borrower to pay such thing; the creditor will receive the value of

the thing at the time of the perfection of the loan (regardless of the
value of the thing at the time of payment).

EXAMPLE:

D borrowed from C two (2) sacks of rice of a certain kind

and quality. When the loan was perfected, the price of each
sack was P1,400.
D should return to C two (2) sacks of rice of the same kind
and quality although at the time of payment, the price had
increased to P1,600. If on the due date of the obligation, the
same kind of rice could not be delivered by D because it was
not available then D should pay C the sum of P2,800 instead,
the value of the rice at the time of the perfection of the loan.

ART. 1956. No interest shall be due unless it has been

expressly stipulated in writing. (1755a)

Interest.
Interest may be paid either as compensation for the use of
money (monetary interest) referred to in Article 1956 or imposed by
law or by courts as penalty or indemnity for damages
(compensatory interest) under Articles 2209 and 2212 for breach
of contractual obligations. (Republic vs. Unimex, 518 SCRA
19 [2007]; Garcia vs. Thio, 518 SCRA 433 [2007]; Siga-an vs.
Villanueva, 576 SCRA 696 [2009].)

Kinds of interest.
They are:
(1) Simple interest. — that which is paid for the principal at a
certain rate fixed or stipulated by the parties (see Art. 2209, Civil
Code.);
(2) Compound interest. — that which is imposed upon interest
due and unpaid. The accrued interest is added to the principal
sum and the whole (principal and accrued interest) is treated as
a new principal upon which the interest for the next period is
calculated (Arts. 1959, 2212, ibid.);
(3) Legal interest. — that which the law directs to be charged
absent any agreement as to the rate between the parties. (Art.
 ular No. 799, series of 2013, the rate of
2209, ibid.) Under BSP Circ interest
e of any money, goods or credit,
for the loan or forbearanc and the rate
s, absent express contract as to
allowed in judgment such rate of interest
cent (6%) per annum, effective
rate, is six per July 1, 2013. Previously,
t the legal rate of interest at
the BSP se 12%. The rate of interest
SP Circular No. 799 is now
provided in B aligned with Section 1 of the
.
Usury Law
dgments when there
(a) The same rate is allowed in ju is no
nticipation of
express contract between the parties in a the same.
the ren
The interest is computed from the time of dition of the
trial court's, not of the appellate court's decision. (De Lima vs.
Laguna Tayabas Co., 160 SCRA 70 [1988].)
(b) The rule has been laid down that the six percent (6%)
interest imposed by a court not be computed from filing the
complaint because at the time of filing the complaint, the
amount of damages to which the plaintiff may be entitled
remains unliquidated and not known until it is definitely
ascertained, assessed, and determined by the court and only
after the presentation of proof thereon. (Phil. Airlines, Inc. vs.
Court of Appeals, 275 SCRA 621 [1997]; Korean Airlines vs.
Court of Appeals, 234 SCRA 717 [1994]; Eastern Shipping Lines
vs. Court of Appeals, 234 SCRA 78 [1994].)
(c) Article 22097 applies to loans or forbearance of money,
good or credits which arise out of obligations consisting in a
sum of money and the debtor incurs in delay. (Lara's Gifts &
Decors, Inc. vs. Midtown Industrial Sales, Inc., G.R. No.
225433, August 28, 2019; Republic Planters Bank vs. Court of
Appeals, 216 SCRA 738 [1992]; National Power Corp. vs.
Angas, 208 SCRA 542 [1992]; Philippine National Bank vs.
Court of Appeals, 263 SCRA 766 [1996].)
(4) Lawful interest.
— that which the law allows or does
not prohibit, that is, the rate of interest within the maximum
prescribed by law (Secs. 2, 3.); and
 (5) Unlawful or usurious interest. — that which is paid or
stipulated to be paid beyond the maximum fixed by law. (ibid.)

EXAMPLES:
(1) B borrowed P50,000 from L payable within one (1)
year. The parties did not expressly stipulate in writing that B
shall pay interest. Under the law, B is not liable to pay interest.
(see Art. 1956.)

(2) Suppose, in the above example, it is expressly stipulated in

writing that B shall pay interest but the parties failed to fix the
rate thereof. Here, the legal rate of 6% per annum is payable.
(3) Suppose now that B expressly agreed in writing to
pay interest of 12% per annum. The interest stipulated is simple
interest. If it was also agreed that the interest due and unpaid
shall likewise earn interest, this interest on interest is called
compound interest.

Requisites to recover interest.

In order that interest may be chargeable, the requisites are:
(1) The payment of interest must be expressly stipulated (Tan vs.
Valdehueza, 66 SCRA 61 [1975]; jardenil vs. Salas, 73 Phil. 636
[1942].);
(2) The agreement to pay interest must be in writing (Art.
1956.); and
(3) The interest must be lawful. (see, however, note to Arts.
1957 and 1961.)

Express stipulation to pay interest.

writing.
(1) Payment expressly stipulated in — Article 1956
est shall be due unless it
specifically mandates that no inter has
riting. Thus, the collection
been expressly stipulated in w of interest
uced in writing is prohibited
with no stipulation red by law. (see Tan
upra; Ching vs. Nicdao, 522
vs. Valdehueza, s SCRA 316 [2007];
struction & Development Corp.
Prima Con
010].) Unilateral impositions of
vs. Menchavez, 614 SCRA 590 [2 interest
of an agreement to pay interest.
do not suffice as proof (Phil.
vs. Kamalig Resources, Inc., 540
Phosphate Fertilizer Corp.
 payment of interest
SCRA 139 [2007].) The requirement that the must
lies to monetary in-
be expressly stipulated in writing app
terest, not to compensatory interest.
which interest
(2) Stipulation inferred from documents in
h Supreme Court,
payments are stated. — According to the Spanis the
56 requires to be
agreement to pay interest (which Article 19 express)
which the interest
can be inferred from documents in payments are
acc
stated, such as periodic statements of ounts issued by the
lender with the conformity of the borrower and which
statements of account include or make reference to the interest
payable. (Jose Luis Lacruz Berdejo, II Elementos de Derecho
Civil, p. 169 [2013], citing la S. 9 mayo 1944.)

