Simple Loan or Mutuum  Liabilty of Borrower of Money
Liability is governed by Arts. 1249 and 1250.
i. Article 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.
 Ownership Passes in Mutuum
Ownership passes to the barrower, but of course
he must pay later.
 Loan distinguished from Rent
Loan Rent
Signifies the delivery of Delivers some non-
money or some other consumable thing with a
consumable things promise to return
without a promise to
return
Relationship is obligor Relationship is landlord
and obligee and tenant
Payment for loan Receives compensation
iv.
ii. Article 1954 - A contract whereby one person
transfers the ownership of non-fungible things
to another with the obligation on the part of the
latter to give things of the same kind, quantity,
and quality shall be considered barter.
 Barter of Non-Consumable things
Here, the word non-fungible does not really
mean non-fungible but non-consumable.
Reason: if the thing were really non-fungible the
identical thing must be returned. Here, an
equivalent thing is returned.
iii. Article 1955 - The obligation of a person who
borrows money shall be governed by the
provisions of Articles 1249 and 1250 of this
Code.
If what was loaned is a fungible thing other
than money, the debtor owes another thing of
the same kind, quantity and quality, even if it
should change in value. In case it is impossible
to deliver the same kind, its value at the time of
the perfection of the loan shall be paid.
v.
Article 1249: The payment of debt in money shall
be made in the currency stipulated, and if it is not
possible to deliver such currency, then in the
currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order,
or bills of exchange or other mercantile documents
shall produce the effect of payment only when they
have been cashed, or when through the fault of the
creditor they have been impaired.
In the meantime, the action derived from the
original obligation shall be held in abeyance
Article 1250: In case an extraordinary inflation or
deflation of the currency stipulated should
supervene, the value of the currency at the time of
the establishment of the obligation shall be th basis
of payment, unless there is an agreement to the
contrary.
Article 1956 - No interest shall be due unless it
has been expressly stipulated in writing.
NOTE:
1. Formality for Interest (for the use of money)
The interest must be stipulated in WRITING
2. How interest arises
The right to interest arises only by virtue of
a contract or by virtue of damages for delay or
failure to pay principal on which interest is
demanded.
3. When interest earns interest
Interest due shall earn legal interest from the
time it is judicially demanded; the obligation may
be silent upon this point. (Article 2212 civil code)
4. Interest by Way of Damages
Article 2209: if the obligation consist in the
payment of 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. (The rate now is 12% per annum)
Article 1957 - Contracts and stipulations, under
any cloak or device whatever, intended to
 circumvent the laws against usury shall be void.
The borrower may recover in accordance with
the laws on usury.
 Usurious contracts declared void
(1) Form of contract not conclusive. - The form of
the contract is not conclusive.
(2) Contract void only as to interest involved. - A
usurious contract should not be considered void in
its entirety but only as to the interest involved.
(3) Right of debtor. — With respect to the debtor,
the amount paid as interest under a usurious
agreement is recoverable by him, since the payment
is deemed to have been made under restraint, rather
than voluntarily.
vi. Article 1958 - In the determination of the
interest, if it is payable in kind, its value shall
be appraised at the current price of the
products or goods at the time and place of
payment.
 Determination of Interest in kind
Value should be at the time and place of
PAYMENT.
vii. Article 1959 - 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.
1. When accrued interest earns interest
The general rule is that accrued interest
(interest due and unpaid) will not bear interest, BUT
a. If there is agreement to this effect (art. 1959), or
b. If there is judicial demand (Art. 2212) Then such
accrued interest will bear interest at the legal rate
(Art. 2212) unless, a different rate is stipulated.
2. Compound interest
Compound interest is interest on accrued interest. It
is valid to charge compound interest, but there must
be a written agreement to this effect; otherwise said
compound interest should not be charged unless it is
interest charged upon judicial demand.
viii. Article 1960 - If the borrower pays interest
when there has been no stipulation therefore,
the provisions of this Code concerning solutio
indebiti, or natural obligation, shall be applied,
as the case may be.
 Recovery of unstipulated interest paid.
This article simply means that if unstipulated
interest (it is, therefore, not due) is paid by mistake,
the debtor may recover as this would be a case of
solutio indebiti or undue payment.
ix. Article 1961 - Usurious contracts shall be
governed by the Usury Law and other special
laws, so far as they are not inconsistent with
this Code.
Note: Usury is now legally non-existent. The
interest legally chargeable depends upon the
agreement between the lender and the borrower.
(Liam Law vs. Olympic Sawmill Co., 129 SCRA
439 [1984].)
1) Phil. Nat’l. Bank vs. Bacani, G.R. No. 194983,
June 20, 2018
FACTS:
Bacani was the registered owner of a parcel of land.
The parcel of land was used to secure a loan that
Rodolfo and his wife obtained from PNB. When the
Spouses Bacani failed to pay their loan, PNB
extrajudicially foreclosed the subject property.
Rodolfo's title was canceled, and in its place, TCT
No. T-185028 was issued in the name of PNB.
Considering this PNB circular, the Spouses Bacani
initiated negotiations with PNB regarding the re-
acquisition of their property. Their intention to buy
-back the subject property. However, PNB later
informed the Spouses Bacani that the request for
repurchase was refused and instead, the subject
property would be sold in a public auction. PNB
sold the subject property through a negotiated sale
to Renato de Leon.
Respondents filed a complaint for the annulment of
the sale and Renato's title over the subject property,
together with a prayer for the payment of damages.
ISSUE: Whether the time deposit of spouses
Bacani with PNB create a contract of sale, or at the
very least, an option contract, between the parties.
HELD: No, the time deposit with PNB did not
create a contract of sale, or at the very least, an
option contract, between PNB and the Spouses
Bacani. Bank deposits are in the nature of a simple
loan or mutuum, which must be paid upon demand
by the depositor. As such, the deposit of whatever
amount to PNB creates a debtor-creditor
relationship between the bank and the depositor.
PNB, as the recipient of the deposit, is duty-bound
to pay or release the amount deposited whenever the
depositor so requires.
