SECOND DIVISION
They were, however, able to collect only to the extent of
G.R. No. 195166, July 08, 2015
SPOUSES SALVADOR ABELLA AND ALMA
ABELLA, Petitioners, v. 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 Resolution2 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 stipulated
interest rate of 30% per annum, as well as litigation expenses
and attorney's fees.4redarclaw
On July 31, 2002, petitioners Spouses Salvador and Alma
Abella filed a Complaint5 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. 6627.6redarclaw
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 P300,000.00.7redarclaw
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.9redarclaw
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.
P200,000.00; hence, the P300,000.00 balance remained
unpaid.11redarclaw
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 solidarity liable to petitioners. The dispositive
portion of its Decision reads:LawlibraryofCRAlaw
ChanRoblesVirtualawlibrary
WHEREFORE, premises considered,
judgment is hereby
rendered:LawlibraryofCRAlaw
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;chanRoblesvirtualLawlibrary
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 P300,000.00.16redarclaw
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 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.20redarclaw
Since petitioners' charging of interest was invalid, the Court of
Appeals reasoned that all payments respondents made by way Respondents' claims, as articulated in their testimonies before
of interest should be deemed payments for the principal the trial court, cannot prevail over the clear terms of the
amount of P500,000.00.21redarclaw 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 Court of Appeals further noted that respondents made a the contracting parties, the literal meaning of its stipulations
total payment of P648,500.00, which, as against the principal shall control."32redarclaw
amount of P500,000.00, entailed an overpayment of
P148,500.00. Applying the principle of solutio indebiti, the Articles 1933 and 1953 of the Civil Code provide the
Court of Appeals concluded that petitioners were liable to guideposts that determine if a contractual relation is one of
reimburse respondents for the overpaid amount of simple loan or mutuum:LawlibraryofCRAlaw
P148,500.00.22 The dispositive portion of the assailed Court of ChanRoblesVirtualawlibrary
Appeals Decision reads:LawlibraryofCRAlaw Art. 1933. By the contract of loan, one of the
ChanRoblesVirtualawlibrary parties delivers to another, either something
WHEREFORE, the Decision of the Regional not consumable so that the latter may use
Trial Court is hereby REVERSED and SET the same for a certain time and return it, in
ASIDE, and a new one issued, finding that which case the contract is called a
the Spouses Salvador and Alma Abella commodatum; or money or other
are DIRECTED to jointly and severally pay consumable thing, upon the condition that
Spouses Romeo and Annie Abella the the same amount of the same kind and
amount of P148,500.00, with interest of 6% quality shall be paid, in which case the
interest (sic) per annum to be computed contract is simply called a loan or mutuum.
upon receipt of this decision, until full
satisfaction thereof. Upon finality of this Commodatum is essentially gratuitous.
judgment, an interest as the rate of 12% per
annum, instead of 6%, shall be imposed on Simple loan may be gratuitous or with a
the amount due, until full payment thereof.23 stipulation to pay interest.
In the Resolution24 dated January 4, 2011, the Court of
Appeals denied petitioners' Motion for Reconsideration. In commodatum the bailor retains the
ownership of the thing loaned, while in
Aggrieved, petitioners filed the present appeal25 where they simple loan, ownership passes to the
claim that the Court of Appeals erred in completely striking off borrower.
interest despite the parties' written agreement stipulating it, as
well as in ordering them to reimburse and pay interest to ....
respondents.
Art. 1953. A person who receives a loan of
In support of their contentions, petitioners cite Article 1371 of money or any other fungible thing acquires
the Civil Code,26 which calls for the consideration of the the ownership thereof, and is bound to pay
contracting parties' contemporaneous and subsequent acts in to the creditor an equal amount of the same
determining their true intention. Petitioners insist that kind and quality. (Emphasis supplied)
respondents' consistent payment of interest in the year On March 22, 1999, respondents executed an
following the perfection of the loan showed that interest at acknowledgment receipt to petitioners, which
2.5% per month was properly agreed upon despite its not states:LawlibraryofCRAlaw
having been expressly stated in the acknowledgment receipt. ChanRoblesVirtualawlibrary
They add that during the proceedings before the Regional Trial  Batan, Aklan
Court, respondents admitted that interest was due on the  March 22, 1999
loan.27redarclaw
This is to acknowledge
In their Comment,28 respondents reiterate the Court of receipt of the Amount of
Appeals' findings that no interest rate was ever stipulated by Five Hundred Thousand
the parties and that interest was not due and demandable at (P500,000.00) Pesos from
the time they were making interest payments.29redarclaw Mrs. Alma R. Abella,
payable within one (1)
In their Reply,30 petitioners argue that even though no interest year from date hereof with
rate was stipulated in the acknowledgment receipt, the case interest.
fell under the exception to the Parol Evidence Rule. They also
argue that there exists convincing and sufficiently credible Annie C. Abella (sgd.)            
evidence to supplement the imperfection of the Romeo M. Abella (sgd.)33
acknowledgment receipt.31redarclaw                                               
(Emphasis supplied)
For resolution are the following issues:LawlibraryofCRAlaw The text of the acknowledgment receipt is uncomplicated and
straightforward. It attests to: first, respondents' receipt of the
First, whether interest accrued on respondents' loan from sum of P500,000.00 from petitioner Alma Abella; second,
petitioners, If so, at what rate? respondents' duty to pay tack this amount within one (1) year
from March 22, 1999; and third, respondents' duty to pay
Second, whether petitioners are liable to reimburse interest. Consistent with what typifies a simple loan, petitioners
respondents for the Litter's supposed excess payments and for delivered to respondents with the corresponding condition lat
interest. respondents shall pay the same amount to petitioners within
one (1) year.
I
II
As noted by the Court of Appeals and the Regional Trial Court,
respondents entered into a simple loan or mutuum, rather than Although we have settled the nature of the contractual relation
a joint venture, with petitioners. between petitioners and respondents, controversy persists
over respondents' duty to pay conventional interest, i.e.,
interest as the cost of borrowing money.34redarclaw amending Section 2 of
Circular No. 905, Series of
Article 1956 of the Civil Code spells out the basic rule that "[n]o 1982:LawlibraryofCRAlaw
interest shall be due unless it has been expressly stipulated in ChanRoblesVirtualawlibrar
writing." y
Section 1. The rate of interest for
On the matter of interest, the text of the acknowledgment the loan or forbearance of any
receipt is simple, plain, and unequivocal. It attests to the money, goods or credits and the
contracting parties' intent to subject to interest the loan rate allowed in judgments, in the
extended by petitioners to respondents. The controversy, absence of an express contract as
however, stems from the acknowledgment receipt's failure to to such rate of interest, shall be six
state the exact rate of interest. percent (6%) per annum.

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."36redarclaw
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."37redarclaw
Security Bank also refers to Eastern Shipping Lines, Inc. v.
Court of Appeals, which, in turn, stated:38
ChanRoblesVirtualawlibrary
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:LawlibraryofCRAlaw
ChanRoblesVirtualawlibrary
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:LawlibraryofCRAlaw
ChanRoblesVirtualawlibrary
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
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:LawlibraryofCRAlaw
ChanRoblesVirtualawlibrary
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:LawlibraryofCRAlaw
....
1. When the obligation is breached,
and it consists in the payment of a
sum of money, i.e., a Joan 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
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.45redarclaw
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.46redarclaw
The rule spelled out in Security Bank and Spouses Toring is
anchored on Article 1956 of the Civil Code and specifically
governs simple loans or mutuum. Mutuum is a type of
nominate contract that is specifically recognized by the Civil
Code and for which the Civil Code provides a specific set of
governing rules: Articles 1953 to 1961. In contrast, Article
11371 is among the Civil Code provisions generally dealing
with contracts. As this case particularly involves a simple loan,
the specific rule spelled out in Security Bank and Spouses
Toring finds preferential application as against Article 1371.
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:LawlibraryofCRAlaw
ChanRoblesVirtualawlibrary
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:LawlibraryofCRAlaw
ChanRoblesVirtualawlibrary
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."52redarclaw
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:LawlibraryofCRAlaw
ChanRoblesVirtualawlibrary
Art. 2212. Interest due shall earn legal
interest from the time it is judicially
demanded, although the obligation may be
silent upon this point.
So, too, Nacar states that "the interest due shall itself earn
legal interest from the time it is judicially
demanded."53redarclaw
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,
2001.56redarclaw
The Court of Appeals' September 30, 2010 Decision stated
that respondents paid P6,000.00 in March 1999.57redarclaw
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."60redarclaw
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
P337,500.00.61redarclaw
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 P60,000.00.62redarclaw
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 P45,000.00.63redarclaw
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:LawlibraryofCRAlaw
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 cf 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 999.
Application of payments must be in accordance with Article
1253 of the Civil Code, which reads:LawlibraryofCRAlaw
ChanRoblesVirtualawlibrary
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 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 he 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:LawlibraryofCRAlaw
Between March 22, 2001 and June 30, 2001, respondents
(a) 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.
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
(c)
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.
On December 30, 2001, respondents paid P100,000.00,
(d) which, like the June 30, 2001 payment, was charged
against the principal.
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
(e) 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 monthly, rather than an
annual, basis.
By April 21, 2002, P18,965.38 (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, P11,580.03 (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 Code 64 applies.
Article 2154 reads:LawlibraryofCRAlaw
ChanRoblesVirtualawlibrary
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:LawlibraryofCRAlaw
ChanRoblesVirtualawlibrary
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 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."67 This
applies to obligations arising from quasi-contracts such
as solutio indebiti.
Further, Article 2159 of the Civil Code
provides:LawlibraryofCRAlaw
ChanRoblesVirtualawlibrary
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:LawlibraryofCRAlaw
1. 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.