ILLUSTRATIVE CASE:
Absence of express stipulation in writing to pay interest
Facts: D's company obtained a loan from C. The loan, with
no specified maturity date, carried a 6% monthly interest, i.e.,
P21,000. The agreement to pay interest was not reduced into
writing.

From December 2000 to August 2003, D's company paid C

P576,000.00 representing interest charges. D's company failed to
pay despite repeated demands.
Issue: Is interest due?

Held: No. Under Article 1956 of the Civil Code, no interest

shall be due unless it has been expressly stipulated in writing.
Jurisprudence on the matter also holds that for interest to be
due and payable, two conditions must concur: a) express
stipulation for the payment of interest; and b) the agreement to
pay interest is reduced in writing.

Here, the parties did not put down in writing their

agreement. Thus, no interest is due. The collection of interest
with no stipulation in writing is prohibited by law.

C asserts that his situation deserves an exception to

applying Article 1956. He blames D, a lawyer, for the lack of a
written document, claiming that D used his legal knowledge to
dupe him. C thus imputes bad faith by D and D's company. The
Court, however, finds no deception by D and D's company. For
one, despite the lack of a document stipulating the payment
 terests
of interest, D's company nevertheless devotedly paid in on
ancial
the loan. It only stopped when it suffered from fin
the six
difficulties that prevented it from continuously paying
percent (6%) monthly rate.
It may be raised that D's company is estopped from
ying
questioning the interest rate considering that it has been pa C
ao, the
interest for over two and a half years. In Ching vs. Nicd daily
as
payments of the debtor to the lender were considered payment
cle
of the principal amount of the loan because Arti 1956 was
not complied with. This was notwithstanding the debtor's
admission that the payments made were for the interests
due. The Court categorically stated that "[e]stoppel cannot give
validity to an act that is prohibited by law or one that is against
public policy."
Even if the payment of interest has been reduced in
writing, a six percent (6%) monthly interest rate on a loan is
unconscionable, regardless of who between the parties
proposed the rate. (De la Paz vs. L & I Development Company, 734
SCRA 364 [20141.)

Existence of stipulation to pay

interest.
(1) If a particular rate of interest has been expressly stipulated by
the parties in writing, that interest, not the legal rate of interest, shall
be applied. (Casa Filipina Development Corp. vs. Deputy
Executive Secretary, 209 SCRA 399 [1992].)
(2) If the parties expressly agreed in writing on the payment of
interest but the exact rate of the interest is not mentioned, the legal
rate of 6% shall be payable. (see Sec. 1, Usury Law, infra.)
(3) No increase in interest shall be due unless such increase
has also been expressly stipulated. (see Phil. National Bank vs.
Court of Appeals, 196 SCRA 536 [1991].)
(4) Sales invoices or slips issued by a store to its customers,
stating interests and attorney's fees in the usual printed forms as
terms and conditions, without the signature of the obligor, do not
constitute the express stipulation required by Article 1956.
Therefore, the obligor is not liable for the interest except only the
legal interest (6%) under Article 2209 (infra.) on the amount due if
he incu
rs in delay. (see Royal Shirt Factory, Inc. vs. Co Bon
 Tic, 94 Phil. 994 [1954]; Uy Chao vs. Compania Maritima, 10 C.A.
Rep. 294.)
(5) The receipt by the creditor of interest payment up to a
certain date on a loan that has already matured does not ipso facto
result in the renewal or extension of maturity period of the loan up
to said date. Whether or not a loan may be renewed does not
solely depend on the debtor but more so on the discretion of the
creditor. (Bonnevie vs. Court of Appeals, 125 SCRA 122 [1983].)
(6) The vendor and the vendee are legally free to stipulate
for the payment of either the cash price of a subdivision lot or its
installment price. Should the vendee opt to purchase a subdivision
lot via the installment payment system, he is paying interest on the
cash price, whether the fact and rate of such interest payment are
disclosed in the contract or not. The contract for the purchase and
sale of a piece of land on the installment plan is not only lawful;
it also reflects a very widespread usage or custom in our present-
day commercial life. (Relucio vs. Bullante-Garfin, 187 SCRA 405
[1990].)

Liability for interest even in the absence

of stipulation.
Article 1956 is subject to two (2) exceptions:
(1) Indemnity for damages. — The debtor in delay is liable to
pay legal interest (6%) as indemnity for damages even absent
stipulation for the payment of interest.'
(a) Under Article 2209,9 the appropriate measure for
damages in case of delay in discharging an obligation
consisting of the payment of a sum or money,i° is the payment
 of the penalty interest at the rate agreed upon; and in the
absence of a stipulation of a particular rate of penalty interest,
then the payment of additional interest at a rate equal to the
regular monetary interest, and if no regular interest had been
agreed upon, then payment of legal interest which is six
percent (6%) per annum as provided for in BSP Circular No.
799, series of 2013. (Erma Industries, Inc. vs. Security Bank
Corp., G.R. No. 191274, December 6, 2017; State Investment
House, Inc. vs. Court of Appeals, 198 SCRA 390 [1991];
Eastern Shipping Lines, Inc. vs. Court of Appeals, 234 SCRA
78 [1994]; New Sampaguita Builders Construction, Inc. vs.
Phils., 435 SCRA 565 [2004], citing De Leon, Comments and
Cases on Credit Transactions [1995], p. 50.)
(b) The "obligation consisting of the payment of a sum of
money" referred to in Article 2209 is not confined to a loan
or forbearance of money. It has also been applied by the
Supreme Court in cases involving default in the payment of
the price or consideration under a contract of sale and an
action for damages for injury to persons and loss of property
and an action for damages arising from unpaid insurance
claims. (Castelo vs. Court of Appeals, 244 SCRA 180 [1995].)
In Lara's Gifts & Decor, Inc. vs. Midtown Industrial Sales,
Inc. (G.R. No. 225433, August 28, 2019), the Supreme Court
ruled that Article 2209 of the Civil Code applies only to loans or
forbearance of money, goods, or credit where there is a
debtor-creditor relationship.
 rec
(c) Under Article 2213, interest "cannot be overed
ages except when the
upon unliquidated claims or dam
able certainty." It
demand can be established with reason is
s, unliquidated a
axiomatic that if the suit were for damage nd not
determined by
known until definitely assessed and the courts,
per annum sh
after proof, interest at rate of 6% ould be from the
rt is made, i.
date the judgment of the cou e., at which time the
qualification of damages may be deemed to be reasonably
ascertained. (Lim vs. Court of Appeals, 373 SCRA 394
[20021.)
(2) Interest accruing from unpaid interest. — Interest due shall
earn interest from the time it is judicially demanded although
the obligation may be silent upon this point. (Art. 2212; see Sec. 5,
Usury Law.)
(a) Both Article 2212 of the Civil Code and Section 5 of
the Usury Law are applicable only where interest has been
stipulated by the parties. Article 1212 contemplates
stipulated or conventional interest which has accrued
when demand was judicially made. If there was no accrued
monetary interest, there will be no compensatory interest on the
monetary interest. Thus, it was held that where no interest had
been stipulated by the parties, no accrued conventional
interest could further earn interest upon judicial demand.
(Phil.-American Accident Insurance Co., Inc. vs. Flores, 97
SCRA 811 [19801; David vs. Court of Appeals, 310 SCRA 710
[1999].)

