payment of interest. It concluded that since
respondent made an excess payment to petitioner in the
amount of ₱660,000.00 through mistake, petitioner should
return the said amount to respondent pursuant to the
principle of solutio indebiti.13
The RTC also ruled that petitioner should pay moral
damages for the sleepless nights and wounded feelings
experienced by respondent. Further, petitioner should pay
exemplary damages by way of example or correction for the
public good, plus attorney’s fees and costs of suit. 
The dispositive portion of the RTC Decision reads:
WHEREFORE, in view of the foregoing evidence and in the
light of the provisions of law and jurisprudence on the matter,
judgment is hereby rendered in favor of the plaintiff and
against the defendant as follows:
(1) Ordering defendant to pay plaintiff the amount
of ₱660,000.00 plus legal interest of 12% per
annum computed from 3 March 1998 until the
amount is paid in full;
(2) Ordering defendant to pay plaintiff the amount
of ₱300,000.00 as moral damages; 
(3) Ordering defendant to pay plaintiff the amount
of ₱50,000.00 as exemplary damages;
(4) Ordering defendant to pay plaintiff the amount
equivalent to 25% of ₱660,000.00 as attorney’s
fees; and
(5) Ordering defendant to pay the costs of suit.14
Petitioner appealed to the Court of Appeals. On 16
December 2005, the appellate court promulgated its
Decision affirming in toto the RTC Decision, thus:
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in General
Cases
WHEREFORE, the foregoing considered, the instant appeal
is hereby DENIED and the assailed decision [is]
AFFIRMED in toto.15
Petitioner filed a motion for reconsideration of the appellate
court’s decision but this was denied. 16 Hence, petitioner
lodged the instant petition before us assigning the following
errors:
I.
THE RTC AND THE COURT OF APPEALS ERRED IN
RULING THAT NO INTEREST WAS DUE TO PETITIONER;
II.
THE RTC AND THE COURT OF APPEALS ERRED IN
APPLYING THE PRINCIPLE OF SOLUTIO INDEBITI.17
Interest is a compensation fixed by the parties for the use or
forbearance of money. This is referred to as monetary
interest. Interest may also be imposed by law or by courts as
penalty or indemnity for damages. This is called
compensatory interest.18 The right to interest arises only by
virtue of a contract or by virtue of damages for delay or
failure to pay the principal loan on which interest is
demanded.19
Article 1956 of the Civil Code, which refers to monetary
interest,20 specifically mandates that no interest shall be due
unless it has been expressly stipulated in writing. As can be
gleaned from the foregoing provision, payment of monetary
interest is allowed only if: (1) there was an express
stipulation for the payment of interest; and (2) the agreement
for the payment of interest was reduced in writing. The
concurrence of the two conditions is required for the payment
of monetary interest. Thus, we have held that collection of
interest without any stipulation therefor in writing is prohibited
by law.21
It appears that petitioner and respondent did not agree on
the payment of interest for the loan. Neither was there
convincing proof of written agreement between the two
regarding the payment of interest. Respondent testified that
although she accepted petitioner’s offer of loan amounting to
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
₱540,000.00, there was, nonetheless, no verbal or written
agreement for her to pay interest on the loan. 22
Petitioner presented a handwritten promissory note dated 12
September 199423 wherein respondent purportedly admitted
owing petitioner "capital and interest." Respondent, however,
explained that it was petitioner who made a promissory note
and she was told to copy it in her own handwriting; that all
her transactions with the PNO were subject to the approval
of petitioner as comptroller of the PNO; that petitioner
threatened to disapprove her transactions with the PNO if
she would not pay interest; that being unaware of the law on
interest and fearing that petitioner would make good of his
threats if she would not obey his instruction to copy the
promissory note, she copied the promissory note in her own
handwriting; and that such was the same promissory note
presented by petitioner as alleged proof of their written
agreement on interest.24 Petitioner did not rebut the
foregoing testimony. It is evident that respondent did not
really consent to the payment of interest for the loan and that
she was merely tricked and coerced by petitioner to pay
interest. Hence, it cannot be gainfully said that such
promissory note pertains to an express stipulation of interest
or written agreement of interest on the loan between
petitioner and respondent.
