G.R. No.

195166

SPOUSES SALVADOR ABELLA AND ALMA ABELLA, Petitioners,

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 Decision  and the January 4, 2011
1

Resolution  of the Court of Appeals Nineteenth Division in CA-G.R. CV No. 01388. The Petition also prays
2

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 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  for sum of money and
5

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. Petitioners added that respondents were able to pay a total of P200,000.00—
P100,000.00 paid on two separate occasions—leaving an unpaid balance of P300,000.00. 7

In their Answer  (with counterclaim and motion to dismiss), respondents alleged that the amount involved did
8

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]."  The 2.5% that each party
10

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 Decision  dated December 28, 2005, the Regional Trial Court ruled in favor of petitioners. It noted that
12

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.  The Regional Trial Court adjudged
13

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;

1
 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,  the Regional Trial Court denied respondents’ Motion for
15

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.  The Court of Appeals noted that while the
17

acknowledgement receipt showed that interest was to be charged, no particular interest rate was
specified.  Thus, at the time respondents were making interest payments of 2.5% per month, these interest
18

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,  noted that interest in the concept of actual or compensatory damages accrues only from the time
19

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.  The dispositive portion of the assailed Court of
22

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 Resolution  dated January 4, 2011, the Court of Appeals denied petitioners’ Motion for
24

Reconsideration.

Aggrieved, petitioners filed the present appeal  where they claim that the Court of Appeals erred in
25

completely striking off interest despite the parties’ written agreement stipulating it, as well as in ordering
them to reimburse and pay interest to respondents.

In support of their contentions, petitioners cite Article 1371 of the Civil Code,  which calls for the
26

consideration of the contracting parties’ contemporaneous and subsequent acts in determining their true
intention. Petitioners insist that respondents’ consistent payment of interest in the year following the
perfection of the loan showed that interest at 2.5% per month was properly agreed upon despite its not
having been expressly stated in the acknowledgment receipt. They add that during the proceedings before
the Regional Trial Court, respondents admitted that interest was due on the loan. 27

In their Comment,  respondents reiterate the Court of Appeals’ findings that no interest rate was ever
28

stipulated by the parties and that interest was not due and demandable at the time they were making
interest payments. 29

In their Reply,  petitioners argue that even though no interest rate was stipulated in the acknowledgment
30

receipt, the case fell under the exception to the Parol Evidence Rule. They also argue that there exists

2
convincing and sufficiently credible evidence to supplement the imperfection of the acknowledgment
receipt.
31

For resolution are the following issues:

First, whether interest accrued on respondents’ loan from petitioners. If so, at what rate?

Second, whether petitioners are liable to reimburse respondents for the latter’s supposed excess payments
and for interest.

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

Respondents’ claims, as articulated in their testimonies before the trial court, cannot prevail over the clear
terms of the document attesting to the relation of the parties. "If the 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

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

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

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes
to the borrower.

....

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

On March 22, 1999, respondents executed an acknowledgment receipt to petitioners, which states:

Batan, Aklan

March 22, 1999

This is to acknowledge receipt of the Amount of Five Hundred Thousand (P500,000.00) Pesos from Mrs.
Alma R. Abella, payable within one (1) year from date hereof with interest.

Annie C. Abella (sgd.) Romeo M. Abella (sgd.)  (Emphasis supplied)

33

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

3
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,  this court clarified the effect of Article 1956 of the Civil Code and noted
35

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

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.  (Emphasis supplied)
39

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.  Thus, the rule leaves no room for
40

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 Frames  recognized that the legal rate of interest has been
41

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

4
30, 2013. Come July 1, 2013 the new rate of six percent (6%) per annum shall be the prevailing rate of
interest when applicable.  (Emphasis supplied, citations omitted)
42

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:

....

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.  (Emphasis supplied, citations omitted)
43

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 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.  In addition, they claim that this case falls under the exceptions to the Parol Evidence Rule, as
44

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,  we spelled 47

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

5
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").  What petitioners have an issue with is not
49

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,  the willingness of the parties to enter into a relation
50

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, 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.

6
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,  the interest due on
54

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,  while the second payment of P100,000.00 was made on December 30, 2001.
55 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"  what was supposedly interest "at the rate of 2.5% per month."
59 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,

7
P452,480.00 was due from respondents. This 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.

(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.

8
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.

As respondents made an overpayment, the principle of solutio indebiti as provided by Article 2154 of the
Civil Code  applies. Article 2154 reads:
64

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,  this court explained the application of solutio indebiti:

65

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 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.  Any further payment they made was only because of a
1awp++i1

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."  This applies to obligations arising from quasi-contracts such as solutio indebiti.
67

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

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.

