15) Legal rate of interest

Federal Builders, Inc. (FBI) vs Foundation Specialists, Inc. (FSI)

FACTS:

FBI entered into an agreement with FSI to sub-contract the construction of the diaphragm wall,
capping beam, and guide walls of the Trafalgar Plaza located at Salcedo Village, Makati
City for a total contract price of P7.4M.

Under the agreement, FBI was to pay the 20% down payment and the balance, through
progress billing every 15 days, payable not later than 1 week from presentation of the
billing.

FSI filed a complaint for Sum of Money against FBI seeking to collect the amount of
P1.6M with accrued interest for FBI’s refusal to pay despite 97% completion.

FBI claimed that the completion is only 85%.

RTC ruled in favor of FSI. One of the orders in the judgment is a plus of 12% legal
interest.

FBI rejected the 12% annual interest rate because there was no stipulation in the
agreement of the parties with regard to interest and despite the fact that their
agreement was not a “loan or forbearance of money.”

ISSUE:

Was the 12% legal interest rate applicable?

RULING:

NO.

12% interest rate is inapplicable, since this case does not involve a loan or forbearance
of money.

In the landmark case of Eastern Shipping Lines, Inc. v. Court of Appeals, if the
agreement of the parties is a loan or forbearance of money and it’s not in writing, the
rate of interest shall be 12%. However, those obligation not constituting a loan or
forbearance of money, interest may be imposed at the rate of 6% per annum. If the
judgment of the court becomes final and executory, the rate of legal interest, shall be
12% per annum.

However, with the recent circular of the Monetary Board of the Bangko Sentral ng
Pilipinas (BSP-MB) No. 799, the guidelines have been modified in the case of Nacar v.
Gallery Frames, that if the agreement of the parties is a loan or forbearance of money
and it’s not in writing, the rate of interest shall be 6%. Same when those obligation not
constituting a loan or forbearance of money, interest may be imposed at the rate of 6%
per annum. If the judgment of the court becomes final and executory, the rate of legal
interest, shall now be 6% per annum.

In addition, 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.

The new rate could only be applied prospectively and not retroactively. Consequently,
the twelve percent (12%) per annum legal interest shall apply only until June 30, 2013.
Come July 1, 2013, the new rate of six percent (6%) per annum shall be the prevailing
rate of interest when applicable. Thus, the need to determine whether the obligation
involved herein is a loan and forbearance of money nonetheless exists.

In S.C. Megaworld Construction and Development Corporation v. Engr. Parada, SC

clarified the meaning of obligations constituting loans or forbearance of money as one
describing a contractual obligation whereby a lender or creditor has refrained
during a given period from requiring the borrower or debtor to repay the loan
or debt then due and payable.

Forbearance of money, goods or credits, therefore, refers to arrangements other than

loan agreements, where a person acquiesces to the temporary use of his money, goods
or credits pending the happening of certain events or fulfilment of certain conditions.

This case, however, does not involve an acquiescence to the temporary use of a party’s
money but a performance of a particular service,

Thus, in the absence of any stipulation as to interest in the agreement between the
parties herein, the matter of interest award arising from the dispute in this case would
actually fall under the second guideline which necessitates the imposition of interest at
the rate of 6%, instead of the 12% imposed.

16) Interest vs Penalty

a. Antonio Tan vs CA and Cultural Center of the Phil. (CCP)

GR No. 116285, October 19, 2001

FACTS:

Tan obtained 2 loans each in the principal amount of P2M , or in the total principal
amount of P4M from CCP evidenced by 2 promissory notes.

Tan defaulted but after a few partial payments he had the loans restructured by CCP,
and Tan accordingly executed a promissory note in the amount of P3.4M payable in 5
installments. Tan failed to pay any installment on the said restructured loan.

In a letter, Tan requested and proposed to CCP a mode of paying the restructured loan,
i.e., (a) 20% of the principal amount of the loan upon the CCP giving its conformity to
his proposal; and (b) the balance on the principal obligation payable in 36 equal
monthly installments until fully paid.
Tan again sent a letter to CCP requesting for a moratorium on his loan obligation until
the following year allegedly due to a substantial deduction in the volume of his business
and on account of the peso devaluation.

No favorable response was made to said letters. Instead, CCP, wrote a ltter to Tan
demanding full payment of the restructured loan amounted to P6M.

CCP filed a complaint for collection of sum of money against Tan after the latter failed
to settle his said restructured loan obligation.