(b) Where the court's judgment which did not provide

for the payment of interest has become final, no interest may be
awarded. (Santuban vs. Fule, 133 SCRA 762 [1984]; Ruiz vs.
Caneba, 191 SCRA 865 [1990]; Solidbank Corporation vs. Court
of Appeals, 379 SCRA 159 [2002].) What remains is the
ministerial execution of the judgment.

Guidelines laid down in cases.

(1) In Nacar vs. Gallery Frames and/or Felipe Bordey, Jr. (703
SCRA 439 [2013].), the Supreme Court modified the guidelines
 BSP
Laid down in the case of Eastern Shipping Lines to embody
Circular No. 799, series of 2013, as follows:
I. When an obligation, regardless of its source, i.e.,
law, contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages.
The provisions under Title XVIII on "Damages" of the Civil
Code govern in determining the measure of recoverable
damages.
II. With regard particularly to an award of interest in
the concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it
consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be
that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be six
percent (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.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the
discretion of the court at the rate of six percent (6%)
per annum. No interest, however, shall be adjudged
on unliquidated claims or damages, except when or
until the demand can be established with reasonable
certainty.
Accordingly, where the demand is established
with reasonable certainty, the interest shall begin to
nm from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code.), but when such
certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to
run only from the date the judgment of the court is
 made (at which time the quantification of damages
may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest
shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a
sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph
1 or paragraph 2, above, shall be six percent (6%)
per annum from such finality until its satisfaction,
this interim period being deemed to be by then an
equivalent to a forbearance of credit. And, in addition to
the above, judgments that have become final and
executory prior to July 1, 2013, shall not be disturbed
and shall continue to be implemented applying the
rate of interest fixed therein."
(2) In Lara's Gifts & Decors, Inc. vs Midtown Industrial Sales,
Inc. (G.R. No. 225433, August 28, 2019), the Supreme Court
modified Eastern Shipping and Nacar in this manner:

"With regard to an award of interest in the concept of

actual and compensatory damages, the rate of interest, as
well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, goods, credits or judgments, the interest due shall be
that which is stipulated by the parties in writing, provided it is
not excessive and unconscionable, which, in the absence of a
stipulated reckoning date, shall be computed from default,
i.e., from extrajudicial or judicial demand in accordance with
Article 1169 of the Civil Code, UNTIL FULL PAYMENT,
without compounding any interest unless compounded
interest is expressly stipulated by the parties, by law or
regulation. Interest due on the principal amount accruing as
of judicial demand shall SEPARATELY earn legal interest
 tral ng
at the prevailing rate prescribed by the Bangko Sen
ULL
Filipinas, from the time of judicial demand UNTIL F
PAYMENT.
an or
2. In the absence of stipulated interest, in a lo
e of
forbearance of money, goods, credits or judgments, the rat
legal
interest on the principal amount shall be the prevailing
ch
interest prescribed by the Bangko Sentral ng Pilipinas, whi
r
shall be computed from default, i.e., from extrajudicial o
judicial demand in accordance with Article 1169 of the Civil
Code, UNTIL FULL PAYMENT, without compounding any
interest unless compounded interest is expressly stipulated by
law or regulation. Interest due on the principal amount
accruing as of judicial demand shall SEPARATELY earn
legal interest at the prevailing rate prescribed by the Bangko
Sentral ng Pilipinas, from the time of judicial demand UNTIL
FULL PAYMENT.
3. When the obligation, not constituting a loan or
forbearance of money, goods, credits or judgments, is
breached, an interest on the amount of damages awarded
may be imposed in the discretion of the court at the prevailing
legal interest prescribed by the Bangko Sentral rig Pilipinas,
pursuant to Articles 2210 and 2011 of the Civil Code. No
interest, however, shall be adjudged on unliquidated claims or
damages until the demand can be established with
reasonable certainty. Accordingly, where the amount of the
claim or damages is established with reasonable certainty,
the prevailing legal interest shall begin to run from the
time the claim is made extrajudicially or judicially (Art.
1169, Civil Code) UNTIL FULL PAYMENT, but when such
certainty cannot be so reasonably established at the time the
demand is made, the interest shall begin to run only from
the date of the judgment of the trial court (at which time the
quantification of damages may be deemed to have been
reasonably ascertained) UNTIL FULL PAYMENT. The actual
base for the computation of the interest shall, in any case, be
on the principal amount finally adjudged, without
compounding any interest unless compounded interest is
expressly stipulated by law or regulation. "
 TRANSACTIONS

EXAMPLES:
hims
(1) Under a written contract of loan, D obliged elf to
incu
pay C the sum of P30,000 at 12% interest a year. If D rs in
delay, he is liable to pay the interest agreed upon as damages
and not for the use of the money.
(2) If nothing was mentioned about the payment of
interest, then no interest is due. If D incurs in delay, he is liable to
pay interest at the legal rate which is six percent (6%) per
annum from the date of delay.
(3) Suppose in the first example, D incurred in delay for
one year. The indemnity for damages shall also be the stipulated
interest of 12% so that D shall be liable to pay a total of P7,200:
P3,600 as compensatory interest for the first year and another
P3,600, as indemnity for damages for the one (1) year delay.
(4) If the interest was judicially demanded six (6) months
after D incurred in delay, the interest due (P3,600 + P1,800 =
P5,400) shall earn legal interest (6%) from that time until
payment is made. (Art. 2212.)