9
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.

MARVIC M.V.F. LEONEN

Associate Justice

G.R. No. 194507               September 8, 2014

FEDERAL BUILDERS, INC., Petitioner,

vs.
FOUNDATION SPECIALISTS, INC., Respondent,

x-----------------------x

G.R. No. 194621

FOUNDATION SPECIALISTS, INC., Petitioner,

vs.
FEDERAL BUILDERS, INC., Respondent.

DECISION

PERALTA, J.:

Before the Court are two consolidated cases, namely: (1) Petition for review on certiorari under Rule 45 of
the Rules of Court, docketed as G.R. No. 194507, filed by Federal Builders, Inc., assailing the Decision  and
1

Resolution,  dated July 15, 2010 and November 23, 2010, respectively, of the Court of Appeals (CA) in CA-
2

G.R. CV No. 70849, which affirmed with modification the Decision  dated May 3, 2001 of the Regional Trial
3

Court (RTC) in Civil Case No. 92-075; and (2) Petition for review on certiorari under Rule 45 of the Rules of
Court,docketed as G.R. No. 194621, filed by Foundation Specialists, Inc., assailing the same Decision  and
4

Resolution,  dated July 15, 2010 and November 23, 2010,respectively, of the CA in CA- G.R. CV No. 70849,
5

which affirmed with modification the Decision  dated May 3, 2001 of the RTC in Civil Case No. 92-075.
6

The antecedent facts are as follows:

On August 20, 1990, Federal Builders, Inc. (FBI) entered into an agreement with Foundation Specialists, Inc.
(FSI) whereby the latter, as subcontractor, undertook the construction of the diaphragm wall, capping beam,
and guide walls of the Trafalgar Plaza located at Salcedo Village, Makati City (the Project), for a total
contract price of Seven Million Four Hundred Thousand Pesos (₱7,400,000.00).  Under the agreement,  FBI
7 8

was to pay a downpayment equivalent to twenty percent (20%) of the contract price and the balance,
through a progress billing every fifteen (15) days, payable not later than one (1) week from presentation of
the billing.

On January 9, 1992, FSI filed a complaint for Sum of Money against FBI before the RTC of Makati City
seeking to collect the amount of One Million Six Hundred Thirty-Five Thousand Two Hundred Seventy-Eight
Pesos and Ninety-One Centavos (₱1,635,278.91), representing Billings No. 3 and 4, with accrued interest
from August 1, 1991 plus moral and exemplary damages with attorney’s fees.  In its complaint,FSI alleged
9

that FBI refused to pay said amount despite demand and itscompletion of ninety-seven percent (97%) of the
contracted works.

In its Answer with Counterclaim, FBI claimed that FSI completed only eighty-five percent (85%) of the
contracted works, failing to finish the diaphragm wall and component works in accordance with the plans

10
and specifications and abandoning the jobsite. FBI maintains that because of FSI’s inadequacy, its schedule
in finishing the Project has been delayed resulting in the Project owner’s deferment of its own progress
billings.  It further interposed counterclaims for amounts it spent for the remedial works on the alleged
10

defects in FSI’s work.

On May 3, 2001, after evaluating the evidence of both parties, the RTC ruled in favor of FSI, the dispositive
portion of its Decision reads:

WHEREFORE, on the basis of the foregoing, judgment is rendered ordering defendant to pay plaintiff the
following:

1. The sum of ₱1,024,600.00 representing billings 3 and 4, less the amount of ₱33,354.40 plus 12%
legal interest from August 30, 1991;

2. The sum of ₱279,585.00 representing the cost of undelivered cement;

3. The sum of ₱200,000.00 as attorney’s fees; and

4. The cost of suit.

Defendant’s counterclaim is deniedfor lack of factual and legal basis.