Tan interposed the defense that he merely accommodated a friend, Lucmen, who
allegedly asked for his help to obtain a loan from CCP.

ISSUE:

1. Whether there are contractual and legal bases for the imposition of the penalty,
interest on the penalty.
2. Whether interest may accrue on the penalty or compensatory interest without
violating the provisions of Article 1959 of the New Civil Code

RULING:

1. YES.

Article 1226 of the New Civil Code provides that:

In obligations with a penal clause, the penalty shall substitute the indemnity for
damages and the payment of interests in case of non-compliance, if there is no
stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to
pay the penalty or is guilty of fraud in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the
provisions of this Code.

In the case at bar, the promissory note (Exhibit "A") expressly provides for the
imposition of both interest and penalties in case of default on the part of the petitioner
in the payment of the subject restructured loan. 

The stipulated fourteen percent (14%) per annum interest charge until full payment of
the loan constitutes the monetary interest on the note and is allowed under Article
1956 of the New Civil Code. 7 On the other hand, the stipulated two percent (2%) per
month penalty is in the form of penalty charge which is separate and distinct from the
monetary interest on the principal of the loan.

Penalty on delinquent loans may take different forms. In Government Service

Insurance System v. Court of Appeals,8 this Court has ruled that the New Civil Code
permits an agreement upon a penalty apart from the monetary interest. If the parties
stipulate this kind of agreement, the penalty does not include the monetary interest,
and as such the two are different and distinct from each other and may be demanded
separately. Quoting Equitable Banking Corp. v. Liwanag,9 the GSIS case went on to
state that such a stipulation about payment of an additional interest rate partakes of
the nature of a penalty clause which is sanctioned by law, more particularly under
Article 2209 of the New Civil Code which provides that:

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

2. YES.

Penalty clauses can be in the form of penalty or compensatory interest. Thus, the
compounding of the penalty or compensatory interest is sanctioned by and allowed
pursuant to the above-quoted provision of Article 1959 of the New Civil Code
considering that:

First, there is an express stipulation in the promissory note (Exhibit "A") permitting the
compounding of interest.

Second, Article 2212 of the New Civil Code provides that "Interest due shall earn legal
interest from the time it is judicially demanded, although the obligation may be silent
upon this point." In the instant case, interest likewise began to run on the penalty
interest upon the filing of the complaint in court by CCP.

b. Rodrigo Rivera vs. Sps. Chua

GR No. 184458 and GR No. 184472

FACTS:
The parties were friends of long standing having known each other since 1973: Rivera and Salvador
are kumpadres, the former is the godfather of the Spouses Chua’s son.

Rivera obtained a loan from the Spouses Chua amounting to P120,000.00. Rivera issued a
promissory note. Part of the note contains the following:

“It is agreed and understood that failure on my part to pay the amount of (120,000.00) One Hundred
Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE
PERCENT (5%) interest monthly from the date of default until the entire obligation is fully paid for.

Should this note be referred to a lawyer for collection, I agree to pay the further sum equivalent to
twenty percent (20%) of the total amount due and payable as and for attorney’s fees which in no
case shall be less than ₱5,000.00 and to pay in addition the cost of suit and other incidental litigation
expense.”
Almost three years from the date of payment stipulated in the promissory note, Rivera, as partial
payment for the loan, issued and delivered to the SpousesChua, as payee, a check drawn against
Rivera’s current account with the Philippine Commercial International Bank (PCIB) in the amount of
₱25,000.00.

Spouses Chua received another check presumably issued by Rivera, likewise drawn against
Rivera’s PCIB current account duly signed and dated, but blank as to payee and amount.
Ostensibly, as per understanding by the parties, the check was issued in the amount of ₱133,454.00
with "cash" as payee.

Purportedly, both checks were simply partial payment for Rivera’s loan in the principal amount of
₱120,000.00.

Upon presentment for payment, the two checks were dishonored for the reason "account closed."

As of 31 May 1999, the amount due the Spouses Chua was pegged at ₱366,000.00 covering the
principal of ₱120,000.00 plus five percent (5%) interest per month from 1 January 1996 to 31 May
1999.

The Spouses Chua alleged that they have repeatedly demanded payment from Rivera to no avail.
Because of Rivera’s unjustified refusal to pay, the Spouses Chua were constrained to file a suit.

Rivera countered that he never executed the subject Promissory Note and in all instances when he
obtained a loan from the Spouses Chua, the loans were always covered by a security.

In the main, Rivera claimed forgery of the subject Promissory Note and denied his indebtedness
thereunder.