By the very nature of the deposit, PNB could not
have assumed that the Spouses Bacani's alleged
time deposit account was meant as an option money
intended to secure the privilege of buying the
subject property within a given period of time,
especially since there was no option contract
between them. Neither may PNB consider the
deposit as a down payment on the price of the
subject property because there was no perfected
contract of sale.
Evidently, as far as PNB was concerned, it cannot
use the money in the time deposit to satisfy the
purchase price for the subject property, without
violating its obligation to return the amount upon
the demand of the depositors. The time deposit with
PNB did not create a contract of sale, or at the very
least, an option contract, between PNB and the
Spouses Bacani.
2) Tolentino vs. Gonzales, 50 Phil. 558
FACTS: Tolentino and Manio purchased a parcel
of land before Luzon Rice Mills Inc., in Tarlac to be
paid by way of installment and non-payment would
revolt the property to the original owner. A transfer
certificate was then given to Tolentino and Manio,
despite the remaining balance of 15,000.00 pesos.
The representative of the vendor then wrote the
vendees to comply with its obligation or else a case
be filed against them, that said obligation is due and
demandable. The vendee failed to comply, hence,
this cause of action and claim for the recovery of
the property in question.
ISSUE: Is the contract usurious on the ground that
higher interest rate was imposed?
HELD: NO. The Usury Law applies only to
contract of loan and not to an absolute sale with
right to repurchase. It is well-settled rule that the
legal interest of the contract of sale is 6% per
annum if there was stipulation and 12% per annum
for contract of loan.
The additional condition in the contract clearly falls
in the category of a contract of rent and therefore
Usury is not applicable in this case. The rate of the
Rent is affected by thousands of conditions which
the court has no ability to decide for the parties who
voluntarily bound themselves. People who make
their own beds must lie thereon. Therefore there is
no usury in this case.
3) Republic vs. Grijaldo, 15 SCRA 681
FACTS:
In 1943, Jose Grijaldo borrowed money from a
bank, evidenced by five promissory notes, and
secured by a chattel mortgage on the standing crops
on his land. During the war, the crops were
destroyed as a result of enemy action.
ISSUE: Whether the obligation to pay was
extinguished considering that the loans were
secured by a chattel mortgage on the standing crops
on a land owned by Grijaldo and these crops were
lost or destroyed through enemy action.
HELD: NO. The terms of the promissory notes and
the chattel mortgage that the appellant executed in
favor of the Bank of Taiwan, Ltd. do not support
such. The obligation of the appellant under the five
promissory notes was not to deliver a determinate
thing. Rather, his obligation was to pay a generic
thing — the amount of money representing the total
sum of the five loans, with interest.
The obligation of the appellant under the five
promissory notes evidencing the loans in questions
is to pay the value thereof; that is, to deliver a sum
of money — a clear case of an obligation to deliver,
a generic thing. Article 1263 of the Civil Code
provides: In an obligation to deliver a generic thing,
the loss or destruction of anything of the same kind
does not extinguish the obligation.
4) PNB vs. CA, 196 SCRA 536.
FACTS:
Private respondents, Ambrosio Padilla was granted
by petitioner, Philippine National Bank, a credit line
of 321.8 million with 18% interest per annum,
secured by a real estate mortgage, for a term of 2-
years. Private respondents executed in favor of the
petitioner a Credit Agreement, 2 promissory notes
in the amount of P900,000.00 each, and a Real
Estate Mortgage Contract.
A stipulation in the promissory note authorizes PNB
to increase the stipulated 18% interest per annum
“within the limits allowed by law at any time
depending on whatever policy the 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.” Padilla
requested to the increase in the rate of interest from
18% be fixed at 21% or 24% but was denied by
PNB.
ISSUE: Whether the bank may unilaterally change
or increase the interest rate stipulated therein at will
and as often as it pleased.
HELD: No. PNB’S successive increases of the
interest rate on the private respondent’s loan, over
the latter’s protest, were arbitrary as they violated
an express provision of the Credit Agreement.
Section 9.01 that its terms "may be amended only
by an instrument in writing signed by the party to be
bound as burdened by such amendment." The
increases imposed by PNB also contravene Art.
1956 of the Civil Code which provides that "no
interest shall be due unless it has been expressly
stipulated in writing."
The debtor herein never agreed in writing to pay the
interest increases fixed by the PNB beyond 24% per
annum, hence, he is not bound to pay a higher rate
than that.
5) Medel vs. CA, 299 SCRA 481
FACTS: Defendants obtained three loans from
plaintiffs, the first loan was 50,000 payable in 2
months, the second loan is 90,000 payable in 2
months with an interest rate of 6% per month, and
the third loan was 300,000 maturing in 1 month and
secured by a real estate mortgage. All of these loans
were executed with a promissory note.
Upon maturity of the three promissory notes,
Defendants failed to pay the indebtedness.
Defendants consolidated all their previous unpaid
loans totalling P440, 000.00, and sought from
Plaintiff another loan in the amount of P60, 000.00,
bringing their indebtedness to a total of
P500,000.00. They executed another promissory
note in favor of Plaintiff to pay the sum of P500,
000.00 with a 5.5% interest per month plus 2%
service charge per annum, with an additional
amount of 1% per month as penalty charges.
Upon maturity of the loan, the Defendants failed to
pay the indebtedness which prompted the Plaintiffs
to file with the RTC a complaint for collection of
the full amount of the loan including interests and
other charges.
ISSUE:
1.Whether the stipulated rate of interest that
plaintiffs extended to the defendants is usurious.
2. Whether the Usury Law is still effective, or has it
been repealed by Central Bank Circular No. 905?
HELD:
1. No. We can not consider the rate "usurious"
because this Court has consistently held that
Circular No. 905 of the Central Bank, adopted on
December 22, 1982, has expressly removed the
interest ceilings prescribed by the Usury Law and
that the Usury Law is now "legally inexistent".
Nevertheless, we find the interest at 5.5% per
month, or 66% per annum, stipulated upon by the
parties in the promissory note iniquitous or
unconscionable, and, hence, contrary to morals, if
not against the law. The stipulation is void.
2. No. The 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 can not
repeal a law. Only a law can repeal another law."