SO ORDERED. 11

On appeal, the CA affirmed the Decision of the lower court, but deleted the sum of ₱279,585.00
representing the cost of undelivered cement and reduced the award of attorney’s fees to ₱50,000.00. In its
Decision  dated July 15, 2010, the CA explained that FSI failed to substantiate how and in what manner it
12

incurred the cost of cement by stressing that its claim was not supported by actual receipts. Also, it found
that while the trial court did not err in awarding attorney’s fees, the same should be reduced for being
unconscionable and excessive. On FBI’s rejection of the 12% annual interest rate on the amount of Billings
3 and 4, the CA ruled that the lower court did not err in imposing the same in the following wise:

x x x The rule is well-settled that when an obligation is breached, and it consists in the payment of a sum of
money, the interest due shall itself earn legal interest from the time it is judicially demanded (BPI Family
Savings Bank, Inc. vs. First Metro Investment Corporation, 429 SCRA 30). When there is no rate of interest
stipulated, such as in the present case, the legal rate of interest shall be imposed, pursuant to Article 2209
of the New Civil Code. In the absence of a stipulated interest rate on a loan due, the legal rate of interest
shall be 12% per annum. 13

Both parties filed separate Motions for Reconsideration assailing different portions of the CADecision, but to
no avail.  Undaunted, they subsequently elevated their claims withthis Court via petitions for review on
14

certiorari.

On the one hand, FSI asserted that the CA should not have deleted the sum of ₱279,585.00 representing
the cost of undelivered cement and reduced the award of attorney’s fees to ₱50,000.00, since it was an
undisputed fact that FBI failed to deliver the agreed quantity of cement. On the other hand, FBI faulted the
CA for affirming the decision of the lower court insofar as the award of the sum representing Billings 3 and 4,
the interest imposed thereon, and the rejection of his counterclaim were concerned. In a Resolution  dated
15

February 21, 2011, however, this Court denied, with finality, the petition filed by FSI in G.R. No. 194621 for
having been filed late.

Hence, the present petition filed byFBI in G.R. No. 194507 invoking the following arguments:

I.

THE COURT OF APPEALS COMMITTED A CLEAR, REVERSABLE ERROR WHEN IT AFFIRMED

THE TRIAL COURT’S JUDGMENT THAT FEDERAL BUILDERS, INC. WAS LIABLE TO PAY THE
BALANCE OF ₱1,024,600.00 LESS THE AMOUNT OF ₱33,354.40 NOTWITHSTANDING THAT
THE DIAPHRAGM WALL CONSTRUCTED BY FOUNDATION SPECIALIST, INC. WAS
CONCEDEDLY DEFECTIVE AND OUT-OF-SPECIFICATIONS AND THAT PETITIONER HAD TO
REDO IT AT ITS OWN EXPENSE.

11
 II.

THE COURT OF APPEALS COMMITTED SERIOUS, REVERSABLE ERROR WHEN IT IMPOSED

THE 12% LEGAL INTEREST FROM AUGUST 30, 1991 ON THE DISPUTED CLAIM OF
₱1,024,600.00 LESS THE AMOUNT OF ₱33,354.40 DESPITE THE FACT THAT THERE WAS NO
STIPULATION IN THE AGREEMENT OF THE PARTIES WITH REGARD TO INTEREST AND
DESPITE THE FACT THAT THEIR AGREEMENT WAS NOT A "LOAN OR FORBEARANCE OF
MONEY."

III.

THE COURT OF APPEALS COMMITTED GRAVE AND SERIOUS REVERSABLE ERROR WHEN
IT DISMISSED THE COUNTERCLAIM OF PETITIONER NOTWITHSTANDING OVERWHELMING
EVIDENCE SUPPORTING ITS CLAIM OF ₱8,582,756.29 AS ACTUAL DAMAGES.

The petition is partly meritorious.

We agree with the courts below and reject FBI’s first and third arguments. Well-entrenched in jurisprudence
is the rule that factual findings of the trial court, especially when affirmed by the appellate court, are
accorded the highest degree of respectand considered conclusive between the parties, save for the
following exceptional and meritorious circumstances: (1) when the factual findings of the appellate court and
the trial court are contradictory; (2) whenthe findings of the trial court are grounded entirely on speculation,
surmises or conjectures; (3) when the lower court’s inference from its factual findings is manifestly mistaken,
absurd or impossible; (4) when there is grave abuse of discretion in the appreciation of facts; (5) when the
findings of the appellate court go beyond the issues of the case, or fail to notice certain relevant facts which,
if properly considered, will justify a different conclusion; (6) when there is a misappreciation of facts; (7)
when the findings of fact are themselves conflicting; and (8) when the findings of fact are conclusions
without mention of the specific evidence on which they are based, are premised on the absence of evidence,
or are contradicted by evidence on record. 16

None of the aforementioned exceptions are present herein. In the assailed Decision, the RTC
meticulouslydiscussed the obligations of each party, the degree of their compliance therewith, as well as
their respective shortcomings, all of which were properly substantiated with the corresponding documentary
and testimonial evidence.