ISSUE:

RULING:

Article 2209 solidifies the consequence of payment of interest as an indemnity for damages when
the obligor incurs in delay:

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. (Emphasis supplied)

Article 2209 is specifically applicable in this instance where: (1) the obligation is for a sum of money;
(2) the debtor, Rivera, incurred in delay when he failed to pay on or before 31 December 1995; and
(3) the Promissory Note provides for an indemnity for damages upon default of Rivera which is the
payment of a 5%monthly interest from the date of default.

The Supreme Court does not consider the stipulation on payment of interest in this case as a penal
clause although Rivera, as obligor, assumed to pay additional 5% monthly interest on the principal
amount of ₱120,000.00 upon default.

At the time interest accrued from 1 January 1996, the date of default under the Promissory Note, the
then prevailing rate of legal interest was 12% per annum under Central Bank (CB) Circular No. 416
in cases involving the loan or for bearance of money.  Thus, the legal interest accruing from the
29

Promissory Note is 12% per annum from the date of default on 1 January 1996. However, the 12%
 per annumrate of legal interest is only applicable until 30 June 2013, before the advent and
effectivity of Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013 reducing the rate of
legal interest to 6% per annum. Pursuant to our ruling in Nacar v. Gallery Frames,  BSP Circular No.
30

799 is prospectively applied from 1 July 2013. In short, the applicable rate of legal interest from 1
January 1996, the date when Rivera defaulted, to date when this Decision becomes final and
executor is divided into two periods reflecting two rates of legal interest: (1) 12% per annum from 1
January 1996 to 30 June 2013; and (2) 6% per annum FROM 1 July 2013 to date when this
Decision becomes final and executory.

For clarity and to obviate confusion, we chart the breakdown of the total amount owed by Rivera to
the Spouses Chua:

Face value of the Stipulated Interest A & Interest due earning Attorney’s Total
Promissory Note B legal interest A & B fees Amount
February 24, 1995 A. January 1, 1996 to A. June 11, 1999 (date Wholesale  
to June 30, 2013 of judicial demand) to Amount
December 31, June 30, 2013
1995 B. July 1 2013 to date B. July 1, 2013 to date
when this Decision when this Decision
becomes final and becomes final and
executory executory
₱120,000.00 A. 12 % per annumon A. 12% per annumon ₱50,000.00 Total amount
the principal amount of the total amount of of Columns 1-
₱120,000.00 column 2 4
B. 6% per annumon the B. 6% per annumon the
principal amount of total amount of column
₱120,000.00 235

As observed by [Rivera], the stipulated interest of 5% per month or 60% per annum in addition to
legal interests and attorney’s fees is, indeed, highly iniquitous and unreasonable. Stipulated interest
rates are illegal if they are unconscionable and the Court is allowed to temper interest rates when
necessary. Since the interest rate agreed upon is void, the parties are considered to have no
stipulation regarding the interest rate, thus, the rate of interest should be 12% per annum computed
from the date of judicial or extrajudicial demand.

17) Compounded Interest

a. Sps. Albos vs Sps. Embisan, Deputy Sheriff Cachero and ROD of QC

GR No. 210831

FACTS:
Sps. Albos entered into an agreement, denominated as "Loan with Real Estate Mortgage, " with
Sps. Embisan in the amount of ₱84,000.00 payable within 90 days with a monthly interest rate of
5%. To secure the indebtedness, Sps. Albos mortgaged to the spouses Embisan a parcel of land.

For failure to settle their account upon maturity, petitioner Aida Albos requested and was given an
extension of eleven (11) months, or until December 17, 1985, within which to pay the loan obligation.
However, when the said deadline came anew, petitioners once again defaulted and so, on
agreement of the parties, another extension of five (5) months, or until May 17, 1986, was set.

May 17, 1986 came and went but the obligation remained unpaid. 

Thus, when Sps. Albos requested a third extension, as will later be alleged by the spouses Embisan,
an additional eight (8) months was granted on the condition that the monthly 5% interest from then
on, i.e. June 1986 onwards, will be compounded. This stipulation, however, was not reduced in
writing.

In a bid to prevent the foreclosure of their mortgaged property, Sps. Albos paid spouses Embisan
the sum of ₱44,500.00.

Due to Sps. Albo’s failure to settle their indebtedness, spouses Embisan proceeded to extra-
judicially foreclose the mortgaged property. At the auction sale conducted by the sheriff, spouses
Embisan emerged as the highest bidders.