Petitioner, nevertheless, claims that both the RTC and the
Court of Appeals found that he and respondent agreed on
the payment of 7% rate of interest on the loan; that the
agreed 7% rate of interest was duly admitted by respondent
in her testimony in the Batas Pambansa Blg. 22 cases he
filed against respondent; that despite such judicial admission
by respondent, the RTC and the Court of Appeals, citing
Article 1956 of the Civil Code, still held that no interest was
due him since the agreement on interest was not reduced in
writing; that the application of Article 1956 of the Civil Code
should not be absolute, and an exception to the application
of such provision should be made when the borrower admits
that a specific rate of interest was agreed upon as in the
present case; and that it would be unfair to allow respondent
to pay only the loan when the latter very well knew and even
admitted in the Batas Pambansa Blg. 22 cases that there
was an agreed 7% rate of interest on the loan.25
We have carefully examined the RTC Decision and found
that the RTC did not make a ruling therein that petitioner and
respondent agreed on the payment of interest at the rate of
7% for the loan. The RTC clearly stated that although
petitioner and respondent entered into a valid oral contract of
loan amounting to ₱540,000.00, they, nonetheless, never
intended the payment of interest thereon.26 While the Court
of Appeals mentioned in its Decision that it concurred in the
RTC’s ruling that petitioner and respondent agreed on a
certain rate of interest as regards the loan, we consider this
as merely an inadvertence because, as earlier elucidated,
both the RTC and the Court of Appeals ruled that petitioner
is not entitled to the payment of interest on the loan. The rule
is that factual findings of the trial court deserve great weight
and respect especially when affirmed by the appellate
court.27 We found no compelling reason to disturb the ruling
of both courts.
Petitioner’s reliance on respondent’s alleged admission in
the Batas Pambansa Blg. 22 cases that they had agreed on
the payment of interest at the rate of 7% deserves scant
consideration. In the said case, respondent merely testified
that after paying the total amount of loan, petitioner ordered
her to pay interest.28 Respondent did not categorically
declare in the same case that she and respondent made
an express stipulation in writing as regards payment of
interest at the rate of 7%. As earlier discussed, monetary
interest is due only if there was an expressstipulation in
writing for the payment of interest. 
There are instances in which an interest may be imposed
even in the absence of express stipulation, verbal or written,
regarding payment of interest. Article 2209 of the Civil Code
states that if the obligation consists in the payment of a sum
of money, and the debtor incurs delay, a legal interest of
12% per annum may be imposed as indemnity for damages
if no stipulation on the payment of interest was agreed upon.
Likewise, Article 2212 of the Civil Code provides that interest
due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent on this
point. 
All the same, the interest under these two instances may be
imposed only as a penalty or damages for breach of
contractual obligations. It cannot be charged as a
compensation for the use or forbearance of money. In other
words, the two instances apply only to compensatory interest
and not to monetary interest. 29 The case at bar involves
petitioner’s claim for monetary interest.
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in General
Cases
Further, said compensatory interest is not chargeable in the
instant case because it was not duly proven that respondent
defaulted in paying the loan. Also, as earlier found, no
interest was due on the loan because there was no written
agreement as regards payment of interest.
Apropos the second assigned error, petitioner argues that
the principle of solutio indebiti does not apply to the instant
case. Thus, he cannot be compelled to return the alleged
excess amount paid by respondent as interest. 30
Under Article 1960 of the Civil Code, if the borrower of
loan pays interest when there has been no stipulation
therefor, the provisions of the Civil Code
concerning solutio indebiti shall be applied. Article 2154
of the Civil Code explains the principle of solutio
indebiti. Said provision provides that if something is
received when there is no right to demand it, and it was
unduly delivered through mistake, the obligation to
return it arises. In such a case, a creditor-debtor
relationship is created under a quasi-contract whereby
the payor becomes the creditor who then has the right to
demand the return of payment made by mistake, and the
person who has no right to receive such payment
becomes obligated to return the same. The quasi-contract
of solutio indebiti harks back to the ancient principle that no
one shall enrich himself unjustly at the expense of
another.31 The principle of solutio indebiti applies where
(1) a payment is made when there exists no binding
relation between the payor, who has no duty to pay, and
the person who received the payment; and (2) the
payment is made through mistake, and not through
liberality or some other cause. 32 We have held that the
principle of solutio indebiti applies in case of erroneous
payment of undue interest.33
It was duly established that respondent paid interest to
petitioner. Respondent was under no duty to make such
payment because there was no express stipulation in
writing to that effect. There was no binding relation
between petitioner and respondent as regards the
payment of interest. The payment was clearly a mistake.
