Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 155223             April 4, 2007

BOBIE ROSE V. FRIAS, represented by her Attorney-in-fact, MARIE F.
FUJITA, Petitioner,
vs.
FLORA SAN DIEGO-SISON, Respondent.

FACTS:
On 7 Dec 1990, Bobie Rose Frias and Dr. Flora San-Diego Sison entered into
a MOA over Frias’property
 MOA consideration is 3M
 Sison has 6 months from the date of contract’s execution to notify Frias of
her intention to purchase the property with the improvements at 6.4M
 Prior to this 6 month period, Frias may still offer the property to other
persons, provided that 3M shall be paid to Sison including interest
based on prevailing compounded bank interest + amount of sale in excess of
7M should the property be sold at a price greater than 7M
 In case Frias has no other buyer within 6 months from the contract’s
execution, no interest shall be charged by Sison on the 3M
 In the event that on the 6th month, Sison would decide not to purchase the
property, Frias has 6 months to pay 3M (amount shall earn compounded bank
interest for the last 6 months only)
 3M treated as a loan and the property considered as the security for the
mortgage
 Upon notice of intention to purchase, Sison has 6 months to pay the balance
of 3.4M (6.4M less 3M MOA consideration)

Frias received from Sison 3M (2M in cash; 1M post-dated check dated

February 28, 1990, instead of 1991, which rendered the check stale). Frias gave Sison
the TCT and the Deed of Absolute Sale over the property. Sison decided not to
purchase the property, so shenotified Frias through a letter dated March 20, 1991
(Frias received it only on June 11, 1991),and Sison reminded Frias of their agreement
that the 2M Sison paid should be considered as a loan payable within 6 months. Frias
failed to pay this amount.
Sison filed a complaintfor sum of money with preliminary attachment. Sison
averred that Frias tried to deprive her of the security for the loan by making a false
report of the loss of her owner’s copy of TCT, executing an affidavit of loss and by
filing a petition[1] for the issuance of a new owner’s duplicate copy. RTC issued a
writ of preliminary attachment upon the filing of a 2M bond. RTC found that Frias
was under obligation to pay Sison 2M with compounded interest pursuant to their
MOA. RTC ordered Frias to pay Sison:
 2M + 32% annual interest beginning December 7, 1991 until fully paid
 70k representing premiums paid by Sison on the attachment bond with legal
interest counted from the date of this decision until fully paid
 100k moral, corrective, exemplary damages liable for moral damages
because of Frias’ fraudulent scheme.
  100k attorney’s fees + cost of litigation

CA affirmed RTC with modification—32% reduced to 25%. CA said that

there was no basis for Frias to say that the interest should be charged for 6 months
only. It said that a loan always bears interest; otherwise, it is not a loan. The interest
should commence on June 7, 1991 until fully paid, with compounded bank interest
prevailing at the time [June 1991] the 2M was considered as a loan (as certified by the
bank).

ISSUES AND RULING:

Ratio only discusses topic of INTEREST (as per syllabus)

 Whether or not compounded bank interest should be limited to 6 months as

contained in the MOA. NO
 Whether or not Sison is entitled to moral damages. YES
 Whether or not the grant of attorney’s fees is proper, even if not mentioned in
the body of the decision. NO

CA committed no error in awarding an annual 25% interest on the 2M even

beyond the 6-month stipulated period. In this case, the phrase “for the last six months
only” should be taken in the context of the entire agreement.
SC notes that the agreement speaks of two (2) periods of 6 months each. No
interest will be charged for the 1st 6-month period (while Sison was making up her
mind), but only for the 2nd 6-month period after Sison decided not to buy the
property. There is nothing in the MOA that suggests that interest will be charged for 6
months only even if it takes forever for Frias to pay the loan.
The payment of regular interest constitutes the price or cost of the use of
money, and until the principal sum due is returned to the creditor, regular interest
continues to accrue since the debtor continues to use such principal amount. For a
debtor to continue in possession of the principal of the loan and to continue to use the
same after maturity of the loan without payment of the monetary interest constitutes
unjust enrichment on the part of the debtor at the expense of the creditor.