Under the construction agreement, FSI’s scope of workconsisted in (1) the construction of the guide walls,
diaphragm walls, and capping beam; and (2) the installation of steel props.  As the lower courts aptly
17

observed from the records at hand, FSI had, indeed, completed ninety-seven percent (97%) of its contracted
works and the non-completion of the remaining three percent (3%), as well as the alleged defects in the said
works, are actually attributable to FBI’s own fault such as, but not limited to, the failure to deliver the needed
cement as agreed upon in the contract, to wit:

On March 8, 1991, plaintiff had finished the construction of the guide wall and diaphragm wall (Exh. "R") but
had not yet constructed the capping beam as of April 22, 1991 for defendant’s failure to deliver the needed
cement in accordance with their agreement(Exhibit "I"). The diaphragm wall had likewise been concrete
tested and was found to have conformed with the required design strength (Exh. "R").

Subsequently, plaintiff was paid the aggregate amount of ₱5,814,000.00. But as of May 30, 1991, plaintiff’s
billings numbers 3 and 4 had remained unpaid (Exhs. "L", "M", and "M-1").

xxxx

On the misaligned diaphragm wall from top to bottom and inbetween panels, plaintiff explained thatin the
excavation of the soil where the rebar cages are lowered and later poured with concrete cement, the
characteristics of the soil is not the same or homogenous all throughout. Because of this property of the
soil,in the process of excavation, it may erode in some places that may cause spaces that the cement may
fill or occupy which would naturally cause bulges, protrusions and misalignment in the concrete cast into the
excavated ground(tsn., June 1, 2000, pp 14-18). This, in fact was anticipated when the agreement was
executed and included as provision 6.4 thereof.

The construction of the diaphragm wall panel by panel caused misalignment and the chipping off of the
portions misaligned is considered a matter of course. Defendant, as the main contractor of the project, has
the responsibility of chopping or chipping off of bulges(tsn., ibid, pp 20-21). Wrong location of rebar dowels

12
was anticipated by both contractor and subcontractor as the latter submitted a plan called "Detail of Sheer
Connectors" (Exh "T") which was approved.The plan provided two alternatives by which the wrong location
of rebar dowels may be remedied. Hence, defendant, aware of the possibility of inaccurate location of these
bars, cannot therefore ascribe the same to the plaintiff as defective work.

Construction of the capping beam required the use of cement. Records, however, show that from
September 14, 1990 up to May 30, 1991 (Exhs. "B" to "L"), plaintiff had repeatedly requested defendant to
deliver cement. Finally, on April 22, 1991, plaintiff notified defendant of its inability to construct the capping
beam for the latter’s failure to deliver the cement as provided in their agreement(Exh. "I"). Although records
show that there was mention of revision of design, there was no evidence presented to show such revision
required less amount of cement than what was agreed on by plaintiff and defendant.

The seventh phase of the construction of the diaphragm wall is the construction of the steel props which
could be installed only after the soil has been excavated by the main contractor. When defendant directed
plaintiff to install the props, the latter requested for a site inspection to determine if the excavation of the soil
was finished up to the 4th level basement. Plaintiff, however, did not receive any response.It later learned
that defendant had contracted out that portion of work to another sub-contractor (Exhs. "O" and "P").
Nevertheless, plaintiff informed defendant of its willingness to execute that portion of its work. 18

It is clear from the foregoing that contrary to the allegations of FBI, FSI had indeed completed its assigned
obligations, with the exception of certain assigned tasks, which was due to the failure of FBI to fulfil its end of
the bargain.

It can similarly be deduced that the defects FBI complained of, such as the misaligned diaphragm wall and
the erroneous location of the rebar dowels, were not only anticipated by the parties, having stipulated
alternative plans to remedy the same, but more importantly, are also attributable to the very actions of FBI.
Accordingly, considering that the alleged defects in FSI’s contracted works were not so much due to the fault
or negligence of the FSI, but were satisfactorily proven to be caused by FBI’s own acts, FBI’s claim of
₱8,582,756.29 representing the cost of the measures it undertook to rectify the alleged defects must
necessarily fail. In fact, as the lower court noted, at the time when FBI had evaluated FSI’s works, it did not
categorically pose any objection thereto, viz:

Defendant admitted that it had paid ₱6 million based on its evaluation of plaintiff’s accomplishments (tsn.,
Sept. 28, 2000, p. 17) and its payment was made without objection on plaintiff’s works, the majority of which
were for the accomplishments in the construction of the diaphragm wall (tsn., ibid, p. 70).