Since petitioner received something when there was no
right to demand it, he has an obligation to return it. 
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
We shall now determine the propriety of the monetary award
and damages imposed by the RTC and the Court of Appeals.
Records show that respondent received a loan amounting to
₱540,000.00 from petitioner.34 Respondent issued two
checks with a total worth of ₱700,000.00 in favor of petitioner
as payment of the loan. 35 These checks were subsequently
encashed by petitioner. 36 Obviously, there was an excess of
₱160,000.00 in the payment for the loan. Petitioner claims
that the excess of ₱160,000.00 serves as interest on the
loan to which he was entitled. Aside from issuing the said
two checks, respondent also paid cash in the total amount of
₱175,000.00 to petitioner as interest.37 Although no receipts
reflecting the same were presented because petitioner
refused to issue such to respondent, petitioner, nonetheless,
admitted in his Reply-Affidavit 38 in the Batas Pambansa Blg.
22 cases that respondent paid him a total amount of
₱175,000.00 cash in addition to the two checks. Section 26
Rule 130 of the Rules of Evidence provides that the
declaration of a party as to a relevant fact may be given in
evidence against him. Aside from the amounts of
₱160,000.00 and ₱175,000.00 paid as interest, no other
proof of additional payment as interest was presented by
respondent. Since we have previously found that petitioner is
not entitled to payment of interest and that the principle
of solutio indebiti applies to the instant case, petitioner
should return to respondent the excess amount of
₱160,000.00 and ₱175,000.00 or the total amount of
₱335,000.00. Accordingly, the reimbursable amount to
respondent fixed by the RTC and the Court of Appeals
should be reduced from ₱660,000.00 to ₱335,000.00.
As earlier stated, petitioner filed five (5) criminal cases
for violation of Batas Pambansa Blg. 22 against
respondent. In the said cases, the MeTC found
respondent guilty of violating Batas Pambansa Blg. 22
for issuing five dishonored checks to petitioner.
Nonetheless, respondent’s conviction therein does not
affect our ruling in the instant case. The two checks,
subject matter of this case, totaling ₱700,000.00 which
respondent claimed as payment of the ₱540,000.00
worth of loan, were not among the five checks found to
be dishonored or bounced in the five criminal cases.
Further, the MeTC found that respondent made an
overpayment of the loan by reason of the interest which
the latter paid to petitioner.39
Article 2217 of the Civil Code provides that moral damages
may be recovered if the party underwent physical suffering,
mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation
and similar injury. Respondent testified that she experienced
sleepless nights and wounded feelings when petitioner
refused to return the amount paid as interest despite her
repeated demands. Hence, the award of moral damages is
justified. However, its corresponding amount of ₱300,000.00,
as fixed by the RTC and the Court of Appeals, is exorbitant
and should be equitably reduced. Article 2216 of the Civil
Code instructs that assessment of damages is left to the
discretion of the court according to the circumstances of
each case. This discretion is limited by the principle that the
amount awarded should not be palpably excessive as to
indicate that it was the result of prejudice or corruption on the
part of the trial court. 40 To our mind, the amount of
₱150,000.00 as moral damages is fair, reasonable, and
proportionate to the injury suffered by respondent.
Article 2232 of the Civil Code states that in a quasi-contract,
such as solutio indebiti, exemplary damages may be
imposed if the defendant acted in an oppressive manner.
Petitioner acted oppressively when he pestered respondent
to pay interest and threatened to block her transactions with
the PNO if she would not pay interest. This forced
respondent to pay interest despite lack of agreement thereto.
Thus, the award of exemplary damages is appropriate. The
amount of ₱50,000.00 imposed as exemplary damages by
the RTC and the Court is fitting so as to deter petitioner and
other lenders from committing similar and other serious
wrongdoings.41
Jurisprudence instructs that in awarding attorney’s fees, the
trial court must state the factual, legal or equitable
justification for awarding the same. 42 In the case under
consideration, the RTC stated in its Decision that the award
of attorney’s fees equivalent to 25% of the amount paid as
interest by respondent to petitioner is reasonable and
moderate considering the extent of work rendered by
respondent’s lawyer in the instant case and the fact that it
dragged on for several years.43 Further, respondent testified
that she agreed to compensate her lawyer handling the
instant case such amount. 44 The award, therefore, of
attorney’s fees and its amount equivalent to 25% of the
amount paid as interest by respondent to petitioner is proper.
