Commercial Law 1 (Mutuum & Usury Law)

G.R. No.
84719 January 25, 1991
YONG CHAN KIM, petitioner,

vs.
PEOPLE OF THE PHILIPPINES, HON. EDGAR D. GUSTILO, Presiding Judge, RTC, 6th Judicial Region,
Branch 28 Iloilo City and Court of Appeals (13th Division) respondents.
Remedios C. Balbin and Manuel C. Cases, Jr. for petitioner.

Hector P. Teodosio for private respondent.
PADILLA, J.:
This petition seeks the review on certiorari of the following:
1. The decision dated 3 September 1986 of the 15th Municipal Circuit Trial Court (Guimbal-Igbaras-
Tigbauan-Tubungan) in Guimbal, Iloilo, in Criminal Case No. 628, and the affirming decision of the Regional
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Trial Court, Branch XXVIII, Iloilo City, in Criminal Case No. 20958, promulgated on 30 July 1987; 2
2. The decision of the Court of Appeals, dated 29 April 1988, 3
dismissing petitioner's appeal/petition for review for having been filed out of time, and the resolution, dated 19
August 1988, denying petitioner's motion for reconsideration. 4
The antecedent facts are as follows:
Petitioner Yong Chan Kim was employed as a Researcher at the Aquaculture Department of the Southeast Asian
Fisheries Development Center (SEAFDEC) with head station at Tigbauan, Province of Iloilo. As Head of the
Economics Unit of the Research Division, he conducted prawn surveys which required him to travel to various
selected provinces in the country where there are potentials for prawn culture.
On 15 June 1982, petitioner was issued Travel Order No. 2222 which covered his travels to different places in
Luzon from 16 June to 21 July 1982, a period of thirty five (35) days. Under this travel order, he received P6,438.00
as cash advance to defray his travel expenses.
Within the same period, petitioner was issued another travel order, T.O. 2268, requiring him to travel from the Head
Station at Tigbauan, Iloilo to Roxas City from 30 June to 4 July 1982, a period of five (5) days. For this travel order,
petitioner received a cash advance of P495.00.
On 14 January 1983, petitioner presented both travel orders for liquidation, submitting Travel Expense Reports to
the Accounting Section. When the Travel Expense Reports were audited, it was discovered that there was an
overlap of four (4) days (30 June to 3 July 1982) in the two (2) travel orders for which petitioner collected per
diems twice. In sum, the total amount in the form of per diems and allowances charged and collected by petitioner
under Travel Order No. 2222, when he did not actually and physically travel as represented by his liquidation
papers, was P1,230.00.
Petitioner was required to comment on the internal auditor's report regarding the alleged anomalous claim for per
diems. In his reply, petitioner denied the alleged anomaly, claiming that he made make-up trips to compensate for
the trips he failed to undertake under T.O. 2222 because he was recalled to the head office and given another
assignment.
In September 1983, two (2) complaints for Estafa were filed against the petitioner before the Municipal Circuit Trial
Court at Guimbal, Iloilo, docketed as Criminal Case Nos. 628 and 631.
After trial in Criminal Case No. 628, the Municipal Circuit Trial Court rendered a decision, the dispositive part of
which reads as follows:
IN VIEW OF THE FOREGOING CONSIDERATIONS, the court finds the accused, Yong Chan Kim, guilty
beyond reasonable doubt for the crime of Estafa penalized under paragraph l(b) of Article 315, Revised
Penal Code. Records disclose there is no aggravating circumstance proven by the prosecution. Neither
there is any mitigating circumstance proven by the accused. Considering the amount subject of the present
complaint, the imposable penalty should be in the medium period of arresto mayor in its maximum period
to prision correccional in its minimum period in accordance with Article 315, No. 3, Revised Penal Code.
Consonantly, the Court hereby sentences the accused to suffer an imprisonment ranging from four (4)
months as the minimum to one (1) year and six (6) months as the maximum in accordance with the
Indeterminate Sentence Law and to reimburse the amount of P1,230.00 to SEAFDEC.
The surety bond of the accused shall remain valid until final judgment in accordance herewith.
Costs against the accused. 5
Criminal Case No. 631 was subsequently dismissed for failure to prosecute.
Petitioner appealed from the decision of the Municipal Circuit Trial Court in Criminal Case No. 628. On 30 July 1987,
the Regional Trial Court in Iloilo City in Criminal Case No. 20958 affirmed in toto the trial court's decision. 6
The decision of the Regional Trial Court was received by petitioner on 10 August 1987. On 11 August 1987,
petitioner, thru counsel, filed a notice of appeal with the Regional Trial Court which ordered the elevation of the
records of the case to the then Intermediate Appellate Court on the following day, 12 August 1987. The records of
the case were received by the Intermediate Appellate Court on 8 October 1987, and the appeal was docketed as
CA-G.R. No. 05035.
On 30 October 1987, petitioner filed with the appellate court a petition for review. As earlier stated, on 29 April 1988,
the Court of Appeals dismissed the petition for having been filed out of time. Petitioner's motion for reconsideration
was denied for lack of merit.
Hence, the present recourse.
On 19 October 1988, the Court resolved to require the respondents to comment on the petition for review. The
Solicitor General filed his Comment on 20 January 1989, after several grants of extensions of time to file the same.
In his Comment, the Solicitor General prayed for the dismissal of the instant petition on the ground that, as provided
for under Section 22, Batas Pambansa 129, Section 22 of the Interim Rules and Guidelines, and Section 3, Rule
123 of the 1985 Rules of Criminal Procedure, the petitioner should have filed a petition for review with the then
Intermediate Appellate Court instead of a notice of appeal with the Regional Trial Court, in perfecting his appeal
from the RTC to the Intermediate Appellate Court, since the RTC judge was rendered in the exercise of its appellate
jurisdiction over municipal trial courts. The failure of petitioner to file the proper petition rendered the decision of the
Regional Trial Court final and executory, according to the Solicitor General.
Petitioner's counsel submitted a Reply (erroneously termed Comment) wherein she contended that the peculiar
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circumstances of a case, such as this, should be considered in order that the principle barring a petitioner's right of
review can be made flexible in the interest of justice and equity.
In our Resolution of 29 May 1989, we resolved to deny the petition for failure of petitioner to sufficiently show that
the Court of Appeals had committed any reversible error in its questioned judgment which had dismissed petitioner's
petition for review for having been filed out of time.8
Petitioner filed a motion for reconsideration maintaining that his petition for review did not limit itself to the issue
upon which the appellate court's decision of 29 April 1988 was based, but rather it delved into the substance and
merits of the case.9
On 10 August 1990, we resolved to set aside our resolution dismissing this case and gave due course to the
petition. In the said resolution, we stated:
In several cases decided by this Court, it had set aside technicalities in the Rules in order to give way to
justice and equity. In the present case, we note that the petitioner, in filing his Notice of Appeal the very next
day after receiving the decision of the court a quo lost no time in showing his intention to appeal, although
the procedure taken was not correct. The Court can overlook the wrong pleading filed, if strict compliance
with the rules would mean sacrificing justice to technicality. The imminence of a person being deprived
unjustly of his liberty due to procedural lapse of counsel is a strong and compelling reason to warrant
suspension of the Rules. Hence, we shall consider the petition for review filed in the Court of Appeals as a
Supplement to the Notice of Appeal. As the Court declared in a recent decision, '. . . there is nothing sacred
about the procedure of pleadings. This Court may go beyond the pleadings when the interest of justice so
warrants. It has the prerogative to suspend its rules for the same purpose. . . . Technicality, when it deserts
its proper office as an aid to justice and becomes its great hindrance and chief enemy, deserves scant
consideration from courts. [Alonzo v. Villamor, et al., 16 Phil. 315]
Conscience cannot rest in allowing a man to go straight to jail, closing the door to his every entreaty for a full
opportunity to be heard, even as he has made a prima facie showing of a meritorious cause, simply
because he had chosen an appeal route, to be sure, recognized by law but made inapplicable to his case,
under altered rules of procedure. While the Court of Appeals can not be faulted and, in fact, it has to be
lauded for correctly applying the rules of procedure in appeals to the Court of Appeals from decisions of the
RTC rendered in the exercise of its appellate jurisdiction, yet, this Court, as the ultimate bulwark of human
rights and individual liberty, will not allow substantial justice to be sacrified at the altar of procedural rigor.10
In the same resolution, the parties were required to file their respective memoranda, and in compliance with said
resolution, petitioner filed his memorandum on 25 October 1989, while private respondent SEAFDEC filed its
required memorandum on 10 April 1990. On the other hand, the Solicitor General filed on 13 March 1990 a
Recommendation for Acquittal in lieu of the required memorandum.
Two (2) issues are raised by petitioner to wit:
I. WHETHER OR NOT THE DECISION (sic) OF THE MUNICIPAL CIRCUIT TRIAL COURT (GUIMBAL,
ILOILO) AND THE REGIONAL TRIAL COURT, BRANCH 28 (ILOILO CITY) ARE SUPPORTED BY THE
FACTS AND EVIDENCE OR CONTRARY TO LAW AND THAT THE TWO COURTS A QUO HAVE ACTED
WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF JURISDICTION OR HAVE ACTED
WITHOUT OR IN EXCESS OF JURISDICTION.
II. WHETHER OR NOT THE DECISION OF THE HONORABLE COURT OF APPEALS IS CONTRARY TO
LAW, ESTABLISHED JURISPRUDENCE, EQUITY AND DUE PROCESS.
The second issue has been resolved in our Resolution dated 10 August 1990, when we granted petitioner's second
motion for reconsideration. We shall now proceed to the first issue.
We find merit in the petition.
It is undisputed that petitioner received a cash advance from private respondent SEAFDEC to defray his travel
expenses under T.O. 2222. It is likewise admitted that within the period covered by T.O. 2222, petitioner was
recalled to the head station in Iloilo and given another assignment which was covered by T.O. 2268. The dispute
arose when petitioner allegedly failed to return P1,230.00 out of the cash advance which he received under T.O.
2222. For the alleged failure of petitioner to return the amount of P1,230.00, he was charged with the crime of
Estafa under Article 315, par. 1(b) of the Revised Penal Code, which reads as follows:
Art. 315. Swindling (Estafa). Any person who shall defraud another by any of the means mentioned herein
below shall be punished by:
x x x x x x x x x
1. With unfaithfulness or abuse of confidence, namely:
(a) x x x x x x x x x
(b) By misappropriating or converting, to the prejudice of another, money, goods, or any other
personal property received by the offender in trust or on commission, or for administration, or under
any other obligation involving the duty to make delivery of; or to return, the same, even though such
obligation be fatally or partially guaranteed by a bond; or by denying having received such money,
goods, or other property.
In order that a person can be convicted under the abovequoted provision, it must be proven that he had the
obligation to deliver or return the same money, good or personal property that he had received. 11
Was petitioner under obligation to return the same money (cash advance) which he had received? We belive not.
Executive Order No. 10, dated 12 February 1980 provides as follows:
B. Cash Advance for Travel
x x x x x x x x x
4. All cash advances must be liquidated within 30 days after date of projected return of the person.
Otherwise, corresponding salary deduction shall be made immediately following the expiration day.
Liquidation simply means the settling of an indebtedness. An employee, such as herein petitioner, who liquidates a
cash advance is in fact paying back his debt in the form of a loan of money advanced to him by his employer,
as per diems and allowances. Similarly, as stated in the assailed decision of the lower court, "if the amount of the
cash advance he received is less than the amount he spent for actual travel . . . he has the right to demand
reimbursement from his employer the amount he spent coming from his personal funds. In other words, the money
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advanced by either party is actually a loan to the other. Hence, petitioner was under no legal obligation to return the
same cash or money, i.e., the bills or coins, which he received from the private respondent. 13
Article 1933 and Article 1953 of the Civil Code define the nature of a simple loan.
Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so
that the latter may use the same for a certain time and return it, in which case the contract is called
a commodatum; or money or other consumable thing, upon the condition that the same amount of the same
kind and quality shall be paid, in which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes
to the borrower.
Art. 1953.— A person who receives a loan of money or any other fungible thing acquires the ownership
thereof, and is bound to pay to the creditor an equal amount of the same kind and quality.
The ruling of the trial judge that ownership of the cash advanced to the petitioner by private respondent was not
transferred to the latter is erroneous. Ownership of the money was transferred to the petitioner. Even the
prosecution witness, Virgilio Hierro, testified thus:
Q When you gave cash advance to the accused in this Travel Order No. 2222 subject to liquidation, who
owns the funds, accused or SEAFDEC? How do you consider the funds in the possession of the accused at
the time when there is an actual transfer of cash? . . .
A The one drawing cash advance already owns the money but subject to liquidation. If he will not liquidate,
be is obliged to return the amount.
Q x x x x x x x x x
So why do you treat the itinerary of travel temporary when in fact as of that time the accused owned already
the cash advance. You said the cash advance given to the accused is his own money. In other words, at the
time you departed with the money it belongs already to the accused?
A Yes, but subject for liquidation. He will be only entitled for that credence if he liquidates.
Q If other words, it is a transfer of ownership subject to a suspensive condition that he liquidates the amount
of cash advance upon return to station and completion of the travel?
A Yes, sir.
(pp. 26-28, tsn, May 8, 1985). 14
Since ownership of the money (cash advance) was transferred to petitioner, no fiduciary relationship was created.
Absent this fiduciary relationship between petitioner and private respondent, which is an essential element of the
crime of estafa by misappropriation or conversion, petitioner could not have committed estafa. 15
Additionally, it has been the policy of private respondent that all cash advances not liquidated are to be deducted
correspondingly from the salary of the employee concerned. The evidence shows that the corresponding salary
deduction was made in the case of petitioner vis-a-vis the cash advance in question.
WHEREFORE, the decision dated 3 September 1986 of the 15th Municipal Circuit Trial Court in Guimbal, Iloilo in
Criminal Case No. 628, finding petitioner guilty of estafa under Article 315, par. 1 (b) of the Revised Penal Code and
the affirming decision of the Regional Trial Court, Branch XXVIII, Iloilo City, in Criminal Case No. 20958,
promulgated on 30 July 1987 are both hereby SET ASIDE. Petitioner is ACQUITTED of criminal charge filed against
him.
SO ORDERED.
Melencio-Herrera, Paras, Sarmiento and Regalado JJ., concur.

G.R. No. 133632 February 15, 2002
BPI INVESTMENT CORPORATION, petitioner,

vs.
HON. COURT OF APPEALS and ALS MANAGEMENT & DEVELOPMENT CORPORATION, respondents.
DECISION
QUISUMBING, J.:
This petition for certiorari assails the decision dated February 28, 1997, of the Court of Appeals and its resolution
dated April 21, 1998, in CA-G.R. CV No. 38887. The appellate court affirmed the judgment of the Regional Trial
Court of Pasig City, Branch 151, in (a) Civil Case No. 11831, for foreclosure of mortgage by petitioner BPI
Investment Corporation (BPIIC for brevity) against private respondents ALS Management and Development
Corporation and Antonio K. Litonjua, consolidated with (b) Civil Case No. 52093, for damages with prayer for the
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issuance of a writ of preliminary injunction by the private respondents against said petitioner.
The trial court had held that private respondents were not in default in the payment of their monthly amortization,
hence, the extrajudicial foreclosure conducted by BPIIC was premature and made in bad faith. It awarded private
respondents the amount of ₱300,000 for moral damages, ₱50,000 for exemplary damages, and ₱50,000 for
attorney’s fees and expenses for litigation. It likewise dismissed the foreclosure suit for being premature.
The facts are as follows:
Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala Investment and Development
Corporation (AIDC), the predecessor of petitioner BPIIC, for the construction of a house on his lot in New Alabang
Village, Muntinlupa. Said house and lot were mortgaged to AIDC to secure the loan. Sometime in 1980, Roa sold
the house and lot to private respondents ALS and Antonio Litonjua for ₱850,000. They paid ₱350,000 in cash and
assumed the ₱500,000 balance of Roa’s indebtedness with AIDC. The latter, however, was not willing to extend the
old interest rate to private respondents and proposed to grant them a new loan of ₱500,000 to be applied to Roa’s
debt and secured by the same property, at an interest rate of 20% per annum and service fee of 1% per annum on
the outstanding principal balance payable within ten years in equal monthly amortization of ₱9,996.58 and penalty
interest at the rate of 21% per annum per day from the date the amortization became due and payable.
Consequently, in March 1981, private respondents executed a mortgage deed containing the above stipulations with
the provision that payment of the monthly amortization shall commence on May 1, 1981.
On August 13, 1982, ALS and Litonjua updated Roa’s arrearages by paying BPIIC the sum of ₱190,601.35. This
reduced Roa’s principal balance to ₱457,204.90 which, in turn, was liquidated when BPIIC applied thereto the
proceeds of private respondents’ loan of ₱500,000.
On September 13, 1982, BPIIC released to private respondents ₱7,146.87, purporting to be what was left of their
loan after full payment of Roa’s loan.
In June 1984, BPIIC instituted foreclosure proceedings against private respondents on the ground that they failed to
pay the mortgage indebtedness which from May 1, 1981 to June 30, 1984, amounted to Four Hundred Seventy Five
Thousand Five Hundred Eighty Five and 31/100 Pesos (₱475,585.31). A notice of sheriff’s sale was published on
August 13, 1984.
On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093 against BPIIC. They alleged, among others, that
they were not in arrears in their payment, but in fact made an overpayment as of June 30, 1984. They maintained
that they should not be made to pay amortization before the actual release of the ₱500,000 loan in August and
September 1982. Further, out of the ₱500,000 loan, only the total amount of ₱464,351.77 was released to private
respondents. Hence, applying the effects of legal compensation, the balance of ₱35,648.23 should be applied to the
initial monthly amortization for the loan.
On August 31, 1988, the trial court rendered its judgment in Civil Case Nos. 11831 and 52093, thus:
WHEREFORE, judgment is hereby rendered in favor of ALS Management and Development Corporation and
Antonio K. Litonjua and against BPI Investment Corporation, holding that the amount of loan granted by BPI to ALS
and Litonjua was only in the principal sum of P464,351.77, with interest at 20% plus service charge of 1% per
annum, payable on equal monthly and successive amortizations at P9,283.83 for ten (10) years or one hundred
twenty (120) months. The amortization schedule attached as Annex "A" to the "Deed of Mortgage" is
correspondingly reformed as aforestated.
The Court further finds that ALS and Litonjua suffered compensable damages when BPI caused their publication in
a newspaper of general circulation as defaulting debtors, and therefore orders BPI to pay ALS and Litonjua the
following sums:
a) P300,000.00 for and as moral damages;
b) P50,000.00 as and for exemplary damages;
c) P50,000.00 as and for attorney’s fees and expenses of litigation.

The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED for being premature.
Costs against BPI.
SO ORDERED. 2
Both parties appealed to the Court of Appeals. However, private respondents’ appeal was dismissed for non-
payment of docket fees.
On February 28, 1997, the Court of Appeals promulgated its decision, the dispositive portion reads:
WHEREFORE, finding no error in the appealed decision the same is hereby AFFIRMED in toto.
SO ORDERED. 3
In its decision, the Court of Appeals reasoned that a simple loan is perfected only upon the delivery of the object of
the contract. The contract of loan between BPIIC and ALS & Litonjua was perfected only on September 13, 1982,
the date when BPIIC released the purported balance of the ₱500,000 loan after deducting therefrom the value of
Roa’s indebtedness. Thus, payment of the monthly amortization should commence only a month after the said date,
as can be inferred from the stipulations in the contract. This, despite the express agreement of the parties that
payment shall commence on May 1, 1981. From October 1982 to June 1984, the total amortization due was only
₱194,960.43. Evidence showed that private respondents had an overpayment, because as of June 1984, they
already paid a total amount of ₱201,791.96. Therefore, there was no basis for BPIIC to extrajudicially foreclose the
mortgage and cause the publication in newspapers concerning private respondents’ delinquency in the payment of
their loan. This fact constituted sufficient ground for moral damages in favor of private respondents.
The motion for reconsideration filed by petitioner BPIIC was likewise denied, hence this petition, where BPIIC
submits for resolution the following issues:
I. WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL CONTRACT IN THE LIGHT OF THE

RULE LAID DOWN IN BONNEVIE VS. COURT OF APPEALS, 125 SCRA 122.
II. WHETHER OR NOT BPI SHOULD BE HELD LIABLE FOR MORAL AND EXEMPLARY DAMAGES AND
ATTORNEY’S FEES IN THE FACE OF IRREGULAR PAYMENTS MADE BY ALS AND OPPOSED TO THE
RULE LAID DOWN IN SOCIAL SECURITY SYSTEM VS. COURT OF APPEALS, 120 SCRA 707.
On the first issue, petitioner contends that the Court of Appeals erred in ruling that because a simple loan is
perfected upon the delivery of the object of the contract, the loan contract in this case was perfected only on
September 13, 1982. Petitioner claims that a contract of loan is a consensual contract, and a loan contract is
perfected at the time the contract of mortgage is executed conformably with our ruling in Bonnevie v. Court of
Appeals, 125 SCRA 122. In the present case, the loan contract was perfected on March 31, 1981, the date when
the mortgage deed was executed, hence, the amortization and interests on the loan should be computed from said
date.
Petitioner also argues that while the documents showed that the loan was released only on August 1982, the loan
was actually released on March 31, 1981, when BPIIC issued a cancellation of mortgage of Frank Roa’s loan. This
finds support in the registration on March 31, 1981 of the Deed of Absolute Sale executed by Roa in favor of ALS,
transferring the title of the property to ALS, and ALS executing the Mortgage Deed in favor of BPIIC. Moreover,
petitioner claims, the delay in the release of the loan should be attributed to private respondents. As BPIIC only
agreed to extend a ₱500,000 loan, private respondents were required to reduce Frank Roa’s loan below said
amount. According to petitioner, private respondents were only able to do so in August 1982.
In their comment, private respondents assert that based on Article 1934 of the Civil Code, a simple loan is perfected
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upon the delivery of the object of the contract, hence a real contract. In this case, even though the loan contract was
signed on March 31, 1981, it was perfected only on September 13, 1982, when the full loan was released to private
respondents. They submit that petitioner misread Bonnevie. To give meaning to Article 1934, according to private
respondents, Bonnevie must be construed to mean that the contract to extend the loan was perfected on March 31,
1981 but the contract of loan itself was only perfected upon the delivery of the full loan to private respondents on
September 13, 1982.
Private respondents further maintain that even granting, arguendo, that the loan contract was perfected on March
31, 1981, and their payment did not start a month thereafter, still no default took place. According to private
respondents, a perfected loan agreement imposes reciprocal obligations, where the obligation or promise of each
party is the consideration of the other party. In this case, the consideration for BPIIC in entering into the loan
contract is the promise of private respondents to pay the monthly amortization. For the latter, it is the promise of
BPIIC to deliver the money. In reciprocal obligations, neither party incurs in delay if the other does not comply or is
not ready to comply in a proper manner with what is incumbent upon him. Therefore, private respondents conclude,
they did not incur in delay when they did not commence paying the monthly amortization on May 1, 1981, as it was
only on September 13, 1982 when petitioner fully complied with its obligation under the loan contract.
We agree with private respondents. A loan contract is not a consensual contract but a real contract. It is perfected
only upon the delivery of the object of the contract. Petitioner misapplied Bonnevie. The contract
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in Bonnevie declared by this Court as a perfected consensual contract falls under the first clause of Article 1934,
Civil Code. It is an accepted promise to deliver something by way of simple loan.
In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44 SCRA 445, petitioner applied for a
loan of ₱500,000 with respondent bank. The latter approved the application through a board resolution. Thereafter,
the corresponding mortgage was executed and registered. However, because of acts attributable to petitioner, the
loan was not released. Later, petitioner instituted an action for damages. We recognized in this case, a perfected
consensual contract which under normal circumstances could have made the bank liable for not releasing the loan.
However, since the fault was attributable to petitioner therein, the court did not award it damages.
A perfected consensual contract, as shown above, can give rise to an action for damages. However, said contract
does not constitute the real contract of loan which requires the delivery of the object of the contract for its perfection
and which gives rise to obligations only on the part of the borrower. 6
In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on the other, was
perfected only on September 13, 1982, the date of the second release of the loan. Following the intentions of the
parties on the commencement of the monthly amortization, as found by the Court of Appeals, private respondents’
obligation to pay commenced only on October 13, 1982, a month after the perfection of the contract. 7
We also agree with private respondents that a contract of loan involves a reciprocal obligation, wherein the
obligation or promise of each party is the consideration for that of the other. As averred by private respondents, the
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promise of BPIIC to extend and deliver the loan is upon the consideration that ALS and Litonjua shall pay the
monthly amortization commencing on May 1, 1981, one month after the supposed release of the loan. It is a basic
principle in reciprocal obligations that neither party incurs in delay, if the other does not comply or is not ready to
comply in a proper manner with what is incumbent upon him. Only when a party has performed his part of the
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contract can he demand that the other party also fulfills his own obligation and if the latter fails, default sets in.
Consequently, petitioner could only demand for the payment of the monthly amortization after September 13, 1982
for it was only then when it complied with its obligation under the loan contract. Therefore, in computing the amount
due as of the date when BPIIC extrajudicially caused the foreclosure of the mortgage, the starting date is October
13, 1982 and not May 1, 1981.
Other points raised by petitioner in connection with the first issue, such as the date of actual release of the loan and
whether private respondents were the cause of the delay in the release of the loan, are factual. Since petitioner has
not shown that the instant case is one of the exceptions to the basic rule that only questions of law can be raised in
a petition for review under Rule 45 of the Rules of Court, factual matters need not tarry us now. On these points we
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are bound by the findings of the appellate and trial courts.
On the second issue, petitioner claims that it should not be held liable for moral and exemplary damages for it did
not act maliciously when it initiated the foreclosure proceedings. It merely exercised its right under the mortgage
contract because private respondents were irregular in their monthly amortization. It invoked our ruling in Social
1âwphi1
Security System vs. Court of Appeals, 120 SCRA 707, where we said:
Nor can the SSS be held liable for moral and temperate damages. As concluded by the Court of Appeals "the
negligence of the appellant is not so gross as to warrant moral and temperate damages," except that, said Court
reduced those damages by only P5,000.00 instead of eliminating them. Neither can we agree with the findings of
both the Trial Court and respondent Court that the SSS had acted maliciously or in bad faith. The SSS was of the
belief that it was acting in the legitimate exercise of its right under the mortgage contract in the face of irregular
payments made by private respondents and placed reliance on the automatic acceleration clause in the contract.
The filing alone of the foreclosure application should not be a ground for an award of moral damages in the same
way that a clearly unfounded civil action is not among the grounds for moral damages.
Private respondents counter that BPIIC was guilty of bad faith and should be liable for said damages because it
insisted on the payment of amortization on the loan even before it was released. Further, it did not make the
corresponding deduction in the monthly amortization to conform to the actual amount of loan released, and it
immediately initiated foreclosure proceedings when private respondents failed to make timely payment.
But as admitted by private respondents themselves, they were irregular in their payment of monthly amortization.
Conformably with our ruling in SSS, we can not properly declare BPIIC in bad faith. Consequently, we should rule
out the award of moral and exemplary damages. 11
However, in our view, BPIIC was negligent in relying merely on the entries found in the deed of mortgage, without
checking and correspondingly adjusting its records on the amount actually released to private respondents and the
date when it was released. Such negligence resulted in damage to private respondents, for which an award of
nominal damages should be given in recognition of their rights which were violated by BPIIC. For this purpose, the
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amount of ₱25,000 is sufficient.
Lastly, as in SSS where we awarded attorney’s fees because private respondents were compelled to litigate, we
sustain the award of ₱50,000 in favor of private respondents as attorney’s fees.
WHEREFORE, the decision dated February 28, 1997, of the Court of Appeals and its resolution dated April 21,
1998, are AFFIRMED WITH MODIFICATION as to the award of damages. The award of moral and exemplary
damages in favor of private respondents is DELETED, but the award to them of attorney’s fees in the amount of
₱50,000 is UPHELD. Additionally, petitioner is ORDERED to pay private respondents ₱25,000 as nominal
damages. Costs against petitioner.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.

G.R. No. 128721 March 9, 1999
CRISMINA GARMENTS, INC., petitioner,

vs.
COURT OF APPEALS and NORMA SIAPNO, respondent.
PANGANIBAN, J.:
Interest shall be computed in accordance with the stipulation of the parties. In the absence of such agreement, the
rate shall be twelve percent (12%) per annum when the obligation arises out of a loan or a forbearance of money,
goods or credits. In other cases, it shall be six percent (6%).
The Case
On May 5, 1997, Crismina Garments, Inc. filed a Petition for Review on Certiorari assailing the December 28, 1995
1
Decision and March 17, 1997 Resolution of the Court of Appeals in CA-GR CV No. 28973. On September 24,
2 3
1997, this Court issued a minute Resolution denying the petition "for its failure to show any reversible error on the
4
part of the Court of Appeals."
Petitioner then filed a Motion for Reconsideration, arguing that the interest rate should be computed at 6 percent
5
per annum as provided under Article 2209 of the Civil Code, not 12 percent per annum as prescribed under Circular
No. 416 of the Central Bank of the Philippines. Acting on the Motion, the Court reinstated the Petition, but only with
6
respect to the issue of which interest rate should be applied.7
The Facts
As the facts of the case are no longer disputed, we are reproducing hereunder the findings of the appellate court:
During the period from February 1979 to April 1979, the [herein petitioner], which was engaged in
the export of girls' denim pants, contracted the services of the [respondent], the sole proprietress of
the D'Wilmar Garments, for the sewing of 20,762 pieces of assorted girls['] denims supplied by the
[petitioner] under Purchase Orders Nos. 1404, dated February 15, 1979, 0430 dated February 1,
1979, 1453 dated April 30, 1979. The [petitioner] was obliged to pay the [respondent], for her
services, in the total amount of P76,410.00. The [respondent] sew[ed] the materials and delivered
the same to the [petitioner] which acknowledged the same per Delivery Receipt Nos. 0030 dated
February 9, 1979; 0032, dated February 15, 1979; 0033 dated February 21, 1979; 0034, dated
February 24, 1979; 0036, dated February 20, 1979; 0038, dated March 11, 1979[;] 0039, dated
March 24, 1979; 0040 dated March 27, 1979; 0041, dated March 29, 1979; 0044, dated Marc[h] 25,
1979; 0101 dated May 18, 1979[;] 0037, dated March 10, 1979 and 0042 dated March 10, 1979, in
good order condition. At first, the [respondent] was told that the sewing of some of the pants w[as]
defective. She offered to take delivery of the defective pants. However, she was later told by
[petitioner]'s representative that the goods were already good. She was told to just return for her
check of P76,410.00. However, the [petitioner] failed to pay her the aforesaid amount. This prompted
her to hire the services of counsel who, on November 12, 1979, wrote a letter to the [petitioner]
demanding payment of the aforesaid amount within ten (10) days from receipt thereof. On February
7, 1990, the [petitioner]'s [v]ice-[p]resident-[c]omptroller, wrote a letter to [respondent]'s counsel,
averring, inter alia, that the pairs of jeans sewn by her, numbering 6,164 pairs, were defective and
that she was liable to the [petitioner] for the amount of P49,925.51 which was the value of the
damaged pairs of denim pants and demanded refund of the aforesaid amount.
On January 8, 1981, the [respondent] filed her complaint against the [petitioner] with the [trial court]
for the collection of the principal amount of P76,410.00. . . .
xxx xxx xxx
After due proceedings, the [trial court] rendered judgment, on February 28, 1989, in favor of the
[respondent] against the [petitioner], the dispositive portion of which reads as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant
ordering the latter to pay the former:
(1) The sum of P76,140.00 with interest thereon at 12% per annum, to be counted from the filing of
this complaint on January 8, 1981, until fully paid;
(2) The sum of P5,000 as attorney[']s fees; and
(3) The costs of this suit;
(4) Defendant's counterclaim is hereby dismissed. 8
The Court of Appeals (CA) affirmed the trial court's ruling, except for the award of attorney's fees which was
deleted. Subsequently, the CA denied the Motion for Reconsideration.
9 10
Hence, this recourse to this Court 11
Sole Issue
In light of the Court's Resolution dated April 27, 1998, petitioner submits for our consideration this sole issue:
Whether or not it is proper to impose interest at the rate of twelve percent (12%) per annum for an
obligation that does not involve a loan or forbearance of money in the absence of stipulation of the
parties.
12
This Court's Ruling
We sustain petitioner's contention that the interest rate should be computed at six percent (6%) per annum.
Sole Issue: Interest Rate
The controversy revolves around petitioner's payment of the price beyond the period prescribed in a contract for a
piece of work. Article 1589 on the Civil Code provides that "[t]he vendee [herein petitioner] shall owe interest for the
period between the delivery of the thing and the payment of the price . . . should he be in default from the time of
judicial or extrajudicial demand for the payment of the price." The only issue now is the applicable rate of interest for
the late payment.
Because the case before us is "an action for the enforcement of an obligation for payment of money arising from a
contract for a piece of work," petitioner submits that the interest rate should be six percent (6%), pursuant to Article
13
2209 of the Civil Code, which states:
If the obligation consists in the payment 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."
(Emphasis supplied.)
On the other hand, private respondent maintains that the interest rate should be twelve percent (12 %) per annum,
in accordance with Central Bank (CB) Circular No. 416, which reads:
By virtue of the authority granted to it under Section 1 of Act No. 2655, as amended, otherwise
known as the "Usury Law", the Monetary Board, in its Resolution No. 1622 dated July 29, 1974, has
prescribed that 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
twelve per cent (12%) per annum." (Emphasis supplied.)
She argues that the circular applies, since "the money sought to be recovered by her is in the form of
forbearance." 14
We agree with the petitioner. In Reformina v. Tomol Jr., this Court stressed that the interest rate under CB Circular
15
No. 416 applies to (1) loans; (2) forbearance of money, goods or credits; or (3) a judgment involving a loan or
forbearance of money, goods or credits. Cases beyond the scope of the said circular are governed by Article 2209
of the Civil Code, which considers interest a form of indemnity for the delay in the performance of an obligation.
16 17
In Eastern Shipping Lines, Inc. v. Court of Appeals, the Court gave the following guidelines for the application of
18
the proper interest rates:
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 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 . . . the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to forbearance of credit. 19
In Keng Hua Paper Products Co., Inc. v. CA, we also ruled that the monetary award shall earn interest at twelve
20
percent (12%) per annum from the date of finality of the judgment until its satisfaction, regardless of whether or not
the case involves a loan of forbearance of money. The interim period is deemed to be equivalent to a forbearance of
a credit.
21
Because the amount due in this case arose from a contract for a piece of work, not from a loan or forbearance of
money, the legal interest of six percent (6%) per annum should be applied. Furthermore, since the amount of the
demand could be established with certainty when the Complaint was filed, the six percent (6%) interest should be
computed from the filing of the said Complaint. But after the judgment becomes final and exuecutory until the
obligation is satisfied, the interest should be reckoned at twelve percent (%12) per year.
Private respondent maintains that the twelve percent (12%) interest should be imposed, because the obligation
arose from a forbearance of
money. This is erroneous. In Eastern Shipping, the Court observed that a "forbearance" in the context of the
22 23
usury law is 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." Using this standard, the obligation in this case
was obviously not a forbearance of money, goods or credit.
WHEREFORE, the appealed Decision is MODIFIED. The rate of interest shall be six percent (6%) per annum,
computed from the time of the filing of the Complaint in the trial court until the finality of the judgment. If the
adjudged principal and the interest (or any part thereof) remain unpaid thereafter, the interest rate shall be twelve
percent (12%) per annum computed from the time the judgment becomes final and executory until it is fully satisfied.
No pronouncement as to costs.
SO ORDERED.
Romero, Vitug, Purisima and Gonzaga-Reyes, JJ., concur.

G.R. No. 123643 October 30, 1996
PHILIPPINE NATIONAL BANK, petitioner,

vs.
COURT OF APPEALS and DR. ERLINDA G. IBARROLA, respondents.
RESOLUTION
FRANCISCO, J.:p
As payments for the purchase of medicines, the Province of Isabela issued several checks drawn against its
account with petitioner Philippine National Bank (PNB) in favor of the seller, Lyndon Pharmaceuticals
Laboratories, a business operated by private respondent Ibarrola. The checks were delivered to the seller's
agents who turned them over to Ibarrola, except 23 checks amounting to P98,691.90, which the agents
1
appropriated after negotiating them with PNB. For her failure to receive the full payment for the medicines,
Ibarrola filed on November 6, 1974 before the Regional Trial Court (RTC) an "action for a sum of money and
damages," docketed as Civil Case 4226-p, against the Province of Isabela, its Treasurer, the two agents
2
and PNB.
In its decision dated September 29, 1987, the trial court ordered all the defendants in said civil case, except
the treasurer who died in the meantime, to "jointly and solidarily" pay Ibarrola several amounts, among
which is:
(1) P98,691.90 with interest thereon at the legal rate from the date of the filing of the complaint until
the entire amount is fully paid; (Emphasis supplied.)
3
PNB's appeal to the Court of Appeals (CA) and later to the Supreme Court were denied and dismissed,
4 5
respectively. All the three courts, however, did not specify whether the legal rate of interest referred to in the
judgment is 6% or 12%. The judgment in Civil Case 4226-P became final and executory on November 26,
1993. At the execution stage, the sheriff computed the interest mentioned in the judgment at the rate of 12%
which PNB opposed insisting that the rate should only be 6%. Ibarrola sought clarification from the same
RTC which promulgated the decision. On August 4, 1994 said court issued an order clarifying that the rate is
12%. PNB's direct appeal to this court from that order was referred to the CA which affirmed the RTC order.
Hence, this petition for review under Rule 45 where two legal issues are raised: (1) whether in an action for
damages, the legal rate of interest is 6% as provided by Article 2209 of the New Civil Code or 12% as
6
provided by CB Circular 416 series of 1974, and (2) whether such rate shall be computed from the filing of
7
the complaint until fully paid?
The issues are not new. In the case of Estern Shipping Lines, Inc. v.
CA, this Court had provided a rule "of thumb for future guidance," to wit:
8 9
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
case, be on the amount finally adjudged. (Emphasis ours.)
10
The case at bench does not involve a loan, forbearance of money or judgment involving a loan or
forbearance of money as it arose from a contract of sale whereby Ibarrola did not receive full payment for
her merchandise. When an obligation arises "from a contract of purchase and sale and not from a contract
of loan or mutuum," the applicable rate is "6% per annum as provided in Article 2209 of the NCC and not
the rate of 12% per annum as provided in (CB) Cir. No. 416." Indeed, PNB's liability is based only on the
11
RTC's judgment where it was held solidarily liable with the other defendants due to its negligence when it
"failed to assure itself" if the Provincial Treasurer was "properly authorized" by Ibarrola to "make
endorsements" of said checks. 12
The rate of 12% interest referred to in Cir. 416 applies only to:
[L]oan or forbearance of money, or to cases where money is transferred from one person to another
and the obligation to return the same or a portion thereof is adjudged. Any other monetary judgment
which does not involve or which has nothing to do with loans or forbearance of any money, goods or
credit does not fall within its coverage for such imposition is not within the ambit of the authority
granted to the Central Bank. When an obligation not constituting a loan or forbearance of money is
breached then an interest on the amount of damages awarded may be imposed at the discretion of
the court at the rate of 6% per annum in accordance with Art. 2209 of the Civil Code. Indeed, the
monetary judgment in favor of private respondent does not involve a loan or forbearance of money,
hence the proper imposable rate of interest is six (6%) per cent. (Emphasis ours.)
13
Applying the aforequoted rule, therefore, the proper rate of interest referred to in the judgment under
execution is only 6%. This interest according to Eastern Shipping shall be computed from the time of the
filing of the complaint considering that the amount adjudged (P98,691.90) can be established with
reasonable certainty. Said amount being merely the uncollected balance of the purchase price covered by
the 23 checks encashed and appropriated by Ibarrola's agents. However, once the judgment becomes final
and executory, the "interim period from the finality of judgment awarding a monetary claim and until payment
thereof, is deemed to be equivalent to a forbearance of credit." Thus, in accordance with the
14
pronouncement in Eastern Shipping the rate of 12% p.a. should be imposed, and to be computed from the
time the judgment became final and executory until fully satisfied. The actual base for the computation of
this 12% interest after the judgment in this damage suit became final shall be the amount adjudged
(P98,691.90).
ACCORDINGLY, the appealed decision is REVERSED. The rate of interest shall be 6% p.a. computed from
the time of the filing of the complaint until its full payment before finality of judgment. Thereafter, if the
amount adjudged remains unpaid, the interest rate shall be 12% p.a. computed from the time the judgment
became final and executory on November 26, 1993 until fully satisfied.
SO ORDERED.
Narvasa, C.J., Davide, Jr., Melo and Panganiban, JJ., concur.

G.R. No. 131622 November 27, 1998
LETICIA Y. MEDEL, DR. RAFAEL MEDEL and SERVANDO FRANCO, petitioners,

vs.
COURT OF APPEALS, SPOUSES VERONICA R. GONZALES and DANILO G. GONZALES, JR. doing lending
business under the trade name and style "GONZALES CREDIT ENTERPRISES", respondents.
PARDO, J.:
The case before the Court is a petition for review on certiorari, under Rule 45 of the Revised Rules of Court, seeking
to set aside the decision of the Court of Appeals, and its resolution denying reconsideration, the dispositive
1 2
portion of which decision reads as follows:
WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are hereby-
ordered to pay the plaintiff: the sum of P500,000.00, plus 5.5% per month interest and 2%
service charge per annum effective July 23, 1986, plus 1% per month of the total amount due
and demandable as penalty charges effective August 23, 1986, until the entire amount is fully
paid.
The award to the plaintiff of P50,000.00 as attorney's fees is affirmed. And so is the
imposition of costs against the defendants.
SO ORDERED. 3
The Court required the respondents to comment on the petition, which was filed on April 3, 1998, and the
4 5
petitioners to reply thereto, which was filed on May 29, 1998. We now resolve to give due course to the
6
petition and decide the case.
The facts of the case, as found by the Court of Appeals in its decision, which are considered binding and
conclusive on the parties herein, as the appeal is limited to questions of law, are as follows:
On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia) obtained a loan
from Veronica R. Gonzales (hereafter Veronica), who was engaged in the money lending business under the
name "Gonzales Credit Enterprises", in the amount of P50,000.00, payable in two months. Veronica gave
only the amount of P47,000.00, to the borrowers, as she retained P3,000.00, as advance interest for one
month at 6% per month. Servando and Leticia executed a promissory note for P50,000.00, to evidence the
loan, payable on January 7, 1986.
On November 19, 1985, Servando and Liticia obtained from Veronica another loan in the amount of
P90,000.00, payable in two months, at 6% interest per month. They executed a promissory note to evidence
the loan, maturing on Janaury 19, 1986. They received only P84,000.00, out of the proceeds of the loan.
On maturity of the two promissory notes, the borrowers failed to pay the indebtedness.
On June 11, 1986, Servando and Leticia secured from Veronica still another loan in the amout of
P300,000.00, maturing in one month, secured by a real estate mortgage over a property belonging to Leticia
Makalintal Yaptinchay, who issued a special power of attorney in favor of Leticia Medel, authorizing her to
execute the mortgage. Servando and Leticia executed a promissory note in favor of Veronica to pay the
sum of P300,000.00, after a month, or on July 11, 1986. However, only the sum of P275.000.00, was given to
them out of the proceeds of the loan.
Like the previous loans, Servando and Medel failed to pay the third loan on maturity.
On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel, consolidated all their
previous unpaid loans totaling P440,000.00, and sought from Veronica another loan in the amount of
P60,000.00, bringing their indebtedness to a total of P500,000.00, payable on August 23, 1986. They
executed a promissory note, reading as follows:
Baliwag, Bulacan July 23, 1986
Maturity Date Augsut 23, 1986
P500,000.00
FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of VERONICA
R. GONZALES doing business in the business style of GONZALES CREDIT ENTERPRISES,
Filipino, of legal age, married to Danilo G. Gonzales, Jr., of Baliwag, Bulacan, the sum of
PESOS . . . FIVE HUNDRED THOUSAND . . . (P500,000.00) Philippine Currency with interest
thereon at the rate of 5.5 PER CENT per month plus 2% service charge per annum from date
hereof until fully paid according to the amortization schedule contained herein. (Emphasis
supplied)
Payment will be made in full at the maturity date.
Should I/WE fail to pay any amortization or portion hereof when due, all the other installments
together with all interest accrued shall immediately be due and payable and I/WE hereby
agree to pay an additional amount equivalent to one per cent (1%) per month of the amount
due and demandable as penalty charges in the form of liquidated damages until fully paid;
and the further sum of TWENTY FIVE PER CENT (25%) thereof in full, without deductions as
Attorney's Fee whether actually incurred or not, of the total amount due and demandable,
exclusive of costs and judicial or extra judicial expenses. (Emphasis supplied).
I, WE further agree that in the event the present rate of interest on loan is increased by law or
the Central Bank of the Philippines, the holder shall have the option to apply and collect the
increased interest charges without notice although the original interest have already been
collected wholly or partially unless the contrary is required by law.
It is also a special condition of this contract that the parties herein agree that the amount of
peso-obligation under this agreement is based on the present value of the peso, and if there
be any change in the value thereof, due to extraordinary inflation or deflation, or any other
cause or reason, then the peso-obligation herein contracted shall be adjusted in accordance
with the value of the peso then prevailing at the time of the complete fulfillment of the
obligation.
Demand and notice of dishonor waived. Holder may accept partial payments and grant
renewals of this note or extension of payments, reserving rights against each and all
indorsers and all parties to this note.
IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors waive all
his/their rights under the provisions of Section 12, Rule 39, of the Revised Rules of Court.
On maturity of the loan, the borrowers failed to pay the indebtedness of P500,000.00, plus interests and
penalties, evidenced by the above-quoted promissory note.
On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G. Gonzales, filed with the
Regional Trial Court of Bulacan, Branch 16, at Malolos, Bulacan, a complaint for collection of the full
amount of the loan including interests and other charges.
In his answer to the complaint filed with the trial court on April 5, 1990, defendant Servando alleged that he
did not obtain any loan from the plaintiffs; that it was defendants Leticia and Dr. Rafael Medel who
borrowed from the plaintiffs the sum of P500,000.00, and actually received the amount and benefited
therefrom; that the loan was secured by a real estate mortgage executed in favor of the plaintiffs, and that
he (Servando Franco) signed the promissory note only as a witness.
In their separate answer filed on April 10, 1990, defendants Leticia and Rafael Medel alleged that the loan
was the transaction of Leticia Yaptinchay, who executed a mortgage in favor of the plaintiffs over a parcel
of real estate situated in San Juan, Batangas; that the interest rate is excessive at 5.5% per month with
additional service charge of 2% per annum, and penalty charge of 1% per month; that the stipulation for
attorney's fees of 25% of the amount due is unconscionable, illegal and excessive, and that substantial
payments made were applied to interest, penalties and other charges.
After due trial, the lower court declared that the due execution and genuineness of the four promissory
notes had been duly proved, and ruled that although the Usury Law had been repealed, the interest charged
by the plaintiffs on the loans was unconscionable and "revolting to the conscience". Hence, the trial court
applied "the provision of the New [Civil] Code" that the "legal rate of interest for loan or forbearance of
money, goods or credit is 12% per annum." 7
Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive portion of which reads
as follows:
WHEREFORE, premises considered, judgment is hereby rendered, as follows:
1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally, to pay
plaintiffs the amount of P47,000.00 plus 12% interest per annum from November 7, 1985 and
1% per month as penalty, until the entire amount is paid in full.
2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly and
severally the amount of P84,000.00 with 12% interest per annum and 1% per cent per month
as penalty from November 19, 1985 until the whole amount is fully paid;
3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount of
P285,000.00 plus 12% interest per annum and 1% per month as penalty from July 11, 1986,
until the whole amount is fully paid;
4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount of P50,000.00 as
attorney's fees;
5. All counterclaims are hereby dismissed.
With costs against the defendants. 8
In due time, both plaintiffs and defendants appealed to the Court of Appeals.
In their appeal, plaintiffs-appellants argued that the promissory note, which consolidated all the unpaid
loans of the defendants, is the law that governs the parties. They further argued that Circular No. 416 of the
Central Bank prescribing the rate of interest for loans or forbearance of money, goods or credit at 12% per
annum, applies only in the absence of a stipulation on interest rate, but not when the parties agreed
thereon.
The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the Usury Law having
become 'legally inexistent' with the promulgation by the Central Bank in 1982 of Circular No. 905, the lender
and borrower could agree on any interest that may be charged on the loan". The Court of Appeals further
9
held that "the imposition of 'an additional amount equivalent to 1% per month of the amount due and
demandable as penalty charges in the form of liquidated damages until fully paid' was allowed by
law".
10
Accordingly, on March 21, 1997, the Court of Appeals promulgated its decision reversing that of the
Regional Trial Court, disposing as follows:
WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are hereby
ordered to pay the plaintiffs the sum of P500,000.00, plus 5.5% per month interest and 2%
service charge per annum effective July 23, 1986, plus 1% per month of the total amount due
and demandable as penalty charges effective August 24, 1986, until the entire amount is fully
paid.
The award to the plaintiffs of P50,000.00 as attorney's fees is affirmed. And so is the
imposition of costs against the defendants.
SO ORDERED. 11
On April 15, 1997, defendants-appellants filed a motion for reconsideration of the said decision. By
resolution dated November 25, 1997, the Court of Appeals denied the motion. 12
Hence, defendants interposed the present recourse via petition for review on certiorari. 13
We find the petition meritorious.
Basically, the issue revolves on the validity of the interest rate stipulated upon. Thus, the question
presented is whether or not the stipulated rate of interest at 5.5% per month on the loan in the sum of
P500,000.00, that plaintiffs extended to the defendants is usurious. In other words, is the Usury Law still
effective, or has it been repealed by Central Bank Circular No. 905, adopted on December 22, 1982, pursuant
to its powers under P.D. No. 116, as amended by P.D. No. 1684?
We agree with petitioners that the stipulated rate of interest at 5.5% per month on the P500,000.00 loan is
excessive, iniquitous, unconscionable and exorbitant. However, we can not consider the rate "usurious"
13
because this Court has consistently held that Circular No. 905 of the Central Bank, adopted on December
22, 1982, has expressly removed the interest ceilings prescribed by the Usury Law and that the Usury Law
14
is now "legally inexistent".

15
In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61 the Court held that CB
16
Circular No. 905 "did not repeal nor in anyway amend the Usury Law but simply suspended the latter's
effectivity." Indeed, we have held that "a Central Bank Circular can not repeal a law. Only a law can repeal
another law." In the recent case of Florendo vs. Court of Appeals , the Court reiterated the ruling that "by
17 18
virtue of CB Circular 905, the Usury Law has been rendered ineffective". "Usury has been legally non-
existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon." 19
Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in
the promissory note iniquitous or unconscionable, and, hence, contrary to morals ("contra bonos mores"),
if not against the law. The stipulation is void. The courts shall reduce equitably liquidated damages,
20 21
whether intended as an indemnity or a penalty if they are iniquitous or unconscionable. 22
Consequently, the Court of Appeals erred in upholding the stipulation of the parties. Rather, we agree with
the trial court that, under the circumstances, interest at 12% per annum, and an additional 1% a month
penalty charge as liquidated damages may be more reasonable.
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of Appeals
promulgated on March 21, 1997, and its resolution dated November 25, 1997. Instead, we render judgment
REVIVING and AFFIRMING the decision dated December 9, 1991, of the Regional Trial Court of Bulacan,
Branch 16, Malolos, Bulacan, in Civil Case No. 134-M-90, involving the same parties.
No pronouncement as to costs in this instance.SO ORDERED.
Narvasa, C.J., Romero, Kapunan and Purisima, JJ., concur.
G.R. No. 172139 December 8, 2010
JOCELYN M. TOLEDO, Petitioner,
vs.
MARILOU M. HYDEN, Respondent.
DECISION
DEL CASTILLO, J.:
It is true that the imposition of an unconscionable rate of interest on a money debt is immoral and unjust and the
court may come to the aid of the aggrieved party to that contract. However, before doing so, courts have to consider
the settled principle that the law will not relieve a party from the effects of an unwise, foolish or disastrous contract if
such party had full awareness of what she was doing.
This Petition for Review on Certiorari1 assails the Decision2 dated August 24, 2005 of the Court of Appeals (CA) in
CA-G.R. CV No. 79805, which affirmed the Decision dated March 10, 20033 of the Regional Trial Court (RTC),
Branch 22, Cebu City in Civil Case No. CEB-22867. Also assailed is the
Resolution dated March 8, 2006 denying the motion for reconsideration.
Factual Antecedents
Petitioner Jocelyn M. Toledo (Jocelyn), who was then the Vice-President of the College Assurance Plan (CAP)
Phils., Inc., obtained several loans from respondent Marilou M. Hyden (Marilou). The transactions are briefly
summarized below:
1) August 15, 1993 ……… ₱ 30,000.00

2) April 21, 1994 ……… 100,000.00
3) October 2, 1995 ……… 30,000.00 with 6% monthly interest
4) October 9, 1995 ……… 30,000.00
5) May 22, 1997 ……… 100,000.00 with 7% monthly interest
TOTAL AMOUNT OF LOAN ……… ₱ 290,000.00 4
From August 15, 1993 up to December 31, 1997, Jocelyn had been religiously paying Marilou the stipulated monthly
interest by issuing checks and depositing sums of money in the bank account of the latter. However, the total
principal amount of ₱290,000.00 remained unpaid. Thus, in April 1998, Marilou visited Jocelyn in her office at CAP
in Cebu City and asked Jocelyn and the other employees who were likewise indebted to her to acknowledge their
debts. A document entitled "Acknowledgment of Debt"5 for the amount of ₱290,000.00 was signed by Jocelyn with
two of her subordinates as witnesses. The said amount represents the principal consolidated amount of the
aforementioned previous debts due on December 25, 1998. Also on said occasion, Jocelyn issued five checks to
Marilou representing renewal payment of her five previous loans, viz:
Check No. 0010761 dated September 2, 1998 . . . . . . . . . ₱ 30,000.00

Check No. 0010762 dated September 9, 1998 ......... 30,000.00
TOTAL ₱ 290,000.00
In June 1998, Jocelyn asked Marilou for the recall of Check No. 0010761 in the amount of ₱30,000.00 and replaced
the same with six checks, in staggered amounts, namely:
Check No. 0010494 dated July 2, 1998 . . . . . . . . . ₱ 6,625.00

Check No. 0010495 dated August 2, 1998 ......... 6,300.00
Check No. 0010497 dated October 2, 1998 ......... 6,500.00
Check No. 0010498 dated November 2, 1998 ......... 5,325.00
Check No. 0010499 dated December 2, 1998 ......... 5,000.00
TOTAL ₱ 35,725.00
After honoring Check Nos. 0010494, 0010495 and 0010496, Jocelyn ordered the stop payment on the remaining
checks and on October 27, 1998, filed with the RTC of Cebu City a complaint6 against Marilou for Declaration of
Nullity and Payment, Annulment, Sum of Money, Injunction and Damages.
Jocelyn averred that Marilou forced, threatened and intimidated her into signing the "Acknowledgment of Debt" and
at the same time forced her to issue the seven postdated checks. She claimed that Marilou even threatened to sue
her for violation of Batas Pambansa (BP) Blg. 22 or the Bouncing Checks Law if she will not sign the said document
and draw the above-mentioned checks. Jocelyn further claimed that the application of her total payment of
₱528,550.00 to interest alone is illegal, unfounded, unjust, oppressive and contrary to law because there was no
written agreement to pay interest.
On November 23, 1998, Marilou filed an Answer7 with Special Affirmative Defenses and Counterclaim alleging that
Jocelyn voluntarily obtained the said loans knowing fully well that the interest rate was at 6% to 7% per month. In
fact, a 6% to 7% advance interest was already deducted from the loan amount given to Jocelyn.
Ruling of the Regional Trial Court
The court a quo did not find any showing that Jocelyn was forced, threatened, or intimidated in signing the
document referred to as "Acknowledgment of Debt" and in issuing the postdated checks. Thus, in its March 10,
2003 Decision the trial court ruled in favor of Marilou, viz:
WHEREFORE, premised on the foregoing, the Court hereby declares the document "Acknowledgment of Debt"
valid and binding. PLAINTIFF is indebted to DEFENDANT [for] the amount of TWO HUNDRED NINETY
THOUSAND (₱290,000.00) PESOS since December 25, 1998 less the amount of EIGHTEEN THOUSAND NINE
HUNDRED (₱18,900.00) PESOS, equivalent to the three checks made good (₱6,625.00 dated 07-02-1998;
₱6,300.00 dated 08-02-1998; and ₱5,975.00 dated 09-02-1998).
Consequently, PLAINTIFF is hereby ordered to pay DEFENDANT the amount of TWO HUNDRED SEVENTY ONE
THOUSAND ONE HUNDRED (₱271,100.00) PESOS due on December 25, 1998 with a 12% interest per annum or
1% interest per month until such time that the said amount shall have been fully paid.
SO ORDERED.8
On March 26, 2003, Jocelyn filed an Earnest Motion for Reconsideration,9 which was denied by the trial court in its
Order10 dated April 29, 2003 stating that it finds no sufficient reason to disturb its March 10, 2003 Decision.
Ruling of the Court of Appeals
On appeal, Jocelyn asserts that she had made payments in the total amount of ₱778,000.00 for a principal amount
of loan of only ₱290,000.00. What is appalling, according to Jocelyn, was that such payments covered only the
interest because of the excessive, iniquitous, unconscionable and exorbitant imposition of the 6% to 7% monthly
interest.
On August 24, 2005, the CA issued its Decision which provides:
WHEREFORE, premises considered, the Decision dated March 10, 2003 and the Order dated April 29, 2003, of the
Regional Trial Court, 7th Judicial Region, Branch 22, Cebu City, in Civil Case No. CEB-22867 are
hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED.11
The Motion for Reconsideration12 filed by Jocelyn was denied by the CA through its Resolution13 dated March 8,
2006.
Issues
Hence, this petition raising the following issues:
I.
Whether the CA gravely erred when it held that the imposition of interest at the rate of six percent (6%) to
seven percent (7%) is not contrary to law, morals, good customs, public order or public policy.
II.
Whether the CA gravely erred when it failed to declare that the "Acknowledgment of Debt" is an inexistent
contract that is void from the very beginning pursuant to Article 1409 of the New Civil Code.
Petitioner’s Arguments
Jocelyn posits that the CA erred when it held that the imposition of interest at the rates of 6% to 7% per month is not
contrary to law, not unconscionable and not contrary to morals. She likewise contends that the CA erred in ruling
that the "Acknowledgment of Debt" is valid and binding. According to Jocelyn, even assuming that the execution of
said document was not attended with force, threat and intimidation, the same must nevertheless be declared null
and void for being contrary to law and public policy. This is borne out by the fact that the payments in the total
amount of ₱778,000.00 was applied to interest payment alone. This only proves that the transaction was iniquitous,
excessive, oppressive and unconscionable.
Respondent’s Arguments
On the other hand, Marilou would like this Court to consider the fact that the document referred to as
"Acknowledgment of Debt" was executed in the safe surroundings of the office of Jocelyn and it was witnessed by
two of her staff. If at all there had been coercion, then Jocelyn could have easily prevented her staff from affixing
their signatures to said document. In fact, petitioner had admitted that she was the one who went to the tables of her
staff to let them sign the said document.
Our Ruling
The petition is without merit.
The 6% to 7% interest per month paid by Jocelyn is not excessive under the circumstances of this case.
In view of Central Bank Circular No. 905 s. 1982, which suspended the Usury Law ceiling on interest effective
January 1, 1983, parties to a loan agreement have wide latitude to stipulate interest rates. Nevertheless, such
stipulated interest rates may be declared as illegal if the same is unconscionable.14 There is certainly nothing in said
circular which grants lenders carte blanche authority to raise interest rates to levels which will either enslave their
borrowers or lead to a hemorrhaging of their assets.15 In fact, in Medel v. Court of Appeals,16 we annulled a
stipulated 5.5% per month or 66% per annum interest with additional service charge of 2% per annum and penalty
charge of 1% per month on a ₱500,000.00 loan for being excessive, iniquitous, unconscionable and exorbitant.
In this case, however, we cannot consider the disputed 6% to 7% monthly interest rate to be iniquitous or
unconscionable vis-à-vis the principle laid down in Medel. Noteworthy is the fact that in Medel, the defendant-
spouses were never able to pay their indebtedness from the very beginning and when their obligations ballooned
into a staggering sum, the creditors filed a collection case against them. In this case, there was no urgency of the
need for money on the part of Jocelyn, the debtor, which compelled her to enter into said loan transactions. She
used the money from the loans to make advance payments for prospective clients of educational plans offered by
her employer. In this way, her sales production would increase, thereby entitling her to 50% rebate on her sales.
This is the reason why she did not mind the 6% to 7% monthly interest. Notably too, a business transaction of this
nature between Jocelyn and Marilou continued for more than five years. Jocelyn religiously paid the agreed amount
of interest until she ordered for stop payment on some of the checks issued to Marilou. The checks were in fact
sufficiently funded when she ordered the stop payment and then filed a case questioning the imposition of a 6% to
7% interest rate for being allegedly iniquitous or unconscionable and, hence, contrary to morals.
It was clearly shown that before Jocelyn availed of said loans, she knew fully well that the same carried with it an
interest rate of 6% to 7% per month, yet she did not complain. In fact, when she availed of said loans, an advance
interest of 6% to 7% was already deducted from the loan amount, yet she never uttered a word of protest.
After years of benefiting from the proceeds of the loans bearing an interest rate of 6% to 7% per month and paying
for the same, Jocelyn cannot now go to court to have the said interest rate annulled on the ground that it is
excessive, iniquitous, unconscionable, exorbitant, and absolutely revolting to the conscience of man. "This is so
because among the maxims of equity are (1) he who seeks equity must do equity, and (2) he who comes into equity
must come with clean hands. The latter is a frequently stated maxim which is also expressed in the principle that he
who has done inequity shall not have equity. It signifies that a litigant may be denied relief by a court of equity on the
ground that his conduct has been inequitable, unfair and dishonest, or fraudulent, or deceitful as to the controversy
in issue." 17
We are convinced that Jocelyn did not come to court for equitable relief with equity or with clean hands. It is patently
clear from the above summary of the facts that the conduct of Jocelyn can by no means be characterized as nobly
fair, just, and reasonable. This Court likewise notes certain acts of Jocelyn before filing the case with the RTC. In
September 1998, she requested Marilou not to deposit her checks as she can cover the checks only the following
month. On the next month, Jocelyn again requested for another extension of one month. It turned out that she was
only sweet-talking Marilou into believing that she had no money at that time. But as testified by Serapio
Romarate,18 an employee of the Bank of Commerce where Jocelyn is one of their clients, there was an available
balance of ₱276,203.03 in the latter’s account and yet she ordered for the stop payments of the seven checks which
can actually be covered by the available funds in said account. She then caught Marilou by surprise when she
surreptitiously filed a case for declaration of nullity of the document and for damages.
The document "Acknowledgment of Debt" is valid and binding.
Jocelyn seeks for the nullification of the document entitled "Acknowledgment of Debt" and wants this Court to
declare that she is no longer indebted to Marilou in the amount of ₱290,000.00 as she had already paid a total
amount of ₱778,000.00. She claims that said document is an inexistent contract that is void from the very beginning
as clearly provided for by Article 140919 of the New Civil Code.
Jocelyn further claims that she signed the said document and issued the seven postdated checks because Marilou
threatened to sue her for violation of BP Blg. 22.
Jocelyn is misguided. Even if there was indeed such threat made by Marilou, the same is not considered as threat
that would vitiate consent. Article 1335 of the New Civil Code is very specific on this matter. It provides:
Art. 1335. There is violence when in order to wrest consent, serious or irresistible force is employed.
xxxx
A threat to enforce one’s claim through competent authority, if the claim is just or legal, does not vitiate
consent. (Emphasis supplied.)
Clearly, we cannot grant Jocelyn the relief she seeks.
As can be seen from the records of the case, Jocelyn has failed to prove her claim that she was made to sign the
document "Acknowledgment of Debt" and draw the seven Bank of Commerce checks through force, threat and
intimidation. As earlier stressed, said document was signed in the office of Jocelyn, a high ranking executive of
CAP, and it was Jocelyn herself who went to the table of her two subordinates to procure their signatures as
witnesses to the execution of said document. If indeed, she was forced to sign said document, then Jocelyn should
have immediately taken the proper legal remedy. But she did not. Furthermore, it must be noted that after the
execution of said document, Jocelyn honored the first three checks before filing the complaint with the RTC. If
indeed she was forced she would never have made good on the first three checks.
It is provided, as one of the conclusive presumptions under Rule 131, Section 2(a), of the Rules of Court that,
"Whenever a party has, by his own declaration, act or omission, intentionally and deliberately led another to believe
a particular thing to be true, and to act upon such belief, he cannot, in any litigation arising out of such declaration,
act or omission, be permitted to falsify it." This is known as the principle of estoppel.
"The essential elements of estoppel are: (1) conduct amounting to false representation or concealment of material
facts or at least calculated to convey the impression that the facts are otherwise than, and inconsistent with, those
which the party subsequently attempts to assert; (2) intent, or at least expectation, that this conduct shall be acted
upon by, or at least influence, the other party; and, (3) knowledge, actual or constructive, of the real facts."20
Here, it is uncontested that Jocelyn had in fact signed the "Acknowledgment of Debt" in April 1998 and two of her
subordinates served as witnesses to its execution, knowing fully well the nature of the contract she was entering
into. Next, Jocelyn issued five checks in favor of Marilou representing renewal payment of her loans amounting to
₱290,000.00. In June 1998, she asked to recall Check No. 0010761 in the amount of ₱30,000.00 and replaced the
same with six checks, in staggered amounts. All these are indicia that Jocelyn treated the "Acknowledgment of
Debt" as a valid and binding contract. 1avvphi1
More significantly, Jocelyn already availed herself of the benefits of the "Acknowledgment of Debt," the validity of
which she now impugns. As aptly found by the RTC and the CA, Jocelyn was making a business out of the loaned
amounts. She was actually using the money to make advance payments for her prospective clients so that her sales
production would increase. Accordingly, she did not mind the 6% to 7% interest per month as she was getting a
50% rebate on her sales.
Clearly, by her own acts, Jocelyn is estopped from impugning the validity of the "Acknowledgment of Debt." "[A]
party to a contract cannot deny the validity thereof after enjoying its benefits without outrage to one’s sense of
justice and fairness."21 "It is a long established doctrine that the law does not relieve a party from the effects of an
unwise, foolish or disastrous contract, entered into with all the required formalities and with full awareness of what
she was doing. Courts have no power to relieve parties from obligations voluntarily assumed, simply because their
contracts turned out to be disastrous or unwise investments."22
WHEREFORE, the instant petition for review on certiorari is DENIED. The Decision of the Court of Appeals in CA-
G.R. CV No. 79805 dated August 24, 2005 affirming the Decision dated March 10, 2003 of the Regional Trial Court,
Branch 22, Cebu City, in Civil Case No. CEB-22867 is AFFIRMED.
SO ORDERED.
MARIANO C. DEL CASTILLO

Associate Justice
WE CONCUR:
RENATO C. CORONA
Chief Justice
Chairperson
TERESITA J. LEONARDO-DE CASTRO ROBERTO A. ABAD*

Associate Justice Associate Justice
JOSE PORTUGAL PEREZ

Associate Justice
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in the above
Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s
Division.
RENATO C. CORONA
Chief Justice
G.R. No. 175139 April 18, 2012
HERMOJINA ESTORES, Petitioner,
vs.
SPOUSES ARTURO and LAURA SUPANGAN, Respondents.
DECISION
DEL CASTILLO, J.:
The only issue posed before us is the propriety of the imposition of interest and attorney’s fees.
Assailed in this Petition for Review filed under Rule 45 of the Rules of Court is the May 12, 2006 Decision of the
1 2
Court of Appeals (CA) in CA-G.R. CV No. 83123, the dispositive portion of which reads:
WHEREFORE, the appealed decision is MODIFIED. The rate of interest shall be six percent (6%) per annum,
computed from September 27, 2000 until its full payment before finality of the judgment. If the adjudged principal
and the interest (or any part thereof) remain unpaid thereafter, the interest rate shall be adjusted to twelve percent
(12%) per annum, computed from the time the judgment becomes final and executory until it is fully satisfied. The
award of attorney’s fees is hereby reduced to ₱100,000.00. Costs against the defendants-appellants.
SO ORDERED. 3
Also assailed is the August 31, 2006 Resolution denying the motion for reconsideration.
4
Factual Antecedents
On October 3, 1993, petitioner Hermojina Estores and respondent-spouses Arturo and Laura Supangan entered
into a Conditional Deed of Sale whereby petitioner offered to sell, and respondent-spouses offered to buy, a parcel
5
of land covered by Transfer Certificate of Title No. TCT No. 98720 located at Naic, Cavite for the sum of ₱4.7
million. The parties likewise stipulated, among others, to wit:
xxxx
1. Vendor will secure approved clearance from DAR requirements of which are (sic):
a) Letter request
b) Title
c) Tax Declaration
d) Affidavit of Aggregate Landholding – Vendor/Vendee
e) Certification from the Prov’l. Assessor’s as to Landholdings of Vendor/Vendee
f) Affidavit of Non-Tenancy
g) Deed of Absolute Sale
xxxx
4. Vendee shall be informed as to the status of DAR clearance within 10 days upon signing of the
documents.
xxxx
6. Regarding the house located within the perimeter of the subject [lot] owned by spouses [Magbago], said
house shall be moved outside the perimeter of this subject property to the 300 sq. m. area allocated for [it].
Vendor hereby accepts the responsibility of seeing to it that such agreement is carried out before full
payment of the sale is made by vendee.
7. If and after the vendor has completed all necessary documents for registration of the title and the vendee
fails to complete payment as per agreement, a forfeiture fee of 25% or downpayment, shall be applied.
However, if the vendor fails to complete necessary documents within thirty days without any sufficient
reason, or without informing the vendee of its status, vendee has the right to demand return of full amount of
down payment.
xxxx
9. As to the boundaries and partition of the lots (15,018 sq. m. and 300 sq. m.) Vendee shall be informed
immediately of its approval by the LRC.
10. The vendor assures the vendee of a peaceful transfer of ownership.
x x x x
6
After almost seven years from the time of the execution of the contract and notwithstanding payment of ₱3.5 million
on the part of respondent-spouses, petitioner still failed to comply with her obligation as expressly provided in
paragraphs 4, 6, 7, 9 and 10 of the contract. Hence, in a letter dated September 27, 2000, respondent-spouses
7
demanded the return of the amount of ₱3.5 million within 15 days from receipt of the letter. In reply, petitioner
8
acknowledged receipt of the ₱3.5 million and promised to return the same within 120 days. Respondent-spouses
were amenable to the proposal provided an interest of 12% compounded annually shall be imposed on the ₱3.5
million. When petitioner still failed to return the amount despite demand, respondent-spouses were constrained to
9
file a Complaint for sum of money before the Regional Trial Court (RTC) of Malabon against herein petitioner as
10
well as Roberto U. Arias (Arias) who allegedly acted as petitioner’s agent. The case was docketed as Civil Case No.
3201-MN and raffled off to Branch 170. In their complaint, respondent-spouses prayed that petitioner and Arias be
ordered to:
1. Pay the principal amount of ₱3,500,000.00 plus interest of 12% compounded annually starting October 1,
1993 or an estimated amount of ₱8,558,591.65;
2. Pay the following items of damages:
a) Moral damages in the amount of ₱100,000.00;
b) Actual damages in the amount of ₱100,000.00;
c) Exemplary damages in the amount of ₱100,000.00;
d) [Attorney’s] fee in the amount of ₱50,000.00 plus 20% of recoverable amount from the [petitioner].
e) [C]ost of suit. 11
In their Answer with Counterclaim, petitioner and Arias averred that they are willing to return the principal amount of
12
₱3.5 million but without any interest as the same was not agreed upon. In their Pre-Trial Brief, they reiterated that
13
the only remaining issue between the parties is the imposition of interest. They argued that since the Conditional
Deed of Sale provided only for the return of the downpayment in case of breach, they cannot be held liable to pay
legal interest as well. 14
In its Pre-Trial Order dated June 29, 2001, the RTC noted that "the parties agreed that the principal amount of 3.5
15
million pesos should be returned to the [respondent-spouses] by the [petitioner] and the issue remaining [is] whether
x x x [respondent-spouses] are entitled to legal interest thereon, damages and attorney’s fees." 16
Trial ensued thereafter. After the presentation of the respondent-spouses’ evidence, the trial court set the
presentation of Arias and petitioner’s evidence on September 3, 2003. However, despite several postponements,
17
petitioner and Arias failed to appear hence they were deemed to have waived the presentation of their evidence.
Consequently, the case was deemed submitted for decision. 18
On May 7, 2004, the RTC rendered its Decision finding respondent-spouses entitled to interest but only at the rate
19
of 6% per annum and not 12% as prayed by them. It also found respondent-spouses entitled to attorney’s fees as
20
they were compelled to litigate to protect their interest. 21
The dispositive portion of the RTC Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the [respondent-spouses] and
ordering the [petitioner and Roberto Arias] to jointly and severally:
1. Pay [respondent-spouses] the principal amount of Three Million Five Hundred Thousand pesos (₱3,500,000.00)
with an interest of 6% compounded annually starting October 1, 1993 and attorney’s fee in the amount of Fifty
Thousand pesos (₱50,000.00) plus 20% of the recoverable amount from the defendants and cost of the suit.
The Compulsory Counter Claim is hereby dismissed for lack of factual evidence.
SO ORDERED. 22
Aggrieved, petitioner and Arias filed their notice of appeal. The CA noted that the only issue submitted for its
23
resolution is "whether it is proper to impose interest for an obligation that does not involve a loan or forbearance of
money in the absence of stipulation of the parties." 24
On May 12, 2006, the CA rendered the assailed Decision affirming the ruling of the RTC finding the imposition of 6%
interest proper. However, the same shall start to run only from September 27, 2000 when respondent-spouses
25
formally demanded the return of their money and not from October 1993 when the contract was executed as held by
the RTC. The CA also modified the RTC’s ruling as regards the liability of Arias. It held that Arias could not be held
solidarily liable with petitioner because he merely acted as agent of the latter. Moreover, there was no showing that
he expressly bound himself to be personally liable or that he exceeded the limits of his authority. More importantly,
there was even no showing that Arias was authorized to act as agent of petitioner. Anent the award of attorney’s
26
fees, the CA found the award by the trial court (₱50,000.00 plus 20% of the recoverable amount) excessive and 27
thus reduced the same to ₱100,000.00. 28
The dispositive portion of the CA Decision reads:
WHEREFORE, the appealed decision is MODIFIED. The rate of interest shall be six percent (6%) per annum,
computed from September 27, 2000 until its full payment before finality of the judgment. If the adjudged principal
and the interest (or any part thereof) remain[s] unpaid thereafter, the interest rate shall be adjusted to twelve percent
(12%) per annum, computed from the time the judgment becomes final and executory until it is fully satisfied. The
award of attorney’s fees is hereby reduced to ₱100,000.00. Costs against the [petitioner].
SO ORDERED. 29
Petitioner moved for reconsideration which was denied in the August 31, 2006 Resolution of the CA.
Hence, this petition raising the sole issue of whether the imposition of interest and attorney’s fees is proper.
Petitioner’s Arguments
Petitioner insists that she is not bound to pay interest on the ₱3.5 million because the Conditional Deed of Sale only
provided for the return of the downpayment in case of failure to comply with her obligations. Petitioner also argues
that the award of attorney’s fees in favor of the respondent-spouses is unwarranted because it cannot be said that
the latter won over the former since the CA even sustained her contention that the imposition of 12% interest
compounded annually is totally uncalled for.
Respondent-spouses’ Arguments
Respondent-spouses aver that it is only fair that interest be imposed on the amount they paid considering that
petitioner failed to return the amount upon demand and had been using the ₱3.5 million for her benefit. Moreover, it
is undisputed that petitioner failed to perform her obligations to relocate the house outside the perimeter of the
subject property and to complete the necessary documents. As regards the attorney’s fees, they claim that they are
entitled to the same because they were forced to litigate when petitioner unjustly withheld the amount. Besides, the
amount awarded by the CA is even smaller compared to the filing fees they paid.
Our Ruling
The petition lacks merit.
Interest may be imposed even in the absence of stipulation in the contract.
We sustain the ruling of both the RTC and the CA that it is proper to impose interest notwithstanding the absence of
stipulation in the contract. Article 2210 of the Civil Code expressly provides that "[i]nterest may, in the discretion of
the court, be allowed upon damages awarded for breach of contract." In this case, there is no question that
petitioner is legally obligated to return the ₱3.5 million because of her failure to fulfill the obligation under the
Conditional Deed of Sale, despite demand. She has in fact admitted that the conditions were not fulfilled and that
she was willing to return the full amount of ₱3.5 million but has not actually done so. Petitioner enjoyed the use of
the money from the time it was given to her until now. Thus, she is already in default of her obligation from the date
30
of demand, i.e., on September 27, 2000.
The interest at the rate of 12% is applicable in the instant case.
Anent the interest rate, the general rule is that the applicable rate of interest "shall be computed in accordance with
the stipulation of the parties." Absent any stipulation, the applicable rate of interest shall be 12% per annum "when
31
the obligation arises out of a loan or a forbearance of money, goods or credits. In other cases, it shall be six percent
(6%)." In this case, the parties did not stipulate as to the applicable rate of interest. The only question remaining
32
therefore is whether the 6% as provided under Article 2209 of the Civil Code, or 12% under Central Bank Circular
No. 416, is due.
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
33
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
34
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.
Petitioner’s unwarranted withholding of the money which rightfully pertains to respondent-spouses amounts to
forbearance of money which can be considered as an involuntary loan. Thus, the applicable rate of interest is 12%
per annum. In Eastern Shipping Lines, Inc. v. Court of Appeals, cited in Crismina Garments, Inc. v. Court of
35
Appeals, the Court suggested the following guidelines:

36
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:
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
case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit. 37
Eastern Shipping Lines, Inc. v. Court of Appeals and its predecessor case, Reformina v. Tongol both involved torts
38 39
cases and hence, there was no forbearance of money, goods, or credits. Further, the amount claimed (i.e.,
damages) could not be established with reasonable certainty at the time the claim was made. Hence, we arrived at
a different ruling in those cases.
Since the date of demand which is September 27, 2000 was satisfactorily established during trial, then the interest
rate of 12% should be reckoned from said date of demand until the principal amount and the interest thereon is fully
satisfied.
1âwphi1
The award of attorney’s fees is warranted.
Under Article 2208 of the Civil Code, attorney’s fees may be recovered:
xxxx
(2) When the defendant’s act or omission has compelled the plaintiff to litigate with third persons or to incur
expenses to protect his interest;
xxxx
(11) In any other case where the court deems it just and equitable that attorney’s fees and expenses of
litigation should be recovered.
In all cases, the attorney’s fees and expenses of litigation must be reasonable.
Considering the circumstances of the instant case, we find respondent-spouses entitled to recover attorney’s fees.
There is no doubt that they were forced to litigate to protect their interest, i.e., to recover their money. However, we
find the amount of ₱50,000.00 more appropriate in line with the policy enunciated in Article 2208 of the Civil Code
that the award of attorney’s fees must always be reasonable.
WHEREFORE, the Petition for Review is DENIED. The May 12, 2006 Decision of the Court of Appeals in CA-G.R.
CV No. 83123 is AFFIRMED with MODIFICATIONS that the rate of interest shall be twelve percent (12%) per
annum, computed from September 27, 2000 until fully satisfied. The award of attorney’s fees is further reduced to
₱50,000.00.
SO ORDERED.

Associate Justice
WE CONCUR:
RENATO C. CORONA
Chief Justice
Chairperson
TERESITA J. LEONARDO-DE CASTRO LUCAS P. BERSAMIN

MARTIN S. VILLARAMA, JR.

Associate Justice
CERTIFICATION
Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s
Division.
RENATO C. CORONA
Chief Justice
G.R. No. 169975 March 18, 2010
PAN PACIFIC SERVICE CONTRACTORS, INC. and RICARDO F. DEL ROSARIO, Petitioners,

vs.
EQUITABLE PCI BANK (formerly THE PHILIPPINE COMMERCIAL INTERNATIONAL BANK), Respondent.
DECISION
CARPIO, J.:
The Case
Pan Pacific Service Contractors, Inc. and Ricardo F. Del Rosario (petitioners) filed this Petition for Review1 assailing
the Court of Appeals’ (CA) Decision2 dated 30 June 2005 in CA-G.R. CV No. 63966 as well as the Resolution3 dated
5 October 2005 denying the Motion for Reconsideration. In the assailed decision, the CA modified the 12 April 1999
Decision4 of the Regional Trial Court of Makati City, Branch 59 (RTC) by ordering Equitable PCI Bank5 (respondent)
to pay petitioners ₱1,516,015.07 with interest at the legal rate of 12% per annum starting 6 May 1994 until the
amount is fully paid.
The Facts
Pan Pacific Service Contractors, Inc. (Pan Pacific) is engaged in contracting mechanical works on airconditioning
system. On 24 November 1989, Pan Pacific, through its President, Ricardo F. Del Rosario (Del Rosario), entered
into a contract of mechanical works (Contract) with respondent for ₱20,688,800. Pan Pacific and respondent also
agreed on nine change orders for ₱2,622,610.30. Thus, the total consideration for the whole project was
₱23,311,410.30.6 The Contract stipulated, among others, that Pan Pacific shall be entitled to a price adjustment in
case of increase in labor costs and prices of materials under paragraphs 70.17 and 70.28 of the "General Conditions
for the Construction of PCIB Tower II Extension" (the escalation clause).9
Pursuant to the contract, Pan Pacific commenced the mechanical works in the project site, the PCIB Tower II
extension building in Makati City. The project was completed in June 1992. Respondent accepted the project on 9
July 1992.10
In 1990, labor costs and prices of materials escalated. On 5 April 1991, in accordance with the escalation clause,
Pan Pacific claimed a price adjustment of ₱5,165,945.52. Respondent’s appointed project engineer, TCGI
Engineers, asked for a reduction in the price adjustment. To show goodwill, Pan Pacific reduced the price
adjustment to ₱4,858,548.67.11
On 28 April 1992, TCGI Engineers recommended to respondent that the price adjustment should be pegged at
₱3,730,957.07. TCGI Engineers based their evaluation of the price adjustment on the following factors:
1. Labor Indices of the Department of Labor and Employment.
2. Price Index of the National Statistics Office.
PD 1594 and its Implementing Rules and Regulations as amended, 15 March 1991.
Shipping Documents submitted by PPSCI.
Sub-clause 70.1 of the General Conditions of the Contract Documents.12
Pan Pacific contended that with this recommendation, respondent was already estopped from disclaiming liability of
at least ₱3,730,957.07 in accordance with the escalation clause.13
Due to the extraordinary increases in the costs of labor and materials, Pan Pacific’s operational capital was
becoming inadequate for the project. However, respondent withheld the payment of the price adjustment under the
escalation clause despite Pan Pacific’s repeated demands.14 Instead, respondent offered Pan Pacific a loan of ₱1.8
million. Against its will and on the strength of respondent’s promise that the price adjustment would be released
soon, Pan Pacific, through Del Rosario, was constrained to execute a promissory note in the amount of ₱1.8 million
as a requirement for the loan. Pan Pacific also posted a surety bond. The ₱1.8 million was released directly to
laborers and suppliers and not a single centavo was given to Pan Pacific.15
Pan Pacific made several demands for payment on the price adjustment but respondent merely kept on promising to
release the same. Meanwhile, the ₱1.8 million loan matured and respondent demanded payment plus interest and
penalty. Pan Pacific refused to pay the loan. Pan Pacific insisted that it would not have incurred the loan if
respondent released the price adjustment on time. Pan Pacific alleged that the promissory note did not express the
true agreement of the parties. Pan Pacific maintained that the ₱1.8 million was to be considered as an advance
payment on the price adjustment. Therefore, there was really no consideration for the promissory note; hence, it is
null and void from the beginning.16
Respondent stood firm that it would not release any amount of the price adjustment to Pan Pacific but it would offset
the price adjustment with Pan Pacific’s outstanding balance of ₱3,226,186.01, representing the loan, interests,
penalties and collection charges.17
Pan Pacific refused the offsetting but agreed to receive the reduced amount of ₱3,730,957.07 as recommended by
the TCGI Engineers for the purpose of extrajudicial settlement, less ₱1.8 million and ₱414,942 as advance
payments.18
On 6 May 1994, petitioners filed a complaint for declaration of nullity/annulment of the promissory note, sum of
money, and damages against the respondent with the RTC of Makati City, Branch 59. On 12 April 1999, the RTC
rendered its decision, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and against the
defendant as follows:
1. Declaring the promissory note (Exhibit "B") null and void;
Ordering the defendant to pay the plaintiffs the following amounts:
a. ₱1,389,111.10 representing unpaid balance of the adjustment price, with interest thereon at the
legal rate of twelve (12%) percent per annum starting May 6, 1994, the date when the complaint was
filed, until the amount is fully paid;
₱100,000.00 representing moral damages;
₱50,000.00 representing exemplary damages; and
₱50,000.00 as and for attorney’s fees.
2. Dismissing defendant’s counterclaim, for lack of merit; and
With costs against the defendant.
SO ORDERED.19
On 23 May 1999, petitioners partially appealed the RTC Decision to the CA. On 26 May 1999, respondent appealed
the entire RTC Decision for being contrary to law and evidence. In sum, the appeals of the parties with the CA are
as follows:
1. With respect to the petitioners, whether the RTC erred in deducting the amount of ₱126,903.97 from the
balance of the adjusted price and in awarding only 12% annual interest on the amount due, instead of the
bank loan rate of 18% compounded annually beginning September 1992.
2. With respect to respondent, whether the RTC erred in declaring the promissory note void and in awarding
moral and exemplary damages and attorney’s fees in favor of petitioners and in dismissing its counterclaim.
In its decision dated 30 June 2005, the CA modified the RTC decision, with respect to the principal amount due to
petitioners. The CA removed the deduction of ₱126,903.97 because it represented the final payment on the basic
contract price. Hence, the CA ordered respondent to pay ₱1,516,015.07 to petitioners, with interest at the legal rate
of 12% per annum starting 6 May 1994.20
On 26 July 2005, petitioners filed a Motion for Partial Reconsideration seeking a reconsideration of the CA’s
Decision imposing the legal rate of 12%. Petitioners claimed that the interest rate applicable should be the 18%
bank lending rate. Respondent likewise filed a Motion for Reconsideration of the CA’s decision. In a Resolution
dated 5 October 2005, the CA denied both motions.
Aggrieved by the CA’s Decision, petitioners elevated the case before this Court.
The Issue
Petitioners submit this sole issue for our consideration: Whether the CA, in awarding the unpaid balance of the price
adjustment, erred in fixing the interest rate at 12% instead of the 18% bank lending rate.
Ruling of the Court

We grant the petition.
This Court notes that respondent did not appeal the decision of the CA. Hence, there is no longer any issue as to
the principal amount of the unpaid balance on the price adjustment, which the CA correctly computed at
₱1,516,015.07. The only remaining issue is the interest rate applicable for respondent’s delay in the payment of the
balance of the price adjustment.
The CA denied petitioners’ claim for the application of the bank lending rate of 18% compounded annually
reasoning, to wit:
Anent the 18% interest rate compounded annually, while it is true that the contract provides for an interest at the
current bank lending rate in case of delay in payment by the Owner, and the promissory note charged an interest of
18%, the said proviso does not authorize plaintiffs to unilaterally raise the interest rate without the other party’s
consent. Unlike their request for price adjustment on the basic contract price, plaintiffs never informed nor sought
the approval of defendant for the imposition of 18% interest on the adjusted price. To unilaterally increase the
interest rate of the adjusted price would be violative of the principle of mutuality of contracts. Thus, the Court
maintains the legal rate of twelve percent per annum starting from the date of judicial demand. Although the contract
provides for the period when the recommendation of the TCGI Engineers as to the price adjustment would be
binding on the parties, it was established, however, that part of the adjusted price demanded by plaintiffs was
already disbursed as early as 28 February 1992 by defendant bank to their suppliers and laborers for their account.21
In this appeal, petitioners allege that the contract between the parties consists of two parts, the Agreement22 and the
General Conditions,23 both of which provide for interest at the bank lending rate on any unpaid amount due under
the contract. Petitioners further claim that there is nothing in the contract which requires the consent of the
respondent to be given in order that petitioners can charge the bank lending rate.24 Specifically, petitioners invoke
Section 2.5 of the Agreement and Section 60.10 of the General Conditions as follows:
Agreement
2.5 If any payment is delayed, the CONTRACTOR may charge interest thereon at the current bank lending rates,
without prejudice to OWNER’S recourse to any other remedy available under existing law.25
General Conditions
60.10 Time for payment
The amount due to the Contractor under any interim certificate issued by the Engineer pursuant to this Clause, or to
any term of the Contract, shall, subject to clause 47, be paid by the Owner to the Contractor within 28 days after
such interim certificate has been delivered to the Owner, or, in the case of the Final Certificate referred to in Sub-
Clause 60.8, within 56 days, after such Final Certificate has been delivered to the Owner. In the event of the failure
of the Owner to make payment within the times stated, the Owner shall pay to the Contractor interest at the rate
based on banking loan rates prevailing at the time of the signing of the contract upon all sums unpaid from the date
by which the same should have been paid. The provisions of this Sub-Clause are without prejudice to the
Contractor’s entitlement under Clause 69.26 (Emphasis supplied)
Petitioners thus submit that it is automatically entitled to the bank lending rate of interest from the time an amount is
determined to be due thereto, which respondent should have paid. Therefore, as petitioners have already proven
their entitlement to the price adjustment, it necessarily follows that the bank lending interest rate of 18% shall be
applied.27
On the other hand, respondent insists that under the provisions of 70.1 and 70.2 of the General Conditions, it is
stipulated that any additional cost shall be determined by the Engineer and shall be added to the contract price after
due consultation with the Owner, herein respondent. Hence, there being no prior consultation with the respondent
regarding the additional cost to the basic contract price, it naturally follows that respondent was never consulted or
informed of the imposition of 18% interest rate compounded annually on the adjusted price.28
A perusal of the assailed decision shows that the CA made a distinction between the consent given by the owner of
the project for the liability for the price adjustments, and the consent for the imposition of the bank lending rate.
Thus, while the CA held that petitioners consulted respondent for price adjustment on the basic contract price,
petitioners, nonetheless, are not entitled to the imposition of 18% interest on the adjusted price, as petitioners never
informed or sought the approval of respondent for such imposition.29
We disagree.
It is settled that the agreement or the contract between the parties is the formal expression of the parties’ rights,
duties, and obligations. It is the best evidence of the intention of the parties. Thus, when the terms of an agreement
have been reduced to writing, it is considered as containing all the terms agreed upon and there can be, between
the parties and their successors in interest, no evidence of such terms other than the contents of the written
agreement.30
The escalation clause of the contract provides:
CHANGES IN COST AND LEGISLATION

70.1 Increase or Decrease of Cost
There shall be added to or deducted from the Contract Price such sums in respect of rise or fall in the cost of labor
and/or materials or any other matters affecting the cost of the execution of the Works as may be determined.
70.2 Subsequent Legislation
If, after the date 28 days prior to the latest date of submission of tenders for the Contract there occur in the country
in which the Works are being or are to be executed changes to any National or State Statute, Ordinance, Decree or
other Law or any regulation or bye-law (sic) of any local or other duly constituted authority, or the introduction of any
such State Statute, Ordinance, Decree, Law, regulation or bye-law (sic) which causes additional or reduced cost to
the contractor, other than under Sub-Clause 70.1, in the execution of the Contract, such additional or reduced cost
shall, after due consultation with the Owner and Contractor, be determined by the Engineer and shall be added to or
deducted from the Contract Price and the Engineer shall notify the Contractor accordingly, with a copy to the
Owner.31
In this case, the CA already settled that petitioners consulted respondent on the imposition of the price adjustment,
and held respondent liable for the balance of ₱1,516,015.07. Respondent did not appeal from the decision of the
CA; hence, respondent is estopped from contesting such fact.
However, the CA went beyond the intent of the parties by requiring respondent to give its consent to the imposition
of interest before petitioners can hold respondent liable for interest at the current bank lending rate. This is
erroneous. A review of Section 2.6 of the Agreement and Section 60.10 of the General Conditions shows that the
consent of the respondent is not needed for the imposition of interest at the current bank lending rate, which occurs
upon any delay in payment.
When the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal
meaning of its stipulations governs. In these cases, courts have no authority to alter a contract by construction or to
make a new contract for the parties. The Court’s duty is confined to the interpretation of the contract which the
parties have made for themselves without regard to its wisdom or folly as the court cannot supply material
stipulations or read into the contract words which it does not contain. It is only when the contract is vague and
ambiguous that courts are permitted to resort to construction of its terms and determine the intention of the parties.32
The escalation clause must be read in conjunction with Section 2.5 of the Agreement and Section 60.10 of the
General Conditions which pertain to the time of payment. Once the parties agree on the price adjustment after due
consultation in compliance with the provisions of the escalation clause, the agreement is in effect an amendment to
the original contract, and gives rise to the liability of respondent to pay the adjusted costs. Under Section 60.10 of
the General Conditions, the respondent shall pay such liability to the petitioner within 28 days from issuance of the
interim certificate. Upon respondent’s failure to pay within the time provided (28 days), then it shall be liable to pay
the stipulated interest.
1avvphi1
This is the logical interpretation of the agreement of the parties on the imposition of interest. To provide a contrary
interpretation, as one requiring a separate consent for the imposition of the stipulated interest, would render the
intentions of the parties nugatory.
Article 1956 of the Civil Code, which refers to monetary interest, specifically mandates that no interest shall be due
unless it has been expressly stipulated in writing. Therefore, payment of monetary interest is allowed only if:
(1) there was an express stipulation for the payment of interest; and
(2) the agreement for the payment of interest was reduced in writing. The concurrence of the two conditions
is required for the payment of monetary interest.33
We agree with petitioners’ interpretation that in case of default, the consent of the respondent is not needed in order
to impose interest at the current bank lending rate.
Applicable Interest Rate
Under Article 2209 of the Civil Code, the appropriate measure for damages in case of delay in discharging an
obligation consisting of the payment of a sum of money is the payment of penalty interest at the rate agreed upon in
the contract of the parties. In the absence of a stipulation of a particular rate of penalty interest, payment of
additional interest at a rate equal to the regular monetary interest becomes due and payable. Finally, if no regular
interest had been agreed upon by the contracting parties, then the damages payable will consist of payment of legal
interest which is 6%, or in the case of loans or forbearances of money, 12% per annum.34 It is only when the parties
to a contract have failed to fix the rate of interest or when such amount is unwarranted that the Court will apply the
12% interest per annum on a loan or forbearance of money.35
The written agreement entered into between petitioners and respondent provides for an interest at the current bank
lending rate in case of delay in payment and the promissory note charged an interest of 18%.
To prove petitioners’ entitlement to the 18% bank lending rate of interest, petitioners presented the promissory
note36 prepared by respondent bank itself. This promissory note, although declared void by the lower courts because
it did not express the real intention of the parties, is substantial proof that the bank lending rate at the time of default
was 18% per annum. Absent any evidence of fraud, undue influence or any vice of consent exercised by petitioners
against the respondent, the interest rate agreed upon is binding on them.37
WHEREFORE, we GRANT the petition. We SET ASIDE the Decision and Resolution of the Court of Appeals in CA-
G.R. CV No. 63966. We ORDER respondent to pay petitioners ₱1,516,015.07 with interest at the bank lending rate
of 18% per annum starting 6 May 1994 until the amount is fully paid.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice
WE CONCUR:
ARTURO D. BRION
Associate Justice
MARIANO C. DEL CASTILLO ROBERTO A. ABAD

JOSE PORTUGAL PEREZ

Associate Justice
ATTESTATION
I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned
to the writer of the opinion of the Court’s Division.
ANTONIO T. CARPIO
Associate Justice
Chairperson
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson’s Attestation, I certify that the
conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of
the opinion of the Court’s Division.
REYNATO S. PUNO
Chief Justice
G.R. No. 160545 March 9, 2010
PRISMA CONSTRUCTION & DEVELOPMENT CORPORATION and ROGELIO S. PANTALEON, Petitioners,

vs.
ARTHUR F. MENCHAVEZ, Respondent.
DECISION
BRION, J.:
We resolve in this Decision the petition for review on certiorari1 filed by petitioners Prisma Construction &
Development Corporation (PRISMA) and Rogelio S. Pantaleon (Pantaleon) (collectively, petitioners) who seek to
reverse and set aside the Decision2 dated May 5, 2003 and the Resolution3 dated October 22, 2003 of the Former
Ninth Division of the Court of Appeals (CA) in CA-G.R. CV No. 69627. The assailed CA Decision affirmed the
Decision of the Regional Trial Court (RTC), Branch 73, Antipolo City in Civil Case No. 97-4552 that held the
petitioners liable for payment of ₱3,526,117.00 to respondent Arthur F. Menchavez (respondent), but modified the
interest rate from 4% per month to 12% per annum, computed from the filing of the complaint to full payment. The
assailed CA Resolution denied the petitioners’ Motion for Reconsideration.
FACTUAL BACKGROUND
The facts of the case, gathered from the records, are briefly summarized below.
On December 8, 1993, Pantaleon, the President and Chairman of the Board of PRISMA, obtained a
₱1,000,000.004 loan from the respondent, with a monthly interest of ₱40,000.00 payable for six months, or a total
obligation of ₱1,240,000.00 to be paid within six (6) months,5 under the following schedule of payments:
January 8, 1994 …………………. ₱40,000.00

February 8, 1994 ………………... ₱40,000.00
March 8, 1994 …………………... ₱40,000.00
April 8, 1994 ……………………. ₱40,000.00
May 8, 1994 …………………….. ₱40,000.00
June 8, 1994 ………………… ₱1,040,000.006
Total ₱1,240,000.00
To secure the payment of the loan, Pantaleon issued a promissory note7 that states:
I, Rogelio S. Pantaleon, hereby acknowledge the receipt of ONE MILLION TWO HUNDRED FORTY THOUSAND
PESOS (P1,240,000), Philippine Currency, from Mr. Arthur F. Menchavez, representing a six-month loan payable
according to the following schedule:
January 8, 1994 …………………. ₱40,000.00

February 8, 1994 ………………... ₱40,000.00
March 8, 1994 …………………... ₱40,000.00
April 8, 1994 ……………………. ₱40,000.00
May 8, 1994 …………………….. ₱40,000.00
June 8, 1994 ………………… ₱1,040,000.00
The checks corresponding to the above amounts are hereby acknowledged.8
and six (6) postdated checks corresponding to the schedule of payments. Pantaleon signed the promissory note in
his personal capacity,9 and as duly authorized by the Board of Directors of PRISMA.10 The petitioners failed to
completely pay the loan within the stipulated six (6)-month period.
From September 8, 1994 to January 4, 1997, the petitioners paid the following amounts to the respondent:
September 8, 1994 ……………… ₱320,000.00

October 8, 1995…………………. ₱600,000.00
November 8, 1995……………. ₱158,772.00
January 4, 1997 …………………. ₱30,000.0011
As of January 4, 1997, the petitioners had already paid a total of ₱1,108,772.00. However, the respondent found
that the petitioners still had an outstanding balance of ₱1,364,151.00 as of January 4, 1997, to which it applied a 4%
monthly interest.12 Thus, on August 28, 1997, the respondent filed a complaint for sum of money with the RTC to
enforce the unpaid balance, plus 4% monthly interest, ₱30,000.00 in attorney’s fees, ₱1,000.00 per court
appearance and costs of suit.13
In their Answer dated October 6, 1998, the petitioners admitted the loan of ₱1,240,000.00, but denied the stipulation
on the 4% monthly interest, arguing that the interest was not provided in the promissory note. Pantaleon also denied
that he made himself personally liable and that he made representations that the loan would be repaid within six (6)
months.14
THE RTC RULING
The RTC rendered a Decision on October 27, 2000 finding that the respondent issued a check for ₱1,000,000.00 in
favor of the petitioners for a loan that would earn an interest of 4% or ₱40,000.00 per month, or a total of
₱240,000.00 for a 6-month period. It noted that the petitioners made several payments amounting to ₱1,228,772.00,
but they were still indebted to the respondent for ₱3,526,117.00 as of February 11,15 1999 after considering the 4%
monthly interest. The RTC observed that PRISMA was a one-man corporation of Pantaleon and used this
circumstance to justify the piercing of the veil of corporate fiction. Thus, the RTC ordered the petitioners to jointly
and severally pay the respondent the amount of ₱3,526,117.00 plus 4% per month interest from February 11, 1999
until fully paid.16
The petitioners elevated the case to the CA via an ordinary appeal under Rule 41 of the Rules of Court, insisting
that there was no express stipulation on the 4% monthly interest.
THE CA RULING
The CA decided the appeal on May 5, 2003. The CA found that the parties agreed to a 4% monthly interest
principally based on the board resolution that authorized Pantaleon to transact a loan with an approved interest of
not more than 4% per month. The appellate court, however, noted that the interest of 4% per month, or 48% per
annum, was unreasonable and should be reduced to 12% per annum. The CA affirmed the RTC’s finding that
PRISMA was a mere instrumentality of Pantaleon that justified the piercing of the veil of corporate fiction. Thus, the
CA modified the RTC Decision by imposing a 12% per annum interest, computed from the filing of the complaint
until finality of judgment, and thereafter, 12% from finality until fully paid.17
After the CA's denial18 of their motion for reconsideration,19 the petitioners filed the present petition for review on
certiorari under Rule 45 of the Rules of Court.
THE PETITION
The petitioners submit that the CA mistakenly relied on their board resolution to conclude that the parties agreed to
a 4% monthly interest because the board resolution was not an evidence of a loan or forbearance of money, but
merely an authorization for Pantaleon to perform certain acts, including the power to enter into a contract of loan.
The expressed mandate of Article 1956 of the Civil Code is that interest due should be stipulated in writing, and no
such stipulation exists. Even assuming that the loan is subject to 4% monthly interest, the interest covers the six (6)-
month period only and cannot be interpreted to apply beyond it. The petitioners also point out the glaring
inconsistency in the CA Decision, which reduced the interest from 4% per month or 48% per annum to 12% per
annum, but failed to consider that the amount of ₱3,526,117.00 that the RTC ordered them to pay includes the
compounded 4% monthly interest.
THE CASE FOR THE RESPONDENT
The respondent counters that the CA correctly ruled that the loan is subject to a 4% monthly interest because the
board resolution is attached to, and an integral part of, the promissory note based on which the petitioners obtained
the loan. The respondent further contends that the petitioners are estopped from assailing the 4% monthly interest,
since they agreed to pay the 4% monthly interest on the principal amount under the promissory note and the board
resolution.
THE ISSUE
The core issue boils down to whether the parties agreed to the 4% monthly interest on the loan. If so, does the rate
of interest apply to the 6-month payment period only or until full payment of the loan?
OUR RULING
We find the petition meritorious.
Interest due should be stipulated in writing; otherwise, 12% per annum
Obligations arising from contracts have the force of law between the contracting parties and should be complied with
in good faith.20 When the terms of a contract are clear and leave no doubt as to the intention of the contracting
parties, the literal meaning of its stipulations governs.21 In such cases, courts have no authority to alter the contract
by construction or to make a new contract for the parties; a court's duty is confined to the interpretation of the
contract the parties made for themselves without regard to its wisdom or folly, as the court cannot supply material
stipulations or read into the contract words the contract does not contain.22 It is only when the contract is vague and
ambiguous that courts are permitted to resort to the interpretation of its terms to determine the parties’ intent.
In the present case, the respondent issued a check for ₱1,000,000.00.23 In turn, Pantaleon, in his personal capacity
and as authorized by the Board, executed the promissory note quoted above. Thus, the ₱1,000,000.00 loan shall be
payable within six (6) months, or from January 8, 1994 up to June 8, 1994. During this period, the loan shall earn an
interest of ₱40,000.00 per month, for a total obligation of ₱1,240,000.00 for the six-month period. We note that this
agreed sum can be computed at 4% interest per month, but no such rate of interest was stipulated in the
promissory note; rather a fixed sum equivalent to this rate was agreed upon.
Article 1956 of the Civil Code specifically mandates that "no interest shall be due unless it has been expressly
stipulated in writing." Under this provision, the payment of interest in loans or forbearance of money is allowed only
if: (1) there was an express stipulation for the payment of interest; and (2) the agreement for the payment of interest
was reduced in writing. The concurrence of the two conditions is required for the payment of interest at a stipulated
rate. Thus, we held in Tan v. Valdehueza24 and Ching v. Nicdao25 that collection of interest without any stipulation in
writing is prohibited by law.
1avvphi1
Applying this provision, we find that the interest of ₱40,000.00 per month corresponds only to the six (6)-month
period of the loan, or from January 8, 1994 to June 8, 1994, as agreed upon by the parties in the promissory note.
Thereafter, the interest on the loan should be at the legal interest rate of 12% per annum, consistent with our ruling
in Eastern Shipping Lines, Inc. v. Court of Appeals:26
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil Code." (Emphasis supplied)
We reiterated this ruling in Security Bank and Trust Co. v. RTC-Makati, Br. 61,27 Sulit v. Court of Appeals,28 Crismina
Garments, Inc. v. Court of Appeals, 29 Eastern Assurance and Surety Corporation v. Court of
Appeals, 30 Sps. Catungal v. Hao, 31 Yong v. Tiu,32 and Sps. Barrera v. Sps. Lorenzo.33 Thus, the RTC and the CA
misappreciated the facts of the case; they erred in finding that the parties agreed to a 4% interest, compounded by
the application of this interest beyond the promissory note’s six (6)-month period. The facts show that the parties
agreed to the payment of a specific sum of money of ₱40,000.00 per month for six months, not to a 4% rate of
interest payable within a six (6)-month period.
Medel v. Court of Appeals not applicable
The CA misapplied Medel v. Court of Appeals34 in finding that a 4% interest per month was unconscionable.
In Medel, the debtors in a ₱500,000.00 loan were required to pay an interest of 5.5% per month, a service charge of
2% per annum, and a penalty charge of 1% per month, plus attorney’s fee equivalent to 25% of the amount due,
until the loan is fully paid. Taken in conjunction with the stipulated service charge and penalty, we found the interest
rate of 5.5% to be excessive, iniquitous, unconscionable, exorbitant and hence, contrary to morals, thereby
rendering the stipulation null and void.
Applying Medel, we invalidated and reduced the stipulated interest in Spouses Solangon v. Salazar35 of 6% per
month or 72% per annum interest on a ₱60,000.00 loan; in Ruiz v. Court of Appeals,36 of 3% per month or 36% per
annum interest on a ₱3,000,000.00 loan; in Imperial v. Jaucian,37 of 16% per month or 192% per annum interest on
a ₱320,000.00 loan; in Arrofo v. Quiño,38 of 7% interest per month or 84% per annum interest on a ₱15,000.00 loan;
in Bulos, Jr. v. Yasuma,39 of 4% per month or 48% per annum interest on a ₱2,500,000.00 loan; and in Chua v.
Timan,40 of 7% and 5% per month for loans totalling ₱964,000.00. We note that in all these cases, the terms of the
loans were open-ended; the stipulated interest rates were applied for an indefinite period.
Medel finds no application in the present case where no other stipulation exists for the payment of any extra amount
except a specific sum of ₱40,000.00 per month on the principal of a loan payable within six months. Additionally,
no issue on the excessiveness of the stipulated amount of ₱40,000.00 per month was ever put in issue by the
petitioners;41 they only assailed the application of a 4% interest rate, since it was not agreed upon.
It is a familiar doctrine in obligations and contracts that the parties are bound by the stipulations, clauses, terms and
conditions they have agreed to, which is the law between them, the only limitation being that these stipulations,
clauses, terms and conditions are not contrary to law, morals, public order or public policy.42 The payment of the
specific sum of money of ₱40,000.00 per month was voluntarily agreed upon by the petitioners and the respondent.
There is nothing from the records and, in fact, there is no allegation showing that petitioners were victims of fraud
when they entered into the agreement with the respondent.
Therefore, as agreed by the parties, the loan of ₱1,000,000.00 shall earn ₱40,000.00 per month for a period of six
(6) months, or from December 8, 1993 to June 8, 1994, for a total principal and interest amount of ₱1,240,000.00.
Thereafter, interest at the rate of 12% per annum shall apply. The amounts already paid by the petitioners during
the pendency of the suit, amounting to ₱1,228,772.00 as of February 12, 1999,43 should be deducted from the total
amount due, computed as indicated above. We remand the case to the trial court for the actual computation of the
total amount due.
Doctrine of Estoppel not applicable
The respondent submits that the petitioners are estopped from disputing the 4% monthly interest beyond the six-
month stipulated period, since they agreed to pay this interest on the principal amount under the promissory note
and the board resolution.
We disagree with the respondent’s contention.
We cannot apply the doctrine of estoppel in the present case since the facts and circumstances, as established by
the record, negate its application. Under the promissory note,44 what the petitioners agreed to was the payment of
a specific sum of ₱40,000.00 per month for six months – not a 4% rate of interest per month for six (6)
months – on a loan whose principal is ₱1,000,000.00, for the total amount of ₱1,240,000.00. Thus, no reason
exists to place the petitioners in estoppel, barring them from raising their present defenses against a 4% per month
interest after the six-month period of the agreement. The board resolution,45 on the other hand, simply authorizes
Pantaleon to contract for a loan with a monthly interest of not more than 4%. This resolution merely embodies the
extent of Pantaleon’s authority to contract and does not create any right or obligation except as between Pantaleon
and the board. Again, no cause exists to place the petitioners in estoppel.
Piercing the corporate veil unfounded
We find it unfounded and unwarranted for the lower courts to pierce the corporate veil of PRISMA.
The doctrine of piercing the corporate veil applies only in three (3) basic instances, namely: a) when the separate
and distinct corporate personality defeats public convenience, as when the corporate fiction is used as a vehicle for
the evasion of an existing obligation; b) in fraud cases, or when the corporate entity is used to justify a wrong,
protect a fraud, or defend a crime; or c) is used in alter ego cases, i.e., where a corporation is essentially a farce,
since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled
and its affairs so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation.46 In the absence of malice, bad faith, or a specific provision of law making a corporate officer liable,
such corporate officer cannot be made personally liable for corporate liabilities.47
In the present case, we see no competent and convincing evidence of any wrongful, fraudulent or unlawful act on
the part of PRISMA to justify piercing its corporate veil. While Pantaleon denied personal liability in his Answer, he
made himself accountable in the promissory note "in his personal capacity and as authorized by the Board
Resolution" of PRISMA.48 With this statement of personal liability and in the absence of any representation on the
part of PRISMA that the obligation is all its own because of its separate corporate identity, we see no occasion to
consider piercing the corporate veil as material to the case.
WHEREFORE, in light of all the foregoing, we hereby REVERSE and SET ASIDE the Decision dated May 5, 2003
of the Court of Appeals in CA-G.R. CV No. 69627. The petitioners’ loan of ₱1,000,000.00 shall bear interest of
₱40,000.00 per month for six (6) months from December 8, 1993 as indicated in the promissory note. Any portion of
this loan, unpaid as of the end of the six-month payment period, shall thereafter bear interest at 12% per annum.
The total amount due and unpaid, including accrued interests, shall bear interest at 12% per annum from the finality
of this Decision. Let this case be REMANDED to the Regional Trial Court, Branch 73, Antipolo City for the proper
computation of the amount due as herein directed, with due regard to the payments the petitioners have already
remitted. Costs against the respondent.
SO ORDERED.
ARTURO D. BRION
Associate Justice
Acting Chairperson
WE CONCUR:
ANTONIO EDUARDO B. NACHURA*
Associate Justice
MARIANO C. DEL CASTILLO ROBERTO A. ABAD
JOSE PORTUGAL PEREZ
Associate Justice
ATTESTATION
ARTURO D. BRION
Associate Justice
Acting Chairperson
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson’s Attestation, it is hereby
certified that the conclusions in the above Decision had been reached in consultation before the case was assigned
REYNATO S. PUNO
Chief Justice
G.R. No. 97873 August 12, 1993
PILIPINAS BANK, petitioner,
vs.
THE HONORABLE COURT OF APPEALS, and LILIA R. ECHAUS, respondents.
Gella, Reyes, Danguilan and Associates for the petitioner.
Manuel L. Melotindos for the respondents.
QUIASON, J.:
This is a petition for certiorari under Rule 45 of the Revised Rules of Court to review the Resolution of the Court of
Appeals in CA-G.R. CV No. 06017 promulgated on March 14, 1991. The Resolution was rendered in response to
private respondent's motion for clarification of the decision of the Court of Appeals in CA-G.R. No. 06017. The
matters sought to be clarified arose in the course of the execution of the decision of the Regional Trial Court, Branch
71, Antipolo, Rizal in Civil Case No. 239-A, as modified by the decision of the Court of Appeals in CA-G.R. CV No.
06017.
In Civil Case No. 239-A, private respondent filed a complaint against petitioner and its president, Constantino
Bautista, for collection of a sum of money. The complaint alleged: (1) that petitioner and Greatland Realty
Corporation (Greatland) executed a "Dacion en Pago," wherein Greatland conveyed to petitioner several parcels of
land in consideration of the sum of P7,776,335.69; (2) that Greatland assigned P2,300,000.00 out of the total
consideration of the Dacion en Pago, in favor of private respondent; and (3) that notwithstanding her demand for
payment, petitioner in bad faith, refused and failed to pay the said amount assigned to her.
Petitioner, while admitting the execution of the Dacion en Pago, claimed: (1) that its former president had no
authority to enter into such agreement; (2) that it never ratified the same; and (3) that assuming arguendo that the
agreement was binding, the conditions stipulated therein were never fulfilled.
Dismissing petitioner's defense as unmeritorious, the trial court ruled in favor of private respondent. The trial court
ordered petitioner and its co-defendant, jointly and severally, to pay private respondent as follows:
1) P2,300,000.00 the total amount assigned by Greatland in her favor out of the P2,300,000.00
liability of defendant Pilipinas to Greatland plus legal interest from the dates of assignments until fully
paid;
2) P3,217,707.00 representing the total actual damages suffered by the plaintiff plus legal interest
until fully paid;
3) P1,000,000.00 in moral damages to partially assuage the extreme moral sufferings of plaintiff
inflicted upon her person considering the bad faith on the part of the defendants and their failure to
act with justice, and to give what is lawfully due her and observe honesty and good faith;
4) P100,000.00 exemplary and nominal damages to vindicate plaintiff's violated rights;
5) Attorney's fees equivalent to 15% of the total award in favor of the plaintiff;
6) Costs of suit (Rollo, p. 78).
On March 22, 1985, petitioner appealed the decision of the trial court to the Court of Appeals, which docketed the
appeal as CA-G.R. No. 06017. On the same day, private respondent filed a motion for Immediate Execution
Pending Appeal. The trial court granted the motion for execution pending appeal in an Order dated April 3, 1985.
Petitioner challenged the Order dated April 3, 1985 before the Court of Appeals in CA-G.R. No. SP No. 05909.
On October 30, 1986, the Court of Appeals modified the Order dated April 3, 1985, by limiting the execution pending
appeal against petitioner to P5,517.707.00 and deferring the execution of the award for moral, exemplary and
nominal damages to await the final judgment of the main case in CA-G.R. No. 06017. On June 17, 1987, the
Supreme Court in G.R. No. L-76506 affirmed the Order dated October 30, 1986 of the Court of Appeals.
On July 1, 1988, the trial court granted the new motion for execution pending appeal filed by private respondent
pursuant to the Resolution of the Supreme Court dated June 17, 1987, upon the filing of the required bond.
Petitioner complied with the writ of execution pending appeal by issuing two manager's checks in the total amount of
P5,517,707.00 (one for P4,965,936.30 payable to private respondent and another for P551,770.70 payable to the
Clerk of Court, RTC, Antipolo, Rizal).
The check payable to private respondent was encashed on July 15, 1988.
On June 28, 1990, the Court of Appeals rendered a decision in CA-G.R. No. CV-06017, which modified the
judgment of the trial court as follows:
1. The defendant-appellant Pilipinas Bank, formerly known as Filipinas Manufacturers Bank is

ordered to pay the plaintiff-appellee the following:
(a) The sum of Two Million Three Hundred Thousand (2,300,000,00) Pesos,
representing the total amount assigned by Greatland to her, with interest at the legal
rate starting July 24, 1981, date when demand was first made (Exh. "F" and "G");
(b) The sum of One Hundred Thousand (P100,000.00) Pesos in moral damages, to
assuage moral sufferings and embarrassment of plaintiff-appellee as a consequence
of appellant-bank's unwarranted acts;
(c) The sum of Twenty Five Thousand (P25,000.00) Pesos, as exemplary damages
to serve as an example or correction for the public good;
(d) The sum equivalent to ten (10) percent of the principal claim awarded,
representing attorney's fees; and
2. Constantino Bautista is absolved of personal liability (Rollo, pp. 31-32).
Petitioner filed a motion for extension of time to file a Petition for Review on Certiorari with the Supreme Court,
which however was withdrawn on July 23,1990. Private respondent, on her part, filed a motion for reconsideration of
the decision of the Court of Appeals in CA-G.R. No. 06017, which likewise was withdrawn on August 13, 1990.
Hence, the decision of the Court of Appeals rendered in CA-G.R. No. 06017 became final and executory.
On September 4, 1990, petitioner filed a motion in the trial court praying that private respondent and Standard
Insurance Co. (which furnished the bond required in the advance execution of the decision of the trial court) to
refund to her the excess payment of P1,898,623.67 with interests at 6% (Rollo, pp. 83-84).
It must be recalled that while private respondent was able to collect P5,517,707.00 from petitioner pursuant to the
writ of advance execution allowed in CA-G.R. No. SP No. 05909, the final judgment in the main case (CA-G.R. No.
06017) awarded to private respondent damages in the total amount of only P2,655,000.00 (P2,300,000.00
representing the amount assigned by Greatland to private respondent, P100,000.00 as moral damages; P25,000.00
as exemplary damages and attorney's fees equivalent to 10% of the P2,300,000.00), together "with interest on the
amount of P2,300,000.00 at the legal rate starting July 24, 1981, date when demand was first made (Exh. "F" and
"G")."
Private respondent opposed the motion of petitioner with respect to the rate of interest to be charged on the amount
of P2,300,000.00. According to private respondent, the legal interest on the principal amount of P2,300,000.00 due
her should be 12% per annum pursuant to CB Circular No. 416 and not 6% per annum as computed by petitioner.
On October 12, 1990, the trial court, while ordering the refund to petitioner of the excess payment, fixed the interest
rate due on the amount of P2,300.000.00 at 12% per annum as proposed by private respondent, instead of 6% per
annum as proposed by petitioner.
On October 16, 1990, petitioner moved to reconsider the Order dated October 12, 1990 of the trail court, which
however could not be acted upon because on October 23, 1990, private respondent filed a Motion for Clarification
with the Court of Appeals in CA-G.R. CV No. 06017, regarding the following matters:
a) The "legal rate" of interest on the principal award of P2,300,000.00 from July 24, 1981 (as per
decision) up to July 14, 1988 (date of actual payment made by defendant-appellant to plaintiff-
appellee per execution pending appeal);
b) The imposition of such "legal rate" of interest on the accrued interest' from July 24, 1981 up to
July 14, 1988;
c) The amount of the costs of suit will include premium on surety bond;
d) The discharged of the surety bond whether total or partial, depending on the computation of the
interest;
e) The award of attorney's fees equivalent to 10% of the principal award, whether this should totally
go to plaintiff-appellee's former counsel or to be shared on the basis of quantum meruit with the
undersigned counsel; and
f) Aside from this final award of 10% attorney's fees chargeable against defendant-appellant,
whether or not former counsel of plaintiff-appellee can still collect from her the balance of 15% out of
the 25% attorney's fees under Exh. "N" (Rollo, p.32).
In its Resolution promulgated on March 14, 1991, the Court of Appeals clarified that:
a) The legal rate of interest on the principal award of P2,300,000.00 should be 12% per annum in
accordance with Circular No. 416 dated July 29, 1974 of the Central Bank.
b) The computation of compounding interest annually has no basis, therefore, not allowed in the
instant case;
c) The payment of premium on the bond in the sum of P259,813.50 as cost, being without legal and
factual basis, is denied;
d) The surety bond posted by plaintiff-appellee may be released after satisfaction of the decision;
and
e) Payment/distribution of attorney's fees may/shall be litigated in a separate proceeding if the

parties cannot settle their differences amicably.
SO ORDERED (Rollo, p. 35-36).
In this appeal, petitioner claims that the Court of Appeals erred:
(1) In ruling that the legal rate of interest on the amount of P2,300,000.00 adjudged to be paid by petitioner to
private respondent is 12% per annum.
(2) In not holding that the refund to which petitioner is entitled should earn interest at the rate of 12% per annum.
(3) In not holding that the surety bond should only be released after actual refund (Rollo, p. 18).
The Court of Appeals was of the theory that the action in Civil Case No. 239-A filed by private respondent against
petitioner "involves forbearance of money, as the principal award to plaintiff-appellee (private respondent) in the
amount of P2,300.000.00 was the overdue debt of defendant-appellant to her since July 1981. The case is, in effect,
a simple collection of the money due to plaintiff-appellee, as the unpaid creditor from the defendant bank, the
debtor" (Resolution, p.3; Rollo, p. 33). Applying Central Bank Circular No. 416, the Court of Appeals held that the
applicable rate of interest is 12% per annum.
Petitioner argues that the applicable law is Article 2209 of the Civil Code, not the Central Bank Circular No. 416.
Said Article 2209 provides:
Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in
delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of
the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent
per annum.
Presidential Decree No. 116 authorized the Monetary Board to prescribe the maximum rate or rates of interest for
the loan or renewal thereof or the forbearance of any money, goods or credits and amended the Usury Law (Act No.
2655) for that purpose.
As amended, the Usury Law now provides:
Sec. 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.
Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of
interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to
charge such rate or rates whenever warranted by prevailing economic and social
conditions: Provided, That such changes shall not be made oftener that 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 such loans made by pawnshops, finance
companies and other similar credit institutions although the rates prescribed for these institutions
need not necessarily be uniform.
Acting on the authority vested on it by the Usury Law, as amended by P.D. No. 116, the Monetary Board of Central
Bank issued Central Bank Circular No. 416, which provides:
By virtue of the authority granted to it under Section 1 of Act 2655, as amended, otherwise known as
the "Usury Law" the Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed
that 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 twelve
(12%) per cent per annum. This Circular shall take effect immediately. (italics supplied)
Note that Circular No. 416, fixing the rate of interest at 12% per annum, deals with (1) loans; (2) forbearance of any
money, goods or credit; and
(3) judgments.
In Reformina v. Tomol, Jr., 139 SCRA 260 [1985], the Court held that the judgments spoken of and referred to in
Circular No. 416 are "judgments in litigation involving loans or forbearance of any money, goods or credits. Any
other kind of monetary judgment which has nothing to do with nor involving loans or forbearance of any money,
goods or credits does not fall within the coverage of the said law for it is not, within the ambit of the authority granted
to the Central Bank."
Reformina was affirmed in Philippines Virginia Tobacco Administration v. Tensuan, 188 SCRA 628 [1990], which
emphasized that the "judgments" contemplated in Circular No. 417 "are judgments involving said loans or
forbearance only and not in judgments in litigation that have nothing to do with loans . . . ."
We held that Circular No. 416 does not apply to judgments involving damages (Reformina v. Tomol, Jr., supra;
Philippine Virginia Tobacco Administration v. Tensuan, supra) and compensation in expropriation proceedings
(National Power Corporation v. Angas, 208 SCRA 542 [1992]). We also held that payment of unliquidated cash
advances to an employee by his employer (Villarica v. Court of Appeals, 123 SCRA 259 [1983]) and the return of
money paid by a buyer of a leasehold right but which contract was voided due to the fault of the seller (Buisier v.
Court of Appeals, 154 SCRA 438 [1987]).
What then is the nature of the judgment ordering petitioner to pay private respondent the amount of P2,300,000.00?
The said amount was a portion of the P7,776,335.69 which petitioner was obligated to pay Greatland as
consideration for the sale of several parcels of land by Greatland to petitioner. The amount of P2,300,000.00 was
assigned by Greatland in favor of private respondent. The said obligation therefore arose from a contract of
purchase and sale and not from a contract of loan or mutuum. Hence, what is applicable is the rate of 6% per
annum as provided in Article 2209 of the Civil Code of the Philippines and not the rate of 12% per annum as
provided in Circular No. 416.
Petitioner next contends that, consistent with its thesis that Circular No. 416 applies only to judgments involving the
payment of loans or forbearance of money, goods and credit, the Court of Appeals should have ordered private
respondent to pay interest at the rate of 12% on the overpayment collected by her pursuant to the advance
execution of the judgment.
Again, we sustain petitioner's contention as correct.
Private respondent was paid in advance the amount of P5,517,707.00 by petitioner to the order for the execution
pending appeal of the judgment of the trial court. On appeal, the Court of Appeals reduced the total damages to
P3,619,083.33, leaving a balance of P1,898,623.67 to be refunded by private respondent to petitioner. In an
execution pending appeal, funds are advanced by the losing party to the prevailing party with the implied obligation
of the latter to repay former, in case the appellate court cancels or reduces the monetary award.
Under Section 5 of Rule 39 of the Revised Rules of Court where "the judgment executed is reversed totally or
partially on appeal, the trial court, on motion, after the case is remanded to it, may issue such orders of restitution,
as equity and justice may warrant under the circumstances." It was to guarantee the restitution contemplated by
Section 5 of Rule 39 of the Revised Rules of Court that private respondent was required by the trial court to post a
bond before the writ of advance execution was issued.
In the case before us, the excess amount ordered to refunded by private respondent falls within the ruling
in Viloria and Buiser that Circular No. 416 applies to cases where money is transferred from one person to another
and the obligation to return the same or a portion thereof is subsequently adjudged.
Finally, petitioner questions as vague the ruling of the Court of Appeals that the surety bond given to secure the
advance execution may be discharged "upon the finality and satisfaction of the decision." We believe that this ruling
of the Court of Appeals is clear enough in ordering that the surety bond shall be released only after private
respondent has fully refunded the overpayment to petitioner.
WHEREFORE, the petition is GRANTED. The Resolution of the Court of Appeals appealed from is MODIFIED in
that (1) the amount of P2,300,000.00 adjudged to be paid by petitioner to private respondent shall earn interest of
6% per annum and (2) the amount of P1,898,623.67 to be refunded by private respondent to petitioner shall earn
interest of 12% per annum. Costs against private respondent.
SO ORDERED.
Cruz, Griño-Aquino, Davide, Jr. and Bellosillo, JJ., concur.

G.R. No. 171925 July 23, 2010
SOLIDBANK CORPORATION, (now Metropolitan Bank and Trust Company), Petitioner,

vs.
ERMANENT HOMES, INCORPORATED, Respondent.
DECISION
CARPIO, J.:
G.R. No. 171925 is a petition for review1 assailing the Decision2 promulgated on 29 June 2005 by the Court of
Appeals (appellate court) as well as the Resolution3 promulgated on 14 March 2006 in CA-G.R. CV No. 75926. The
appellate court granted the petition filed by Permanent Homes, Incorporated (Permanent) and reversed the decision
of the Regional Trial Court of Makati City, Branch 58 (trial court) dated 5 July 2002 in Civil Case No. 98-654. The
appellate court ordered Solidbank Corporation (Solidbank) and Permanent to enter into an express agreement
about the applicable interest rates on Permanent’s loan. Solidbank was also ordered to render an accounting of
Permanent’s payments, not to impose interest on interest upon Permanent’s loans, and to release the remaining
amount available under Permanent’s omnibus credit line.
The Facts
The appellate court narrated the facts as follows:
The records disclose that PERMANENT HOMES is a real estate development company, and to finance its housing
project known as the "Buena Vida Townhomes" located within Merville Subdivision, Parañaque City, it applied and
was subsequently granted by SOLIDBANK with an "Omnibus Line" credit facility in the total amount of SIXTY
MILLION PESOS. Of the entire loan, FIFTY NINE MILLION as [sic] time loan for a term of up to three hundred sixty
(360) days, with interest thereon at prevailing market rates, and subject to monthly repricing. The remaining ONE
MILLION was available for domestic bills purchase.
To secure the aforesaid loan, PERMANENT HOMES initially mortgaged three (3) townhouse units within the Buena
Vida project in Parañaque. At the time, however, the instant complaint was filed against SOLIDBANK, a total of thirty
six (36) townhouse units were mortgaged with said bank.
Of the 60 million available to PERMANENT HOMES, it availed of a total of 41.5 million pesos, covered by three (3)
promissory notes, which contain the following provisions, thus:
"xxx
5. We/I irrevocably authorize Solidbank to increase or decrease at any time the interest rate agreed in this
Note or Loan on the basis of, among others, prevailing rates in the local or international capital markets. For
this purpose, We/I authorize Solidbank to debit any deposit or placement account with Solidbank belonging
to any one of us. The adjustment of the interest rate shall be effective from the date indicated in the written
notice sent to us by the bank, or if no date is indicated, from the time the notice was sent.
6. Should We/I disagree to the interest rate adjustment, We/I shall prepay all amounts due under this Note
or Loan within thirty (30) days from the receipt by anyone of us of the written notice. Otherwise, We/I shall
be deemed to have given our consent to the interest rate adjustment."
Contrary, however, to the specific provisions as afore-quoted, there was a standing agreement by the parties that
any increase or decrease in interest rates shall be subject to the mutual agreement of the parties.
For the first loan availment of PERMANENT HOMES on March 20, 1997, in the amount of 19.6 MILLION, from the
initial interest rate of 14.25% per annum (p.a.), the same was increased 15% p.a. effective May 19, 1997; it was
again increased to 26% p.a. effective July 18, 1997. It was thereafter reduced to 20% p.a. effective August 18,
1997, and then increased to 24% p.a. effective September 17, 1997. The rate was increased further to 30%
p.a. effective October 17, 1997, then decreased to 27% p.a. on November 17, 1997, and again increased to 34%
p.a. effective December 17, 1997. The rate then decreased to 30% p.a. on January 16, 1998.
For the second loan availment in the amount of 18 million, the rate was initially pegged at 15.75% p.a. on June 24,
1997. A month later, the rate increased to 23.5% p.a. It thereafter decreased to 20% p.a. effective August 24, 1997,
but again increased to 22.5% p.a. effective September 24, 1997. For the next month, the rate surged to 30%
p.a., and decreased to 27% p.a. for the month of November. The rate again surged to 34% p.a. for the month of
December, and was decreased to 30% p.a. from January 22, 1998 to February 20, 1998.
For the third loan availment on July 15, 1997, in the amount of 3.9 million, the interest rate was initially pegged
at 35% p.a., but this was decreased to 21% p.a. from August 14 until September 11, 1997. The rate increased
slightly to 23% p.a. on September 12, 1997, and surged to 27% p.a. on October 13, 1997. The rate went down
slightly to 27% p.a. for the month of November, and to 26% p.a. for the month of December. The rate, however,
again surged to 30% p.a. on January 12, 1998 before settling at 29% p.a. for the month of February.
It is [Permanent’s] stand that SOLIDBANK unilaterally and arbitrarily accelerated the interest rates without any
declared basis of such increases, of which PERMANENT HOMES had not agreed to, or at the very least, been
informed of. This is contrary to their earlier agreement that any interest rate changes will be subject to mutual
agreement of the parties. PERMANENT HOMES further admits that it was not able to protest such arbitrary
increases at the time they were imposed by SOLIDBANK, for fear that SOLIDBANK might cut off the credit facility it
extended to PERMANENT HOMES. Permanent was then in the midst of the construction of its project in Merville,
Parañaque City, and SOLIDBANK knew that it was relying substantially on the credit facility the latter extended to it.
[Permanent] thus filed a case before the trial court seeking the following: (1) the annulment of the increases in
interest rates on the loans it obtained from SOLIDBANK, on the ground that it was violative of the principle of
mutuality of agreement of the parties, as enunciated in Article 1409 of the New Civil Code, (2) the fixing of the
interest rates at the applicable interest rate, and (3) for the trial court to order SOLIDBANK to make an accounting of
the payments it made, so as to determine the amount of refund PERMANENT is entitled to, as well as to order
SOLIDBANK to release the remaining available balance of the loan it extended to PERMANENT. In addition,
[Permanent] prays for the payment of compensatory, moral and exemplary damages.
SOLIDBANK, on the other hand, avers that PERMANENT HOMES has no cause of action against it, in view of the
pertinent provisions of the Omnibus Credit Line and the promissory notes agreed to and signed by PERMANENT
HOMES. Thus, in accordance with said provisions, SOLIDBANK was authorized to, upon due notice, periodically
adjust the interest rates on PERMANENT HOMES’ loan availments during the monthly interest repricing dates,
depending on the changes in prevailing interest rates in the local and international capital markets. In fact,
SOLIDBANK avers that four (4) days before July 15, 1997, the Bangko Sentral ng Pilipinas (BSP) declared that it
could no longer support the Philippine currency from external speculative forces, hence, the local currency was
allowed to seek its own exchange rate level. As a result of the volatile exchange rate ratio, banks were then hesitant
to extend loans, and in some instances that it granted loans, they had to ensure that they will not be at the losing
end of the deal, so to speak, by the repricing of the interest rates every month. SOLIDBANK insists that
PERMANENT HOMES should not be allowed to renege on its contractual obligations, as it freely and voluntarily
bound itself to the provisions of the Omnibus Credit Line and the promissory notes.
PERMANENT HOMES presented as witnesses Jacqueline S. Lim, its Vice President and Chief Financial Officer,
Engr. Rey A. Romasanta, its Executive Vice President and Chief Operating Officer, and Martha Julia Flores, its
Treasury Officer.
On March 24, 1998, the trial court issued a temporary restraining order (TRO), after a summary hearing, which
enjoined SOLIDBANK from implementing and collecting the increases in interest rates and from initiating any action,
including the foreclosure of the mortgaged properties.
Ms. Lim’s testimony centered on PERMANENT HOMES’ allegations that the repricing of the interest rates was done
by SOLIDBANK without any written agreement entered into between the parties. In fact, Ms. Lim accounted that
SOLIDBANK will merely advise them of the interest rate for the period, after said period had already commenced,
and at times very late in the period, by fax messages. When PERMANENT HOMES called SOLIDBANK’s attention
to the seemingly surging rates it imposed on its loan, SOLIDBANK will merely answer that it was the bank’s policy,
without offering any basis for such increase. Furthermore, Ms. Lim also mentioned SOLIDBANK’s alleged practice
of imposing interest on unpaid interest, at the highest rate of 30% p.a.. Ms. Lim also presented a tabulation, which
presents the number of days their billing statements were sent late, from the time the interest period started. It is
PERMANENT HOMES’ stand that since the purpose of the billing statements was to inform them beforehand of the
applicable interest rate for the period, the late billings will clearly show SOLIDBANK’s arbitrary imposition of the
repriced interest rates, as well as its indifference to PERMANENT HOMES’ plight.
To illustrate, for the first loan availment in the amount of ₱19.6 million, the billing statements which should have
notified PERMANENT HOMES of the repriced interest rates were faxed to PERMANENT HOMES between eighteen
(18) to thirty-three (33) days late. For the second loan availment in the amount of ₱18 million, the faxed billings were
late between six (6) to twenty-one (21) days, and one instance where PERMANENT HOMES received no billing at
all. For the third loan availment in the amount of ₱3.9 million, the faxed billings were late between seven (7) to
twenty-nine (29) days, and also an instance where PERMANENT HOMES received no billing at all.
This practice, according to Ms. Lim, clearly affected its operations, as the completion of its construction project was
unnecessarily delayed, to its prejudice and its buyers. This was the import of the testimony of PERMANENT
HOMES’ second witness, Engr. Rey A. Romasanta. According to Engr. Rey, the target date of completion was
August 1997, but in view of the shortage of funds by reason of SOLIDBANK’s refusal for PERMANENT HOMES to
make further availments on its omnibus credit line, the project was completed only on February 1998.
PERMANENT HOMES’ third and final witness was Martha Julia Flores, its Treasury Officer, who explained that as
such, it was her who received the late billings from SOLIDBANK. She would also call up SOLIDBANK to ask what
the repriced interest rate for the coming interest period, to no avail, as SOLIDBANK will merely fax its billings almost
always, as abovementioned, late in the period. Ms. Flores admitted that she prepared the tabulation presented
before the court, which showed how late SOLIDBANK’s billings were sent to PERMANENT HOMES, as well as the
computation of interest rates that SOLIDBANK had allegedly overcharged on its loan, vis-a-vis the average of the
high and the low published lending rates of SOLIDBANK.
SOLIDBANK, to establish its defense, presented its lone witness, Mr. Cesar Lugtu, who testified to the effect that,
contrary to PERMANENT HOMES’ assertions that it was not promptly informed of the repriced interest rates,
SOLIDBANK’s officers verbally advised PERMANENT HOMES of the repriced rates at the start of the period, and
even added that their transaction[s] were based on trust. Aside from these allegations, however, no written
memorandum or note was presented by SOLIDBANK to support their assertion that PERMANENT HOMES was
timely advised of the repriced interests.4
The Trial Court’s Ruling
On 5 July 2002, the trial court promulgated its Decision in favor of Solidbank. The trial court ratiocinated and ruled
thus:
It becomes crystal clear that there is sufficient proof to show that the instant case was instituted by [Permanent] as
an after-thought and as an obvious subterfuge intended to completely lay on the defendant the blame for the
debacle of its Buena Vida project. An afterthought because the records of the case show that the complaint was
filed in March 16, 1998, already after it was having difficulty making the amortization payments, the last of which
being in February 1998. A subterfuge because plaintiff, instead of blaming itself and its own business judgment that
went sour, would rather put the blame on [Solidbank], taking advantage of every conceivable gray area of its
contract with [Solidbank] to avoid its own liabilities. In fact, this complaint was made the very basis for [Permanent]
to altogether stop the payment of its loan from [Solidbank] including the interest payment (TSN, May 07, 1998, p.
60).
xxxx
WHEREFORE, finding the complaint not impressed with merit, judgment is hereby rendered dismissing the said
complaint. The Counterclaim is likewise dismissed for lack of evidence to support the same.
SO ORDERED.5
Permanent filed an appeal before the appellate court.
The Appellate Court’s Ruling
The appellate court granted Permanent’s appeal, and set aside the trial court’s ruling. The appellate court not only
recognized the validity of escalation clauses, but also underscored the necessity of a basis for the increase in
interest rates and of the principle of mutuality of contracts.
The dispositive portion of the appellate court’s decision reads, thus:
THE FOREGOING CONSIDERED, the instant appeal is hereby GRANTED, the assailed decision dated July 5,
2002 is REVERSED and SET ASIDE, and a new one is hereby entered as follows:
(1) Unless the parties herein subsequently enter into an express agreement regarding the applicable
interest rates on PERMANENT HOMES’ loan availments subsequent to the initial thirty-day (30) period, the
legal rate of twelve percent (12%) per annum is hereby FIXED, to be applied on the outstanding balance of
the loan;
(2) SOLIDBANK is ordered to render an accounting of all the payments made by PERMANENT HOMES,
and in case there is excess payment by reason of the wrongful imposition of the repriced interest rates, to
apply such amount to the interest payment at the legal rate, and thereafter to the outstanding principal
amount;
(3) SOLIDBANK is directed not to impose penalties, particularly interest on interest, upon PERMANENT
HOMES’ loan, there being no evidence that the latter was in default on its payments;
(4) SOLIDBANK is hereby ordered to release the remaining amount available under the omnibus credit line,
subject, however, to availability of funds on the part of SOLIDBANK.
SO ORDERED.6
The appellate court resolved to deny Solidbank’s Motion for Reconsideration for lack of merit.7
The Issues
Solidbank raised the following issues in their petition:

(A) Whether the Honorable Court of Appeals was correct in ruling that the increases in the interest rates on
[Permanent’s] loans are void for having been unilaterally imposed without basis.
(B) Whether the Honorable Court of Appeals was correct in ordering the parties to enter into an express
agreement regarding the applicable interest rates on Permanent’s loan availments subsequent to the initial
thirty-day (30) period.
(C) Whether the Honorable Court of Appeals was correct in ruling that [Permanent] is entitled to attorney’s
fees notwithstanding the absence of bad faith or malice on the part of [Solidbank].8
The Court’s Ruling
The petition has merit.
The Usury Law had been rendered legally ineffective by Resolution No. 224 dated 3 December 1982 of the
Monetary Board of the Central Bank, and later by Central Bank Circular No. 905 which took effect on 1 January
1983. These circulars removed the ceiling on interest rates for secured and unsecured loans regardless of maturity.
The effect of these circulars is to allow the parties to agree on any interest that may be charged on a loan. The
virtual repeal of the Usury Law is within the range of judicial notice which courts are bound to take into
account.9 Although interest rates are no longer subject to a ceiling, the lender still does not have an unbridled
license to impose increased interest rates. The lender and the borrower should agree on the imposed rate, and such
imposed rate should be in writing.
The three promissory notes between Solidbank and Permanent all contain the following provisions:
5. We/I irrevocably authorize Solidbank to increase or decrease at any time the interest rate agreed in this
Note or Loan on the basis of, among others, prevailing rates in the local or international capital markets. For
this purpose, We/I authorize Solidbank to debit any deposit or placement account with Solidbank belonging
to any one of us. The adjustment of the interest rate shall be effective from the date indicated in the written
notice sent to us by the bank, or if no date is indicated, from the time the notice was sent.
6. Should We/I disagree to the interest rate adjustment, We/I shall prepay all amounts due under this Note
or Loan within thirty (30) days from the receipt by anyone of us of the written notice. Otherwise, We/I shall
be deemed to have given our consent to the interest rate adjustment.
The stipulations on interest rate repricing are valid because (1) the parties mutually agreed on said stipulations; (2)
repricing takes effect only upon Solidbank’s written notice to Permanent of the new interest rate; and (3) Permanent
has the option to prepay its loan if Permanent and Solidbank do not agree on the new interest rate. The phrases
"irrevocably authorize," "at any time" and "adjustment of the interest rate shall be effective from the date indicated in
the written notice sent to us by the bank, or if no date is indicated, from the time the notice was sent," emphasize
that Permanent should receive a written notice from Solidbank as a condition for the adjustment of the interest rates.
In order that obligations arising from contracts may have the force of law between the parties, there must be a
mutuality between the parties based on their essential equality.10 A contract containing a condition which makes its
fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties is void.11 There was no
showing that either Solidbank or Permanent coerced each other to enter into the loan agreements. The terms of the
Omnibus Line Agreement and the promissory notes were mutually and freely agreed upon by the parties.
Moreover, Solidbank’s range of lending rates were consistent with "prevailing rates in the local or international
capital markets." Permanent presented a tabulation12 of the range of Solidbank’s lending rates, as reported to
Bangko Sentral ng Pilipinas and compared the lending rates with the interest rates charged by Solidbank on
Permanent’s loans, thus:
Solidbank’s range of
lending rates as per
BSP records
High Low Interest rates charged Excess Interest Rate

by Solidbank on Over the Average of
Permanent’s loans High and Low Rates
Sept. 12, 1997 25.0% 22.0% 23.0%
Sept. 17, 1997 27.0% 24.0% 24.0%
Sept. 22, 1997 26.0% 23.0% 22.5%
Oct. 13, 1997 29.0% 26.0% 28.0%
Oct. 17, 1997 30.0% 27.0% 30.0%
Oct. 22, 1997 32.0% 29.0% 30.0%
Nov. 12, 1997 28.0% 25.0% 27.0%
Nov. 17, 1997 28.0% 25.0% 27.0%

Nov. 21, 1997 27.0% 24.0% 27.0%
Dec. 12, 1997 25.0% 23.0% 26.0% 2.0%
Dec. 17, 1997 25.0% 23.0% 34.0% 10.0%
Dec. 22, 1997 25.0% 23.0% 32.0% 8.0%
Jan. 12, 1998 26.0% 24.0% 30.0% 5.0%
Jan. 16, 1998 28.0% 25.0% 30.0% 3.5%
Jan. 22, 1998 28.0% 25.0% 30.0% 3.5%
Feb. 9, 1998 27.0% 24.0% 30.0% 3.5%
Feb. 11, 1998 27.0% 24.0% 29.0% 4.5%
Feb. 12, 1998 27.0% 24.0% 30.0% 4.5%
The repriced interest rates from 12 September to 21 November 1997 conformed to the range of Solidbank’s lending
rates to other borrowers. The 12 December 1997 to 12 February 1998 repriced interest rates were not
unconscionably out of line with the upper range of lending rates to other borrowers. The interest rate repricing
happened at the height of the Asian financial crises in late 1997, when banks clamped down on lendings because of
higher credit risks across industries, particularly the real estate industry.
We also recognize that Solidbank admitted that it did not promptly send Permanent written repriced rates, but rather
verbally advised Permanent’s officers over the phone at the start of the period. Solidbank did not present any written
memorandum to support its allegation that it promptly advised Permanent of the change in interest rates.13 Solidbank
advised Permanent on the repriced interest rate applicable for the 30-day interest period only after the period had
begun. Permanent presented a tabulation which showed that Solidbank either did not send a billing statement, or
sent a billing statement 6 to 33 days late.14 We reproduce the tabulation below:
PN #435 – P19.6MM
Reference Interest Period Date Billing Statements Number of days Billing

No. were faxed to Permanent Statement was Late
1 03/20/97 04/18/97 04/17/97 28
2 04/18/97 05/19/97 05/16/97 28
05/19/97 06/19/97 no statement received
3 06/19/97 07/18/97 07/12/97 23
4 07/18/97 08/18/97 08/05/97 18
5 08/18/97 09/17/97 09/10/97 23
6 09/17/97 10/17/97 10/06/97 19
7 10/17/97 11/17/97 11/11/97 25
8 11/17/97 12/17/97 12/12/97 25
9 12/17/97 01/16/98 01/09/98 23
14 01/16/98 02/20/98 02/18/98 33
PN #969 – P18MM

3 06/24/97 07/24/97 07/12/97 18
4 07/24/97 08/22/97 08/05/97 12
5 08/22/97 09/22/97 09/10/97 19
6 09/22/97 10/22/97 10/06/97 14
7 10/22/97 11/21/97 11/11/97 20
8 11/21/97 12/22/97 12/12/97 21
9 12/22/97 01/22/98 01/09/98 18
14 02/12/98 02/20/98 02/18/98 6

PN #1077 – P3.9MM

10 07/15/97 08/14/97 08/14/97 30
11 08/14/97 08/26/97 08/26/97 12
5 08/26/97 09/12/97 09/10/97 15
6 09/12/97 10/13/97 10/06/97 24
7 10/13/97 11/12/97 11/11/97 29
12 11/12/97 12/12/97 12/10/97 28
9 12/12/97 01/12/98 01/09/98 28
13 01/12/98 02/09/98 02/09/98 28
14 02/11/98 03/13/98 02/18/98 7
We rule that Solidbank’s computation of the interest due from Permanent should be adjusted to take effect only
upon Permanent’s receipt of the written notice from Solidbank. 1avvphi1
WHEREFORE, we GRANT the petition in part. We SET ASIDE the Decision of the Court of Appeals promulgated
on 29 June 2005 as well as the Resolution promulgated on 14 March 2006 in CA-G.R. CV No. 75926
and AFFIRM the decision of the Regional Trial Court of Makati City, Branch 58 dated 5 July 2002 in Civil Case No.
98-654 with the MODIFICATION that the repricing of the interest rates should take effect only upon Permanent
Homes, Incorporated’s receipt of the written notice from Solidbank Corporation of the adjustment in interest rate.
The records of this case are therefore remanded to the trial court for the computation of the proper interest
payments based on the dates of receipt of written notice.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice
WE CONCUR:
ANTONIO EDUARDO B. NACHURA

Associate Justice
DIOSDADO M. PERALTA MARIANO C. DEL CASTILLO*

ROBERTO A. ABAD
Associate Justice
ATTESTATION
ANTONIO T. CARPIO
Associate Justice
Chairperson
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson’s Attestation, I certify that the
the opinion of the Court’s Division.
RENATO C. CORONA
Chief Justice
G.R. No. 170452 August 13, 2008
SALVADOR CHUA and VIOLETA CHUA, petitioners,

vs.
RODRIGO TIMAN, MA. LYNN TIMAN and LYDIA TIMAN, respondents.
DECISION
QUISUMBING, J.:
Before us is a petition for review on certiorari assailing the Decision1 and Resolution2 dated March 9, 2005 and November
24, 2005, respectively, of the Court of Appeals in CA-G.R. CV No. 82865, which had affirmed the Decision3 dated May 14,
2004 of the Regional Trial Court (RTC) of Quezon City, Branch 86, in Civil Case No. Q-00-41276. The Court of Appeals
reduced the stipulated original interest rates of 7% and 5% per month to only 1% per month or 12% per annum and
ordered petitioners to refund the excess interest payments by respondents.
The pertinent facts are as follows:
In February and March 1999, petitioners Salvador and Violeta Chua granted respondents Rodrigo, Ma. Lynn and Lydia
Timan the following loans: a) P100,000; b) P200,000; c) P150,000; d) P107,000; e) P200,000; and f) P107,000. These
loans were evidenced by promissory notes with interest of 7% per month, which was later reduced to 5% per month.
Rodrigo and Ma. Lynn issued five (5) postdated checks to secure the loans, except for the P150,000 loan which was
secured by a postdated check issued by Lydia.
Respondents paid the loans initially at 7% interest rate per month until September 1999 and then at 5% interest rate per
month from October to December 1999. Sometime in March 2000, respondents offered to pay the principal amount of the
loans through a Philippine National Bank manager’s check worth P764,000, but petitioners refused to accept the same
insisting that the principal amount of the loans totalled P864,000.
On May 3, 2000, respondents deposited P864,000 with the Clerk of Court of the RTC of Quezon City. Later, they filed a
case for consignation and damages. Petitioners moved to dismiss the case, but the RTC denied the motion, as well as the
subsequent motion for reconsideration.
By virtue of an order of Partial Judgment4 dated October 16, 2002, the Clerk of Court of the RTC of Quezon City released
the amount of P864,000 to petitioners.
Trial on the validity of the stipulated interests on the subject loans, as well as on the issue of damages, then proceeded.
On May 14, 2004, the RTC rendered a decision in favor of respondents. It ruled that the original stipulated interest rates of
7% and 5% per month were excessive. It further ordered petitioners to refund to respondents all interest payments in
excess of the legal rate of 1% per month or 12% per annum. However, the RTC denied petitioners’ claim for damages.
On appeal, the Court of Appeals affirmed the trial court’s decision. The Court of Appeals declared illegal the stipulated
interest rates of 7% and 5% per month for being excessive, iniquitous, unconscionable and exorbitant. Accordingly, the
Court of Appeals reduced the stipulated interest rates of 7% and 5% per month (equivalent to 84% and 60% per annum,
respectively) to a fair and reasonable rate of 1% per month or 12% per annum. The Court of Appeals also ordered
petitioners to refund to respondents all interest payments in excess of 12% per annum. Petitioners sought
reconsideration, but it was denied.
Hence, this petition raising the lone issue of:
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR – OR

ACTED NOT IN ACCORD WITH THE LAW AND JURISPRUDENCE – WHEN IT AFFIRMED THE JUDGMENT
OF THE REGIONAL TRIAL COURT ORDERING THE RETURN OF THE EXCESS INTEREST TO
RESPONDENTS.5
Essentially, the main issue is: (1) Did the Court of Appeals err in ruling that the original stipulated interest rates of 7% and
5%, equivalent to 84% and 60% per annum, are unconscionable, and in ordering petitioners to refund to respondents all
payments of interest in excess of 12% per annum?
Petitioners aver that the stipulated interest of 5% monthly and higher cannot be considered unconscionable because
these rates are not usurious by virtue of Central Bank (C.B.) Circular No. 905-826 which had expressly removed the
interest ceilings prescribed by the Usury Law. Petitioners add that respondents were in pari delicto since they agreed on
the stipulated interest rates of 7% and 5% per month. They further aver they honestly believed that the interest rates they
imposed on respondents’ loans were not usurious.
Respondents, invoking Medel v. Court of Appeals,7 counter that the stipulated interest rates of 7% and 5% per month are
iniquitous, unconscionable and exorbitant, thus, they are entitled to the return of the excessive interest paid. They also
contend that petitioners cannot raise the defense of in pari delicto for the first time on appeal. They further contend that
the defense of good faith is a factual issue which cannot be raised by petitioners in a petition for review under Rule 45 of
the Rules of Civil Procedure.
The petition is patently devoid of merit.
The stipulated interest rates of 7% and 5% per month imposed on respondents’ loans must be equitably reduced to 1%
per month or 12% per annum.8 We need not unsettle the principle we had affirmed in a plethora of cases that stipulated
interest rates of 3%9 per month and higher10 are excessive, iniquitous, unconscionable and exorbitant. Such stipulations
are void for being contrary to morals, if not against the law.11 While C.B. Circular No. 905-82, which took effect on January
1, 1983, effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless of
maturity,12 nothing in the said circular could possibly be read as granting carte blanche authority to lenders to raise
interest rates to levels which would either enslave their borrowers or lead to a hemorrhaging of their assets.13
Petitioners cannot also raise the defenses of in pari delicto and good faith. The defense of in pari delicto was not raised in
the RTC, hence, such an issue cannot be raised for the first time on appeal. Petitioners must have seasonably raised it in
the proceedings before the lower court, because questions raised on appeal are confined only within the issues framed by
the parties.14 The defense of good faith must also fail because such an issue is a question of fact15 which may not be
properly raised in a petition for review under Rule 45 of the Rules of Civil Procedure which allows only questions of law.16
As well set forth in Medel:17
We agree … that the stipulated rate of interest at 5.5% per month on the P500,000.00 loan is excessive,
iniquitous, unconscionable and exorbitant. However, we can not consider the rate "usurious" because this Court
has consistently held that Circular No. 905 of the Central Bank, adopted on December 22, 1982, has expressly
removed the interest ceilings prescribed by the Usury Law and that the Usury Law is now "legally inexistent."
In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61, the Court held that CB
Circular No. 905 "did not repeal nor in any way amend the Usury Law but simply suspended the latter’s
effectivity." Indeed, we have held that "a Central Bank Circular can not repeal a law. Only a law can repeal
another law." In the recent case of Florendo vs. Court of Appeals, the Court reiterated the ruling that "by virtue of
CB Circular 905, the Usury Law has been rendered ineffective." "Usury has been legally non-existent in our
jurisdiction. Interest can now be charged as lender and borrower may agree upon."
Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in the
promissory note iniquitous or unconscionable, and, hence, contrary to morals ("contra bonos mores"), if not
against the law. The stipulation is void.
WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision and Resolution dated March 9, 2005 and
November 24, 2005, respectively, of the Court of Appeals in CA-G.R. CV No. 82865 are hereby AFFIRMED. Costs
against petitioners.
SO ORDERED.
LEONARDO A. QUISUMBING
Associate Justice
WE CONCUR:
*RENATO C. CORONA
Associate Justice
CONCHITA CARPIO MORALES PRESBITERO J. VELASCO, JR.

ARTURO D. BRION
Associate Justice
ATTESTATION
I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the
writer of the opinion of the Court’s Division.
LEONARDO A. QUISUMBING
Associate Justice
Chairperson
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson’s Attestation, it is hereby certified that
the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the
opinion of the Court’s Division.
REYNATO S. PUNO
Chief Justice
G.R. No. 154129. July 8, 2005
TERESITA DIO, Petitioners,
vs.
SPOUSES VIRGILIO and LUZ ROCES JAPOR and MARTA1 JAPOR, Respondents.
DECISION
QUISUMBING, J.:
For review on certiorari is the Decision,2 dated February 22, 2002, of the Court of Appeals, in the consolidated
cases CA-G.R. CV No. 51521 and CA-G.R. SP No. 40457. The decretal portion read:
WHEREFORE, premises considered, in CA-G.R. CV No. 51521, the decision of the trial court is AFFIRMED with
MODIFICATION. Judgment is rendered as follows:
1. Declaring the Real Estate Mortgage to be valid;
2. Fixing the interest at 12% per annum and an additional 1% penalty charge per month such that plaintiffs-
appellants’ contractual obligation under the deed of real estate mortgage would amount to ₱1,252,674.00;
3. Directing defendant-appellee Dio to give the surplus of ₱2,247,326.00 to plaintiffs-appellants; and
4. Affirming the dissolution of the writ of preliminary injunction previously issued by the trial court.
The Petition in CA-G.R. SP No. 40457 is DENIED for being moot and academic.
SO ORDERED.3
Equally assailed in this petition is the Resolution,4 dated July 2, 2002, of the appellate court, denying Teresita
Dio’s Motion for Partial Reconsideration of March 19, 2002 and the Spouses Japor and Marta Japor’s Motion for
Reconsideration dated March 20, 2002.
The antecedent facts are as follows:
Herein respondents Spouses Virgilio Japor and Luz Roces Japor were the owners of an 845.5 square-meter
residential lot including its improvements, situated in Barangay Ibabang Mayao, Lucena City, as shown by Transfer
Certificate of Title (TCT) No. T-39514. Adjacent to the Japor’s lot is another lot owned by respondent Marta Japor,
which consisted of 325.5 square meters and titled under TCT No. T-15018.
On August 23, 1982, the respondents obtained a loan of ₱90,000 from the Quezon Development Bank (QDB), and
as security therefor, they mortgaged the lots covered by TCT Nos. T-39514 and T-15018 to QDB, as evidenced by a
Deed of Real Estate Mortgage duly executed by and between the respondents and QDB.
On December 6, 1983, respondents and QDB amended the Deed of Real Estate Mortgage increasing respondents’
loan to ₱128,000.
The respondents failed to pay their aforesaid loans. However, before the bank could foreclose on the mortgage,
respondents, thru their broker, one Lucia G. Orian, offered to mortgage their properties to petitioner Teresita Dio.
Petitioner prepared a Deed of Real Estate Mortgage, whereby respondents mortgaged anew the two properties
already mortgaged with QDB to secure the timely payment of a ₱350,000 loan that respondents had from petitioner
Dio. The Deed of Real Estate Mortgage, though dated January 1989, was actually executed on February 13, 1989
and notarized on February 17, 1989.
Under the terms of the deed, respondents agreed to pay the petitioner interest at the rate of five percent (5%) a
month, within a period of two months or until April 14, 1989. In the event of default, an additional interest equivalent
to five percent (5%) of the amount then due, for every month of delay, would be charged on them.
The respondents failed to settle their obligation to petitioner on April 14, 1989, the agreed deadline for settlement.
On August 27, 1991, petitioner made written demands upon the respondents to pay their debt.
Despite repeated demands, respondents did not pay, hence petitioner applied for extrajudicial foreclosure of the
mortgage. The auction of the unredeemed properties was set for February 26, 1992.
Meanwhile, on February 24, 1992, respondents filed an action for Fixing of Contractual Obligation with Prayer
for Preliminary Mandatory Injunction/Restraining Order, docketed as Civil Case No. 92-26, with the Regional
Trial Court (RTC) of Lucena City. Respondents prayed that "judgment be rendered fixing the contractual obligations
of plaintiffs with the defendant Dio plus legal or allowable interests thereon."5
The trial court issued an Order enjoining the auction sale of the aforementioned mortgaged properties.
On June 15, 1992, the Japors filed a Motion to Admit Amended Complaint with an attached copy of
their Amended Complaint praying that the Deed of Real Estate Mortgage dated February 13, 1989 be declared null
and void, but reiterating the plea that the trial court fix the contractual obligations of the Japors with Dio. The trial
court denied the motion.
On September 27, 1994, respondents filed with the appellate court, a petition for certiorari, docketed as CA-G.R. SP
No. 35315, praying that the Court of Appeals direct the trial court to admit their Amended Complaint. The appellate
court denied said petition.6
On December 11, 1995, the trial court handed down the following judgment:
WHEREFORE, in view of the foregoing considerations, judgment is rendered:
1. Dismissing the complaint for failure of the plaintiffs to substantiate their affirmative allegations;
2. Declaring the Real Estate Mortgage (Exhs. "A" to "A-13"/Exhs. "3" to "3-D") to be valid and binding as between
the parties, more particularly the plaintiffs Virgilio Japor, Luz Japor and Marta Japor or the latter’s substituted heir or
heirs, as the case may be;
3. Dissolving the writ of preliminary injunction previously issued by this Court; and
4. To pay the cost of this suit.
SO ORDERED.7
On January 17, 1996, respondents filed their notice of appeal. On April 26, 1996, they also filed a Petition for
Temporary Restraining Order And/Or Mandatory Injunction in Aid of Appellate Jurisdiction with the Court of
Appeals.
On May 8, 1996, petitioner Dio as the sole bidder in an auction purchased the properties for ₱3,500,000.
On May 9, 1996, the Court of Appeals denied respondents’ application for a temporary restraining order.8
On October 9, 1996, the appellate court consolidated CA-G.R. CV No. 51521 and CA-G.R. SP No. 40457.
As stated at the outset, the appellate court affirmed the decision of the trial court with respect to the validity of the
Deed of Real Estate Mortgage, but modified the interest and penalty rates for being unconscionable and exorbitant.
Before us, petitioner assigns the following errors allegedly committed by the appellate court:
THE ALLEGED INIQUITY OF THE STIPULATED INTEREST AND PENALTY WAS NOT RAISED BEFORE THE
TRIAL COURT NOR ASSIGNED AS AN ERROR IN RESPONDENTS’ APPEAL.
II
THE STIPULATED INTEREST AND PENALTY ARE NOT "EXCESSIVE, INIQUITOUS, UNCONSCIONABLE,
EXORBITANT AND CONTRARY TO MORAL[S]".
III
PAYMENT OF THE "SURPLUS" OF ₱2,247,326.00 TO RESPONDENTS WOULD RESULT IN THEIR UNJUST

ENRICHMENT.
IV
RESPONDENTS’ APPEAL SHOULD HAVE BEEN DISMISSED DUE TO FORUM SHOPPING.9
Simply stated, the issue is: Did the Court of Appeals err when it held that the stipulations on interest and penalty in
the Deed of Real Estate Mortgage is contrary to morals, if not illegal? Corollarily, were respondents entitled to any
"surplus" on the auction sale price?
On the main issue, petitioner contends that The Usury Law10 has been rendered ineffective by Central Bank Circular
No. 905, series of 1982 and accordingly, usury has become legally non-existent in this jurisdiction, thus, interest
rates may accordingly be pegged at such levels or rates as the lender and the borrower may agree upon. Petitioner
avers she has not violated any law considering she is not engaged in the business of money-lending. Moreover, she
claims she has suffered inconveniences and incurred expenses for some 13 years now as a result of respondents’
failure to pay her. Petitioner further points out that the 5% interest rate was proposed by the respondents and have
only themselves to blame if the interests and penalties ballooned to its present amount due to their willful delay and
default in payment. The appellate court thus erred, petitioner now insists, in applying Sps. Almeda v. Court of
Appeals11 and Medel v. Court of Appeals12 to reduce the interest rate to 12% per annum and the penalty to 1% per
month.
Respondents admit they owe petitioner ₱350,000 and do not question any lawful interest on their loan but they
maintain that the Deed of Real Estate Mortgage is null and void since it did not state the true intent of the parties,
which limited the 5% interest rate to only two (2) months from the date of the loan and which did not provide for
penalties and other charges in the event of default or delay. Respondents vehemently contend that they never
consented to the said stipulations and hence, should not be bound by them.
On the first issue, we are constrained to rule against the petitioner’s contentions.
Central Bank Circular No. 905, which took effect on January 1, 1983, effectively removed the ceiling on interest
rates for both secured and unsecured loans, regardless of maturity. However, nothing in said Circular grants
lenders carte blanche authority to impose interest rates which would result in the enslavement of their borrowers or
to the hemorrhaging of their assets.13 While a stipulated rate of interest may not technically and necessarily be
usurious under Circular No. 905, usury now being legally non-existent in our jurisdiction,14 nonetheless, said rate
may be equitably reduced should the same be found to be iniquitous, unconscionable, and exorbitant, and hence,
contrary to morals (contra bonos mores), if not against the law.15 What is iniquitous, unconscionable, and exorbitant
shall depend upon the factual circumstances of each case.
In the instant case, the Court of Appeals found that the 5% interest rate per month and 5% penalty rate per month
for every month of default or delay is in reality interest rate at 120% per annum. This Court has held that a stipulated
interest rate of 5.5% per month or 66% per annum is void for being iniquitous or unconscionable.16 We have likewise
ruled that an interest rate of 6% per month or 72% per annum is outrageous and inordinate.17 Conformably to these
precedent cases, a combined interest and penalty rate at 10% per month or 120% per annum, should be deemed
iniquitous, unconscionable, and inordinate. Hence, we sustain the appellate court when it found the interest and
penalty rates in the Deed of Real Estate Mortgage in the present case excessive, hence legally impermissible.
Reduction is legally called for now in rates of interest and penalty stated in the mortgage contract.
What then should the interest and penalty rates be?
The evidence shows that it was indeed the respondents who proposed the 5% interest rate per month for two (2)
months. Having agreed to said rate, the parties are now estopped from claiming otherwise. For the succeeding
period after the two months, however, the Court of Appeals correctly reduced the interest rate to 12% per
annum and the penalty rate to 1% per month, in accordance with Article 222718 of the Civil Code.
But were respondents entitled to the "surplus" of ₱2,247,32619 as a result of the "overpricing" in the auction?
We note that the "surplus" was the result of the computation by the Court of Appeals of respondents’ outstanding
liability based on a reduced interest rate of 12% per annum and the reduced penalty rate of 1% per month. The
court a quo then proceeded to apply our ruling in Sulit v. Court of Appeals,20 to the effect that in case of surplus in
the purchase price, the mortgagee is liable for such surplus as actually comes into his hands, but where he sells on
credit instead of cash, he must still account for the proceeds as if the price were paid in cash, for such surplus
stands in the place of the land itself with respect to liens thereon or vested rights therein particularly those of the
mortgagor or his assigns.
In the instant case, however, there is no "surplus" to speak of. In adjusting the interest and penalty rates to equitable
and conscionable levels, what the Court did was merely to reflect the true price of the land in the foreclosure sale.
The amount of the petitioner’s bid merely represented the true amount of the mortgage debt. No surplus in the
purchase price was thus created to which the respondents as the mortgagors have a vested right.
WHEREFORE, the Decision dated February 22, 2002, of the Court of Appeals in the consolidated cases CA-G.R.
CV No. 51521 and CA-G.R. SP No. 40457 is hereby AFFIRMED with MODIFICATION. The interest rate for the
subject loan owing to QDB, or whoever is now the party mortgagee, is hereby fixed at five percent (5%) for the first
two (2) months following the date of execution of the Deed of Real Estate Mortgage, and twelve percent (12%) for
the succeeding period. The penalty rate thereafter shall be fixed at one percent (1%) per month. Petitioner Teresita
Dio is declared free of any obligation to return to the respondents, the Spouses Virgilio Japor and Luz Roces Japor
and Marta Japor, any surplus in the foreclosure sale price. There being no surplus, after the court below had applied
our ruling in Sulit,21 respondents could not legally claim any overprice from the petitioner, much less the amount of
₱2,247,326.00.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Ynares-Santiago, and Azcuna, JJ., concur.
Carpio, J., on official leave.
G.R. No. 189871 August 13, 2013
DARIO NACAR, PETITIONER,
vs.
GALLERY FRAMES AND/OR FELIPE BORDEY, JR., RESPONDENTS.
DECISION
PERALTA, J.:
This is a petition for review on certiorari assailing the Decision1 dated September 23, 2008 of the Court of Appeals
(CA) in CA-G.R. SP No. 98591, and the Resolution2 dated October 9, 2009 denying petitioner’s motion for
reconsideration.
The factual antecedents are undisputed.
Petitioner Dario Nacar filed a complaint for constructive dismissal before the Arbitration Branch of the National Labor
Relations Commission (NLRC) against respondents Gallery Frames (GF) and/or Felipe Bordey, Jr., docketed as
NLRC NCR Case No. 01-00519-97.
On October 15, 1998, the Labor Arbiter rendered a Decision3 in favor of petitioner and found that he was dismissed
from employment without a valid or just cause. Thus, petitioner was awarded backwages and separation pay in lieu
of reinstatement in the amount of ₱158,919.92. The dispositive portion of the decision, reads:
With the foregoing, we find and so rule that respondents failed to discharge the burden of showing that complainant
was dismissed from employment for a just or valid cause. All the more, it is clear from the records that complainant
was never afforded due process before he was terminated. As such, we are perforce constrained to grant
complainant’s prayer for the payments of separation pay in lieu of reinstatement to his former position, considering
the strained relationship between the parties, and his apparent reluctance to be reinstated, computed only up to
promulgation of this decision as follows:
SEPARATION PAY
Date Hired = August 1990
Rate = ₱198/day
Date of Decision = Aug. 18, 1998
Length of Service = 8 yrs. & 1 month
₱198.00 x 26 days x 8 months = ₱41,184.00
BACKWAGES
Date Dismissed = January 24, 1997
Rate per day = ₱196.00
Date of Decisions = Aug. 18, 1998
a) 1/24/97 to 2/5/98 = 12.36 mos.
₱196.00/day x 12.36 mos. = ₱62,986.56
b) 2/6/98 to 8/18/98 = 6.4 months
Prevailing Rate per day = ₱62,986.00
₱198.00 x 26 days x 6.4 mos. = ₱32,947.20
TOTAL = ₱95.933.76
xxxx
WHEREFORE, premises considered, judgment is hereby rendered finding respondents guilty of constructive
dismissal and are therefore, ordered:
To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred eighty-six pesos and
56/100 (₱62,986.56) Pesos representing his separation pay;
To pay jointly and severally the complainant the amount of nine (sic) five thousand nine hundred thirty-three and
36/100 (₱95,933.36) representing his backwages; and
All other claims are hereby dismissed for lack of merit.
SO ORDERED.4
Respondents appealed to the NLRC, but it was dismissed for lack of merit in the Resolution5 dated February 29,
2000. Accordingly, the NLRC sustained the decision of the Labor Arbiter. Respondents filed a motion for
reconsideration, but it was denied.6
Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On August 24, 2000, the CA issued
a Resolution dismissing the petition. Respondents filed a Motion for Reconsideration, but it was likewise denied in a
Resolution dated May 8, 2001.7
Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332. Finding no reversible
error on the part of the CA, this Court denied the petition in the Resolution dated April 17, 2002.8
An Entry of Judgment was later issued certifying that the resolution became final and executory on May 27,
2002.9 The case was, thereafter, referred back to the Labor Arbiter. A pre-execution conference was consequently
scheduled, but respondents failed to appear.10
On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his backwages be computed
from the date of his dismissal on January 24, 1997 up to the finality of the Resolution of the Supreme Court on May
27, 2002.11 Upon recomputation, the Computation and Examination Unit of the NLRC arrived at an updated amount
in the sum of ₱471,320.31.12
On December 2, 2002, a Writ of Execution13 was issued by the Labor Arbiter ordering the Sheriff to collect from
respondents the total amount of ₱471,320.31. Respondents filed a Motion to Quash Writ of Execution, arguing,
among other things, that since the Labor Arbiter awarded separation pay of ₱62,986.56 and limited backwages of
₱95,933.36, no more recomputation is required to be made of the said awards. They claimed that after the decision
becomes final and executory, the same cannot be altered or amended anymore.14 On January 13, 2003, the Labor
Arbiter issued an Order15 denying the motion. Thus, an Alias Writ of Execution16 was issued on January 14, 2003.
Respondents again appealed before the NLRC, which on June 30, 2003 issued a Resolution17 granting the appeal in
favor of the respondents and ordered the recomputation of the judgment award.
On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the NLRC to be final and
executory. Consequently, another pre-execution conference was held, but respondents failed to appear on time.
Meanwhile, petitioner moved that an Alias Writ of Execution be issued to enforce the earlier recomputed judgment
award in the sum of ₱471,320.31.18
The records of the case were again forwarded to the Computation and Examination Unit for recomputation, where
the judgment award of petitioner was reassessed to be in the total amount of only ₱147,560.19.
Petitioner then moved that a writ of execution be issued ordering respondents to pay him the original amount as
determined by the Labor Arbiter in his Decision dated October 15, 1998, pending the final computation of his
backwages and separation pay.
On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the judgment award that was due
to petitioner in the amount of ₱147,560.19, which petitioner eventually received.
Petitioner then filed a Manifestation and Motion praying for the re-computation of the monetary award to include the
appropriate interests.19
On May 10, 2005, the Labor Arbiter issued an Order20 granting the motion, but only up to the amount of ₱11,459.73.
The Labor Arbiter reasoned that it is the October 15, 1998 Decision that should be enforced considering that it was
the one that became final and executory. However, the Labor Arbiter reasoned that since the decision states that
the separation pay and backwages are computed only up to the promulgation of the said decision, it is the amount
of ₱158,919.92 that should be executed. Thus, since petitioner already received ₱147,560.19, he is only entitled to
the balance of ₱11,459.73.
Petitioner then appealed before the NLRC,21 which appeal was denied by the NLRC in its Resolution22 dated
September 27, 2006. Petitioner filed a Motion for Reconsideration, but it was likewise denied in the
Resolution23 dated January 31, 2007.
Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No. 98591.
On September 23, 2008, the CA rendered a Decision24 denying the petition. The CA opined that since petitioner no
longer appealed the October 15, 1998 Decision of the Labor Arbiter, which already became final and executory, a
belated correction thereof is no longer allowed. The CA stated that there is nothing left to be done except to enforce
the said judgment. Consequently, it can no longer be modified in any respect, except to correct clerical errors or
mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution25 dated October 9, 2009.
Hence, the petition assigning the lone error:
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED, COMMITTED GRAVE
ABUSE OF DISCRETION AND DECIDED CONTRARY TO LAW IN UPHOLDING THE QUESTIONED
RESOLUTIONS OF THE NLRC WHICH, IN TURN, SUSTAINED THE MAY 10, 2005 ORDER OF LABOR ARBITER
MAGAT MAKING THE DISPOSITIVE PORTION OF THE OCTOBER 15, 1998 DECISION OF LABOR ARBITER
LUSTRIA SUBSERVIENT TO AN OPINION EXPRESSED IN THE BODY OF THE SAME DECISION.26
Petitioner argues that notwithstanding the fact that there was a computation of backwages in the Labor Arbiter’s
decision, the same is not final until reinstatement is made or until finality of the decision, in case of an award of
separation pay. Petitioner maintains that considering that the October 15, 1998 decision of the Labor Arbiter did not
become final and executory until the April 17, 2002 Resolution of the Supreme Court in G.R. No. 151332 was
entered in the Book of Entries on May 27, 2002, the reckoning point for the computation of the backwages and
separation pay should be on May 27, 2002 and not when the decision of the Labor Arbiter was rendered on October
15, 1998. Further, petitioner posits that he is also entitled to the payment of interest from the finality of the decision
until full payment by the respondents.
On their part, respondents assert that since only separation pay and limited backwages were awarded to petitioner
by the October 15, 1998 decision of the Labor Arbiter, no more recomputation is required to be made of said
awards. Respondents insist that since the decision clearly stated that the separation pay and backwages are
"computed only up to [the] promulgation of this decision," and considering that petitioner no longer appealed the
decision, petitioner is only entitled to the award as computed by the Labor Arbiter in the total amount of
₱158,919.92. Respondents added that it was only during the execution proceedings that the petitioner questioned
the award, long after the decision had become final and executory. Respondents contend that to allow the further
recomputation of the backwages to be awarded to petitioner at this point of the proceedings would substantially vary
the decision of the Labor Arbiter as it violates the rule on immutability of judgments.
The petition is meritorious.
The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v. Court of Appeals (Sixth
Division),27 wherein the issue submitted to the Court for resolution was the propriety of the computation of the
awards made, and whether this violated the principle of immutability of judgment. Like in the present case, it was a
distinct feature of the judgment of the Labor Arbiter in the above-cited case that the decision already provided for
the computation of the payable separation pay and backwages due and did not further order the computation of the
monetary awards up to the time of the finality of the judgment. Also in Session Delights, the dismissed employee
failed to appeal the decision of the labor arbiter. The Court clarified, thus:
In concrete terms, the question is whether a re-computation in the course of execution of the labor arbiter's original
computation of the awards made, pegged as of the time the decision was rendered and confirmed with modification
by a final CA decision, is legally proper. The question is posed, given that the petitioner did not immediately pay the
awards stated in the original labor arbiter's decision; it delayed payment because it continued with the litigation until
final judgment at the CA level.
A source of misunderstanding in implementing the final decision in this case proceeds from the way the original
labor arbiter framed his decision. The decision consists essentially of two parts.
The first is that part of the decision that cannot now be disputed because it has been confirmed with finality. This is
the finding of the illegality of the dismissal and the awards of separation pay in lieu of reinstatement, backwages,
attorney's fees, and legal interests.
The second part is the computation of the awards made. On its face, the computation the labor arbiter made shows
that it was time-bound as can be seen from the figures used in the computation. This part, being merely a
computation of what the first part of the decision established and declared, can, by its nature, be re-computed. This
is the part, too, that the petitioner now posits should no longer be re-computed because the computation is already
in the labor arbiter's decision that the CA had affirmed. The public and private respondents, on the other hand, posit
that a re-computation is necessary because the relief in an illegal dismissal decision goes all the way up to
reinstatement if reinstatement is to be made, or up to the finality of the decision, if separation pay is to be given in
lieu reinstatement.
That the labor arbiter's decision, at the same time that it found that an illegal dismissal had taken place, also made a
computation of the award, is understandable in light of Section 3, Rule VIII of the then NLRC Rules of Procedure
which requires that a computation be made. This Section in part states:
[T]he Labor Arbiter of origin, in cases involving monetary awards and at all events, as far as practicable, shall
embody in any such decision or order the detailed and full amount awarded.
Clearly implied from this original computation is its currency up to the finality of the labor arbiter's decision. As we
noted above, this implication is apparent from the terms of the computation itself, and no question would have
arisen had the parties terminated the case and implemented the decision at that point.
However, the petitioner disagreed with the labor arbiter's findings on all counts - i.e., on the finding of illegality as
well as on all the consequent awards made. Hence, the petitioner appealed the case to the NLRC which, in turn,
affirmed the labor arbiter's decision. By law, the NLRC decision is final, reviewable only by the CA on jurisdictional
grounds.
The petitioner appropriately sought to nullify the NLRC decision on jurisdictional grounds through a timely filed Rule
65 petition for certiorari. The CA decision, finding that NLRC exceeded its authority in affirming the payment of 13th
month pay and indemnity, lapsed to finality and was subsequently returned to the labor arbiter of origin for
execution.
It was at this point that the present case arose. Focusing on the core illegal dismissal portion of the original labor
arbiter's decision, the implementing labor arbiter ordered the award re-computed; he apparently read the figures
originally ordered to be paid to be the computation due had the case been terminated and implemented at the labor
arbiter's level. Thus, the labor arbiter re-computed the award to include the separation pay and the backwages due
up to the finality of the CA decision that fully terminated the case on the merits. Unfortunately, the labor arbiter's
approved computation went beyond the finality of the CA decision (July 29, 2003) and included as well the payment
for awards the final CA decision had deleted - specifically, the proportionate 13th month pay and the indemnity
awards. Hence, the CA issued the decision now questioned in the present petition.
We see no error in the CA decision confirming that a re-computation is necessary as it essentially considered the
labor arbiter's original decision in accordance with its basic component parts as we discussed above. To reiterate,
the first part contains the finding of illegality and its monetary consequences; the second part is the computation of
the awards or monetary consequences of the illegal dismissal, computed as of the time of the labor arbiter's original
decision.28
Consequently, from the above disquisitions, under the terms of the decision which is sought to be executed by the
petitioner, no essential change is made by a recomputation as this step is a necessary consequence that flows from
the nature of the illegality of dismissal declared by the Labor Arbiter in that decision.29 A recomputation (or an
original computation, if no previous computation has been made) is a part of the law – specifically, Article 279 of the
Labor Code and the established jurisprudence on this provision – that is read into the decision. By the nature of an
illegal dismissal case, the reliefs continue to add up until full satisfaction, as expressed under Article 279 of the
Labor Code. The recomputation of the consequences of illegal dismissal upon execution of the decision does not
constitute an alteration or amendment of the final decision being implemented. The illegal dismissal ruling stands;
only the computation of monetary consequences of this dismissal is affected, and this is not a violation of the
principle of immutability of final judgments.30
That the amount respondents shall now pay has greatly increased is a consequence that it cannot avoid as it is the
risk that it ran when it continued to seek recourses against the Labor Arbiter's decision. Article 279 provides for the
consequences of illegal dismissal in no uncertain terms, qualified only by jurisprudence in its interpretation of when
separation pay in lieu of reinstatement is allowed. When that happens, the finality of the illegal dismissal decision
becomes the reckoning point instead of the reinstatement that the law decrees. In allowing separation pay, the final
decision effectively declares that the employment relationship ended so that separation pay and backwages are to
be computed up to that point.31
Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines, Inc. v. Court of
Appeals,32 the Court laid down the guidelines regarding the manner of computing legal interest, to wit:
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows:
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand
can be established with reasonable certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made,
the interest shall begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from
such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.33
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796 dated May
16, 2013, approved the amendment of Section 234 of Circular No. 905, Series of 1982 and, accordingly, issued
Circular No. 799,35 Series of 2013, effective July 1, 2013, the pertinent portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following revisions governing the
rate of interest in the absence of stipulation in loan contracts, thereby amending Section 2 of Circular No. 905,
Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in
judgments, in the absence of an express contract as to such rate of interest, shall be six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.136 of the Manual of Regulations for Banks and Sections
4305Q.1,37 4305S.338 and 4303P.139 of the Manual of Regulations for Non-Bank Financial Institutions are hereby
amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that would govern the
parties, the rate of legal interest for loans or forbearance of any money, goods or credits and the rate allowed in
judgments shall no longer be twelve percent (12%) per annum - as reflected in the case of Eastern Shipping
Lines40 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.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B. Olaguer v. Bangko Sentral
Monetary Board,41 this Court affirmed the authority of the BSP-MB to set interest rates and to issue and enforce
Circulars when it ruled that "the BSP-MB may prescribe the maximum rate or rates of interest for all loans or
renewals thereof or the forbearance of any money, goods or credits, including those for loans of low priority such as
consumer loans, as well as such loans made by pawnshops, finance companies and similar credit institutions. It
even authorizes the BSP-MB to prescribe different maximum rate or rates for different types of borrowings, including
deposits and deposit substitutes, or loans of financial intermediaries."
Nonetheless, with regard to those judgments that have become final and executory prior to July 1, 2013, said
judgments shall not be disturbed and shall continue to be implemented applying the rate of interest fixed therein. 1awp++i1
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Lines42 are
accordingly modified to embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of
the Civil Code govern in determining the measure of recoverable damages. 1âwphi1
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the
rate of interest, as well as the accrual thereof, is imposed, as follows:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest
shall be 6% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil Code.
When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of
damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however,
shall be adjudged on unliquidated claims or damages, except when or until the demand can be established with
reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such
certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only
from the date the judgment of the court is made (at which time the quantification of damages may be deemed to
have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on
the amount finally adjudged.
When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall not be
disturbed and shall continue to be implemented applying the rate of interest fixed therein.
WHEREFORE, premises considered, the Decision dated September 23, 2008 of the Court of Appeals in CA-G.R.
SP No. 98591, and the Resolution dated October 9, 2009 are REVERSED and SET ASIDE. Respondents are
Ordered to Pay petitioner:
(1) backwages computed from the time petitioner was illegally dismissed on January 24, 1997 up to May 27,
2002, when the Resolution of this Court in G.R. No. 151332 became final and executory;
(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one month pay per year of
service; and
(3) interest of twelve percent (12%) per annum of the total monetary awards, computed from May 27, 2002
to June 30, 2013 and six percent (6%) per annum from July 1, 2013 until their full satisfaction.
The Labor Arbiter is hereby ORDERED to make another recomputation of the total monetary benefits awarded and
due to petitioner in accordance with this Decision.
SO ORDERED.
DIOSDADO M. PERALTA
Associate Justice
WE CONCUR:
MARIA LOURDES P. A. SERENO

Chief Justice
ANTONIO T. CARPIO PRESBITERO J. VELASCO, JR.

TERESITA J. LEONARDO-DE CASTRO ARTURO D. BRION

LUCAS P. BERSAMIN MARIANO C. DEL CASTILLO

ROBERTO A. ABAD MARTIN S VILLARAMA, JR.

JOSE PORTUGAL PEREZ JOSE CATRAL MENDOZA

BIENVENIDO L. REYES ESTELA M. PERLAS-BERNABE

MARVIC MARIO VICTOR F. LEONEN

Associate Justice
CERTIFICATION
Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court.

Chief Justice
G.R. No. 212689 August 6, 2014
ECE REALTY and DEVELOPMENT, INC., Petitioner,

vs.
HAYDYN HERNANDEZ, Respondent.
RESOLUTION
REYES, J.:
This is a Petition for Review on Certiorari from the Decision dated November 4, 2013 of the Court of Appeals (CA)
1 2
in CA-G.R. SP No. 120738, which affirmed with modification the Decision dated January 10, 2011 of the Office of
3
the President (OP) in O.P. Case Number 09-D-152, entitled, "The Housing and Land Use Regulatory Board and
Haydyn Hernandez v. ECE Realty and Development Corporation." The fallo of the appellate court's decision reads:
We AFFIRM the assailed Decision of the Office of the President in O.P. Case Number 09-D-152, with
MODIFICATION: We DIRECT petitioner ECE REALTY AND DEVELOPMENT INC., to pay respondent Haydyn
Hernandez, the amount of [P]452,551.65 (representing the total amount respondent Hernandez paid petitioner
ECE), plus 6% interest per annum starting 07 September 2006, and 12% interest per annum from the time the
judgment becomes final and executor[y], until fully paid.
IT IS SO ORDERED. 4
On September 7, 2006, Haydyn Hernandez (respondent) filed a Complaint for specific performance, with damages,
against Emir Realty and Development Corporation (EMIR) and ECE Realty and Development Incorporated (ECE)
before the Housing and Land Use Regulatory Board Expanded National Capital Region Field Office (HLURB-
Regional Office). The respondent alleged that ECE and EMIR, engaged in condominium development and
marketing,respectively, sold tohim a 30-square meter condominium unit in the "Harrison Mansion" described as Unit
808, Building B, Phase 1 (Unit 808). On July 22, 1997 the respondent paid the reservation fee of ₱35,000.00, and
on August 2, 1997 he paid ₱104,063.65 to complete the downpayment. In the parties’ Contract to Sell dated
5 6
November 5, 1997, EMIR and ECE promised that Unit 808 would be ready for occupancy by December 31, 1999.
EMIR and ECE failed to deliver Unit 808 to the respondent on December 31, 1999, by which date he had already
paid a total of ₱452,551.65. Moreover, the respondentdiscovered that Unit 808 contained only 26 sq m, not 30 sq m
as contracted, thus, he asked for a corresponding reduction in the price by ₱120,000.00, based on the price per sq
m of ₱30,000.00. Instead, EMIR and ECE demanded that he settle all his amortizations in arrears with interest.
Sometime in 2005, the respondent learned that EMIR and ECE had sold Unit 808 to a third party. 7
The respondent in his complaint inthe HLURB asked that EMIR and ECE be ordered to accept his payment of the
balance of the price of Unit 808, less ₱120,000.00, without interest; and to pay him moral damages of ₱500,000.00,
actual damages of ₱100,000.00, exemplary damages of ₱100,000.00, and attorney’s fees of ₱50,000.00 plus
₱2,000.00 per appearance fee. If Unit 808 is no longer available, the respondent asked that EMIR and ECE
reimburse him the amountof ₱452,551.65 he paid, plus legal interest. 8
In their Answer with Counterclaim, EMIR and ECE sought to dismiss the complaint for lack of cause of action, and to
drop EMIR as defendant because it has no contractual relations with the respondent. They alleged that the
9
respondent unjustifiably refused to accept the turn-over of Unit 808, that he was duly given a Grace Period
Notice that he was in arrears in his monthly amortizations, but the respondentlet the said period lapse without
10
settling his past-due amortizations. Thus, ECE was compelled to cancel his contract to sell, invoking RepublicAct
No. 6552 (An Act to provide protection to buyers of Real Estate on Installment Payments). EMIR and ECE also
sought exemplary damages, attorney’s fees, and litigation expenses.
On May 12, 2008, the HLURB-Regional Office ordered EMIR and ECE to reimburse the respondent the amount of
₱452,551.65, plus legal interest, from the filing of the complaint, and to pay the respondent ₱50,000.00 as moral
damages, ₱50,000.00 as attorney’s fees, and ₱50,000.00 as exemplary damages. 11
EMIR and ECE appealed to the HLURB Board of Commissioners, which in its Decision dated January 23, 2009
12
upheld the HLURB-Regional Office but dropped EMIR as defendant. ECE appealed to the OP, but the OP in its
Decision dated January 10, 2011 dismissed ECE’s appeal. On July 5, 2011, the OP denied ECE’s motion for
13
reconsideration.
On petition for review to the CA, ECE argued that the OP erred in affirming the rescission of the parties’ contract to
sell and the order to refund the respondent’s payments with legal interest from filing of the complaint, along with the
award of moral and exemplary damages and attorney’s fees to the respondent. ECE pointed out that the respondent
did not ask for rescission and refund on account of the delay in the delivery of Unit 808, but only for a reduction in
the price. It further argued that interest may be imposed only from finality of judgment.Insisting that it was not in bad
faith, ECE sought the deletion of the award for damages and attorney’s fees, saying also that they are excessive.
In upholding the OP, the CA cited Section 23 of Presidential Decree (P.D.) No. 957 (Regulating the Sale of
Subdivision Lots and Condominiums, Providing for Penalties for Violations Thereof), which reads:
Sec. 23. Non-Forfeiture of Payments. No installment payment made by a buyer in a subdivision or condominium
project for the lot or unit he contracted to buy shall be forfeited in favor of the owner or developer when the buyer,
after due notice to the owner or developer, desists from further payment due to the failure of the owner or developer
to develop the subdivision or condominium project according to the approved plans and within the time limit for
complying with the same. Such buyer may, at his option, be reimbursed the total amount paid including amortization
interests but excluding delinquency interests, with interest thereon at the legal rate. The CA found that the
respondent duly notified ECE that he was suspending his subsequent amortizationsbecause of the delayed delivery
of Unit 808. The CA then ruled that under P.D. No. 957, when the owner of the subdivision or condominium fails to
develop the same according to the plan within the period agreed, the buyer, after notifying the owner, may desist
from paying the balance, and may demand the reimbursement of all that he has paid. ECE failed to deliver Unit 808
on or before December 31, 1999, even as the said unit measured only 26 sq m, not 30 sqm as agreed. As also
found by the CA, by ECE’s own evidence Unit 808 was ready for inspection only on June 28, 2002, or two and a half
years after the agreed date of delivery. But the CA deleted the award of moral and exemplary damages, finding that
ECE did not act in bad faith, while sustaining the award of ₱50,000.00 as attorney’s fees pursuant to Article 2208 (2)
of the Civil Code, since ECE’s act or omission compelled the respondent to litigate.
On the imposition of six percent (6%)interest, the appellate court cites Eastern Shipping Lines, Inc. v. Court of
Appeals and in Fil-Estate Properties, Inc. v. Spouses Go, the amount to be refunded being neither a loan nor a
14 15
forbearance of money, goods or credit.
On petition to this Court, the petitioner ECE reiterated all the arguments it proffered before the CA.
Our Ruling
We resolve to affirm the CA decision with modification, by reducing the interest imposable after finality fromtwelve
percent (12%) to six percent (6%).
Article 2209 of the New Civil Code 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." There is no doubt that ECE incurred in delay in delivering the subject condominium unit, for which reason
the trial court was justified inawarding interest to the respondent from the filing of his complaint. There being no
stipulation as to interest, under Article 2209 the imposable rate is six percent (6%) by way of damages, following the
guidelines laid down in the landmark case of Eastern Shipping Lines v. Court of Appeals: 16
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:
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, notconstituting a loan or forbearance of money, is breached, an interest on the

amount of damages awarded may be imposed at the discretion of the courtat the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand
can be established with reasonable certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially(Art. 1169,
Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made,
the interest shall begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally adjudged. 3. When the judgment of
the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case
falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. 17
As further clarified in Sunga-Chan, et al. v. Court of Appeals, et al.: 18
In Reformina v. Judge Tomol, Jr., the Court held that the legal interest at 12% per annumunder Central Bank (CB)
Circular No. 416 shall be adjudged only in cases involving the loan or forbearance of money. And for transactions
involving payment of indemnities in the concept of damages arising from default in the performance of obligations in
general and/or for money judgment not involving a loan or forbearance of money, goods, or credit, the governing
provision is Art. 2209 of the Civil Code prescribing a yearly6% interest. Art. 2209 pertinently provides: Art. 2209. If
the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for
damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the
absence of stipulation, the legal interest, which is six per cent per annum.
The term "forbearance," within the context of usury law, has been described as a contractual obligation ofa lender or
creditor to refrain, during a given period of time, from requiring the borrower or debtor to repay the loan or debt then
due and payable.
Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the applicable rate, as
follows: The 12% per annum rate under CB CircularNo. 416 shall apply only to loans or forbearance of money,
goods, or credits, as well as to judgments involving such loan or forbearance of money, goods, or credit, while the
6%per annumunder Art. 2209 of the Civil Code applies "when the transaction involves the payment ofindemnities in
the concept of damage arising from the breach or a delay in the performance of obligations in general," with the
application ofboth rates reckoned "from the time the complaint was filed until the [adjudged] amount is fully paid." In
either instance, the reckoning period for the commencement of the running of the legal interest shall besubject to
the condition "that the courts are vested with discretion, depending on the equities of each case, on the award of
interest." (Emphasis ours)
19
Thus, from the finality of the judgment awarding a sum of money until it is satisfied, the award shall beconsidered a
forbearance of credit, regardless of whether the award in fact pertained to one. Pursuant to Central Bank Circular
20
No. 416 issued on July 29, 1974, in the absence of written stipulation the interest rate to be imposed in judgments
involving a forbearance of credit was twelve percent (12%) per annum, up from six percent (6%) under Article 2209
of the Civil Code. This was reiterated in Central Bank Circular No. 905, which suspended the effectivity of the Usury
1âwphi1
Law beginning on January 1, 1983.
But since July 1, 2013, the rate of twelve percent (12%) per annum from finality of the judgment until satisfaction has
been brought back to six percent (6%). Section 1 of Resolution No. 796 of the Monetary Board of the Bangko
Sentral ng Pilipinas dated May 16, 2013 provides: "The rate of interest for the loan or forbearance of any money,
goods or credits and the rate allowed in judgments, in the absence of an express contract as to such rate of interest,
shall be six percent (6%) per annum." Thus, the rate of interest to be imposed from finality of judgments is now back
at six percent (6%), the rate provided in Article 2209 of the Civil Code.
WHEREFORE, the decision of the Court of Appeals in CA-G.R. SP No. 120738 is AFFIRMED with MODIFICATION.
Petitioner ECE Realty and Development, Inc. is hereby ordered to pay respondent Haydyn Hernandez the amount
of ₱452,551.65 representing the total amount he paid to petitioner ECE Realty and Development Incorporated, plus
six percent (6%) interest per annum from September 7, 2006 until finality hereof by way of actual and compensatory
damages. From finality until full satisfaction, the total amount due now compounded with interest due from
September 7, 2006 up to finality, shall likewise earn interest at six percent (6%) per annum until fully paid.
SO ORDERED.
BIENVENIDO L. REYES
Associate Justice
WE CONCUR:
MARIA LOURDES P.A. SERENO

Chief Justice
Chairperson
LUCAS P. BERSAMIN* MARTIN S. VILLARAMA, JR.

JOSE CATRAL MENDOZA**

Associate Justice
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above Resolution had
been reached in consultation before the case was assigned to the writer of the opinion of the Court's Division.

