PAN PACIFIC VS EQUITABLE CA
G.R. No. 169975 March 18, 2010  the CA modified the RTC decision, with respect to
FACTS:
On 1989, Pan Pacific who is engaged in contracting
mechanical works on airconditioning system, through its
President, Ricardo F. Del Rosario (Del Rosario), entered into a
contract of mechanical works(Contract) with respondent bank
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.
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 70.2 of the "General Conditions for the
Construction of PCIB Tower II Extension" (the escalation
clause).
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.
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.
On 28 April 1992, TCGI Engineers recommended to
respondent that the price adjustment should be pegged at
₱3,730,957.07.
Due to the extraordinary increases in the costs of labor and
materials, Pan Pacific’s operational capital was becoming
inadequate for the project. However, the bank withheld the
payment of the price adjustment under the escalation clause
despite Pan Pacific’s repeated demands.
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.
Pan Pacific made demands, and Equitable kept promising to
pay. When the ₱1.8m loan matured, Pan Pacific refused to pay
and insisted that it would not have incurred the loan if
Equitable had released the price adjustment on time, and that it
should be considered as an advance payment. Equitable stood
firm that it will not release any amount, but it would offset the
price adjustment. This prompted Pan Pacific to file a complaint
for nullity of the Promissory Note.
RTC:
 ordered the defendant to pay the plaintiffs the
following amounts:
₱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;
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.
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.
 ISSUE:
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. – YES, the interest rate should be
at 18%
RULING:
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.
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
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.
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.
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.
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.
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.
Application to the case:
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 note 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.
SPS. SALVADOR & ALMA ABELLA
VS
SPS. ROMEO & ANNIE ABELLA
G.R. No. 195166 July 8, 2015
FACTS:
On July 31, 2002, petitioners Spouses Salvador and Alma
Abella filed a Complaint for sum of money and damages with
prayer for preliminary attachment against respondents Spouses
Romeo and Annie Abella.
Petitioners alleged that respondents obtained a loan from
them in the amount of P500,000.00. The loan was evidenced
by an acknowledgment receipt dated March 22, 1999 and was
payable within one (1) year.
Respondents – In their Answer(with counterclaim and motion
to dismiss), respondents alleged that the amount involved did
not pertain to a loan they obtained from petitioners but was part
of the capital for a joint venture involving the lending of
money.
RTC:
ordered the defendants jointly and severally to pay the
plaintiffs the sum of P300,000.00 with interest at the rate of
30% per annum from the time the complaint was filed on July
31, 2002 until fully paid
CA:
reasoned that the loan could not have earned interest, whether
as contractually stipulated interest or as interest in the concept
of actual or compensatory damages.
As to the loan’s not having earned stipulated interest, the Court
of Appeals anchored its ruling on Article 1956 of the Civil
Code, which requires interest to be stipulated in writing for it to
be due
(since wla dw written stipulation sa interest, wala daw interst)
ISSUE:
1. Whether interest accrued on respondents' loan from
petitioners, If so, at what rate? YES
2. Whether petitioners are liable to reimburse
respondents for the Litter's supposed excess
payments and for interest? YES
RULING:
AS TO WHETHER IT WAS A LOAN
Respondents’ claims, as articulated in their testimonies before
the trial court, cannot prevail over the clear terms of the
document attesting to the relation of the parties. "If the
terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its
stipulations shall control.
Articles 1933 and 1953 of the Civil Code provide the
guideposts that determine if a contractual relation is one of
simple loan or mutuum:
Art. 1933. By the contract of loan, one of the parties
delivers to another, either something not consumable so
that the latter may use the same for a certain time and
return it, in which case the contract is called a
commodatum; or money or other consumable
thing, upon the condition that the same amount of the
same kind and quality shall be paid, in which case the
contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to
pay interest.
In commodatum the bailor retains the ownership of the
thing loaned, while in simple loan, ownership passes to
the borrower.
....
Art. 1953. A person who receives a loan of money or
any other fungible thing acquires the ownership thereof,
and is bound to pay to the creditor an equal amount of
the same kind and quality. (Emphasis supplied)
On March 22, 1999, respondents executed an acknowledgment
receipt to petitioners, which states:
Batan, Aklan
March 22, 1999
This is to acknowledge receipt of the Amount of Five Hundred
Thousand (P500,000.00) Pesos from Mrs. Alma R. Abella,
payable within one (1) year from date hereof with interest.