35
CREDIT TRANSACTIONS – PART 2: LOAN (Articles 1933 – 1961) III. Mutuum & Usury Law – PART III: DEPOSIT (Articles 1962 – 2009) I. Deposit
in General
Cases
Finally, the RTC and the Court of Appeals imposed a 12%
rate of legal interest on the amount refundable to respondent
computed from 3 March 1998 until its full payment. This is
erroneous.  ZSHORNACK respondents.
We held in Eastern Shipping Lines, Inc. v. Court of
Appeals,45 that when an obligation, not constituting a loan or
forbearance of money is breached, an interest on the amount
of damages awarded may be imposed at the rate of 6% per
annum. We further declared that when the judgment of the
court awarding a sum of money becomes final and
executory, the rate of legal interest, whether it is a
loan/forbearance of money or not, shall be 12% per annum
from such finality until its satisfaction, this interim period
being deemed equivalent to a forbearance of credit.
In the present case, petitioner’s obligation arose from a
quasi-contract of solutio indebiti and not from a loan or
forbearance of money. Thus, an interest of 6% per
annum should be imposed on the amount to be refunded
as well as on the damages awarded and on the
attorney’s fees, to be computed from the time of the
extra-judicial demand on 3 March 1998, 46 up to the
finality of this Decision. In addition, the interest shall
become 12% per annum from the finality of this Decision
up to its satisfaction.
WHEREFORE, the Decision of the Court of Appeals in CA-
G.R. CV No. 71814, dated 16 December 2005, is
hereby AFFIRMED with the following MODIFICATIONS: (1)
the amount of ₱660,000.00 as refundable amount of interest
is reduced to THREE HUNDRED THIRTY FIVE THOUSAND
PESOS (₱335,000.00); (2) the amount of ₱300,000.00
imposed as moral damages is reduced to ONE HUNDRED
FIFTY THOUSAND PESOS (₱150,000.00); (3) an interest of
6% per annum is imposed on the ₱335,000.00, on the
damages awarded and on the attorney’s fees to be
computed from the time of the extra-judicial demand on 3
March 1998 up to the finality of this Decision; and (4) an
interest of 12% per annum is also imposed from the finality of
this Decision up to its satisfaction. Costs against petitioner.
SO ORDERED.
G.R. No. L-66826 August 19, 1988
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
BANK OF THE PHILIPPINE ISLANDS, petitioner,  xxx xxx xxx
vs.
THE INTERMEDIATE APPELLATE COURT and
5. Ordering defendant COMTRUST to
 
pay plaintiff in the amount of P8,000.00
as damages in the concept of litigation
CORTES, J.: expenses and attorney's fees suffered
by plaintiff as a result of the failure of the
defendant bank to restore to his
The original parties to this case were Rizaldy T. Zshornack
(plaintiffs) account the amount of U.S.
and the Commercial Bank and Trust Company of the
$1,000.00 and to return to him (plaintiff)
Philippines [hereafter referred to as "COMTRUST."] In 1980,
the U.S. $3,000.00 cash left for
the Bank of the Philippine Islands (hereafter referred to as
safekeeping. 
BPI absorbed COMTRUST through a corporate merger, and
was substituted as party to the case. 
Costs against defendant COMTRUST. 
Rizaldy Zshornack initiated proceedings on June 28,1976 by
filing in the Court of First Instance of Rizal — Caloocan City SO ORDERED. [Rollo, pp. 47-48.] 
a complaint against COMTRUST alleging four causes of
action. Except for the third cause of action, the CFI ruled in
Undaunted, the bank comes to this Court praying that it be
favor of Zshornack. The bank appealed to the Intermediate
totally absolved from any liability to Zshornack. The latter not
Appellate Court which modified the CFI decision absolving
having appealed the Court of Appeals decision, the issues
the bank from liability on the fourth cause of action. The
facing this Court are limited to the bank's liability with regard
pertinent portions of the judgment, as modified, read: 
to the first and second causes of action and its liability for
damages. 