xxxx

While there is no evidence to show the scope of work for these billings, it is safe to assume that these were
also works in the construction of the diaphragm wall considering that as of May 16, 1991, plaintiff had only
the installation of the steel props and welding works to complete (Exh. "H"). If defendant was able to
evaluate the work finished by plaintiff the majority of which was the construction of the diaphragm wall and
paid it about ₱6 million as accomplishment, there was no reason why it could not evaluate plaintiff’s works
covered by billings 3 and 4.In other words, defendants did nothave to excavate in order to determine and
evaluate plaintiff’s works. Hence, defendant’s refusal to pay was not justified and the alleged defects of the
diaphragm wall (tsn, Sept. 28, 2000, p. 17) which it claims to have discovered only after January 1992 were
mere afterthoughts. 19

Thus, in the absence of any record to otherwise prove FSI’s neglect in the fulfilment of its obligations under
the contract, this Court shall refrain from reversing the findings of the courts below, which are fully supported
by and deducible from, the evidence on record. Indeed, FBI failed to present any evidence to justify its
refusal to pay FSI for the works it was contracted to perform. As such, We do not see any reason to deviate
from the assailed rulings.

Anent FBI’s second assignment of error, however, We find merit in the argument that the 12% interest rateis
inapplicable, since this case does not involve a loan or forbearance ofmoney. In the landmark case of
Eastern Shipping Lines, Inc. v. Court of Appeals,  We laid down the following guidelines in computing legal
20

interest:

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:

13
 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 Article1169 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.21

In line, however, with the recent circular of the Monetary Board of the Bangko Sentral ng Pilipinas (BSP-MB)
No. 799, we have modified the guidelines in Nacar v. Gallery Frames,  as follows:
22

I. When an obligation, regardless of itssource, i.e., law, contracts, quasicontracts, 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.

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 6% per
annumto 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 6% per annumfrom 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. 23

It should be noted, however, 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. Thus, the need to determine whether the obligation involved herein is a loanand forbearance of
money nonetheless exists.

14
In S.C. Megaworld Construction and Development Corporation v. Engr. Parada,  We clarified the meaning
24

of obligations constituting loans or forbearance of money in the following wise:

As further clarified in the case of Sunga-Chan v. CA, a loan or forbearance of money, goods or credit
describes a contractual obligation whereby a lender or creditor has refrained during a given period from
requiring the borrower or debtor to repay the loan or debt then due and payable. Thus:

In Reformina v. Tomol, Jr., the Court held that the legal interest at 12% per annum under Central Bank (CB)
Circular No. 416 shall be adjudged only in cases involving the loan or forbearance of money. And for
transactions involving payment of indemnities in the concept of damages arising from default in the
performance of obligations in general and/or for money judgment not involving a loan or forbearance of
money, goods, or credit, the governing provision is Art. 2209 of the Civil Code prescribing a yearly 6%
interest. Art. 2209 pertinently provides:

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

The term "forbearance," within the context of usury law, has been described as a contractual obligation ofa
lender or creditor to refrain, during a given period of time, from requiring the borrower or debtor to repay the
loan or debt then due and payable. 25

Forbearance of money, goods or credits, therefore, refers to arrangements other than loan agreements,
where a person acquiesces to the temporary use of his money, goods orcredits pending the happening of
certain events or fulfilment of certain conditions.  Consequently, if those conditions are breached, said
26

person is entitled not only to the return of the principal amount paid, but also to compensation for the use of
his money which would be the same rateof legal interest applicable to a loan since the use or deprivation of
funds therein is similar to a loan.
27

This case, however, does not involve an acquiescence to the temporary use of a party’s money but a
performance of a particular service, specifically the construction of the diaphragm wall, capping beam, and
guide walls of the Trafalgar Plaza.

A review of similar jurisprudence would tell us that this Court had repeatedly recognized this distinction and
awarded interest at a rate of 6% on actual or compensatory damages arising from a breach not only of
construction contracts,  such as the one subject ofthis case, but also of contracts wherein one of the parties
28

reneged on its obligation to perform messengerial services,  deliver certain quantities of

29

molasses,  undertake the reforestation of a denuded forest land,  as well as breaches of contracts of
30 31

carriage,  and trucking agreements.  We have explained therein that the reason behind such is that said
32 33

contracts do not partake of loans or forbearance of money but are more in the nature of contracts of service.

Thus, in the absence of any stipulation as to interest in the agreement between the parties herein, the matter
of interest award arising from the dispute in this case would actually fall under the second paragraph of the
above-quoted guidelines inthe landmark case of Eastern Shipping Lines, which necessitates the imposition
of interestat the rate of 6%, instead of the 12% imposed by the courts below.