Annie C. Abella (sgd.) Romeo M. Abella (sgd.)33 (Emphasis
supplied)
The text of the acknowledgment receipt is uncomplicated and
straightforward. It attests to:
1. first, respondents’ receipt of the sum of
P500,000.00 from petitioner Alma Abella;
2. second, respondents’ duty to pay back this amount
within one (1) year from March 22, 1999; and
3. third, respondents’ duty to pay interest.
Consistent with what typifies a simple loan, petitioners
delivered to respondents with the corresponding condition that
respondents shall pay the same amount to petitioners within
one (1) year.
AS TO THE MONETARY INTEREST
Article 1956 of the Civil Code spells out the basic rule
that "[n]o interest shall be due unless it has been
expressly stipulated in writing.
On the matter of interest, the text of the acknowledgment
receipt is simple, plain, and unequivocal. It attests to the
contracting parties’ intent to subject to interest the loan
extended by petitioners to respondents. The controversy,
however, stems from the acknowledgment receipt’s failure to
state the exact rate of interest.
Jurisprudence is clear about the applicable interest rate if a
written instrument fails to specify a rate.
(CAVEAT: OLD PA ITO)
 In Spouses Toring v. Spouses Olan, this court clarified
the effect of Article 1956 of the Civil Code and noted that
the legal rate of interest (then at 12%) is to apply: "In a
loan or forbearance of money, according to the Civil
Code, the interest due should be that stipulated in
writing, and in the absence thereof, the rate  shall  be
12% per annum."
Security Bank  also refers to Eastern Shipping Lines, Inc.
v. Court of Appeals, which, in turn, stated:
1. When the obligation is breached, and it consists
in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that
which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall  be 12%
per annum  to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code. 39 (Emphasis
supplied)
Our intervening Decision in Nacar v. Gallery Frames
recognized that the legal rate of interest has been REDUCED
TO 6% PER ANNUM:
Recently, however, the Bangko Sentral ng Pilipinas
Monetary Board (BSP-MB), in its Resolution No. 796
dated May 16, 2013, approved the amendment of
Section 2 of Circular No. 905, Series of 1982 and,
accordingly, issued Circular No. 799, Series of 2013,
effective July 1, 2013, the pertinent portion of which
reads:
The Monetary Board, in its Resolution No. 796 dated 16
May 2013, approved the following revisions governing
the rate of interest in the absence of stipulation in loan
contracts, thereby amending Section 2 of Circular No.
905, Series of 1982:
Section 1. The rate of interest for the loan or
forbearance of any money, goods or credits and the rate
allowed in judgments, in the absence of an express
contract as to such rate of interest,  shall  be six percent
(6%) per annum.
Section 2. In view of the above, Subsection X305.1 of
the Manual of Regulations for Banks and Sections
4305Q.1, 4305S.3 and 4303P.1 of the Manual of
Regulations for
Non-Bank Financial Institutions are hereby amended
accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express
stipulation as to the rate of interest that would govern the
parties, the rate of legal interest for loans or forbearance of
any money, goods or credits and the rate allowed in judgments
SHALL NO LONGER BE TWELVE PERCENT (12%) PER
ANNUM—  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.
Nevertheless, both Bangko Sentral ng Pilipinas Circular No.
799, Series of 2013 and Nacar  retain the definite and
mandatory framing of the rule articulated in Eastern
Shipping, Security Bank, and Spouses Toring. Nacar even
RESTATES Eastern Shipping:
To recapitulate and for future guidance, the guidelines
laid down in the case of Eastern Shipping Lines are
accordingly modified to embody BSP-MB Circular No.
799, as follows:
1. When the obligation is breached, and it
consists in the payment of a sum of
money, i.e., a loan or forbearance of money,
the interest due should be that which may
have been stipulated in writing.
Furthermore, the interest due shall itself earn
 legal interest from the time it is judicially
demanded. In the absence of stipulation, the
rate of interest  shall  be 6% per annum  to
be computed from default, i.e., from
judicial or extrajudicial demand under and
subject to the provisions of Article 1169
of the Civil Code. (Emphasis supplied,
citations omitted)
(AS TO THE MONETARY INTEREST)
Thus, it remains that where interest was stipulated in
writing by the debtor and creditor in a simple loan or
mutuum, but no exact interest rate was mentioned, the
legal rate of interest shall apply.