ILLUSTRATIVE CASE:
Interest for 14 years was due on principal obligation when
foreclosure was filed.
Facts: The remaining balance of D's indebtedness to C is
P576,573.90 with an agreed interest at the rate of 6% per
annum from January 1, 1959. D defaulted. So, C filed a suit for
foreclosure of mortgage on December 12, 1962.

Issue: How much interest is payable?

Held: The interest at six percent (6%) per annum from
January 1, 1959 to December 12, 1962 is P136,482.13. This is to
be added to the principal amount, thus making a total of
P713,056.03 which shall earn legal interest at 6% per annum
from December 12, 1962 until fully paid. Such interest is not
due by stipulation but by the mandate of the law, i.e., Article
2212. (Joven de Cortes vs. Venturanza, 79 SCRA 709 [1977].)

Liability for surcharges and penalties.

Surcharges and penalties agreed to be paid by the debtor if
default occurs partake of the nature of liquidated damages,
covered by Section 4, Chapter 3, Title XVIII of the Civil Code.
Article 2227 thereof provides: "ART. 2227. Liquidated damages,
whether intended as an indemnity or penalty, shall be equitably
reduced if they are iniquitous and unconscionable. In exercising
this vested power to determine what is iniquitous and
unconscionable, the Court must consider the circumstances of
each case."

ILLUSTRATIVE CASE:
Penalty interest of 3% a month.
Facts: D obtained a loan from C binding himself to pay the
sum borrowed with interest of 15.189% per annum upon
maturity and to pay a penalty of five percent (5%) every month on
the outstanding principal and interest in case of default. In
addition, D agreed to pay 10% of the total amount due by way
of attorney's fees if the matter was indorsed to a lawyer for
collection or if a suit was instituted to enforce payment. D failed
to pay. The Court of Appeals subsequently reduced the penalty
from five percent (5%) per month to three percent (3%) per month.
Issue: Is the penalty interest of three percent (3%) per month
manifestly exorbitant, iniquitous and unconscionable?
Held: No. A penalty clause, expressly recognized by law, is
an accessory undertaking to assume greater liability by an
obligor in case of breach of an obligation. It functions to
strengthen the coercive force of the obligation and to provide, in
effect, for what could be the liquidated damages resulting from
such a breach. The obligor would then be bound to pay the
stipulated indemnity without the necessity of proof on the
existence and on the measure of damages caused by the breach.
Although a court may not at liberty ignore the freedom of the
parties to agree on such terms and conditions as they see fit that
contravene neither law nor morals, good customs, public order or
public policy, a stipulated penalty, nevertheless, may be equitably
reduced by the courts if it is iniquitous or unconscionable or if
the principal obligation has been partly or irregularly complied
with.
The question of whether a penalty is reasonable or
iniquitous can be partly subjective and partly objective.
 Its resolution would depend on such factors as, but not
necessarily confined to, the type, extent and purpose of the
penalty, the nature of the obligation, the mode of breach and its
consequences, the supervening realities, the standing and
relationship of the parties, and the like, the application of
which, by and large, is addressed to the sound discretion of the
court. In Rizal Commercial Banking Corp. vs. Court of Appeals, just
an example, the Court has tempered the penalty charges
after taking into account the debtor's pitiful situation and its
offer to settle the entire obligation with the creditor bank. The
stipulated penalty might likewise be reduced when a partial or
irregular performance is made by the debtor. The stipulated
penalty might even be deleted such as when there has been
substantial performance in good faith by the obligor, when
the penalty clause itself suffers from fatal infirmity, or when
exceptional circumstances so exist as to warrant it.
The Court of Appeals, exercising its good judgment in the
instant case, has reduced the penalty interest from five percent
(5%) a month to three percent (3%) a month which petitioner
still disputes. Given the circumstances, not to mention the
repeated acts of breach by petitioners of their contractual
obligation, the Court sees no cogent ground to modify the
ruling of the appellate court. (Ligutan vs. Court of Appeals, 376
SCRA 560 [2002].)

Interest separate and distinct from surcharges

and penalties.
The essence or rationale for the payment of interest often
called "cost of money," is separate and distinct from that of
surcharges and penalties.
(1) In obligations with a penal clause, the penalty will gene-
rally substitute for damages and the payment of interest in case of
noncompliance, unless there is a stipulation to the contract. (Art.
1226].) Thus, a penalty stipulation is not necessarily preclusive of
interest, if there is an agreement to that effect, the two (2) being
distinct concepts which may separately be demanded. What
ot allowing the cr full
may justify a court in n editor to impose
es, despite an express s therefor
surcharges and penalti tipulation
not equally justify non-payment or
in a valid agreement, may
 6 SCRA
reduction of interest. (Ligutan vs. Court of Appeals, 37 560
[2002].)
ial
(2) The charging of interest for loans forms an essent
which
and fundamental element of the banking business, may
eing. It
be considered at the very core of its existence or b is
ill not
inconceivable for a bank to grant loans for which it w
on vs.
charge any interest. (Rizal Commercial Banking Corporati
t of
Court of Appeals, 289 SCRA 292 [1998]; Digutan vs. Cour
Appeals, 376 SCRA 560 [2002] .)

Escalation clause in a loan agreement.