The 6% interest rate shall further be imposed from the finality of the judgment herein until satisfaction
thereof, in light of our recent ruling in Nacar v. Gallery Frames.34

Note, however, that contrary to FBI’sassertion, We find no error in the RTC’s ruling that the interest shall
begin to run from August 30, 1991 as this is the date when FSI extrajudicially made its claim against FBI
through a letter demanding payment for its services. 35

In view of the foregoing, therefore, We find no compelling reason to disturb the factual findings of the RTC
and the CA, which are fully supported by and deducible from, the evidence on record, insofar as the sum
representing Billings 3 and 4 is concerned. As to the rate of interest due thereon, however, We note that the
same should be reduced to 6% per annum considering the fact that the obligation involved herein does not
partake of a loan or forbearance of money.

WHEREFORE, premises considered, the instant petition is DENIED. The Decision and Resolution, dated
July 15, 2010 and November 23, 2010, respectively, of the Court of Appeals in CA-G.R. CV No. 70849 are
hereby AFFIRMED with MODIFICATION. Federal Builders, Inc. is ORDERED to pay Foundation Specialists,

15
Inc. the sum of Pl ,024,600.00 representing billings 3 and 4, less the amount of ₱33,354.40, plus interest at
six percent (6%) per annum reckoned from August 30, 1991 until full payment thereof.

SO ORDERED.

G.R. No. 233974, July 02, 2018

CATALINA F. ISLA, ELIZABETH ISLA, AND GILBERT F.

ISLA, Petitioners, v. GENEVIRA* P. ESTORGA, Respondent.

DECISION

PERLAS-BERNABE, J.:

Before the Court is a petition for review on certiorari1 filed by petitioners Catalina F. Isla
(Catalina), Elizabeth Isla, and Gilbert F. Isla (collectively, petitioners) assailing the
Decision2 dated May 31, 2017 and the Resolution3 dated August 24, 2017 of the Court of
Appeals (CA) in CA-G.R. CV No. 101743, which affirmed with modification the Decision4 dated
December 10, 2012 of the Regional Trial Court of Pasay City, Branch 112 (RTC) in Civil Case
No. 07-0014, directing petitioners to pay respondent Genevira P. Estorga (respondent) the
following sums: (a) P100,000.00 representing the principal of the loan obligation; (b) an
amount equivalent to twelve percent (12%) of P100,000.00 computed from November 16,
2006 until full payment, representing interest on the loan; (c) an amount equivalent to six
percent (6%) of the sums due in (a) and (b) per annum computed from the finality of the CA
Decision until full payment, representing legal interest; and (d) P20,000.00 as attorney's fees.

The Facts

On December 6, 2004, petitioners obtained a loan in the amount of P100,000.00 from

respondent, payable anytime from six (6) months to one (1) year and subject to interest at
the rate of ten percent (10%) per month, payable on or before the end of each month. As
security, a real estate mortgage5 was constituted over a parcel of land located in Pasay City,
covered by Transfer Certificate of Title (TCT) No. 1326736 and registered under the name of
Edilberto Isla (Edilberto), who is married to Catalina (subject property). When petitioners
failed to pay the said loan, respondent sought assistance from the barangay, and
consequently, a Kasulatan ng Pautang7 dated December 8, 2005 was executed. Petitioners,
however, failed to comply with its terms, prompting respondent to send a demand
letter8 dated November 16, 2006. Once more, petitioners failed to comply with the demand,
causing respondent to file a Petition for Judicial Foreclosure9 against them before the RTC.10

For their part,11petitioners maintained that the subject mortgage was not a real estate
mortgage but a mere loan, and that the stipulated interest of ten percent (10%) per month
was exorbitant and grossly unconscionable.12 They also insisted that since petitioners were not
the absolute owners of the subject property - as the same was allegedly owned by Edilberto –
they could not have validly constituted the subject mortgage thereon.13

The RTC Ruling

In a Decision14 dated December 10, 2012, the RTC granted the Petition for Judicial
Foreclosure, finding that petitioners themselves admitted that: (a) they obtained a loan in the
amount of P100,000.00 and that the said loan was secured by a real estate mortgage over the
subject property; and (b) the subject mortgage was annotated on TCT No. 132673.15 Further,
the RTC observed that while it is true that the present action pertains to a judicial foreclosure,
the underlying principle is that a real estate mortgage is but a security and not a satisfaction
of indebtedness. Thus, it is only proper to render petitioners solidarily liable to pay respondent
and/or foreclose the subject mortgage should they fail to fulfill their obligation.16

Consequently, the RTC directed petitioners to pay respondent the amounts of P100,000.00
with twelve percent (12%) interest per annum from December 2007 until fully paid and
P20,000.00 as attorney's fees. Alternatively, in the event that petitioners fail to pay or deposit
with the Clerk of Court the said amounts within a period of six (6) months from receipt of a

16
copy of the RTC Decision, it held that the subject property will be foreclosed and sold at public
auction to satisfy the mortgage debt, and the surplus, if any, will be delivered to petitioners
with reasonable interest under the law.17

Aggrieved, respondent appealed18 to the CA.