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.cralawlawlibrary

August 28, 2019
G.R. No. 225433
LARA'S GIFTS & DECORS, INC., Petitioner
vs.
MIDTOWN INDUSTRIAL SALES, INC., Respondent
DECISION
CARPIO, J.:
The Case
This petition for review1 assails the 21 April 2016
Decision2 and the 29 June 2016 Resolution3 of the Court of
Appeals in CA-G.R. CV No. 102465. The Court of Appeals
affirmed the 27 January 2014 Decision4 of the Regional Trial
Court, Branch 128, Caloocan City in Civil Case No. C-22007.
The Facts
Petitioner Lara's Gifts & Decors, Inc. (petitioner) is engaged in
the business of manufacturing, selling, and exporting
handicraft products. On the other hand, respondent Midtown
Industrial Sales, Inc. (respondent) is engaged in the business
of selling industrial and construction materials, and petitioner is
one of respondent's customers. Respondent alleged that from
January 2007 up to December 2007, petitioner purchased from
respondent various industrial and construction materials in the
total amount of ₱1,263,104.22. The purchases were on a sixty
(60)-day credit term, with the condition that 24% interest per
annum would be charged on all accounts overdue, as stated in
the sales invoices. Petitioner paid for its purchases by issuing
several Chinabank postdated checks in favor of respondent.
However, when respondent deposited the Chinabank checks
on their maturity dates, the checks bounced. After repeated
demands from respondent, petitioner replaced the bounced
checks with new postdated Export and Industry Bank checks.
However, when respondent deposited the replacement checks
on their maturity dates, the checks were likewise dishonored
for being "Drawn Against Insufficient Funds," and
subsequently, for "Account Closed." Respondent sent a
demand letter5 dated 21 January 2008, which was received by
petitioner on 22 January 2008, informing petitioner of the
bounced checks and demanding that petitioner settle its
accounts. Still petitioner failed to pay, prompting respondent to
file on 5 February 2008 a Complaint 6 for Sum of Money with
Prayer for Attachment against petitioner.
In its Answer,7 petitioner admitted that from January 2007 to
December 2007, petitioner purchased from respondent, on a
60-day credit term, various industrial and construction
materials in the total amount of ₱1,263,104.22. However,
petitioner claimed that most of the deliveries made were
substandard and of poor quality. Petitioner alleged that the
checks it issued for payment were not for value because not all
of the materials delivered by respondent were received in good
order and condition. Thus, when petitioner used the raw
materials, the finished product allegedly did not pass the
standards required by petitioner's buyers from the United
States (US) who rejected the products. Furthermore, due to
the economic recession in the US, subsequent orders made by
petitioner's US buyers were canceled. Petitioner claimed that
on 19 February 2008, a fire razed its factory and office,
destroying its equipment, machineries, and inventories,
including those rejected by the US buyers.
The Ruling of the Trial Court
On 27 January 2014, the trial court rendered a Decision, the
dispositive portion of which reads:
WHEREFORE, premises considered,
judgment is hereby rendered in favor of the
plaintiff MIDTOWN INDUSTRIAL SALES,
INC. and against the defendant LARA'S
GIFTS [&] DECORS, INC. ordering the latter
to pay the former the following amount:
1. ONE MILLION TWO HUNDRED SIXTY
THREE THOUSAND ONE HUNDRED
FOUR PESOS and 22/100
(Phpl,263,104.22) plus interest fixed at
24% per annum to be computed from
February 5, 2008, the date of judicial
demand, until the judgment obligation is fully
paid. 2. The sum of FIFTY THOUSAND
PESOS (Php50,000.00) as and by way of
attorney's fees.
Finally, defendant is ordered to pay the cost
of suit.
SO ORDERED.8
The trial court held that petitioner failed to prove that the
deliveries made by respondent did not comply with the
required specifications. Other than the self-serving denials of
its witnesses, no other evidence was offered by petitioner to
prove that the materials delivered were substandard. On the
other hand, the amount of ₱1,263,104.22 claimed by
respondent against petitioner was supported by the sales
invoices and postdated checks. The trial court also held that
the stipulated 24% interest per annum on overdue accounts is
not unconscionable.
The Ruling of the Court of Appeals
The Court of Appeals denied petitioner's appeal, and affirmed
the 27 January 2014 Decision of the trial court.
The Court of Appeals sustained the finding of the trial court
that petitioner admitted issuing postdated checks as payment
for the materials purchased from respondent from January
2007 to December 2007. The Court of Appeals ruled that
petitioner failed to prove that the materials delivered were
substandard and of poor quality to justify its claim that the
checks were issued without valuable consideration.
On the 24% interest per annum imposed, the Court of Appeals
found implausible petitioner's claim that it was placed in a
disadvantageous position. Petitioner could not have been
cheated or misled into agreeing to the 24% interest rate per
annum that was stated in the sales invoices. Petitioner, an
established company with numerous transactions with
respondent prior to the purchases made in 2007, could have
negotiated with respondent for more favorable terms. Since
the 24% interest rate per annum was stipulated in writing, the
Court of Appeals held that such rate should be applied
considering that petitioner has not shown that it was placed at
a disadvantage in its contractual relation with respondent.
The Issues
 Petitioner raises the following issues:
I. WHETHER OR NOT MIDTOWN'S SALES
INVOICES HAVE PROBATIVE VALUE,
CONSIDERING THAT THEIR
GENUINENESS, DUE EXECUTION AND
AUTHENTICITY ARE NOT ESTABLISHED
UNDER SECTION 20, RULE 132 OF THE
RULES OF COURT.
II. WHETHER OR NOT [LARA'S GIFTS &
DECORS, INC.] IS IN DEFAULT OF ITS
CONTRACTUAL OBLIGATIONS. III.
WHETHER OR NOT ARTICLES 1192 AND
1283 OF THE CIVIL CODE ARE
APPLICABLE IN THE PRESENT CASE.
IV. WHETHER OR NOT THE INTEREST
RATE FIXED AT 24% PERANNUM IS
VOID.
V. ASSUMING THAT THE INTEREST
RATE OF 24% IS VALID, WHETHER OR
NOT THE SAID RATE SHALL BE APPLIED
ONLY UNTIL FINALITY OF JUDGMENT.9
The Court's Ruling
We find the petition without merit. We affirm the ruling of the
Court of Appeals with modification.
Admissibility of the Sales Invoices
Petitioner argues that the sales invoices on the alleged
purchases have no probative value because their
genuineness, due execution, and authenticity have not been
established. Petitioner stresses that in paragraph 2 of its
Answer, 10 it only admitted the existence of the sales invoices
but not their due execution.
It should be stressed that petitioner admitted in its Answer that
from January 2007 to December 2007, it purchased from
respondent various industrial and construction materials in the
total amount of ₱1,263,104.22. Petitioner likewise admitted the
existence of the sales invoices covering the said purchases,
which were attached as annexes to the Complaint. Although
petitioner stated that it is not admitting the due execution of the
sales invoices, petitioner's Answer failed to specifically deny or
contest under oath the genuineness or due execution of any of
the sales invoices or any of the signatures of petitioner's
representatives or employees appearing therein. Furthermore,
petitioner failed to specify which of the sales invoices pertain to
materials delivered which were allegedly substandard and of
poor quality.
The rule on actionable documents is provided under Sections
7 and 8, Rule 8 of the 1997 Rules of Civil Procedure:
Sec. 7. Action or defense based on
document. - Whenever an action or defense
is based upon a written instrument or
document, the substance of such instrument
or document shall be set forth in the
pleading, and the original or a copy thereof
shall be attached to the pleading as an
exhibit, which shall be deemed to be a part
of the pleading, or said copy may with like
effect be set forth in the pleading.
Sec. 8. How to contest such documents. -
When an action or defense is founded upon
a written instrument, copied in or attached to
the corresponding pleading as provided in
the preceding section, the genuineness
and due execution of the instrument shall
be deemed admitted unless the adverse
party, under oath, specifically denies
them, and sets forth what he claims to be
the facts; but the requirement of an oath
does not apply when the adverse party does
not appear to be a party to the instrument or
when compliance with an order for an
inspection of the original instrument is
refused. (Emphasis supplied)
Section 10 of Rule 8 further describes how a specific denial
should be made:
Sec. 10. Specific denial. - A defendant
must specify each material allegation of
fact the truth of which he does not admit
and, whenever practicable, shall set forth
the substance of the matters upon which
be relies to support his denial. Where a
defendant desires to deny only a part of an
averment, he shall specify so much of it as is
true and material and shall deny only the
remainder. Where a defendant is without
knowledge or information sufficient to form a
belief as to the truth of a material averment
made in the complaint, he shall so state, and
this shall have the effect of a denial.
(Emphasis supplied)
In this case, petitioner did not state the facts or substance of
the matters relied upon to support its denial of the due
execution of the sales invoices. As held in Sy-Quia v.
Marsman, 11 "the Rules require that besides specifying the
allegations of fact not admitted, the answer should set forth the
matters relied upon in support of the denial; so that, in effect,
the Rules are no longer satisfied with mere denials, even if
specific, but demand that defendant manifest what he
considers to be the true facts." The purpose of the specific
denial is to compel the defendant to specify the allegations
which he or she intends to disprove and disclose the matters
relied upon to support such denial, 12 thereby limiting the
issues and avoiding unnecessary delays and
surprises. 13 Petitioner's general denial amounts to an
admission of the genuineness and due execution of the sales
invoices.
Default in the Contractual Obligations
Petitioner admits that it made purchases amounting to
₱1,263,104.22, but that the materials delivered were
substandard or of poor quality. 14 In effect, petitioner is alleging
fraud in the transactions, which petitioner is bound to
substantiate. Whoever alleges fraud or mistake affecting a
transaction must substantiate his allegation and has the
burden of proof. 15 As found by the trial court and the appellate
court, petitioner failed to substantiate its claim that the
materials delivered by respondent did not comply with the
specifications required or that the materials were substandard
and of poor quality.
The best evidence of the transaction between petitioner and
respondent are the sales invoices and the checks issued by
petitioner as payments for the materials purchased. The sales
invoices show that petitioner, through its authorized staff or
employees, acknowledged receipt of the deliveries without
protest. The sales invoices clearly stated that petitioner
"RECEIVED MERCHANDISE IN GOOD ORDER &
CONDITION." 16 Furthermore, petitioner admits issuing the
postdated checks as payment for the materials delivered. The
postdated checks were subsequently dishonored for being
"drawn against insufficient funds" or for "account closed."
Petitioner insists that the checks were issued without valuable
consideration since most of the materials delivered did not
comply with the required specifications. However, other than
its bare allegation that the materials delivered were