6) Cuaton vs. Salud, Jan. 27, 2004
FACTS: On January 5, 1993, respondent Rebecca
Salud, joined by her husband Rolando Salud,
instituted a suit for foreclosure of real estate
mortgage with damages against petitioner Mansueto
Cuaton and his mother, Conchita Cuaton, with the
Regional Trial Court of General Santos City,
Branch 35, docketed as SPL. Civil Case No. 359.
The trial court rendered a decision declaring the
mortgage constituted on October 31, 1991 as void,
because it was executed by Mansueto Cuaton in
favor of Rebecca Salud without expressly stating
that he was merely acting as a representative of
Conchita Cuaton, in whose name the mortgaged lot
was titled. The court ordered petitioner to pay
Rebecca Salud, inter alia, the loan secured by the
mortgage in the amount of One Million Pesos plus a
total P610,000.00 representing interests of 10% and
8% per month for the period February 1992 to
August 1992.
ISSUE: Whether the interest rates imposed on the
one-million-peso loan obligation of petitioner to
respondent are valid.
HELD: The court ruled that the 8% and 10%
monthly interest rates imposed on the one million
peso loan obligation of petitioner to respondent
Rebecca Salud are void. In Medel v. Court of
Appeals, and Spouses Solangon v. Salazar, the
Court annulled a stipulated 5.5% per month or 66%
per annum interest on a P500,000.00 loan and a 6%
per month or 72% per annum interest on a
P60,000.00 loan, respectively, for being excessive,
iniquitous, unconscionable and exorbitant. In both
cases, the interest rates were reduced to 12% per
annum.
In present case, the 10% and 8% interest rates per
month on the one million peso loan of petitioner are
even higher than those previously invalidated by the
Court in the above cases. Accordingly, the
reduction of said rates to 12% per annum is fair and
reasonable. Stipulations authorizing iniquitous or
unconscionable interests are contrary to morals, if
not against the law. Under Article 1409 of the Civil
Code, these contracts are inexistent and void from
the beginning. They cannot be ratified nor the right
to set up their illegality as a defense be waived.
Applying the foregoing rules, the interest of 12%
per annum imposed by the Court (in lieu of the
invalidated 10% and 8% per month interest rates)
on the one million peso loan should be computed
from the date of the execution of the loan on
October 31, 1991 until finality of this decision.
After the judgment becomes final and executory
until the obligation is satisfied, the amount due shall
further earn interest at 12% per year.
7) Tan vs. CA, Oct. 19, 2001
FACTS: Antonio Tan, herein petitioner, obtained 2
loans from the Cultural Center of the Philiipines
(CCP). After partial payments, the petitioner was
not able to pay the balance of the loan and requested
from CCP for the restructuring of the loan which
was granted by the latter. Tan failed to pay any
installment on the said restructured loan.
Tan requested from CCP a moratorium on his loan
obligation. No favorable response was made,
instead, CCP, wrote a letter to Tan demanding full
payment of the restructured loan.
CCP filed a complaint for collection of a sum of
money, against Tan after the latter failed to settle
his said restructured loan obligation.
ISSUE:
1. Whether there are contractual and legal
bases for the imposition of the penalty and interest
on the penalty.
2. Whether interest may accrue on the penalty
or compensatory interest without violating the
provisions of Article 1959 of the New Civil Code.
Held:
1. Yes. Article 1226 of NCC 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. The PNs 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. Penalty on delinquent loans may take different
forms.
2. Yes. Penalty clauses can be in the form of
penalty or compensatory interest. Thus, the
compounding of the penalty or compensatory
interest is sanctioned by and allowed pursuant to the
above-quoted provision of Article 1959 of the New
Civil Code considering that; (1)there is an express
stipulation in the PN permitting the compounding of
interest; (2) Article 2212 of the New Civil Code
provides that "Interest due shall earn legal interest
from the time it is judicially demanded, although
the obligation may be silent upon this point." In the
instant case, interest likewise began to run on the
penalty interest upon the filing of the complaint in
court by CCP.
8) Ligutan vs. CA, Feb. 12, 2002
FACTS: Ligutan and de la Llama obtained a loan
from Security bank and Trust Company. Ligutan
and Llama executed a promissory note binding
themselves jointly and severally to pay the sum
borrowed with an interes of 15. 189% per annum
upon maturity and to pay a penalty of 5% every
month on the outstanding principal and interest in
case of default. In addition, they agreed to pay 10%
of the total amount due by way of attorney’s fees of
a suit were instituted to enforce payment. Despite
demand, petitioners failed to pay. The filing of
complaint was instituted by the bank, where the
RTC rendered decision ordering petitioners to pay
the sum of 14,416 pesos of corresponding interest
as agreed upon plus 2% service charge.
ISSUE:
Whether the CA erred in holding that the interest
and penalty imposed by the bank on the petitioners’
loan obligation are still manifestly exorbitant,
iniquitous, and unconscionable.
Held:
No. A penalty clause, expressly recognized by law,
is an accessory undertaking to assume greater
liability on the part of an obligor in case of breach
of an obligation. It strengthens the coercive force of
the obligation. Although the court recognizes the
freedom of the parties to agree on the terms of their
contract, it may reduce or even remove the
stipulated penalty if it was iniquitous or
unconscionable or suffers from fatal infirmity.
The CA, in exercising its good judgment has
reduced the penalty even with the repeated acts of
breach by the petitioners of their obligation. SC
finds no reason to adjust such judgment. It also
finds that the 15.189% per annum interest was not
excessive.
9) Sentinel Insurance vs. CA, 182 SCRA 517
FACTS: Sentinel Insurance Co., Inc., entered into a
contract of suretyship as a surety with Nemesio
Azcueta, Sr., who is doing business under the name
and style of 'Malayan Trading where both of them
bound themselves jointly and severally to fully and
religiously guarantee the compliance with the terms
and stipulations of the credit line granted by private
respondent Rose Industries.
Azcueta bought several tires, batteries, and tire
tubes from private respondent but did not pay for, to
which Rose Industries then demanded payment, and
the case was referred to the Insurance
Commissioner who invited the attention of Sentinel
Insurance Co., Inc. on the matter and the latter
cancelled the Suretyship Agreement on May 13,
1975 with due notice to the private respondent.