Application to the case:
At present, this is 6% per annum, subject
to Nacar’s qualification on prospective application.
Applying this, the loan obtained by respondents from
petitioners is deemed subjected to conventional interest at the
rate of 12% per annum, the legal rate of interest at the time the
parties executed their agreement. Moreover, should
conventional interest still be due as of July 1, 2013, the rate of
12% per annum shall persist as the rate of conventional
interest.
(VERY IMPORTANT)
THE LEGAL RATE OF INTEREST, WHEN APPLIED AS
CONVENTIONAL INTEREST, SHALL ALWAYS BE THE
LEGAL RATE AT THE TIME THE AGREEMENT WAS
EXECUTED AND SHALL NOT BE SUSCEPTIBLE TO SHIFTS
IN RATE.
Contention:
Petitioners, however, insist on conventional interest at the
rate of 2.5% per month or 30% per annum. They argue that
the acknowledgment receipt fails to show the complete and
accurate intention of the contracting parties. They rely on
Article 1371 of the Civil Code, which provides that the
contemporaneous and subsequent acts of the contracting
parties shall be considered should there be a need to ascertain
their intent
Even if it can be shown that the parties have agreed to monthly
interest at the rate of 2.5%  or 30% per annum, THIS IS
UNCONSCIONABLE.
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.
AS TO THE COMPENSATORY INTEREST
Apart from respondents’ liability for conventional interest at
the rate of 12% per annum, outstanding conventional interest—
if any is due from respondents—shall itself earn legal interest
from the time judicial demand was made by petitioners, i.e.,
on July 31, 2002, when they filed their Complaint.
This is consistent with Article 2212 of the Civil Code, which
provides:
Art. 2212. Interest due shall earn legal interest from the
time it is judicially demanded, although the obligation
may be silent upon this point.
So, too, Nacar  states that "the interest due shall itself earn legal
interest from the time it is judicially demanded."
Consistent with Nacar, as well as with our ruling in Rivera v.
Spouses Chua,54 the interest due on conventional interest shall
be at the rate of 12% per annum from July 31, 2002 to June 30,
2013. Thereafter, or starting July 1, 2013, this shall be at the
rate of 6% per annum.
AS TO THE OVERPAYMENT
by June 21, 2002, respondents had not only fully paid the
principal and all the conventional interest that had accrued on
their loan. By this date, they also overpaid P3,379.17.
Moreover, while hypothetically, interest on conventional
interest would not have run from July 31, 2002, no such
interest accrued since there was no longer any conventional
interest due from respondents by then.
Consistent however, with our finding that the excess payment
made by respondents were borne out of a mere mistake that it
was due, we find it in the better interest of equity to no longer
hold petitioners liable for interest arising from their quasi-
contractual obligation.
Nevertheless, Nacar also provides:
3. When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 6% per annum from such
finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of
credit.68
Thus, interest at the rate of 6% per annum may be
properly imposed on the total judgment award. This shall
be reckoned from the finality of this Decision until its full
satisfaction.
DISPOSITIVE PORTION:
WHEREFORE, the assailed September 30, 2010 Decision and
the January 4, 2011 Resolution of the Court of Appeals
Nineteenth Division in CA-G.R. CV No. 01388 are SET
ASIDE. Petitioners Spouses Salvador and Alma Abella
are DIRECTED to jointly and severally reimburse respondents
Spouses Romeo and Annie Abella the amount of P3,379.17,
which respondents have overpaid.
A legal interest of 6% per annum shall likewise be imposed on
the total judgment award from the finality of this Decision until
its full satisfaction.

TAN VS CA & CCP
G.R. No. 116285 October 19, 2001
FACTS:
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 in the amount
(P3,411,421.32) payable in five (5) installments. Petitioner Tan
failed to pay any installment on the said restructured loan of
(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
(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, 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.