The property was never redeemed.

Sps. Albos alleged that afterwards, they were pressured by spouses Embisan to execute a Contract
of Lease over the property wherein the Sps. Albos, as lessees, are obligated to pay monthly rent.

Sps. Albos filed a complaint for the annulment of the Loan with Real Estate Mortgage.

ISSUE:
1. Should the compounding of interest be in writing?
2. Does the 5% compounding interest excessive, exorbitant, oppressive, iniquitous and
unconscionable thus void being contrary to law and morals?
RULING:
1. YES.
The compounding of interest should be in writing.

Article 1956 of the New Civil Code, which refers to monetary interest, provides: No interest shall be
due unless it has been expressly stipulated in writing.

As mandated by the foregoing provision, payment of monetary interest shall be due only if: (1) there
was an express stipulation for the payment of interest; and (2) the agreement for such payment was
reduced in writing. Thus, collection of interest without any stipulation thereof in writing is prohibited
by law.

The first requirement––that there be an express stipulation for the payment of interest––is not
sufficiently complied with, for purposes of imposing compounded interest on the loan. The
requirement does not only entail reducing in writing the interest rate to be earned but also the
manner of earning the same, if it is to be compounded. Failure to specify the manner of earning
interest, however, shall not automatically render the stipulation imposing the interest rate void since
it is readily apparent from the contract itself that the parties herein agreed for the loan to bear
interest. Instead, in default of any stipulation on the manner of earning interest, simple interest shall
accrue.

2. YES.

Imposing 5% monthly interest, whether compounded or simple, is unconscionable

Nevertheless, even if there was such an agreement that interest will be compounded, the 5%
monthly rate, be it simple or compounded, written or verbal, is void for being too exorbitant, thus
running afoul of Article 1306 of the New Civil Code, which provides:

Article 1306. The contracting parties may establish such stipulations, clauses, terms and conditions
as they may deem convenient, provided they are not contrary to law, morals, good customs, public
order, or public policy.

As case law instructs, 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.

Court of Appeals correctly imposed the legal interest of 12% per annum in place of the excessive
interest stipulated.

b. Tarcisio Calilung vs Paramount Insurance Corp, RP Technical Services Inc, Renato Punzalan and Jose
Manalo, Jr.

GR No. 195641

18) Solutio Indebiti

a. Dela Paz vs. L & J Development Company

GR No. 183360

b. Sps. Salvador and Alma Abella vs Sps. Romeo and Annie Abella

GR No. 195166

FACTS:
Spouses Salvador and Alma Abella filed a Complaint  for sum of money and damages with prayer
5

for preliminary attachment against respondents Spouses Romeo and Annie Abella.

It was alleged that respondent obtained a loan amounting to P500K. The loan was evidenced by an
acknowledgment receipt  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.

acknowledgment receipt to petitioners, which states:

Batan, Aklan

March 22, 1999

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

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

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.

ISSUE:

1. whether interest accrued on respondents’ loan from petitioners. If so, at what rate?
2. whether petitioners are liable to reimburse respondents for the latter’s supposed excess
payments and for interest.

RULING:
Jurisprudence is clear about the applicable interest rate if a written instrument fails to specify a rate.

IV. DEPOSIT

1. Definition of deposit
a. BPI vs IAC and Zshornack
GR No. L-66826
FACTS:
Zshornack entrusted to COMTRUST, thru Garcia, US $3,000.00 cash (popularly known as
greenbacks) for safekeeping, and that the agreement was embodied in a document.

An application for a dollar draft was accomplished by Garcia, Assistant Manager of COMTRUST,
payable to a certain Dizon in the amount of $1,000.00. In the application, Garcia indicated that
the amount was to be charged to Dollar Savings Acct. of Zhornacks. the charges for
commission, documentary stamp tax and others shall be charged to the current account of
Zshornacks.
 There was no indication of the name of the purchaser of the dollar draft.

On the same date, COMTRUST, under the signature of Garcia issued a check payable to the
order of Dizon in the sum of US $1,000 with an indication that it was to be charged to Dollar
Savings Acct. No. 25-4109.

When Zshornack noticed the withdrawal of US$1,000.00 from his account, he demanded an
explanation from the bank. In answer, COMTRUST claimed that the peso value of the
withdrawal was given to Atty. Ernesto Zshornack, Jr., brother of Rizaldy when he (Ernesto)
encashed with COMTRUST a cashier's check for P8,450.00 issued by the Manila Banking
Corporation payable to Ernesto.