Meanwhile, Rose Industries, Inc. filed with the
respondent court of Makati a complaint for
collection of sum of money against herein petitioner
and Azcueta, praying that said defendants be
ordered to pay jointly and severally unto the
plaintiff.
ISSUE: Whether the CA was wrong in ordering the
clarification of the decision of the trial court by
amending the dispositive portion to include the
phrase “damage dues” to modify the stated rate of
2%
HELD: NO. This got rid of any misconception that
the 2% is being imposed as interest and this did not
make the decision of the trial court void. The
damages due are not included when it comes to the
computation of interest because they are distinct
from one another and they can be demanded
separately.
While interest is part of the consideration of the
contract itself, damage dues (penalties, and so forth)
are paid only when there is default or the contract is
not performed. Also, although interest is subject to
the provisions of the Usury Law, there is no policy
or provision in that law preventing the enforcement
of damage dues although its effect may be to
increase the sum payable beyond the prescribed
ceiling rates.
10) Yong Chan Kim vs. People of the Philippines,
193 SCRA 1991
FACTS: Petitioner, Yong Chan Kim was employed
as a Researcher of the Southeast Asian Fisheries
Development Center. On 15 June 1982, petitioner
was issued Travel Order No. 2222 which covered
his travels to different places in Luzon for a period
of thirty five days. Under this travel order, he
received P6,438.00 as cash advance to defray his
travel expenses. Within the same period, petitioner
was issued another travel order, T.O. 2268,
requiring him to travel from the Head Station to
Roxas City for a period of five days. For this travel
order, petitioner received a cash advance of
P495.00.
When petitioner presented both travel orders for
liquidation, it was discovered that there was an
overlap of four (4) days in the two (2) travel orders
for which petitioner collected per diems twice.
Two (2) complaints for Estafa were then filed
against the petitioner before the MCTC. After trial,
the MCTC rendered a decision, finding, petitioner,
guilty beyond reasonable doubt for the crime of
Estafa. Petitioner appealed from the decision to the
Regional Trial Court, where the latter affirmed in
toto the MCTC's decision. Petitioner filed with the
appellate court a petition for review. But the Court
of Appeals dismissed the petition for having been
filed out of time.
ISSUE: Whether petitioner is guilty of the crime of
Estafa.
HELD:
No. Petitioner is not guilty of the crime of Estafa. In
order that a person can be convicted for estafa, it
must be proven that he had the obligation to deliver
or return the same money, good or personal
property that he had received. In the case, petitioner
was under no obligation to return the same money
(cash advance) which he had received.
It is undisputed that petitioner received a cash
advance from private respondent, SEAFDEC to
defray his travel expenses under his Travel Orders.
Here, the money advanced to petitioner is actually a
loan. Hence, petitioner was under no legal
obligation to return the same cash or money he
received from the private respondent.
Article 1953 of the Civil Code which define the
nature of a simple loan provides that when a person
receives a loan of money or any other fungible thing
he acquires the ownership thereof, and is bound to
pay to the creditor an equal amount of the same
kind and quality.
11) Consolidated Bank and Trust Corporation vs
CA, 356 SCRA 671
FACTS: On July 13, 1982, Continental Cement
Corporation and its President, Gregory Lim,
obtained from Consolidated Bank and Trust
Corporation Letter of Credit in the amount of
P1,068,150.00 which was used to purchase fuel oil
from Petrophil Corporation. On the same date,
Continental Cement paid a marginal deposit of
P320,445.00 to CBTC. In relation to the same
transaction, a trust receipt for the amount of
P1,001,520.93 was executed by Continental
Cement. CBTC filed a complaint for sum of money
claiming that Continental Cement and Lim failed to
turn over the goods covered by the trust receipt or
the proceeds. In its answer, Continental Cement
argued that the transaction was a simple loan and
not a trust receipt transaction.
ISSUE: Whether or not the transaction involved is a
simple loan.
HELD: YES. In Colinares v. Court of Appeals, it
was found that inasmuch as the debtor received the
goods subject of the trust receipt before the trust
receipt itself was entered into, the transaction was a
simple loan and not a trust receipt agreement. Prior
to the date of execution of the trust receipt,
ownership over the goods was already transferred to
the debtor. This situation is inconsistent with what
normally obtains in a pure trust receipt transaction,
wherein the goods belong in ownership to the bank
and are only released to the importer in trust after
the loan is granted. In this case, the delivery to
Continental Cement of the goods subject to the trust
receipt occurred long before the trust receipt itself
was executed.
Furthermore, Continental Cement is not an
importer, which acquired the bunker fuel oil for re-
sale; it needed the oil for its own operations. More
importantly, at no time did title over the oil pass to
CBTC, but directly to Continental Cement to which
the oil was directly delivered long before the trust
receipt was executed. Continental Cement was
required to sign the trust receipt simply to facilitate
collection by CBTC of the loan it had extended to
the former.
12) People vs. Puig 563 SCRA 564
FACTS: Respondents Puig and Porras, the Cashier
and Bookkeeper of the Rural Bank of Pototan, Inc.
were alleged to have taken, without the knowledge
and/or consent of the management of the Bank and
with intent of gain, P15,000 to the damage and
prejudice of the said bank.
Trial court did not find any probable cause stating
that the element of 'taking without the consent of
the owners' was missing on the ground that it is the
depositors-clients, and not the Bank, are the owners
of the money allegedly taken therefore the bank is
not a real party in interest.
Petitioner asserts however that Article 1980 of the
NCC provides "fixed, savings, and current deposits
of money in banks and similar institutions shall be
governed by the provisions concerning simple
loans." It also says that "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." Therefore, the depositors who place their
money with the bank are considered creditors of the
bank. The bank acquires ownership of the money
deposited by its clients, making the money taken by
respondents as belonging to the bank.
ISSUE: Whether the relationship between banks
and its depositors are considered that of creditor-
debtor.
HELD: Yes. Under the law, fixed, savings, and
current deposits of money in banks and similar
institutions shall be governed by the provisions
concerning simple loans. It is beyond doubt that
tellers, Cashiers, Bookkeepers and other employees
of a Bank who come into possession of the monies
deposited therein enjoy the confidence reposed in
them by their employer. Banks, on the other hand,
where monies are deposited, are considered the
owners thereof. The relationship between banks and
depositors has been held to be that of creditor and
debtor. In summary, the Bank acquires ownership
of the money deposited by its clients; and the
employees of the Bank, who are entrusted with the
possession of money of the Bank due to the
confidence reposed in them, occupy positions of
confidence.
13) BPI Family Bank vs. Franco, 538 SCRA 184
FACTS: Franco opened three accounts, namely, a
current,4 savings,5 and time deposit,6 with BPI-FB.
The current and savings accounts were respectively
funded with an initial deposit of P500,000.00 each,
while the time deposit account had P1,000,000.00
with a maturity date of August 31, 1990. The total
amount of P2,000,000.00 used to open these
accounts is traceable to a check issued by Te-
vesteco allegedly in consideration of Franco’s
introduction of Eladio Teves, who was looking for a
conduit bank to facilitate Tevesteco’s business
transactions, to Jaime Sebastian, who was then BPI-
FB SFDM’s Branch Manager. In turn, the funding
for the P2,000,000.00 check was part of the
P80,000,000.00 debited by BPI-FB from FMIC’s
time deposit account and credited to Tevesteco’s
current account pursuant to an Authority to Debit
purportedly signed by FMIC’s officers. It appears
that the signatures of FMIC’s officers on the
Authority to Debit were forged. Unfortunately,
Tevesteco had already effected several withdrawals
from its current account (to which had been credited
the P80,000,000.00 covered by the forged Authority
to Debit) amounting to P37,455,410.54, including
the P2,000,000.00 paid to Franco.
On September 8, 1989, impelled by the need to
protect its interests in light of FMIC’s forgery
claim, BPI-FB instructed Jesus Arangorin to debit
Franco’s savings and current accounts for the
amounts remaining therein. In the meantime, two
checks drawn by Franco against his BPI-FB current
account were dishonored upon presentment for
payment, and stamped with a notation “account
under garnishment.” BPI-FB urges the court that
the legal consequence of FMIC’s forgery claim is
that the money transferred by BPI-FB to Tevesteco
is its own, and considering that it was able to
recover possession of the same when the money
was redeposited by Franco, it had the right to set up
its ownership thereon and freeze Franco’s accounts.
To bolster its position, BPI-FB cites Article 559 of
the Civil Code.
ISSUE: Whether Franco had a better right to the
deposits in the subject accounts which are part of
the proceeds of a forged Authority to Debit.
HELD:
The court held that the movable property mentioned
in Article 559 of the Civil Code pertains to a
specific or determinate thing. A determinate or
specific thing is one that is individualized and can
be identified or distinguished from others of the
same kind.
Here, the court held that the deposit in Franco’s
accounts consists of money which, albeit
characterized as a movable, is generic and fungible.
The quality of being fungible depends upon the
possibility of the property, because of its nature or
the will of the parties, being substituted by others of
the same kind, not having a distinct individuality.
Moreover, BPI-FB conveniently forgets that the
deposit of money in banks is governed by the Civil
Code provisions on simple loan or mutuum. As
there is a debtor-creditor relationship between a
bank and its depositor, BPI-FB ultimately acquired
ownership of Franco’s deposits, but such ownership
is coupled with a corresponding obligation to pay
him an equal amount on demand. Although BPI-FB
owns the deposits in Franco’s accounts, it cannot
prevent him from demanding payment of BPI-FB’s
obligation by drawing checks against his current
account, or asking for the release of the funds in his
savings account. Thus, when Franco issued checks
drawn against his current account, he had every
right as creditor to expect that those checks would
be honored by BPI-FB as debtor.
14) Siga-an vs. Villanueva, 576 SCRA 696
FACTS:
Respondent filed a complaint for sum of money
against petitioner. Respondent claimed that
petitioner approached her inside the PNO and
offered to loan her the amount of P540,000.00 of
which the loan agreement was not reduced in
writing and there was no stipulation as to the
payment of interest for the loan. Respondent issued
a check worth P500,000.00 to petitioner as partial
payment of the loan. She then issued another check
in the amount of P200,000.00 to petitioner as
payment of the remaining balance of the loan of
which the excess amount of P160,000.00 would be
applied as interest for the loan. Not satisfied with
the amount applied as interest, petitioner pestered
her to pay additional interest and threatened to
block or disapprove her transactions with the PNO
if she would not comply with his demand. Thus, she
paid additional amounts in cash and checks as
interests for the loan. She asked petitioner for
receipt for the payments but was told that it was not
necessary as there was mutual trust and confidence
between them. According to her computation, the
total amount she paid to petitioner for the loan and
interest accumulated to P1,200,000.00.
The RTC rendered a Decision holding that
respondent made an overpayment of her loan
obligation to petitioner and that the latter should
refund the excess amount to the former. It
ratiocinated that respondent’s obligation was only to
pay the loaned amount of P540,000.00, and that the
alleged interests due should not be included in the
computation of respondent’s total monetary debt
because there was no agreement between them
regarding payment of interest. It concluded that
since respondent made an excess payment to
petitioner in the amount of P660,000.00 through
mistake, petitioner should return the said amount to
respondent pursuant to the principle of solutio
indebiti. Also, petitioner should pay moral damages
for the sleepless nights and wounded feelings
experienced by respondent. Further, petitioner
should pay exemplary damages by way of example
or correction for the public good, plus attorney’s
fees and costs of suit.
ISSUE:
1. Whether the interest was due to petitioner.
2. Whether the principle of solutio indebiti applies
to the case at bar.
HELD:
1. No. Compensatory interest is not chargeable in
the instant case because it was not duly proven that
respondent defaulted in paying the loan and no
interest was due on the loan because there was no
written agreement as regards payment of interest.
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; and (2) the
agreement for the payment of interest was reduced
in writing. The concurrence of the two conditions is
required for the payment of monetary interest.
Thus, we have held that collection of interest
without any stipulation therefor in writing is
prohibited by law.
2. Petitioner cannot be compelled to return the
alleged excess amount paid by respondent as
interest. Under Article 1960 of the Civil Code, if the
borrower of loan pays interest when there has been
no stipulation therefor, the provisions of the Civil
Code concerning solutio indebiti shall be applied.
Article 2154 of the Civil Code explains the
principle of solutio indebiti. Said provision
provides that if something is received when there is
no right to demand it, and it was unduly delivered
through mistake, the obligation to return it arises.
In such a case, a creditor-debtor relationship is
created under a quasi-contract whereby the payor
becomes the creditor who then has the right to
demand the return of payment made by mistake,
and the person who has no right to receive such
payment becomes obligated to return the same. The
quasi-contract of solutio indebiti harks back to the
ancient principle that no one shall enrich himself
unjustly at the expense of another. 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.
Article 2232 of the Civil Code states that in a quasi-
contract, such as solutio indebiti, exemplary
damages may be imposed if the defendant acted in
an oppressive manner. Petitioner acted
oppressively when he pestered respondent to pay
interest and threatened to block her transactions
with the PNO if she would not pay interest. This
forced respondent to pay interest despite lack of
agreement thereto. Thus, the award of exemplary
damages is appropriate so as to deter petitioner and
other lenders from committing similar and other
serious wrongdoings.
15) De Lima vs Laguna Tayabas Co , 160 SCRA
70
FACTS:
On June 3, 1958, an accident occur between Laguna
Tayabas Bus Co. and a delivery truck among others
passengers were Petra dela Cruz, died on the spot,
Elaida Lima with serious physical injuries and
Remesis Flores injured. Plaintiff’s voluntarily
desisted, due to financial necessity and base on
judgment as “quo” on the agreement that financial
assistance will be extended to the victims by the
LTB Co. Plaintiffs were discontented with the
assistance extended as to the decision of the Lower
Court as “quo.” December 29, 1971, they filed a
petition for the immediate decision of the court a
“quo” and to increase civil indemnity instead of
only P3,000.00 was awarded to the decease Petra
dela Cruz.
ISSUE: Whether the court erred that the petitioner
is entitled of the claims for damages and death
claims of Petra dela Cruz.
HELD: Yes. Supreme Court modifies the decision
of the lower court and CA, in the legal interest and
damages incurred by petitioner, commences from
the date of the decision of the court a quo until
actual payment while the civil damages was
increased to P300,000. This judgment is
immediately executing and no motion for extension
of time to file motion for reconsideration shall be
entertain.
16) Tan vs Valdehueza, 66 SCRA 61
FACTS:
Plaintiff was the highest bidder in the public auction
sale of a parcel of land which is the subject of the
first cause of action. Defendants Arador and Reculo
Valdehueza executed two documents of deed of
pacto de retro sale with the right to repurchase in
favor of the plaintiff of two portions of parcel of
land described in the second cause of action. This
was not registered in the Registry of Deeds.
After the execution of the second cause of action,
the defendants remained in the possession of the
land and continue paying taxes. The Trial Court
declares Tan is the absolute owner of the property
and ordered the defendants to pay plaintiff the
amount of P1,200 and the legal interest of 6%. With
regard to the land in the second cause of action,
Valdehueza were ordered to pay the amount of
P300 with legal interest of 6%.
ISSUE: Should the respondent pay the interest?
HELD: The Supreme Court held in the negative.
The imposition of legal interest on the amounts
subject of the equitable mortgages of P1,200 and
P300, respectively, is without legal basis. Under
Article 1956 of the New Civil Code, no interest
shall be due unless it has been expressly stipulated
in writing. Furthermore, the plaintiff did not pray
for such interest.
17) Prisma Construction & Development Corp vs
Mechavez, 614 SCRA 590
FACTS: Rogelio Pantaleon, the petitioner and the
President and Chairman of the Board of PRISMA,
obtained a P1,000,000 loan from Arthur
Menchavez. The loan had a monthly interest of
P40,000 payable for six months or a total obligation
of P1,240,000.
Pantaleon, in his personal capacity and as executed
by the Board, issued a promissory note to secure the
payment of the loan. Unfortunately, PRISMA and
Pantaleon failed to completely pay the loan within
the stipulated six (6)-month period.
PRISMA and Pantaleon had already paid a total of
₱1,108,772.00 beyond the six-month period.
However, Menchavez found that the petitioners still
had an outstanding balance of ₱1,364,151.00 to
which it applied a 4% monthly interest. Thus,
Menchavez filed a complaint for a sum of money to
enforce the unpaid balance plus 4% monthly
interest.
PRISMA and Pantaleon admitted the loan of
₱1,240,000.00 but denied the stipulation on the 4%
monthly interest, arguing that the interest was not
provided in the promissory note.
Petitioners argue that the expressed mandate of
Article 1956 of the Civil Code is that interest due
should be stipulated in writing, and no such
stipulation exists. Even assuming that the loan is
subject to 4% monthly interest, the interest covers
the six (6)-month period only and cannot be
interpreted to apply beyond it.
ISSUE: Whether the parties agreed to the 4%
monthly interest on the loan. If so, does the rate of
interest apply to the 6-month payment period only
or until full payment of the loan?
HELD: No. The parties did not agree to the 4%
monthly interest. The parties agreed to the payment
of a specific sum of money of P40,000 per month
for six months, not to a 4% rate of interest payable
within a six-month period.
The Court said that interest due should be stipulated
in writing; otherwise, 12% per annum. The Court
cited Article 1956 of the Civil Code specifically
mandates that "no interest shall be due unless it has
been expressly stipulated in writing."
Under this provision, the payment of interest in
loans or forbearance of money is allowed only if:
(1) there was an express stipulation for the payment
of interest; and
(2) the agreement for the payment of interest was
reduced in writing.
The concurrence of the two conditions is required
for the payment of interest at a stipulated rate.
Here, the respondent issued a check for
₱1,000,000.00. 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. 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.