RTC:
ordered 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
The petitioner appealed the decision of the trial court to the
Court of Appeals INSOFAR AS IT CHARGED INTEREST,
SURCHARGES,
CA: On August 31, 1993, the appellate court rendered a
decision affirming the decision of the trial court imposing
surcharges and interest. However, the CA deleted the award for
exemplary damages and reduce the amount of attorney’s fees to
5%.
ISSUE:
WON there are contractual and legal bases for the imposition
of the penalty, interest on the penalty YES
RULING:
CONTENTION:   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"
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
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  (P3,411,421.32) Philippine
Currency,
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
IMPORTANT:
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. 
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, 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.
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.  Petitioner insists that the penalty should be reduced to ten
AS TO WHETHER INTEREST MAY ACCRUE ON THE
PENALTY OR COMPENSATORY INTEREST
WITHOUT VIOLATING ARTICLE 1959
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.
CONTENTION: 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.
COURT’S ANSWER: 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."
Therefore, any penalty interest not paid, when due, shall earn
the legal interest of twelve percent (12%) per annum, 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.
AS TO THE PRAYER OF REDUCTION OF PENALTY
OF 2% PER MONTH
CONTENTION: 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."
percent (10%) of the unpaid debt in accordance with
Bachrach Motor Company v. Espiritu.
COURT’S ANSWER: 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.
(MAY ISSUE PA DITO SA SUSPENSION OF INTEREST
PERO DI MAN RELATED SA TOPIC SO GINVM KO NA
LANG HAHAHAHA)
DISPOSITIVE PORTION:
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.

SIGA-AN VS VILLANUEVA
G.R. No. 173227 January 20, 2009
FACTS:
Alicia Villanueva a businesswoman engaged in supplying
office materials and equipments to the Philippine Navy Office
(PNO) located at Fort Bonifacio. Sebastian Siga-An was a
military officer and comptroller of the PNO from 1991 to 1996.
In 1992, Siga-An offered Villanueva a Php 540,000.00 loan.
Villanueva accepted. The LOAN WAS NOT REDUCED IN
WRITING & THERE WAS NO STIPULATION AS TO THE
PAYMENT OF INTEREST FOR THE LOAN.
In 1993, Villanueva issued the following amounts through
checks as partial payment of the loan:
  Php 500k in 31 August 1993
  Php 200k in 31 October 1993
Sia-An told Villanueva that since she paid a total amount of
P700,000.00 for the P540,000.00 worth of loan, the excess
amount of P160,000.00 would be applied as interest for the
loan.
Furthermore, he pestered Villanueva to pay additional interest,
threatening that he would block or disapprove her transactions
with the PNO if she would not comply with his demand.
Out of fear, she complied. She ended up paying a total
amount of Php 1.2M for the loan & interest. No receipt was
issued by Siga-an as he told her that it was not necessary as
there was mutual trust & confidence between them.
Villanueva consulted a lawyer regarding the loan, who told her
that Siga-an CANNOT VALIDLY COLLECT INTEREST ON
THE LOAN AS THERE WAS NO AGREEMENT
REGARDING PAYMENT OF INTEREST. She sent a demand
letter asking for reimbursement which was ignored.
Villanueva filed with the RTC a complaint for sum of
money against Siga-an. In his comment, Siga-an denied that
he offered a loan, contending that it was Villanueva who
approached him for money & that she later asked to restructure
her loan several times and subsequently failed to pay the said
loans. He insisted that there was no overpayment as Villanueva
admitted in a promissory note that her monetary obligation as
of 12 September 1994 was Php 1,240,000.00 inclusive of
interests.
RTC: ruled in favor of Villianueva
CA: was affimed in toto by the CA, ruling that there was
overpayment of the loan as there was no express stipulation
regarding the payment of interest. Since there was excess
payment through mistake, Siga-an should return the said
amount to Villanueva pursuant to the principle of solutio
indebiti.
ISSUE:
1. WON Villanueva should have paid interest? NO
2. WON solution indebiti applies to this case? YES
RULING:
AS TO WHETHER VILLANUEVA SHOULD HAVE
PAID INTEREST
MONETARY INTEREST
 is a compensation fixed by the parties for the use
or forbearance of money.
COMPENSATORY INTEREST
 Interest may also be imposed by law or by courts
as penalty or indemnity for damages.
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.
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.
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;
(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
Application to the case:
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.
Siga-An presented a handwritten promissory note dated 12
September 1994 wherein respondent purportedly admitted
owing petitioner “capital and interest.” Villanueva, however,
explained that it was petitioner who made a promissory note
and she was told to copy it in her own handwriting. Siga-An
did not rebut the foregoing testimony. It is evident that
Villanueva 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.
AS TO THE ALLEGED ADMISSION OF 7%
CONTENTION: 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;
However, 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.
COURT’S ANSWER:
 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. 
 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.
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.
AS TO WHETHER THERE WAS SOLUTIO INDEBITI
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.
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.
We have held that the principle of solutio indebiti applies in
case of erroneous payment of undue interest.
Applicatoin to the case:
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. 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.
AS TO WON THE LOWER COURTS WAS IN ERROR
IN IMPOSING A 12% RATE OF LEGAL INTEREST
FOR THE REFUND
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, 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.
Application to the case:
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, 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.
Dispositive portion:
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.
SPOUSES CHUA V. TIMAN
G.R. 170452 (2008)
Facts: In February and March 1999, Spouses Salvador
and Violeta Chua granted loans to the Rodrigo, Ma.
Lynn and Lydia Timan, evidenced by promissory notes
with interest rates of 7% per month, which was later
reduced to 5% per month.
The Timans initially paid the loans at 7% interest per
month ntil September 1999, and then at 5% interest
from October to December 1999. In March 2000, the
Timans offered to pay the principal amount through a
PNB Manager's Check in the amount of P764,000, but
the Sps. Chua to accept the same, insisting that the
principal amount of the loans totalled P864,000.
On May 3, 2000, the Timans deposited P864,000 with
the Clerk of Court of the RTC. Later, they filed a case for
consignation & damages. The RTC held that the original
stipulated interest rates of 7% and 5% per month were
excessive. It ordered Sps. Chua to refund to the
Timans all interest payments in excess of the legal
rate of 1% per month or 12% per annum. CA affirmed
the RTC, stating that the said rates were being
excessive, iniquitous, unconscionable and exorbitant.
Issue: Are the stipulated rates of 7% and 5% per month
unconscionable? Should the Sps. Chua refund all excess
payments to the Timans?
Ruling: YES. The 7% and 5% interest rates per month
are unconscionable. Accordingly, the excess payments
must be refunded to the Timans.
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. In a
plethora of cases we held that the 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.
 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, 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.
As we ruled in Medel, the rate of 5.5% per month is
excessive and unconscionable. However, cannot
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. RTC of Makati,
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." "Usury has been
legally non-existent in our jurisdiction. Interest can now
be charged as lender and borrower may agree upon.
Cannot Raise In Pari Delicto
It was not raised in the RTC and cannot be raised for
the first time on appeal. The Defense of good faith
must also fail because such an issue is a question of fact
which may not be properly raised in a petition for
review.
DISCUSSION: In this case, the case of Medel was
cited. It provided a benchmark. It states that 3% per
month and higher are excessive, iniquitous,
unconscionable, and exorbitant. It's not actually
correct to say that the interest is usurious because
again, the Usury Law is not anymore existent. As of
this moment, it is suspended by Central Bank
Circular 905. So, in this case, since it involves 5%
interest per month and 7% per month, that would
be 60% per annum or 84% per annum, the legal rate
was reduced to 12% per annum or 1% per month.
 Jocelyn Toledo v. Marilou Hyden
G.R. 172139 (2010)
Here the 6% to 7% monthly rate was not ruled as excessive
based on the principle of equity. But Medel is still the general
rule. UwU
Facts: Jocelyn Toledo obtained several loans from Marilou
Hyden in a span of 12 years. Four loans had interest rates of
6% per month and one loan had a monthly interest of 7%.
From August 15, 1993 up to December 31, 1997, Jocelyn had
been religiously paying Marilou the stipulated monthly
interest. However, the total principal amount of ₱290,000.00
remained unpaid. Marilou then went to Jocelyn in her office
to acknowledge her debts. They signed a document entitled
“Acknowledgement of Debt” for the amount of P290,000,
representing the principal consolidate amount due on
December 25, 1998.