IN VIEW OF THE FOREGOING, the
Court renders judgment as follows: 
1. We first consider the first cause of action, On the dates
material to this case, Rizaldy Zshornack and his wife, Shirley
1. Ordering the defendant COMTRUST Gorospe, maintained in COMTRUST, Quezon City Branch, a
to restore to the dollar savings account dollar savings account and a peso current account. 
of plaintiff (No. 25-4109) the amount of
U.S $1,000.00 as of October 27, 1975 to
On October 27, 1975, an application for a dollar draft was
earn interest together with the remaining
accomplished by Virgilio V. Garcia, Assistant Branch
balance of the said account at the rate
Manager of COMTRUST Quezon City, payable to a certain
fixed by the bank for dollar deposits
Leovigilda D. Dizon in the amount of $1,000.00. In the
under Central Bank Circular 343; 
application, Garcia indicated that the amount was to be
charged to Dollar Savings Acct. No. 25-4109, the savings
2. Ordering defendant COMTRUST to account of the Zshornacks; the charges for commission,
return to the plaintiff the amount of U.S. documentary stamp tax and others totalling P17.46 were to
$3,000.00 immediately upon the finality be charged to Current Acct. No. 210465-29, again, the
of this decision, without interest for the current account of the Zshornacks. There was no indication
reason that the said amount was merely of the name of the purchaser of the dollar draft. 
held in custody for safekeeping, but was
not actually deposited with the
On the same date, October 27,1975, COMTRUST, under the
defendant COMTRUST because being
signature of Virgilio V. Garcia, issued a check payable to the
cash currency, it cannot by law be
order of Leovigilda D. Dizon in the sum of US $1,000 drawn
deposited with plaintiffs dollar account
on the Chase Manhattan Bank, New York, with an indication
and defendant's only obligation is to
that it was to be charged to Dollar Savings Acct. No. 25-
return the same to plaintiff upon
4109. 
demand; 
36
CREDIT TRANSACTIONS – PART 2: LOAN (Articles 1933 – 1961) III. Mutuum & Usury Law – PART III: DEPOSIT (Articles 1962 – 2009) I. Deposit
in General
Cases
When Zshornack noticed the withdrawal of US$1,000.00
from his account, he demanded an explanation from the
bank. In answer, COMTRUST claimed that the peso value of
the withdrawal was given to Atty. Ernesto Zshornack, Jr.,
brother of Rizaldy, on October 27, 1975 when he (Ernesto)
encashed with COMTRUST a cashier's check for P8,450.00
issued by the Manila Banking Corporation payable to
Ernesto.  proceeds amounting to P8,350.00 were deposited to his
Upon consideration of the foregoing facts, this Court finds no
reason to disturb the ruling of both the trial court and the
Appellate Court on the first cause of action. Petitioner must
be held liable for the unauthorized withdrawal of
US$1,000.00 from private respondent's dollar account.  conversion rates, BPI now posits another ground to defeat
In its desperate attempt to justify its act of withdrawing from
its depositor's savings account, the bank has adopted
inconsistent theories. First, it still maintains that the peso
value of the amount withdrawn was given to Atty. Ernesto
Zshornack, Jr. when the latter encashed the Manilabank
Cashier's Check. At the same time, the bank claims that the
withdrawal was made pursuant to an agreement where
Zshornack allegedly authorized the bank to withdraw from
his dollar savings account such amount which, when
converted to pesos, would be needed to fund his peso
current account. If indeed the peso equivalent of the amount
withdrawn from the dollar account was credited to the peso
current account, why did the bank still have to pay Ernesto? 
At any rate, both explanations are unavailing. With regard to
the first explanation, petitioner bank has not shown how the
transaction involving the cashier's check is related to the
transaction involving the dollar draft in favor of Dizon
financed by the withdrawal from Rizaldy's dollar account.
The two transactions appear entirely independent of each
other. Moreover, Ernesto Zshornack, Jr., possesses a
personality distinct and separate from Rizaldy Zshornack.