CA DECISION AND RESOLUTION AFFIRMED WITH MODIFICATION—

Award of attorney’s fees deleted
At first, Frias’ petition was granted, but it was eventually set aside, since RTC
granted Sison’s petition for relief from judgment (as Sison was in possession of the
owner’s duplicate copy).
 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G. R. No. 173227               January 20, 2009

SEBASTIAN SIGA-AN, Petitioner,
vs.
ALICIA VILLANUEVA, Respondent.

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. 

ISSUES:
Whether or not interest was due to petitioner; and
Whether the principle of solutio indebiti applies to the case at bar. 

RULING:
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.   

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.
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 183360               September 8, 2014

ROLANDO C. DE LA PAZ, Petitioner,

vs.
L & J DEVELOPMENT COMPANY, Respondent.

FACTS:
Out of trust and confidence, Rolando dela Paz lent a sum of money worth Php
350,000 to L & J Development Corporation, a property developer represented by
Atty. Esteban Salonga as its president and general manager.
The loan was executed without any security and no maturity date. It was
however agreed between the parties that the loan will have a 6% monthly interest
(amounting to Php 21,000). So far, L&J paid a total of Php 576,000 already –
including interest charges from December 2000 to August 2003.
L&J later failed to make payments due to financial difficulties in the business.
Rolando then filed a collection case with the MTC and alleged as of January 2005,
L&J still owes him Php 772,000 inclusive of monthly interests. L&J (represented by
Atty. Salonga) did not deny that they did incurred a debt from Rolando, and admitted
that they failed to pay due to a fortuitous event (financial difficulties). They also
contended that the 6% monthly interest is unconscionable and that their total payment
of Php 576,000 should be applied to the principal loan which only amounts to Php
350,000.
Rolando also contends that Atty. Salonga tricked him to execute the said loan
plus interest without reducing the agreement in writing. He also said that the 6%
interest rate was at the suggestion and insistence of L&J.
The MTC rendered judgment in favor of Rolando and upheld the 6% interest
rate as valid since L&J complied to it as evidenced by the payment they made from
December 2000 to August 2003. L&J is now estopped to impugn said interest rate.
The MTC also reduced the legal interest rate to 12% per annum on the remaining loan
for reasons of equity. They did not grant the prayer of moral damages to Rolando
since there was no bad faith on the part of L&J.
L&J appealed the decision to the RTC – contending once again that the 6%
interest rate is unconscionable, and that their previous payment which totaled Php
576,000 should be used to set off the principal loan of Php 350,000. RTC however
affirmed the decision of the MTC. L&J appealed to the CA.
CA ruled in favor of L&J, noting that the agreed 6% interest rate was not
reduced in a written agreement and hence, it should not be considered due. CA ruled
that the loan was already paid, and that Rolando should return the excess Php 226,000
with interest of 12% per annum. The case has now reached the Supreme Court.

ISSUE:
Whether or not the unwritten 6% interest agreement should be honored.

HELD:
No. The Supreme Court held that, as provided under the Civil Code, an
agreement regarding loan interests should be stipulated in writing. Even if the 6%
monthly rate was done in writing, it will still be void for being unconscionable and
contrary to morals and public policy – for at this time, an interest rate of 3% and
higher is considered excessive and exorbitant.
Furthermore, the lack of maturity date puts the total interest to a whooping
72% per annum which the Supreme Court considered to be “definitely outrageous and
inordinate.” The Supreme Court affirmed CA’s ruling, but as to Rolando’s obligation
to pay the excess Php 226,000, the interest rate was reduced from 12% to 6% per
annum.
 Republic of the Philippines
MANILA
FIRST DIVISION
G.R. NO. 187678 : April 10, 2013

SPOUSES IGNACIO F. JUICO and ALICE P. JUICO, Petitioners, 

vs.
CHINA BANKING CORPORATION, Respondent.