substandard and of poor quality, petitioner failed to prove or
substantiate its claims. As found by the trial court, none of
petitioner's witnesses was able to present proof that the
materials delivered were substandard or of poor quality.
Applicability of Articles 1192 and 1283 of the Civil Code
Articles 1192 and 1283 of the Civil Code read:
Art. 1192. In case both parties have
committed a breach of the obligation, the
liability of the first infractor shall be equitably
tempered by the courts. If it cannot be
determined which of the parties first violated
the contract, the same shall be deemed
extinguished, and each shall bear his own
damages.
Art. 1283. If one of the parties to a suit over
an obligation has a claim for damages
against the other, the former may set it off by
proving his right to said damages and the
amount thereof.
As previously discussed, petitioner failed to substantiate its
claims that the materials delivered were substandard or of
poor quality. Thus, petitioner cannot demand either a
tempering of its liability or an offset of damages.
Validity of the 24% Interest Rate In Asian Construction and
Development Corporation v. Cathay Pacific Steel
Corporation, 17 the Court upheld the validity of interest rate
fixed at 24% per annum that was expressly stipulated in the
sales invoices. The Court held that petitioner construction
company is presumed to have full knowledge of the terms and
conditions of the contract and that by not objecting to the
stipulations in the sales invoice, it also bound itself to pay not
only the stated selling price but also the interest of 24% per
annum on overdue accounts and the 25% of the unpaid
invoice for attorney's fees.
In the present case, petitioner, which has been doing business
since 1990 and has been purchasing various materials from
respondent since 2004, cannot claim to have been misled into
agreeing to the 24% interest rate which was expressly stated
in the sales invoices. Besides, this Court has already ruled in
several cases that an interest rate of 24% per annum agreed
upon between the parties is valid and binding18 and not
excessive and unconscionable. 19 Thus, the stipulated 24%
interest per annum is binding on petitioner. Imposition of
Legal Interest
The rates of interest stated in the guidelines on the imposition
of interests, as laid down in the landmark case of Eastern
Shipping Lines, Inc. v. Court of Appeals20 have already been
modified in Bangko Sentral ng Pilipinas Monetary Board (BSP-
MB) Circular No. 799, Series of 2013, which reduced the rate
of legal interest from twelve percent (12%) per annum to six
percent (6%)per annum.
The modified guidelines are detailed in the 2013 case of Nacar
v. Gallery Frames,21 thus:
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:
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.
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 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 extra judicially (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
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.22 (Emphasis
supplied)
However, if the rate of interest is stipulated, such stipulated
interest shall apply and not the legal interest,23 provided the
stipulated interest is not excessive and unconscionable.24 The
stipulated interest shall be applied until full payment of
the obligation because that is the law between the
parties. 25 The legal interest only applies in the absence of
stipulated interest. This is in accord with Article 2209 of the
Civil Code, which states:
Art. 2209. If the obligation consists in the
payment of a sum of money, and the
debtor incurs in delay, the indemnity for
damages, there being no stipulation to
the contrary, shall be the payment of the
interest agreed upon, and in the absence
of stipulation, the legal interest, which is six
percent per annum. (Boldfacing and
italicization supplied)
Even BSP-MB Circular No. 799 expressly states that the legal
interest applies only in the absence of stipulated interest in
loan contracts. Circular No. 799 reads:
CIRCULAR NO. 799
Series of 2013
Subject: Rate of interest in the absence of
stipulation
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. (Emphasis supplied)
Clearly, Circular No. 799 will apply only in the absence of
stipulated interest.
In Eastern Shipping Lines, which first laid down the guidelines
on the computation of legal interest, the Court declared:
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.
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 of 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
of [sic] 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. 26 (Emphasis
supplied)
Paragraph 3 above failed to qualify that for loans or
forbearance of money, the prevailing legal interest should
only apply in the absence of stipulated interest. The
stipulated interest is the law between the parties and
should apply from the time of extrajudicial or judicial
demand until full payment.27 This omission resulted in
several rulings of this Court, which imposed the stipulated
interest on the adjudged amount until finality of the decision
BUT applied the prevailing legal interest in lieu of the
stipulated interest from finality of the decision until full payment
of the obligation.28 This is in direct contravention of the law,
particularly Article 2209 of the Civil Code, which mandates that
when a debtor incurs a delay in obligations to pay a sum of
money, the indemnity for damages shall be the payment of the
interest agreed upon. Only in the absence of a stipulated
interest will the legal interest be applied.
To repeat, the stipulated interest is the law between the
parties, and should be applied until full payment of the
obligation. Article 1159 of the Civil Code provides that
"[o]bligations arising from contracts have the force of law
between the contracting parties and should be complied with in
good faith." Article 1956 of the Civil Code also states that "[n]o
interest shall be due unless it has been expressly stipulated in
writing." Furthermore, the contracting parties may establish
such stipulations as they may deem convenient, provided they
are not contrary to law, morals, good customs, public order, or
public policy, 29 and the parties are bound to fulfill what has
been expressly stipulated.30 Thus, unless the stipulated
interest is excessive and unconscionable, there is no legal
basis for the reduction of the stipulated interest at any
time until full payment of the principal amount. The
stipulated interest remains in force until the obligation is
satisfied. In the absence of stipulated interest, the prevailing
legal interest prescribed by the Bangko Sentral ng
Pilipinas shall apply.
Moreover, there should be no compounding of interest,
whether stipulated or legal, unless compounding is expressly
agreed upon in writing by the parties or mandated by law or
regulation.31 Section 5 of the Usury Law, as amended,
expressly provides that compounded interest "shall not be
reckoned, except by agreement."32 Being more burdensome
than simple interest, compounded interest must be expressly
stipulated by the parties or mandated by law or regulation.
Articles 2210 and 2211 of the Civil Code Apply to
Obligations Other Than Loans or Forbearance of Money,
Goods or Credits
Articles 2210 and 2211 of the Civil Code provide:
Art. 2210. Interest may, in the discretion of
the court, be allowed upon damages
awarded for breach of contract.
Art. 2211. In crimes and quasi-delicts,
interest as a part of the damages may, in a
proper case, be adjudicated in the discretion
of the court.
Under these articles, when the obligation, other than loans or
forbearance of money, goods or credits, is breached, the
court may in its discretion impose an interest on the
damages awarded. The interest imposed in the discretion of
the court will be the prevailing legal interest prescribed by
the Bangko Sentral ng Pilipinas.
In contrast, Article 2209 of the Civil Code is applicable only to
loans or forbearance of money, goods or credit which arise out
of "obligations consisting in the payment of a sum of
money, and the debtor incurs in delay," and thus where
there is a debtor-creditor relationship. Articles 2210 and 2211
refer to obligations that do not involve the payment of a sum of
money and there is no debtor-creditor relationship. Moreover,
the payment of interest in Article 2209 is mandatory, while the
payment of interest in Articles 2210 and 2211
is discretionary on the court.
The Legal Interest Rate in Article 2209 of the Civil Code
Has Been Amended
On 24 Feb1uary 1916, Act No. 265533 or the Usury Law was
enacted, which fixed the legal interest at 6% per annum for
loans, forbearance of money, goods, credits or
judgments.34 This legal interest applied in the absence of
stipulated interest.
On 18 June 1949, Republic Act No. 386,35 otherwise known as
the Civil Code of the Philippines, was enacted and took effect
the following year. Article 220936 of the Civil Code declared
that the legal interest in obligations to pay a sum of money is
6% per annum when the debtor incurs in delay. Article 2209
applies to loans and forbearance of money, goods or
credits. 37 This legal interest will apply in the absence of
stipulated interest. 38
On 29 January 1973, Presidential Decree No. 11639 (P.D. No.
116) was issued, which amended the Usury Law and fixed the
legal interest for loans, forbearance of money, goods, credits
or judgments at 6% per annum "or such rate as may be
prescribed by the Monetary Board of the Central Bank of
the Philippines." This legal interest applies in the absence of
stipulated interest. Section 11 of P.D. No. 116 states: "All Acts
and parts of Acts inconsistent with the provisions of this
Decree are hereby repealed." This repealing clause applied
to Acts, Commonwealth Acts, and Republic Acts, including
Article 2209 of Republic Act No. 386 (Civil Code of the
Philippines). When P.D. No. 116 says "[a]ll Acts and parts of
Acts," it does not mean only Act No. 2655 (Usury Law) but all
other Acts, without exception. P.D. No. 116 was obviously
intended to amend all laws prescribing the rate of legal
interest in the absence of stipulated interest. The Whereas
clauses of P.D. No. 116 state that "the monetary authorities
have recognized the need to amend the present Usury Law to
allow for more flexible interest rate ceilings that would be more
responsive to the requirements of changing economic
conditions,"40 and that "the availability of adequate capital
resources is, among other factors, a decisive element in the
achievement of the declared objective of accelerating the
growth of the national economy."41 Thus, P.D. No. 116
amended all laws, including Article 2209 of the Civil Code,
prescribing the rate of legal interest to allow the Bangko
Sentral ng Pilipinas to calibrate the legal interest rate to meet
changing economic conditions and to accelerate the growth of
the national economy. If P.D. No. 116 did not amend Article
2209, then all "obligations consisting in the payment of a
sum of money," which is the all-encompassing coverage of
Article 2209 applying to all loans or forbearance of money,
goods, credits or judgments, would still be subject to the fixed
6% legal interest rate. This would prevent the Bangko Sentral
ng Pilipinas from calibrating the legal interest to meet changing
economic conditions and to accelerate the growth of the
national economy.
Thus, the legal interest referred to in Article 2209 of the Civil
Code is now 6% per annum or as may be fixed by the
Monetary Board of the Bangko Sentral ng Pilipinas
pursuant to the Usury Law, as amended by PD 116.
Forbearance of Money, Goods or Credits
The term "forbearance" in the context of the Usury Law has
been defined as "a contractual obligation of lender or creditor
to refrain, during a given period of time, from requiring the
borrower or debtor to repay a loan or debt then due and