It was also alleged in the complaint that despite demands, the bank refused to return the money.

BPI now posits another ground to defeat private respondent's claim. It now argues that the
contract embodied in the document is the contract of depositum (as defined in Article 1962, New
Civil Code), which banks do not enter into. The bank alleges that Garcia exceeded his powers
when he entered into the transaction. Hence, it is claimed, the bank cannot be liable under the
contract, and the obligation is purely personal to Garcia.

ISSUE:
RULING:

b. Atty. Calibo, Jr. vs CA and Dr. Abella

GR No. 120528

FACTS:
Pablo U. Abella purchased an MF 210 agricultural tractor  which he used in his farm.

Pablo Abella's son, Mike abella rented for residential purpose the house of Atty. Calibo.

Pablo Abella pulled out his aforementioned tractor from his farm and left it in the safekeeping of
his son, Mike Abella. Mike kept the tractor in the garage of the house he was leasing from
Calibo.

Since he started renting Calibo's house, Mike had been religiously paying the monthly rentals
therefor, but beginning November of 1986, he stopped doing so. The following month, Calibo
learned that Mike had never paid the charges for electric and water consumption in the leased
premises which the latter was duty-bound to shoulder. Thus, Calibo confronted Mike about his
rental arrears and the unpaid electric and water bills. During this confrontation, Mike informed
Calibo that he (Mike) would be staying in the leased property only until the end of December
1986. Mike also assured Calibo that he would be settling his account with the latter, offering the
tractor as security. Mike even asked Calibo to help him find a buyer for the tractor so he could
sooner pay his outstanding obligation.

When a new tenant moved into the house formerly leased to Mike, Calibo had the tractor moved
to the garage of his father's house.
 When Calibo tried to collect payment, on all three occasions, Calibo was unable to talk to Mike
as the latter was reportedly out of town.
After a long while, Mike's father, Pablo Abella, came to Tagbilaran City to claim and take
possession of the tractor.

Calibo, however, informed Pablo that Mike left the tractor with him as security for the payment of
Mike's obligation to him. Pablo offered to write Mike a check for P2,000.00 in payment of Mike's
unpaid lease rentals, in addition to issuing postdated checks to cover the unpaid electric and
water bills the correctness of which Pablo said he still had to verify with Mike. Calibo told Pablo
that he would accept the P2,000.00-check only if the latter would execute a promissory note in
his favor to cover the amount of the unpaid electric and water bills. Pablo was not amenable to
this proposal.

Pablo Abella instituted an action for replevin, claiming ownership of the tractor and seeking to
recover possession thereof.

ISSUE:
Was there a contract of deposit?

RULING:
NO.

In a contract of deposit, a person receives an object belonging to another with the obligation of
safely keeping it and of returning the same.5 Petitioner himself states that he received the tractor not
to safely keep it but as a form of security for the payment of Mike Abella's obligations. There is no
deposit where the principal purpose for receiving the object is not safekeeping. 6

Consequently, petitioner had no right to refuse delivery of the tractor to its lawful owner. On the other
hand, private respondent, as owner, had every right to seek to repossess the tractor, including the
institution of the instant action for replevin.
1âwphi1.nêt

c. RCJ Bus Lines, Inc. vs Master Tours and travel Corp

GR No. 177232

Rosa Lim vs CA
G.R. No. 102784             February 28, 1996

FACTS:
Rosa Lim got and received in trust from Victoria Suarez one (1) ring worth P169K and 1 bracelet
worth P170K with the obligation to sell the same on commission basis and to turn over the
proceeds of the sale to Suarez or to return said jewelry if unsold. The agreement was reflected in
a receipt.
Rosa Lim returned the bracelet to Vicky Suarez, but failed to return the diamond ring or to turn
over the proceeds thereof if sold.

As a result, Victoria Suarez, aside from making verbal demands, wrote a demand letter to Lim
7 

asking for the return of said ring or the proceeds of the sale thereof.

In response, Lim, thru counsel, wrote a letter to Suarez’s counsel alleging that Rosa Lim had
8 

returned both ring and bracelet to Vicky Suarez sometime in September, 1987, for which reason,
Lim had no longer any liability to Mrs. Suarez insofar as the pieces of jewelry were concerned.

Irked, Vicky Suarez filed a complaint for estafa

ISSUE:
what was the real transaction between Rosa Lim and Vicky Suarez a contract of agency to sell
on commission basis as set out in the receipt or a sale on credit

RULING: