Sps. Andal Vs. PNB G.R. No.

194201, November 27, 2013

(Interest Rate)

FACTS: Petitioners obtained a loan from respondent bank (P21.8M) for which 12 pro forma
promissory notes were executed, with an agreed upon varying interest rates of 17.5-27%. Petitioners
also executed a real estate mortgage in favor of the respondent bank over five parcels of lands,
including all improvements thereon. Respondent bank advised petitioners to pay their loan, otherwise
they would declare it due and demandable. Petitioners paid P14.8M to avoid foreclosure. Respondent
bank executed a release of real estate mortgage over two of the parcels of land. Despite payment,
respondent foreclosed the remaining real estate mortgage over the remaining three parcels of land. A
public auction sale resulted in respondent bank as the winning bidder. This prompted petitioners to file
a complaint alleging that they tried to religiously pay their loan obligation but due to exorbitant rate on
interest unilaterally determined and imposed by respondent it prevented them from doing so. RTC ruled
in favor of petitioners finding the interest void for being potestative and ordered that the rate of interest
be reduced to 6% in accordance with Art. 2209 of the NCC and declaring all the foreclosure sales as void.
PNB filed an appeal alleging that the lower court erred in reducing the interest rate. CA affirmed the
ruling of the RTC with modification that the interest rate be 12% per annum instead of 6%. Petitioners
alleged that no interest is due on their principal loan obligation since the potestive interest rate
stipulation is already declared null and void by the court. CA denied their contention. Hence, this
recourse.

ISSUE:

Whether or not the interest should be imposed on the loan?

RULING:

Yes, it is clear from the contract of loan between petitioners-spouses and respondent bank that
petitioners-spouses, as borrowers, agreed to the payment of interest on their loan obligation. That the
rate of interest was subsequently declared illegal and unconscionable does not entitle petitioners-
spouses to stop payment of interest. It should be emphasized that only the rate of interest was declared
void. The stipulation requiring petitioners-spouses to pay interest on their loan remains valid and
binding. They are, therefore, liable to pay interest from the time they defaulted in payment until their
loan is fully paid. (To prevent UNJUST ENRICHMENT). In addition, pursuant to Circular No. 799, series of
2013, issued by the Office of the Governor of the Bangko Sentral ng Pilipinas on 21 June 2013, and in
accordance with the ruling of the Supreme Court in the recent case of Dario Nacar v. Gallery Frames
and/or Felipe Bordey, Jr., effective 1 July 2013, 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. Accordingly, the rate of interest of 12% per
annum on petitioners-spouses' obligation shall apply from May 20, 2011 (the date of default) until June
30, 2013 only. Moreover, from July 1, 2013 until fully paid, the legal rate of 6% per annum shall be
applied to petitioners-spouses' unpaid obligation.
 S.C. MEGAWORLD CONSTRUCTION AND DEV. CORPORATION VS PARADA (G.R.NO. 183804)

(Interest Rate)

FACTS:

- Petitioner S.C. Megaworld Construction and Development Corporation bought electrical

lighting materials from Genlite Industries, a sole proprietorship owned by Engineer Luis U. Parada
(respondent), for its Read-Rite project in Canlubang, Laguna.

- Petitioner failed to pay said purchase on due date, but blamed it on its failure to collect
under its sub-contract with the EnviroKleen Technologies, Inc. (EnviroKleen).

- It was however able to persuade EnviroKleen to agree to settle its above purchase, but
after paying the respondent P250,000.00 on June 2, 1999, EnviroKleen stopped making further
payments, leaving an outstanding balance of P816,627.00. It also ignored the various demands of the
respondent, who then filed a suit in the RTC.

- Petitioner denied liability and claimed that it was released from its indebtedness to the
respondent by reason of the novation of their contract, which, it reasoned, took place when the latter
accepted the partial payment of EnviroKleen in its behalf, and thereby acquiesced to the substitution of
EnviroKleen as the new debtor in the petitioner’s place.

RTC - Ruled in favor of respondent. As follows:

WHEREFORE, judgment is hereby rendered for the [respondent].

[The petitioner] is hereby ordered to pay the [respondent] the following:

1. A. the sum of [P]816,627.00 representing the principal obligation due;

2. B. the sum equivalent to twenty percent (20%) per month of the principal obligation due
from date of judicial demand until fully paid as and for interest; and

3. C. the sum equivalent to twenty[-]five [percent] (25%) of the principal sum due as and
for attorney’s fees and other costs of suits.

The compulsory counterclaim interposed by the [petitioner] is hereby ordered dismissed for lack
of merit.

CA – Concurred with RTC decision. CA noted that there is nothing in the two (2) letters of the
respondent to EnviroKleen, dated April 14, 1999 and June 16, 1999, which would imply that he
consented to the alleged novation, and, particularly, that he intended to release the petitioner from its
primary obligation to pay him for its purchase of lighting materials. The appellate court cited the RTC’s
finding9 that the respondent informed EnviroKleen in his first letter that he had served notice to the
petitioner that he would take legal action against it for its overdue account, and that he retained his
option to pull out the lighting materials and charge the petitioner for any damage they might sustain
during the pull-out.

ISSUE:

Whether or not the interest imposed to be paid by petitioner is proper

RULING: No.

Pursuant to Article 2209 of the Civil Code, except as provided under Central Bank Circular No.
905, and now under BangkoSentral ng Pilipinas Circular No. 799, which took effect on July 1, 2013, the
respondent may be awarded interest of six percent (6%) of the judgment amount by way of actual and
compensatory damages.

It appears from the recital of facts in the trial court’s decision that the respondent demanded
interest of two percent (2%) per month upon the balance of the purchase price of P816,627.00, from
judicial demand until full payment. There is then an obvious clerical error committed in the fallo of the
trial court’s decision, for it incorrectly ordered the defendant therein to pay “the sum equivalent to
twenty percent (20%) per month of the principal obligation due from date of judicial demand until fully
paid as and for interest.”virtualaw library

A clerical mistake is one which is visible to the eyes or obvious to the understanding; an error
made by a clerk or a transcriber; a mistake in copying or writing. The Latin maxims Error
placitandiaequitatem non tollit (“A clerical error does not take away equity”), and Error scribentisnocere
non debit (“An error made by a clerk ought not to injure; a clerical error may be corrected”) are apt in
this case. Viewed against the landmark case of Medel v. CA, an award of interest of 20% per month on
the amount due is clearly excessive and iniquitous. It could not have been the intention of the trial
court, not to mention that it is way beyond what the plaintiff had prayed for below.

It is settled that other than in the case of judgments which are void ab initio for lack of
jurisdiction, or which are null and void per se, and thus may be questioned at any time, when a decision
is final, even the court which issued it can no longer alter or modify it, except to correct clerical errors or
mistakes.virtualaw library
 Nowhere stated in the trial court’s decision that the parties had in fact stipulated an interest on
the amount due to the respondent. Even granting that there was such an agreement, there is no finding
by the trial court that the parties stipulated that the outstanding debt of the petitioner would be subject
to two percent (2%) monthly interest. The most that the decision discloses is that the respondent
demanded a monthly interest of 2% on the amount outstanding.

Article 2209 of the Civil Code provides that “[i]f the obligation consists in the payment of a sum
of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the
contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal
interest, which is six percent per annum.” Pursuant to the said provision, then, since there is no finding
of a stipulation by the parties as to the imposition of interest, only the amount of 12% per annum47 may
be awarded by the court by way of damages in its discretion, not two percent (2%) per month, following
the guidelines laid down in the landmark case of Eastern Shipping Lines v. Court of Appeals,48 to
wit:chanrobles virtua1aw 1ibrary

II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed
from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article
1169 of the Civil Code.

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

on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until
the demand can be established with reasonable certainty. Accordingly, where the demand is established
with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.49 (Citations omitted)

As further clarified in the case of Sunga-Chan v. CA,50 a loan or forbearance of money, goods or
credit describes a contractual obligation whereby a lender or creditor has refrained during a given
period from requiring the borrower or debtor to repay the loan or debt then due and
payable.51Thus:chanrobles virtua1aw 1ibrary

In Reformina v. Tomol, Jr., the Court held that the legal interest at 12% per annum under Central
Bank (CB) Circular No. 416 shall be adjudged only in cases involving the loan or forbearance of money.
And for transactions involving payment of indemnities in the concept of damages arising from default in
the performance of obligations in general and/or for money judgment not involving a loan or
forbearance of money, goods, or credit, the governing provision is Art. 2209 of the Civil Code prescribing
a yearly 6% interest. Art. 2209 pertinently provides:chanrobles virtua1aw 1ibrary

“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 of a 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 Circular No. 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 annum under Art. 2209 of the Civil Code applies “when the
transaction involves the payment of indemnities in the concept of damage arising from the breach or a
delay in the performance of obligations in general,” with the application of both 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 be subject to the
condition “that the courts are vested with discretion, depending on the equities of each case, on the
award of interest.”52 (Citations omitted and emphasis ours)

Pursuant, then, to Central Bank Circular No. 416, issued on July 29, 1974,53 in the absence of a
written stipulation, the interest rate to be imposed in judgments involving a forbearance of credit shall
be 12% per annum, up from 6% under Article 2209 of the Civil Code. This was reiterated in Central Bank
Circular No. 905, which suspended the effectivity of the Usury Law from January 1, 1983.54 But if the
judgment refers to payment of interest as damages arising from a breach or delay in general, the
applicable interest rate is 6% per annum, following Article 2209 of the Civil Code.55 Both interest rates
apply from judicial or extrajudicial demand until finality of the judgment. But from the finality of the
judgment awarding a sum of money until it is satisfied, the award shall be considered a forbearance of
credit, regardless of whether the award in fact pertained to one, and therefore during this period, the
interest rate of 12% per annum for forbearance of money shall apply.56cralaw virtualaw library

But notice must be taken that in Resolution No. 796 dated May 16, 2013, the Monetary Board of
the BangkoSentral ng Pilipinas approved the revision of the interest rate to be imposed 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. Thus, under BSP Circular No. 799, issued on June 21, 2013
and effective on July 1, 2013, the said rate of interest is now back at six percent (6%), viz:chan

rBangkoSentral ng Pilipinas

OFFICE OF THE GOVERNOR

CIRCULAR NO. 799

Series of 2013

Subject: Rate of interest in the absence of stipulation

The monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following
revisions governing the rate of interest in the absence of stipulation in loan contracts, thereby amending
Section 2 of Circular No. 905, Series of 1982:

Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and
the rate allowed in judgments, in the absence of an express contract as to such rate of interest, shall be
six percent (6%) per annum.

Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations for Banks and
Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions
are hereby amended accordingly.

This Circular shall take effect on 1 July 2013.

FOR THE MONETARY BOARD:

DIWA C. GUINIGUNDO

Officer-In-Charge
G.R. No. L-48349 December 29, 1986

FRANCISCO HERRERA, plaintiff-appellant,

vs.

PETROPHIL CORPORATION, defendant-appellee.

(Application of Usury)

FACTS:

The facts are as follows: On December 5, 1969, the plaintiff-appellant and ESSO Standard
Eastern. Inc., (later substituted by Petrophil Corporation) entered into a "Lease Agreement" whereby
the former leased to the latter a portion of his property for a period of twenty (20) years from said
date.One of the conditions in the contract was worded as follows:

“The portion on the side of the leased premises with an area of 365 sqrm.more or less, will be
occupied by LESSEE without rental during the lifetime of this lease. PROVIDED FINALLY, that the Lessor is
paid 8 years advance rental based on P2,930.70 per month discounted at 12% interest per annum or a
total net amount of P130,288.47 before registration of lease”

On December 31, 1969, pursuant to the said contract, the defendant-appellee paid to the
plaintfff-appellant advance rentals for the first eight years, subtracting therefrom the amount of
P98,828.03 as discount.

On October 14, 1974, the plaintiff-appellant sued the defendant-appellee for the sum of
P98,828.03, with interest, claiming this had been illegally deducted from him in violation of the Usury
Law.

ISSUE:

Was the interest collected out of the rentals paid for the first eight yearsexcessive and violative
of the Usury Law?

RULING:

No. The contract between the parties is one of lease and not of loan. It is clearly denominated a
"LEASE AGREEMENT." Nowhere in the contract is there any showing that the parties intended a loan
rather than a lease. The provision for the payment of rentals in advance cannot be construed as a
repayment of a loan because there was no grant or forbearance of money as to constitute an
indebtedness on the part of the lessor.

The provision for a discount is not unusual in lease contracts. As to its validity, it is settled that
the parties may establish such stipulations, clauses, terms and condition as they may want to include;
and as long as such agreements are not contrary to law, morals, good customs, public policy or public
order, they shall have the force of law between them.
 There is no usury in this case because no money was given by the defendant-appellee to the
plaintiff-appellant, nor did it allow him to use its money already in his possession. There was neither
loan nor forbearance but a mere discount which the plaintiff-appellant allowed the defendant-appellee
to deduct from the total payments because they were being made in advance for eight years. The
discount was in effect a reduction of the rentals which the lessor had the right to determine, and any
reduction thereof, by any amount, would not contravene the Usury Law.

The difference between a discount and a loan or forbearance is that the former does not have to
be repaid. The loan or forbearance is subject to repayment and is therefore governed by the laws on
usury.

It has been held that the elements of usury are (1) a loan, express or implied; (2) an
understanding between the parties that the money lent shall or may be returned; that for such loan a
greater rate or interest that is allowed by law shall be paid, or agreed to be paid, as the case may be;
and (4) a corrupt intent to take more than the legal rate for the use of money loaned. Unless these four
things concur in every transaction, it is safe to affirm that no case of usury can be declared.

The plaintfff-appellant simply understood that for every year of advance payment there would
be a deduction of 12% and this amount would be the same for each of the eight years.

The deduction shall be for only eight years because that was plainly what the parties intended at
the time they signed the lease agreement. "Simplistic" it may be, as the Solicitor General describes it,
but that is how the lessor understood the arrangement.

On the annual rental of P35,168.40, the deducted 12% discount was P4,220.21; and for eight
years, the total rental was P281,347.20 from which was deducted the total discount of P33,761.68,
leaving a difference of P247,585.52. Subtracting from this amount, the sum of P182,471.17 already paid
will leave a balance of P65,114.35 still due the plaintiff-appellant.

WHEREFORE, the decision of the trial court is hereby modified, and the defendant-
appelleePetrophil Corporation is ordered to pay plaintiff-appellant the amount of Sixty Five Thousand
One Hundred Fourteen pesos and Thirty-Five Centavos (P65,114.35), with interest at the legal rate until
fully paid, plus Ten Thousand Pesos (P10,000.00) as attorney's fees. Costs against the defendant-
appellee.
Unconscionable Interest Rate

MEDEL vs. COURT OF APPEALS

G.R. No. 131622 November 27, 1998

FACTS:

On the 7th and 19th of November 1985, Servando Franco and Leticia Medel obtained a loan
from Veronica R. Gonzales in the amount of P50,000.00 and P90,000.00, respectively, payable in two
months. Veronica retained payments for advance interest for one month at 6% per month. Servando
and Leticia executed a promissory note, to evidence the loan transactions. 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 amount
of P300,000.00, maturing in one month, secured by a real estate mortgage over a property. Servando
and Leticia executed a promissory note in favor of Veronica. Like the previous loans, Servando and
Medel failed to pay the third loan on maturity.

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. On maturity of the loan, the borrowers failed to
pay the indebtedness, plus interests and penalties. A complaint for collection of the full amount of the
loan including interests and other charges was then filed by Veronica.

Issue: WON the stipulated rates of interest at 5.5% per month on the loan in the sum of P500,00
that plaintiffs extended to the defendant is usurious?

Held:

No. The Supreme Court cannot consider the rate "usurious" because it 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".
However, the SC agreed 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.
 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 anyway amend the Usury Law but simply suspended the
latter's effectivity." Indeed, we have held that "a Central Bank Circular cannot repeal a law. Only a law
can repeal another law."

Nevertheless, SC 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, whether intended as an indemnity or a penalty if they are iniquitous or
unconscionable.
SPOUSES JOVENAL TORING and CECILIA ESCALONA-TORINGv. SPOUSES ROSALIE GANZON-OLAN and
GILBERT OLAN, and ROWENA OLAN

(Unconscionable Interest Rate)

Facts:

On September 4, 1998, petitioner JovenalToring obtained from respondents a loan amounting

to P6,000,000 at 3% interest per month. The loan was secured by a mortgage on a parcel of land
covered by Transfer Certificate of Title No. T-27418,4 as evidenced by a Deed of Real Estate Mortgage5
dated September 8, 1998.

On September 23, 1998, the parties executed a Deed of Absolute Sale6 conveying the
mortgaged property in favor of respondents. Subsequently, respondents gave petitioners an exclusive
option to repurchase the land for P10,000,000. This was embodied in a document denominated as an
Option to Buy7 dated September 28, 1998. On this same document, respondents acknowledged receipt
of a total sum of P10,000,000 as consideration for the purchase of the land.8 The Option to Buy
provided that if the option is exercised after December 5, 1998, the purchase price shall increase at the
rate of P300,000 or 3% of the purchase price every month until September 5, 1999 and thereafter at the
rate of P381,000 or 3.81% of the purchase price every month, with the fifth of every month as the cut-
off date for said increases.9

On July 28, 2000, petitioners filed a Complaint10 docketed as Civil Case No. 00-137 for
reformation of instruments, abuse of rights and damages against respondents.

The Trial court ruled in favor of the Sps. Olan, ordering Sps. Toring to pay 20 million.

Aggrieved by the decision of the trial court, Sps. Toring brought the case before the Court of
Appeals, but to the Sps. Toring’s dismay, the former affirmed the decision of the trial court. Hence, this
petition.

Issue:

Should the stipulated interest rates of 3% and 3.18% be considered unconscionable?

Ruling:

Petitioners contend that they are not liable to pay interest as the stipulated monthly rates of 3%
and 3.81%17 are unconscionable. Petitioners further contend that the reformed instrument, i.e., the
Option to Buy dated September 28, 1998, did not mention any rate of interest chargeable to the loan
but rather, an escalation18 of the purchase price.
 On the other hand, respondents maintain that petitioners are liable to pay interest based on the
Deed of Absolute Sale and Option to Buy executed by the parties. Respondents assert that the P300,000
and P381,000 differences per month as stated in the Option to Buy represents the 3% or 3.81% interest
to be charged on the loan. Respondents further assert that the 3% or 3.81% interest is not usurious
since Central Bank Circular No. 905-8219 removed the ceiling on interest rates on secured and
unsecured loans.

While the parties are free to stipulate on the interest to be imposed on monetary obligations,
the Court will temper interest rates if they are unconscionable.23 Even if the Usury Law has been
suspended by Central Bank Circular No. 905-82, and parties to a loan agreement have been given wide
latitude to agree on any interest rate, we have held that stipulated interest rates are illegal if they are
unconscionable.24 Consequently, in our view, the Court of Appeals erred in sustaining the trial court's
decision upholding the stipulated interest of 3% and 3.81%. Thus, we are unanimous now in our ruling to
reduce the above stipulated interest rates to 1% per month, in conformity with our ruling in Ruiz v.
Court of Appeals.25 For as well stressed in that case:

... Nothing in the said circular [CB Circular No. 905, s. 1982] 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.
 Restituta M. Imperial vs Alexa Jaucian

G.R. No. 149004

(Unconscionable Interest Rate)

FACTS:

Controversy Arose from a case of collection of money, filed by Alex A. Jaucian (now respondent)
against Restituta Imperial (now petitioner). The complaint alleges that defendant now petitioner
obtained from plaintiff now respondent six separate loans for which the former executed in favour of
the latter 6 separate promissory notes and issued several checks as guarantee for payment.

Petitioner obtained six (6) separate loans amounting to P 320,000.00 from the respondent. In
the written agreement, they agreed upon the 16% interest per month plus penalty charge of 5% per
month and the 25% attorney’s fee, failure to pay the said loans on the stipulated date.

The petitioner was able to pay only P 116,540.00 as found by the RTC. Although she alleged that
she had already paid the amount of P 441,780.00 and the excess of P 121,780.00 is more than the
interest that could be legally charged, the Court affirms the findings of RTC that petitioner is still
indebted to the respondent.

ISSUES:

Whether or not the stipulated interest of 16% per month, 5% per month for penalty
charge and 25% attorney’s fee are usurious.

HELD:
 YES. The rate must be equitably reduced for being iniquitous, unconscionable and
exorbitant. While the Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in
the said circular grants lenders carte blanche authority to raise interests rates to levels which will either
enslave their borrowers or lead to a hemorrhaging of their assets.

When the agreed rate is iniquitous or unconscionable, it considered contrary to morals, if not
against the law. Such stipulation is void. Since the stipulation is void, it is as if there was no express
contract thereon. Hence, courts may reduce the interest rate as reason and equity demand.

The interest rate of 16% per month was reduced to 1.167% per month or 14% per annum and
the penalty charge of 5% per month was also reduced to 1.167% per month or 14% per annum.

The attorney’s fees here are in the nature of liquidated damages and the stipulation therefor is
aptly called a penal clause. So long as the stipulation does not contravene the law, morals, public order
or public policy, it is binding upon the obligor. Nevertheless, in the case at bar, petitioner’s failure to
comply fully with her obligation was not motivated by ill will or malice. The partial payments she made
were manifestations of her good faith. Hence the attorney’s fees were reduced to 10% of the total due
and payable.
 Security Bank and Trust Company vs. R.T.C MAKATI BR. 61 MAGTANGGOL EUSEBIO AND LEILA
VENTURA G.R.No. 113926 23 October1996

(Unconscionable Interest Rate)

FACTS OF THE CASE:

On April 27, 1983, private respondent Magtanggol Eusebio executed 3 Promissory Notes from
different dates in favor of petitioner Security Bank and Trust Co. (SBTC) in the amounts of 100,000,
100,000, and 65,000. Respondent bound himself to pay the said amounts in six (6) monthly installments
plus 23% interest per annum. On all the abovementioned promissory notes, private respondent Leila
Ventura had signed as co-maker. Upon maturity there were still principal balance remaining on the
notes. Eusebio refused to pay the balance payable, so SBTC filed a collection case against him. The RTC
rendered a judgment in favor of SBTC, although the rate of interest imposed by the RTC was 12% p.a.
instead of the agreed upon 23% p.a. The court denied the motion filed by SBTC to apply the 23% p.a.
instead of the 12% p.a.

ISSUES OF THE CASE:

Did the RTC err in using 12% instead of the 23% as agreed upon by the parties?

RULING:

Yes, the rate of interest was agreed upon by the parties freely. Significantly, respondent did not
question that rate. - P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to
stipulate freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or
forbearance of money, goods or credits. - It is not for respondent court a quo to change the stipulations
in the contract where it is not illegal. Furthermore, Article 1306 of the New Civil Code provides that
contracting parties may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. -
The 12% shall be applied for obligations arising from loans, or forbearance of money in the absence of
express stipulations HELD: IN VIEW OF THE FOREGOING, the decision of the respondent court a quo, is
hereby AFFIRMED with the MODIFICATION that the rate of interest that should be imposed be 23% per
annum.
 Interest: Exception to Medel

JOCELYN TOLDEO v. MARILOU HYDEN

G.R. No. 172139; December 8, 2010; FIRST DIVISION (Del Castillo, J.)

FACTS:

Jocelyn Toledoobtained five loans of various amounts fromMarilouHydenamounting to a total of

P290,000.00 with 6% to 7% monthly interests. Said interests were deducted in advance from the loan
amount given to Jocelyn. She used the money from the loans to make advance payments for prospective
clients of educational plans. In this way, her sales production would increase, thereby entitling her to
50% rebate on her sales.

Jocelyn had been religiously paying Marilou for almost 5 years and was able to
payP778,000.00covering only the interest.However, the total principal amount of P290,000.00 remained
unpaid. She issued five checks to Marilou representing renewal payment of her loans. Of the five checks,
Jocelynrecalled one and replaced the same with six checks. After honoring the three replacement
checks, Jocelyn ordered the stop payment on the remaining checks despite being sufficiently funded and
filed with the RTC a complaint against Marilou.

ISSUE:

Is the 6% to 7% monthly interest considered excessive, iniquitous, unconscionable and

exorbitant?

RULING:

No, the 6% to 7% interest per month paid by Jocelyn is not excessive under the circumstances of
the case.The Court cannot consider the disputed 6% to 7% monthly interest rate to be iniquitous or
unconscionable vis-à-vis the principle laid down in Medel. 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. She used the
money from the loans to make advance payments for prospective clients. Her sales production
increased, thereby entitling her to 50% rebate on her sales. This is the reason why she did not mind the
6% to 7% monthly interest. 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. The checks were in fact sufficiently funded when she ordered the stop
payment. 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.The Courts have no power to relieve parties from obligations voluntarily assumed,
simply because their contracts turned out to be disastrous or unwise investments.
Prisma Construction & Development and Pantaleon v. Menchavez

GR NO. 160545 March 9, 2010

(Exception to Medel)

FACTS:

Pantaleon, as the President and chairman of the board of Prisma entered into a contract of loan
with Menchavez in the amount of 1 million pesos to be paid in 6 months. A promissory note was used to
secure the loan with the condition that it shall yield an interest of 40,000 for 6 months bringing the total
obligation of Prisma into 1,240,000.00. Annexed with the promissory note was the board resolution
authorizing Pantaleon to enter into a contract of loan in behalf of Prisma whereby the loan’s interest
must not be more than 4% per month.

Prisma was not able to pay the loan in the stipulated time period from January to June of 1994.
Their payment only began on September 1994. Their total payment as of January 1997 was 1,108,772,
however, when Menchavez computed using the 6% monthly interest rate, he found out that Prisma was
still indebted to him in the amount pf 1,264,157. He then filed a case for collection of sum of money to
enforce the unpaid balance.

As a defense, Prisma avers that it did not agree with the 4% monthly interest rate or 48% per
annum and even if did so, such is only applicable to the 6 month payment period as stipulated. The RTC
ruled in favor of Menchavez and stated that Prisma indeed agreed with the 4% monthly interest.

The CA agreed with the ruling of the RTC that Prisma agreed with the 4% monthly interest,
however, the CA ruled that such interest rate is unconscionable and thus should be reduced into 12%
which is the legal interest rate.

ISSUE:

Did Prisma agree to the 4% monthly interest rate? If so, does it apply only to the 6 months
payment period or indefinitely?

RULING:

No, Prisma did not agree with the 4% monthly interest rate.
 As seen in the promissory of Prisma, they agreed to the specific amount of 40,000 and not a 4%
monthly interest rate. Furthermore, such stipulation is only applicable to the 6-month period from
January to June 1994 and not beyond that.

The court also ruled that the same in not unconscionable as the interest stipulated was for the
specific amount of 40,000.

As an exception to Medel:

In the Medel case, the 5.5% monthly interest rate was considered as excessive, iniquitous,
unconscionable, exorbitant, contrary to morals and is therefore null and void. However, the difference
with the Medel case and this one is that, in the Medel case the interest rate was open ended in as far as
it is applied for an indefinite period; on this case howeverthere were no other stipulation for the
payment of any extra amount other than the specific 40,000 for a period of 6 months only.
G.R. No. 109563 July 9, 1996

PHILIPPINE NATIONAL BANK, petitioner,

vs.

COURT OF APPEALS, MARIA AMOR BASCOS and MARCIANO BASCOS, respondents.

This is a petition seeking review of the decision dated August 10, 1992,1 of the Eighth Division of the
Court of Appeals and its resolution dated March 25, 1993,2 both rendered in CA-G.R. CV No. 27653,
which affirmed the decision of the Regional Trial Court (RTC) of San Jose City (Branch 38).

The facts are as follows:

On June 4, 1979, private respondent spouses Maria Amor and Marciano Bascos obtained a loan from the
Philippine National Bank in the amount of P15,000.00 evidenced by a promissory note and secured by a
real estate mortgage.

The promissory note contained the following stipulation:

For value received, I/we, [private respondents] jointly and severally promise to pay to the ORDER of the
PHILIPPINE NATIONAL BANK, at its office in San Jose City, Philippines, the sum of FIFTEEN THOUSAND
ONLY (P15,000.00), Philippine Currency, together with interest thereon at the rate of 12% per annum
until paid, which interest rate the Bank may at any time without notice, raise within the limits allowed
by law, and I/we also agree to pay jointly and severally ____ % per annum penalty charge, by way of
liquidated damages should this note be unpaid or is not renewed on due date.

Payment of this note shall be as follows:

* THREE HUNDRED SIXTY FIVE DAYS * AFTER DATE

On the reverse side of the note the following condition was stamped:4
All short-term loans to be granted starting January 1, 1978 shall be made subject to the condition that
any and/or all extensions hereof that will leave any portion of the amount still unpaid after 730 days
shall automatically convert the outstanding balance into a medium or long-term obligation as the case
may be and give the Bank the right to charge the interest rates prescribed under it policies from the
date the account was originally granted.

To secure payment of the loan the parties executed a real estate mortgage contract which provided:5

(k) INCREASE OF INTEREST RATE:

The rate of interest charged on the obligation secured by this mortgage as well as the interest on the
amount which may have been advanced by the MORTGAGEE, in accordance with the provision hereof,
shall be subject during the life of this contract to such an increase within the rate allowed by law, as the
Board of Directors of the MORTGAGEE may prescribe for its debtors.

On December 12, 1980, PNB extended the period of payment of the loan to June 5, 1981, thus
converting the loan from a short-term to a medium-term loan, i.e., a loan which matured over two to
five years.6 PNB also increased the rate of interest per annum, first to 14%, effective December 1, 1979;
7 then to 22% effective February 21, 1983;8 to 22.5% effective June 20, 1983;9 to 23% from November
2, 1983; 10 to 25% effective March 2, 1984; 11 and finally to 28% from April 10, 1984. 12

Because private respondents defaulted in paying their obligation, the Provincial Sheriff of Nueva Ecija
scheduled the extrajudicial foreclosure of the mortgage on June 15, 1984 to pay private respondents'
indebtedness which, according to PNB, had increased from P15,000.00 to P35,125.84, plus 28% annual
interest. 13

Private respondents brought suit against PNB, its Branch Manager Jetro Godoy, and the Provincial
Sheriff of Nueva Ecija Numeriano Y. Galang (1) for a declaration of nullity of C.B. Monetary Board
Resolution No. 2126 dated November 29, 1979 (embodied in C.B. Circular No. 705 dated December 1,
1979), which increased the ceiling on the interest rate of secured and unsecured loans to 16% per
annum and 14% per annum, respectively, on the ground that it was contrary to the Usury Law, good
morals, public policy, customs and traditions, social justice, due process and the equal protection clause
of the Constitution; and (2) for a declaration that the interest rate increases on their loan were contrary
to Art. 1959 of the Civil Code which provides that interest due and unpaid shall not earn interest.
Pending final determination of the case, private respondents asked that the auction sale be enjoined.

PNB filed an answer with compulsory counterclaim. It alleged that private respondents had no cause of
action because §1-a of the Usury Law, as amended by P.D. No. 1684, did not limit the number of times
the interest could be increased and that private respondents were estopped from questioning the
increases because they failed to object to the same. PNB asked that the complaint be dismissed and that
private respondents be ordered to pay P35,125.84, plus interest from April 10, 1984, until the obligation
was fully paid, attorney's fees and moral damages in such amount as may be determined by the court.

On June 13, 1984 private respondents deposited with the clerk of court P8,000.00 14 and on January 15,
1985 P2,000.00, 15 in partial payment of their loan.

On June 15, 1990, the RTC rendered a decision, the dispositive portion of which reads:

The increase in interest rates based on the escalation clauses in the Promissory Note and the Real Estate
Mortgage, par. K, being contrary to Sec. 3, P.D. No. 116 are declared null and void, that henceforth, the
defendant PNB is hereby directed to desist from enforcing the increased rate of interest more than
TWELVE (12%) per cent on plaintiffs' loan;

On the other hand, the plaintiffs can settle their unpaid obligation with the defendant PNB at the
interest rate of TWELVE (12%) per cent per annum computed from the inception of the loan until the
same is fully paid; advances made by the PNB for insurance premiums and penalties added; and the
P10,000.00 paid to and defendant bank to be credited as payment by the plaintiffs;

The RTC invalidated the stipulations in the promissory note and the real estate mortgage, which
authorized PNB to increase the interest rate, on the ground that there was no corresponding stipulation
that the interest rate would be reduced in the event the law reduced the applicable maximum rate as
provided under P.D. No. 1684; that P.D. No. 116, which sets a ceiling of 12% interest on secured loans, is
a "law," which should prevail over Circular No. 705, used by PNB to increase the interest; that collection
of the increased interest sanctions unjust enrichment contrary to Art. 22 of the Civil Code; and that the
promissory note and real estate mortgage were contracts of adhesion which should be interpreted in
favor of private respondents.
PNB appealed. However, the Court of Appeals affirmed the trial court's decision. The appellate court
held that the escalation clause in the promissory note could not be given effect because of the absence
of a provision for a de-escalation in the event a reduction of interest was ordered by law. In addition it
held that pursuant to the escalation clause any increase in interest must be within "the limits allowed by
law" but C.B. circulars, on the basis of which PNB increased the interest, could not be considered "laws".

PNB moved for a reconsideration. As its motion was denied, it filed this petition. PNB's argument is that
the Court of Appeals erred in applying §2 of P.D. No. 1684, which makes the validity of an escalation
clause turn on the presence of a de-escalation clause, to the promissory note and real estate mortgage
in this case. PNB contends that the two had been executed on June 4, 1979, before the effectivity of P.D.
No. 1684 on March 17, 1980.

To begin with, PNB's argument rests on a misapprehension of the import of the appellate court's ruling.
The Court of Appeals nullified the interest rate increases not because the promissory note did not
comply with P.D. No. 1684 by providing for a de-escalation, but because the absence of such provision
made the clause so one-sided as to make it unreasonable.

That ruling is correct. It is in line with our decision in Banco Filipino Savings & Mortgage Bank v. Navarro
16 that although P.D. No. 1684 is not to be retroactively applied to loans granted before its effectivity,
there must nevertheless be a de-escalation clause to mitigate the one-sideness of the escalation clause.
Indeed because of concern for the unequal status of borrowers vis-a-vis the banks, our cases after Banco
Filipino have fashioned the rule that any increase in the rate of interest made pursuant to an escalation
clause must be the result of agreement between the parties.

Thus in Philippine National Bank v. Court of Appeals, 17 two promissory notes authorized PNB to
increase the stipulated interest per annum "within the limits allowed by law at any time depending on
whatever policy [PNB] may adopt in the future; Provided, that the interest rate on this note shall be
correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or
by the Monetary Board." The real estate mortgage likewise provided:

The rate of interest charged on the obligation secured by this mortgage as well as the interest on the
amount which may have been advanced by the MORTGAGEE, in accordance with the provisions hereof,
shall be subject during the life of this contract to such an increase within the rate allowed by law, as the
Board of Directors of the MORTGAGEE may prescribe for its debtors.

Pursuant to these clauses, PNB successively increased the interest from 18% to 32%, then to 41% and
then to 48%. This Court declared the increases unilaterally imposed by PNB to be in violation of the
principle of mutuality as embodied in Art. 1308 of the Civil Code, which provides that "[t]he contract
must bind both contracting parties; its validity or compliance cannot be left to the will of one of them."
As the Court explained: 18

In order that obligations arising from contracts may have the force of law between the parties, there
must be mutuality between the parties based on their essential equality. A contract containing a
condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the
P1.8 million loan agreement between the PNB a license (although in fact there was none) to increase the
interest rate at will during the term of the loan, that license would have been null and void for being
violative of the principle of mutuality essential in contracts. It would have invested the loan agreement
with the character of a contract of adhesion, where the parties do not bargain on equal footing,

the weaker party's (the debtor) participation being reduced to the alternative "to take it or leave it"
(Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker
party whom the courts of justice must protect against abuse and imposition.

A similar ruling was made in Philippine National Bank v. Court of Appeals. 19 The credit agreement in
that case provided:

The BANK reserves the right to increase the interest rate within the limits allowed by law at any time
depending on whatever policy it may adopt in the future: Provided, that the interest rate on this
accommodation shall be correspondingly decreased in the event that the applicable maximum interest
is reduced by law or by the Monetary Boar. . . .

As in the first case, PNB successively increased the stipulated interest so that what was originally 12%
per annum became, after only two years, 42%. In declaring the increases invalid, we held: 20
We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it
unbridled right to unilaterally upwardly adjust the interest on private respondents' loan. That would
completely take away from private respondents the right to assent to an important modification in their
agreement, and would negate the element of mutuality in contracts.

Only recently we invalidated another round of interest increases decreed by PNB pursuant to a similar
agreement it had with other borrowers: 21

While the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the said circular
could possibly be read as granting respondent bank carte blanche authority to raise interest rates to
levels which would either enslave its borrowers or lead to a hemorrhaging of their assets.

In this case no attempt was made by PNB to secure the conformity of private respondents to the
successive increases in the interest rate. Private respondents' assent to the increase can not be implied
from their lack of response to the letters sent by PNB, informing them of the increases. For as stated in
one case, 22 no one receiving a proposal to change a contract is obliged to answer the proposal.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED.

SO ORDERED.