payable."42 In consideration of this forbearance, the parties
often agree on the payment of interest on the amount due.
In Estores v. Spouses Supangan,43 the Court ruled that
"forbearance of money, goods or credits" has a "separate
meaning from a loan." The Court then reiterated,
citing Crismina Garments, Inc. v. Court of Appeals,44 that
"forbearance of money, goods or credits" refers to
"arrangements other than loan agreements, where a person
acquiesces to the temporary use of his money, goods or
credits pending happening of certain events or fulfillment of
certain conditions." The Court explained in Estores:
The contract involved in this case is
admittedly not a loan but a Conditional Deed
of Sale. However, the contract provides that
the seller (petitioner) must return the
payment made by the buyer (respondent
spouses) if the conditions are not fulfilled.
There is no question that they have in fact,
not been fulfilled as the seller (petitioner)
has admitted this. Notwithstanding demand
by the buyer (respondent-spouses), the
seller (petitioner) has failed to return the
money and should be considered in default
from the time that demand was made on
September 27, 2000.
Even if the transaction involved a
Conditional Deed of Sale, can the stipulation
governing the return of the money be
considered as a forbearance of money
which required payment of interest at the
rate of 12%? We believe so.
In Crismina Garments, Inc. v. Court of
Appeals, "forbearance" was defined as a
"contractual obligation of lender or creditor to
refrain during a given period of time, from
requiring the borrower or debtor to repay a
loan or debt then due and payable." This
definition describes a loan where a debtor is
given a period within which to pay a loan or
debt. In such case, "forbearance of money,
goods or credits" will have no distinct
definition from a loan. We believe,
however, that the phrase "forbearance of
money, goods or credits" is meant to
have a separate meaning from a loan,
otherwise there would have been no need
to add that phrase as a loan is already
sufficiently defined in the Civil Code.
Forbearance of money, goods or credits
should therefore refer to arrangements
other than loan agreements, where a
person acquiesces to the temporary use
of his money, goods or credits pending
happening of certain events or fulfillment
of certain conditions. In this case, the
respondent-spouses parted with their money
even before the conditions were fulfilled.
They have therefore allowed or granted
forbearance to the seller (petitioner) to use
their money pending fulfillment of the
conditions. They were deprived of the use of
their money for the period pending fulfillment
of the conditions and when those conditions
were breached, they are entitled not only to
the return of the principal amount paid, but
also to compensation for the use of their
money. And the compensation for the use of
their money, absent any stipulation, should
be the same rate of legal interest applicable
to a loan since the use or deprivation of
funds is similar to a loan. 45 (Emphasis
supplied)
The Court further stressed in Reformina v. Judge Tomol,
Jr. 46 that Act No. 2655 or the Usury Law deals with "interest
on (1) loans; (2) forbearance of any money, goods or
credits; and (3) the rate allowed in judgments." 47 The Court
clarified that the term "judgments" refers to judgments in
litigations involving loans or forbearance of any money, goods
or credits.48 As declared in Eastern Shipping Lines, the
"finality [of judgment] until its satisfaction x x x [is a]
period being deemed to be by then an equivalent to a
forbearance of credit"49 or a forbearance of money.
P.D. No. 116 amended Act No. 2655 or the Usury Law, as
follows:
SECTION 1. Section one of Act Numbered two thousand six
hundred fifty-five is hereby amended to read as follows:
"Sec. 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 express
contract as to such rate of interest, shall
be six per centum per annum or such
rate as may be prescribed by the
Monetary Board of the Central Bank of
the Philippines for that purpose in
accordance with the authority hereby
granted."
SECTION 2. The same Act is hereby amended by adding the
following section immediately after section one thereof, which
reads as follows:
"Sec. 1-a. The Monetary Board is hereby
authorized to prescribe the maximum rate or
rate of interest for the loan or renewal
thereof or the forbearance of any money,
goods or credits, and to chance [sic] such
rate or rates whenever warranted by
prevailing economic and social
conditions: Provided, That such changes
shall not be made oftener than once every
twelve months.
In the exercise of the authority herein
granted, the Monetary Board may prescribe
higher maximum rates for consumer loans or
renewals thereof as well as loans made by
pawnshops, finance companies and other
similar credit institutions although the rates
prescribed for these institutions need not
necessarily be uniform."
xxxx
SECTION 7. Section five of the same Act is hereby amended
to read as follows:
"Sec. 5. In computing the interest on any
obligation, promissory note or other
instrument or contract, compound interest
shall not be reckoned, except by
agreement: Provided, That whatever
compound interest is agreed upon, the
effective rate of interest charged by the
creditor shall not exceed the equivalent of
the maximum rate prescribed by the
Monetary Board, or, in default thereof,
whenever the debt is judicially claimed, in
which last case it shall draw six per
centum per annum interest or such rate as
may be prescribed by the Monetary Board.
No person or corporation shall require
interest to be paid in advance for a period of
not more than one year: Provided, however,
That whenever interest is paid in advance,
 the effective rate of interest charged by the
creditor shall not exceed the equivalent of
the maximum rate prescribed by the
Monetary Board."
x x x x (Boldfacing and italicization supplied)
Clearly, under the law and jurisprudence, the prevailing legal
interest prescribed by the Bangko Sentral ng
Pilipinas applies, in the absence of stipulated interest, on
the following: (1) loans; (2) forbearance of any money, goods
or credits; and (3) judgments in litigations involving loans or
forbearance of money, goods or credits. It should be noted that
under Section 1 of P.D. No.116, the prevailing legal interest
prescribed by the Bangko Sentral ng Pilipinas applies to
"judgments" in the absence of stipulated interest.
Forbearance of goods includes the sale of goods on
installment, requiring periodic payment of money to the
creditor.1âшphi1 Forbearance of credits includes the sale of
anything on credit, where the full amount due can be paid at a
date after the sale.
As previously discussed, the general rule is that the interest
stipulated by the parties shall apply, provided it is not
excessive and unconscionable. Absent any stipulation, the
Court has consistently held that the prevailing legal interest
prescribed by the Bangko Sentral ng Pilipinas applies to loans
or forbearance of money, goods or credits, as well as to
judgments.50
To summarize, the guidelines on the imposition of interest as
provided in Eastern Shipping Lines and Nacar are further
modified for clarity and uniformity, as follows:
With regard to an award of interest in the
concept of actual and compensatory
damages, the rate of interest, as well as the
accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it
consists in the payment of a sum of
money, i.e, a loan or forbearance of
money, goods, credits or judgments, the
interest due shall be that which is
stipulated by the parties in
writing,51 provided it is not excessive and
unconscionable, which, in the absence of
a stipulated reckoning date,52 shall be
computed from default, i.e., from
extrajudicial or judicial demand in
accordance with Article 116953 of the Civil
Code, UNTIL FULL PAYMENT, without
compounding any interest unless
compounded interest is expressly
stipulated by the parties, by law or
regulation. Interest due on the principal
amount accruing as of judicial demand
shall SEPARATELY earn legal
interest54 at the prevailing rate prescribed
by the Bangko Sentral ng Pilipinas,55 from
the time of judicial demand UNTIL FULL
PAYMENT.56
2. In the absence of stipulated interest, in
a loan or forbearance of money, goods,
credits or judgments, the rate of interest
on the principal amount shall be the
prevailing legal interest prescribed by
the Bangko Sentral ng Pilipinas, which
shall be computed from default, i.e., from
extrajudicial or judicial demand in
accordance with Article 1169 of the Civil
Code, UNTIL FULL PAYMENT, without
compounding any interest unless
compounded interest is expressly
stipulated by law or regulation. Interest
due on the principal amount accruing as
of judicial demand shall SEPARATELY
earn legal interest at the prevailing rate
prescribed by the Bangko Sentral ng
Pilipinas,57 from the time of judicial
demand UNTIL FULL PAYMENT. 58
3. When the obligation, not constituting a
loan or forbearance of money, goods,
credits or judgments, is breached, an
interest on the amount of damages
awarded may be imposed in the
discretion of the court at the prevailing
legal interest prescribed by the Bangko
Sentral ng Pilipinas, pursuant to Articles
2210 and 2011 of the Civil Code.59 No
interest, however, shall be adjudged on
unliquidated claims or damages until the
demand can be established with
reasonable certainty.60 Accordingly,
where the amount of the claim or
damages is established with reasonable
certainty, the prevailing legal interest
shall begin to run from the time the claim
is made extrajudicially or judicially (Art.
1169, Civil Code) UNTIL FULL PAYMENT,
but when such certainty cannot be so
reasonably established at the time the
demand is made, the interest shall begin
to run only from the date of the judgment
of the trial court (at which time the
quantification of damages may be
deemed to have been reasonably
ascertained) UNTIL FULL PAYMENT. The
actual base for the computation of the
interest shall, in any case, be on the
principal amount finally adjudged,
without compounding any interest unless
compounded interest is expressly
stipulated by law or regulation.61
This case involves a forbearance of credit wherein petitioner
was granted a 60-day credit term on its purchases, with the
condition that a 24% interest per annum would be charged on
all accounts overdue. Since there was an extra judicial
demand before the complaint was filed, interest on the amount
due begins to run not from the filing of the complaint but from
the date of such extrajudicial demand. 62 Thus, the unpaid
principal obligation of ₱1,263,104.22 shall earn the stipulated
interest of 24% per annum from the date of extrajudicial
demand on 22 January 2008 until full payment.
Furthermore, in accordance with Article 221263 of the Civil
Code, the 24% interest per annum due on the principal amount
accruing as of the judicial demand shall earn legal interest at
the rate of 12% per annum from the date of judicial demand on
5 February 2008 until 30 June 2013, and thereafter at the rate
of 6% per annum from 1 July 2013 until full payment. From the
date of judicial demand on 5 February 2008 until 30 June
2013, the prevailing rate of legal interest was 12% per annum.
The 6% per annum legal interest prescribed under BSP-MB
Circular No. 799 took effect on 1 July 2013 and could only be
applied prospectively. 64 The ₱50,000.00 attorney's fees shall
also earn legal interest at the rate of 6% per annum from the
finality of this Decision until full payment.1âшphi1
WHEREFORE, the Decision dated 21 April 2016 of the Court
of Appeals in CA-G.R. CV No. 102465, affirming the 27
January 2014 Decision of the Regional Trial Court, Branch
128, Caloocan City, is AFFIRMED with MODIFICATION, as
follows:

Petitioner Lara's Gifts & Decors, Inc. is

ordered to pay respondent Midtown
Industrial Sales, Inc. the following:

1. ONE MILLION TWO HUNDRED SIXTY

THREE THOUSAND ONE HUNDRED
FOUR PESOS and 22/100 (₱1,263,104.22)
representing the principal amount plus
stipulated interest at 24% per annum to be
computed from 22 January 2008, the date of
extrajudicial demand, until full payment.

2. Legal interest on the 24% per

annum interest due on the principal amount
accruing as of judicial demand, at the rate of
12% per annum from the date of judicial
demand on 5 February 2008 until 30 June
2013, and thereafter at the rate of 6% per
annum from 1 July 2013 until full payment.

3. The sum of FIFTY THOUSAND PESOS

(₱50,000.00) as attorney's fees, plus legal
interest thereon at the rate of 6% per
annum to be computed from the finality of
this Decision until full payment.

4. Cost of the suit.

SO ORDERED.

G.R. No. 206806, June 25, 2014 - ARCO PULP AND PAPER
CO., INC. AND CANDIDA A. SANTOS, Petitioners, v. DAN T.
LIM, DOING BUSINESS UNDER THE NAME AND STYLE OF
QUALITY PAPERS & PLASTIC PRODUCTS ENTERPRISES,
Respondent.:
G.R. No. 206806, June 25, 2014 - ARCO PULP AND PAPER
CO., INC. AND CANDIDA A. SANTOS, Petitioners, v. DAN T.
LIM, DOING BUSINESS UNDER THE NAME AND STYLE OF
QUALITY PAPERS & PLASTIC PRODUCTS ENTERPRISES,
Respondent.
THIRD DIVISION
G.R. No. 206806, June 25, 2014
ARCO PULP AND PAPER CO., INC. AND CANDIDA A.
SANTOS, Petitioners, v. DAN T. LIM, DOING BUSINESS
UNDER THE NAME AND STYLE OF QUALITY PAPERS &
PLASTIC PRODUCTS ENTERPRISES, Respondent.
DECISION
LEONEN, J.:
Novation must be stated in clear and unequivocal terms to
extinguish an obligation. It cannot be presumed and may be
implied only if the old and new contracts are incompatible on
every point.
Before us is a petition for review on certiorari 1 assailing the
Court of Appeals’ decision2 in CA-G.R. CV No. 95709, which
stemmed from a complaint3 filed in the Regional Trial Court of
Valenzuela City, Branch 171, for collection of sum of money.
The facts are as follows:
Dan T. Lim works in the business of supplying scrap papers,
cartons, and other raw materials, under the name Quality
Paper and Plastic Products, Enterprises, to factories engaged
in the paper mill business.4 From February 2007 to March
2007, he delivered scrap papers worth P7,220,968.31 to Arco
Pulp and Paper Company, Inc. (Arco Pulp and Paper) through
its Chief Executive Officer and President, Candida A.
Santos.5 The parties allegedly agreed that Arco Pulp and
Paper would either pay Dan T. Lim the value of the raw
materials or deliver to him their finished products of equivalent
value.6cralawred
Dan T. Lim alleged that when he delivered the raw materials,
Arco Pulp and Paper issued a post-dated check dated April 18,
20077 in the amount of P1,487,766.68 as partial payment, with
the assurance that the check would not bounce.8 When he
deposited the check on April 18, 2007, it was dishonored for
being drawn against a closed account.9cralawred
On the same day, Arco Pulp and Paper and a certain Eric Sy
executed a memorandum of agreement10 where Arco Pulp and
Paper bound themselves to deliver their finished products to
Megapack Container Corporation, owned by Eric Sy, for his
account. According to the memorandum, the raw materials
would be supplied by Dan T. Lim, through his company,
Quality Paper and Plastic Products. The memorandum of
agreement reads as follows:chanRoblesvirtualLawlibrary
Per meeting held at ARCO, April 18, 2007, it
has been mutually agreed between Mrs.
Candida A. Santos and Mr. Eric Sy that
ARCO will deliver 600 tons Test Liner
150/175 GSM, full width 76 inches at the
price of P18.50 per kg. to Megapack
Container for Mr. Eric Sy’s account.
Schedule of deliveries are as follows:
....
It has been agreed further that the Local
OCC materials to be used for the production
of the above Test Liners will be supplied by
Quality Paper & Plastic Products Ent., total
of 600 Metric Tons at P6.50 per kg. (price
subject to change per advance notice).
Quantity of Local OCC delivery will be based
on the quantity of Test Liner delivered to
Megapack Container Corp. based on the
above production schedule.11
On May 5, 2007, Dan T. Lim sent a letter 12 to Arco Pulp and
Paper demanding payment of the amount of ?7,220,968.31,
but no payment was made to him.13cralawred
Dan T. Lim filed a complaint14 for collection of sum of money
with prayer for attachment with the Regional Trial Court,
Branch 171, Valenzuela City, on May 28, 2007. Arco Pulp and
Paper filed its answer15 but failed to have its representatives
attend the pre-trial hearing. Hence, the trial court allowed Dan
T. Lim to present his evidence ex parte.16cralawred
On September 19, 2008, the trial court rendered a judgment in
favor of Arco Pulp and Paper and dismissed the complaint,
holding that when Arco Pulp and Paper and Eric Sy entered
into the memorandum of agreement, novation took place,
which extinguished Arco Pulp and Paper’s obligation to Dan T.
Lim.17cralawred
Dan T. Lim appealed18 the judgment with the Court of Appeals.
According to him, novation did not take place since the
memorandum of agreement between Arco Pulp and Paper and
Eric Sy was an exclusive and private agreement between
them. He argued that if his name was mentioned in the
contract, it was only for supplying the parties their required
scrap papers, where his conformity through a separate
contract was indispensable.19cralawred
On January 11, 2013, the Court of Appeals20 rendered a
decision21 reversing and setting aside the judgment dated
September 19, 2008 and ordering Arco Pulp and Paper to
jointly and severally pay Dan T. Lim the amount of
P7,220,968.31 with interest at 12% per annum from the time of
demand; P50,000.00 moral damages; P50,000.00 exemplary
damages; and P50,000.00 attorney’s fees.22cralawred
The appellate court ruled that the facts and circumstances in
this case clearly showed the existence of an alternative
obligation.23 It also ruled that Dan T. Lim was entitled to
damages and attorney’s fees due to the bad faith exhibited by
Arco Pulp and Paper in not honoring its
undertaking.24cralawred
Its motion for reconsideration25 having been denied,26 Arco
Pulp and Paper and its President and Chief Executive Officer,
Candida A. Santos, bring this petition for review on certiorari.
On one hand, petitioners argue that the execution of the
memorandum of agreement constituted a novation of the
original obligation since Eric Sy became the new debtor of
respondent. They also argue that there is no legal basis to
hold petitioner Candida A. Santos personally liable for the
transaction that petitioner corporation entered into with
respondent. The Court of Appeals, they allege, also erred in
awarding moral and exemplary damages and attorney’s fees
to respondent who did not show proof that he was entitled to
damages. 27cralawred
Respondent, on the other hand, argues that the Court of
Appeals was correct in ruling that there was no proper
novation in this case. He argues that the Court of Appeals was
correct in ordering the payment of ?7,220,968.31 with
damages since the debt of petitioners remains unpaid. 28 He
also argues that the Court of Appeals was correct in holding
petitioners solidarily liable since petitioner Candida A. Santos
was “the prime mover for such outstanding corporate
liability.”29cralawred
In their reply, petitioners reiterate that novation took place
since there was nothing in the memorandum of agreement
showing that the obligation was alternative. They also argue
that when respondent allowed them to deliver the finished
products to Eric Sy, the original obligation was
novated.30cralawred
A rejoinder was submitted by respondent, but it was noted
without action in view of A.M. No. 99-2-04-SC dated November
21, 2000.31cralawred
The issues to be resolved by this court are as
follows:chanRoblesvirtualLawlibrary
1. Whether the obligation between the
parties was extinguished by novation
2. Whether Candida A. Santos was solidarily
liable with Arco Pulp and Paper Co., Inc.
3. Whether moral damages, exemplary
damages, and attorney’s fees can be
awarded
The petition is denied.
The obligation between the
parties was an alternative
obligation
The rule on alternative obligations is governed by Article 1199
of the Civil Code, which states:chanRoblesvirtualLawlibrary
Article 1199. A person alternatively bound by
different prestations shall completely
perform one of them.
The creditor cannot be compelled to receive
part of one and part of the other undertaking.
“In an alternative obligation, there is more than one object, and
the fulfillment of one is sufficient, determined by the choice of
the debtor who generally has the right of election.”32 The right
of election is extinguished when the party who may exercise
that option categorically and unequivocally makes his or her
choice known.33 The choice of the debtor must also be
communicated to the creditor who must receive notice of it
since:chanRoblesvirtualLawlibrary
The object of this notice is to give the
creditor . . . opportunity to express his
consent, or to impugn the election made by
the debtor, and only after said notice shall
the election take legal effect when
consented by the creditor, or if impugned by
the latter, when declared proper by a
competent court.34
According to the factual findings of the trial court and the
appellate court, the original contract between the parties was
for respondent to deliver scrap papers worth P7,220,968.31 to
petitioner Arco Pulp and Paper. The payment for this delivery
became petitioner Arco Pulp and Paper’s obligation. By
agreement, petitioner Arco Pulp and Paper, as the debtor, had
the option to either (1) pay the price or (2) deliver the finished
products of equivalent value to respondent.35cralawred
The appellate court, therefore, correctly identified the
obligation between the parties as an alternative obligation,
whereby petitioner Arco Pulp and Paper, after receiving the
raw materials from respondent, would either pay him the price
of the raw materials or, in the alternative, deliver to him the
finished products of equivalent value.
When petitioner Arco Pulp and Paper tendered a check to
respondent in partial payment for the scrap papers, they
exercised their option to pay the price. Respondent’s receipt of
the check and his subsequent act of depositing it constituted
his notice of petitioner Arco Pulp and Paper’s option to pay.
This choice was also shown by the terms of the memorandum
of agreement, which was executed on the same day. The
memorandum declared in clear terms that the delivery of
petitioner Arco Pulp and Paper’s finished products would be to
a third person, thereby extinguishing the option to deliver the
finished products of equivalent value to respondent.
The memorandum of
agreement did not constitute
a novation of the original
contract
The trial court erroneously ruled that the execution of the
memorandum of agreement constituted a novation of the
contract between the parties. When petitioner Arco Pulp and
Paper opted instead to deliver the finished products to a third
person, it did not novate the original obligation between the
parties.
The rules on novation are outlined in the Civil Code,
thus:chanRoblesvirtualLawlibrary
Article 1291. Obligations may be modified
by:
(1) Changing their object or principal
conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of
the creditor. (1203)
Article 1292. In order that an obligation may
be extinguished by another which substitute
the same, it is imperative that it be so
declared in unequivocal terms, or that the
old and the new obligations be on every
point incompatible with each other. (1204)