Jocelyn also issued 5 checks to Marilou representing renewal
payment of her 5 previous loans. Thereafter, Jocelyn asked
Marilou for the recall of one check and issued 6 other
staggered checks. After honoring 3 of the checks, Jocelyn
ordered to stop the payment of the checks. Subsequently,
Jocelyn filed with a complaint for Declaration of Nullity and
Payment, Annulment, Sum of Money with the RTC against
Marilou, alleging that the Acknowledgement of Debt was
invalid and that she was threatened and intimidated to sign
said document and that the interest rates were iniquitous and
unconscionable. Marilou filed an Answer alleging that Jocelyn
voluntarily obtained the said loans knowing fully well that the
interest rate was at 6% to 7% per month.
On appeal with the CA, 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. The CA ruled the rate to be valid.
Issue: Are the 7% and 5% monthly interest rates
unconscionable?
Ruling: NO. 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 In fact, in Medel v. Court of Appeals, we
annulled a stipulated 5.5% per month or 66% per annum
interest for being unconscionable.
Comparison with Medel Case
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. 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.
Q: What were the rates involved here? 6% and 7% per
month.
Q: In the previous cases we discussed that 5.5% is
unconscionable as well as 6% and 7%. Why is it that in
this case it was declared that 6% and 7% are not
unconscionable? In this case, the SC took into
consideration a few factors. First, in the case of Medel, the
petitioners there never had the chance to pay their debt
while in this case, Jocelyn had no urgency or need for the
loans which compelled her to enter into these transactions.
Q: Why did she actually entered into a loan transaction?
The SC here found that Jocelyn here actually used the loan
for her educational plans because she was the VP for the
College Assurance Plans Philippines.
DISCUSSION: This case prrovided that the rates of 6% and
7% are not actually unconscionable. This ruling was made
out of equity. The general rule in the case of Medel was
that the benchmark, 3% and higher is iniquitous and
unconscionable. This case is different. Si Jocelyn, pumayag
siya. Nag-utang siya and then ang ginawa niya, binayaran
niya in advance yung mga prospective clients niya. It was a
sales strategy. She did that to the prospective clients so
tumaas yung sales niya. Because of that, she reached the
certain quota which entitled her to 50% rebate and
because of that 50% rebate, she did not care at all about
the 6% or 7% interest which means that she was well-
aware of what she was entering into. Wise ba. Later on,
when she realized, maybe may nagsabi sa kanya na
unconscionable yung interest rates, she immediately asked
that no payment shall be made and she was pretending
that she had no money and suddenly, there was a case
which deemed the interest rates unconscionable and
iniquitous. So in this case, there was bad faith. So
nagnegosyo ka, you entered willingly, pinaniwala mo yung
 other person, you were paying religiously and then later
on, you realized you could actually take advantage of the
situation so you will have to pay a lower amount and then
dun ka magkakaso in court. Again, this ruling was made
out of equity. So do not use this ruling as a general rule.
Only use this ruling in case the question in your exam or in
the Bar exam has the same facts as this case. But if it does
not have the same facts, then go back to the case of Medel
vs. CA or Chua vs. Timan wherein the rate of 3% and above
per month is unconscionable, iniquitous, and excessive.
Prisma Construction v. Menchavez
G.R. 160545 (2010)
(Note: This case was decided before CB Circular 799 July 30,
2013). The general rule in Medel was also not applied here.
Note that the interest agreed upon was an AMOUNT and not
a rate.
Facts: On December 8, 1993, Rogelio Pantaleon, in his capacity
as the President and Chairman of the Board of Prisma
Construction, obtained a P1,000,000 loan from Arthur
Menchavez, with a monthly interest of ₱40,000 payable for
six months, or a total obligation of ₱1,240,000.00 to be paid
within six (6) months. (note: an amount was agreed not a
rate)
As of January 4, 1997, Prisma had a balance of P1,364,151, to
which it applied a 4% monthly interest. Thus, on August 28,
1997, Menchavez filed a complaint for sum of money with the
RTC to enforce the unpaid balance, plus 4% monthly interest.
On the other hand, Prisma admittied the loan of P1,240,000
but denied the stipulation on the 4% monthly interest, arguing
that the interest was not provided in the promissory note.
RTC found that Menchavez 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 per month, or a total of ₱240,000.00 for a 6-
month period. It upheld the 4% monthly interest. The CA also
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. But it reduced the interest to 12%
per annum.
Issue: Did the parties agree 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?