Payment made to Ernesto cannot be considered payment to
Rizaldy.  questioning the authority of Garcia to bind the bank, or
As to the second explanation, even if we assume that there
was such an agreement, the evidence do not show that the
withdrawal was made pursuant to it. Instead, the record
reveals that the amount withdrawn was used to finance a
dollar draft in favor of Leovigilda D. Dizon, and not to fund
the current account of the Zshornacks. There is no proof
whatsoever that peso Current Account No. 210-465-29 was
ever credited with the peso equivalent of the US$1,000.00
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
withdrawn on October 27, 1975 from Dollar Savings Account safekeeping. When he requested the return of the money on
No. 25-4109.  May 10, 1976, COMTRUST explained that the sum was
disposed of in this manner: US$2,000.00 was sold on
December 29, 1975 and the peso proceeds amounting to
2. As for the second cause of action, the complaint filed with
P14,920.00 were deposited to Zshornack's current account
the trial court alleged that on December 8, 1975, Zshornack
per deposit slip accomplished by Garcia; the remaining
entrusted to COMTRUST, thru Garcia, US
US$1,000.00 was sold on February 3, 1976 and the peso
$3,000.00 cash (popularly known as greenbacks)
for safekeeping, and that the agreement was embodied in a
current account per deposit slip also accomplished by
document, a copy of which was attached to and made part of
Garcia. 
the complaint. The document reads:
Aside from asserting that the US$3,000.00 was properly
Makati Cable Address:
credited to Zshornack's current account at prevailing
Philippines “COMTRUST"
private respondent's claim. It now argues that the contract
embodied in the document is the contract of depositum (as
COMMERCIAL BANK AND TRUST COMPANY
defined in Article 1962, New Civil Code), which banks do not
enter into. The bank alleges that Garcia exceeded his
of the Philippines
powers when he entered into the transaction. Hence, it is
claimed, the bank cannot be liable under the contract, and
Quezon City Branch
the obligation is purely personal to Garcia. 
December 8, 1975
Before we go into the nature of the contract entered into, an
MR. RIZALDY T. ZSHORNACK important point which arises on the pleadings, must be
&/OR MRS SHIRLEY E. ZSHORNACK considered. 
Sir/Madam:
The second cause of action is based on a document
purporting to be signed by COMTRUST, a copy of which
We acknowledged (sic) having received from you today the
document was attached to the complaint. In short, the
sum of US DOLLARS: THREE THOUSAND ONLY
second cause of action was based on an actionable
(US$3,000.00) for safekeeping.
document. It was therefore incumbent upon the bank to
specifically deny under oath the due execution of the
Received by:
document, as prescribed under Rule 8, Section 8, if it
(Sgd.) VIRGILIO V. GARCIA
desired: (1) to question the authority of Garcia to bind the
corporation; and (2) to deny its capacity to enter into such
It was also alleged in the complaint that despite demands, contract. [See, E.B. Merchant v. International Banking
the bank refused to return the money.  Corporation, 6 Phil. 314 (1906).] No sworn answer denying
the due execution of the document in question, or
In its answer, COMTRUST averred that the US$3,000 was
denying the bank's capacity to enter into the contract, was
credited to Zshornack's peso current account at prevailing
ever filed. Hence, the bank is deemed to have admitted not
conversion rates. 
only Garcia's authority, but also the bank's power, to enter
into the contract in question. 
It must be emphasized that COMTRUST did not deny
specifically under oath the authenticity and due execution of
In the past, this Court had occasion to explain the reason
the above instrument. 
behind this procedural requirement. 
During trial, it was established that on December 8, 1975
The reason for the rule enunciated in the
Zshornack indeed delivered to the bank US $3,000 for
foregoing authorities will, we think, be
37
CREDIT TRANSACTIONS – PART 2: LOAN (Articles 1933 – 1961) III. Mutuum & Usury Law – PART III: DEPOSIT (Articles 1962 – 2009) I. Deposit
in General
Cases
readily appreciated. In dealing with
corporations the public at large is bound
to rely to a large extent upon outward
appearances. If a man is found acting
for a corporation with the external indicia
of authority, any person, not having
notice of want of authority, may usually
rely upon those appearances; and if it be
found that the directors had permitted
the agent to exercise that authority and
thereby held him out as a person
competent to bind the corporation, or
had acquiesced in a contract and
retained the benefit supposed to have
been conferred by it, the corporation will
be bound, notwithstanding the actual
authority may never have been granted  subsequent acts of the parties also show that the intent of
... Whether a particular officer actually
possesses the authority which he
assumes to exercise is frequently known
to very few, and the proof of it usually is
not readily accessible to the stranger
who deals with the corporation on the
faith of the ostensible authority
exercised by some of the corporate
officers. It is therefore reasonable, in a
case where an officer of a corporation
has made a contract in its name, that the
corporation should be required, if it
denies his authority, to state such
defense in its answer. By this means the
plaintiff is apprised of the fact that the
agent's authority is contested; and he is
given an opportunity to adduce evidence
showing either that the authority existed
or that the contract was ratified and
approved. [Ramirez v. Orientalist Co.