Chief Justice
G.R. No. 183360 September 8, 2014
ROLANDO C. DE LA PAZ,* Petitioner,
vs.
L & J DEVELOPMENT COMPANY, Respondent.
DECISION
DEL CASTILLO, J.:
"No interest shall be due unless it has been expressly stipulated in writing." 1
This is a Petition for Review on Certiorari assailing the February 27, 2008 Decision of the Court of Appeals (CA) in
2 3
CA-G.R. SP No. 100094, which reversed and set aside the Decision dated April 19, 2007 of the Regional Trial
4
Court (RTC), Branch 192, Marikina City in Civil Case No. 06-1145-MK. The said RTC Decision affirmed in all
respects the Decision dated June 30, 2006 of the Metropolitan Trial Court (MeTC), Branch 75, Marikina City in Civil
5
Case No. 05-7755, which ordered respondent L & J Development Company (L&J) to pay petitioner Architect
Rolando C. De La Paz (Rolando) its principal obligation of ₱350,000.00, plus 12% interest per annumreckoned from
the filing of the Complaint until full payment of the obligation.
Likewise assailed is the CA’s June 6, 2008 Resolution which denied Rolando’s Motion for Reconsideration.
6
Factual Antecedents
On December 27, 2000, Rolando lent ₱350,000.00 without any security to L&J, a property developer with Atty.
Esteban Salonga (Atty. Salonga) as its President and General Manager. The loan, with no specified maturity date,
carried a 6% monthly interest, i.e., ₱21,000.00. From December 2000 to August 2003, L&J paid Rolando a total of
₱576,000.00 representing interest charges.
7
As L&J failed to pay despite repeated demands, Rolando filed a Complaint for Collection of Sum of Money with
8
Damages against L&J and Atty. Salonga in his personal capacity before the MeTC, docketed as Civil Case No. 05-
7755. Rolando alleged, amongothers, that L&J’s debtas of January 2005, inclusive of the monthly interest, stood at
₱772,000.00; that the 6% monthly interest was upon Atty. Salonga’s suggestion; and, that the latter tricked him into
parting with his money without the loan transaction being reduced into writing.
In their Answer, L&J and Atty. Salonga denied Rolando’s allegations. While they acknowledged the loan as a
9
corporate debt, they claimed that the failure to pay the same was due to a fortuitous event, that is, the financial
difficulties brought about by the economic crisis. They further argued that Rolando cannot enforce the 6% monthly
interest for being unconscionable and shocking to the morals. Hence, the payments already made should be applied
to the ₱350,000.00 principal loan.
During trial, Rolando testified that he had no communication with Atty. Salonga prior to the loan transaction but
knew him as a lawyer, a son of a former Senator, and the owner of L&J which developed Brentwood Subdivision in
Antipolo where his associate Nilo Velasco (Nilo) lives. When Nilo told him that Atty. Salonga and L&J needed money
to finish their projects, heagreed to lend them money. He personally met withAtty. Salonga and their meeting was
cordial.
He narrated that when L&J was in the process of borrowing the ₱350,000.00 from him, it was Arlene San Juan
(Arlene), the secretary/treasurer of L&J, who negotiated the terms and conditions thereof.She said that the money
was to finance L&J’s housing project. Rolando claimed that it was not he who demanded for the 6% monthly
interest. It was L&J and Atty. Salonga, through Arlene, who insisted on paying the said interest as they asserted that
the loan was only a short-term one.
Ruling of the Metropolitan Trial Court
The MeTC, in its Decision of June 30, 2006, upheld the 6% monthly interest. In so ruling, it ratiocinated that since
10
L&J agreed thereto and voluntarily paid the interest at suchrate from 2000 to 2003, it isalready estopped from
impugning the same. Nonetheless, for reasons of equity, the saidcourt reduced the interest rate to 12% per
annumon the remaining principal obligation of ₱350,000.00. With regard to Rolando’s prayer for moral damages, the
MeTC denied the same as it found no malice or bad faith on the part ofL&J in not paying the obligation. It likewise
relieved Atty. Salonga of any liability as it found that he merely acted in his official capacity in obtaining the loan. The
MeTC disposed of the case as follows:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff, Arch. Rolando C. Dela
Paz, and against the defendant, L & J Development Co., Inc., as follows:
a) ordering the defendant L & J Development Co., Inc. to pay plaintiff the amount of Three Hundred Fifty
Thousand Pesos (₱350,000.00) representing the principal obligation, plus interest at the legal rate of 12%
per annum to be computed from January 20, 2005, the date of the filing of the complaint, until the whole
obligation is fully paid;
b) ordering the defendant L & J Development Co., Inc. to pay plaintiff the amount of Five Thousand Pesos
(₱5,000.00) as and for attorney’s fees; and
c) to pay the costs of this suit.
SO ORDERED. 11
L&J appealed to the RTC. It asserted in its appeal memorandum that from December 2000 to March 2003, it paid
12
monthly interest of ₱21,000.00 based on the agreed-upon interest rate of 6%monthly and from April 2003 to August
2003, interest paymentsin various amounts. The total of interest payments made amounts to ₱576,000.00 – an
13
amount which is even more than the principal obligation of ₱350,000.00
L&J insisted that the 6% monthly interest rate is unconscionable and immoral. Hence, the 12% per annumlegal
interest should have been applied from the time of the constitution of the obligation. At 12% per annum interest rate,
it asserted that the amount of interestit ought to pay from December 2000 to March 2003 and from April 2003 to
August 2003, only amounts to ₱105,000.00. If this amount is deducted from the total interest paymentsalready
made, which is ₱576,000.00, the amount of ₱471,000.00 appears to have beenpaid over and above what is due.
Applying the rule on compensation, the principal loan of ₱350,000.00 should be set-off against the ₱471,000.00,
resulting in the complete payment of the principal loan.
Unconvinced, the RTC, inits April 19, 2007 Decision, affirmed the MeTC Decision, viz: WHEREFORE, premises
14
considered, the Decision appealed from is hereby AFFIRMED in all respects, with costs against the appellant.
SO ORDERED. 15
Undaunted, L&J went to the CA and echoed its arguments and proposed computation as proffered before the RTC.
In a Decision dated February 27, 2008, the CAreversed and set aside the RTC Decision. The CA stressed that the
16
parties failedto stipulate in writing the imposition of interest on the loan. Hence, no interest shall be due thereon
pursuant to Article 1956 of the Civil Code. And even if payment of interest has been stipulated in writing, the 6%
17
monthly interest is still outrightly illegal and unconscionable because it is contrary to morals, if not against the law.
Being void, this cannot be ratified and may be set up by the debtor as defense. For these reasons, Rolando cannot
collect any interest even if L&J offered to pay interest. Consequently, he has to return all the interest payments of
₱576,000.00 to L&J.
Considering further that Rolando and L&J thereby became creditor and debtor of each other, the CA applied the
principle of legal compensation under Article 1279 of the Civil Code. Accordingly, it set off the principal loan of
18
₱350,000.00 against the ₱576,000.00 total interest payments made, leaving an excess of ₱226,000.00, which the
CA ordered Rolando to pay L&J plus interest. Thus:
WHEREFORE, the DECISION DATED APRIL 19, 2007 is REVERSED and SET ASIDE.
CONSEQUENT TO THE FOREGOING, respondent Rolando C. Dela Paz is ordered to pay to the petitioner the
amount of ₱226,000.00,plus interest of 12% per annumfrom the finality of this decision.
Costs of suit to be paid by respondent Dela Paz.
SO ORDERED. 19
In his Motion for Reconsideration, Rolando argued thatthe circumstances exempt both the application of Article
20
1956 and of jurisprudence holding that a 6% monthly interest is unconscionable, unreasonable, and exorbitant. He
alleged that Atty. Salonga, a lawyer, should have taken it upon himself to have the loan and the stipulated rate of
interest documented but, by way of legal maneuver, Atty. Salonga, whom he fully trusted and relied upon, tricked
him into believing that the undocumented and uncollateralized loan was withinlegal bounds. Had Atty. Salonga told
him that the stipulated interest should be in writing, he would have readily assented. Furthermore, Rolando insisted
that the 6% monthly interest ratecould not be unconscionable as in the first place, the interest was not imposed by
the creditor but was in fact offered by the borrower, who also dictated all the terms of the loan. He stressed that in
cases where interest rates were declared unconscionable, those meant to be protected by such declaration are
helpless borrowers which is not the case here.
Still, the CA denied Rolando’s motion in its Resolution of June 6, 2008.
21
Hence, this Petition.
The Parties’ Arguments
Rolando argues that the 6%monthly interest rateshould not have been invalidated because Atty. Salonga took
advantage of his legal knowledge to hoodwink him into believing that no document was necessaryto reflect the
interest rate. Moreover, the cases anent unconscionable interest rates that the CA relied upon involve lenders who
imposed the excessive rates,which are totally different from the case at bench where it is the borrower who decided
on the high interest rate. This case does not fall under a scenariothat ‘enslaves the borrower or that leads to the
hemorrhaging of his assets’ that the courts seek to prevent.
L&J, in controverting Rolando’s arguments, contends that the interest rate is subject of negotiation and is
agreedupon by both parties, not by the borrower alone. Furthermore, jurisprudence has nullified interestrates on
loans of 3% per month and higher as these rates are contrary to moralsand public interest. And while Rolando
raises bad faithon Atty. Salonga’s part, L&J avers thatsuch issue is a question of fact, a matter that cannot be raised
under Rule 45.
Issue
The Court’s determination of whether to uphold the judgment of the CA that the principal loan is deemed paid
isdependent on the validity of the monthly interest rate imposed. And in determining such validity, the Court must
necessarily delve into matters regarding a) the form of the agreement of interest under the law and b) the alleged
unconscionability of the interest rate. Our Ruling
The Petition is devoid of merit.
The lack of a written stipulation to pay interest on the loaned amount disallows a creditor from charging monetary
interest.
Under Article 1956 of the Civil Code, no interest shall bedue unless it has been expressly stipulated in writing.
Jurisprudence on the matter also holds that for interest to be due and payable, two conditions must concur: a)
express stipulation for the payment of interest; and b) the agreement to pay interest is reduced in writing.
Here, it is undisputed that the parties did not put down in writing their agreement. Thus, no interest is due. The
collection of interest without any stipulation in writing is prohibited by law.
22
But Rolando asserts that his situation deserves an exception to the application of Article 1956. He blames Atty.
Salonga for the lack of a written document, claiming that said lawyer used his legal knowledge to dupe him. Rolando
thus imputes bad faith on the part of L&J and Atty. Salonga. The Court, however, finds no deception on the partof
L&J and Atty. Salonga. For one, despite the lack of a document stipulating the payment of interest, L&J
nevertheless devotedly paid interests on the loan. It only stopped when it suffered from financial difficulties that
prevented it from continuously paying the 6% monthly rate. For another,regardless of Atty. Salonga’s profession,
Rolando who is an architect and an educated man himself could have been a more reasonably prudent person
under the circumstances. To top it all, he admitted that he had no prior communication with Atty. Salonga. Despite
Atty. Salonga being a complete stranger, he immediately trusted him and lent his company ₱350,000.00, a
significant amount. Moreover, as the creditor,he could have requested or required that all the terms and conditions
of the loan agreement, which include the payment of interest, be put down in writing to ensure that he and L&J are
on the same page. Rolando had a choice of not acceding and to insist that their contract be put in written form as
this will favor and safeguard him as a lender. Unfortunately, he did not. It must be stressed that "[c]ourts cannot
follow one every step of his life and extricate him from bad bargains, protect him from unwise investments, relieve
him from one-sided contracts,or annul the effects of foolish acts. Courts cannotconstitute themselves guardians of
persons who are not legally incompetent." 23
It may be raised that L&J is estopped from questioning the interest rate considering that it has been paying Rolando
interest at such ratefor more than two and a half years. In fact, in its pleadings before the MeTCand the RTC, L&J
merely prayed for the reduction of interest from 6% monthly to 1% monthly or 12% per annum. However, in Ching v.
Nicdao, the daily payments of the debtor to the lender were considered as payment of the principal amount of the
24
loan because Article 1956 was not complied with. This was notwithstanding the debtor’s admission that the
payments made were for the interests due. The Court categorically stated therein that "[e]stoppel cannot give
validity to an act that is prohibited by law or one thatis against public policy."
Even if the payment of interest has been reduced in writing, a 6% monthly interest rate on a loan is unconscionable,
regardless of who between the parties proposed the rate.
Indeed at present, usury has been legally non-existent in view of the suspension of the Usury Law by Central Bank
25
Circular No. 905 s. 1982. Even so, not all interest rates levied upon loans are permitted by the courts as they have
26
the power to equitably reduce unreasonable interest rates. In Trade & Investment Development Corporation of the
Philippines v. Roblett Industrial Construction Corporation, we said:
27
While the Court recognizes the right of the parties to enter into contracts and who are expectedto comply with their
terms and obligations, this rule is not absolute. Stipulated interest rates are illegal if they are unconscionable and
the Court is allowed to temper interest rates when necessary. In exercising this vested power to determine what is
iniquitous and unconscionable, the Court must consider the circumstances of each case. What may be iniquitous
and unconscionable in onecase, may be just in another. x x x 28
Time and again, it has been ruled in a plethora of cases that stipulated interest rates of 3% per month and higher,
are excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for being contrary to morals, if
not against the law. The Court, however, stresses that these rates shall be invalidated and shall be reduced only in
29
cases where the terms of the loans are open-ended, and where the interest rates are applied for an indefinite
period. Hence, the imposition of a specific sum of ₱40,000.00 a month for six months on a ₱1,000,000.00 loan is
not considered unconscionable. 30
In the case at bench, there is no specified period as to the payment of the loan. Hence, levying 6% monthly or 72%
interest per annumis "definitely outrageous and inordinate." The situation that it was the debtor who insisted on the
31
interest rate will not exempt Rolando from a ruling that the rate is void. As this Court cited in Asian Cathay Finance
and Leasing Corporation v. Gravador, "[t]he imposition of an unconscionable rate of interest on a money debt, even
32
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." Indeed, "voluntariness does notmake
33
the stipulation on [an unconscionable] interest valid."

34
As exhaustibly discussed,no monetary interest isdue Rolando pursuant to Article 1956. The CA thus correctly
1âwphi1
adjudged that the excess interest payments made by L&J should be applied to its principal loan. As computed by
the CA, Rolando is bound to return the excess payment of ₱226,000.00 to L&J following the principle of solutio
indebiti.
35
However, pursuant to Central Bank Circular No. 799 s. 2013 which took effect on July 1, 2013, the interest imposed
36
by the CA must be accordingly modified. The ₱226,000.00 which Rolando is ordered to pay L&J shall earn an
interest of 6% per annumfrom the finality of this Decision.
WHEREFORE, the Decision dated February 27, 2008 of the Court of Appeals in CA-G.R. SP No. 100094 is hereby
AFFIRMED with modification that petitioner Rolando C. De La Paz is ordered to pay respondent L&J Development
Company the amount of ,₱226,000.00, plus interest of 6o/o per annum from the finality of this Decision until fully
paid.
SO ORDERED.

Associate Justice
WE CONCUR:
ANTONIO T. CARPIO**
Associate Justice
ARTURO D. BRION MARTIN S. VILLARAMA, JR.***

MARVIC MARIO VICTOR F. LEONEN

Associate Justice
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above Decision had been
reached in consultation before the case was assigned to the writer of the opinion of the Court's Division.
ANTONIO T. CARPIO
Associate Justice
Acting Chief Justice
G.R. No. 210831 November 26, 2014
SPOUSES TAGUMPAY N. ALBOS and AIDA C. ALBOS, Petitioners,

vs.
SPOUSES NESTOR M. EMBISAN and ILUMINADA A. EMBISAN, DEPUTY SHERIFF MARINO V. CACHERO,
and the REGISTER OF DEEDS OF QUEZON CITY, Respondents.
DECISION
VELASCO, JR., J.:
Nature of the Case
Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking the reversal and
the setting aside of the Decision of the Court of Appeals (CA) dated May 29, 2013 and its Resolution dated January
1
13, 2014 in CA-G.R. CV No. 93667. Said rulings upheld the validity of the extra-judicial foreclosure sale over the
property that petitioners, spouses Tagumpay and Aida Albos, mortgaged in favor of private respondents.
The Facts
On October 17, 1984, petitioners entered into an agreement, denominated as "Loan with Real Estate Mortgage,
" with respondent spouses Nestor and Iluminada Embisan (spouses Embisan) in the amount of ₱84,000.00 payable
2
within 90 days with a monthly interest rate of 5%. To secure the indebtedness, petitioners mortgaged to the spouses
Embisan a parcel of land in Project 3, Quezon City, measuring around 207.6 square meters and registered under
their name, as evidenced by Transfer Certificate Title No. 257697. 3
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 the petitioners requested a third
extension, as will later be alleged by the respondent spouses, anadditional 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. On February 9, 1987, respondent spouses addressed a letter to petitioners
4
demanding the payment of ₱234,021.90, representing the unpaid balance and interests from the loan. This was
followed, on April 14, 1987, by another letter of the same tenor, but this time demanding from the petitioners the
5
obligation due amounting to ₱258,009.15.
Obviously in a bid to prevent the foreclosure of their mortgaged property, petitioners paid respondent spouses the
sum of ₱44,500.00 on October 2, 1987. The respondent spouses accepted the partial payment of the principal loan
amount owed to them, which, based on the Statement of Account6 the respondent spouses prepared, by that time,
has already ballooned to ₱296,658.70. As extrapolated from the Statement of Account:
1âwphi1
Month Year Loan Interest Payment Balance

October 1984 84,000.00 84,000.00
November 1984 4,200.00 8,000.00 80,200.00
December 1984 4,200.00 84,400.00
January 1985 4,200.00 4,000.00 84,600.00
February 1985 4,200.00 88,800.00
March 1985 4,200.00 93,000.00
April 1985 4,200.00 97,200.00
May 1985 4,200.00 101,400.00
June 1985 4,200.00 105,600.00
July 1985 4,200.00 109,800.00
August 1985 4,200.00 114,000.00
September 1985 4,200.00 118,200.00
October 1985 4,200.00 122,400.00
November 1985 4,200.00 126,600.00
December 1985 4,200.00 130,800.00
January 1986 4,200.00 135,000.00
February 1986 4,200.00 139,200.00
March 1986 4,200.00 143,400.00
April 1986 4,200.00 147,600.00
May 1986 4,200.00 151,800.00
June 1986 7,590.00 159,390.00
July 1986 7,969.50 167,359.50
August 1986 8,367.98 175,727.45
September 1986 8,786.37 184,513.82
October 1986 9,225.69 192,739.50
November 1986 9,417.50 202,157.00
December 1986 10,107.75 212,264.75
January 1987 10,613.25 222,878.00
February 1987 11,143.90 234,021.90
March 1987 11,701.10 245,723.00
April 1987 12,286.15 258,009.15
May 1987 12,900.45 270,909.60
June 1987 13,545.48 284,455.10
July 1987 14,222.75 298,677.85
August 1987 14,933.90 313,611.75
September 1987 15,680.60 329,292.35
October 1987 44,500.00 284,792.35
Interest for 15 days 7,119.80 291,912.15
Interest for 10 days 4,746.55 296,658.70
Due to petitioners’ failure to settle their indebtedness, respondent spouses proceeded to extra-judicially foreclose
the mortgaged property on October 12, 1987. At the auction sale conducted by the respondent sheriff, respondent
spouses emerged as the highest bidders at ₱330,000.00 and were later issued a Sheriff’s Certificate of Sale. 7
The property was never redeemed, and so the respondent spouses executed an Affidavit of Consolidation over the
8
property on November 23, 1988. The affidavit was subsequently registered with the Registry of Deeds of Quezon
City, consolidating ownership to the spouses Embisan. Petitioners alleged that afterwards, on February 4, 1989,
they were pressured by the respondent spouses to execute a Contract of Lease over the property wherein the
9
petitioners, as lessees, are obligated to pay the respondent spouses, as lessors, monthly rent in the amount of
₱2,500.00.
On August 14, 1989, herein petitioners filed a complaint for the annulment of the Loan with Real Estate Mortgage,
Certificate of Sale, Affidavit of Consolidation, Deed of Final Sale, and Contract of Lease before the Regional Trial
Court of Quezon City (RTC). In their complaint, docketed as Civil Case No. 89-3246, and later raffled to Branch 99
of the court, petitioners alleged that the foreclosure sale is void because respondents only released ₱60,000.00 out
of the ₱84,000.00 amount loaned, which has already been paid. As petitioner Aida Albos testified during trial, she
was able to pay ₱50,000 out of the ₱60,000 principal loan released, and also ₱4,500.00 monthly interests, as
evidenced by receipts dated December 19, 1984 and February 9, 1985. 10
In their Answer, the spouses Embisan countered that the loan was legally and validly entered at arms length after a
series of meetings and negotiations; that petitioners agreed to pay compounded interest in exchange for extending
the payment period the third time; that never during the life of the mortgage did petitioners pay 50,000.00; and, that
petitioners, having defaulted, left the spouses Embisan with no other option except to extrajudicially foreclose the
property security as stipulated in the mortgage.
Ruling of the Trial Court
Following trial, the RTC rendered a Decision on December 15, 2008 dismissing the complaint for lack of merit, the
11
dispositive portion of which reads:
WHEREFORE, in view of the foregoing considerations, the complaint filed by plaintiff is DISMISSEDfor lack of merit.
Defendants’ counterclaim is denied.
SO ORDERED.
In so doing, the trial court did notgive credence to petitioners’ claim that only ₱60,000.00 of the loaned amount was
released tothem. It also found that between October 17, 1984 to October 28, 1987, petitioners only paid the total
amount of ₱56,000.00, which is not sufficient to cover both the principal loan and the accrued interest. In addition,
the trial court shrugged aside petitioners’ contention that they wereforced to affix their signatures in the adverted
Contract of Lease, adding that having signed the lease agreement, they were estopped from asserting title over the
property.
Petitioners filed a Motion for Reconsideration, but the same was denied by the trial court through a Resolution dated
January 13, 2014. Aggrieved, they elevated the case to the CA.
On appeal, petitioners argued that the imposition by the respondent spouses of a 5% compounded interest on the
loan, without the petitioners’ consent or knowledge, is fraudulent and contrary to public morals. Respondents, on the
other hand, insisted that the compounding of the interest was agreed upon as a condition for the third and final
extension of time given for the petitioners to make good their promise to pay.
On May 29, 2013, the CA promulgated the assailed Decision, affirming in toto the ruling of the trial court. The
1âwphi1
appellate court held that, under the circumstances, inasmuch as the request for the third extension––for another
eight months––was made after the expiration of one year and four months from when the payment first became
due, the agreement to compound the interest was just and reasonable. It added that it was precisely the petitioners’
repeated non-compliance which prompted the imposition of a compounded interest rate and, therefore, petitioners
could no longer feign ignorance of its imposition.
Through the challenged Resolution dated January 13, 2014, the CA denied petitioners’ Motion for Reconsideration.
Hence, the instant petition.
The Issues
Petitioners anchor their plea for the reversal of the assailed Decision on the following grounds: 12
I.
THERE IS NO DOCUMENTARY PROOF TO SHOW THAT THE PETITIONERS AGREED IN WRITING TO THE
IMPOSITION OF THE 5% COMPOUNDED MONTHLY INTEREST, CONTRARY TO ARTICLE 1956 OF THE CIVIL
CODE
II.
THE 5% COMPOUNDED MONTHLY INTEREST UNILATERALLY IMPOSED BY RESPONDENT EMBISAN ON

THE PETITIONERS IS EXCESSIVE, EXORBITANT, OPPRESSIVE, INIQUITOUS AND UNCONSCIONABLE,
THEREFORE, THE SAME IS VOID FOR BEING CONTRARY TO LAW AND MORALS
III.
THE FORECLOSURE PROCEEDINGS INSTITUTED BY THE RESPONDENT SPOUSES EMBISAN SHOULD BE

NULLIFIED FOR BEING BASED ON A WRONG COMPUTATION OF THE OUTSTANDING LOAN OF THE
PETITIONERS WHICH WAS WRONGLY COMPUTED ON THE BASIS OF A 5% COMPOUNDED MONTHLY
INTEREST
Succinctly put, the pivotal issue to be resolved is whether or not the extra-judicial foreclosure proceedings should be
nullified for being based on an allegedly erroneous computation of the loan’s interest.
Respondent spouses, in their Comment, contend that the issues raised in the petition are questions of fact that
cannot be entertained by this Court; that parole evidence can be introduced, as was properly appreciated by the
RTC and CA, to ascertain the true intention of the parties on how the interest on the loan will accrue; and that
petitioners’ cause of action is barred by prescription, counting four (4) years from the original due date of the loan,
which was December 17, 1984.
The Court’s Ruling
The petition is meritorious.
The compounding of interest should be in writing
For academic purposes, We first determine whether or not the stipulation compounding the interest charged should
specifically be indicated in a written agreement.
We rule in the affirmative.
Article 1956 of the New Civil Code, which refers to monetary interest, provides:
Article 1956.No interest shall be due unless it has been expressly stipulated in writing.
As mandated by the foregoing provision, payment of monetary interest shall be due only if: (1) there was an express
stipulation for the payment of interest; and (2) the agreement for such payment was reduced in writing. Thus, We
have held that collection of interest without any stipulation thereof in writing is prohibited by law. 13
In the case at bar, it is undisputed that the parties have agreed for the loan to earn 5% monthly interest, the
stipulation to that effect put in writing. When the petitioners defaulted, the period for payment was extended,
carrying over the terms of the original loan agreement, including the 5% simple interest. However, by the third
extension of the loan, respondent spouses decided to alter the agreement by changing the manner of earning
interest rate, compounding it beginning June 1986. This is apparent from the Statement of Account prepared by the
spouses Embisan themselves.
Given the circumstances, We rule that the first requirement––that there be an express stipulation for the payment of
interest––is not sufficiently complied with, for purposes of imposing compounded interest on the loan. The
requirement does not only entail reducing in writing the interest rate to be earned but also the manner of earning the
same, if it is to be compounded. Failure to specify the manner of earning interest, however, shall not automatically
render the stipulation imposing the interest rate void since it is readily apparent from the contract itself that the
parties herein agreed for the loan to bear interest. Instead, in default of any stipulation on the manner of earning
interest, simple interest shall accrue.
Settled is the rule that ambiguities in a contract are interpreted against the party that caused the ambiguity. Any
ambiguity in a contract whose terms are susceptible of different interpretations must be read against the party who
drafted it. In the extant case, respondent spouses, having imposed, unilaterally at that, the compounded interest
14
rate, had the correlative duty of clarifying and reducing in writing how the said interest shall be earned. Having failed
to do so, the silence of the agreement on the manner of earning interest is a valid argument for prohibiting them
from charging interest at a compounded rate.
Further, by analogy, We have had the occasion to hold that, when a final money judgment ordered the payment of
"legal interest" without mention of payment of compound interest, a judge who orders payment of compound interest
does so in excess of his authority. As held in Philippine American Accident Insurance v. Flores:
15 16
The judgment which was sought to be executed ordered the payment of simple "legal interest" only. It said nothing
about the payment of compound interest. Accordingly, when the respondent judge ordered the payment of
compound interest he went beyond the confines of his own judgment which had been affirmed by the Court of
Appeals and which had become final. x x x Therefore, in default of any unequivocal wording in the contract, the
legal interest stipulated by the parties should be understood to be simple, not compounded.
Imposing 5% monthly interest, whether compounded or simple, is unconscionable
Nevertheless, even if there was suchan agreement that interest will be compounded, We agree with the petitioners
that the 5% monthly rate, be it simple or compounded, written or verbal, is void for being too exorbitant, thus running
afoul of Article 1306 of the New Civil Code, which provides:
Article 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary tolaw, morals, good customs, public order, or public policy.
(emphasis added)
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. 17
Summarizing the jurisprudential trend towards this direction is the recent case of Castro v. Tan in which We held:
18
While we agree with petitioners that parties to a loan agreement have wide latitude to stipulate on any interest ratein
view of the Central Bank Circular No. 905 s. 1982 which suspended the Usury Law ceiling on interest effective
January 1, 1983, it is also worth stressing that interest rates whenever unconscionable may still be declared illegal.
There is certainly nothing in said circular which grants lenders carte blanche authority to raise interest rates to levels
which will either enslave their borrowers or lead to a hemorrhaging of their assets.
In several cases, we have ruled that stipulations authorizing iniquitous or unconscionable interests are contrary to
morals, if not against the law. In Medel v. Court of Appeals, we annulled a stipulated 5.5% per month or 66% per
19
annum interest on a ₱500,000.00 loan and a 6% per month or 72% per annum interest on a ₱60,000.00 loan,
respectively, for being excessive, iniquitous, unconscionable and exorbitant. In Ruiz v. Court of Appeals, we
20
declared a 3% monthly interest imposed on four separate loans to be excessive. Inboth cases, the interest rates
were reduced to 12% per annum.
In this case, the 5% monthly interest rate, or 60% per annum, compounded monthly, stipulated in the Kasulatan is
even higher than the 3% monthly interest rate imposed in the Ruiz case. Thus, we similarly hold the 5% monthly
interest to be excessive, iniquitous, unconscionable and exorbitant, contrary to morals, and the law. It is therefore
void ab initio for being violative of Article 1306 of the Civil Code. With this, and in accord with the Medel and Ruiz
cases, we hold that the Court of Appeals correctly imposed the legal interest of 12% per annum in place of the
excessive interest stipulated in the Kasulatan. (emphasis added)
As can be gleaned, jurisprudence on the nullity of excessive interest rates is both clear and consistent. Wefind no
cogent reason to deviate therefrom. As the lender in Castro, respondent spouses herein similarly imposed a 5%
monthly interest in the loan contracted by petitioners. Following the judicial pronouncement in the said cases, the
interest rate so imposed herein is nullified for being unconscionable. In lieu thereof, a simple interest of 12% per
annum should be imposed.
The foreclosure sale should be Nullified
In view of the above disquisitions, We are constrained to nullify the foreclosure proceedings with respect to the
mortgaged property in this case, following the doctrine in Heirs of Zoilo and Primitiva Espiritu v. Landrito.
21
In Heirs of Espiritu, the spouses Maximo and Paz Landrito, sometime in 1986, borrowed from the spouses Zoilo and
Primitiva Espiritu the amount of ₱350,000.00, secured by a real estatemortgage. Because of the Landritos’
continued inability to pay the loan, the due date for payment was extended on the condition that the interest that has
already accrued shall, from then on, form part of the principal. As such, after the third extension, the principal
amounted to ₱874,125.00 in only two years. Despite the extensions, however, the debt remained unpaid, prompting
the spouses Espiritu to foreclose the mortgaged property.
The foreclosure proceeding in Heirs of Espiritu, however, was eventually nullified by this Court because the
Landritos were deprived of the opportunity to settle the debt, in viewof the overstated amount demanded from them.
As held:
Since the Spouses Landrito, the debtors in this case, were not given an opportunity to settle their debt, at the correct
amount and without the iniquitous interest imposed, no foreclosure proceedings may be instituted. A judgment
ordering a foreclosure sale is conditioned upon a finding on the correct amount of the unpaid obligation and the
failure of the debtor to pay the said amount. In this case, it has notyet been shown that the Spouses Landrito had
already failed to pay the correct amount of the debt and, therefore, a foreclosure sale cannot be conducted in order
to answer for the unpaid debt. x x x
As a result, the subsequent registration of the foreclosure sale cannot transfer any rights over the mortgaged
property to the Spouses Espiritu. The registration of the foreclosure sale, herein declared invalid, cannot vest title
over the mortgaged property. x x x
Applying Espiritu, the extra-judicial foreclosure of the mortgaged property dated October 12, 1987 is declarednull,
void, and of no legal effect.
WHEREFORE, in view of the foregoing, the petition is GRANTED. The Decision and Resolution of the Court of
Appeals, dated May 29, 2013 and January 13, 2014, respectively, in CA-G.R. CV No. 93667 are hereby
REVERSED and SET ASIDE. Let a new Decision be entered, the dispositive portion of which reads:
1. The stipulation in the Loan with Real Estate Mortgage imposing an interest of 5% monthly is declared
void.
2. In view of the nullity of the interest imposed on the loan which affected the total arrearages upon which
foreclosure was based, the foreclosure of mortgage, Certificate of Sale, Affidavit of Consolidation, Deed of
Final Sale, and Contract of Lease are declared void.
3. The case is remanded to the Regional Trial Court to compute the current arrearages of petitioners taking
into account the partial payments made by them and the imposition of the simple interest rate of 12% per
annum.
SO ORDERED.
PRESBITERO J. VELASCO, JR.