An escalation clause is a stipulation allowing an increase in
the interest rate originally agreed upon by the parties. On the
other hand, a de-escalation clause is a stipulation allowing a
decrease in the interest rate originally agreed upon by the parties.
(1) Escalation clause generally valid. — Escalation clauses are
valid stipulations in commercial contracts to maintain fiscal
stability and to retain the value of money on long-term contracts.
(New Sampaguita Builders Construction, Inc. vs. PNB, 935
SCRA 565 [2004], citing De Leon, Comments and Cases on Credit
Transactions [1995], p. 87.) Thus, a stipulation that the interest
rate will be increased if the Bangko Sentral raises its rediscount-
ing rates is valid (Concepcion vs. Court of Appeals, 274 SCRA
614 [1997].);
(2) Escalation clause must not be solely potestative. — An
escalation clause that grants the creditor an unbridled right to
adjust the interest independently and upwardly, completely
depriving the debtor of the right to assent to an important
modification in the agreement is void. (Juico vs. Chinabank,
695 SCRA 520 [2013].) To give the lender unbridled right to
unilaterally upwardly adjust the interest on a loan would
completely take away from the borrower the right to assent to an
important modification in their agreement and would negate the
element of mutuality in contracts ordained in Article 1308 of the
Civil Code. (Phil. National Bank vs. Court of Appeals, 238 SCRA
20 [1994]; Concepcion vs. Court of Appeals, 274 SCRA 614 [1997];
Mendoza vs. Court of Appeals, 359 SCRA 438 [2001]; Florendo, Jr. vs.
Metropolitan Bank & Trust Co., 532 SCRA 43 [2007]; Equitable PCI
Bank vs. Ng Sheung Ngor, 541 SCRA 223 [2007].)
Thus, a stipulation that the bank can increase the stipulated
interest per annum "within the limits allowed by law at any
time depending on whatever policy [the bank] may adopt in the
future" is void (Silos vs. Philippine National Bank, G.R. No.
181045, July 2, 2014.);
(3) Other requirements for validity. The following points
must be considered by creditors and debtors in the drafting of
valid escalation clauses.
First, as a matter of equity and consistent with P.D. No. 1684,
the escalation clause must be paired with a de-escalation clause.12
Second, so as not to violate the principle of mutuality, the
escalation must be pegged to the prevailing market rates, and
not merely make a generalized reference to "any increase or
decrease in the interest rate" in the event a law or a Central Bank
regulation is passed.
Third, consistent with the nature of contracts, the proposed
modification must result from an agreement between the parties.
(see concurring opinion of Sereno, C.J., in Juico vs. China Banking
Corporation, 695 SCRA 520 [2013].)
In another case, the court ruled that the stipulations on interest
rate repricing are valid because: (a) the parties mutually agreed on
the stipulations; (b) repricing takes effect only upon creditor's
written notice to the borrower of the new interest rate; and (c)
the borrower has the option to prepay its loan if the borrower
and the creditor do not agree on the new interest rate (Solidbank
Corporation vs. Permanent Homes, Incorporated, 625 SCRA 275
[2010].);
 (4) Consequences of invalid escalation clause. — An invalid
escalation clause, being separable from the other stipulations of
an
the loan agreement, does not affect the validity of the lo
agreement. Hence, the creditor is entitled to the payment of the
principal amount of the loan. However, since the escalation clause
ld
is invalid, the interest rate payable by the borrower shou be the
original interest rate agreed upon by the parties;
(5) Estoppel by the borrower. — If the escalation clause is
invalid, the borrower is not estopped from questioning the
validity of the clause or the interest rate imposed. It has been
held that "[e]stoppel cannot be predicated on an illegal act. As
between the parties to a contract, validity cannot be given to it by
estoppel if it is prohibited by law or is against public policy." (Silos
vs. Philippine National Bank, 728 SCRA 617 [2014].)

ILLUSTRATIVE CASE:
Promissory notes provided for an escalation clause.
Facts: Spouses S executed various promissory notes and
constituted a mortgage over their parcel of land to secure the
performance of their obligation. The interest rates were fixed for
the first year, subject to escalation or de-escalation in certain events
without advance notice to them.
Issue: Is the escalation clause valid?
Held: Yes. Escalation clauses like those affecting the
petitioners were not void per se, and an increase in the
interest rate pursuant to such clauses were not necessarily
void. In Philippine National Bank vs, Rocamora, the Court said:
"Escalation clauses are valid and do not contravene public
policy. These clauses are common in credit agreements as
means of maintaining fiscal stability and retaining the value of
money on long-term contracts. To avoid any resulting one-
sided situation that escalation clauses may bring, we required in
Banco Filipino the inclusion in the parties' agreement of a de-
escalation clause that would authorize a reduction in the
interest rates corresponding to downward changes made by
law or by the Monetary Board."
The validity of escalation clauses notwithstanding, we
cautioned that these clauses do not give creditors the unbridled
 right to adjust interest rates unilaterally. As we said in the
same Banco Filipino case, any increase in the rate of interest
made pursuant to an escalation clause must be the result of an
agreement between the parties. The minds of all the parties must
meet on the proposed modification as this modification affects
an important aspect of the agreement. There can be no contract
in the true sense in the absence of the element of an agreement,
i.e., the parties' mutual consent. Thus, any change must be
mutually agreed upon, otherwise, the change carries no binding
effect. A stipulation on the validity or compliance with the
contract that is left solely to the will of one of the parties is void;
the stipulation goes against the principle of mutuality of contract
under Article 1308 of the Civil Code. (Delos Santos vs.
Metropolitan Bank and Trust Company, 684 SCRA 410 [2012].)