and Fernandez, 38 Phil. 634, 645- 646
(1918).]  on December 9, 1949, which was in force at the time the
Petitioner's argument must also be rejected for another
reason. The practical effect of absolving a corporation from
liability every time an officer enters into a contract which is
beyond corporate powers, even without the proper allegation
or proof that the corporation has not authorized nor ratified
the officer's act, is to cast corporations in so perfect a mold
that transgressions and wrongs by such artificial beings
become impossible [Bissell v. Michigan Southern and N.I.R.
Cos 22 N.Y 258 (1860).] "To say that a corporation has no
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
right to do unauthorized acts is only to put forth a very plain
truism but to say that such bodies have no power or capacity
to err is to impute to them an excellence which does not
belong to any created existence with which we are
acquainted. The distinction between power and right is no
more to be lost sight of in respect to artificial than in respect
to natural persons." [Ibid.] 
Having determined that Garcia's act of entering into the
contract binds the corporation, we now determine the correct
nature of the contract, and its legal consequences, including
its enforceability.  payable abroad, irrespective of the currency in which they
The document which embodies the contract states that the
US$3,000.00 was received by the bank for safekeeping. The
the parties was really for the bank to safely keep the dollars
and to return it to Zshornack at a later time, Thus, Zshornack
demanded the return of the money on May 10, 1976, or over
five months later.  or with banks or banking institutions, and existent within the
The above arrangement is that contract defined under Article
1962, New Civil Code, which reads: 
Art. 1962. A deposit is constituted from
the moment a person receives a thing
belonging to another, with the obligation
of safely keeping it and of returning the
same. If the safekeeping of the thing
delivered is not the principal purpose of
the contract, there is no deposit but
some other contract. 
Note that the object of the contract between Zshornack and
COMTRUST was foreign exchange. Hence, the transaction
was covered by Central Bank Circular No. 20, Restrictions
on Gold and Foreign Exchange Transactions, promulgated
parties entered into the transaction involved in this case. The
circular provides: 
xxx xxx xxx
2. Transactions in the assets described below and all
dealings in them of whatever nature, including, where
applicable their exportation and importation, shall NOT be
effected, except with respect to deposit accounts included in
sub-paragraphs (b) and (c) of this paragraph, when such
deposit accounts are owned by and in the name of, banks. 
(a) Any and all assets, provided they are held through, in, or
with banks or banking institutions located in the Philippines,
including money, checks, drafts, bullions bank drafts, deposit
accounts (demand, time and savings), all debts,
indebtedness or obligations, financial brokers and investment
houses, notes, debentures, stocks, bonds, coupons, bank
acceptances, mortgages, pledges, liens or other rights in the
nature of security, expressed in foreign currencies, or if
are expressed, and belonging to any person, firm,
partnership, association, branch office, agency, company or
other unincorporated body or corporation residing or located
within the Philippines; 
(b) Any and all assets of the kinds included and/or described
in subparagraph (a) above, whether or not held through, in,
Philippines, which belong to any person, firm, partnership,
association, branch office, agency, company or other
unincorporated body or corporation not residing or located
within the Philippines; 
(c) Any and all assets existent within the Philippines
including money, checks, drafts, bullions, bank drafts, all
debts, indebtedness or obligations, financial securities
commonly dealt in by bankers, brokers and investment
houses, notes, debentures, stock, bonds, coupons, bank
acceptances, mortgages, pledges, liens or other rights in the
nature of security expressed in foreign currencies, or if
payable abroad, irrespective of the currency in which they
are expressed, and belonging to any person, firm,
partnership, association, branch office, agency, company or
other unincorporated body or corporation residing or located
within the Philippines. 