Associate JusticeWE CONCUR:
DIOSDADO M. PERALTA
Associate Justice
MARTIN S. VILLARAMA, JR. BIENVENIDO L. REYES
FRANCIS H. JARDELEZA
Associate Justice
ATTESTATION
to the writer of the opinion of the Court's Division.
PRESBITERO J. VELASCO, JR.
Associate Justice
Chairperson
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify that the
the opinion of the Court's Division.
MARIA LOURDES P.A. SERENO
Chief Justice
G.R. No. 116285 October 19, 2001
ANTONIO TAN, petitioner,
vs.
COURT OF APPEALS and the CULTURAL CENTER OF THE PHILIPPINES, respondents.
DE LEON, JR., J.:
Before us is a petition for review of the Decision1 dated August 31, 1993 and Resolution2 dated July 13, 1994 of the
Court of Appeals affirming the Decision3 dated May 8, 1991 of the Regional Trial Court (RTC) of Manila, Branch 27.
The facts are as follows:
On May 14, 1978 and July 6, 1978, petitioner Antonio Tan obtained two (2) loans each in the principal amount of
Two Million Pesos (P2,000,000.00), or in the total principal amount of Four Million Pesos (P4,000,000.00) from
respondent Cultural Center of the Philippines (CCP, for brevity) evidenced by two (2) promissory notes with maturity
dates on May 14, 1979 and July 6, 1979, respectively. Petitioner defaulted but after a few partial payments he had
the loans restructured by respondent CCP, and petitioner accordingly executed a promissory note (Exhibit "A") on
August 31, 1979 in the amount of Three Million Four Hundred Eleven Thousand Four Hundred Twenty-One Pesos
and Thirty-Two Centavos (P3,411,421.32) payable in five (5) installments. Petitioner Tan failed to pay any
installment on the said restructured loan of Three Million Four Hundred Eleven Thousand Four Hundred Twenty-
One Pesos and Thirty-Two Centavos (P3,411,421.32), the last installment falling due on December 31, 1980. In a
letter dated January 26, 1982, petitioner requested and proposed to respondent CCP a mode of paying the
restructured loan, i.e., (a) twenty percent (20%) of the principal amount of the loan upon the respondent giving its
conformity to his proposal; and (b) the balance on the principal obligation payable in thirty-six (36) equal monthly
installments until fully paid. On October 20, 1983, petitioner again sent a letter to respondent CCP requesting for a
moratorium on his loan obligation until the following year allegedly due to a substantial deduction in the volume of
his business and on account of the peso devaluation. No favorable response was made to said letters. Instead,
respondent CCP, through counsel, wrote a letter dated May 30, 1984 to the petitioner demanding full payment,
within ten (10) days from receipt of said letter, of the petitioner’s restructured loan which as of April 30, 1984
amounted to Six Million Eighty-Eight Thousand Seven Hundred Thirty-Five Pesos and Three Centavos
(P6,088,735.03).
On August 29, 1984, respondent CCP filed in the RTC of Manila a complaint for collection of a sum of money,
docketed as Civil Case No. 84-26363, against the petitioner after the latter failed to settle his said restructured loan
obligation. The petitioner interposed the defense that he merely accommodated a friend, Wilson Lucmen, who
allegedly asked for his help to obtain a loan from respondent CCP. Petitioner claimed that he has not been able to
locate Wilson Lucmen. While the case was pending in the trial court, the petitioner filed a Manifestation wherein he
proposed to settle his indebtedness to respondent CCP by proposing to make a down payment of One Hundred
Forty Thousand Pesos (P140,000.00) and to issue twelve (12) checks every beginning of the year to cover
installment payments for one year, and every year thereafter until the balance is fully paid. However, respondent
CCP did not agree to the petitioner’s proposals and so the trial of the case ensued.
On May 8, 1991, the trial court rendered a decision, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendant, ordering defendant
to pay plaintiff, the amount of P7,996,314.67, representing defendant’s outstanding account as of August 28,
1986, with the corresponding stipulated interest and charges thereof, until fully paid, plus attorney’s fees in
an amount equivalent to 25% of said outstanding account, plus P50,000.00, as exemplary damages, plus
costs.
Defendant’s counterclaims are ordered dismissed, for lack of merit.
SO ORDERED.4
The trial court gave five (5) reasons in ruling in favor of respondent CCP. First, it gave little weight to the petitioner’s
contention that the loan was merely for the accommodation of Wilson Lucmen for the reason that the defense
propounded was not credible in itself. Second, assuming, arguendo, that the petitioner did not personally benefit
from the said loan, he should have filed a third party complaint against Wilson Lucmen, the alleged accommodated
party but he did not. Third, for three (3) times the petitioner offered to settle his loan obligation with respondent CCP.
Fourth, petitioner may not avoid his liability to pay his obligation under the promissory note (Exh. "A") which he must
comply with in good faith pursuant to Article 1159 of the New Civil Code. Fifth, petitioner is estopped from denying
his liability or loan obligation to the private respondent.
The petitioner appealed the decision of the trial court to the Court of Appeals insofar as it charged interest,
surcharges, attorney’s fees and exemplary damages against the petitioner. In his appeal, the petitioner asked for
the reduction of the penalties and charges on his loan obligation. He abandoned his alleged defense in the trial
court that he merely accommodated his friend, Wilson Lucmen, in obtaining the loan, and instead admitted the
validity of the same. On August 31, 1993, the appellate court rendered a decision, the dispositive portion of which
reads:
WHEREFORE, with the foregoing modification, the judgment appealed from is hereby AFFIRMED.
SO ORDERED.5
In affirming the decision of the trial court imposing surcharges and interest, the appellate court held that:
We are unable to accept appellant’s (petitioner’s) claim for modification on the basis of alleged partial or
irregular performance, there being none. Appellant’s offer or tender of payment cannot be deemed as a
partial or irregular performance of the contract, not a single centavo appears to have been paid by the
defendant.
However, the appellate court modified the decision of the trial court by deleting the award for exemplary damages
and reducing the amount of awarded attorney’s fees to five percent (5%), by ratiocinating as follows:
Given the circumstances of the case, plus the fact that plaintiff was represented by a government lawyer,
We believe the award of 25% as attorney’s fees and P500,000.00 as exemplary damages is out of
proportion to the actual damage caused by the non-performance of the contract and is excessive,
unconscionable and iniquitous.
In a Resolution dated July 13, 1994, the appellate court denied the petitioner’s motion for reconsideration of the said
decision.
Hence, this petition anchored on the following assigned errors:
THE HONORABLE COURT OF APPEALS COMMITTED A MISTAKE IN GIVING ITS IMPRIMATUR TO THE
DECISION OF THE TRIAL COURT WHICH COMPOUNDED INTEREST ON SURCHARGES.
II
THE HONORABLE COURT OF APPEALS ERRED IN NOT SUSPENDING IMPOSITION OF INTEREST FOR THE
PERIOD OF TIME THAT PRIVATE RESPONDENT HAS FAILED TO ASSIST PETITIONER IN APPLYING FOR
RELIEF OF LIABILITY THROUGH THE COMMISSION ON AUDIT AND THE OFFICE OF THE PRESIDENT.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT DELETING AWARD OF ATTORNEY’S FEES AND IN
REDUCING PENALTIES.
Significantly, the petitioner does not question his liability for his restructured loan under the promissory note marked
Exhibit "A". The first question to be resolved in the case at bar is whether there are contractual and legal bases for
the imposition of the penalty, interest on the penalty and attorney’s fees.
The petitioner imputes error on the part of the appellate court in not totally eliminating the award of attorney’s fees
and in not reducing the penalties considering that the petitioner, contrary to the appellate court’s findings, has
allegedly made partial payments on the loan. And if penalty is to be awarded, the petitioner is asking for the non-
imposition of interest on the surcharges inasmuch as the compounding of interest on surcharges is not provided in
the promissory note marked Exhibit "A". The petitioner takes exception to the computation of the private respondent
whereby the interest, surcharge and the principal were added together and that on the total sum interest was
imposed. Petitioner also claims that there is no basis in law for the charging of interest on the surcharges for the
reason that the New Civil Code is devoid of any provision allowing the imposition of interest on surcharges.
We find no merit in the petitioner’s contention. Article 1226 of the New Civil Code provides that:
In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of
interests in case of non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be
paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.
In the case at bar, the promissory note (Exhibit "A") expressly provides for the imposition of both interest and
penalties in case of default on the part of the petitioner in the payment of the subject restructured loan. The
pertinent6 portion of the promissory note (Exhibit "A") imposing interest and penalties provides that:
For value received, I/We jointly and severally promise to pay to the CULTURAL CENTER OF THE PHILIPPINES at
its office in Manila, the sum of THREE MILLION FOUR HUNDRED ELEVEN THOUSAND FOUR HUNDRED +
PESOS (P3,411,421.32) Philippine Currency, xxx.
xxx xxx xxx
With interest at the rate of FOURTEEN per cent (14%) per annum from the date hereof until paid. PLUS
THREE PERCENT (3%) SERVICE CHARGE.
In case of non-payment of this note at maturity/on demand or upon default of payment of any portion of it
when due, I/We jointly and severally agree to pay additional penalty charges at the rate of TWO per cent
(2%) per month on the total amount due until paid, payable and computed monthly. Default of payment of
this note or any portion thereof when due shall render all other installments and all existing promissory notes
made by us in favor of the CULTURAL CENTER OF THE PHILIPPINES immediately due and demandable.
(Underscoring supplied)
xxx xxx xxx
The stipulated fourteen percent (14%) per annum interest charge until full payment of the loan constitutes the
monetary interest on the note and is allowed under Article 1956 of the New Civil Code.7 On the other hand, the
stipulated two percent (2%) per month penalty is in the form of penalty charge which is separate and distinct from
the monetary interest on the principal of the loan.
Penalty on delinquent loans may take different forms. In Government Service Insurance System v. Court of
Appeals,8 this Court has ruled that the New Civil Code permits an agreement upon a penalty apart from the
monetary interest. If the parties stipulate this kind of agreement, the penalty does not include the monetary interest,
and as such the two are different and distinct from each other and may be demanded separately. Quoting Equitable
Banking Corp. v. Liwanag,9 the GSIS case went on to state that such a stipulation about payment of an additional
interest rate partakes of the nature of a penalty clause which is sanctioned by law, more particularly under Article
2209 of the New Civil Code which provides that:
If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for
damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in
the absence of stipulation, the legal interest, which is six per cent per annum.
The penalty charge of two percent (2%) per month in the case at bar began to accrue from the time of default by the
petitioner. There is no doubt that the petitioner is liable for both the stipulated monetary interest and the stipulated
penalty charge. The penalty charge is also called penalty or compensatory interest. Having clarified the same, the
next issue to be resolved is whether interest may accrue on the penalty or compensatory interest without violating
the provisions of Article 1959 of the New Civil Code, which provides that:
Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However,
the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal,
shall earn new interest.
According to the petitioner, there is no legal basis for the imposition of interest on the penalty charge for the reason
that the law only allows imposition of interest on monetary interest but not the charging of interest on penalty. He
claims that since there is no law that allows imposition of interest on penalties, the penalties should not earn
interest. But as we have already explained, penalty clauses can be in the form of penalty or compensatory interest.
Thus, the compounding of the penalty or compensatory interest is sanctioned by and allowed pursuant to the above-
quoted provision of Article 1959 of the New Civil Code considering that:
First, there is an express stipulation in the promissory note (Exhibit "A") permitting the compounding of interest. The
fifth paragraph of the said promissory note provides that: "Any interest which may be due if not paid shall be added
to the total amount when due and shall become part thereof, the whole amount to bear interest at the maximum rate
allowed by law."10 Therefore, any penalty interest not paid, when due, shall earn the legal interest of twelve percent
(12%) per annum,11 in the absence of express stipulation on the specific rate of interest, as in the case at bar.
Second, Article 2212 of the New Civil Code provides that "Interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent upon this point." In the instant case, interest likewise
began to run on the penalty interest upon the filing of the complaint in court by respondent CCP on August 29, 1984.
Hence, the courts a quo did not err in ruling that the petitioner is bound to pay the interest on the total amount of the
principal, the monetary interest and the penalty interest.
The petitioner seeks the elimination of the compounded interest imposed on the total amount based allegedly on the
case of National Power Corporation v. National Merchandising Corporation,12 wherein we ruled that the imposition of
interest on the damages from the filing of the complaint is unjust where the litigation was prolonged for twenty-five
(25) years through no fault of the defendant. However, the ruling in the said National Power Corporation (NPC) case
is not applicable to the case at bar inasmuch as our ruling on the issue of interest in that NPC case was based on
equitable considerations and on the fact that the said case lasted for twenty-five (25) years "through no fault of the
defendant." In the case at bar, however, equity cannot be considered inasmuch as there is a contractual stipulation
in the promissory note whereby the petitioner expressly agreed to the compounding of interest in case of failure on
his part to pay the loan at maturity. Inasmuch as the said stipulation on the compounding of interest has the force of
law between the parties and does not appear to be inequitable or unjust, the said written stipulation should be
respected.
The private respondent’s Statement of Account (marked Exhibits "C" to "C-2")13 shows the following breakdown of
the petitioner’s indebtedness as of August 28, 1986:
Principal P2,838,454.68
Interest P 576,167.89
Surcharge P4,581,692.10
P7,996,314.67
The said statement of account also shows that the above amounts stated therein are net of the partial payments
amounting to a total of Four Hundred Fifty-Two Thousand Five Hundred Sixty-One Pesos and Forty-Three Centavos
(P452,561.43) which were made during the period from May 13, 1983 to September 30, 1983.14 The petitioner now
seeks the reduction of the penalty due to the said partial payments. The principal amount of the promissory note
(Exhibit "A") was Three Million Four Hundred Eleven Thousand Four Hundred Twenty-One Pesos and Thirty-Two
Centavos (P3,411,421.32) when the loan was restructured on August 31, 1979. As of August 28, 1986, the principal
amount of the said restructured loan has been reduced to Two Million Eight Hundred Thirty-Eight Thousand Four
Hundred Fifty-Four Pesos and Sixty-Eight Centavos (P2,838,454.68). Thus, petitioner contends that reduction of the
penalty is justifiable pursuant to Article 1229 of the New Civil Code which provides that: "The judge shall equitably
reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if
there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable."
Petitioner insists that the penalty should be reduced to ten percent (10%) of the unpaid debt in accordance
with Bachrach Motor Company v. Espiritu.15
There appears to be a justification for a reduction of the penalty charge but not necessarily to ten percent (10%) of
the unpaid balance of the loan as suggested by petitioner. Inasmuch as petitioner has made partial payments which
showed his good faith, a reduction of the penalty charge from two percent (2%) per month on the total amount due,
compounded monthly, until paid can indeed be justified under the said provision of Article 1229 of the New Civil
Code.
In other words, we find the continued monthly accrual of the two percent (2%) penalty charge on the total amount
due to be unconscionable inasmuch as the same appeared to have been compounded monthly.
Considering petitioner’s several partial payments and the fact he is liable under the note for the two percent (2%)
penalty charge per month on the total amount due, compounded monthly, for twenty-one (21) years since his default
in 1980, we find it fair and equitable to reduce the penalty charge to a straight twelve percent (12%) per annum on
the total amount due starting August 28, 1986, the date of the last Statement of Account (Exhibits "C" to "C-2"). We
also took into consideration the offers of the petitioner to enter into a compromise for the settlement of his debt by
presenting proposed payment schemes to respondent CCP. The said offers at compromise also showed his good
faith despite difficulty in complying with his loan obligation due to his financial problems. However, we are not
unmindful of the respondent’s long overdue deprivation of the use of its money collectible from the petitioner.
The petitioner also imputes error on the part of the appellate court for not declaring the suspension of the running of
the interest during that period when the respondent allegedly failed to assist the petitioner in applying for relief from
liability. In this connection, the petitioner referred to the private respondent’s letter16 dated September 28, 1988
addressed to petitioner which partially reads:
Dear Mr. Tan:

xxx xxx xxx
With reference to your appeal for condonation of interest and surcharge, we wish to inform you that the
center will assist you in applying for relief of liability through the Commission on Audit and Office of the
President xxx.
While your application is being processed and awaiting approval, the center will be accepting your proposed
payment scheme with the downpayment of P160,000.00 and monthly remittances of P60,000.00 xxx.
xxx xxx xxx
The petitioner alleges that his obligation to pay the interest and surcharge should have been suspended because
the obligation to pay such interest and surcharge has become conditional, that is dependent on a future and
uncertain event which consists of whether the petitioner’s request for condonation of interest and surcharge would
be recommended by the Commission on Audit and the Office of the President to the House of Representatives for
approval as required under Section 36 of Presidential Decree No. 1445. Since the condition has not happened
allegedly due to the private respondent’s reneging on its promise, his liability to pay the interest and surcharge on
the loan has not arisen. This is the petitioner’s contention.
It is our view, however, that the running of the interest and surcharge was not suspended by the private
respondent’s promise to assist the petitioners in applying for relief therefrom through the Commission on Audit and
the Office of the President.
First, the letter dated September 28, 1988 alleged to have been sent by the respondent CCP to the petitioner is not
part of the formally offered documentary evidence of either party in the trial court. That letter cannot be considered
evidence pursuant to Rule 132, Section 34 of the Rules of Court which provides that: "The court shall consider no
evidence which has not been formally offered xxx." Besides, the said letter does not contain any categorical
agreement on the part of respondent CCP that the payment of the interest and surcharge on the loan is deemed
suspended while his appeal for condonation of the interest and surcharge was being processed.
Second, the private respondent correctly asserted that it was the primary responsibility of petitioner to inform the
Commission on Audit and the Office of the President of his application for condonation of interest and surcharge. It
was incumbent upon the petitioner to bring his administrative appeal for condonation of interest and penalty charges
to the attention of the said government offices.
On the issue of attorney’s fees, the appellate court ruled correctly and justly in reducing the trial court’s award of
twenty-five percent (25%) attorney’s fees to five percent (5%) of the total amount due.
WHEREFORE, the assailed Decision of the Court of Appeals is hereby AFFIRMED with MODIFICATION in that the
penalty charge of two percent (2%) per month on the total amount due, compounded monthly, is hereby reduced to
a straight twelve percent (12%) per annum starting from August 28, 1986. With costs against the petitioner.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Quisumbing, and Buena, JJ., concur.
G.R. No. 173227 January 20, 2009
SEBASTIAN SIGA-AN, Petitioner,
vs.
ALICIA VILLANUEVA, Respondent.
DECISION
CHICO-NAZARIO, J.:
Before Us is a Petition1 for Review on Certiorari under Rule 45 of the Rules of Court seeking to set aside the
Decision,2 dated 16 December 2005, and Resolution,3 dated 19 June 2006 of the Court of Appeals in CA-G.R. CV
No. 71814, which affirmed in toto the Decision,4 dated 26 January 2001, of the Las Pinas City Regional Trial Court,
Branch 255, in Civil Case No. LP-98-0068.
The facts gathered from the records are as follows:
On 30 March 1998, respondent Alicia Villanueva filed a complaint5 for sum of money against petitioner Sebastian
Siga-an before the Las Pinas City Regional Trial Court (RTC), Branch 255, docketed as Civil Case No. LP-98-0068.
Respondent alleged that she was a businesswoman engaged in supplying office materials and equipments to the
Philippine Navy Office (PNO) located at Fort Bonifacio, Taguig City, while petitioner was a military officer and
comptroller of the PNO from 1991 to 1996.
Respondent claimed that sometime in 1992, petitioner approached her inside the PNO and offered to loan her the
amount of ₱540,000.00. Since she needed capital for her business transactions with the PNO, she accepted
petitioner’s proposal. The loan agreement was not reduced in writing. Also, there was no stipulation as to the
payment of interest for the loan.6
On 31 August 1993, respondent issued a check worth ₱500,000.00 to petitioner as partial payment of the loan. On
31 October 1993, she issued another check in the amount of ₱200,000.00 to petitioner as payment of the remaining
balance of the loan. Petitioner told her that since she paid a total amount of ₱700,000.00 for the ₱540,000.00 worth
of loan, the excess amount of ₱160,000.00 would be applied as interest for the loan. Not satisfied with the amount
applied as interest, petitioner pestered her to pay additional interest. Petitioner threatened to block or disapprove
her transactions with the PNO if she would not comply with his demand. As all her transactions with the PNO were
subject to the approval of petitioner as comptroller of the PNO, and fearing that petitioner might block or unduly
influence the payment of her vouchers in the PNO, she conceded. Thus, she paid additional amounts in cash and
checks as interests for the loan. She asked petitioner for receipt for the payments but petitioner told her that it was
not necessary as there was mutual trust and confidence between them. According to her computation, the total
amount she paid to petitioner for the loan and interest accumulated to ₱1,200,000.00.7
Thereafter, respondent consulted a lawyer regarding the propriety of paying interest on the loan despite absence of
agreement to that effect. Her lawyer told her that petitioner could not validly collect interest on the loan because
there was no agreement between her and petitioner regarding payment of interest. Since she paid petitioner a total
amount of ₱1,200,000.00 for the ₱540,000.00 worth of loan, and upon being advised by her lawyer that she made
overpayment to petitioner, she sent a demand letter to petitioner asking for the return of the excess amount of
₱660,000.00. Petitioner, despite receipt of the demand letter, ignored her claim for reimbursement.8
Respondent prayed that the RTC render judgment ordering petitioner to pay respondent (1) ₱660,000.00 plus legal
interest from the time of demand; (2) ₱300,000.00 as moral damages; (3) ₱50,000.00 as exemplary damages; and
(4) an amount equivalent to 25% of ₱660,000.00 as attorney’s fees.9
In his answer10 to the complaint, petitioner denied that he offered a loan to respondent. He averred that in 1992,
respondent approached and asked him if he could grant her a loan, as she needed money to finance her business
venture with the PNO. At first, he was reluctant to deal with respondent, because the latter had a spotty record as a
supplier of the PNO. However, since respondent was an acquaintance of his officemate, he agreed to grant her a
loan. Respondent paid the loan in full.11
Subsequently, respondent again asked him to give her a loan. As respondent had been able to pay the previous
loan in full, he agreed to grant her another loan. Later, respondent requested him to restructure the payment of the
loan because she could not give full payment on the due date. He acceded to her request. Thereafter, respondent
pleaded for another restructuring of the payment of the loan. This time he rejected her plea. Thus, respondent
proposed to execute a promissory note wherein she would acknowledge her obligation to him, inclusive of interest,
and that she would issue several postdated checks to guarantee the payment of her obligation. Upon his approval of
respondent’s request for restructuring of the loan, respondent executed a promissory note dated 12 September
1994 wherein she admitted having borrowed an amount of ₱1,240,000.00, inclusive of interest, from petitioner and
that she would pay said amount in March 1995. Respondent also issued to him six postdated checks amounting to
₱1,240,000.00 as guarantee of compliance with her obligation. Subsequently, he presented the six checks for
encashment but only one check was honored. He demanded that respondent settle her obligation, but the latter
failed to do so. Hence, he filed criminal cases for Violation of the Bouncing Checks Law (Batas Pambansa Blg. 22)
against respondent. The cases were assigned to the Metropolitan Trial Court of Makati City, Branch 65 (MeTC).12
Petitioner insisted that there was no overpayment because respondent admitted in the latter’s promissory note that
her monetary obligation as of 12 September 1994 amounted to ₱1,240,000.00 inclusive of interests. He argued that
respondent was already estopped from complaining that she should not have paid any interest, because she was
given several times to settle her obligation but failed to do so. He maintained that to rule in favor of respondent is
tantamount to concluding that the loan was given interest-free. Based on the foregoing averments, he asked the
RTC to dismiss respondent’s complaint.
After trial, the RTC rendered a Decision on 26 January 2001 holding that respondent made an overpayment of her
loan obligation to petitioner and that the latter should refund the excess amount to the former. It ratiocinated that
respondent’s obligation was only to pay the loaned amount of ₱540,000.00, and that the alleged interests due
should not be included in the computation of respondent’s total monetary debt because there was no agreement
between them regarding payment of interest. It concluded that since respondent made an excess payment to
petitioner in the amount of ₱660,000.00 through mistake, petitioner should return the said amount to respondent
pursuant to the principle of solutio indebiti.13
The RTC also ruled that petitioner should pay moral damages for the sleepless nights and wounded feelings
experienced by respondent. Further, petitioner should pay exemplary damages by way of example or correction for
the public good, plus attorney’s fees and costs of suit.
The dispositive portion of the RTC Decision reads:
WHEREFORE, in view of the foregoing evidence and in the light of the provisions of law and jurisprudence on the
matter, judgment is hereby rendered in favor of the plaintiff and against the defendant as follows:
(1) Ordering defendant to pay plaintiff the amount of ₱660,000.00 plus legal interest of 12% per annum
computed from 3 March 1998 until the amount is paid in full;
(2) Ordering defendant to pay plaintiff the amount of ₱300,000.00 as moral damages;
(3) Ordering defendant to pay plaintiff the amount of ₱50,000.00 as exemplary damages;
(4) Ordering defendant to pay plaintiff the amount equivalent to 25% of ₱660,000.00 as attorney’s fees; and
(5) Ordering defendant to pay the costs of suit.14
Petitioner appealed to the Court of Appeals. On 16 December 2005, the appellate court promulgated its Decision
affirming in toto the RTC Decision, thus:
WHEREFORE, the foregoing considered, the instant appeal is hereby DENIED and the assailed decision [is]
AFFIRMED in toto.15
Petitioner filed a motion for reconsideration of the appellate court’s decision but this was denied.16 Hence, petitioner
lodged the instant petition before us assigning the following errors:
I.
THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO INTEREST WAS DUE TO
PETITIONER;
II.
THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE PRINCIPLE OF SOLUTIO INDEBITI.17
Interest is a compensation fixed by the parties for the use or forbearance of money. This is referred to as monetary
interest. Interest may also be imposed by law or by courts as penalty or indemnity for damages. This is called
compensatory interest.18 The right to interest arises only by virtue of a contract or by virtue of damages for delay or
failure to pay the principal loan on which interest is demanded.19
Article 1956 of the Civil Code, which refers to monetary interest,20 specifically mandates that no interest shall be due
unless it has been expressly stipulated in writing. As can be gleaned from the foregoing provision, payment of
monetary interest is allowed only if: (1) there was an express stipulation for the payment of interest; and (2) the
agreement for the payment of interest was reduced in writing. The concurrence of the two conditions is required for
the payment of monetary interest. Thus, we have held that collection of interest without any stipulation therefor in
writing is prohibited by law.21
It appears that petitioner and respondent did not agree on the payment of interest for the loan. Neither was there
convincing proof of written agreement between the two regarding the payment of interest. Respondent testified that
although she accepted petitioner’s offer of loan amounting to ₱540,000.00, there was, nonetheless, no verbal or
written agreement for her to pay interest on the loan.22
Petitioner presented a handwritten promissory note dated 12 September 199423 wherein respondent purportedly
admitted owing petitioner "capital and interest." Respondent, however, explained that it was petitioner who made a
promissory note and she was told to copy it in her own handwriting; that all her transactions with the PNO were
subject to the approval of petitioner as comptroller of the PNO; that petitioner threatened to disapprove her
transactions with the PNO if she would not pay interest; that being unaware of the law on interest and fearing that
petitioner would make good of his threats if she would not obey his instruction to copy the promissory note, she
copied the promissory note in her own handwriting; and that such was the same promissory note presented by
petitioner as alleged proof of their written agreement on interest.24 Petitioner did not rebut the foregoing testimony. It
is evident that respondent did not really consent to the payment of interest for the loan and that she was merely
tricked and coerced by petitioner to pay interest. Hence, it cannot be gainfully said that such promissory note
pertains to an express stipulation of interest or written agreement of interest on the loan between petitioner and
respondent.
Petitioner, nevertheless, claims that both the RTC and the Court of Appeals found that he and respondent agreed
on the payment of 7% rate of interest on the loan; that the agreed 7% rate of interest was duly admitted by
respondent in her testimony in the Batas Pambansa Blg. 22 cases he filed against respondent; that despite such
judicial admission by respondent, the RTC and the Court of Appeals, citing Article 1956 of the Civil Code, still held
that no interest was due him since the agreement on interest was not reduced in writing; that the application of
Article 1956 of the Civil Code should not be absolute, and an exception to the application of such provision should
be made when the borrower admits that a specific rate of interest was agreed upon as in the present case; and that
it would be unfair to allow respondent to pay only the loan when the latter very well knew and even admitted in the
Batas Pambansa Blg. 22 cases that there was an agreed 7% rate of interest on the loan.25
We have carefully examined the RTC Decision and found that the RTC did not make a ruling therein that petitioner
and respondent agreed on the payment of interest at the rate of 7% for the loan. The RTC clearly stated that
although petitioner and respondent entered into a valid oral contract of loan amounting to ₱540,000.00, they,
nonetheless, never intended the payment of interest thereon.26 While the Court of Appeals mentioned in its Decision
that it concurred in the RTC’s ruling that petitioner and respondent agreed on a certain rate of interest as regards
the loan, we consider this as merely an inadvertence because, as earlier elucidated, both the RTC and the Court of
Appeals ruled that petitioner is not entitled to the payment of interest on the loan. The rule is that factual findings of
the trial court deserve great weight and respect especially when affirmed by the appellate court.27 We found no
compelling reason to disturb the ruling of both courts.
Petitioner’s reliance on respondent’s alleged admission in the Batas Pambansa Blg. 22 cases that they had agreed
on the payment of interest at the rate of 7% deserves scant consideration. In the said case, respondent merely
testified that after paying the total amount of loan, petitioner ordered her to pay interest.28 Respondent did not
categorically declare in the same case that she and respondent made an express stipulation in writing as regards
payment of interest at the rate of 7%. As earlier discussed, monetary interest is due only if there was
an express stipulation in writing for the payment of interest.
There are instances in which an interest may be imposed even in the absence of express stipulation, verbal or
written, regarding payment of interest. Article 2209 of the Civil Code states that if the obligation consists in the
payment of a sum of money, and the debtor incurs delay, a legal interest of 12% per annum may be imposed as
indemnity for damages if no stipulation on the payment of interest was agreed upon. Likewise, Article 2212 of the
Civil Code provides that interest due shall earn legal interest from the time it is judicially demanded, although the
obligation may be silent on this point.
All the same, the interest under these two instances may be imposed only as a penalty or damages for breach of
contractual obligations. It cannot be charged as a compensation for the use or forbearance of money. In other
words, the two instances apply only to compensatory interest and not to monetary interest.29 The case at bar
involves petitioner’s claim for monetary interest.
Further, said compensatory interest is not chargeable in the instant case because it was not duly proven that
respondent defaulted in paying the loan. Also, as earlier found, no interest was due on the loan because there was
no written agreement as regards payment of interest.
Apropos the second assigned error, petitioner argues that the principle of solutio indebiti does not apply to the
instant case. Thus, he cannot be compelled to return the alleged excess amount paid by respondent as interest.30
Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has been no stipulation
therefor, the provisions of the Civil Code concerning solutio indebiti shall be applied. Article 2154 of the Civil Code
explains the principle of solutio indebiti. Said provision provides that if something is received when there is no right
to demand it, and it was unduly delivered through mistake, the obligation to return it arises. In such a case, a
creditor-debtor relationship is created under a quasi-contract whereby the payor becomes the creditor who then has
the right to demand the return of payment made by mistake, and the person who has no right to receive such
payment becomes obligated to return the same. The quasi-contract of solutio indebiti harks back to the ancient
principle that no one shall enrich himself unjustly at the expense of another.31 The principle of solutio indebiti applies
where (1) a payment is made when there exists no binding relation between the payor, who has no duty to pay, and
the person who received the payment; and (2) the payment is made through mistake, and not through liberality or
some other cause.32 We have held that the principle of solutio indebiti applies in case of erroneous payment of
undue interest.33
It was duly established that respondent paid interest to petitioner. Respondent was under no duty to make such
payment because there was no express stipulation in writing to that effect. There was no binding relation between
petitioner and respondent as regards the payment of interest. The payment was clearly a mistake. Since petitioner
received something when there was no right to demand it, he has an obligation to return it.
We shall now determine the propriety of the monetary award and damages imposed by the RTC and the Court of
Appeals.
Records show that respondent received a loan amounting to ₱540,000.00 from petitioner.34 Respondent issued two
checks with a total worth of ₱700,000.00 in favor of petitioner as payment of the loan.35 These checks were
subsequently encashed by petitioner.36 Obviously, there was an excess of ₱160,000.00 in the payment for the loan.
Petitioner claims that the excess of ₱160,000.00 serves as interest on the loan to which he was entitled. Aside from
issuing the said two checks, respondent also paid cash in the total amount of ₱175,000.00 to petitioner as
interest.37 Although no receipts reflecting the same were presented because petitioner refused to issue such to
respondent, petitioner, nonetheless, admitted in his Reply-Affidavit38 in the Batas Pambansa Blg. 22 cases that
respondent paid him a total amount of ₱175,000.00 cash in addition to the two checks. Section 26 Rule 130 of the
Rules of Evidence provides that the declaration of a party as to a relevant fact may be given in evidence against
him. Aside from the amounts of ₱160,000.00 and ₱175,000.00 paid as interest, no other proof of additional payment
as interest was presented by respondent. Since we have previously found that petitioner is not entitled to payment
of interest and that the principle of solutio indebiti applies to the instant case, petitioner should return to respondent
the excess amount of ₱160,000.00 and ₱175,000.00 or the total amount of ₱335,000.00. Accordingly, the
reimbursable amount to respondent fixed by the RTC and the Court of Appeals should be reduced from
₱660,000.00 to ₱335,000.00.
As earlier stated, petitioner filed five (5) criminal cases for violation of Batas Pambansa Blg. 22 against respondent.
In the said cases, the MeTC found respondent guilty of violating Batas Pambansa Blg. 22 for issuing five dishonored
checks to petitioner. Nonetheless, respondent’s conviction therein does not affect our ruling in the instant case. The
two checks, subject matter of this case, totaling ₱700,000.00 which respondent claimed as payment of the
₱540,000.00 worth of loan, were not among the five checks found to be dishonored or bounced in the five criminal
cases. Further, the MeTC found that respondent made an overpayment of the loan by reason of the interest which
the latter paid to petitioner.39
Article 2217 of the Civil Code provides that moral damages may be recovered if the party underwent physical
suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation and similar injury. Respondent testified that she experienced sleepless nights and wounded feelings
when petitioner refused to return the amount paid as interest despite her repeated demands. Hence, the award of
moral damages is justified. However, its corresponding amount of ₱300,000.00, as fixed by the RTC and the Court
of Appeals, is exorbitant and should be equitably reduced. Article 2216 of the Civil Code instructs that assessment
of damages is left to the discretion of the court according to the circumstances of each case. This discretion is
limited by the principle that the amount awarded should not be palpably excessive as to indicate that it was the
result of prejudice or corruption on the part of the trial court.40 To our mind, the amount of ₱150,000.00 as moral
damages is fair, reasonable, and proportionate to the injury suffered by respondent.
Article 2232 of the Civil Code states that in a quasi-contract, such as solutio indebiti, exemplary damages may be
imposed if the defendant acted in an oppressive manner. Petitioner acted oppressively when he pestered
respondent to pay interest and threatened to block her transactions with the PNO if she would not pay interest. This
forced respondent to pay interest despite lack of agreement thereto. Thus, the award of exemplary damages is
appropriate. The amount of ₱50,000.00 imposed as exemplary damages by the RTC and the Court is fitting so as to
deter petitioner and other lenders from committing similar and other serious wrongdoings.41
Jurisprudence instructs that in awarding attorney’s fees, the trial court must state the factual, legal or equitable
justification for awarding the same.42 In the case under consideration, the RTC stated in its Decision that the award
of attorney’s fees equivalent to 25% of the amount paid as interest by respondent to petitioner is reasonable and
moderate considering the extent of work rendered by respondent’s lawyer in the instant case and the fact that it
dragged on for several years.43 Further, respondent testified that she agreed to compensate her lawyer handling the
instant case such amount.44 The award, therefore, of attorney’s fees and its amount equivalent to 25% of the amount
paid as interest by respondent to petitioner is proper.
Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest on the amount refundable to
respondent computed from 3 March 1998 until its full payment. This is erroneous.
We held in Eastern Shipping Lines, Inc. v. Court of Appeals, 45 that when an obligation, not constituting a loan or
forbearance of money is breached, an interest on the amount of damages awarded may be imposed at the rate of
6% per annum. We further declared that when the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether it is a loan/forbearance of money or not, shall be 12% per annum
from such finality until its satisfaction, this interim period being deemed equivalent to a forbearance of credit.
In the present case, petitioner’s obligation arose from a quasi-contract of solutio indebiti and not from a loan or
forbearance of money. Thus, an interest of 6% per annum should be imposed on the amount to be refunded as well
as on the damages awarded and on the attorney’s fees, to be computed from the time of the extra-judicial demand
on 3 March 1998,46 up to the finality of this Decision. In addition, the interest shall become 12% per annum from the
finality of this Decision up to its satisfaction.
WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 71814, dated 16 December 2005, is
hereby AFFIRMED with the following MODIFICATIONS: (1) the amount of ₱660,000.00 as refundable amount of
interest is reduced to THREE HUNDRED THIRTY FIVE THOUSAND PESOS (₱335,000.00); (2) the amount of
₱300,000.00 imposed as moral damages is reduced to ONE HUNDRED FIFTY THOUSAND PESOS
(₱150,000.00); (3) an interest of 6% per annum is imposed on the ₱335,000.00, on the damages awarded and on
the attorney’s fees to be computed from the time of the extra-judicial demand on 3 March 1998 up to the finality of
this Decision; and (4) an interest of 12% per annum is also imposed from the finality of this Decision up to its
satisfaction. Costs against petitioner.
SO ORDERED.
MINITA V. CHICO-NAZARIO
Associate Justice
WE CONCUR:
CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson
MA. ALICIA AUSTRIA-MARTINEZ ANTONIO EDUARDO B. NACHURA

TERESITA J. LEONARDO-DE CASTRO*

Associate Justice
ATTESTATION
I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the
writer of the opinion of the Court’s Division.
CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Third Division
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson’s Attestation, it is hereby
certified that the conclusions in the above Decision were reached in consultation before the case was assigned to
the writer of the opinion of the Court’s Division.
REYNATO S. PUNO
Chief Justice

Commercial Law 1 (Mutuum & Usury Law)

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G.R. No.

84719 January 25, 1991

YONG CHAN KIM, petitioner,

Remedios C. Balbin and Manuel C. Cases, Jr. for petitioner.

This petition seeks the review on certiorari of the following:

2. The decision of the Court of Appeals, dated 29 April 1988, 3

The antecedent facts are as follows:

Costs against the accused. 5

Hence, the present recourse.

Two (2) issues are raised by petitioner to wit:

We find merit in the petition.

1. With unfaithfulness or abuse of confidence, namely:

B. Cash Advance for Travel

Commodatum is essentially gratuitous.

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

(pp. 26-28, tsn, May 8, 1985). 14

Melencio-Herrera, Paras, Sarmiento and Regalado JJ., concur.

BPI INVESTMENT CORPORATION, petitioner,

The facts are as follows:

a) P300,000.00 for and as moral damages;

b) P50,000.00 as and for exemplary damages;

c) P50,000.00 as and for attorney’s fees and expenses of litigation.

Costs against BPI.

WHEREFORE, finding no error in the appealed decision the same is hereby AFFIRMED in toto.

I. WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL CONTRACT IN THE LIGHT OF THE

are bound by the findings of the appellate and trial courts.

amount of ₱25,000 is sufficient.

Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.

CRISMINA GARMENTS, INC., petitioner,

part of the Court of Appeals."

respect to the issue of which interest rate should be applied.7

xxx xxx xxx

(2) The sum of P5,000 as attorney[']s fees; and

(3) The costs of this suit;

(4) Defendant's counterclaim is hereby dismissed. 8

This Court's Ruling

Sole Issue: Interest Rate

2209 of the Civil Code, which states:

the proper interest rates:

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on

Romero, Vitug, Purisima and Gonzaga-Reyes, JJ., concur.

PHILIPPINE NATIONAL BANK, petitioner,

the complaint until fully paid?

When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the

Narvasa, C.J., Davide, Jr., Melo and Panganiban, JJ., concur.

LETICIA Y. MEDEL, DR. RAFAEL MEDEL and SERVANDO FRANCO, petitioners,

portion of which decision reads as follows:

petition and decide the case.

Baliwag, Bulacan July 23, 1986

Maturity Date Augsut 23, 1986

Payment will be made in full at the maturity date.

WHEREFORE, premises considered, judgment is hereby rendered, as follows:

5. All counterclaims are hereby dismissed.

With costs against the defendants. 8

Hence, defendants interposed the present recourse via petition for review on certiorari. 13

We find the petition meritorious.

is now "legally inexistent".

whether intended as an indemnity or a penalty if they are iniquitous or unconscionable. 22

No pronouncement as to costs in this instance.SO ORDERED.

Narvasa, C.J., Romero, Kapunan and Purisima, JJ., concur.

G.R. No. 172139 December 8, 2010

Resolution dated March 8, 2006 denying the motion for reconsideration.

1) August 15, 1993 ……… ₱ 30,000.00