Interest to be based on the prevailing

market rate.
(1) Interest rate not dependent solely on will of creditor. — Where the
clause authorizes the creditor "to correspondingly increase the
rate of the interest in the event of changes in prevailing market
rates," it cannot be said to be dependent solely on the will of the
creditor as it is also dependent on the prevailing market rates.
Obviously, the fluctuation in the market rates is beyond the control
of the creditor. (Polotan vs. Court of Appeals, 296 SCRA 247
[1998].)
(a) The contractual provision states that "if there occurs
any change in the prevailing market rates, the new interest
rate shall be the guiding rate in computing the interest due on
the outstanding obligation without need of serving notice to
the cardholder other than the required posting on the
monthly statement served to the Cardholder."
This provision, it was held, could not be considered an
escalation clause for the reason that it neither states an
increase nor a decrease in interest rate. Said clause simply
states that the interest rate should be based on the prevailing
market rate. Interpreting it differently, while the clause
does not expressly stipulate a reduction in interest rate, it
be
nevertheless provides a leeway for the interest rate to
 reduced if the prevailing market rates dictate the reduction.
(ibid.)
(b) While it may be acceptable, for practical reasons given
the fluctuating economic conditions, for banks to stipulate
that interest rates on a loan not be fixed and instead be made
dependent upon prevailing market conditions, there should
always be a reference rate upon which to peg such variable
interest rates.
(2) Decrease in interest rate covered. — The aforequoted pro-
vision was upheld notwithstanding that it may partake of an
escalation clause, because at the same time it provides for the
decrease in the interest rate if the prevailing market rates
dictate its reduction. The interest rate is designed to be based on
the prevailing market rate. On the other hand, a stipulation
ostensibly signifying an agreement to "any increase or decrease in
the interest rate," without more, cannot be accepted as valid for it
leaves solely to the creditor the determination of what interest
rate to charge against an outstanding loan. (Consolidated Bank and
Trust Corporation vs. Court of Appeals, 356 SCRA 671 [2001], citing
Polotan vs. Court of Appeals, 296 SCRA 247 [19981.)

Borrower's option to prepay the loan.

(1) If the escalation clause is valid, and the borrower does not
agree to the increased rate determined under the escalation
clause, the borrower should have the option to prepay the loan.
(Solidbank Corporation vs. Permanent Homes, Incorporated,
625 SCRA 275 [2010].)
(2) On the other hand, if the escalation clause is void because it
gives the lender the right to unilaterally determine interest
rates, the lender cannot take refuge in the right given to the
borrower to prepay the loan without penalty if the borrower is
not agreeable to the new interest rate. According to the Supreme
Court, "premium may not be placed upon a stipulation in a
contract which grants one party the right to choose whether to
continue with or withdraw from the agreement if it discovers
that what the other party has been doing all along is improper or
illegal." (Silos vs. Philippine National Bank, 728 SCRA 617 [2014].)
 ART. 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. (n)

Usurious contracts declared void.

(1) Form of contract not conclusive. — The above provision is
deemed necessary to defeat the cunning devices of usurers.
(Report of the Code Commission, p. 152.) The form of the
contract is not conclusive. Parol evidence is admissible to show
that a written document though legal in form was in fact a cloak or
device to cover usury if from a construction of the whole
transaction it becomes apparent there exists a corrupt intention to
violate the laws on usury.
Cases illustrating the cunning devices of usurers are dis-
cussed subsequently under the Usury Law. It is evident that the
Civil Code yields to the Usury Law when it comes to the question of
how much of the loans and interests paid by the borrower may be
recovered. (Briones vs. Cammayo, 41 SCRA 404 [1971].)
(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. (see Sec. 7, Usury Law, infra.) It is only
the stipulation on usurious interest which should be treated as
void so that the loan becomes without stipulation to pay interest.
(Briones vs. Cammayo, supra; see First Metro Investment Corp.
vs. Este Del Sol Mountain Reserve, Inc., 369 SCRA 99 [2001].) In a
simple loan with stipulation of usurious interest, the prestation of
the debtor to pay the principal debt which is the cause of the
contract (Art. 1350.) is not illegal. (Angel Jose Warehousing Co.,
Inc. vs. Chelda Enterprises, 41 SCRA 404 [1971]; Private Dev.
Corp. of the Phils. vs. Intermediate Appellate Court, 213 SCRA
282 [1992].)
The nullity of the stipulation on the usurious interest does not,
therefore, affect the lender's right to receive back the principal
amount of the loan.
(3) Right of debtor. — With respect to the debtor, the amount
paid as interest under a usurious agreement is recoverable by
 ave been made under
him, since the payment is deemed to h
Metro Investment Corp.
restraint, rather than voluntarily. (First vs.
69 SCRA 99 [20011.)
Este Del Sol Mountain Reserve, Inc., 3
ny ceiling. The
Note: Interest rates are no longer subject to a rate
e parties (see Note in II
will depend on the agreement of th — The
the courts to temper
Usury Law.), subject to the power of the interest
nscionable or iniquitous
rates if they are found unco considering the
circumstances of each case.

Instances of contracts disguised

to cover usurious loans.
The following may be mentioned:
(1) Credit sale of property at exorbitant price to loan applicant.
— When a credit sale of property is made to an applicant for a
loan at an exorbitant price to be paid at a future day to enable the
purchaser to sell it immediately for cash and thus obtain the
money of which he is in need, and the purchaser's obligation is
for a sum greater than the fair value of the property sold and
lawful interest. It is, however, necessary to show actual intent to
reserve usurious interest under the guise of excess of price (91
C.J.S. 592.);

(2) Purchase of lender's property at an exorbitant price to be taken

from loan. — When the lender corruptly requires of the borrower as
a condition for securing the loan, the purchase of the lender's
property at an exorbitant price to be taken out of the loan, or
payable at a subsequent date and takes the borrower's obligation for
the sum loaned, or for both the loan and purchase price; or as a
condition for extending time in which to pay a debt, the
purchase of the lender's property at an exorbitant price. In such
case, the principal debt is the amount of the loan plus the fair
value of the property at the time of the receipt by the buyer. All in
excess of that sum is usury.

But if the evidence does not disclose a guilty intent, such a

contract will be upheld even though the collateral sale is made at a
price higher than the market value of the property sold (ibid.);
 (3) Price of sale with right to repurchase inadequate. — When
reservi
a vendor sells a property at an inadequate price, ng an
original p
option to repurchase at a price greater than the rice
to be a mort
with lawful interest as such contract is in effect gage to
secure a usurious loan (ibid.);
(4) Pretended lease by borrower at usurious rental. — Where the
purc
borrower wishes to borrow money to enable him to hase
property and the lender furnishes the money taking title in
himself, and puts the borrower in possession under a pretended
lease at a usurious rental (ibid., 598.);
(5) Rent-free by lender of borrower's property besides interest on
loans. — Where the lender, besides interest on the sum loaned, is to
have the privilege of occupying rent-free, certain property of the
borrower. Where other circumstances are present, showing that
the purchase and lease are bona fide and not colorable, the
transaction will be valid (ibid.);
(6) Date for repayment of loan with interest ante-dates actual
transaction. — Where an obligation for the repayment of money
bearing interest from its date, ante-dates the actual transaction
and receipt of the money loaned to hide a usurious contract.
Where, however, the circumstances of the loan show good
faith by the contracting parties, as where the delay in receiving the
money is unavoidably incident of the completion of the
transaction or is due merely to the failure of the borrower to make
earlier demand for it, the contract will not ordinarily be regarded as
usurious, even though the actual result may be to give to the
lender something more than the lawful rate of interest, if delay is not
unreasonable (ibid., 612; see Art. 1602.); and
(7) Payment by borrower for lender's services as additional
compensation for loan. — An apparently lawful loan is usurious
when it is intended that additional compensation for loan be
disguised by an ostensibly unrelated contract providing for
payment by the borrower for the lender's services which are of
little value or which are not, in fact, to be rendered. (First Metro
Investment Corp. vs. Este Del Sol Mountain Reserve, Inc., 369
SCRA 99 [20001.)
 t, if it is
ART. 1958. In the determination of the interes
e current
payable in kind, its value shall be appraised at th
price of the products or goods at the time and p lace of
payment. (n)

Determination of interest payable

in kind.
r to
Article 1958 has the same purpose: to make usury harde
71]; see Arts.
perpetrate. (Briones vs. Cammayo, 41 SCRA 404 [19
fra.)
1602, last par., 2132, and 2133; Sec. 8, Usury Law, in

EXAMPLE:
B borrowed P10,000 from L payable in palay in one (1) year
which shall be appraised at the current market price at the time
and place of payment. When the contract was entered into, the
price per cavan of palay was P1,000. On the due date of the
loan, the price increased to P1,500.
In this case, the value of the palay shall be appraised at
P1,500 per cavan.

ART. 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. (n)

When unpaid interest earns interest.

As a general rule, accrued interest (interest due and unpaid)
shall not earn interest except in two (2) instances:
(1) When judicially demanded as provided for in Article
2212 (supra.); and

(2) When there is an express stipulation made by the parties:

that the interest due and unpaid shall be added to the principal
obligation and the resulting total amount shall earn interest.
(see Mambulao Lumber Co. vs. Phil. National Bank, 22 SCRA
359 [1968].) This practice is called compounding interest and it is
allowed by the Usury Law if there is express stipulation. (Sec. 5,
ibid.)
Stipulation to pay both interest and penalty
if default occurs.
The parties may stipulate on imposing both interest and
penalty if default on the part of the borrower occurs. (Art. 1226.13)
Under Article 1959, the compounding of not only of the monetary
interest but also of the penalty charge, also called penalty or
compensatory interest is allowed. Hence, the borrower may be
held liable to pay the interest on the total amount of principal,
the monetary interest and the penalty interest. (Tan vs. Court of
Appeals, 367 SCRA 571 [2001].)
Because of Article 1956, the stipulation as to compound
interest must be in writing. (Nolan vs. Majinay, 12 Phil. 559
[1909].)

ART. 1960. If the borrower pays interest when there has

been no stipulation therefor, the provisions of this Code
concerning solutio indebiti, or natural obligations, shall be
applied, as the case may be. (n)

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. (Art.
2154.14) But where the unstipulated interest, or interest
stipulated, there being a stipulation but it is not in writing, is
paid voluntarily because the debtor feels morally obliged to do
so, there can be no recovery as in the case of natural obligations.
(Art. 1423. 15)
 AS- L.,Vf11I ',PI lVLAA 1.411111

ART. 1961. Usurious contracts shall be governed by the

Usury Law and other special laws, so far as they are not
inconsistent with this Code. (n)

Usurious transactions governed

by special laws.
The Usury Law and other special laws apply only so far as
they are not inconsistent with the Civil Code.
However, according to Article 1175, "usurious transactions
shall be governed by special laws." These two (2) provisions
have given rise to the question: In case of conflict, which would
prevail, the Usury Law or the Civil Code? (see Sec. 6 of the Usury
Law.)

Usury now legally non-existent.

(1) Rate depends upon agreement. The interest legally
chargeable now depends upon the agreement between the lender
and the borrower. (Liam Law vs. Olympic Sawmill Co., 129 SCRA
439 [1984]; Joven vs. De Guzman, 193 SCRA 434 [1990]; Phil.
National Bank vs. Encina, 544 SCRA 608 [2008].) Central Bank
Circular No. 905 (Dec. 10, 1982, effective Jan. 1, 1983.) removed the
Usury Law ceiling on interest rates16 for secured and unsecured
loans, regardless of maturity (Bautista vs. Pilar Development
Authority, 312 SCRA 64 [1999].), rendering it legally ineffective.
(see Note in II — Usury Law.) According to the Supreme Court,
the Circular which took effect on January 1, 1983 "did not repeal
nor in any way amend the Usury Law but simply suspended the
latter's effectivity" (First Metro Investment Corp. vs. Este Del Sol
Mountain Reserves, Inc., 369 SCRA 99 [2001], citing Medel vs.
Court of Appeals, 299 SCRA 481 [1998]; and Security Bank & Trust
Company vs. Regional Trial Court, 263 SCRA 483 [1996].)
 The parties are now free to stipulate the interest to be paid on
monetary obligations, and absent any evidence of fraud, undue
influence or any vice of consent exercised by one party against
the other, the interest rate agreed upon is binding upon them.
The imposed rate should be in writing.
(2) Where agreed rate excessive. — "While the Usury Law
ceiling on interest rates was lifted by C.B. Circular No. 905,
nothing in said circular grants lenders carte blanche authority to
raise interest rates to levels which will either enslave their
borrowers or lead to a hemorrhaging of their assets." When the
agreed rate is found to be "excessive, iniquitous, unconscionable or
exorbitant," the courts may declare the rate illegal and reduce the
same as reason and equity demand. (Imperial vs. Juacian, 427
SCRA 517 [2004].) Such stipulated interest, even if knowingly and
voluntarily assumed, is contrary to morals (Asian Cathay
Finance & Leasing Corp. vs. Gravador, 62 SCRA 517 [2010].), if
not against the law. (see Arts. 1306, 1409[1].)
The Supreme Court has held that a 25% per annum interest on
a P2 million loan is fair and reasonable. (Frias vs. Court of
Appeals, 520 SCRA 244 [2007].) It has also been held that an
interest rate of 24% per annum agreed upon by the parties is not
unconscionable or excessive. (Bacolor vs. Banco Filipino Savings &
Mortgage Bank, 515 SCRA 79 [2007].) Similarly, a 23% per annum
interest rate and the 12% per annum penalty charge on petitioners'
P1,700,000 loan was not deemed excessive or unconscionable
under the circumstances. (see Mallari vs. Prudential Bank, 697
SCRA 555 [2013].) In Pascual vs. Ramos (384 SCRA 105 [2002].), the
Supreme Court allowed an interest rate of five percent (5%) per
month when the borrowers belatedly raised the issue of validity of
the interest rate in their motion for reconsideration of the
decision of the Court of Appeals.
In these cases, the interest rate agreed upon was deemed
excessive:
(a) In Medel vs. Cruz (359 Phil. 820 [19981.), the Supreme
f intere 66%
Court reduced the rate o st of 5.5% per month or per
onable rate m;
annum to the more reas of 12% per annu
 (b) In Ruiz vs. Court of Appeals (401 SCRA 410 [2003].), the
Supreme Court equitably reduced the agreed three percent
(3%) per month or 36% per annum interest to one percent (1%)
per month or 12% per annum interest;
(c) In Solangon vs. Salazar (412 Phil. 816 [2001].), the
Supreme Court annulled the stipulation of six percent (6%)
per month or 72% per annum interest on a P60,000 loan and
imposed an interest rate of 12% per annum;
(d) In Cuaton vs. Salud (421 SCRA 278 [2004].), the 10% and
eight percent (8%) interest rates per month on a P1,000,000
loan were reduced to 12% per annum;
(e) In Imperial vs. Jaucian (427 SCRA 517 j20041.), the
Supreme Court reduced the interest rate from 16% per month to
1.167% per month or 14% per annum;
(f) In Arrofo vs. Quino (449 SCRA 284 [2005].), the Supreme
Court reduced the seven percent (7%) interest per month on a
P15,000 loan amounting to 84% interest per annum to 18% per
annum;
(g) In Carpo vs. Chua (471 SCRA 471 [2005].), the Supreme
Court ruled that an interest rate of six percent (6%) per
month, or 72% per annum is similarly invalid, and reduced
the rate to 12% per annum;
(h) In Bulos vs. Yasuma (527 SCRA 727 [2007].), the interest
rate of four percent (4%) per month or 48% per annum was
deemed highly unconscionable and was reduced to 12% per
annum;
(0 In Svendsen vs. People (546 SCRA 659 [2008].), the
Supreme Court held that the interest rate of 10% per month
agreed upon by the parties is excessive, iniquitous, and
unconscionable cannot be sustained. The Supreme Court
reduced the interest rate to 12% per annum. (see also
Macalalag vs. People, 511 SCRA 400 [2006]; Ditio vs. Jardines,
481 SCRA 226 [2006].)
(3) Reduced rate. — In many cases, the Supreme Court !
duced the interest rate to 12% per annum (which was the legal
rate of interest). In some cases, the Supreme Court imposed an
interest rate of six percent (6%) per annum (Philippine Export
and Foreign Loan Guarantee Corporation, 658 SCRA 273 [2011].); an
interest rate of 10% per annum (Development Bank of the
Philippines vs. Court of Appeals, 344 SCRA 492 [2000].); an
interest rate of 18% per annum (Arrofo vs. Quino, 449 SCRA 284
[2005].); and an interest rate of 24% per annum. (Macalinao vs.
Bank of the Philippine Islands, 600 SCRA 67 [2009].)
Under BSP Circular No. 799, series of 2013, the rate of interest for
the loan or forbearance of any money, goods or credit, and the rate
allowed in judgments, absent express contract as to such rate of
interest rate, is now six percent (6%) per annum. Previously, the
Bangko Sentral set the legal rate of interest as 12% per annum.
(4) Loan term not open-ended. — The Supreme Court has
stated that the interest rate "shall be invalidated and shall be
reduced only in cases where the terms of the loans are open-
ended, and where the interest rates are applied for an indefinite
period. Hence, the imposition of a specific sum of P40,000 a
month for six (6) months on a P1,000,000 loan is not considered
unconscionable." (De la Paz vs. L & J Development Company,
734 SCRA 364 [2014], citing Prisma Construction & Development
Corporation vs. Menchavez, 614 SCRA 590 [2010].)
(5) Consequences of clause imposing excessive rates. — A clause
that imposes excessive interest rates, being separable from the
other stipulations of the loan agreement, does not affect the
validity of the loan agreement. Hence, the creditor is entitled
to the payment of the principal amount of the loan. However,
since the interest rate agreed upon is invalid, the effect should be
similar to a situation where the parties expressly agreed on the
payment of interest but the exact rate was not agreed upon. Thus,
it was held that where the escalation clause is invalid, "the
principal amount of the loan is subject to the original or
nd upon mat t due
stipulated rate of interest, a urity, the amoun shall
gal interest at the rate of 12% (now six percent
be subject to le [6%]) per
los vs. Philippine National Bank, 728 SCRA
annum." (Si 617 [2014].)
er, as seen from various cases decided by the
Howev Supreme Court,
rest rates have been reduced to such rates as
inte
 the court may deem equitable (which rates may not necessarily be
the legal rate).
(6) Estoppel to question excessive rates. "[T]he 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."
Voluntariness does not make the stipulation on an unconscionable
interest valid. (Asian Cathay Finance and Leasing Corporation vs.
Gravador, 623 SCRA 517 [2010]; De la Paz vs. L & J Development
Company, 734 SCRA 364 [2014].)