Article 1293. Novation which consists in
substituting a new debtor in the place of the
original one, may be made even without the
knowledge or against the will of the latter,
but not without the consent of the creditor.
Payment by the new debtor gives him the
rights mentioned in Articles 1236 and 1237.
(1205a)
Novation extinguishes an obligation between two parties when
there is a substitution of objects or debtors or when there is
subrogation of the creditor. It occurs only when the new
contract declares so “in unequivocal terms” or that “the old and
the new obligations be on every point incompatible with each
other.”36cralawred
Novation was extensively discussed by this court in Garcia v.
Llamas:37cralawred
Novation is a mode of extinguishing an
obligation by changing its objects or
principal obligations, by substituting a
new debtor in place of the old one, or by
subrogating a third person to the rights
of the creditor. Article 1293 of the Civil
Code defines novation as follows:
“Art. 1293. Novation which consists in
substituting a new debtor in the place of the
original one, may be made even without the
knowledge or against the will of the latter,
but not without the consent of the creditor.
Payment by the new debtor gives him rights
mentioned in articles 1236 and 1237.”
In general, there are two modes of
substituting the person of the debtor:
(1) expromision and (2) delegacion.
In expromision, the initiative for the change
does not come from — and may even be
made without the knowledge of — the
debtor, since it consists of a third person’s
assumption of the obligation. As such, it
logically requires the consent of the third
person and the creditor. In delegacion, the
debtor offers, and the creditor accepts, a
third person who consents to the substitution
and assumes the obligation; thus, the
consent of these three persons are
necessary. Both modes of substitution by
the debtor require the consent of the
creditor.
Novation may also be extinctive or
modificatory. It is extinctive when an old
obligation is terminated by the creation of a
new one that takes the place of the former. It
is merely modificatory when the old
obligation subsists to the extent that it
remains compatible with the amendatory
agreement. Whether extinctive or
modificatory, novation is made either by
changing the object or the principal
conditions, referred to as objective or real
novation; or by substituting the person of the
debtor or subrogating a third person to the
rights of the creditor, an act known as
subjective or personal novation. For
novation to take place, the following
requisites must concur:
1) There must be a previous valid
obligation.
2) The parties concerned must agree to a
new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
Novation may also be express or implied. It
is express when the new obligation declares
in unequivocal terms that the old obligation
is extinguished. It is implied when the new
obligation is incompatible with the old one on
every point. The test of incompatibility is
whether the two obligations can stand
together, each one with its own
independent existence.38 (Emphasis
supplied)
Because novation requires that it be clear and unequivocal, it
is never presumed, thus:chanRoblesvirtualLawlibrary
In the civil law setting, novatio is literally
construed as to make new. So it is deeply
rooted in the Roman Law jurisprudence,
the principle — novatio non praesumitur
— that novation is never presumed. At
bottom, for novation to be a jural reality,
its animus must be ever present, debitum
pro debito — basically extinguishing the old
obligation for the new one.39 (Emphasis
supplied)
There is nothing in the memorandum of agreement that states
that with its execution, the obligation of petitioner Arco Pulp
and Paper to respondent would be extinguished. It also does
not state that Eric Sy somehow substituted petitioner Arco
Pulp and Paper as respondent’s debtor. It merely shows that
petitioner Arco Pulp and Paper opted to deliver the finished
products to a third person instead.
The consent of the creditor must also be secured for the
novation to be valid:chanRoblesvirtualLawlibrary
Novation must be expressly consented
to. Moreover, the conflicting intention and
acts of the parties underscore the absence
of any express disclosure or circumstances
with which to deduce a clear and
unequivocal intent by the parties to novate
the old agreement.40 (Emphasis supplied)
In this case, respondent was not privy to the memorandum of
agreement, thus, his conformity to the contract need not be
secured. This is clear from the first line of the memorandum,
which states:chanRoblesvirtualLawlibrary
Per meeting held at ARCO, April 18, 2007, it
has been mutually agreed between Mrs.
Candida A. Santos and Mr. Eric Sy. . . .41
If the memorandum of agreement was intended to novate the
original agreement between the parties, respondent must have
first agreed to the substitution of Eric Sy as his new debtor.
The memorandum of agreement must also state in clear and
unequivocal terms that it has replaced the original obligation of
petitioner Arco Pulp and Paper to respondent. Neither of these
circumstances is present in this case.
Petitioner Arco Pulp and Paper’s act of tendering partial
payment to respondent also conflicts with their alleged intent to
pass on their obligation to Eric Sy. When respondent sent his
letter of demand to petitioner Arco Pulp and Paper, and not to
Eric Sy, it showed that the former neither acknowledged nor
consented to the latter as his new debtor. These acts, when
taken together, clearly show that novation did not take place.