The court said that the interest of ₱40,000.00 per
month corresponds only to the six (6)-month period
of the loan, 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 since in the absence of stipulation, the rate
of interest shall be 12% per annum to be computed
from default,
18) Philippine Phosphate Fertilizer Corp. vs
Kamalig Resources, Inc. 540 SCRA 139
FACTS:
Kamalig purchased fertilizer products from
Philphos for eventual sale to its customers. On 30
September 1985, Kamalig purchased from and
made advance payments for fertilizer products of
various grades to Philphos in the total sum of
₱4,548,152.53. In the letter dated 21 July 1986,7
Philphos informed Kamalig of its overwithdrawal of
various fertilizer stocks in the supply depots in
Manila and Iloilo. According to Philphos, the cost
of these overwithdrawals by Kamalig amounted to
₱1,016,994.21. But since Philphos also had an
obligation to Kamalig in the amount of ₱470,348.91
representing the Capital Recovery Component,
partial compensation took place by operation of law
thereby reducing Kamalig’s obligation to
₱546,645.30. Thus, Philphos demanded that this
sum be settled on or before 31 July 1986, otherwise
Kamalig would be charged 34% interest per annum.
Kamalig, however, denied that it had exceeded its
withdrawals of fertilizer and thus contended that it
should not be made liable for any amount.
ISSUE: Whether or not the imposition of the thirty-
four percent (34%) interest to Kamalig Resources
Inc. by Philippine Phosphate Fertilizer Corporation
is meritorious.
HELD: Concerning the thirty-four percent (34%)
per annum premium guaranteed by Philphos, the
Supreme Court concurred with the Court of Appeals
that no proof was introduced that would show that
the parties stipulated on the payment of interest.
Under Article 1956 of the Civil Code states that
“No interest shall be due unless it has been
expressly stipulated in writing”. Philphos presented
only its demand letters insisting on payment of the
value of the over withdrawals and imposition of
thirty-four percent (34%) interest per annum if
payment is not made in due time. Said unilateral
impositions of interest do not suffice as proof of
agreement on the alleged thirty-four percent (34%)
per annum interest. The decision was dated May 26,
2004.
19) De la Paz vs L& J Development Company, 734
SCRA 364
FACTS: In 2000, by virtue of trust and confidence,
petitioner lent P350 000 with 6% monthly interest
but with no specified maturity date to L&J
Development Company. The agreement to pay
interest was not reduced into writing.
From December 2000 to August 2003, L&J
Development Company paid petitioner Rolando
P576 000 representing interest charges. However,
due to economic crisis, L&J Development
Company failed to pay despite repeated demands.
The MeTC ordered the respondent to pay petioner
its principal obligation of P350 000, plus 12%
interest per annum computed from the filing of the
complaint until full payment of the obligation.
The RTC affirmed in toto the MeTC decision.
The Court of Appeals reversed the decision for the
parties failed to stipulate in writing the imposition
of interest on the loan. Thus, no interest shall be due
pursuant to Article 1956 of the Civil Code. Also,
even the interest was reduced in writing, the 6%
monthly interest is illegal as it is contrary to morals.
ISSUE: Whether the interest is due.
Held:
No. Article 1956 of the Civil Code provides that no
interest shall be due unless it has been expressly
stipulated in writing.
For interest to be due and payable, two conditions
must concur: a) express stipulation for the payment
of interest; and b) the agreement to pay interest is
written.
In the case, De la Paz and L&j Development
Corporation did not put their agreement into
writing. Therefore, no interest is due. De la Paz,
collecting the interest with no stipulation in writing
is prohibited by law.
20) Joven de Cortes vs. Venturazan, 79 SCRA 709
FACTS: Plaintiff filed the instant action for
foreclosure of real estate against the defendants.
The complaint alleges that plaintiff Felix Cortez y
Ochoa was the original owner of nine (9) parcels of
land. While plaintiff Noel J. Cortes was the original
owner of twenty-four (24) parcels of land. Then,
plaintiffs sold and delivered to the defendants
thirty-three (33) parcels of land with all the
improvements for the total sum of P716,573.90 of
which defendants agreed to pay jointly and
severally the sum of P100,000.00 and P40,000.00
upon the signing and execution of a deed of sale
leaving a balance of P576,573.90 which the
defendants agreed and bound themselves to pay
jointly and severally within three (3) years from
January with interest at the rate of 6% per annum.
Defendants further agreed and bound themselves to
secure the payment of the said balance of
P576,573.90 with a first mortgage upon the said 33
parcels of land. Unfortunately, defendants failed
and refused to pay the said balance of P576,573.90
to plaintiffs.
Defendants Spouses Venturanza admit the
allegations of the complaint regarding plaintiffs's
former ownership of the lands but allege that they
are at present the registered owners of the same
parcels of land by virtue of the sale. While
Defendants Jose Oledan and Erlinda M. Oledan
deny the material allegations of the complaint with
respect to the mortgage obligation alleging that
plaintiffs cause of action against them has been
extinguished.
ISSUE: Whether the Agreement and Deed of Sale
of Undivided Share in Real Estate executed and
entered between them and their co-defendants
Venturanzas extinguished their obligation to the
plaintiff.
HELD:
NO. A personal novation by substitution of another
in place of the debtor may be effected with or
without the knowledge of the debtor but not without
the consent of the creditor (Art. 1205, Civil Code
[now Art 1293, New Civil code]). This is the legal
provision applicable to the case at bar. The reason
for the requirement that the creditor give his consent
to the substitution is obvious. The substitution of
another in place of the debtor may prevent or delay
the fulfillment or performance of the obligation by
reason of the inability or insolvency of the new
debtor; hence, the consent of the creditor is
necessary. This kind of substitution may take place
without the knowledge of the debtor when a third
party assumes the obligation of the debtor with the
consent of the creditor. The novation effected in this
way is called delegacion. (Art. 1206, Civil Code
[now Art. 1295, New Civil Code]). In these two
modes of substitution, the consent of the creditor is
always required).
After going over carefully of the decisions of the
Court of Appeal cited by the defendants Oledans,
we find that they do not help any the cause of said
defendants. While the Agreement and Deed of Sale
of Undivided Share in Real Estate, might have
created a juridical relation as between defendants
Venturanzas and Oledans, it cannot however affect
the relation between them on one hand, and the
plaintiffs, on the other, since the latter are not
privies to the said agreement, and this kind of
novation cannot be made without the consent of the
plaintiffs (Garcia vs. Khu Yek Chiong, et al.,
supra). One reason for the requirement of the
creditor's consent to such substitution is obvious.