xxx xxx xxx
4. (a) All receipts of foreign exchange
shall be sold daily to the Central Bank by
those authorized to deal in foreign
exchange. All receipts of foreign
exchange by any person, firm,
partnership, association, branch office,
agency, company or other
unincorporated body or corporation shall
be sold to the authorized agents of the
38
CREDIT TRANSACTIONS – PART 2: LOAN (Articles 1933 – 1961) III. Mutuum & Usury Law – PART III: DEPOSIT (Articles 1962 – 2009) I. Deposit
in General
Cases
Central Bank by the recipients within
one business day following the receipt
of such foreign exchange. Any person,
firm, partnership, association, branch
office, agency, company or other
unincorporated body or corporation,
residing or located within the Philippines,
who acquires on and after the date of
this Circular foreign exchange shall not,
unless licensed by the Central Bank,
dispose of such foreign exchange in
whole or in part, nor receive less than its
full value, nor delay taking ownership
thereof except as such delay is
customary; Provided, further, That within
one day upon taking ownership, or
receiving payment, of foreign exchange
the aforementioned persons and entities
shall sell such foreign exchange to
designated agents of the Central Bank. 
xxx xxx xxx
8. Strict observance of the provisions of
this Circular is enjoined; and any person,
firm or corporation, foreign or domestic,
who being bound to the observance
thereof, or of such other rules,
regulations or directives as may
hereafter be issued in implementation of
this Circular, shall fail or refuse to
comply with, or abide by, or shall violate
the same, shall be subject to the penal
sanctions provided in the Central Bank
Act.
xxx xxx xxx
Paragraph 4 (a) above was modified by Section 6 of Central
Bank Circular No. 281, Regulations on Foreign Exchange,
promulgated on November 26, 1969 by limiting its coverage
to Philippine residents only. Section 6 provides: 
SEC. 6. All receipts of foreign exchange
by any resident person, firm, company
or corporation shall be sold to authorized
agents of the Central Bank by the
recipients within one business day
following the receipt of such foreign
Abrasaldo, A., Cavite, A., Dingal, J., Emuy, F., and Palma Gil, L. – II-Sanchez Roman
exchange. Any resident person, firm, WHEREFORE, the decision appealed from is hereby
company or corporation residing or MODIFIED. Petitioner is ordered to restore to the dollar
located within the Philippines, who savings account of private respondent the amount of
acquires foreign exchange shall not, US$1,000.00 as of October 27, 1975 to earn interest at the
unless authorized by the Central Bank, rate fixed by the bank for dollar savings deposits. Petitioner
dispose of such foreign exchange in is further ordered to pay private respondent the amount of
whole or in part, nor receive less than its P8,000.00 as damages. The other causes of action of private
full value, nor delay taking ownership respondent are ordered dismissed. 
thereof except as such delay is
customary; Provided, That, within one
SO ORDERED.
business day upon taking ownership or
receiving payment of foreign exchange
the aforementioned persons and entities
shall sell such foreign exchange to the
authorized agents of the Central Bank. 
As earlier stated, the document and the subsequent acts of
the parties show that they intended the bank to safekeep the
foreign exchange, and return it later to Zshornack, who
alleged in his complaint that he is a Philippine resident. The
parties did not intended to sell the US dollars to the Central
Bank within one business day from receipt. Otherwise, the
contract of depositum would never have been entered into at
all. 
Since the mere safekeeping of the greenbacks, without
selling them to the Central Bank within one business day
from receipt, is a transaction which is not authorized by CB
Circular No. 20, it must be considered as one which falls
under the general class of prohibited transactions. Hence,
pursuant to Article 5 of the Civil Code, it is void, having been
executed against the provisions of a mandatory/prohibitory
law. More importantly, it affords neither of the parties a cause
of action against the other. "When the nullity proceeds from
the illegality of the cause or object of the contract, and the
act constitutes a criminal offense, both parties being in pari
delicto, they shall have no cause of action against each
other. . ." [Art. 1411, New Civil Code.] The only remedy is
one on behalf of the State to prosecute the parties for
violating the law. 
We thus rule that Zshornack cannot recover under the
second cause of action. 
3. Lastly, we find the P8,000.00 awarded by the courts a
quo as damages in the concept of litigation expenses and
attorney's fees to be reasonable. The award is sustained. 
39