The CA Ruling

In a Decision19 dated May 31, 2017, the CA affirmed with modification the RTC Decision, and
accordingly, ordered petitioners to pay respondent the following sums: (a) P100,000.00
representing the principal of the loan obligation; (b) an amount equivalent to twelve percent
(12%) of P100,000.00 computed per year from November 16, 2006 until full payment,
representing interest on the loan; (c) an amount equivalent to six percent (6%) of the sums
due in (a) and (b) per annum computed from the finality of the CA Decision until full payment,
representing legal interest; and (d) P20,000.00 as attorney's fees.20

The CA held that in light of the registry return receipt bearing the signature of Catalina, it was
established that petitioners indeed received the demand letter dated November 16,
2006.21 Meanwhile, it did not agree with the RTC's order providing petitioners alternative
remedies, which remedies are, by law, mutually exclusive. Thus, since respondent's Petition
for Judicial Foreclosure was essentially an action to collect a sum of money, she is then barred
from causing the foreclosure of the subject mortgage.22

Moreover, the CA ruled that the RTC erred in imposing the interest rate of twelve percent
(12%) per annum from December 2007 until full payment. It likewise held that the stipulated
interest of ten percent (10%) per month on the real estate mortgage is exorbitant. And finally,
it declared that respondent is entitled to the award of attorney's fees based on equity and in
the exercise of its discretion.23

Undaunted, petitioners sought partial reconsideration,24 claiming that the award of attorney's

fees was without factual, legal, and equitable justification and should therefore be
deleted.25 The same, however, was denied in a Resolution26 dated August 24, 2017; hence, the
instant petition, claiming that the CA gravely erred not only in awarding attorney's fees
despite the absence of factual justification in the body of its Decision but also in imposing
interest of twelve percent (12%) per annum interest until full payment.27

In her Comment,28 respondent retorted that the CA's award of attorney's fees was proper and
within the discretion of the court. Likewise, the CA correctly imposed interest at the rate of
twelve percent (12%) per annum to the principal loan obligation of petitioners.29

The Issues Before the Court

The issue for the Court's resolution is whether or not the CA erred in awarding: (a) twelve
percent (12%) interest on the principal obligation until full payment; and (b) attorney's fees.

The Court's Ruling

The petition is partly meritorious.

I.

In their petition, petitioners contest the interest imposed on the principal amount of the loan
at the rate of twelve percent (12%) per annum from the date of extrajudicial demand until full
payment, as stated in paragraph 2 of the CA ruling. In this regard, they argue that pursuant
to ECE Realty and Development, Inc. v. Hernandez (ECE Realty),30 the applicable interest rate
should only be six percent (6%).31

The argument is untenable.

17
Case law states that there are two (2) types of interest, namely, monetary interest and
compensatory interest. Monetary interest is the compensation fixed by the parties for the use
or forbearance of money. On the other hand, compensatory interest is that imposed by law or
by the courts as penalty or indemnity for damages. Accordingly, the right to recover interest
arises only either by virtue of a contract (monetary interest) or as damages for delay or failure
to pay the principal loan on which the interest is demanded (compensatory interest).32

Anent monetary interest, the parties are free to stipulate their preferred rate. However, courts
are allowed to equitably temper interest rates that are found to be excessive, iniquitous,
unconscionable, and/or exorbitant,33 such as stipulated interest rates of three percent (3%)
per month or higher.34 In such instances, it is well to clarify that only the unconscionable
interest rate is nullified and deemed not written in the contract; whereas the parties'
agreement on the payment of interest on the principal loan obligation subsists.35 It is as if the
parties failed to specify the interest rate to be imposed on the principal amount, in which
case the legal rate of interest prevailing at the time the agreement was entered
into is applied by the Court.36 This is because, according to jurisprudence, the legal rate of
interest is the presumptive reasonable compensation for borrowed money.37

In this case, petitioners and respondent entered into a loan obligation and clearly stipulated
for the payment of monetary interest. However, the stipulated interest of ten percent (10%)
per month was found to be unconscionable, and thus, the courts a quo struck down the same
and pegged a new monetary interest of twelve percent (12%) per annum, which was the
prevailing legal rate of interest for loans and forbearances of money at the time the loan was
contracted on December 6, 2004.