Substitution of one debtor for another may delay or
prevent the fulfillment of the obligation by reason
of the financial inability or insolvency of the new
debtor; hence, the creditor should agree to accept
the substitution in order that it may be binding on
him.
In the case at bar, the agreement, relied upon by the
defendants Oledans, does not show on its face that
the plaintiffs intervened in, much less gave their
consent to, the substitution. As a matter of fact,
plaintiff Cortes vehemently denied having
consented to the transfer of rights from the Oledans
to the Venturanzas alone. Res inter alios acta alteri
nocere non debet , no less than defendant lose
Oledan himself testified that he did not personally
see Dr. Cortes about the transfer of rights despite
his commitment with his co-defendants in said
agreement 'to inform Messrs. Felix Cortes and Noel
J. Cortes (Jesus Noel) of the execution of the said
agreement". There is thus a complete absence of
animus novandi, whether express or implied, on the
part of the creditors, the Corteses.
21) Security Bank Corp. vs. Spouses Mercado, GR
192934&197010, June 27, 2018
FACTS:
Security Bank granted spouses Mercado a revolving
credit line of 1M pesos. The revolving credit line
agreement stipulated the following:
In the addendum to the agreement, there is a
provision that the spouses are giving their
continuing consent without need for additional
confirmation to the interests stipulated as computed
by Security Bank. The spouses executed a real
estate mortgage to secure the credit line.
Subsequently, the spouses Mercado defaulted in
their payment under the revolving credit line
agreement. Security Bank requested the spouses
Mercado to update their account, and sent a final
demand letter on March 31, 1999.
The spouses filed a complaint for annulment of
foreclosure sale, damages, injunction, specific
performance, and accounting with application for
TRO. Among the contentions of the spouses is that
the interests and the penalties imposed by Security
Bank on their obligations were iniquitous and
unconscionable.
The RTC declared the interest rates contained in the
revolving credit line agreement void for being
potestative or solely based on the will of Security
Bank. The CA also concluded that the provisos
giving Security Bank the sole discretion to
determine the annual interest rate is violative of the
principle of mutuality of contracts because there is
no reference rate from which to peg the annual
interest rate to be imposed.
ISSUE: Whether the provisions under the Civil
Code on interest rate in the revolving credit line
agreement and its addendum violate the principle of
mutuality of contracts?
HELD: The interest rate provisions in the parties'
agreement violate the principle of mutuality of
contracts.
The principle of mutuality of contracts is found in
Article 1308 of the New Civil Code, which states
that contracts must bind both contracting parties,
and its validity or compliance cannot be left to the
will of one of them. The binding effect of any
agreement between parties to a contract is premised
on two settled principles: (I) that any obligation
arising from contract has the force of law between
the parties; and (2) that there must be mutuality
between the parties based on their essential equality.
As such, any contract which appears to be heavily
weighed in favor of one of the parties so as to lead
to an unconscionable result is void. Likewise, any
stipulation regarding the validity or compliance of
the contract that is potestative or is left solely to the
will of one of the parties is invalid. This holds true
not only as to the original terms of the contract but
also to its modifications. Consequently, any change
in a contract must be made with the consent of the
contracting parties, and must be mutually agreed
upon. Otherwise, it has no binding effect.
Stipulations as to the payment of interest are subject
to the principle of mutuality of contracts. As a
principal condition and an important component in
contracts of loan, interest rates are only allowed if
agreed upon by express stipulation of the parties,
and only when reduced into writing.
22) Spouses Silos vs. Philippine National Bank,
GR 181045, July 2, 2014
FACTS: Spouses Eduardo and Lydia Silos
secureda revolving credit line with Philippine
National Bank (PNB)through a real estate mortgage
as a security. After two years, their credit line
increased. Spouses Silos then signed a Credit
Agreement, which was also amended two years
later, and several Promissory Notes as regards their
Credit Agreements with PNB. The said loan was
initially subjected to a 19.5% interest rate per
annum. In the Credit Agreements, Spouses Silos
bound themselves to the power of PNB to modify
the interest rate depending on whatever policy that
PNB may adopt in the future, without the need of
notice upon them. Thus, the said interest rates
played from 16% to as high as 32% per annum.
Spouses Silos acceded to the policy by pre-signing a
total of twenty-six (26) PNs leaving the individual
applicable interest rates at hand blank since it would
be subject to modification by PNB.
Spouses Silos regularly renewed and made good on
their PNs, religiously paid the interests without
objection or fail. However, during the 1997 Asian
Financial Crisis, Spouses Silos faltered when the
interest rates soared. Spouses Silos’ 26thPN became
past due, and despite repeated demands by PNB,
they failed to make good on the note. Thus, PNB
foreclosed and auctioned the involved security for
the mortgage. Spouses Silos instituted an action to
annul the foreclosure sale on the ground that the
succeeding interest rates used in their loan
agreements was left to the sole will of PNB, the
same fixed by the latter without their prior consent
and thus, void. The Regional Trial Court (RTC)
ruled that such stipulation authorizing both the
increase and decrease of interest rates as may be
applicable is valid. The Court of Appeals (CA)
affirmed the RTC decision.
ISSUE: May the bank, on its own, modify the
interest rate in a loan agreement without violating
the mutuality of contracts?
HELD: No. Any modification in the contract, such
as the interest rates, must be made with the consent
of the contracting parties. The minds of all the
parties must meet as to the proposed modification,
especially when it affects an important aspect of the
agreement. In the case of loan agreements, the rate
of interest is a principal condition, if not the most
important component.
Loan and credit arrangements may be made enticing
by, or "sweetened" with, offers of low initial
interest rates, but actually accompanied by
provisions written in fine print that allow lenders to
later on increase or decrease interest rates
unilaterally, without the consent of the borrower,
and depending on complex and subjective factors.
Because they have been lured into these contracts
by initially low interest rates, borrowers get caught
and stuck in the web of subsequent steep rates and
penalties, surcharges and the like. Being ordinary
individuals or entities, they naturally dread legal
complications and cannot afford court litigation;
they succumb to whatever charges the lenders
impose. At the very least, borrowers should be
charged rightly; but then again this is not possible in
a one-sided credit system where the temptation to
abuse is strong and the willingness to rectify is
made weak by the eternal desire for profit.