Ruling: NO. An amount was agreed upon, not a rate.
Accordingly, the P40,000 interest applies only to the 6-month
payment period, and thereafter a legal rate of 12% per
annum shall be applied.
The interest due should be stipulated in writing; otherwise,
the interest should be at 12% per annum.
Under Article 1956 of the New Civil Code, 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.
In the present case, Menchavez issued a check for
₱1,000,000. 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.
Applying Article 1956, 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:
“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."
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. CA IS NOT APPLICABLE
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. In all the cases ruled by the SC applying the case of
Medel, 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 Prisma; 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 payment of the specific sum of money of
₱40,000.00 per month was voluntarily agreed upon by the
parties. There is nothing from the records and there is no
allegation showing that Prisma were victims of fraud when
they entered into the agreement.
Dispositive Portion
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 RTC for proper
computation of the amount due, with due regard to the
payments Prisma has already paid (amounting to P1,228,772
as of February 12, 1999).
Q: So was there an agreement as to an exact interest
rate? A: There was no agreement. It was only that 40k and
in fact, there was no agreement that beyond the 6-month
period, there would be an imposition of interest. That is
why the SC held that the 12% would be proper after the 6-
month period.
DISCUSSION: In this case, there was an agreement not to
pay a certain interest rate but there was an agreement to
pay a fixed sum of 40k per month for 6 months, not 4% per
month. The 4% was actually just computed based on the
fact that there was a total amount by the number of
months.
You may wonder, looking at the previous cases, "I thought
the interest rate of 3% and above is iniquitous,
unconscionable and excessive but in this case, 4% is fine?"
Yes. It is fine because there was no agreement as to an
interest rate but only to a fixed sum and only for a certain
period. Unlike in Medel, it was open-ended, 5.5% for no
matter how long. In this case, it was only limited to a
certain time and it was agreed upon. The legal rate of
interest will only apply after that 6-month period.
Remember this case. This is not the general rule. If there is
a question which has the same facts as this case, then you
can say that the 4% is not iniquitous, unconscionable
because in the first place, there was no interest rate that
was agreed upon. It does not violate the fact that Art. 1956
provides that an interest must be expressly stipulated and
be in writing for it to be demandable because again, in the
first place, there was no interest rate that was agreed
upon.
Teresita Dio v. Sps. Japor
G.R. 154129 (2005)
Facts: Spouses Virgilio and Luz Japor owned a parcel of land. In
August 1982, Spouses Japor obtained a loan from Quezon
Development Bank (QDB) in the amount of ₱90,000 secured
by a Real Estate Mortgage (REM). A year after, the parties
amended their contract wherein the loan of the spouses was
increased to ₱128,000.
The spouses failed to settle their obligations. However, before
the bank could foreclose the subject properties, the spouses
mortgaged said properties to the petitioner Teresita Dio,
wherein they obtained a loan of ₱350,000 to be paid to the
bank. Under the terms of the Deed, Dio and Sps. Japor
stipulated that the spouses will either pay: (1) 5% monthly
interest for two months or until April 14, 1989; or (2) an
additional interest equivalent to 5% for every month of
delay.
The spouses failed to settle their obligation to pay despite
several demands made by Teresita Dio. Subsequently, Dio
applied for extrajudicial foreclosure. Meanwhile, spouses
Japor filed a case involving the fixing of contractual obligations
and to deem the REM as null and void. The trial court declared
the REM as valid. Upon public auction, Dio was the sole bidder
in the amount of ₱3.5 million. The CA affirmed and declared
valid the REM, but modified the interest and penalty rates
for being unconscionable and exorbitant. Dio contends the
stipulation is valid.
Issue: Is the stipulated interest and penalty excessive,
iniquitous, unconscionable, exorbitant and contrary to
morals?
Ruling: YES, they are.
Unconscionable
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, 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. 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. We have likewise ruled that an
interest rate of 6% per month or 72% per annum is outrageous
and inordinate. 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?
Estoppel
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 2227 of the Civil Code, which
provides “Liquidated damages, whether intended as an
indemnity or a penalty, shall be equitably reduced if they are
iniquitous or unconscionable.”
DISCUSSION: So in this case, same principle as the previous
cases, the interest rate of 5% per month plus an additional
 5% for every month in case of default, or 120% per annum
is iniquitous, unconscionable, exorbitant, and excessive.