Since there was no novation, petitioner Arco Pulp and Paper’s
obligation to respondent remains valid and existing. Petitioner
Arco Pulp and Paper, therefore, must still pay respondent the
full amount of P7,220,968.31.
Petitioners are liable for damages  detention or arrest;
Under Article 2220 of the Civil Code, moral damages may be
awarded in case of breach of contract where the breach is due
to fraud or bad faith:chanRoblesvirtualLawlibrary
Art. 2220. Willfull injury to property may be a
legal ground for awarding moral damages if
the court should find that, under the
circumstances, such damages are justly
due. The same rule applies to breaches of
contract where the defendant acted
fraudulently or in bad faith. (Emphasis
supplied)
Moral damages are not awarded as a matter of right but only
after the party claiming it proved that the breach was due to
fraud or bad faith. As this court
stated:chanRoblesvirtualLawlibrary
Moral damages are not recoverable simply
because a contract has been breached.
They are recoverable only if the party from
whom it is claimed acted fraudulently or in
bad faith or in wanton disregard of his
contractual obligations. The breach must be
wanton, reckless, malicious or in bad faith,
and oppressive or abusive.42
Further, the following requisites must be proven for the
recovery of moral damages:chanRoblesvirtualLawlibrary
An award of moral damages would require
certain conditions to be met, to wit: (1) first,
there must be an injury, whether physical,
mental or psychological, clearly sustained by
the claimant; (2) second, there must be
culpable act or omission factually
established; (3) third, the wrongful act or
omission of the defendant is the proximate
cause of the injury sustained by the
claimant; and (4) fourth, the award of
damages is predicated on any of the cases
stated in Article 2219 of the Civil Code.43
Here, the injury suffered by respondent is the loss of
P7,220,968.31 from his business. This has remained unpaid
since 2007. This injury undoubtedly was caused by petitioner
Arco Pulp and Paper’s act of refusing to pay its obligations.
When the obligation became due and demandable, petitioner
Arco Pulp and Paper not only issued an unfunded check but
also entered into a contract with a third person in an effort to
evade its liability. This proves the third requirement.
As to the fourth requisite, Article 2219 of the Civil Code
provides that moral damages may be awarded in the following
instances:chanRoblesvirtualLawlibrary
Article 2219. Moral damages may be
recovered in the following and analogous
cases:ChanRoblesVirtualawlibrary
(1) A criminal offense
resulting in physical
injuries;
(2) Quasi-delicts causing
physical injuries;
(3) Seduction, abduction,
rape, or other lascivious
acts;
(4) Adultery or
concubinage;
(5) Illegal or arbitrary
(6) Illegal search;
(7) Libel, slander or any
other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in
Article 309;
(10) Acts and actions
referred to in Articles 21,
26, 27, 28, 29, 30, 32, 34,
and 35.
Breaches of contract done in bad faith, however, are not
specified within this enumeration. When a party breaches a
contract, he or she goes against Article 19 of the Civil Code,
which states:chanRoblesvirtualLawlibrary
Article 19. Every person must, in the
exercise of his rights and in the performance
of his duties, act with justice, give everyone
his due, and observe honesty and good
faith.
Persons who have the right to enter into contractual relations
must exercise that right with honesty and good faith. Failure to
do so results in an abuse of that right, which may become the
basis of an action for damages. Article 19, however, cannot be
its sole basis:chanRoblesvirtualLawlibrary
Article 19 is the general rule which governs
the conduct of human relations. By itself, it is
not the basis of an actionable tort. Article 19
describes the degree of care required so
that an actionable tort may arise when it is
alleged together with Article 20 or Article
21.44
Article 20 and 21 of the Civil Code are as
follows:chanRoblesvirtualLawlibrary
Article 20. Every person who, contrary to
law, wilfully or negligently causes damage to
another, shall indemnify the latter for the
same.
Article 21. Any person who wilfully causes
loss or injury to another in a manner that is
contrary to morals, good customs or public
policy shall compensate the latter for the
damage.
To be actionable, Article 20 requires a violation of law, while
Article 21 only concerns with lawful acts that are contrary to
morals, good customs, and public
policy:chanRoblesvirtualLawlibrary
Article 20 concerns violations of existing law
as basis for an injury. It allows recovery
should the act have been willful or negligent.
Willful may refer to the intention to do the act
and the desire to achieve the outcome which
is considered by the plaintiff in tort action as
injurious. Negligence may refer to a situation
where the act was consciously done but
without intending the result which the plaintiff
considers as injurious.
Article 21, on the other hand, concerns
 injuries that may be caused by acts which Code, exemplary damages are due in the following
are not necessarily proscribed by law. This circumstances:chanRoblesvirtualLawlibrary
article requires that the act be willful, that is,
that there was an intention to do the act and Article 2232. In contracts and quasi-
a desire to achieve the outcome. In cases contracts, the court may award exemplary
under Article 21, the legal issues revolve damages if the defendant acted in a wanton,
around whether such outcome should be fraudulent, reckless, oppressive, or
considered a legal injury on the part of the malevolent manner.
plaintiff or whether the commission of the act
was done in violation of the standards of Article 2233. Exemplary damages cannot be
care required in Article 19.45 recovered as a matter of right; the court will
decide whether or not they should be
When parties act in bad faith and do not faithfully comply with adjudicated.
their obligations under contract, they run the risk of violating
Article 1159 of the Civil Code:chanRoblesvirtualLawlibrary Article 2234. While the amount of the
exemplary damages need not be proven, the
Article 1159. Obligations arising from plaintiff must show that he is entitled to
contracts have the force of law between the moral, temperate or compensatory damages
contracting parties and should be complied before the court may consider the question
with in good faith. of whether or not exemplary damages
should be awarded.
Article 2219, therefore, is not an exhaustive list of the
instances where moral damages may be recovered since it In Tankeh v. Development Bank of the Philippines,49 we stated
only specifies, among others, Article 21. When a party reneges that:chanRoblesvirtualLawlibrary
on his or her obligations arising from contracts in bad faith, the
act is not only contrary to morals, good customs, and public The purpose of exemplary damages is to
policy; it is also a violation of Article 1159. Breaches of serve as a deterrent to future and
contract become the basis of moral damages, not only under subsequent parties from the commission
Article 2220, but also under Articles 19 and 20 in relation to of a similar offense. The case of People v.
Article 1159. Rante citing People v. Dalisay held
that:ChanRoblesVirtualawlibrary
Moral damages, however, are not recoverable on the mere Also known as ‘punitive’
breach of the contract. Article 2220 requires that the breach be or ‘vindictive’ damages,
done fraudulently or in bad faith. In Adriano v. exemplary or corrective
Lasala:46cralawred damages are intended to
serve as a deterrent to
To recover moral damages in an action for serious wrong doings,
breach of contract, the breach must be and as a vindication of
palpably wanton, reckless and malicious, in undue sufferings and
bad faith, oppressive, or abusive. Hence, the wanton invasion of the
person claiming bad faith must prove its rights of an injured or a
existence by clear and convincing evidence punishment for those
for the law always presumes good faith. guilty of outrageous
conduct. These terms are
Bad faith does not simply connote bad generally, but not always,
judgment or negligence. It imports a used interchangeably. In
dishonest purpose or some moral common law, there is
obliquity and conscious doing of a preference in the use of
wrong, a breach of known duty through exemplary damages when
some motive or interest or ill will that the award is to account for
partakes of the nature of fraud. It is, injury to feelings and for
therefore, a question of intention, which the sense of indignity and
can be inferred from one’s conduct humiliation suffered by a
and/or contemporaneous person as a result of an
statements.47 (Emphasis supplied) injury that has been
maliciously and wantonly
Since a finding of bad faith is generally premised on the intent inflicted, the theory being
of the doer, it requires an examination of the circumstances in that there should be
each case. compensation for the hurt