Facts:
Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a loan from
China Banking Corporation (respondent) as evidenced by two Promissory Notes for
the sums of P6,216,000 and P4,139,000, respectively.  The loan was secured by a
Real Estate Mortgage (REM) over petitioners' property located at 49 Greensville St.,
White Plains, Quezon City. When petitioners failed to pay the monthly amortizations
due, respondent demanded the full payment of the outstanding balance with accrued
monthly interests. The amount due on the two promissory notes totaled
P19,201,776.63 representing the principal, interests, penalties and attorney's fees.  On
the same day, the mortgaged property was sold at public auction, with respondent as
highest bidder for the amount of P10,300,000. Petitioners received a demand letter
dated May 2, 2001 from respondent for the payment of P8,901,776.63, the amount of
deficiency after applying the proceeds of the foreclosure sale to the mortgage debt.
Respondent filed a collection suit in the trial court. In their Answer, petitioners
admitted the existence of the debt but interposed, by way of special and affirmative
defense, that the complaint states no cause of action considering that the principal of
the loan was already paid when the mortgaged property was extrajudicially foreclosed
and sold for P10,300,000.
By way of counterclaim, petitioners prayed that respondent be ordered to pay
P100,000 in attorney's fees and costs of suit.
As of the date of the public auction, petitioners' outstanding balance was
P19,201,776.63 On cross-examination, Ms. Yu reiterated that the interest rate changes
every month based on the prevailing market rate and she notified petitioners of the
prevailing rate by calling them monthly before their account becomes past due.
When asked if there was any... written authority from petitioners for
respondent to increase the interest rate unilaterally, she answered that petitioners
signed a promissory note indicating that they agreed to pay interest at the prevailing
rate. Petitioner Ignacio F. Juico testified that prior to the release of the loan, he was
required to sign a blank promissory note and was informed that the interest rate on the
loan will be based on prevailing market rates. The RTC ruled in favor of respondent
The trial court agreed with respondent It ruled that the amount realized at the auction
sale was applied to the interest, conformably with Article 1253 of the Civil Code
which provides that if the debt produces interest, payment of the principal shall not be
deemed to have been made until the interests have been covered.
The trial court further held that Ignacio's claim that he signed the promissory
notes in blank cannot negate or mitigate his liability since he admitted reading the
promissory notes before signing them. When the case was elevated to the CA, the
latter affirmed the trial court's decision.

ISSUES:
Whether the interest rates imposed upon them by respondent are valid.
 They insist that the interest rates were unilaterally imposed by the bank and
thus violate the principle of mutuality of contracts. They argue that the escalation
clause in the promissory notes does not give respondent the unbridled authority to
increase the interest rate unilaterally. Any change must be mutually agreed upon.

RULING:
The appeal is partly meritorious.The provision in the promissory note
authorizing respondent bank to increase, decrease or otherwise change from time to
time the rate of interest and/or bank charges "without advance notice" to petitioner,
"in the event of change in the interest rate prescribed by law or the Monetary Board of
the Central Bank of the Philippines," does not give respondent bank unrestrained
freedom to charge any rate other than that which was agreed upon. Here, the monthly
upward/downward adjustment of interest rate is left to the will of respondent bank
alone. It violates the essence of mutuality of the contract.
Although interest rates are no longer subject to a ceiling, the lender still does
not have an unbridled license to impose increased interest rates.  The lender and the
borrower should agree on the imposed rate, and  such imposed rate should be in...
writing.
In this case, the trial and appellate courts, in upholding the validity of the
escalation clause, underscored the fact that there was actually no fixed rate of interest
stipulated in the promissory notes as this was made dependent on prevailing rates in
the market. In interpreting a contract, its provisions should not be read in isolation but
in relation to each other and in their entirety so as to render them effective
Here, the escalation clause in the promissory notes authorizing the respondent
to adjust the rate of interest on the basis of a law or regulation issued by the Central
Bank of the Philippines, should be read together with the statement after the first
paragraph where no rate of interest was fixed as it would be based on prevailing
market rates.
Evidently, the parties intended the interest on... petitioners' loan, including any
upward or downward adjustment, to be determined by the prevailing market rates and
not dictated by respondent's policy.
There is no indication that petitioners were coerced into agreeing with the
foregoing provisions of the promissory notes we hold that the escalation clause is still
void because it grants respondent the power to impose an increased rate of interest
without a written notice to petitioners and their written consent.
WHEREFORE, the petition for review on certiorari is PARTLY GRANTED.
Petitioners Spouses Ignacio F. Juico and Alice P. Juico are hereby ORDERED to pay
jointly and severally respondent China Banking Corporation P4,761,865.79
representing the amount of deficiency inclusive of interest, penalty charge and
attorney's fees.
Principles:
Escalation clauses refer to stipulations allowing an increase in the interest rate
agreed upon by the contracting parties. This Court has long recognized that there is
nothing inherently wrong with escalation clauses which are valid stipulations in
commercial contracts to maintain fiscal stability and to retain the value of money in
long term contracts.Hence, such stipulations are not void per se.
Nevertheless, an escalation clause "which 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. A
stipulation of such nature violates the principle of mutuality of contracts. The
stipulations on interest rate repricing are valid because
(1) the parties mutually agreed on said stipulations;
(2) repricing takes effect only upon Solidbank's written notice to
Permanent of the new interest rate; and
(3) Permanent has the option to prepay its loan if Permanent and
Solidbank do not agree on the new interest rate. The phrases "irrevocably authorize,"
"at any time" and "adjustment of the interest rate shall be effective from the date
indicated in the written notice sent to us by the bank, or if no date is indicated, from
the time the notice was sent," emphasize that Permanent should receive a written
notice from Solidbank as a condition for the adjustment of the interest rates.
The contractual provision in question 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 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.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 181045               July 2, 2014

SPOUSES EDUARDO and LYDIA SILOS, Petitioners,

vs.
PHILIPPINE NATIONAL BANK, Respondent.

FACTS:

Facts:
Spouses Eduardo and Lydia Silos (petitioners) have been in business for about
two decades of operating a department store and buying and selling of ready-to-wear
apparel.
To secure a one-year revolving credit line of P150,000.00 obtained from PNB,
petitioners constituted in August 1987 a Real Estate Mortgage over a 370-square
meter lot in Kalibo, Aklan the credit line was increased to P1.8 million and the
mortgage was correspondingly increased to P1.8 million. A Supplement to the
Existing Real Estate Mortgage was executed to cover the same credit line, which was
increased to P2.5 million, and additional security was given in the form of a 134-
square meter lot petitioners issued eight Promissory Notes and signed a Credit
Agreement. stipulation on interest which provides as follows:
(a) The Loan shall be subject to interest at the rate of 19.5% per annum.
Interest shall be payable in advance every one hundred twenty days at the rate
prevailing at the time of the renewal.
(b) The Borrower agrees that the Bank may modify the interest rate in the
Loan depending on whatever policy the Bank may adopt in the future, including
without limitation, the shifting from the floating interest rate system to the fixed
interest rate system, or vice... versa. Where the Bank has imposed on the Loan interest
at a rate per annum, which is equal to the Bank's spread over the current floating
interest rate, the Borrower hereby agrees that the Bank may, without need of notice to
the Borrower, increase or decrease its spread over the floating interest rate at any time
depending on whatever policy it may adopt in the future.
The eight Promissory Notes, on the other hand, contained a stipulation
granting PNB the right to increase or reduce interest rates "within the limits allowed
by law or by the Monetary Board. The Real Estate Mortgage agreement provided the
same... right to increase or reduce interest rates "at any time depending on whatever
policy PNB may adopt in the future. An Amendment to Credit Agreement was
executed by the parties, with the following stipulation regarding interest:
Borrowers agree to pay interest on each Availment from date of each
Availment up to but not including the date of full payment thereof at the rate per
annum which is determined by the Bank to be prime... rate plus applicable spread in
effect as of the date of each Availment Under this Amendment to Credit Agreement,
petitioners issued in favor of PNB the following 18 Promissory Notes, which
petitioners settled except the last (the note covering the principal) at the following
interest rates:
The 9th up to the 17th promissory notes provide for the payment of interest at
the "rate the Bank may at any time without notice, raise within the limits allowed by
law x x x."
On the other hand, the 18th up to the 26th promissory notes including PN
9707237, which is the 26th promissory note carried the following provision:
The rate of interest herein stipulated may be increased or decreased for the
subsequent Interest Periods, with prior notice to the Borrower in the event of changes
in interest rate prescribed by law or the Monetary Board of the Central Bank of the
Philippines, or in the Bank's overall cost of funds.
I/We hereby agree that in the event I/we are not agreeable to the interest rate
fixed for any Interest Period, I/we shall have the option to prepay the loan or credit
facility without penalty within ten (10) calendar days from the Interest Setting Date.
Respondent regularly renewed the line from 1990 up to 1997, and petitioners made
good on the promissory notes, religiously paying the interests without objection or
fail. But in 1997, petitioners faltered when the interest rates soared due to the Asian
financial crisis. Sole outstanding promissory note for P2.5 million PN 9707237
executed in July 1997 and due 120 days later or on October 28, 1997 became past
due, and despite repeated demands, petitioners failed to make good on the note
provided for the penalty equivalent to 24% per annum in case of default PNB
prepared a Statement of Account[20] as of October 12, 1998, detailing the amount
due and demandable from petitioners in the total amount of P3,620,541.60 petitioners
failed to pay the foregoing amount. Thus, PNB foreclosed on the mortgage, and on
January 14, 1999, TCTs T-14250 and T-16208 were sold to it at auction for the
amount of P4,324,172.96.
More than a year later, or on March 24, 2000, petitioners filed Civil Case No.
5975, seeking annulment of the foreclosure sale and an accounting of the PNB credit.
Petitioners theorized that after the first promissory note where they agreed to pay
19.5% interest, the succeeding... stipulations for the payment of interest in their loan
agreements with PNB which allegedly left to the latter the sole will to determine the
interest rate became null and void. Because the interest rates were fixed by respondent
without their prior consent or agreement, these rates are void, and as a result,
petitioners should only be made liable for interest at the legal rate of 12% Lydia)
testified that the Credit Agreement, the Amendment to Credit Agreement, Real Estate
Mortgage and the Supplement thereto were all prepared by respondent PNB and were
presented to her and her husband Eduardo only for signature; that she was told by
PNB that the latter alone would determine the interest rate; that as to the Amendment
to Credit Agreement, she was told that PNB would fill up the interest rate portion
thereof; that at the time the parties executed the said Credit Agreement, she was not
informed... about the applicable spread that PNB would impose on her account; that
the interest rate portion of all Promissory Notes she and Eduardo issued were always
left in blank when they executed them, with respondent's mere assurance that it would
be the one to enter or indicate thereon the prevailing interest rate at the time of
availment; and that they agreed to such arrangement. PNB Kalibo Branch Manager
Diosdado Aspa, Jr. (Aspa), the sole witness for respondent, stated on cross-
examination that as a practice, the determination of the prime rates of interest was the
responsibility solely of PNB's Treasury Department which is based in Manila; that
these prime rates were simply communicated to all PNB branches for
implementation;... the trial court rendered judgment dismissing Civil Case No. 5975
Petitioners appealed to the CA... the instant appeal is PARTLY GRANTED, the
interest rate to be applied after the expiration of the first 30-day interest period for PN.
No. 9707237 should be 12% per annum; PNB is hereby ordered to reimburse
[petitioners] the excess in the bid price of P377,505.99 which is the difference
between the total amount due [PNB] and the amount of its bid price. The CA ruled
that petitioners are entitled to P377,505.09 surplus, which is the difference between
PNB's bid price of P4,324,172.96 and petitioners' total computed obligation as of
January 14, 1999, or the date of the auction sale, in the amount of P3,946,667.87.
Petitioners conclude that by this method of fixing the interest rates, the
principle of mutuality of contracts is violated, and public policy as well as Circular
905 of the then Central Bank had been breached.

ISSUES:
 Erred in not nullifying the interest rate provision in the credit agreement
 Which left to the sole unilateral determination of the
 Respondent pnb the original fixing of interest rate and its increase, which
agreement is contrary to law
 And in applying the principle of estoppel arising from the alleged delayed
complaint of petitioner[s], and [their] payment of the interest charged.

RULING:
The Court grants the Petition.
It appears that respondent's practice, more than once proscribed by the Court, has
been carried over once more to the petitioners. In a number of decided cases, the
Court struck down provisions in credit documents issued by PNB to, or required of,
its borrowers which allow the bank to increase or decrease interest rates "within the
limits allowed by law at any time depending on whatever policy it may adopt in the
future... such stipulation and similar ones were declared in violation of Article 1308 of
the Civil Code. In making the unilateral increases in interest rates, petitioner bank
relied on the escalation clause contained in their credit agreement This clause is
authorized by Section 2 of Presidential Decree (P.D.) No. 1684 which further
amended Act No. 2655 ("The Usury Law")
Provided, That such stipulation shall be valid only if there is also a stipulation
in the agreement that the rate of interest agreed upon shall be reduced in the event that
the applicable maximum rate of interest is reduced by law or by the Monetary Board;
Provided further, That the adjustment in the rate of interest agreed upon shall take
effect on or after the effectivity of the increase or decrease in the maximum rate of
interest. Section 1 of P.D. No. 1684 also empowered the Central Bank's Monetary
Board to prescribe the maximum rates of interest for loans and certain forbearances.
rate of interest shall not be subject to any... ceiling prescribed under or pursuant to the
Usury Law, they can agree to adjust, upward or downward, the interest previously
stipulated. However, contrary to the stubborn insistence of petitioner bank, the said
law and circular did not authorize either party to unilaterally raise the interest rate
without the other's consent. It is basic that there can be no contract in the true sense in
the absence of the element of agreement, or of mutual assent of the parties. If this
assent is wanting on the part of the one who contracts, his act has no more efficacy
than if it had been done under duress or by a person of unsound mind. contract
changes must be made with the consent of the contracting parties In the case of loan
contracts, it cannot be gainsaid that the rate of interest is always a vital component,
for it can make or break a capital venture. Thus, any change must be mutually agreed
upon, otherwise, it is bereft of any binding effect.
We cannot countenance petitioner bank's posturing that the escalation clause
at bench gives it unbridled right to unilaterally upwardly adjust the interest on private
respondents' loan. That would completely take away from private respondents the
right to assent to an important modification in their agreement, and would negate the
element of mutuality in contracts.
The unilateral action of the PNB in increasing the interest rate on the private
respondent's loan violated the mutuality of contracts ordained in Article 1308 of the
Civil Code:
It is plainly obvious, therefore, from the undisputed facts of the case that
respondent bank unilaterally altered the terms of its contract with petitioners by
increasing the interest rates on the loan without the prior assent of the latter. These
stipulations must be once more invalidated, as was done in previous cases. The
common denominator in these cases is the lack of agreement of the parties to the
imposed interest rates. For this case, this lack of consent by the petitioners has been
made obvious by the fact that they signed the promissory notes in blank for the
respondent to fill. We find credible the testimony of Lydia in this respect. Respondent
failed to discredit her; in fact, its witness PNB Kalibo Branch Manager Aspa admitted
that interest rates were fixed solely by its Treasury Department in Manila, which were
then simply communicated to all PNB branches for implementation. If this were the
case, then this would explain why petitioners had to sign the promissory notes in
blank... since the imposable interest rates have yet to be determined and... fixed by
respondent's Treasury Department in Manila.
Clearly, respondent's method of fixing interest rates based on one-sided,
indeterminate, and subjective criteria such as profitability, cost of money, bank costs,
etc. is arbitrary for there is no fixed standard or margin above or below these
considerations. Any modification in the contract, such as the interest rates, must be
made with the consent of the contracting parties.
In the case of loan agreements, the rate of interest is a principal condition, if
not the most important component. Thus, any modification thereof must be mutually
agreed upon; otherwise, it has no binding effect.
What is even more glaring in the present case is that, the stipulations in
question no longer provide that the parties shall agree upon the interest rate to be
fixed; -instead, they are worded in such a way that the borrower shall agree to
whatever interest rate respondent fixes. The Borrower hereby agrees that the Bank
may, without need of notice to the Borrower, increase or decrease its spread over the
floating interest rate at any time depending on whatever policy it may adopt in the
future. Plainly, with the present credit agreement, the element of consent or agreement
by the borrower is now completely lacking.Accordingly, petitioners are correct in
arguing that estoppel should not apply to them, for "[e]stoppel cannot be predicated
on an illegal act. By requiring the petitioners to sign the credit documents and the
promissory notes in blank, and then unilaterally filling them up later on, respondent
violated the Truth in Lending Act, and was remiss in its disclosure obligations
The fact that petitioners later received several statements of account detailing
its outstanding obligations does not cure respondent's breach. To repeat, the belated
discovery of the true cost of credit does not reverse the ill effects of an already
consummated business decision. 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. That petitioners are given the right to question the interest
rates imposed is, under the circumstances, irrelevant; we have a situation where the
petitioners do not stand on equal footing with the respondent. It is doubtful that any
borrower who finds himself in petitioners' position would dare question respondent's
power to arbitrarily modify interest rates at any time. In the second place, on what
basis could any borrower question such power, when the criteria or standards which
are really one-sided, arbitrary and subjective for the exercise of such power are
precisely lost on him? the Court cannot validly consider that, as stipulated in the 18th
up to the 26th promissory notes, petitioners are granted the option to prepay the loan
or credit facility without penalty within 10 calendar days from the Interest Setting
Date if they are not agreeable to the interest rate fixed. It has been shown that the
promissory notes are executed and signed in blank, meaning that by the time
petitioners learn of the interest rate, they are already bound to pay it because they
have already pre-signed the note where the rate is subsequently entered. Besides,
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.
the Court finds that since the escalation clause is annulled, the principal amount of the
loan is subject to the original or stipulated rate of interest, and upon maturity, the
amount due shall be subject to legal interest at the rate of 12% per annum.
Thus, the parties' original agreement stipulated the payment of 19.5% interest;
however, this rate was intended to apply only to the first promissory note... it was not
intended to apply to the whole... duration of the loan. Subsequent higher interest rates
have been declared illegal; but because only the rates are found to be improper, the
obligation to pay interest subsists, the same to be fixed at the legal rate of 12% per
annum. However, the 12% interest shall apply... only until June 30, 2013. Starting
July 1, 2013, the prevailing rate of interest shall be 6% per annum pursuant to our
ruling in Nacar v. Gallery Frames[99] and Bangko Sentral ng Pilipinas-Monetary
Board Circular No. 799.
The Court sustains petitioners' view that the penalty may not be included as part of the
secured amount. Having found the credit agreements and promissory notes to be
tainted, we must accord the same treatment to the mortgages. After all, "[a] mortgage
and a note secured by it... are deemed parts of one transaction and are construed
together.
An examination of the mortgage agreements reveals that nowhere is it stated that
penalties are to be included in the secured amount. Construing this silence strictly
against the respondent, the Court can only conclude that the parties did not intend to
include the penalty... allowed under PN 9707237 as part of the secured amount... the
case should be remanded to the lower court for proper accounting and computation
1st Promissory Note with the 19.5% interest rate is deemed proper and paid
All subsequent promissory notes (from the 2nd to the 26th promissory notes) shall
carry an interest rate of only 12% per annum. interest payment made in excess of 12%
on the 2nd promissory note shall immediately be applied to the... principal, and the
principal shall be accordingly reduced. The reduced principal shall then be subjected
to the 12%
After the above procedure is carried out, the trial court shall be able to
conclude if petitioners a) still have an OUTSTANDING BALANCE/OBLIGATION
or b) MADE PAYMENTS OVER AND ABOVE THEIR TOTAL OBLIGATION

Republic of the Philippines

MANILA
SECOND DIVISION
July 8, 2015 G.R. No. 195166

SPOUSES SALVADOR ABELLA AND ALMA ABELLA, Petitioners,

vs.
SPOUSES ROMEO ABELLA AND ANNIE ABELLA, Respondents.