But what is different in this case is the fact that the first
two months, the 555% rate was not actually disturbed by
the Supreme Court because of the fact that yung debtor
yung actually nag suggest na 'okay,‘magbayad ako ng 5%
for the first two months.’
Solidbank (now MBTC) v. Permanent Homes
G.R. 171925 (2010)
Topic: Escalation Clauses
Facts: Permanent Homes, a real estate development
company, applied with Solidbank and was granted a credit line
for 60M. Of this amount, 59M was granted as time loan for
360 days, with interest at prevailing market rates, subject to a
monthly repricing.
It was indicated in the promissory note that: Solidbank
may increase or decrease the interest rate agreed upon
on the basis of the prevailing interest rates in the local or
international capital market. The adjustment of the
interest rates shall be effective from the date indicated
in the written notice sent to Permanent Homes by
Solidbank, if there is no date indicated, from the date the
notice was sent. Should Permanent Homes disagree to
the interest rate adjustment, it 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, it shall be deemed to have given consent to
the interest rate adjustment."
Contrary however to the provisions of the agreement between
the parties, they agreed that any increase in the interest
rates will be subject to the mutual agreement between the
parties.
During the course of the loan, there was an increase and also a
decrease in the interest rate (from initially 13.25% to finally
30% per annum for the first loan availment; from 15.75% to
finally 30% per annum for the second loan availment; and
from 30% to 29% for the third loan availment). This prompted
Permanent Homes to file a complaint for the annulment of the
said increase in the interest rate of the loan for being in
violation of the mutuality of agreement between the parties.
Contentions
Permanent Homes alleged that Solidbank unilaterally and
arbitrarily increased of the interest rate of the loan 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. It 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. On the other hand,
Solidbank contends the validity of its authority to periodically
adjust the interest rates during the monthly interest repricing
dates, depending on the changes in the prevailing interest
rates.
Issue: Is the stipulation on the interest rate repricing valid?
Ruling: YES, it is valid.
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. 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 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.
A contract containing a condition which makes its fulfillment
dependent exclusively upon the uncontrolled will of one of the
contracting parties is void. 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
tabulation 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.
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. 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.
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.
Dispositive Portion
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.

DISCUSSION: This case has a quite different concept from

the previous cases if you have noticed. It actually talks
about escalation clauses, which is also a very important
topic when we talk about interest. So what’s important
about escalation clauses? The lender does not have an
unbridled license to impose an increased interest rate. So
when we talk about escalation clauses, I believe you have
discussed this thoroughly in your oblicon when you talked
about mutuality of contracts because I think the very good
example for mutuality of contracts are contracts involving
escalation clauses. So what if there is a contract providing
that the interest rates can actually increase. Does that
mean that the increase can just be at any time? What are
the conditions? – It can only be increased if there is an
agreement to decrease the same – it can only be valid if
there is a corresponding de-escalation clause. So it cannot
be just increasing. It can have a clause that they can
increase the rates provided that some condition happens
but if some condition also happen, they can also decrease
the rate. That’s very important when we talk about
escalation clauses.

So in this case, it was provided by the Supreme Court that

the stipulations on the interest rate repricing are valid
because first, the parties mutually agreed on the said
stipulations; second, the repricing takes effect only upon
Solidbank’s written notice to Permanent Homes on the
new interest rates. I think sa cases ninyo sa oblicon, it
would be this part which is very tricky. Was there actually a
notice to the other party that hey, there would be another
increase on the interest rate. Because if that part is
missing, it means that it violates the mutuality of contracts
because the other party did not consent to the increase;
and third, Permanent Homes has an option to prepay its
loan if the parties does not agree on the interest rate.

Another thing that was discussed in this case was the

lending rate was actually based on the prevailing rates of
the local and international capital market. So it was not
solely dependent on one party, which means that it is not
violative of the basic principles on obligations and
contracts.

So that is the case of Solidbank vs Permanent Homes, it

again discussed the principles relating to escalation
clauses. Important things to remember is that it must not
violate the principle of mutuality of contracts. How? There
must be a: (1) notice; (2) an agreement as to the increase
of interest rate; and (3) de-escalation clause.