caused by the highly
When petitioner Arco Pulp and Paper issued a check in partial reprehensible conduct of
payment of its obligation to respondent, it was presumably with the defendant—
the knowledge that it was being drawn against a closed associated with such
account. Worse, it attempted to shift their obligations to a third circumstances as
person without the consent of respondent. willfulness, wantonness,
malice, gross negligence
Petitioner Arco Pulp and Paper’s actions clearly show “a or recklessness,
dishonest purpose or some moral obliquity and conscious oppression, insult or fraud
doing of a wrong, a breach of known duty through some or gross fraud—that
motive or interest or ill will that partakes of the nature of intensifies the injury. The
fraud.”48 Moral damages may, therefore, be awarded. terms punitive or vindictive
damages are often used
Exemplary damages may also be awarded. Under the Civil to refer to those species of
damages that may be
 awarded against a person
to punish him for his
outrageous conduct. In
either case, these
damages are intended in
good measure to deter the
wrongdoer and others like
him from similar conduct
in the future.50 (Emphasis
supplied; citations omitted)
The requisites for the award of exemplary damages are as
follows:ChanRoblesVirtualawlibrary
they may be imposed by way of example in addition to
(1) compensatory damages, and only after the claimant's right
to them has been established;
that they cannot be recovered as a matter of right, their
(2) determination depending upon the amount of compensatory
damages that may be awarded to the claimant; and
the act must be accompanied by bad faith or done in a
(3)
wanton, fraudulent, oppressive or malevolent manner.51
Business owners must always be forthright in their dealings.
They cannot be allowed to renege on their obligations,
considering that these obligations were freely entered into by
them. Exemplary damages may also be awarded in this case
to serve as a deterrent to those who use fraudulent means to
evade their liabilities.
Since the award of exemplary damages is proper, attorney’s
fees and cost of the suit may also be recovered. Article 2208
of the Civil Code states:chanRoblesvirtualLawlibrary
Article 2208. In the absence of stipulation,
attorney's fees and expenses of litigation,
other than judicial costs, cannot be
recovered, except:
(1) When exemplary damages are
awarded[.]
Petitioner Candida A. Santos
is solidarily liable with petitioner
corporation
Petitioners argue that the finding of solidary liability was
erroneous since no evidence was adduced to prove that the
transaction was also a personal undertaking of petitioner
Santos. We disagree.
In Heirs of Fe Tan Uy v. International Exchange Bank,52 we
stated that:chanRoblesvirtualLawlibrary
Basic is the rule in corporation law that a
corporation is a juridical entity which is
vested with a legal personality separate and
distinct from those acting for and in its behalf
and, in general, from the people comprising
it. Following this principle, obligations
incurred by the corporation, acting through
its directors, officers and employees, are its
sole liabilities. A director, officer or
employee of a corporation is generally
not held personally liable for obligations
incurred by the corporation. Nevertheless,
this legal fiction may be disregarded if it is
used as a means to perpetrate fraud or an
illegal act, or as a vehicle for the evasion of
an existing obligation, the circumvention of
statutes, or to confuse legitimate issues.
....
Before a director or officer of a P1,487,766.68 issued by [petitioner] Santos
corporation can be held personally liable
for corporate obligations, however, the
following requisites must concur: (1) the
complainant must allege in the complaint
that the director or officer assented to
patently unlawful acts of the corporation,
or that the officer was guilty of gross
negligence or bad faith; and (2) the
complainant must clearly and
convincingly prove such unlawful acts,
negligence or bad faith.
While it is true that the determination of the
existence of any of the circumstances that
would warrant the piercing of the veil of
corporate fiction is a question of fact which
cannot be the subject of a petition for review
on certiorari under Rule 45, this Court can
take cognizance of factual issues if the
findings of the lower court are not supported
by the evidence on record or are based on a
misapprehension of facts.53 (Emphasis
supplied)
As a general rule, directors, officers, or employees of a
corporation cannot be held personally liable for obligations
incurred by the corporation. However, this veil of corporate
fiction may be pierced if complainant is able to prove, as in this
case, that (1) the officer is guilty of negligence or bad faith, and
(2) such negligence or bad faith was clearly and convincingly
proven.
Here, petitioner Santos entered into a contract with respondent
in her capacity as the President and Chief Executive Officer of
Arco Pulp and Paper. She also issued the check in partial
payment of petitioner corporation’s obligations to respondent
on behalf of petitioner Arco Pulp and Paper. This is clear on
the face of the check bearing the account name, “Arco Pulp &
Paper, Co., Inc.”54 Any obligation arising from these acts would
not, ordinarily, be petitioner Santos’ personal undertaking for
which she would be solidarily liable with petitioner Arco Pulp
and Paper.
We find, however, that the corporate veil must be pierced.
In Livesey v. Binswanger Philippines:55cralawred
Piercing the veil of corporate fiction is an
equitable doctrine developed to address
situations where the separate corporate
personality of a corporation is abused or
used for wrongful purposes. Under the
doctrine, the corporate existence may be
disregarded where the entity is formed or
used for non-legitimate purposes, such
as to evade a just and due obligation, or
to justify a wrong, to shield or perpetrate
fraud or to carry out similar or
inequitable considerations, other
unjustifiable aims or intentions, in which
case, the fiction will be disregarded and
the individuals composing it and the two
corporations will be treated as
identical.56 (Emphasis supplied)
According to the Court of Appeals, petitioner Santos was
solidarily liable with petitioner Arco Pulp and Paper, stating
that:chanRoblesvirtualLawlibrary
In the present case, We find bad faith on the
part of the [petitioners] when they
unjustifiably refused to honor their
undertaking in favor of the [respondent].
After the check in the amount of
 was dishonored for being drawn against a
closed account, [petitioner] corporation
denied any privity with [respondent]. These
acts prompted the [respondent] to avail of
the remedies provided by law in order to
protect his rights.57
We agree with the Court of Appeals. Petitioner Santos cannot
be allowed to hide behind the corporate veil. When petitioner
Arco Pulp and Paper’s obligation to respondent became due
and demandable, she not only issued an unfunded check but
also contracted with a third party in an effort to shift petitioner
Arco Pulp and Paper’s liability. She unjustifiably refused to
honor petitioner corporation’s obligations to respondent. These
acts clearly amount to bad faith. In this instance, the corporate
veil may be pierced, and petitioner Santos may be held
solidarily liable with petitioner Arco Pulp and Paper.
The rate of interest due on
the obligation must be reduced
in view of Nacar v. Gallery
Frames58cralawred
In view, however, of the promulgation by this court of the
decision dated August 13, 2013 in Nacar v. Gallery
Frames,59 the rate of interest due on the obligation must be
modified from 12% per annum to 6% per annum from the time
of demand.
Nacar effectively amended the guidelines stated in Eastern
Shipping v. Court of Appeals,60 and we have laid down the
following guidelines with regard to the rate of legal
interest:chanRoblesvirtualLawlibrary
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:
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.
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 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 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.61 (Emphasis
supplied; citations omitted.)
According to these guidelines, the interest due on the
obligation of P7,220,968.31 should now be at 6% per annum,
computed from May 5, 2007, when respondent sent his letter
of demand to petitioners. This interest shall continue to be due
from the finality of this decision until its full satisfaction.
WHEREFORE, the petition is DENIED in part. The decision in
CA-G.R. CV No. 95709 is AFFIRMED.
Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos
are hereby ordered solidarily to pay respondent Dan T. Lim the
amount of P7,220,968.31 with interest of 6% per annum at the
time of demand until finality of judgment and its full
satisfaction, with moral damages in the amount of P50,000.00,
exemplary damages in the amount of P50,000.00, and
attorney’s fees in the amount of P50,000.00.
SO ORDERED.