In Spouses Abella v. Spouses Abella,38 the Court was also faced with a situation where the
parties entered into a loan with an agreement to pay monetary interest. Since the stipulated
rate of interest by the parties was found to be unconscionable, the Court struck down the
same and substituted it with the prevailing legal interest rate at the time the loan was
perfected, i.e., twelve percent (12%) per annum. In holding that such rate shall persist in
spite of supervening events, the Court held:

Jurisprudence is clear about the applicable interest rate if a written instrument fails to specify
a rate. In Spouses Toring v. Spouses Olan [(589 Phil. 362 [2008])], 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."

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 [(331 Phil. 787
[1996])]: "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."

xxxx

The rule is not only definite; it is cast in mandatory language. From Eastern Shipping [Lines,
Inc. v. CA] [(G.R. No. 97412, July 12, 1994, 234 SCRA 78)] 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. 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 Frames [(716 Phil. 267 [2013])] recognized that
the legal rate of interest has been reduced to 6% per annum[.]

xxxx

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:

18
xxxx

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.39 (Emphases and underscoring supplied)

Following this pronouncement, the Court rules that the CA correctly imposed a straight
monetary interest rate of twelve percent (12%) per annum on the principal loan obligation of
petitioners to respondent, reckoned from the date of extrajudicial demand until finality of this
ruling. At this point, suffice it to say that petitioner's reliance on ECE Realty is misplaced
primarily because unlike in this case, the amount due therein does not partake of a loan
obligation or forbearance of money.

In addition, not only the principal amount but also the monetary interest due to respondent as
discussed above shall itself earn compensatory interest at the legal rate, pursuant to Article
2212 of the Civil Code, which states that "[i]nterest due shall earn legal interest from the time
it is judicially demanded, although the obligation may be silent upon this point."40 To be sure,
Article 2212 contemplates the presence of stipulated or conventional interest,  i.e., monetary
interest, which has accrued when demand was judicially made. In cases where no monetary
interest had been stipulated by the parties, no accrued monetary interest could further earn
compensatory .interest upon judicial demand.41 Thus, the principal amount and monetary
interest due to respondent shall earn compensatory interest of twelve percent (12%) per
annum from judicial demand, i.e., the date of the filing of the complaint on July 24, 2007,42 to
June 30, 2013, and thereafter, at the rate of six percent (6%) per annum from July 1, 2013
until fully paid.

II.

On the issue of attorney's fees, the general rule is that the same cannot be recovered as part
of damages because of the policy that no premium should be placed on the right to litigate.
They are not to be awarded every time a party wins a suit.43 The power of the court to award
attorney's fees under Article 220844 of the Civil Code demands factual, legal, and equitable
justification.45 It must clearly state the reasons for awarding attorney's fees in the body of its
decision, and not merely in its dispositive portion.46

In this case, the CA awarded the amount of P20,000.00 as attorney's fees premised merely on
the general statement "upon equity and in the exercise of [its] discretion."47 Hence, since the
CA failed to "clearly state the reasons for awarding attorney's fees in the body of its decision",
the Court finds it proper to delete the same.

WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated May 31, 2017 and
the Resolution dated August 24, 2017 of the Court of Appeals in CA-G.R. CV No. 101743 are
hereby MODIFIED as follows:

19
 1. Petitioners Catalina F. Isla, Elizabeth Isla, and Gilbert F. Isla are ORDERED to pay
respondent Genevira P. Estorga:

(a)
P100,000.00 representing the principal loan obligation;
  
(b)
Monetary interest on the principal loan obligation at the rate of twelve percent (12%) per
annum from the date of default,  i.e., extrajudicial demand on November 16, 2006, until
finality of this ruling;
  
(c)
Compensatory interest on the monetary interest as stated in letter (b) at the rate of twelve
percent (12%) per annum from judicial demand, i.e., July 24, 2007, to June 30, 2013, and
thereafter, at the rate of six percent (6%) per annum from July 1, 2013 until finality of this
ruling; and
  
(d)
Legal interest at the rate of six percent (6%) per annum imposed on the sums due in letters
(a), (b), and (c) from finality of this ruling until full payment; and

2. The award of attorney's fees in favor of respondent is DELETED.

SO ORDERED.

20