FACTS:
Petitioners Spouses Salvador and Alma Abella filed a Complaint for sum of
money and damages with prayer for preliminary attachment against respondents
Spouses Romeo and Annie Abella respondents obtained a loan from them in the
amount of P500,000.00. The loan was evidenced by an acknowledgment receipt dated
March 22, 1999 and was payable within one (1) year. Amount of Five Hundred
Thousand (P500,000.00) Pesos from Mrs. Alma R. Abella, payable within one (1)
year from date hereof with interest.

ISSUES:
Whether or not the interest accrued on respondents' loan from petitioners, If
so, at what rate?

RULING:
Article 1956 of the Civil Code spells out the basic rule that "[n]o interest shall
be due unless it has been expressly stipulated in writing."
On the matter of interest, the text of the acknowledgment receipt is simple,
plain, and unequivocal. It attests to the contracting parties' intent to subject to interest
the loan extended by petitioners to respondents. The controversy, however, stems
from the acknowledgment receipt's failure to state the exact rate of interest.
In a loan or forbearance of money, according to the Civil Code, the interest
due should be that stipulated in writing, and in the absence thereof, the rate shall be
12% per annum. When the obligation is breached, and it consists in the payment of a
sum of money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 12% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of
Article 1169 of the Civil Code Applying this, the loan obtained by respondents from
petitioners is deemed subjected to conventional interest at the rate of 12% per annum,
the legal rate of interest at the time the parties executed their agreement. Moreover,
should conventional interest still be due as of July 1, 2013, the rate of 12% per annum
shall persist as the rate of conventional interest. Article 1956 of the Civil Code, read
in light of established jurisprudence, prevents the application of any interest rate other
than that specifically provided for by the parties in their loan document or, in lieu of
it, the legal rate. Here, as the contracting parties failed to make a specific stipulation,
the legal rate must apply. Moreover, the rate that petitioners adverted to is
unconscionable. The conventional interest due on the principal amount loaned by
respondents from petitioners is held to be 12% per annum.
Apart from respondents' liability for conventional interest at the rate of 12%
per annum, outstanding conventional interest—if any is due from respondents—shall
itself earn legal interest from the time judicial demand was made by petitioners, i.e.,
on July 31, 2002, when they filed their Complaint. This is consistent with Article
2212 of the Civil Code, which provides:
Art. 2212. Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point.
Art. 1253. If the debt produces interest, payment of the principal shall not be
deemed to have been made until the interests have been covered.
As respondents made an overpayment, the principle of solutio indebiti as provided by
Article 2154 of the Civil Code applies. Article 2154 reads:
Article 2154. 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.
Nacar provides that "[w]hen an obligation, not constituting a loan or
forbearance of money, is breached, an interest on the amount of damages awarded
may be imposed at the discretion of the court at the rate of 6% per annum.". This
applies to obligations arising from quasi-contracts such as solutio indebiti.

Further, Article 2159 of the Civil Code provides:

Art. 2159. Whoever in bad faith accepts an undue payment, shall pay legal
interest if a sum of money is involved, or shall be liable for fruits received or which
should have been received if the thing produces fruits.
He shall furthermore be answerable for any loss or impairment of the thing
from any cause, and for damages to the person who delivered the thing, until it is
recovered. When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 6% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.
Thus, interest at the rate of 6% per annum may be properly imposed on the total
judgment award. This shall be reckoned from the finality of this Decision until its full
satisfaction.